10-Q 1 form10q.htm FORM 10-Q form10q.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
__________________________________

FORM 10-Q
(Mark One)

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:  June 30, 2010

OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to ___________

Commission file number 1-8625
READING INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)

NEVADA
(State or other jurisdiction of incorporation or organization)
95-3885184
(IRS Employer Identification No.)
   
500 Citadel Drive, Suite 300
Commerce,  CA
(Address of principal executive offices)
90040
(Zip Code)

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  þ  No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):  Large accelerated filer ¨  Accelerated filer þ  Non-accelerated filer ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  þ
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of August 4, 2010, there were 21,308,823 shares of Class A Nonvoting Common stock, $0.01 par value per share and 1,495,490 shares of Class B Voting Common Stock, $0.01 par value per share outstanding.
 



 
 

 

READING INTERNATIONAL, INC.  AND SUBSIDIARIES

TABLE OF CONTENTS
 
Page
 
 


PART I – Financial Information
Item 1 – Financial Statements
Reading International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(U.S. dollars in thousands)
 
   
June 30, 2010
   
December 31, 2009
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
  $ 26,495     $ 24,612  
Receivables
    6,449       9,458  
Inventory
    762       860  
Investment in marketable securities
    2,730       3,120  
Restricted cash
    1,728       321  
Land held for sale
    44,129       --  
Prepaid and other current assets
    2,860       3,078  
Total current assets
    85,153       41,449  
                 
Property held for and under development
    31,833       78,676  
Property & equipment, net
    194,276       200,749  
Investment in unconsolidated joint ventures and entities
    8,980       9,732  
Investment in Reading International Trust I
    838       838  
Goodwill
    32,370       37,411  
Intangible assets, net
    21,336       22,655  
Other assets
    14,115       14,907  
Total assets
  $ 388,901     $ 406,417  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current Liabilities:
               
Accounts payable and accrued liabilities
  $ 13,304     $ 14,943  
Film rent payable
    6,232       7,256  
Notes payable – current portion
    90,418       7,914  
Note payable to related party – current portion
    --       14,000  
Taxes payable
    23,851       6,140  
Deferred current revenue
    6,125       6,968  
Other current liabilities
    177       457  
Total current liabilities
    140,107       57,678  
Notes payable – long-term portion
    91,347       177,166  
Note payable to related party – long-term portion
    9,000       --  
Subordinated debt
    27,913       27,913  
Noncurrent tax liabilities
    2,044       6,968  
Deferred non-current revenue
    102       577  
Other liabilities
    31,121       25,852  
Total liabilities
    301,634       296,154  
Commitments and contingencies (Note 19)
               
Stockholders’ equity:
               
Class A Nonvoting Common Stock, par value $0.01, 100,000,000 shares authorized, 35,789,473 issued and 21,308,823 outstanding at June 30, 2010 and 35,610,857 issued and 21,132,582 outstanding at December 31, 2009
    216       215  
Class B Voting Common Stock, par value $0.01, 20,000,000 shares authorized and 1,495,490 issued and outstanding at June 30, 2010 and at December 31, 2009
    15       15  
Nonvoting preferred stock, par value $0.01, 12,000 shares authorized and no issued or outstanding shares at June 30, 2010 and at December 31, 2009
    --       --  
Additional paid-in capital
    133,440       134,044  
Accumulated deficit
    (76,746 )     (63,385 )
Treasury shares
    (3,765 )     (3,514 )
Accumulated other comprehensive income
    33,023       41,514  
Total Reading International, Inc. stockholders’ equity
    86,183       108,889  
Noncontrolling interests
    1,084       1,374  
Total stockholders’ equity
    87,267       110,263  
Total liabilities and stockholders’ equity
  $ 388,901     $ 406,417  

See accompanying notes to unaudited condensed consolidated financial statements.


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

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenue
                       
Cinema
  $ 52,433     $ 51,215     $ 106,279     $ 94,651  
Real estate
    4,599       3,207       8,902       6,849  
      57,032       54,422       115,181       101,500  
Operating expense
                               
Cinema
    41,867       40,143       85,162       75,249  
Real estate
    2,224       1,632       4,491       3,439  
Depreciation and amortization
    3,865       3,324       7,768       7,168  
Loss on transfer of real estate held for sale to continuing operations
    --       549       --       549  
Impairment expense
    2,239       --       2,239       --  
General and administrative
    4,616       4,233       8,822       8,668  
      54,811       49,881       108,482       95,073  
                                 
Operating income
    2,221       4,541       6,699       6,427  
                                 
Interest income
    364       219       646       737  
Interest expense
    (4,431 )     (3,090 )     (7,810 )     (7,998 )
Gain on retirement of subordinated debt (trust preferred securities)
    --       10,714       --       10,714  
Gain on sale of assets
    351       --       351       --  
Other income (expense), net
    (131 )     (1,921 )     (713 )     (2,716 )
Income (loss) before income tax expense and equity earnings of unconsolidated joint ventures and entities
    (1,626 )     10,463       (827 )     7,164  
Income tax expense
    (12,201 )     (647 )     (12,783 )     (999 )
Income (loss) before equity earnings of unconsolidated joint ventures and entities
    (13,827 )      9,816       (13,610 )      6,165  
Equity earnings of unconsolidated joint ventures and entities
    266       164       617       659  
Net income (loss)
  $ (13,561 )   $ 9,980     $ (12,993 )   $ 6,824  
Net income attributable to noncontrolling interest
    (153 )     (90 )     (368 )     (328 )
Net income (loss) attributable to Reading International, Inc. common shareholders
  $ (13,714 )   $ 9,890     $ (13,361 )   $ 6,496  
                                 
Basic and diluted earnings (loss) per share attributable to Reading International, Inc. common shareholders
  $ (0.60 )   $ 0.44     $ (0.59 )   $ 0.29  
Weighted average number of shares outstanding – basic
    22,797,534       22,653,050       22,754,599       22,616,193  
Weighted average number of shares outstanding – dilutive
    22,797,534       22,687,273       22,754,599       22,650,415  

See accompanying notes to unaudited condensed consolidated financial statements.


Reading International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(U.S. dollars in thousands)
   
Six Months Ended
 
   
June 30,
 
   
2010
   
2009
 
Operating Activities
           
Net income (loss)
  $ (12,993 )   $ 6,824  
Adjustments to reconcile net income (loss)  to net cash provided by operating activities:
               
Loss recognized on foreign currency transactions
    14       2,248  
Equity earnings of unconsolidated joint ventures and entities
    (617 )     (659 )
Distributions of earnings from unconsolidated joint ventures and entities
    616       412  
Loss provision on impairment of asset
    2,239       --  
Other-than-temporary loss on marketable securities
    --       2,093  
Gain on retirement of subordinated debt (trust preferred securities)
    --       (10,714 )
Gain on option termination
    --       (1,530 )
Loss on transfer of real estate held for sale to continuing operations
    --       549  
Gain on sale of assets
    (351 )     --  
Depreciation and amortization
    7,768       7,168  
Amortization of prior service costs
    152       142  
Amortization of above and below market leases
    480       431  
Amortization of deferred financing costs
    333       417  
Amortization of straight-line rent
    318       721  
Stock based compensation expense
    26       331  
Changes in operating assets and liabilities:
               
Decrease in receivables
    2,786       1,416  
(Increase) decrease in prepaid and other assets
    382       (670 )
Decrease in accounts payable and accrued expenses
    (1,290 )     (1,264 )
Decrease in film rent payable
    (859 )     (1,234 )
Increase taxes payable
    12,797       159  
Decrease in deferred revenues and other liabilities
    (1,117 )     (654 )
Net cash provided by operating activities
    10,684       6,186  
Investing activities
               
Acquisitions
    (2,891 )     --  
Acquisition deposits paid
    (223 )     (147 )
Purchases of and additions to property and equipment
    (4,353 )     (3,043 )
Change in restricted cash
    (1,477 )     801  
Purchase of marketable securities
    --       (11,463 )
Sale of marketable securities
    29       --  
Distributions of investment in unconsolidated joint ventures and entities
    259       1,277  
Option proceeds
    --       284  
Net cash used in investing activities
    (8,656 )     (12,291 )
Financing activities
               
Repayment of long-term borrowings
    (13,811 )     (5,468 )
Proceeds from borrowings
    15,525       1,453  
Repurchase of Class A Nonvoting Common Stock
    (251 )     --  
Proceeds from the exercise of stock options
    248       --  
Noncontrolling interest contributions
    113       50  
Noncontrolling interest distributions
    (751 )     (489 )
Net cash provided by (used in) financing activities
    1,073       (4,454 )
Effect of exchange rate changes on cash and cash equivalents
    (1,218 )     884  
                 
Increase (decrease) in cash and cash equivalents
    1,883       (9,675 )
Cash and cash equivalents at beginning of period
    24,612       30,874  
                 
Cash and cash equivalents at end of period
  $ 26,495     $ 21,199  
                 
Supplemental Disclosures
               
Interest paid
  $ 6,963     $ 7,753  
Income taxes paid
  $ 469     $ 254  
Non-cash transactions
               
Reduction in note payable associated with acquisition purchase price adjustment
  $ 4,381     $ 226  
Deemed distribution
  $ 877     $ --  
Capital lease asset addition
  $ 4,697     $ --  
Capital lease obligation
  $ 5,573     $ --  
Exchange of marketable securities for Reading International Trust I securities
  $ --     $ (11,463 )
Retirement of subordinated debt (trust preferred securities)
  $ --     $ (23,634 )
Retirement of Reading International Trust I securities
  $ --     $ 11,463  
Retirement of investment in Reading International Trust I securities
  $ --     $ 709  

See accompanying notes to unaudited condensed consolidated financial statements.


Reading International, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Six Months Ended June 30, 2010


Note 1 – Basis of Presentation
 
Reading International, Inc., a Nevada corporation (“RDI” and collectively with our consolidated subsidiaries and corporate predecessors, the “Company,” “Reading” and “we,” “us,” or “our”), was founded in 1983 as a Delaware corporation and reincorporated in 1999 in Nevada.  Our businesses consist primarily of:
 
·  
the development, ownership and operation of multiplex cinemas in the United States, Australia, and New Zealand; and
 
·  
the development, ownership, and operation of retail and commercial real estate in Australia, New Zealand, and the United States.

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 (“SEC”) for interim reporting.  As such, certain information and disclosures typically required by US GAAP for complete financial statements have been condensed or omitted.  The financial information presented in this quarterly report on Form 10-Q for the period ended June 30, 2010 (the “June Report”) should be read in conjunction with our 2009 Annual Report which contains the latest audited financial statements and related notes.  The periods presented in this document are the three (“2010 Quarter”) and six (“2010 Six Months”) months ended June 30, 2010 and the three (“2009 Quarter”) and six (“2009 Six Months”) months ended June 30, 2009.

In the opinion of management, all adjustments of a normal recurring nature considered necessary to present fairly in all material respects our financial position, results of our operations, and cash flows as of and for the three and six months ended June 30, 2010 and 2009 have been made.  The results of operations for the three and six months ended June 30, 2010 and 2009 are not necessarily indicative of the results of operations to be expected for the entire year.

Marketable Securities

We had investments in marketable securities of $2.7 million and $3.1 million at June 30, 2010 and December 31, 2009, respectively.  We account for these investments as available for sale investments.  We assess our investment in marketable securities for other-than-temporary impairments in accordance with Accounting Standards Codification (“ASC”) 320-10 for each applicable reporting period.  During the three and six months ended June 30, 2010, we did not record any other-than-temporary losses related to our marketable securities, whereas, during the three and six months ended June 30, 2009, we recorded losses of $1.3 million and $2.1 million on certain marketable securities.  Additionally, these investments have a cumulative unrealized gain (temporary) of $265,000 included in accumulated other comprehensive income at June 30, 2010.  For the three months and six months ended June 30, 2010, our net unrealized loss (temporary) on marketable securities was $474,000 and $256,000, respectively.  For the three and six months ended June 30, 2009, our net unrealized gain (temporary) on marketable securities was $3,000 and $1,000, respectively.

Expiring Long-Term Debt

As indicated in our 2009 Annual Report, the term of our Australia Corporate Credit Facility matures on June 30, 2011.  Accordingly, the outstanding balance of this debt is classified as current on our June 30, 2010 balance sheet.  The Australia Corporate Credit Facility is secured by the majority of our theater and entertainment-themed retail center (“ETRC”) properties in Australia.  We are currently in the process of renegotiating this facility with our current lender while also seeking a replacement facility with other lenders.  While no assurances can be given that we will be successful, we currently anticipate that the current facility will either be extended or replaced prior to maturity.

 
Other Income/Loss

For the 2010 Quarter, we recorded an other loss of $131,000 compared to $1.9 million for the 2009 Quarter.  For the 2010 Quarter, the $131,000 other loss included offsetting settlements related to our Burstone litigation and the 2008 sale of our interest in the Botany Downs cinema.  For the 2009 Quarter, the $1.9 million other loss included a $2.2 million loss on foreign currency translation, a $1.3 million other-than-temporary loss on marketable securities, offset by a $1.5 million gain on the expiration of an option to purchase granted with respect to our Auburn property.

For the 2010 Six Months, we recorded an other loss of $713,000 compared to $2.7 million for the 2009 Six Months.  For the 2010 Six Months, the $713,000 other loss included offsetting settlements related to our Burstone litigation and the 2008 sale of our interest in the Botany Downs cinema and a $605,000 of loss associated our Mackie litigation.  For the 2009 Six Months, the $2.7 million other loss included a $2.2 million loss on foreign currency translation, a $2.0 million other-than-temporary loss on marketable securities, offset by a $1.5 million gain on the expiration of an option to purchase granted with respect to our Auburn property.

Deferred Leasing Costs

We amortize direct costs incurred in connection with obtaining tenants over the respective term of the lease on a straight-line basis.

Deferred Financing Costs

We amortize direct costs incurred in connection with obtaining financing over the term of the loan using the effective interest method, or the straight-line method, if the result is not materially different.  In addition, interest on loans with increasing interest rates and scheduled principal pre-payments, is also recognized using the effective interest method.

Accounting Pronouncements Adopted During 2010

FASB ASU 2009-17 – Reporting on Variable Interest Entities

In December 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) 2009-17, “Consolidations (Topic 810):  Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.”  This ASU incorporates Statement of Financial Accounting Standards (SFAS) No. 167, “Amendments to FASB Interpretation No. 46(R),” issued by the FASB in June 2009.  The amendments in this ASU replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact such entity’s economic performance and (i) the obligation to absorb losses of such entity or (ii) the right to receive benefits from such entity. ASU 2009-17 also requires additional disclosures about a reporting entity’s involvement in variable interest entities, which enhances the information provided to users of financial statements.  We adopted ASU 2009-17 effective January 1, 2010.  As a result of the fact that we have no variable interests in variable interest entities, the adoption of this ASU did not have a material impact on our financial position or results of operations.
 

FASB ASU 2010-06 – Fair Value Measurements

In January 2010, the FASB issued ASU 2010-06 to the Fair Value Measurements and Disclosure topic of the Accounting Standards Codification.  The ASU clarifies disclosure requirements relating to the level of disaggregation of disclosures relating to classes of assets and liabilities and disclosures about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value estimates for Level 2 or Level 3 assets and liabilities.  These requirements of the ASU are effective for interim and annual disclosures for interim and annual reporting periods beginning after December 15, 2009.  The adoption of these requirements of the ASU resulted in the disclosure by the Company of the inputs and valuation techniques used in preparing the nonrecurring fair value measurement of an impaired property for purpose of presentation in the Company's financial statements.

New Accounting Pronouncements

FASB ASU 2010-06 – Fair Value Measurements

The ASU also requires additional disclosures about the transfers of classifications among the fair value classification levels and the reasons for those changes and separate presentation of purchases, sales, issuances, and settlements in the presentation of the roll forward of Level 3 assets and liabilities.  Those disclosures are effective for interim and annual reporting periods for fiscal years beginning after December 15, 2010.  The adoption of this portion of the ASU is not expected to have a material effect on the Company's financial statements.

There were no other new accounting pronouncements issued during the 2010 Quarter that will have a material impact on our financial statements.


Note 2 –Equity and Stock Based Compensation

Equity Compensation

Landplan Property Partners, Pty Ltd

On April 1, 2010, we terminated our then existing contractual relationship with Doug Osborne, at that time the chief executive officer of our Landplan real estate operations.  Mr. Osborne’s incentive interest in our various Landplan projects was valued at $0 and closed out at that time.  Mr. Osborne continues to provide services to us on a non-exclusive independent contractor basis.  As consideration for his future services on our behalf with respect to our Manukau properties, we have agreed to pay Mr. Osborne an amount equal to 7.5% of the net profit realized, if any, from our investment in these properties.  Profits are to be measured based on our total investment, without taking into account amortization or depreciation, and capitalizing all costs related to the carrying, development, and/or disposition of the properties.  Based on our total investment to date in these properties (measured as stated in the immediately preceding sentence), we do not currently anticipate a profit from these properties, and, as a result, we have booked no expense in the three or six months ended June 30, 2010 with respect to Mr. Osborne’s consulting services with respect to our Manukau properties.  During the three and six months ended June 30, 2009, we expensed $5,000 and $55,000 associated with Mr. Osborne’s previous, contractual interest in the properties associated with Landplan Property Partners, Pty Ltd.

Stock Based Compensation

For the three and six months ended June 30, 2010, we recorded compensation expense of $0, and $4,000, respectively, and, for the three and six months ended June 30, 2009, we recorded compensation expense of $56,000, and $113,000, respectively, related to the vesting of all our restricted stock grants.  During the six months ended June 30, 2010, we issued 143,462 of Class A Nonvoting Shares to an executive employee associated with his prior years’ stock bonuses.  For the three and six months, ended June 30, 2010, no restricted stock grants were made to our employees.

 
Employee/Director Stock Option Plan

We have a long-term incentive stock option plan that provides for the grant to eligible employees, directors, and consultants of incentive or nonstatutory options to purchase shares of our Class A Nonvoting Common Stock. Our 1999 Stock Option Plan expired in November 2009, and has been replaced by our new 2010 Stock Incentive Plan, which was approved by the holders of our Class B Voting Common Stock in May 2010.

When the Company’s tax deduction from an option exercise exceeds the compensation cost resulting from the option, a tax benefit is created.  FASB ASC 718-40 relating to Stock-Based Compensation (“FASB ASC 718-40”), requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows.  For the three months ended June 30, 2010 and 2009, there was no impact to the unaudited condensed consolidated statement of cash flows because there were no recognized tax benefits from stock option exercises during these periods.

FASB ASC 718-40 requires companies to estimate forfeitures.  Based on our historical experience and the relative market price to strike price of the options, we do not currently estimate any forfeitures of vested or unvested options.

In accordance with FASB ASC 718-40, we estimate the fair value of our options using the Black-Scholes option-pricing model, which takes into account assumptions such as the dividend yield, the risk-free interest rate, the expected stock price volatility, and the expected life of the options.  We exclude the dividend yield from the calculation, as we intend to retain all earnings.  We expense the estimated grant date fair values of options issued on a straight-line basis over the vesting period.

We granted no options in the three or six months ended June 30, 2010 or 2009.

Based on prior year’s assumptions and in accordance with the FASB ASC 718-40 modified prospective method, we recorded compensation expense for the total estimated grant date fair value of stock options that vested of $8,000 and $22,000 for the three and six months ended June 30, 2010, respectively, and $58,000 and $218,000 for the three and six months ended June 30, 2009, respectively.  At June 30, 2010, the total unrecognized estimated compensation cost related to non-vested stock options granted was $72,000, which we expect to recognize over a weighted average vesting period of 1.58 years.  60,000 and 90,000 options were exercised during the three and six months ended June 30, 2010 having a realized value of $91,000 and $138,000, respectively, for which we received $166,000 and $248,000, respectively, of cash.  The grant date fair value of options vesting during the three and six months ended June 30, 2010 was $8,000 and $22,000, respectfully, and $58,000 and $218,000 for the three and six months ended June 30, 2009, respectively.  The intrinsic, unrealized value of all options outstanding, vested and expected to vest, at June 30, 2010 was $74,000 of which 100% are currently exercisable.

Pursuant to both our 1999 Stock Option Plan and our 2010 Stock Incentive Plan, all stock options expire within ten years of their grant date.  The aggregate total number of shares of Class A Nonvoting Common Stock authorized for issuance under our 2010 Stock Incentive Plan is 1,250,000.  At the discretion of our Compensation and Stock Options Committee, the vesting period of stock options is usually between zero and four years.
 
 
We had the following stock options outstanding and exercisable as of June 30, 2010 and December 31, 2009:
 
   
Common Stock Options Outstanding
   
Weighted Average Exercise
Price of Options Outstanding
   
Common Stock Exercisable
Options
   
Weighted Average
Price of Exercisable
Options
 
   
Class A
   
Class B
   
Class A
   
Class B
   
Class A
   
Class B
   
Class A
   
Class B
 
Outstanding- January 1, 2009
    577,850       185,100     $ 5.60     $ 9.90       525,350       110,100     $ 5.19     $ 9.67  
Granted
    50,000       --     $ 4.01     $ --                                  
Exercised
    (3,000 )     --     $ 3.80     $ --                                  
Expired
    (35,100 )     (35,100 )   $ 5.13     $ 8.47                                  
Outstanding- December 31, 2009
    589,750       150,000     $ 5.51     $ 10.24       534,750       150,000     $ 5.62     $ 10.24  
Exercised
    (90,000 )     --     $ 2.76     $ --                                  
Outstanding-June 30, 2010
    499,750       150,000     $ 6.00     $ 10.24       449,750       150,000     $ 6.22     $ 10.24  

The weighted average remaining contractual life of all options outstanding, vested, and expected to vest at June 30, 2010 and December 31, 2009 was approximately 5.22 and 5.05 years, respectively.  The weighted average remaining contractual life of the exercisable options outstanding at June 30, 2010 and December 31, 2009 was approximately 4.88 and 4.70 years, respectively.


Note 3 – Business Segments

We organize our operations into two reportable business segments within the meaning of FASB ASC 280-10 - Segment Reporting.  Our reportable segments are (1) cinema exhibition and (2) real estate.  The cinema exhibition segment is engaged in the development, ownership, and operation of multiplex cinemas.  The real estate segment is engaged in the development, ownership, and operation of commercial properties.  Incident to our real estate operations we have acquired, and continue to hold, raw land in urban and suburban centers in Australia and New Zealand.

During the six months ended June 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 segment.  This change in management’s structure of the reportable segments commenced on January 1, 2010, such changes to segment reporting are reflected in the segment results for the three and six months ended June 30, 2010 and 2009, respectively.  The retroactive presentation for the three and six months ended June 30, 2009 segment results decreased intersegment revenue and expense for the intercompany rent by $1.0 million and $2.2 million, respectively, and transferred the third party lease costs from the real estate segment to the cinema segment.  The overall results of these changes decreased real estate segment revenues and expense by $1.0 million and $2.2 million, respectively.  This change results in a reduction of real estate operating expense and an increase of cinema operating expense of $1.0 million and $2.2 million, respectively, on our Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009, respectively.

The tables below summarize the results of operations for each of our principal business segments for the three and six months ended June 30, 2010 and 2009, respectively.  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 (dollars in thousands):


Three months ended June 30, 2010
 
Cinema Exhibition
   
Real Estate
   
Intersegment Eliminations
   
Total
 
Revenue
  $ 52,433     $ 6,014     $ (1,415 )   $ 57,032  
Operating expense
    43,282       2,224       (1,415 )     44,091  
Depreciation & amortization
    2,555       1,118       --       3,673  
Impairment expense
    --       2,239       --       2,239  
General & administrative expense
    634       482       --       1,116  
Segment operating income (loss)
  $ 5,962     $ (49 )   $ --     $ 5,913  
 
Three months ended June 30, 2009
 
Cinema Exhibition
   
Real Estate
   
Intersegment Eliminations
   
Total
 
Revenue
  $ 51,215     $ 4,210     $ (1,003 )   $ 54,422  
Operating expense
    41,146       1,632       (1,003 )     41,775  
Depreciation & amortization
    2,576       754       --       3,330  
Loss on transfer of real estate held for sale to continuing operations
    --       549       --       549  
General & administrative expense
    765       189       --       954  
Segment operating income
  $ 6,728     $ 1,086     $ --     $ 7,814  

Reconciliation to net income attributable to Reading International, Inc. shareholders:
 
2010 Quarter
   
2009 Quarter
 
Total segment operating income
  $ 5,913     $ 7,814  
Non-segment:
               
Depreciation and amortization expense
    192       (6 )
General and administrative expense
    3,500       3,279  
Operating income
    2,221       4,541  
Interest expense, net
    (4,067 )     (2,871 )
Gain on retirement of subordinated debt (trust preferred securities)
    --       10,714  
Gain on sale of assets
    351       --  
Other loss
    (131 )     (1,921 )
Income tax expense
    (12,201 )     (647 )
Equity earnings of unconsolidated joint ventures and entities
    266       164  
Net income (loss)
    (13,561 )     9,980  
   Net income attributable to the noncontrolling interest
    (153 )     (90 )
Net income (loss) attributable to Reading International, Inc. common shareholders
  $ (13,714 )   $ 9,890  

Six months ended June 30, 2010
 
Cinema Exhibition
   
Real Estate
   
Intersegment Eliminations
   
Total
 
Revenue
  $ 106,279     $ 11,713     $ (2,811 )   $ 115,181  
Operating expense
    87,973       4,491       (2,811 )     89,653  
Depreciation & amortization
    5,109       2,271       --       7,380  
Impairment expense
    --       2,239       --       2,239  
General & administrative expense
    1,226       706       --       1,932  
Segment operating income
  $ 11,971     $ 2,006     $ --     $ 13,977  
 

 
Six months ended June 30, 2009
 
Cinema Exhibition
   
Real Estate
   
Intersegment Eliminations
   
Total
 
Revenue
  $ 94,651     $ 9,196     $ (2,347 )   $ 101,500  
Operating expense
    77,596       3,439       (2,347 )     78,688  
Depreciation & amortization
    5,485       1,435       --       6,920  
Loss on transfer of real estate held for sale to continuing operations
    --       549       --       549  
General & administrative expense
    1,567       370       --       1,937  
Segment operating income
  $ 10,003     $ 3,403     $ --     $ 13,406  

Reconciliation to net income attributable to Reading International, Inc. shareholders:
 
2010 Six Months
   
2009 Six Months
 
Total segment operating income
  $ 13,977     $ 13,406  
Non-segment:
               
Depreciation and amortization expense
    388       248  
General and administrative expense
    6,890       6,731  
Operating income
    6,699       6,427  
Interest expense, net
    (7,164 )     (7,261 )
Gain on retirement of subordinated debt (trust preferred securities)
    --       10,714  
Gain on sale of assets
    351       --  
Other loss
    (713 )     (2,716 )
Income tax expense
    (12,783 )     (999 )
Equity earnings of unconsolidated joint ventures and entities
    617       659  
Net income (loss)
    (12,993 )     6,824  
   Net income attributable to the noncontrolling interest
    (368 )     (328 )
Net income (loss) attributable to Reading International, Inc. common shareholders
  $ (13,361 )   $ 6,496  


Note 4 – Operations in Foreign Currency

We have significant assets in Australia and New Zealand.  To the extent possible, we conduct our Australian and New Zealand operations on a self-funding basis.  The carrying value of our Australian and New Zealand assets and liabilities fluctuate 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).  We have no derivative financial instruments to hedge against the risk of foreign currency exposure.
 
Presented in the table below are the currency exchange rates for Australia and New Zealand as of June 30, 2010 and December 31, 2009:

   
US Dollar
 
   
June 30, 2010
   
December 31, 2009
 
Australian Dollar
  $ 0.8480     $ 0.8979  
New Zealand Dollar
  $ 0.6901     $ 0.7255  


Note 5 – Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing the net income (loss) attributable to Reading International, Inc. common shareholders by the weighted average number of common shares outstanding during the period.  Diluted earnings (loss) per share is computed by dividing the net income (loss) attributable to Reading International, Inc. common shareholders 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 and non-vested stock awards give rise to potentially dilutive common shares.  In accordance with FASB ASC 260-10 - Earnings Per Share, these shares are included in the diluted earnings per share calculation under the treasury stock method.  As noted in the table below, due to the small difference between the basic and diluted weighted average common shares, the basic and the diluted earnings (loss) per share are the same for the 2010 Quarter.  The following is a calculation of earnings (loss) per share (dollars in thousands, except share data):

 
-10-

 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net income (loss) attributable to Reading International, Inc. common shareholders
  $ (13,714 )   $ 9,890     $ (13,361 )   $ 6,496  
                                 
Basic and diluted earnings (loss) per share attributable to Reading International, Inc. common share holders
  $ (0.60 )   $ 0.44     $ (0.59 )   $ 0.29  
Weighted average common stock – basic
    22,797,534       22,653,050       22,754,599       22,616,193  
Weighted average common stock – dilutive
    22,797,534       22,687,273       22,754,599       22,650,415  

For the three and six months ended June 30, 2010, we recorded losses from continuing operations.  As such, we excluded the 25,058 of in-the-money stock options from the computation of diluted loss per share because they were anti-dilutive in those periods.  For the three and six months ended June 30, 2009, the weighted average common stock – diluted included 34,222 of in-the-money incremental stock options.  In addition, 624,692 of out-of-the-money stock options were excluded from the computation of diluted earnings (loss) per share for the three and six months ended June 30, 2010, and 693,628 of out-of-the-money stock options were excluded from the computation of diluted earnings (loss) per share for the three and six months ended June 30, 2009.


Note 6 – Property Held for Sale, Property Held For and Under Development, and Property and Equipment

Property Held for Sale – Burwood

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 $44.1 million (AUS$52.0 million) which has been reclassified from property held for development to land held for sale on our June 30, 2010 condensed consolidated balance sheet.

Property Held For and Under Development

As of June 30, 2010 and December 31, 2009, we owned property held for and under development summarized as follows (dollars in thousands):

Property Held For and Under Development
 
June 30, 2010
   
December 31,
2009
 
Land
  $ 27,400     $ 45,629  
Construction-in-progress (including capitalized interest)
    4,433       33,047  
Property held for and under development
  $ 31,833     $ 78,676  
 

We recorded capitalized interest related to our properties under development for the six months ended June 30, 2009 of $136,000.  We have curtailed the development activities of our properties under development and are not currently capitalizing interest expense.  Therefore, we did not capitalize any interest during the three or six months ended June 30, 2010.

Property and Equipment

As of June 30, 2010 and December 31, 2009, we owned investments in property and equipment as follows (dollars in thousands):

Property and equipment
 
June 30,
2010
   
December 31,
2009
 
Land
  $ 59,356     $ 61,110  
Building
    121,606       122,784  
Leasehold interests
    33,319       33,716  
Construction-in-progress
    2,458       1,807  
Fixtures and equipment
    82,272       85,235  
Total cost
    299,011       304,652  
Less: accumulated depreciation
    (104,735 )     (103,903 )
Property and equipment, net
  $ 194,276     $ 200,749  

Depreciation expense for property and equipment was $3.4 million and $2.6 million for the three months ended June 30, 2010 and 2009, respectively, and $6.5 million and $5.8 million for the six months ended June 30, 2010 and 2009, respectively.


Note 7 – Investments in Unconsolidated Joint Ventures and Entities

Our investments in unconsolidated joint ventures and entities are accounted for under the equity method of accounting, and, as of June 30, 2010 and December 31, 2009, included the following (dollars in thousands):

   
Interest
   
June 30,
2010
   
December 31,
2009
 
Rialto Distribution
    33.3 %   $ --     $ --  
Rialto Cinemas
    50.0 %     4,168       4,475  
205-209 East 57th Street Associates, LLC
    25.0 %     124       207  
Mt. Gravatt Cinema
    33.3 %     4,688       5,050  
Total investments
          $ 8,980     $ 9,732  

For the three months ended June 30, 2010 and 2009, we recorded our share of equity earnings (loss) from our investments in unconsolidated joint ventures and entities as follows (dollars in thousands):

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Rialto Distribution
  $ 35     $ (60 )   $ 35     $ (150 )
Rialto Cinemas
    64       19       85       106  
205-209 East 57th Street Associates, LLC
    --       --       --       304  
Mt. Gravatt Cinema
    167       205       497       399  
Total equity earnings
  $ 266     $ 164     $ 617     $ 659  

 
205-209 East 57th Street Associates, LLC – Retail Condominium Sale

The remaining retail condominium of our Place 57 joint venture was sold in February 2009 for approximately $4.0 million.  Based on the closing statements of the sale, our share of the sale price was approximately $900,000 resulting in earnings to us of $304,000.On February 10, 2010, we received $83,000 relating to our investment in the Place 57 joint venture representing a return of substantially all of our remaining initial investment.


Note 8 – Goodwill and Intangible Assets

In accordance with FASB ASC 350-20-35, Goodwill - Subsequent Measurement and Impairment, we perform an annual impairment review of our goodwill and other intangible assets on a reporting unit basis, or earlier if changes in circumstances indicate that an asset may be impaired.  As of June 30, 2010 and December 31, 2009, we had goodwill consisting of the following (dollars in thousands):

   
Cinema
   
Real Estate
   
Total
 
Balance as of December 31, 2009
  $ 32,187     $ 5,224     $ 37,411  
Change in goodwill due to a purchase price adjustment
    (4,381 )     --       (4,381 )
Foreign currency translation adjustment
    (660 )     --       (660 )
Balance at June 30, 2010
  $ 27,146     $ 5,224     $ 32,370  

During the first quarter of 2010, Nationwide Theaters Corp. and Reading agreed to reduce the Nationwide Note 1 by $4.4 million pursuant to the original sale and purchase agreement (See Note 11 – Notes Payable and Subordinated Debt (Trust Preferred Securities)).  The reduction in this note has resulted in an adjustment to the carrying value of the goodwill for $4.4 million.

We have intangible assets other than goodwill that are subject to amortization, which we amortize over various periods.  We amortize our beneficial leases over the lease period, the longest of which is 20 years; our trade name using an accelerated amortization method over its estimated useful life of 50 years; and our option fee and other intangible assets over 10 years.  For the three months ended June 30, 2010 and 2009, amortization expense totaled $614,000 and $697,000, respectively; and for the six months ended June 30, 2010 and 2009, amortization expense totaled $1.3 million and $1.3 million, respectively.

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

 
As of June 30, 2010
 
Beneficial Leases
   
Trade name
   
Option Fee
   
Other Intangible Assets
   
Total
 
Gross carrying amount
  $ 24,014     $ 7,220     $ 2,773     $ 449     $ 34,456  
Less: Accumulated amortization
    7,435       2,702       2,758       225       13,120  
   Total, net
  $ 16,579     $ 4,518     $ 15     $ 224     $ 21,336  

 
As of December 31, 2009
 
Beneficial Leases
   
Trade name
   
Option Fee
   
Other Intangible Assets
   
Total
 
Gross carrying amount
  $ 24,079     $ 7,220     $ 2,773     $ 451     $ 34,523  
Less: Accumulated amortization
    6,924       2,051       2,710       183       11,868  
   Total, net
  $ 17,155     $ 5,169     $ 63     $ 268     $ 22,655  
 
 
Note 9 – Prepaid and Other Assets

Prepaid and other assets are summarized as follows (dollars in thousands):

   
June 30, 2010
   
December 31,
2009
 
Prepaid and other current assets
           
Prepaid expenses
  $ 1,176     $ 1,333  
Prepaid taxes
    665       686  
Deposits
    152       146  
Other
    867       913  
Total prepaid and other current assets
  $ 2,860     $ 3,078  
                 
Other non-current assets
               
Other non-cinema and non-rental real estate assets
  $ 1,134     $ 1,134  
Long-term deposits
    212       269  
Deferred financing costs, net
    3,284       3,661  
Interest rate swap at fair value – non-qualifying hedge
    356       766  
Other receivables
    6,750       6,750  
Tenant inducement asset
    1,678       1,135  
Straight-line rent asset
    671       1,074  
Other
    30       118  
Total non-current assets
  $ 14,115     $ 14,907  


Note 10 – Income Tax

The provision for income taxes is different from the amount computed by applying U.S. statutory rates to consolidated losses before taxes.  The significant reason for these differences is as follows (dollars in thousands):

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Expected tax provision (benefit)
  $ (476 )   $ 3,719     $ (73 )   $ 2,738  
Reduction (increase) in taxes resulting from:
                               
Change in valuation allowance, retirement of trust preferred debt
    --       (4,012 )     --       (4,012 )
Change in valuation allowance, other
    413       388       149       1,355  
Foreign income tax provision
    147       98       293       156  
Foreign withholding tax provision
    66       165       267       321  
Tax effect of foreign tax rates on current income
    63       (95 )     (76 )     (81 )
State and local tax provision
    127       257       213       268  
Reserve for federal tax litigation
    11,861       127       12,010       254  
Actual tax provision
  $ 12,201     $ 647     $ 12,783     $ 999  

During the three and six months ended June 30, 2010 the Company’s FASB ASC 740-10-2a liability increased by $11.8 million and $12.0 million, respectively, reflecting the settlement in July 2010 of federal income tax matters under litigation, as more fully described in Note 13 – Commitments and Contingencies below.

 
-14-

 
Pursuant to ASC 740-10, a provision should be made for the tax effect of earnings of foreign subsidiaries that are not permanently invested outside the United States.  Our intent is that earnings of our foreign subsidiaries are not permanently invested outside the United States.  No current or cumulative earnings were available for distribution in the Reading Australia consolidated group of subsidiaries or in the Puerto Rico subsidiary as of June 30, 2010.  The Reading New Zealand consolidated group of subsidiaries generated earnings in the six months ending June 30, 2010, but had no cumulative earnings available for distribution.  We have provided $453,000 in foreign withholding taxes connected with foreign retained earnings.

We have accrued $25.9 million in income tax liabilities as of June 30, 2010, of which $23.9 million has been classified as income taxes payable and $2.0 million have been classified as non-current tax liabilities.  As part of current tax liabilities, we have accrued $18.1 million in accordance with the cumulative probability approach prescribed by FASB ASC 740-10-25 – Income Taxes - Uncertain Tax Positions in connection with settlement of the IRS litigation matter discussed in Note 13 – Commitments and Contingencies below.  We believe these amounts represent an adequate provision for our income tax exposures, including income tax contingencies related to foreign withholding taxes described in Note 15 – Other Liabilities.

The following table is a summary of the activity related to unrecognized tax benefits, excluding interest and penalties, for the periods ending June 30, 2010, December 31, 2009, and December 31, 2008 (dollars in thousands):

   
Six Months Ended June 30, 2009
   
Year Ended December 31, 2009
   
Year Ended December 31, 2008
 
Unrecognized tax benefits – gross beginning balance
  $ 11,412     $ 11,271     $ 11,417  
Gross increases – prior period tax provisions
    502       92       --  
Gross decreases – prior period tax positions
    (219 )     --       (146 )
Gross increases – current period tax positions
    --       219       --  
Settlements
    3,765       --       --  
Statute of limitations lapse
    (174 )     (170 )     --  
Unrecognized tax benefits – gross ending balance
    15,286       11,412       11,271  

We adopted FASB ASC 740-10-25 – Income Taxes - Uncertain Tax Positions (“ASC 740-10-25”) on January 1, 2007.  As a result, we recognized a $509,000 cumulative increase to reserves for uncertain tax positions, which was accounted for as an adjustment to the beginning balance of accumulated deficit in 2007.  As of that date, we also reclassified approximately $4.0 million in reserves from current taxes liabilities to non-current tax liabilities.  Interest and/or penalties related to income tax matters are recorded as part of income tax expense.  We had approximately $10.8 million of gross tax benefits and $1.7 million of tax interest unrecognized on the financial statements as of the date of adoption, mostly reflecting operating loss carry forwards and the IRS litigation matter described below.  Of the $12.5 million total gross unrecognized tax benefits at January 1, 2007, $4.5 million would affect the effective tax rate if recognized.  The remaining balance consists of items that would not affect the effective tax rate due to the existence of the valuation allowance.  We recorded an increase to our gross unrecognized tax benefits of approximately $0.6 million and an increase to tax interest of approximately $0.6 million during the period January 1, 2007 to December 31, 2007.  Of the $11.3 million gross unrecognized tax benefit at December 31, 2008, $3.1 million would affect the effective rate if recognized.  We further recorded a decrease to our gross unrecognized tax benefits of approximately $0.1 million and an increase to tax interest of approximately $0.9 million during the period January 1, 2008 to December 31, 2008, and the total balance at December 31, 2008 was approximately $14.5 million (of which approximately $3.2 million represents interest).  We further recorded an increase to our gross unrecognized tax benefits of approximately $0.2 million and an increase to tax interest of approximately $0.6 million during the period January 1, 2009 to December 31, 2009, and the total balance at December 31, 2009 was approximately $15.3 million (of which approximately $3.8 million represents interest).  As of June 30, 2010, we recorded an increase to our gross unrecognized tax benefits of $3.8 million and an increase in tax interest of approximately $8.2 million to reflect a proposed agreement to settle the IRS litigation matter described in Note 13.  The total balance as of that date was $27.4 million, of which $12.1 million represents interest.  Of the $15.3 million gross unrecognized tax benefit at June 30, 2010, $7.1 million would affect the effective tax rate if recognized.

 
-15-

 
We anticipate that within 12 months following June 30, 2010 our gross unrecognized tax benefits will decrease by approximately $8.2 million, reflecting a reduction in available loss carry forwards related to the IRS litigation matter described in Note 13.  Because of valuation allowances, the decrease will not affect the effective tax rate.  We also anticipate in that period a tax payment of approximately $5.3 million tax, plus undetermined interest, to satisfy our obligation under the IRS litigation settlement.  We expect no other significant change to our gross unrecognized tax benefits caused by settlement of audits or expiration of statutes of limitations.


Note 11 – Notes Payable and Subordinated Debt (Trust Preferred Securities)

Notes payable and subordinated debt (trust preferred securities) are summarized as follows (dollars in thousands):

Name of Note Payable or Security
 
June 30, 2010
Interest Rate
   
December 31, 2009
Interest Rate
   
Maturity Date
   
June 30, 2010
Balance
   
December 31, 2009
Balance
 
Australian Corporate Credit Facility
    6.22%       5.58%    
June 30, 2011
    $ 85,224     $ 90,239  
Australian Shopping Center Loans
    --       --      2010-2013       636       786  
New Zealand Corporate Credit Facility
    4.55%       4.35%    
March 31, 2012
      18,288       10,882  
Trust Preferred Securities
    9.22%       9.22%    
April 30, 2027
      27,913       27,913  
US Euro-Hypo Loan
    6.73%       6.73%    
July 11, 2012
      15,000       15,000  
US GE Capital Term Loan
    6.35%       6.35%    
February 21, 2013
      30,975       32,700  
US Liberty Theaters Term Loans
    6.20%       6.20%    
April 1, 2013
      6,795       6,862  
US Nationwide Loan 1
    8.50%       7.50 - 8.50%    
February 21, 2013
      15,600       20,021  
US Nationwide Loan 2
    8.50%       8.50%    
February 21, 2011
      1,763       1,693  
US Sutton Hill Capital Note 1 – Related Party
    10.25%       10.25%      N/A       --       5,000  
US Sutton Hill Capital Note 2 – Related Party
    8.25%       8.25%    
December 31, 2013
      9,000       9,000  
US Union Square Term Loan
    --       6.26%      N/A       --       6,897  
US Union Square Term Loan – Sun Life
    5.92%       6.26%    
May 1, 2015
      7,484       --  
Total
                          $ 218,678     $ 226,993  

Australia Corporate Credit Facility

As indicated in our 2009 Annual Report, the term of our Australia Corporate Credit Facility matures on June 30, 2011.  Accordingly, the outstanding balance of this debt is classified as current on our balance sheet.  We are currently in the process of renegotiating this facility with our current lender while also seeking a replacement facility with other lenders.  While no assurances can be given that we will be successful, we currently anticipate that the current facility will either be extended or replaced prior to maturity.

Union Square Loan

On April 30, 2010, we refinanced the loan secured by our Union Square property with another lender.  The new loan for $7.5 million has a five-year term with a fixed interest rate of 5.92% per annum and an amortization payment schedule of 20 years with a balloon payment of approximately $6.4 million at the end of the loan term.
 

Sutton Hill Capital Notes 1 & 2

As part of the negotiation of the Village East Lease (see Note 20 – Related Party Transactions), we paid off the Sutton Hill Capital (“SHC”) Note #1 on June 30, 2010 of $5.0 million and renegotiated the SHC Note 2 for $9.0 million.  Under the new terms of the SHC Note 2, the loan has a variable annual rate equal to a Five-Year Constant Maturity United States Treasury Note rate plus 575 basis points, subject to a minimum rate of 8.25% and a maximum rate of 10% and an expiration date of December 31, 2013.  No other covenants are required for this loan.  This loan is unsecured.

Nationwide Note 1

During the first quarter of 2010, Nationwide Theaters Corp. (the Seller’s note above associated with the Consolidated Cinemas acquisition) and Reading agreed to reduce the seller’s note, Nationwide Note 1, by $4.4 million pursuant to the original sale and purchase agreement.  This reduction in the note effectively reduces the original purchase price for the Consolidated Cinemas by $4.4 million from $20.0 million to $15.6 million.  The reduction in this note has resulted in an adjustment to the carrying value of the goodwill for $4.4 million.


Note 12 – Other Liabilities

Other liabilities are summarized as follows (dollars in thousands):

   
June 30, 2010
   
December 31, 2009
 
Current liabilities
           
Security deposit payable
  $ 181     $ 143  
Contractual commitment loss
    --       321  
Other
    (4 )     (7 )
Other current liabilities
  $ 177     $ 457  
Other liabilities
               
Foreign withholding taxes
  $ 5,944     $ 5,944  
Straight-line rent liability
    6,462       6,199  
Capital Lease liability
    5,573       --  
Environmental reserve
    1,656       1,656  
Accrued pension
    4,064       3,912  
Interest rate swap – non-qualifying hedge
    494       785  
Acquired leases
    3,693       4,042  
Other payable
    2,603       2,603  
Other
    632       711  
Other liabilities
  $ 31,121     $ 25,852  

Included in our other liabilities are accrued pension costs of $4.1 million.  The benefits of our pension plans are fully vested, and, as such, no service costs were recognized for the three and six months ended June 30, 2010 and 2009.  Our pension plans are unfunded; therefore, the actuarial assumptions do not include an estimate for expected return on plan assets.  For the three and six months ended June 30, 2010, we recognized $75,000 and $152,000, respectively, of interest cost and $76,000 and $152,000, respectively, of amortized prior service cost.  For the three and six months ended June 30, 2009, we recognized $65,000 and $134,000, respectively, of interest cost and $71,000 and $142,000, respectively, of amortized prior service cost.
 

Note 13 – Commitments and Contingencies

Unconsolidated Debt

Total debt of unconsolidated joint ventures and entities was $932,000 and $979,000 as of June 30, 2010 and December 31, 2009.  Our share of unconsolidated debt, based on our ownership percentage, was $310,000 and $326,000 as of June 30, 2010 and December 31, 2009.  This loan is guaranteed by one of our subsidiaries to the extent of our ownership percentage.

Litigation Update

IRS 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 $13.4 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 June 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 June 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 $11.8 million for the quarter ended June 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 June 30, 2010, we show the $18.1 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 $848,000 (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 $848,000 (AUS$1.0 million) plus interest of $448,000 (AUS$528,000).  It is also possible that the court will order us to pay a proportion of Mackie Group's costs of the proceeding.  We have appealed the Mackie decision.  Inclusive of the $555,000 (AUS$655,000) accrued in the six months ended June 30, 2010, we have accrued $1.3 million (AUS$1.5 million) associated with this judgment against us.  Pending our appeal, and as agreed by both parties, we have placed $1.3 million (AUS$1.5 million) into a jointly controlled, restricted cash account relating to this judgment.


Note 14 – Noncontrolling interests

Noncontrolling interest is composed of the following enterprises:
 
·  
50% membership interest in Angelika Film Centers LLC (“AFC LLC”) owned by a subsidiary of iDNA, Inc.;
 
·  
25% noncontrolling interest in Australia Country Cinemas Pty Ltd (“ACC”) owned by Panorama Cinemas for the 21st Century Pty Ltd.;
 
·  
33% noncontrolling interest in the Elsternwick Joint Venture owned by Champion Pictures Pty Ltd.;
 
·  
15% incentive interest in certain property holding trusts established by LPP or its affiliates (see Note 2); and
 
·  
25% noncontrolling interest in the Sutton Hill Properties, LLC owned by Sutton Hill Capital, L.L.C.

The components of noncontrolling interest are as follows (dollars in thousands):

   
June 30, 2010
   
December 31, 2009
 
AFC LLC
  $ 955     $ 1,135  
Australian Country Cinemas
    144       255  
Elsternwick unincorporated joint venture
    165       139  
Landplan Property Partners
    --       --  
Sutton Hill Properties
    (180 )     (155 )
Noncontrolling interests in consolidated subsidiaries
  $ 1,084     $ 1,374  
 

The components of income attributable to noncontrolling interests are as follows (dollars in thousands):

   
Expense for the
   
Expense for the
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
AFC LLC
  $ 153     $ 98     $ 345     $ 302  
Australian Country Cinemas
    58       43       118       70  
Elsternwick Unincorporated Joint Venture
    15       6       43       16  
Landplan Property Partners
    --       5       --       55  
Sutton Hill Properties
    (73 )     (62 )     (138 )     (115 )
Net income attributable to noncontrolling interest
  $ 153     $ 90     $ 368     $ 328  
 
A summary of the changes in controlling and noncontrolling stockholders’ equity is as follows (dollars in thousands):

   
Reading International, Inc. Stockholders’ Equity
   
Noncontrolling Interests
   
Total Stockholders’ Equity
 
Equity at – January 1, 2010
  $ 108,889     $ 1,374     $ 110,263  
Net income (loss)
    (13,361 )     368       (12,993 )
Increase (decrease) in additional paid in capital
    (604 )     113       (491 )
Treasury stock purchased
    (251 )     --       (251 )
Distributions to noncontrolling interests
    --       (751 )     (751 )
Accumulated other comprehensive income
    (8,490 )     (20 )     (8,510 )
Equity at – June 30, 2010
  $ 86,183     $ 1,084     $ 87,267  

   
Reading International, Inc. Stockholders’ Equity
   
Noncontrolling Stockholders’ Equity
   
Total Stockholders’ Equity
 
Equity at – January 1, 2009
  $ 67,630     $ 1,817     $ 69,447  
Net income
    6,496       328       6,824  
Increase in additional paid in capital
    331       50       381  
Distributions to noncontrolling stockholders
    --       (489 )     (489 )
Accumulated other comprehensive income
    17,589       78       17,667  
Equity at – June 30, 2009
  $ 92,046     $ 1,784     $ 93,830  


Note 15 – Common Stock

Common Stock Issuance

During the six months ended June 30, 2010, we issued 143,462 of Class A Nonvoting shares to an executive employee associated with his prior years’ stock bonuses.

 
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For the stock options exercised during 2010, we issued for cash to employees of the corporation under our employee stock option plan 90,000 shares of Class A Nonvoting Common Stock at an exercise price of $2.76 per share.


Note 16 – Comprehensive Income (Loss)

U.S. 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 (loss).  The following table sets forth our comprehensive income (loss) for the periods indicated (dollars in thousands):

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net unrealized gains (losses) on investments included in other comprehensive income:
                       
Reclassification of recognized loss on available for sale investments included in net income
  $  --     $  1,346     $  --     $  2,093  
Unrealized loss on available for sale investments
    (474 )     (1,343 )     (256 )     (2,092 )
Net unrealized gains (losses) on investments
    (474 )     3       (256 )     1  
Net income (loss)
    (13,561 )     9,980       (12,993 )     6,824  
Foreign currency translation gains (losses)
    (9,434 )     19,796       (8,407 )     17,446  
Accrued pension
    76       71       152       142  
Comprehensive income (loss)
    (23,393 )     29,850       (21,504 )     24,413  
Net income attributable to noncontrolling interest
    (153 )     (90 )     (368 )     (328 )
Comprehensive income (loss) attributable to noncontrolling interest
    28       (79 )     20       (78 )
Comprehensive income (loss) attributable to Reading International, Inc.
  $ (23,518 )   $ 29,681     $ (21,852 )   $ 24,007  


Note 17 – Derivative Instruments

We are exposed to interest rate changes from our outstanding floating rate borrowings.  We manage our fixed to floating rate debt mix to mitigate the impact of adverse changes in interest rates on earnings and cash flows and on the market value of our borrowings.  From time to time, we may enter into interest rate hedging contracts, which effectively convert a portion of our variable rate debt to a fixed rate over the term of the interest rate swap.  In the case of our Australian borrowings, we are presently required to swap no less than 70% of our drawdowns under our Australian Corporate Credit Facility into fixed interest rate obligations.  Under our GE Capital Term Loan, we are required to swap no less than 50% of our variable rate drawdowns for the first two years of the loan agreement.

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

Type of Instrument
 
Notional Amount
   
Pay Fixed Rate
   
Receive Variable Rate
 
Maturity Date
Interest rate swap
  $ 32,500,000      2.854%      0.5330%  
April 1, 2011
Interest rate swap
  $ 40,899,000      4.550%      4.5433%  
December 31, 2011
Interest rate cap
  $ 22,023,000      4.550%      4.5433%  
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 an increase in interest expense of $342,000 and $119,000 during the three and six months ended June 30, 2010, respectively, and a $1.1 million and $710,000 decrease to interest expense during the three and six months ended June 30, 2009, respectively.  At June 30, 2010, we recorded the fair market value of an interest rate swap and a cap of $356,000 as other long-term assets and an interest rate swap of $494,000 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
   
June 30, 2010
   
December 31, 2009
   
June 30, 2010
   
December 31, 2009
 
Investment in marketable securities
    1     $ 2,730     $ 3,120     $ 2,730     $ 3,120  
Interest rate swap & cap assets
    2     $ 356     $ 766     $ 356     $ 766  
Interest rate swap liability
    2     $ 494     $ 785     $ 494     $ 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.
 
·  
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.  The fair value of the Taringa Property was estimated at $1.8 million (AU$2.2 million) for purposes of recording our impairment expense for the three and six months ended June 30, 2010 and was based on level 3 inputs in developing management’s estimate of fair value.

 
-22-

 
As of June 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 respective 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 June 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.

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 months ended June 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 June 30, 2010 and December 31, 2009 (dollars in thousands):

   
Book Value
   
Fair Value
 
Financial Instrument
 
June 30, 2010
   
December 31, 2009
   
June 30, 2010
   
December 31, 2009
 
Notes payable
  $ 181,765     $ 185,080     $ 141,914     $ 172,946  
Notes payable to related party
  $ 9,000     $ 14,000     $ N/A     $ N/A  
Subordinated debt (trust preferred securities)
  $ 27,913     $ 27,913     $ 19,847     $ 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 of our investment in these properties by $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 $44.1 million (AUS$52.0 million) which was reclassified from property held for development to land held for sale on our June 30, 2010 condensed consolidated balance sheet.


Note 20 – Related Party Transactions

Village East Lease

On June 29, 2010, we agreed to extend our existing lease from Sutton Hill Capital LLC (“SHC”) of the Village East Cinema in New York City by 10 years, with a new termination date of June 30, 2020.  The extended lease provides for a call option pursuant to which Reading may purchase the cinema 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 cinema lease at any time between 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.  As our Chairman, Chief Executive Officer and controlling shareholder, Mr. James J. Cotter is also the managing member of SHC; therefore, 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 June 30, 2010
     
2010
  $ 295  
2011
    590  
2012
    590  
2013
    590  
2014
    590  
Thereafter
    9,145  
Total future minimum rental income
  $ 11,800  

 
Sutton Hill Capital Notes 1 & 2

During the three months ended June 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 Event

IRS Litigation

During July 2010, our wholly owned subsidiary, Craig, and the IRS agreed to file with the Tax Court a stipulation settling the IRS’s claim against Craig.  We have accrued $18.1 million for the federal and state tax liabilities for this settlement which resulted in a tax expense for the three and six months ending June 30, 2010 of $11.8 million and $12.0 million, respectively (see Note 13 – Commitments and Contingencies).
 

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 58 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.  Additionally, during May 2010, we elected not to renew the lease of our 4-screen Kapiti cinema in New Zealand.  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.