Reading International - 10-Q quarterly report FY

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission file number 1-8625

READING INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: (213) 235-2240

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [x] No [   ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [x] No [   ]

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 5, 2004, there were 19,916,876 shares of Class A Nonvoting Common Stock, $0.01 par value per share and 1,982,414 shares of Class B Voting Common Stock, $0.01 par value per share outstanding.

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READING INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX

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PART I – Financial Information

Item 1 – Financial Statements

Reading International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(dollars in thousands)

See accompanying notes to consolidated financial statements.

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Reading International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(dollars in thousands, except per share amounts)

See accompanying notes to consolidated financial statements.

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Reading International, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(dollars in thousands, except per share amounts)

See accompanying notes to consolidated financial statements.

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Reading International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)

See accompanying notes to consolidated financial statements.

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Reading International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2004

Note 1 – Basis of Presentation

     Reading International, Inc. a Nevada corporation along with its consolidated subsidiaries (the “Company” or “Reading”) is the corporate successor to the Reading Railroad, initially organized in Pennsylvania in 1833. Reading was incorporated in 1999 and, following the consummation of a consolidation transaction on December 31, 2001 (the “Consolidation”) is now the owner of the consolidated businesses and assets of Reading Entertainment (“RDGE”), Craig Corporation (“CRG”) and Citadel Holding Corporation (“CDL”). Its businesses consist primarily of:

     The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim reporting and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission for interim reporting. As such, certain information and footnote disclosures typically required by US GAAP for complete financial statements have been condensed or omitted. There have been no material changes in the information disclosed in the notes to the condensed consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (“2003 Annual Report”). The financial information presented in this quarterly report on Form 10-Q for the period ended March 31, 2004 (the “March Report”), including the information under the heading, Management’s Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with the Company’s 2003 Annual Report which contains the latest audited financial statements and related footnotes.

     In the opinion of management, all adjustments of a normal recurring nature considered necessary to present fairly in all material respects the Company’s financial position, results of its operations and cash flows for the three months ended March 31, 2004 have been made. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results of operations to be expected for the entire year. Certain amounts in previously issued financial statements have been reclassified to conform to the 2004 presentation.

Note 2 – Stock-Based Compensation

     The Company has a stock based compensation plan for certain employees and non-employee directors which is fully described in the 2003 Annual Report. The Company accounts for the plan under the recognition and measurement principles of APB Opinion (“APBO”) No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Under APBO No. 25, no stock-based employee compensation cost has been reflected in net income, as all options granted under the plan had an exercise price equal to the market value of

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the underlying common stock on the date of grant. APBO No. 25 does not apply to non-employees and would require that the Company record compensation expense for non-employees. However, APBO No. 25 applies to non-employee directors when stock options are granted in connection with the non-employee directors’ board services. As such, no compensation expense has been recorded.

     Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure (“SFAS Nos. 123 and 148”) established disclosure requirements using the fair value basis method of accounting for stock-based compensation. As permitted by SFAS Nos. 123 and 148, the Company has elected to continue using the intrinsic value method of accounting prescribed under APBO No. 25. The following table illustrates the effect on net loss and net loss per common share as if the Company had applied the fair value provisions of SFAS Nos. 123 and 148 to measure stock-based compensation (dollars in thousands):

Note 3 – Business Segments

     Reading’s operations are organized into three reportable business segments within the meaning of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The Company’s reportable segments are: (1) cinema,(2) live theater and (3) rental/real estate. The Company’s cinema segment is primarily engaged in the development, ownership and operation of multiplex cinemas. The live theater segment is engaged in the ownership and operation of “Off Broadway” style live theaters. Reading’s rental and real estate segment is primarily engaged in the development, ownership and operation of commercial properties, including ETRCs. Corporate results include interest income earned with respect to the Company’s cash balances, interest expense, general and administrative expenses, minority interest expense and other (income) expense.

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     Information about the Company’s cinema, live theater and rental/real estate segment operations for the three months ended March 31, 2004 and 2003 is presented in the following tables (dollars in thousands):

Note 4 — Foreign Currency and Derivative Instruments

     As fully described in the Company’s 2003 Annual Report, Reading has cinema operations and significant assets in Australia and New Zealand. To the extent possible, Reading conducts its Australian and New Zealand operations on a self-funding basis. The carrying value of the Company’s Australian and New Zealand assets fluctuates due to changes in the exchange rates between the US dollar and the functional currency of Australia (Australian dollar) and New Zealand (New Zealand dollar). The Company has no derivative financial instruments to hedge foreign currency exposure.

     Presented in the table below are the currency exchange rates for Australia and New Zealand as of March 31, 2004 and December 31, 2003.

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Note 5 – Loss Per Share

     Basic loss per share is computed by dividing net loss to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share is computed by dividing net loss to common stockholders by the weighted average number of common shares outstanding during the period after giving effect to all potentially dilutive common shares that would have been outstanding if the dilutive common shares had been issued. Stock options give rise to potentially dilutive common shares.

     For the three months ended March 31, 2004 and 2003, respectively, the Company recorded net losses. As such, the incremental shares of 573,669 and 385,402 in 2004 and 2003, respectively from stock options to purchase shares of common stock were excluded from the computation of diluted loss per share because they were anti-dilutive in those periods.

Note 6 — Comprehensive Income

     US GAAP requires that the effect of foreign currency translation adjustments and unrealized gains and/or losses on securities that are available-for-sale (“AFS”) be classified as comprehensive income. The following table sets forth the Company’s comprehensive income for the periods indicated (dollars in thousands):

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Note 7 — Rental Property and Property and Equipment

     As of March 31, 2004 and December 31, 2003, Reading had investments in rental property and property and equipment as follows (dollars in thousands):

Note 8 – Goodwill and Intangible Assets

     As of January 1, 2002, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets, Reading does not amortize goodwill and instead, performs annual impairment reviews of its goodwill and other intangible assets. As of March 31, 2004 and December 31, 2003, Reading had goodwill of $5,094,000 and $5,090,000, respectively, consisting of the following (dollars in thousands):

     Reading has intangible assets other than goodwill which are subject to amortization and are being amortized over various periods. The Company amortizes its beneficial lease over 20 years and its option fees and acquisition costs over 10 years. For the three months ended March 31, 2004, the amortization expense totaled $280,000.

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     Intangible assets subject to amortization consist of the following (dollars in thousands):

Note 9 – Income Tax

     The income tax provision (benefit) for the three months ended March 31, 2004 and 2003 was comprised of the following amounts (dollars in thousands), respectively:

Note 10 – Minority Interest

     Minority interest is comprised of the following enterprises:

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Note 11 – Other (Income) Expense

     Other (income) expense is comprised of the following (dollars in thousands):

Note 12 – Loan Agreement

     During the fourth quarter of 2003, the Company accepted an Offer to Loan from a major Australian Bank to refinance its existing AUD$30,000,000 loan facility in Australia and to extend its borrowing to AUD$40,000,000. Advanced discussions concerning the finalization and documentation of this loan facility are currently in process with the bank.

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Note 13– Subsequent Event

     Subsequent to the end of the first quarter of 2004, the Company entered into a letter of intent with a possible purchaser of the Company’s cinemas in Puerto Rico. The sale of these cinemas remains subject to due diligence and the negotiation and execution of definitive transactional documents. Accordingly, no assurances can be given that the letter of intent will eventually result in a sale of the Company’s cinemas in Puerto Rico.

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Reading International, Inc. (“the Company,” “Reading,” and “we,” “us” or “our”) consider ourselves to be essentially a cinema exhibition and live theater operating company with a strong focus on the development and holding of real estate assets. Our business operations include:

     We manage our worldwide cinema business under various different brands:

     We currently operate (directly or indirectly through consolidated entities or majority owned unincorporated joint ventures) 204 screens in 29 cinema complexes, including a 4-screen cinema in which we have no ownership interest. In addition, we have 50% unincorporated joint venture interests in 21 screens in four cinema complexes in New Zealand (including one 8-screen cinema which our joint venture operates under a management agreement and in which our joint venture has no ownership interest) and a 331/3% unincorporated joint venture interest in a 16-screen cinema complex in Australia. In addition, we have been retained to manage a new state-of-the-art 5-screen art house complex in Plano, Texas, scheduled to open in June 2004), and our joint venture in New Zealand is currently developing a new state-of-the-art 8-screen cinema in an Auckland suburb (scheduled to open before the end of the year).

     During the first quarter of 2004, we entered heads of agreement to fit-out and lease two new cinemas comprising 16 screens currently under development in Australia. Since the close of the first quarter, we have, in addition, entered into agreements for lease with respect to the fit-out and leasing of two additional cinemas, comprising a total of 15 screens, and a purchase agreement for the acquisition of an existing state-of-the-art 10-screen cinema, also in Australia. In the aggregate these agreements cover five cinemas comprising 36 screens in Australia.

     Our business plan is to continue to identify, develop and acquire cinema and live theater properties, focusing on those opportunities where we can acquire either the fee interest underlying the operating assets, or long term leases, which we believe provide flexibility with respect to the usage of such leasehold assets. In the near term, we are focusing principally on the operation of our existing cinema and live theater assets and in the development of five parcels of undeveloped real estate in Melbourne, Brisbane, and Sydney in Australia, and in Wellington in New Zealand while taking advantage of those opportunities that may present themselves to strategically expand our existing cinema circuits. Shortly after the close of the first quarter, we entered into agreements for lease with the two anchor tenants aggregating approximately 44,000 square feet for our approximately 95,000 square foot shopping center development in a suburb of Brisbane, and are accordingly now moving forward with the development of final plans for that project.

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     A significant portion of our business is conducted in Australia and New Zealand, and as such, we are subject to a certain degree of currency risk. We do not engage in currency hedging activities. Rather, to the extent possible, we operate our Australian and New Zealand operations on a self-funding basis. Our policy in Australia and New Zealand is to match revenue and expenses, whenever possible, in local currencies. As a result, a majority of our expenses in Australia and New Zealand have been procured in local currencies. Due to the developing nature of our operations in Australia and New Zealand, our revenues are not yet significantly greater than our operating expenses. The resulting natural operating hedge has led to a negligible foreign currency effect on our earnings. As we continue to progress our acquisition and development activities in Australia and New Zealand, we cannot assure you that the foreign currency effect on our earnings will be insignificant in the future.

     We are continuing our efforts to dispose of our assets in Puerto Rico. In May 2004, we entered into a letter of intent to sell our Puerto Rico assets. Closing of the transaction contemplated by this letter of intent is subject to a variety of contingencies, including due diligence by the purchaser and the negotiation and execution of definitive documentation. Accordingly, we cannot assure you that a sale of our Puerto Rico assets will be completed. Accordingly, we continue to operate these assets, and although we intend to sell these assets, we have, since the beginning of 2003 begun to record for book purposes, depreciation expense with respect to these assets.

Results of Operations

     As previously discussed, at March 31, 2004, we operated 29 cinemas with 204 screens and four live theaters comprising seven stages. Unconsolidated joint ventures in which we have interests, operated an additional four cinemas with 21 screens. In addition, along with the three ETRC’s that we developed in Australia and New Zealand, we have fee interests in five developed commercial properties in the United States, and hold for development an additional five parcels (aggregating approximately 60 acres) in urbanized areas of Australia and New Zealand. Two of these parcels are in areas designated by the Victorian government as “major activity areas.”

     The tables below summarize the results of operations for each of our principal business segments for the three months ended March 31, 2004 (“2004 Quarter”) and 2003 (“2003 Quarter”), respectively. Operating expenses include costs associated with the day-to-day operations of the cinemas and live theaters and the management of rental properties.

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Cinema

     Included in the cinema segment above is revenue and expense from the operations of 28 cinema complexes with a total of 200 screens.

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Live Theater

     We operate our live theater segment through Liberty Theaters and its wholly owned theater operating companies, of leasing theater auditoriums to the producers of “Off Broadway” theatrical productions and providing various box office and concession services. Liberty Theaters generates revenues by:

     At the current time, we have three single auditorium theaters in Manhattan:

     We also own a four auditorium theater complex, the Royal George in Chicago (main stage 452 seats, cabaret 199 seats, great room 100 seats and gallery 60 seats). We own the fee interest in each of these theaters.

     Live theater revenue decreased approximately $253,000, or 23% in the 2004 Quarter when compared to the same period in 2003 primarily due to increased “dark time” (the period when the theater carries no production). The losses of productions in the third and fourth quarters of 2003 were not replaced through most of the first quarter of 2004.

     Live theater operating expenses decreased $86,000, or 14% in the first quarter of 2004 compared to the 2003 Quarter, consistent with the absence of replacement productions in the 2004 Quarter.

     As a result, live theater net income decreased $160,000 in the 2004 Quarter when compared to the same period in the 2003 Quarter.

     Our live theater rental weeks for the 2004 Quarter were 62 compared to 70 theater weeks rented in the 2003 Quarter. The theaters are currently running the following shows:

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Rental / Real Estate

     F6r the three months ended March 31, 2004, our rental generating real estate holdings consisted of:

     The Wellington ETRC is now approximately 89% leased (62% excluding the cinema space which is occupied by our own cinema). This lease up level reflects our determination to limit our leasing activity in the Wellington ETRC while we work on plans for the development of phase two of that project. The ancillary retail space at our Perth and Auburn ETRC’s is now approximately 72% leased.

     We own certain unimproved tracts of land which are currently either in various stages of development or held for sale, namely:

     Revenue for the real estate/rental segment increased $980,000 in the 2004 Quarter when compared to the 2003 Quarter. Of this increase, approximately $395,000 was attributable to the positive effect of currency translation. Rental revenue increased at our Australian and New Zealand ETRCs due to higher occupancy rates.

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     Depreciation expense for the real estate/rental segment increased $334,000 in the 2004 Quarter when compared to the 2003 Quarter. Of this increase, approximately $256,000 was attributable to the negative effect of currency translation. The remaining increase was due to additional depreciation recorded on assets acquired after the 2003 Quarter.

     Net income for the real estate/rental segment was $340,000 for the 2004 Quarter compared to a net loss of $175,000 recorded in the same period of 2003. The increase in net income is primarily due to increased rentals at our Australian ETRCs and the positive effect of currency fluctuation on net income of approximately $215,000. The increase in net income was somewhat offset by the increase in depreciation expense, due in part to depreciation on assets acquired subsequent to the 2003 Quarter and currency fluctuation.

Corporate

     General and administrative expense includes expense that is not directly attributable to other operating segments. The increase in expense was $161,000 in the 2004 Quarter when compared to the 2003 Quarter. The increase is primarily due to increased professional fees and certain travel related expenses. This increase in general and administrative expenses was somewhat offset by a decrease in our Australian and New Zealand expenses of approximately $20,000, of which roughly $8,000 was due to the positive effect of currency fluctuation.

     Corporate other expense (income) is comprised of:

     For the three months ended March 31, 2004, other income was $498,000, compared to other expense of $912,000 in compared to the same period in 2003. The increase in other income was primarily due to $719,000 in gains recognized for currency fluctuation in connection with certain cash transfers that were transacted in the first quarter of 2004. In addition, we recorded increased equity earnings from our unconsolidated joint ventures of approximately $440,000, primarily from the earnings of a 16-screen joint venture interest that we acquired in May of 2003.

Business Plan, Capital Resources and Liquidity

Business Plan

     Our business plan is to continue to identify, develop and acquire cinema and live theater properties, focusing, where reasonably available, on those opportunities where we can acquire either the fee interest underlying such operating assets, or long term leases, which provide flexibility with respect to the usage of such leasehold estates. We are currently concentrating our acquisitions and development activities primarily in Australia and New Zealand, as we believe that there are currently better opportunities in these markets than domestically. Since the first of the year, we have entered into various agreements relating to the development of four new state-of-the-art cinemas aggregating 31 screens and one existing state-of-the-art 10-screen cinema in

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Australia. Our New Zealand joint venture has acquired the management rights to a 5-screen cinema, and is currently in the process of constructing a new 8-screen cinema in a suburb of Auckland. In June we are slated to open anAngelika Film Center in Plano, Texas, which we will operate under a long-term management arrangement.

     We intend to dispose of our interest in Puerto Rico, and have entered into a letter of intent with respect to such a disposition transaction, and have already disposed of all of our agricultural interests and assets. We continue to close under-performing cinema assets, or to sell those which have value as real estate significantly in excess of their value as cinemas.

Contractual Obligations

     The following table provides information with respect to the maturities and scheduled principal repayments of the Company’s secured debt and lease obligations at March 31, 2004 (in thousands):

Liquidity and Capital Resources

     Our ability to generate sufficient cash flows from operating activities in order to meet our obligations and commitments drives our liquidity position. This is further affected by our ability to obtain adequate, reasonable financing and/or to convert non-performing or non-strategic assets into cash. We cannot separate liquidity from capital resources in achieving our long-term goals in order to meet our debt servicing requirements.

     Currently, our liquidity needs arise mainly from:

Operating Activities

     Cash used in operations was $3,048,000 in the 2004 Quarter compared to $1,058,000 in the 2003 Quarter. The increase in cash used in operations of $1,990,000 is primarily due to a significant increase in our prepaid assets constituting primarily our prepaid workers’ compensation, property and liability insurance premiums which were prepaid, worldwide and are being amortized over the 12-month policy period. In addition, our receivable balance in the 2004 Quarter increased when compared to the 2003 Quarter primarily due to GST refunds that have not yet been received in Australia and by insurance proceeds for claim reimbursements that have not yet been received domestically.

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Investing Activities

     Cash used in investing activities during the first three months of 2004 was $73,000 compared to cash used in investing activities of $64,000 during the same period in 2003. In the 2003 Quarter, we had $368,000 in proceeds from the sale of assets. We did not have similar sales of assets in the 2004 Quarter. This was offset by the increase in distributions from our joint ventures.

Financing Activities

     Cash used in financing activities was $880,000 for the first three months of 2004 compared to $716,000 for the same period in 2003. This $164,000 increase is directly attributable to the increase in repayment of long term debt made in the 2004 Quarter compared to the 2003 Quarter.

Summary

     Our cash position at March 31, 2004 was $18,221,000. At March 31, 2004, our working capital, contrary to industry norm was positive at $1,117,000. Virtually all cinema companies operate with negative working capital, reflecting the delays between the time revenues are collected at the cinemas and the time film rental is remitted to distributors.

     We have put into place several measures that are expected to have or have already had a positive effect on our overall liquidity, including:

     Potential uses for funds during 2004 that would reduce our liquidity, other than those relating to working capital needs and debt service requirements include:

     Based upon the current levels of the consolidated operations, anticipated cost savings and future growth, we believe our cash flow from operations, together with both the existing and anticipated lines-of-credit and other sources of liquidity (including future potential asset sales) will be adequate to meet our anticipated requirements for interest payments and other debt service obligations, working capital, capital expenditures and other operating needs. There can be no assurance, however, that the business will continue to generate cash

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flow at or above current levels or that estimated cost savings or growth can be achieved. Future operating performance and our ability to service or refinance existing indebtedness, will be subject to future economic conditions and to financial and other factors, such as access to first-run films, many of which are beyond our control. If our cash flow from operations and/or proceeds from anticipated borrowings should prove to be insufficient to meet our funding needs, our current intention is either:

     At the present time, included among the assets that are securing our AUD$30,000,000 loan facility are our 50-acre Burwood property, our three-acre Moonee Ponds property and our four-acre Newmarket property. Because of Australian operating losses incurred as we entered into the Australian market, these assets could be liquidated without the payment of any income taxes.

     We are currently in advanced discussions with our banks in Australia with a view of increasing our current AUD$30,000,000 loan facility to AUD$40,000,000, achieving lower financing costs, obtaining capital repayment deferral and releasing the Burwood, Moonee Ponds and Newmarket properties from the securitization pool. We can give no assurance that we will be successful in achieving any or all of these terms.

Critical Accounting Policies

     The Securities and Exchange Commission defines critical accounting policies as those that are, in management’s view, most important to the portrayal of the company’s financial condition and results of operations and the most demanding in their calls on judgment. Although accounting for our core business of cinema and live theater exhibition with a real estate focus is relatively straightforward, we believe our most critical accounting policies relate to:

These critical accounting policies are fully discussed in our 2003 Annual Report and you are advised to refer to that discussion.

Financial Risk Management

     Our internally developed risk management procedure, seeks to minimize the potentially negative effects of changes in foreign exchange rates and interest rates on the results of operations. Our primary exposure to fluctuations in the financial markets is currently due to changes in foreign exchange rates between U.S and Australia and New Zealand, and interest rates.

     After the Consolidation on December 31, 2001, we began recognizing unrealized foreign currency translation gains and losses. As our operational focus continues to shift to Australia and New Zealand, unrealized foreign currency translation gains and losses could materially affect our financial position. We currently manage our currency exposure by creating natural hedges in Australia and New Zealand. This involves local country sourcing of goods and services as well as borrowing in local currencies.

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     Our exposure to interest rate risk arises out of our long-term debt obligations. Consistent with our internally developed guidelines, we seek to reduce the negative effects of changes in interest rates by changing the character of the interest rate on our long-term debt, converting a fixed rate into a variable rate and vice versa. Our internal procedures allow us to enter into derivative contracts on certain borrowing transactions to achieve this goal; however, to date, no such contracts had been utilized.

Inflation

     We continually monitor inflation and the effects of changing prices. Inflation increases the cost of goods and services used. Competitive conditions in many of our markets restrict our ability to fully recover the higher costs of acquired goods and services through price increases. We attempt to mitigate the impact of inflation by implementing continuous process improvement solutions to enhance productivity and efficiency and, as a result, lower costs and operating expenses. In our opinion, the effects of inflation have been managed appropriately and as a result, have not had a material impact on our operations and the resulting financial position or liquidity.

Litigation

     We are currently, and are from time to time, involved with claims and lawsuits arising in the ordinary course of our business. Some examples of the types of claims are:

     Where we are the plaintiffs, we expense all legal fees on an on-going basis and make no provision for any potential settlement amounts until received. In Australia, the prevailing party is entitled to recover its attorneys fees, which typically works out to be approximately 60% of the amounts actually spent where first class legal counsel is engaged at customary rates. Where we are a plaintiff, we have likewise made no provision for the liability for such attorneys in the event we were determined not to be the prevailing party.

     Where we are the defendants, we accrue for probable damages, which may not be covered by insurance, as they become known and can be reasonably estimated. In our opinion, any claims and litigation in which we are currently involved are not reasonably likely to have a material adverse effect on our business, results of operations, financial position or liquidity. However, we do not give any assurance as to the ultimate outcome of such claims and litigation. The resolution of such claims and litigation could be material to our operating results for any particular period, depending on the level of income for such period. Our current litigation is fully described in our Company’s 2003 Annual Report and you are advised to refer to that discussion.

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Forward-Looking Statements

     This March Report contains “forward-looking statements,” as defined under the Private Securities Litigation Reform Act of 1995, regarding, among other items:

     These forward-looking statements are based on our expectations and are subject to a number of risks and uncertainties, some of which are beyond our control. These risks and uncertainties include, but are not limited to:

     Although we believe we have the exhibition and real estate resources to achieve our objectives, actual results could differ materially from those anticipated by these forward-looking statements. There can be no assurance that events anticipated by these forward-looking statements will in fact transpire as expected.

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Item 3 – Quantitative and Qualitative Disclosure about Market Risk

     The Securities and Exchange Commission requires that registrants include information about potential effects of changes in currency exchange and interest rates in their filings. Several alternatives, all with some limitations, have been offered. The following discussion is based on a sensitivity analysis, which models the effects of fluctuations in currency exchange rates and interest rates. This analysis is constrained by several factors, including the following:

     Although the results of such an analysis may be useful as a benchmark, they should not be viewed as forecasts.

     At March 31, 2004, approximately 50% and 17% of our assets were invested in assets denominated in Australian dollars (Reading Australia) and New Zealand dollars (Reading New Zealand), respectively, including approximately AUD$14,900,000 and NZ$5,100,000, respectively in cash and cash equivalents. At December 31, 2003, approximately 46% and 16% of our assets were invested in assets denominated in Australian dollars (Reading Australia) and New Zealand dollars (Reading New Zealand), respectively, including approximately AUD$18,800,000 and NZ$3,400,000, respectively in cash and cash equivalents.

     Our policy in Australia and New Zealand is to match revenue and expenses, whenever possible, in local currencies. As a result, a majority of our expenses in Australia and New Zealand have been procured in local currencies. Due to the developing nature of our operations in Australia and New Zealand, our revenue is not yet significantly greater than our operating expense. The resulting natural operating hedge has led to a somewhat neglible foreign currency effect on our earnings.

     Our policy is to borrow in local currencies to finance the development and construction of our ETRC’s in Australia and New Zealand whenever possible. As a result, the borrowings in local currencies have provided somewhat of a natural hedge against the foreign currency exchange exposure. Even so, approximately 67% and 34% of our Australian and New Zealand assets, respectively, remain subject to such exposure unless we elect to hedge our foreign currency exchange between the US and Australian and New Zealand dollars. At the present time, we have no plan to hedge such exposure.

     Commencing in 2002, we also began recognizing unrealized foreign currency translation gains or losses which could materially affect our financial position. For the three months ended March 31, 2004 and for the year ended December 31, 2003, we have recorded a cumulative unrealized foreign currency translation gain of approximately $31,950,000 and $31,160,000, respectively.

     Historically, we maintained most of our cash and cash equivalent balances in short-term money market instruments with original maturities of three months or less. Some of our money market investments may decline in value if interest rates increase. Due to the short-term nature of such investments, a change of 1% in short-term interest rates would not have a material effect on our financial condition.

Item 3A – Quantitative and Qualitative Disclosure about Interest Risk

     The majority of our Australian and New Zealand bank loans have variable rates and a change of approximately 1% in short-term interest rate would have resulted in the increase or decrease of approximately $97,000 increase or decrease in our interest expense for the three months ended March 31, 2004, respectively.

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     During the second quarter of 2003, we renewed a loan agreement extending our AUD$30,000,000 loan facility in Australia. The amended and restated loan agreement provides for a fixed interest rate on a portion of the total loan facility.

Item 4 – Controls and Procedures

     The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

     The Company carried out an evaluation, as of the end of the quarterly period covered by the March Report, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

     Nothing has come to management’s attention to indicate that there has been any change in the Company’s internal controls that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – Other Information

Item 1 — Legal Proceedings

Item 2 — Change in Securities

Item 3 — Defaults upon Senior Securities

Item 4 — Submission of Matters to a Vote of Securities Holders

Item 5 — Other Information

Item 6 — Exhibits and Reports on Form 8-K

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Table of Contents

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

READING INTERNATIONAL, INC.

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