The following table sets forth the terms of our interest rate swap derivative instruments at September 30, 2010:

Type of Instrument		Notional Amount				Pay Fixed Rate				Receive Variable Rate			Maturity Date
Interest rate swap		$	31,000,000				2.854	%			0.2900	%	April 1, 2011
Interest rate swap		$	46,494,000				4.550	%			4.9700	%	December 31, 2011
Interest rate cap		$	25,035,000				4.550	%			4.9700	%	December 31, 2011

In accordance with FASB ASC 815-10-35, Subsequent Valuation of Derivative Instruments and Hedging Instruments (“FASB ASC 815-10-35”), we marked our interest rate swap instruments to market on the consolidated balance sheet resulting in a decrease in interest expense of $308,000 and $189,000 during the three and nine months ended September 30, 2010, respectively, and a $456,000 and $1.2 million decrease in interest expense during the three and nine months ended September 30, 2009, respectively.  At September 30, 2010, we recorded the fair market value of an interest rate swap and a cap of $543,000 as other long-term assets and an interest rate swap of $367,000 as an other long-term liability.  At December 31, 2009, we recorded the fair market value of an interest rate swap and a cap of $766,000 as other long-term assets and an interest rate swap of $785,000 as an other long-term liability.  In accordance with FASB ASC 815-10-35, we have not designated any of our current interest rate swap positions as financial reporting hedges.

Note 18 – Fair Value of Financial Instruments

We measure the following items at fair value on a recurring basis subject to the disclosure requirements of FASB ASC 820-20, Fair Value of Financial Instruments (dollars in thousands):

					Book Value								Fair Value
Financial Instrument		Level			September 30, 2010				December 31, 2009				September 30, 2010				December 31, 2009
Investment in marketable securities		1			$	2,800			$	3,120			$	2,800			$	3,120
Interest rate swap & cap assets		2			$	543			$	766			$	543			$	766
Interest rate swap liability		2			$	367			$	785			$	367			$	785

ASC 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The statement requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

 

·	Level 1: Quoted market prices in active markets for identical assets or liabilities.

 

·	Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

 

 

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·	Level 3: Unobservable inputs that are not corroborated by market data (were not used to value any of our assets requiring recurring measurements of fair value).

We used the following methods and assumptions to estimate the fair values of the assets and liabilities:

Level 1 Fair Value Measurements – are based on market quotes of our marketable securities.

Level 2 Fair Value Measurements –

Interest Rate Swaps – The fair value of interest rate swaps and cap are estimated using internal discounted cash flow calculations based upon forward interest rate curves, which are corroborated by market data, and quotes obtained from counterparties to the agreements.

Level 3 Fair Value Measurements – we do not have any assets or liabilities that fall into this category for assets measured at fair value on a recurring basis.

Impaired Property - For assets measured on a non-recurring basis, such as real estate assets that are required to be recorded at fair value as a result of an impairment, our estimates of fair value are based on management’s best estimate derived from evaluating market sales data for comparable properties developed by a third party appraiser and arriving at management’s estimate of fair value based on such comparable data primarily based on properties with similar characteristics.  In the first quarter of 2010, the fair value of the Taringa Property was estimated at $1.8 million (AUS$2.2 million) for purposes of recording our impairment expense for the nine months ended September 30, 2010 and was based on level 3 inputs in developing management’s estima te of fair value.

As of September 30, 2010, we held certain items that are required to be measured at fair value on a recurring basis.  These included cash equivalents, available for sale securities, and interest rate derivative contracts.  Cash equivalents consist of short-term, highly liquid, income-producing investments, all of which have maturities of 90 days or less.  Derivative instruments are related to our economic hedge of interest rates.  Our available-for-sale securities primarily consist of investments associated with the ownership of marketable securities in Australia.

The fair values of the interest rate swap agreements are determined using the market standard methodology of discounting the future cash payments and cash receipts on the pay and receive legs of the interest swap agreements that have the net effect of swapping the estimated variable rate note payment stream for a fixed rate payment stream over the period of the swap.  The variable interest rates used in the calculation of projected receipts on the interest rate swap and cap agreements are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.  To comply with the provisions of ASC 820-10, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respectiv e counterparty's nonperformance risk in the fair value measurements.  Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by our counterparties and us.  However, as of September 30, 2010, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation and determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives.  As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.  The nature of our interest rate swap derivative instruments is described in Note 17 – Derivative Instruments.

 

 

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We have consistently applied these valuation techniques in all periods presented and believe we have obtained the most accurate information available for the types of derivative contracts we hold.  Additionally, there were no transfers of assets and liabilities between levels 1, 2, or 3 during the three or nine months ended September 30, 2010.

Financial Instruments Disclosed at Fair Value

The following table sets forth the carrying value and the fair value of our financial assets and liabilities at September 30, 2010 and December 31, 2009 (dollars in thousands):

		Book Value								Fair Value
Financial Instrument		September 30, 2010				December 31, 2009				September 30, 2010				December 31, 2009
Notes payable		$	193,387			$	185,080			$	175,542			$	172,946
Notes payable to related party		$	9,000			$	14,000			$	N/A			$	N/A
Subordinated debt (trust preferred securities)		$	27,913			$	27,913			$	18,760			$	20,416

The fair value of notes payable to related party cannot be determined due to the related party nature of the terms of the notes payable.

We estimated the fair value of our secured mortgage notes payable, our unsecured notes payable, trust preferred securities, and other debt instruments by performing discounted cash flow analyses using an appropriate market discount rate.  We calculated the market discount rate by obtaining period-end treasury rates for fixed-rate debt, or LIBOR rates for variable-rate debt, for maturities that correspond to the maturities of our debt, adding appropriate credit spreads derived from information obtained from third-party financial institutions.  These credit spreads take into account factors such as our credit standing, the maturity of the debt, whether the debt is secured or unsecured, and the loan-to-value ratios of the debt.

Note 19 – Acquisitions, Asset Impairment, and Assets Held for Sale

Manukau Land Purchase

On April 30, 2009, we entered into an agreement to purchase for $3.6 million (NZ$5.2 million) a property adjacent to our Manukau property.  An initial deposit of $26,000 (NZ$50,000) was paid upon signing of the agreement, a second deposit of $175,000 (NZ$258,000) was paid in the second quarter of 2009 and a third deposit of $531,000 (NZ$773,000) was paid in August 2009.  The fourth and final purchase payment of $2.9 million (NZ$4.1 million) was made on March 31, 2010 completing our acquisition of this land parcel.

Taringa

During June 2010, we determined that we would no longer pursue the development of our Taringa properties.  As such, we recorded an impairment to our investment in these properties of $2.2 million, primarily associated with the development costs of the project.

Burwood – Held for Sale

In May 2010, we announced our intent to sell and began actively marketing our 50.6-acre Burwood development site in suburban Melbourne.  The current carrying value of this property on our books is $50.2 million (AUS$52.1 million) which was reclassified during the second quarter of 2010 from property held for development to land held for sale on our condensed consolidated balance sheet.  In accordance with ASC 820-10-50, we carry this property at the lower of cost or estimated fair value less costs to sell.

 

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Note 20 – Related Party Transactions

Village East Lease

On June 29, 2010, we agreed to extend our existing lease from SHC of the Village East Cinema in New York City by 10 years, with a new termination date of June 30, 2020.  The Village East lease includes a sub-lease of the ground underlying the cinema that is subject to a longer-term ground lease between SHC and an unrelated third party that expires in June 2031 (the “cinema ground lease”).  The extended lease provides for a call option pursuant to which Reading may purchase the cinema ground lease for $5.9 million at the end of the lease term.  Additionally, the lease has a put option pursuant to which SHC may require Reading to purchase all or a portion of SHC’s interest in the existing cinema lease and the cinema ground lease at any time b etween July 1, 2013 and December 4, 2019.  SHC’s put option may be exercised on one or more occasions in increments of not less than $100,000 each.  Because our Chairman, Chief Executive Officer, and controlling shareholder, Mr. James J. Cotter, is also the managing member of SHC, RDI and SHC are considered entities under common control.  As a result, we recorded the Village East Cinema building as a property asset of $4.7 million on our balance sheet based on the cost carry-over basis from an entity under common control with a corresponding capital lease liability of $5.6 million presented under other liabilities (see Note 12 – Other Liabilities).  This resulted in a deemed equity distribution of $877,000.

The future minimum lease payments associated with this lease are (dollars in thousands):

As of September 30, 2010
2010		$	147
2011			590
2012			590
2013			590
2014			590
Thereafter			9,096
Total future minimum rental income		$	11,603

Sutton Hill Capital Notes 1 & 2

During the nine months ended September 30, 2010, we paid off the SHC Note 1 and renegotiated the SHC Note 2 [see Note 11 – Notes Payable and Subordinated Debt (Trust Preferred Securities)].

Note 21 – Subsequent Events

Nationwide Note Reduction

Pursuant to our note agreement with Nationwide Theaters Corp. (the Sellers note above associated with the Consolidated Cinemas acquisition), effective October 28, 2010, the Nationwide Note 1 was reduced by $12.5 million in the principal amount owed.  This reduction has the effect of reducing the principal amount of the note to $592,000 with a retroactive adjustment to the accrued interest.  This reduction in the note effectively adjusts the original purchase price of the Consolidated Cinemas by $12.5 million.

 

 

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Cinema Opening in Newcastle, NSW, Australia

During October 2010, we opened a newly leased 8-screen cinema in Newcastle, NSW, Australia.

 

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

We are an internationally diversified company principally focused on the development, ownership, and operation of entertainment and real property assets in the United States, Australia, and New Zealand.  Currently, we operate in two business segments:

 

·	cinema exhibition, through our 57 multiplex cinemas; and

 

·	real estate, including real estate development and the rental of retail, commercial and live theater assets.

 

We believe that these two business segments can complement one another, as we can use the comparatively consistent cash flows generated by our cinema operations to fund the front-end cash demands of our real estate development business.

We manage our worldwide cinema exhibition businesses under various different brands:

 

·	in the US, under the Reading, Angelika Film Center, Consolidated Amusements, and City Cinemas brands;

 

·	in Australia, under the Reading brand; and

 

·	in New Zealand, under the Reading and Rialto brands.

We believe cinema exhibition to be a business that will likely continue to generate consistent cash flows in the years ahead.  We base this on our belief that people will continue to spend some reasonable portion of their entertainment dollar on entertainment outside of the home and that, when compared to other forms of outside the home entertainment, movies continue to be a popular and competitively priced option.  During the third quarter of 2009, we leased two existing cinemas in New York City with 3 screens but elected not to renew the lease of our 5-screen cinema in Market City, Australia.  During May 2010, we elected not to renew the lease of our 4-screen Kapiti cinema in New Zealand, and, during September 2010, we decided not to continue a month-to-mo nth lease of our 8-screen AFC Houston cinema.  We anticipate that our cinema operations will continue as our main source of cash flow and will support our real estate oriented activities.

In short, while we do have operating company attributes, we see ourselves principally as a hard asset company and intend to add to shareholder value by building the value of our portfolio of tangible assets.

In addition, we may from time to time identify opportunities to expand our existing businesses and asset base, or to otherwise profit, through the acquisition of interests in other publicly traded companies, both in the United States and in the overseas jurisdictions in which we do business.  We may also take positions in private companies in addition to our investments in various private cinema joint ventures.

At September 30, 2010, we owned and operated 51 cinemas with 413 screens, had interests in certain unconsolidated joint ventures and entities that own an additional 4 cinemas with 32 screens and managed 2 cinemas with 9 screens.  We anticipate opening the following two newly leased cinemas:

·	one in Newcastle, NSW, Australia with 8 screens which opened in October 2010; and

·	the Angelika branded cinema in Merrifield, Virginia with 8 screens, which we anticipate will open in early 2012.

On July 24, 2009, we signed a lease with the City of Brisbane, Australia to lease our Indooroopilly building to them for an initial three-year period with two three-year options.  Although we have curtailed our development activities, we remain opportunistic in our acquisitions of cinema and real estate assets.  Our business plan going forward is to continue the build-out of our existing development properties and to seek out additional, profitable real estate development opportunities while continuing to use and judiciously expand our presence in the cinema exhibition by identifying, developing, and acquiring cinema properties when and where appropriate.  In addition, we will continue to investigate potential synergistic acquisitions that may not readily fa ll into either of our two currently identified segments.

 

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We continue to acquire, to dispose of, or to reposition assets in accordance with our business plan.  For a description of our acquisitions so far in 2010, see Note 19 – Acquisitions, Asset Impairments, and Assets Held for Sale to our September 30, 2010 Condensed Consolidated Financial Statements.

Results of Operations

At September 30, 2010, we owned and operated 51 cinemas with 413 screens, had interests in certain unconsolidated joint ventures and entities that own an additional 4 cinemas with 32 screens and managed 2 cinemas with 9 screens.  In real estate during the period, we (i) owned and operated four ETRC’s that we developed in Australia and New Zealand, (ii) owned the fee interests in four developed commercial properties in Manhattan and Chicago improved with live theaters comprising seven stages and ancillary retail and commercial space, (iii) owned the fee interests underlying one of our Manhattan cinemas, and (iv) held for development an additional seven parcels aggregating approximately 78.4 acres located principally in urbanized areas of Australia and New Zealand. 
60;One of these parcels held for development, our Moonee Ponds property, comprises approximately 3.4 acres, and is in an area designated by the provincial government of Victoria, Australia as a “principal activity centre.”

Operating expense includes costs associated with the day-to-day operations of the cinemas and the management of rental properties, including our live theater assets.  Our year-to-year results of operation were principally impacted by the following:

 

·	strong revenue growth from our cinema exhibition segment driven primarily by the availability of good 3D content and our ability to show these films on our newly installed 3D projectors;

 

·	the fluctuation in the value of the Australian and New Zealand dollars vis-à-vis the US dollar resulting in an increase in results of operations for our foreign operations for 2010 compared to 2009.

During the nine months ended September 30, 2010, we changed our reporting for intercompany property rent where our cinema operations were substantially the only tenant of such property by eliminating the intersegment revenue and expense relating to the intercompany rent, and transferring the third party lease costs from the real estate segment to the cinema exhibition segment.  This change in management’s structure of its reportable segments commenced on January 1, 2010, such changes to segment reporting are reflected in the segment results for the three and nine months ended September 30, 2010 and 2009, respectively.  The retroactive presentation for the three and nine months ended September 30, 2009 segment results decreased intersegment revenue and expense for the intercompany rent by $1.3 million and $3.5 million, respectively, and transferred the third party lease costs from the real estate segment to the cinema exhibition segment.  The overall results of these changes decreased real estate segment revenues and expense by $1.3 million and $3.5 million, respectively.  This change results in a reduction of real estate operating expense and an increase of cinema operating expense of $1.3 million and $3.5 million, respectively on our Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2009, respectively.

The tables below summarize the results of operations for each of our principal business segments for the three (“2010 Quarter”) and nine (“2010 Nine Months”) months ended September 30, 2010 and the three (“2009 Quarter”) and nine (“2009 Nine Months”) months ended September 30, 2009, respectively (dollars in thousands):

 

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Three months ended September 30, 2010		Cinema Exhibition				Real Estate				Intersegment Eliminations				Total
Revenue		$	55,303			$	6,744			$	(1,409	)		$	60,638
Operating expense			46,219				2,190				(1,409	)			47,000
Depreciation & amortization			2,526				1,136				--				3,662
General & administrative expense			669				217				--				886
Segment operating income		$	5,889			$	3,201			$	--			$	9,090
Three months ended September 30, 2009		Cinema Exhibition				Real Estate				Intersegment Eliminations				Total
Revenue		$	52,340			$	5,078			$	(1,351	)		$	56,067
Operating expense			43,166				1,866				(1,351	)			43,681
Depreciation & amortization			2,723				1,039				--				3,762
General & administrative expense			608				195				--				803
Segment operating income		$	5,843			$	1,978			$	--			$	7,821

 

Reconciliation to net income attributable to Reading International, Inc. shareholders:		2010 Quarter				2009 Quarter
Total segment operating income		$	9,090			$	7,821
Non-segment:
Depreciation and amortization expense			212				239
General and administrative expense			3,313				3,403
Other operating income			--				(2,551	)
Operating income			5,565				6,730
Interest expense, net			(3,615	)			(3,476	)
Other income (loss)			20				(24	)
Income tax expense			(885	)			(424	)
Equity earnings of unconsolidated joint ventures and entities			293				202
Gain on sale of investments in unconsolidated entities			--				268
Net income			1,378				3,276
Net income attributable to the noncontrolling interest			(136	)			(133	)
Net income attributable to Reading International, Inc. common shareholders		$	1,242			$	3,143

 

Nine months ended September 30, 2010		Cinema Exhibition				Real Estate				Intersegment Eliminations				Total
Revenue		$	161,582			$	18,457			$	(4,220	)		$	175,819
Operating expense			134,193				6,681				(4,220	)			136,654
Depreciation & amortization			7,635				3,407				--				11,042
Impairment expense			--				2,239				--				2,239
General & administrative expense			1,896				922				--				2,818
Segment operating income		$	17,858			$	5,208			$	--			$	23,066

 

Nine months ended September 30, 2009		Cinema Exhibition				Real Estate				Intersegment Eliminations				Total
Revenue		$	146,991			$	14,274			$	(3,698	)		$	157,567
Operating expense			120,762				5,305				(3,698	)			122,369
Depreciation & amortization			8,208				2,474				--				10,682
Loss on transfer of real estate held for sale to continuing operations			--				549				--				549
General & administrative expense			2,176				564				--				2,740
Segment operating income		$	15,845			$	5,382			$	--			$	21,227

 

 

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Reconciliation to net income attributable to Reading International, Inc. shareholders:		2010 Nine Months				2009 Nine Months
Total segment operating income		$	23,066			$	21,227
Non-segment:
Depreciation and amortization expense			600				487
General and administrative expense			10,202				10,135
Other operating income			--				(2,551	)
Operating income			12,264				13,156
Interest expense, net			(10,779	)			(10,737	)
Gain on retirement of subordinated debt (trust preferred securities)			--				10,714
Gain on sale of assets			350				--
Other loss			(692	)			(2,740	)
Income tax expense			(13,668	)			(1,422	)
Equity earnings of unconsolidated joint ventures and entities			910				861
Gain on sale of investments in unconsolidated entities			--				268
Net income (loss)			(11,615	)			10,100
Net income attributable to the noncontrolling interest			(505	)			(460	)
Net income (loss) attributable to Reading International, Inc. common shareholders		$	(12,120	)		$	9,640

 

Cinema Exhibition Segment

Included in the cinema exhibition segment above is revenue and expense from the operations of 51 cinema complexes with 413 screens during the 2010 Quarter and 53 cinema complexes with 425 screens during the 2009 Quarter and management fee income from 2 cinemas with 9 screens in both years.  The following tables detail our cinema exhibition segment operating results for the three months ended September 30, 2010 and 2009, respectively (dollars in thousands):

 

Three Months Ended September 30, 2010		United States				Australia				New Zealand				Total
Admissions revenue		$	19,068			$	16,455			$	4,148			$	39,671
Concessions revenue			7,039				4,946				1,052				13,037
Advertising and other revenues			1,308				1,032				255				2,595
Total revenues			27,415				22,433				5,455				55,303
Cinema costs			23,117				16,767				3,972				43,856
Concession costs			1,090				1,037				236				2,363
Total operating expense			24,207				17,804				4,208				46,219
Depreciation and amortization			1,599				669				258				2,526
General & administrative expense			491				178				--				669
Segment operating income		$	1,118			$	3,782			$	989			$	5,889

 

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Three Months Ended September 30, 2009		United States				Australia				New Zealand				Total
Admissions revenue		$	18,589			$	14,734			$	3,975			$	37,298
Concessions revenue			6,988				4,934				1,095				13,017
Advertising and other revenues			1,264				556				205				2,025
Total revenues			26,841				20,224				5,275				52,340
Cinema costs			22,461				14,552				3,837				40,850
Concession costs			1,105				969				242				2,316
Total operating expense			23,566				15,521				4,079				43,166
Depreciation and amortization			1,643				801				279				2,723
General & administrative expense			414				195				(1	)			608
Segment operating income		$	1,218			$	3,707			$	918			$	5,843

 

·

Cinema revenue increased for the 2010 Quarter by $3.0 million or 5.7% compared to the same period in 2009.  The 2010 Quarter increase was primarily from our Australia and New Zealand cinema operations, which accounted for $2.4 million of the increase primarily relating to a year over year increase in the value of the Australia and New Zealand dollars compared to the U.S. dollar.  This increase translated to higher Australian and New Zealand revenues for the 2010 Quarter compared to the 2009 Quarter (see below).  In addition to this uplift in revenues associated with foreign currency exchange, our revenues increased in the U.S. and Australia primarily related to higher ticket prices from 3D films.  We also made certain internal reporting changes to our intersegment revenue recognition between our cinema and real estate segments which resulted in an increase in other cinema revenues of $62,000 in the U.S.

 

·

Operating expense increased for the 2010 Quarter by $3.1 million or 7.1% compared to the same period in 2009.  This increase followed the increased revenues noted above primarily relating to an increase in the value of the Australia and New Zealand dollars compared to the U.S. dollar (see below) combined with an adjustment for straight-line rent expense for our Australia cinemas.  For the U.S., we noted higher operating costs primarily related to the newly leased 3D equipment and the associated labor-intensive nature of showing 3D films.  Overall, our operating expense as a percent of gross revenue increased from 82.5% to 83.6% primarily due to the aforementioned an adjustment for straight-line rent expense.

 

·	Depreciation and amortization expense decreased for the 2010 Quarter by $197,000 or 7.2% compared to the same period in 2009 primarily related to the short useful lives of the used assets associated with our Consolidated Entertainment cinemas purchased February 2008.

 

·	General and administrative costs increased for the 2010 Quarter by $61,000 or 10.0% compared to the same period in 2009.

 

·	For our statement of operations, Australia and New Zealand quarterly average exchange rates have increased by 8.7% and 6.6%, respectively, since the 2009 Quarter, which had an impact on the individual components of our income statement.

 

·	Because of the above, cinema exhibition segment income increased for the 2010 Quarter by $46,000 compared to the same period in 2009, a 0.8% increase.

 

 

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The following tables detail our cinema exhibition segment operating results for the nine months ended September 30, 2010 and 2009, respectively (dollars in thousands):

 

Nine Months Ended September 30, 2010		United States				Australia				New Zealand				Total
Admissions revenue		$	55,981			$	47,059			$	12,520			$	115,560
Concessions revenue			21,062				14,032				3,073				38,167
Advertising and other revenues			3,860				3,254				741				7,855
Total revenues			80,903				64,345				16,334				161,582
Cinema costs			67,789				47,482				11,922				127,193
Concession costs			3,275				3,012				713				7,000
Total operating expense			71,064				50,494				12,635				134,193
Depreciation and amortization			4,805				2,063				767				7,635
General & administrative expense			1,436				460				--				1,896
Segment operating income		$	3,598			$	11,328			$	2,932			$	17,858

Nine Months Ended September 30, 2009		United States				Australia				New Zealand				Total
Admissions revenue		$	55,913			$	38,377			$	9,840			$	104,130
Concessions revenue			21,779				12,755				2,717				37,251
Advertising and other revenues			3,456				1,627				527				5,610
Total revenues			81,148				52,759				13,084				146,991
Cinema costs			65,755				38,672				9,572				113,999
Concession costs			3,449				2,670				644				6,763
Total operating expense			69,204				41,342				10,216				120,762
Depreciation and amortization			5,410				1,960				838				8,208
General & administrative expense			1,648				529				(1	)			2,176
Segment operating income		$	4,886			$	8,928			$	2,031			$	15,845

·

Cinema revenue increased for the 2010 Nine Months by $14.6 million or 9.9% compared to the same period in 2009.  The 2010 Nine Months increase was primarily from our Australia and New Zealand cinema operations, which accounted for $14.8 million of the increase primarily related to an increase in the average ticket price primarily associated with the recently released 3D movies for the 2010 Nine Months by comparison to 2009 and an increase in the value of the Australia and New Zealand dollars compared to the U.S. dollar (see below).  Our U.S. cinemas did not experience the same uplift in revenues as noted from our Australia and New Zealand cinemas due to increased competition at one of our cinemas and decreased admissions circuit wide.  In addition, we made certain internal reporting changes to our intersegment revenue rec ognition between our cinema and real estate segments which resulted in an increase in other cinema revenues of $218,000 in the U.S.

 

·

Operating expense increased for the 2010 Nine Months by $13.4 million or 11.1% compared to the same period in 2009.  For Australia and New Zealand, this increase followed the increased revenues noted above.  For the U.S., we noted higher operating costs primarily related to the newly leased 3D equipment and the associated increased labor-intensive nature of showing 3D films.  Overall, our operating expense as a percent of gross revenue increased from 82.2% to 83.0% from the 2009 Nine Months to the 2010 Nine Months due primarily to the aforementioned cost increases in the U.S.

 

 

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·	Depreciation and amortization expense decreased for the 2010 Nine Months by $573,000 or 7.0% compared to the same period in 2009 primarily related to the short useful lives of the used assets associated with our Consolidated Entertainment cinemas purchased February 2008.

 

·	General and administrative costs decreased for the 2010 Nine Months by $280,000 or 12.9% compared to the same period in 2009 primarily related to cost cutting measures throughout the segment.

 

·	For our statement of operations, Australia and New Zealand nine month average exchange rates have increased by 19.2% and 17.4%, respectively, since the 2009 Nine Months, which had an impact on the individual components of our income statement.

 

·	Because of the above, cinema exhibition segment income increased for the 2010 Nine Months by $2.0 million compared to the same period in 2009, a 12.7% increase.

Real Estate Segment

The following tables detail our real estate segment operating results for the three months ended September 30, 2010 and 2009, respectively (dollars in thousands):

 

Three Months Ended September 30, 2010		United States				Australia				New Zealand				Total
Live theater rental and ancillary income		$	764			$	--			$	--			$	764
Property rental income			440				3,880				1,660				5,980
Total revenues			1,204				3,880				1,660				6,744
Live theater costs			513				--				--				513
Property rental cost			101				1,147				429				1,677
Total operating expense			614				1,147				429				2,190
Depreciation and amortization			80				692				364				1,136
General & administrative expense			2				211				4				217
Segment operating income		$	508			$	1,830			$	863			$	3,201

 

Three Months Ended September 30, 2009		United States				Australia				New Zealand				Total
Live theater rental and ancillary income		$	455			$	--			$	--			$	455
Property rental income			391				2,681				1,551				4,623
Total revenues			846				2,681				1,551				5,078
Live theater costs			296				--				--				296
Property rental cost			129				1,033				408				1,570
Total operating expense			425				1,033				408				1,866
Depreciation and amortization			84				584				371				1,039
General & administrative expense			--				172				23				195
Segment operating income		$	337			$	892			$	749			$	1,978

 

·

Real estate revenue increased for the 2010 Quarter by $1.7 million or 32.8% compared to the same period in 2009.  U.S. real estate revenue increased primarily due to improved live theater results in 2010 compared to the same period in 2009.  Real estate revenue increased from our Australia and New Zealand properties primarily due to offsetting adjustments to the amortization of a tenant improvement and straight-line rent and due to a year over year increase in the value of the Australia and New Zealand dollars compared to the U.S. dollar.  This increase translated to higher Australian and New Zealand revenues for the 2010 Quarter compared to the 2009 Quarter (see below).

 

 

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·	Operating expense for the real estate segment increased for the 2010 Quarter by $324,000 or 17.4% compared to the same period in 2009.  This increase followed the increased revenues noted above.

 

·	Depreciation and amortization expense for the real estate segment increased by $97,000 or 9.3% for the 2010 Quarter compared to the same period in 2009 primarily due to the aforementioned impact of currency exchange rates (see below).

 

·	General and administrative costs increased for the 2010 Quarter by $22,000 or 11.3% compared to the same period in 2009 primarily due to the impact of currency exchange rate increases (see below) net of our cost cutting measures across the corporation.

 

·	For our statement of operations, Australia and New Zealand quarterly average exchange rates have increased by 8.7% and 6.6%, respectively, since the 2009 Quarter, which had an impact on the individual components of our income statement.

 

·	As a result of the above, real estate segment income increased for the 2010 Quarter by $1.2 million compared to the same period in 2009.

The following tables detail our real estate segment operating results for the nine months ended September 30, 2010 and 2009, respectively (dollars in thousands):

 

Nine Months Ended September 30, 2010		United States				Australia				New Zealand				Total
Live theater rental and ancillary income		$	2,239			$	--			$	--			$	2,239
Property rental income			1,314				10,071				4,833				16,218
Total revenues			3,553				10,071				4,833				18,457
Live theater costs			1,516				--				--				1,516
Property rental cost			341				3,556				1,268				5,165
Total operating expense			1,857				3,556				1,268				6,681
Depreciation and amortization			240				2,056				1,111				3,407
Impairment expense			--				2,239				--				2,239
General & administrative expense			3				893				26				922
Segment operating income		$	1,453			$	1,327			$	2,428			$	5,208

 

 

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Nine Months Ended September 30, 2009		United States				Australia				New Zealand				Total
Live theater rental and ancillary income		$	1,900			$	--			$	--			$	1,900
Property rental income			1,176				7,022				4,176				12,374
Total revenues			3,076				7,022				4,176				14,274
Live theater costs			1,122				--				--				1,122
Property rental cost			379				2,718				1,086				4,183
Total operating expense			1,501				2,718				1,086				5,305
Depreciation and amortization			249				1,227				998				2,474
Loss on transfer of real estate held for sale to continuing operations			--				549				--				549
General & administrative expense			9				504				51				564
Segment operating income		$	1,317			$	2,024			$	2,041			$	5,382

 

·

Real estate revenue increased for the 2010 Nine Months by $4.2 million or 29.3% compared to the same period in 2009.  Real estate revenue increased in Australia in part due to the opening of our Indooroopilly office building during the third quarter of 2009.  Additionally, real estate revenue increased from our Australia and New Zealand properties primarily due to a year over year increase in the value of the Australia and New Zealand dollars compared to the U.S. dollar and due to offsetting adjustments to the amortization of a tenant improvement and straight-line rent.  This increase translated to higher Australian and New Zealand revenues for the 2010 Nine Months compared to the 2009 Nine Months (see below).  Additionally, real estate revenue increased in the U.S. primarily due to improved live theater results in 2010 compared to the same period in 2009.

 

·	Operating expense for the real estate segment increased for the 2010 Nine Months by $1.4 million or 25.9% compared to the same period in 2009.  This increase followed the increased revenues noted above.

 

·

Depreciation and amortization expense for the real estate segment increased by $933,000 or 37.7% for the 2010 Nine Months compared to the same period in 2009 primarily due to the opening of our Indooroopilly office building during the third quarter of 2009 and the impact of currency exchange rates (see below).

 

·	We recorded a $2.2 million impairment charge related to our Taringa real estate property during 2010 primarily associated with the development costs of the project.

 

·	We recorded a loss, in effect catch up depreciation, during 2009, on transfer of real estate held for sale to continuing operations of $549,000 related to our Auburn property.

 

·	General and administrative costs increased for the 2010 Nine Months by $358,000 or 63.5% compared to the same period in 2009 primarily due to the litigation costs associated with the Mackie case in Australia and the impact of currency exchange rate increases (see below).

 

·	For our statement of operations, Australia and New Zealand nine month average exchange rates have increased by 19.2% and 17.4%, respectively, since the 2009 Nine Months, which had an impact on the individual components of our income statement.

 

·	As a result of the above, real estate segment income decreased for the 2010 Nine Months by $174,000 compared to the same period in 2009.

 

 

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Corporate

Quarterly Results

General and administrative expense includes expenses that are not directly attributable to other operating segments.  General and administrative expense decreased by $90,000 in the 2010 Quarter compared to the 2009 Quarter primarily related to a decrease in legal and consulting fees primarily associated with our federal tax litigation, which was settled during July 2010, and reductions in our other administrative costs.

Net interest expense increased by $139,000 for the 2010 Quarter compared to the 2009 Quarter.  The increase in interest expense during the 2010 Quarter was primarily related to slightly higher debt balances for the 2010 Quarter and the aforementioned increase in currency rates for Australia and New Zealand offset by a larger decrease in interest expense from our interest rate swaps in 2009 than that noted in 2010.

For the 2010 Quarter, we recorded an other income of $20,000 compared to an other loss of $24,000 for the 2009 Quarter.  For the 2010 Quarter, the $20,000 other income primarily related to the recovery of previously written-off receivables.  For the 2009 Quarter, the $24,000 other loss included a $250,000 legal settlement gain for our now concluded, Puerto Rico litigation offset by a $224,000 provision loss on our Whitehorse Center litigation and a $63,000 realized foreign currency loss.

For the 2010 Quarter, income tax expense increased by $461,000 primarily relating to additional tax accrual associated with our potential tax exposures related to FASB ASC 740-10-2a, Accounting for Uncertainty in Income Taxes.

For the 2010 Quarter, we recorded an increase in our equity earnings of unconsolidated joint ventures and entities of $91,000 primarily due to improved earnings from our Rialto Distributions investment.

Nine Months Results

General and administrative expense increased by $67,000 in the 2010 Nine Months compared to the 2009 Nine Months related to an increase in legal and consulting fees primarily associated with our federal tax litigation during the first six months of 2010 offset by decreases in other administrative costs.

Net interest expense increased by $42,000 for the 2010 Nine Months compared to the 2009 Nine Months.  The increase in interest expense during the 2010 Nine Months was primarily related to slightly higher debt balances for the 2010 Nine Month and the aforementioned increase in currency rates for Australia and New Zealand offset by a larger decrease in interest expense from our interest rate swaps in 2009 than that noted in 2010.

During the 2009 Nine Months, we recorded a $10.7 million gain on retirement of subordinated debt (trust preferred securities), net of a $749,000 loss on deferred financing costs associated with the subordinated debt.

During the 2010 Nine Months, we recorded a $350,000 gain on sale of assets primarily related to a deferred gain on sale of a property.

For the 2010 Nine Months, we recorded an other loss of $692,000 compared to $2.7 million for the 2009 Nine Months.  For the 2010 Nine Months, the $692,000 other loss included offsetting settlements related to our Whitehorse Center litigation and the 2008 sale of our interest in the Botany Downs cinema, a $605,000 of loss associated our Mackie litigation, and a recovery of previously written-off receivables.  For the nine months ended September 30, 2009, the $2.7 million other loss included a $2.3 million loss on foreign currency transactions, a $2.0 million other-than-temporary loss on marketable securities, offset by a $1.5 million gain from fees associated with a terminated option.

 

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For the 2010 Nine Months, income tax expense increased by $12.2 million primarily relating to our July 2010 settlement with the IRS on our tax litigation case.

For the 2010 Nine Months, we recorded an increase in our equity earnings of unconsolidated joint ventures and entities of $49,000 primarily related to an increase in equity earnings from our Mt. Gravatt and Rialto Distributions investments in the 2010 Nine Months offset by the last condominium being sold associated with our Place 57 investment during the 2009 Nine Months.

Net Income (Loss) Attributable to Reading International, Inc. Common Shareholders

 

During 2010, we recorded a net loss attributable to Reading International, Inc. common shareholders of $12.1 million for the 2010 Nine Months compared to a net income of $9.6 million for the 2009 Nine Months and a net income of $1.2 million for the 2010 Quarter compared to $3.1 million for the 2009 Quarter.  The change from a net income to a net loss from 2009 to 2010 was primarily related to a one-time $10.7 million gain on retirement of subordinated debt and an other operating income gain of $2.6 million representing the recovery of our previously expensed litigation costs incurred during the course of our Malulani litigation, both in 2009, while in 2010, we recorded a one-time income tax accrual of $12.0 million for our federal tax case settlement and a property impairment c harge of $2.2 million.

 

Acquisition

Manukau Land Purchase

On April 30, 2009, we entered into an agreement to purchase for $3.6 million (NZ$5.2 million) a property adjacent to our Manukau property.  An initial deposit of $26,000 (NZ$50,000) was paid upon signing of the agreement, a second deposit of $175,000 (NZ$258,000) was paid in the second quarter of 2009 and a third deposit of $531,000 (NZ$773,000) was paid in August 2009.  The fourth and final purchase payment of $2.9 million (NZ$4.1 million) was made on March 31, 2010.

Business Plan, Capital Resources, and Liquidity

Business Plan

Our cinema exhibition business plan is to continue to identify, develop, and acquire cinema properties, where reasonably available, that allow us to leverage our cinema expertise and technology over a larger operating base.  Our real estate business plan is to continue development of our existing land assets to be sensitive to opportunities to convert our entertainment assets to higher and better uses, or, when appropriate, dispose of such assets.  Because we believe that current economic conditions are not conducive to obtaining the pre-construction leasing commitments necessary to justify commencement of construction, we currently focus our development efforts on improving and enhancing land entitlements and negotiating with end users for build to suit projects.  In addition, we review opportunities to monetize our assets where such action leads to a financially acceptable outcome.  We will also continue to investigate potential synergistic acquisitions that may not readily fall into either of our two currently identified segments.

 

 

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Contractual Obligations

 

The following table provides information with respect to the maturities and scheduled principal repayments of our secured debt and lease obligations at September 30, 2010 (in thousands):

 

		2010				2011				2012				2013				2014				Thereafter				Total
Debt		$	331			$	102,386			$	35,393			$	48,464			$	346			$	6,467			$	193,387
Notes payable to related parties			--				--				--				9,000				--				--				9,000
Subordinated notes (trust preferred securities)			--				--				--				--				--				27,913				27,913
Pension liability			2				14				23				32				40				4,028				4,139
Lease obligations			7,192				27,284				25,721				23,258				20,283				80,272				184,010
Estimated interest on debt			3,467				11,435				5,781				2,678				1,552				14,674				39,587
Total		$	10,992			$	141,119			$	66,918			$	83,432			$	22,221			$	133,354			$	458,036

We base estimated interest on long-term debt on the anticipated loan balances for future periods calculated against current fixed and variable interest rates.

We adopted FASB ASC 740-10-2a, Accounting for Uncertainty in Income Taxes on January 1, 2007.  As of adoption, the total amount of gross unrecognized tax benefits for uncertain tax positions was $12.5 million increasing to $27.8 million as of September 30, 2010.  We expect a tax payment related to these obligations within the next 12 months of approximately $5.3 million in federal taxes plus interest.

Unconsolidated Debt

Total debt of unconsolidated joint ventures and entities was $989,000 and $979,000 as of September 30, 2010 and December 31, 2009.  Our share of unconsolidated debt, based on our ownership percentage, was $330,000 and $326,000 as of September 30, 2010 and December 31, 2009.  This loan is guaranteed by one of our subsidiaries to the extent of our ownership percentage.

Off-Balance Sheet Arrangements

There are no off-balance sheet transactions, arrangements or obligations (including contingent obligations) that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in the financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Currency Risk

We are subject to currency risk because we conduct a significant portion of our business in Australia and New Zealand.  Set forth below is a chart indicating the various exchange rates at certain points in time for the Australian and New Zealand Dollar vis-à-vis the US Dollar over the past 20 years.

 

 

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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 revenues and expenses, whenever possible, in local currencies.  As a result, we have procured in local currencies the majority of our expenses in Australia and New Zealand.  Due to the developing nature of our operations in Australia and New Zealand and our historic practice of funding our asset growth through local borrowings, our revenues are not yet significantly greater than our operating expenses and interest charges in these countries.  As we continue to progress with our acquisition and development activities in Australi a and New Zealand, the effect of variations in currency values will likely increase.

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.

Currently, our liquidity needs arise primarily from:

 

·	capital expenditure needs for our expanding digital and 3D implementations;

 

·	working capital requirements; and

 

·	debt servicing requirements.

At September 30, 2010, we had approximately $5.3 million (AUS$5.5 million) in undrawn funds under our Australian Corporate Credit Facility and $13.6 million (NZ$18.5 million) available under our line of credit in New Zealand.  Accordingly, we believe that we have sufficient borrowing capacity under our Australian Corporate Credit Facility and our New Zealand line of credit to meet our anticipated short-term working capital requirements.

 

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On July 31, 2010, Bank of America extended $3.0 million line of credit (“LOC”) to RDI.  The agreement is for one year and is potentially renewable at that date.  The LOC carries an interest rate equal to BBA LIBOR floating plus 350 basis points margin.  At September 30, 2010, we had not as yet borrowed on this LOC.

As indicated in our 2009 Annual Report, the term of our Australian Credit Facility with BOS International matures on June 30, 2011.  Accordingly, the outstanding balance of this debt $96.9 million (AU $100.5 million at September 30, 2010) is classified as current on our balance sheet.  We are advised that BOS International’s parent bank has determined to reduce its loan exposure to Australia.  Accordingly, we are currently in negotiations with a group of Australian based banks to replace our current facility with a new facility.  Our operating results in Australia have generally improved over the past two years, and we believe that this decision by BOS International was a policy decision not tied to our performance as a borrower.

 

Operating Activities

Cash provided by operations was $15.5 million in the 2010 Nine Months compared to $10.5 million in the 2009 Nine Months.  The increase in cash provided by operations of $4.9 million was due primarily to a $2.8 million from the changes in operating assets and liabilities (excluding $12.8 million accrual for our tax litigation settlement) and $1.3 million increase of operational cash flows.

Investing Activities

Cash used in investing activities for the 2010 Nine Months increased by $3.2 million to $15.8 million compared to $12.6 million from the same period in 2009.  The $15.8 million cash used for the 2010 Nine Months was primarily related to:

 

·	$9.1 million in property enhancements to our existing properties;

 

·	$5.4 million in acquisitions; and

 

·	$1.6 million of change in restricted cash

 

offset by

 

·	$200,000 in return of investment of unconsolidated entities.

The $12.6 million cash used for the 2009 Nine Months was primarily related to:

 

·	$4.0 million in property enhancements to our existing properties;

 

·	$706,000 deposit to purchase a property adjacent to our Manukau property;

 

·	$11.5 million to purchase marketable securities to exchange for our Reading International Trust I securities;

 

offset by

 

·	$317,000 of change in restricted cash;

 

·	$3.0 million in return of investment of unconsolidated entities; and

 

·	$285,000 receipt of an option purchase payment for the Auburn property.

 

Financing Activities

Cash used in financing activities for the 2010 Nine Months was $936,000 compared to $12.1 million of cash used in financing activities for the same period in 2009 resulting in a change of $11.2 million.  The $936,000 in cash used in financing activities during the 2010 Nine Months was primarily related to:

 

 

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·	$8.0 million of borrowing on our New Zealand credit facility;

 

·	$7.2 million of borrowing proceeds from our new Union Square Theater Term Loan net of capitalized borrowing costs;

 

·	$200,000 of contributions from noncontrolling interests; and

 

·	$253,000 of proceeds from the exercise of employee stock options;

 

offset by

 

·	$15.4 million of loan repayments including $6.9 million for the pay off of our Union Square Term Loan, $5.0 million for the pay off of our SHC Loan, and $3.2 million pay down of our GE Capital Loan;

 

·	$251,000 of repurchase of Class A Nonvoting Common Stock; and

 

·	$1.0 million in noncontrolling interest distributions.

The $12.1 million in cash used in the 2009 Nine Months was primarily related to:

 

·	$1.5 million of borrowing on our Australia credit facilities; and

 

·	$175,000 of noncontrolling interest contributions;

 

offset by

 

·	$13.1 million of loan repayments including $6.7 million to pay down on our GE Capital loan and $6.1 million to pay off our Australia Construction Loan; and

 

·	$714,000 in noncontrolling interest distributions.

Critical Accounting Policies

The SEC 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:

 

·	impairment of long-lived assets, including goodwill and intangible assets;

 

·	tax valuation allowance and obligations; and

 

·	legal and environmental obligations.

We discuss these critical accounting policies in our 2009 Annual Report and advise you to refer to that discussion.

Financial Risk Management

Our internally developed risk management procedure, seeks to minimize the potentially negative effects of changes in currency 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 currency exchange rates between U.S and Australia and New Zealand, and interest rates.

 

 

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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, whenever possible, natural hedges in Australia and New Zealand.  This involves local country sourcing of goods and services as well as borrowing in local currencies.

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 variable rate into a fixed rate.  Our internal procedures allow us to enter into derivative contracts on certain borrowing transactions to achieve this goal.  Our Australian credit facilities provide for floating interest rates but require that not less than a certain percentage of the loans be swapped into fixed rate obligations using derivative contracts.

In accordance with FASB ASC 815-10-35, Subsequent Valuation of Derivative Instruments and Hedging Instruments (“FASB ASC 815-10-35”), we marked our interest rate swap instruments to market on the consolidated balance sheet resulting in a decrease in interest expense of $308,000 and $189,000 during the three and nine months ended September 30, 2010, respectively, and a $456,000 and $1.2 million decrease in interest expense during the three and nine months ended September 30, 2009, respectively.  At September 30, 2010, we recorded the fair market value of an interest rate swap and a cap of $543,000 as other long-term assets and an interest rate swap of $367,000 as an other long-term liability.  At December 31, 2009, we recorded the fair market value of an interest rate swap and a cap of $766,000 as other long-term assets and an interest rate swap of $785,000 as an other long-term liability.  In accordance with FASB ASC 815-10-35, we have not designated any of our current interest rate swap positions as financial reporting hedges.

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 recover fully 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, we have managed the effects of inflation appropriately, and, as a result, it has 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:

 

·	contractual obligations;

 

·	insurance claims;

 

·	IRS claims;

 

·	employment matters;

 

·	environmental matters; and

 

·	anti-trust issues.

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 the defendant’s attorneys' fees in the event we are determined not to be the prevailing party.

 

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Where we are the defendants, we accrue for probable damages, which insurance may not cover, 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.  Except as noted below, there have been no material changes to our litigation exposure since our 2009 Annual Report.

Tax Litigation

In July 2010, our subsidiary, Craig Corporation (“Craig”), and the Internal Revenue Service (the “IRS”) agreed to file with the Tax Court a settlement of the IRS’s claim against Craig.  In the settlement, the IRS conceded 70% of its proposed adjustment to income claimed in its notices of deficiency dated June 29, 2006.  The proposed adjustment had resulted in a claim for unpaid taxes of $20.9 million plus interest.  The effect of the terms of settlement on the Reading consolidated group is to require a total federal income tax obligation of $13.6 million, inclusive of interest due for the underpayment of taxes and net of all tax refunds available.

The impact of the settlement upon state taxes on the Reading consolidated group remains uncertain as of September 30, 2010, but if the agreed adjustment to income were reflected on state returns, it would cause a state tax obligation of approximately $4.7 million.  Of this, $4.2 million would be related to California, and $0.5 million to other states.  Craig’s 1997 tax year remains open with respect to Craig’s potential tax liability to the State of California.  As of September 30, 2010, no deficiency has been asserted by the State of California, and we have made no final decision as to the course of action to be followed if a deficiency were to be asserted.

The decision to settle was based on various business considerations, the most prominent of which was the potential size of an adverse judgment (some $68.1 million including interest) and the estimated direct costs of trial.

As a result of this settlement, we recorded an additional federal and state tax expense of $12.0 million for the nine months ended September 30, 2010 to increase our reserve for uncertain tax positions in accordance with FASB ASC 740-10-25 – Income Taxes.  As of March 31, 2010, we had a reserve against this uncertain tax position contingency of $6.3 million.  As of September 30, 2010, we show the $18.3 million potential impact as current taxes payable.

Mackie Litigation

On November 7, 2005, we were sued in the Supreme Court of Victoria at Melbourne by a former construction contractor with respect to the discontinued development of an ETRC at Frankston, Victoria.  The action is entitled Mackie Group Pty Ltd (the “Mackie Group”) v. Reading Properties Pty Ltd, and in it the former contractor seeks payment of a claimed fee in the amount of $964,000 (AUS$1.0 million).  That case was tried in March 2010 before a judge, and a decision in favor of Mackie was rendered on April 16, 2010, finding us responsible to pay fees to Mackie in the amount of $964,000 (AUS$1.0 million) plus interest of $509,000 (AUS$528,000).  It is also possible that the court will order us to pay a proportion of Mackie Group's costs of the proceed ing.  We have appealed the Mackie decision.  Inclusive of the $631,000 (AUS$655,000) accrued in the nine months ended September 30, 2010, we have accrued $1.4 million (AUS$1.5 million) associated with this judgment against us.  Pending our appeal, and as agreed by both parties, we have placed $1.4 million (AUS$1.5 million) into a jointly controlled, restricted cash account relating to this judgment.

 

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Forward-Looking Statements

Our statements in this interim quarterly report contain a variety of forward-looking statements as defined by the Securities Litigation Reform Act of 1995.  Forward-looking statements reflect only our expectations regarding future events and operating performance and necessarily speak only as of the date the information was prepared.  We cannot guarantee that our expectation will be realized in whole or in part.  You can recognize these statements by our use of words such as, by way of example, “may,” “will,” “expect,” “believe,” and “anticipate” or other similar terminology.

These forward-looking statements reflect our expectation after having considered a variety of risks and uncertainties.  However, they are necessarily the product of internal discussion and do not necessarily completely reflect the views of individual members of our Board of Directors or of our management team.  Individual Board members and individual members of our management team may have different views as to the risks and uncertainties involved, and may have different views as to future events or our operating performance.

Among the factors that could cause actual results to differ materially from those expressed in or underlying our forward-looking statements are the following:

 

·	With respect to our cinema operations:

 

o	The number and attractiveness to movie goers of the films released in future periods;

 

o	The amount of money spent by film distributors to promote their motion pictures;

 

o	The ability to implement digital and 3D projectors throughout our cinema circuits worldwide;

 

o	The licensing fees and terms required by film distributors from motion picture exhibitors in order to exhibit their films;

 

o	The continued willingness of moviegoers to spend money on our concession items;

 

o	The comparative attractiveness of motion pictures as a source of entertainment and willingness and/or ability of consumers (i) to spend their dollars on entertainment and (ii) to spend their entertainment dollars on movies in an outside the home environment;

 

o

The extent to which we encounter competition from other cinema exhibitors, from other sources of outside of the home entertainment, and from inside the home entertainment options, such as “home theaters” and competitive film product distribution technology such as, by way of example, cable, satellite broadcast, DVD and VHS rentals and sales, and so called “movies on demand”; and

 

o	The extent to and the efficiency with which, we are able to integrate acquisitions of cinema circuits with our existing operations.

 

·	With respect to our real estate development and operation activities:

 

o	The rental rates and capitalization rates applicable to the markets in which we operate and the quality of properties that we own;

 

o	The extent to which we can obtain on a timely basis the various land use approvals and entitlements needed to develop our properties;

 

o	The risks and uncertainties associated with real estate development;

 

o	The availability and cost of labor and materials;

 

o	Competition for development sites and tenants;

 

o	Environmental remediation issues; and

 

 

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o	The extent to which our cinemas can continue to serve as an anchor tenant who will, in turn, be influenced by the same factors as will influence generally the results of our cinema operations.

 

·	With respect to our operations generally as an international company involved in both the development and operation of cinemas and the development and operation of real estate:

 

o	Our ongoing access to borrowed funds and capital and the interest that must be paid on that debt and the returns that must be paid on such capital;

 

o	The relative values of the currency used in the countries in which we operate;

 

o	Changes in government regulation;

 

o	Our labor relations and costs of labor (including future government requirements with respect to pension liabilities, disability insurance and health coverage, and vacations and leave);

 

o

Our exposure from time to time to legal claims and to uninsurable risks such as those related to our historic railroad operations, including potential environmental claims and health related claims relating to alleged exposure to asbestos or other substances now or in the future, recognized as being possible causes of cancer or other health related problems;

 

o	Changes in future effective tax rates and the results of currently ongoing and future potential audits by taxing authorities having jurisdiction over our various companies; and

 

o	Changes in applicable accounting policies and practices.

The above list is not exhaustive, as business is inherently unpredictable, risky, and subject to influence by numerous factors outside of our control.  Such factors include changes in government regulation or policy, competition, interest rates, supply, technological innovation, changes in consumer taste and fancy, weather, and the extent to which consumers in our markets have the economic ability to spend money on beyond-the-home entertainment.

Given the variety and unpredictability of the factors that will ultimately influence our businesses and our results of operation, it naturally follows that no guarantees can be given that any of our forward-looking statements will ultimately prove to be correct.  Actual results will undoubtedly vary and there is no guarantee as to how our securities will perform either when considered in isolation or when compared to other securities or investment opportunities.

Finally, please understand that we undertake no obligation to update publicly or to revise any of our forward-looking statements, whether because of new information, future events or otherwise, except as may be required under applicable law.  Accordingly, you should always note the date to which our forward-looking statements speak.

Additionally, certain of the presentations included in this interim quarterly report may contain “non-GAAP financial measures.”  In such case, we will make available in connection with such statements a reconciliation of this information to our GAAP financial statements.

 

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Item 3 – Quantitative and Qualitative Disclosure about Market Risk

The SEC 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.  We base the following discussion 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:

 

·	It is based on a single point in time; and

 

·	It does not include the effects of other complex market reactions that would arise from the changes modeled.

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

At September 30, 2010, approximately 53% 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 $15.6 million in cash and cash equivalents.  At December 31, 2009, approximately 50% and 16% of our assets were invested in assets denominated in Australian dollars (Reading Australia) and New Zealand dollars (Reading New Zealand) including approximately $15.4 million in cash and cash equivalents.

Our policy in Australia and New Zealand is to match revenues and expenses, whenever possible, in local currencies.  As a result, we have procured in local currencies a majority of our expenses in Australia and New Zealand.  Due to the developing nature of our operations in Australia and New Zealand, our revenue is not yet significantly greater than our operating and interest expenses.  The resulting natural hedge has led to a somewhat negligible foreign currency effect on our current earnings.  Although foreign currency has had a nominal effect on our current earnings, the effect of the translation adjustment on our assets and liabilities noted in our other comprehensive income was an increase of $16.5 million and $8.1 million for the three and nin e months ended September 30, 2010, respectively.  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 negligible in the future.

Historically, our policy has been to borrow in local currencies to finance the development and construction of our ETRCs 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, and as a result of our issuance of fully subordinated notes (TPS) in 2007, and their subsequent partial repayment, approximately 49% and 55% 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.  If the foreign currency rates were to fluctuate by 10% the resulting change in Australian and New Zealand asse ts would be $10.9 million and $3.6 million, respectively, and the change in our quarterly net income would be $240,000 and $88,000, respectively.  Presently, we have no plan to hedge such exposure.

We record unrealized foreign currency translation gains or losses that could materially affect our financial position.  As of September 30, 2010 and December 31, 2009, we have recorded a cumulative unrealized foreign currency translation gain of approximately $51.3 million and $43.2 million, respectively.

Historically, we maintain most of our cash and cash equivalent balances in short-term money market instruments with original maturities of three months or less.  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.

 

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While we have typically used fixed rate financing (secured by first mortgages) in the U.S., fixed rate financing is typically not available to corporate borrowers in Australia and New Zealand.  The majority of our Australian and New Zealand bank loans have variable rates.  The Australian facility provides for floating interest rates, but requires that not less than a certain percentage of the loan be swapped into fixed rate obligations (see Financial Risk Management above).  If we consider the interest rate swaps, a 1% increase or decrease in short-term interest rates would have resulted in approximately $514,000 increase or decrease in our 2010 Quarter’s Australian and New Zealand interest expense.

 

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Item 4 – Controls and Procedures

We maintain 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 our management, including our 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 our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this quarterly report.

Changes in Internal Control over Financial Reporting

During the third quarter of 2010, our management concluded that our internal control over financial reporting was not effective as of September 30, 2010, due to a material weakness, as described below.

Our controls related to the calculation of rent revenue failed to prevent or detect errors in our consolidated financial statements.  As a result, we identified the following material weakness in the operation of our internal control as of September 30, 2010:

·	The Company did not effectively apply internal control procedures relating to the calculation of rental revenue for our foreign subsidiaries that resulted in the misapplication of generally accepted accounting principles in the United States of America.

This material weakness in internal control did not result in an actual misstatement of our consolidated financial statements at September 30, 2010 because the errors were detected and corrected prior to the issuance of our consolidated financial statements for the three and nine months ended September 30, 2010.  We plan to remediate this deficiency in the operating effectiveness of internal control over financial reporting by effectively applying our review and analysis controls over rental revenue during the fourth quarter of 2010.

 

 

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PART II – Other Information

Item 1 - Legal Proceedings

For a description of legal proceedings, please refer to Item 3 entitled Legal Proceedings contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

For a description of grants of stock to certain executives, see the Stock Based Compensation section under see Note 2 – Stock-Based and Equity Compensation, above.

Item 3 - Defaults upon Senior Securities

Not applicable.

Item 4 - Removed and Reserved

None.

Item 5 - Other Information

Not applicable.

Item 6 - Exhibits

31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32	Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

 

 

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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.

Date:	November 15, 2010	By:	/s/ James J. Cotter
			James J. Cotter
			Chief Executive Officer

Date:	November 15, 2010	By:	/s/ Andrzej Matyczynski
			Andrzej Matyczynski
			Chief Financial Officer

 

 

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