Overview

We are one of the largest motion picture exhibitors in the United States and as of March 31, 2009 we owned, operated or had an interest in 249 theatres with 2,288 screens located in 35 states. We target small to mid-size non-urban markets with the belief that they provide a number of operating benefits, including lower operating costs and fewer alternative forms of entertainment.

As of March 31, 2009, we had 229 theatres with 2,154 screens on a digital-based platform, including 193 theatres with 500 screens equipped for 3-D. We believe our leading-edge technologies allow us not only greater flexibility in showing feature films, but also provide us with the capability to explore revenue-enhancing alternative content programming. Digital film content can be easily moved to and from auditoriums in our theatres to maximize attendance. The superior quality of digital cinema and our 3-D capability could provide a competitive advantage to us in markets where we compete for film and patrons.

Our business depends to a substantial degree on the availability of suitable motion pictures for screening in our theatres and the appeal of such motion pictures to patrons in our specific theatre markets. Our results of operations vary from period to period based upon the number and popularity of the films we show in our theatres. A disruption in the production of motion pictures, a lack of motion pictures, or the failure of motion pictures to attract the patrons in our theatre markets will likely adversely affect our business and results of operations.

Our revenue also varies significantly depending upon the timing of the film releases by distributors. While motion picture distributors have begun to release major motion pictures more evenly throughout the year, the most marketable films are usually released during the summer months and the year-end holiday season, and we usually earn more during those periods than in other periods during the year. As a result, the timing of such releases affects our results of operations, which may vary significantly from quarter to quarter and year to year.

In addition to competition with other motion picture exhibitors, our theatres face competition from a number of alternative motion picture exhibition delivery systems, such as cable television, satellite and pay-per-view services and home video systems. The expansion of such delivery systems could have a material adverse effect upon our business and results of operations. We also compete for the public's leisure time and disposable income with all forms of entertainment, including sporting events, concerts, live theatre and restaurants. A prolonged economic downturn could materially affect our business by reducing amounts consumers spend on entertainment including attending movies and purchasing concessions. Any reduction in consumer confidence or disposable income in general may affect the demand for movies or severely impact the motion picture production industry such that our business and operations could be adversely affected.

The ultimate performance of our film product any time during the calendar year will have a dramatic impact on our cash needs. In addition, the seasonal nature of the exhibition industry and positioning of film product makes our needs for cash vary significantly from quarter to quarter. Generally, our liquidity needs are funded by operating cash flow, available funds under our credit agreement and short term float. Our ability to generate this cash will depend largely on future operations.

In light of the continuing challenging conditions in the credit markets and the wider economy, we continue to incur operating losses and focus on operating performance improvements. This includes managing our operating costs, implementing pricing initiatives and closing underperforming theatres. We also intend to allocate our available capital primarily to reducing our overall leverage. To this end, during the three months ended March 31, 2009, we made voluntary pre-payments to reduce bank debt of $5 million and in September 2008 we announced our decision to suspend our quarterly dividend. In addition, we continue to sell surplus property in order to deleverage our balance sheet.

In January 2009, the Company's Chairman, Chief Executive Officer and President, Michael W. Patrick, ceased employment with the Company. Refer to Note 9 - Separation Agreement Charges.

For a summary of risks and uncertainties relevant to our business, please see "Item 1A. Risk Factors" contained in our Annual Report on Form 10-K for the year ended December 31, 2008.

Results of Operations

Comparison of Three Months Ended March 31, 2009 and March 31, 2008

Revenues. We collect substantially all of our revenues from the sale of
admission tickets and concessions. The table below provides a comparative
summary of the operating data for this revenue generation.



                                                     Three Months Ended March 31,
                                                       2009               2008
 Average theatres                                             250                262
 Average screens                                            2,289              2,341
 Average attendance per screen                              5,579              5,229
 Average admission per patron                     $          6.38    $          6.45
 Average concessions and other sales per patron   $          3.19    $          3.18
 Total attendance (in thousands)                           12,771             12,239
 Total revenues (in thousands)                    $       121,912    $       116,260

Total revenue increased approximately 5% to $121.9 million for the three months ended March 31, 2009 compared to $116.3 million for the three months ended March 31, 2008, due to an increase in total attendance and an increase in average concessions and other sales per patron offset by a decrease in average admissions per patron due to the strong performance of a special event movie in the three months ended March 31, 2008.

Admissions revenue increased approximately 4% to $81.3 million for the three months ended March 31, 2009 from $77.9 million for the same period in 2008, due to an increase in total attendance offset by a decrease in average admissions per patron due to the strong performance of a special event movie in the three months ended March 31, 2008.

Concessions and other revenue increased approximately 6% to $40.6 million for the three months ended March 31, 2009 compared to $38.4 million for the same period in 2008, due to an increase in total attendance and an increase in average concessions and other sales per patron.

We operated 249 theatres with 2,288 screens at March 31, 2009 compared to 262 theatres with 2,339 screens at March 31, 2008.

Operating costs and expenses. The table below summarizes operating expense data for the periods presented.

                                                     Three Months Ended March 31,
  ($'s in thousands)                                 2009           2008     % Change
  Film exhibition costs                           $   43,806      $ 41,640          5
  Concession costs                                $    3,831      $  4,135         (7 )
  Other theatre operating costs                   $   50,793      $ 49,251          3
  General and administrative expenses             $    4,058      $  5,646        (28 )
  Depreciation and amortization                   $    8,662      $  9,132         (5 )
  Loss (gain) on sale of property and equipment   $      (45 )    $     12        n/m

Film exhibition costs. Film exhibition costs fluctuate in direct relation to the increases and decreases in admissions revenue and the mix of aggregate and term film deals. Film exhibition costs for the three months ended March 31, 2009 increased to $43.8 million as compared to $41.6 million for the three months ended March 31, 2008 due to an increase in admissions revenue primarily as a result of an increase in attendance. As a percentage of admissions revenue, film exhibition costs for the three months ended March 31, 2009 were 54% as compared to 53% for the three months ended March 31, 2008 primarily as a result of additional costs associated with 3D films due to higher attendance and advertising for theatre openings.

Concession costs. Concession costs fluctuate with changes in concessions revenue and product sales mix and changes in our cost of goods sold. Concession costs equaled approximately $3.8 million for the three months ended March 31, 2009 and $4.1 million for the three months ended March 31, 2008 due to lower product costs offset by an increase in concessions and other sales revenue. As a percentage of concessions and other revenues, concession costs for the three months ended March 31, 2009 were 9.4% as compared to 10.8% for the three months ended March 31, 2008 due to an increase in concessions sales of higher margin products. Our focus continues to be a limited concessions offering of high margin products; such as soft drinks, popcorn and individually packaged candy, to maximize our profit potential.

Other theatre operating costs. Other theatre operating costs for the three months ended March 31, 2009 increased to $50.8 million as compared to $49.3 million for the three months ended March 31, 2008. The increase in our other theatre operating costs are primarily the result of an increase in occupancy costs due to the opening of new theatres and an increase in repair and maintenance costs, offset by a reduction in our salaries and wages expense.

General and administrative expenses. General and administrative expenses for the three months ended March 31, 2009 decreased to $4.1 million as compared to $5.6 million for the three months ended March 31, 2008. The decrease in our general and administrative expenses is due to reductions in our salaries and wages expense, incentive compensation and legal and professional fees.

Depreciation and amortization. Depreciation and amortization expenses for the three months ended March 31, 2009 decreased approximately 5% as compared to the three months ended March 31, 2008. The decrease in depreciation and amortization expenses resulted from a combination of a lower balance of property and equipment due to theatre closures, asset sales and other property and equipment disposals, as well as a portion of our long-lived assets becoming fully depreciated.

Net loss (gain) on sales of property and equipment. We recognized a gain of $45,000 on the sales of property and equipment for the three months ended March 31, 2009, as compared to a loss of $12,000 for the three months ended March 31, 2008.

Separation agreement charges. We recognized charges of $5.5 million for estimated expenses pertaining to the separation agreement with our former Chairman, Chief Executive Officer and President, Michael W. Patrick for the three months ended March 31, 2009, as compared to no expense recorded for the three months ended March 31, 2008.

Operating Income. Operating income for the three months ended March 31, 2009 decreased 17% to $5.3 million as compared to $6.4 million for the three months ended March 31, 2008. As a percentage of revenues, operating income for the three months ended March 31, 2009 was 4% as compared to 6% for the three months ended March 31, 2008. These fluctuations are primarily a result of the separation agreement charges and the other factors described above.

Interest expense, net. Interest expense, net for the three months ended March 31, 2009 decreased 19% to $9.0 million from $11.1 million for the three months ended March 31, 2008. The decrease is primarily related to a combination of lower average outstanding debt and a reduction in interest rates. Interest income, included in interest expense net, was $23,000 for the three months ended March 31, 2009, respectively, as compared to $110,000 for the same period in 2008.

Income tax. During the first three months of 2008 and 2009 we did not recognize any tax benefit. At March 31, 2009 and December 31, 2008, our consolidated net deferred tax assets were $57.4 million and $56.4 million, respectively, before the effects of any valuation allowance. We regularly assess whether it is more likely than not that our deferred tax asset balance will be recovered from future taxable income, taking into account such factors as our earnings history, carryback and carryforward periods, and tax planning strategies. When sufficient evidence exists that indicates that recovery is uncertain, a valuation allowance is established against the deferred tax asset, increasing our income tax expense in the period that such conclusion is made.

A significant factor in our assessment of the recoverability of the deferred tax asset is our history of cumulative losses. During 2007, we concluded that the recoverability of the deferred tax assets was uncertain based upon cumulative losses in that year and the preceding two years and determined that a valuation allowance was necessary to fully reserve our deferred tax assets. We expect that we will not recognize income tax benefits until a determination is made that a valuation allowance for all or some portion of the deferred tax assets is no longer required.

Should we realize year-to-date pre-tax income during 2009, then we will likely record income tax expense as a result of the Section 382 limitation to the use of our net operating loss carryforwards.

Income (loss) from discontinued operations, net of tax. We generally consider theatres for closure due to an expiring lease term, underperformance, or the opportunity to better deploy invested capital. During the three months ended March 31, 2009 and 2008, we closed two theatres and one theatre, respectively, and reported the results of these operations, including gains or losses in disposal, as discontinued operations. The operations and cash flow of these theatres have been eliminated from the Company's operations, and the Company will not have any continuing involvement in their operations.

The accompanying condensed consolidated statements of operations separately show the results of operations from discontinued operations through the respective dates of the theatre closings. Assets and liabilities associated with the discontinued operations have not been segregated from assets and liabilities from continuing operations as they are not material. We recorded a loss from discontinued operations for the three months ended March 31, 2009 of $326,000 as compared to income of $361,000 for the three months ended March 31, 2008. The results from discontinued operations include a gain of $74,000 on disposal of assets for the three months ended March 31, 2009 as compared to a gain of $854,000 for the three months ended March 31, 2008.

Liquidity and Capital Resources

General

Our revenues are collected in cash and credit card payments. Because we receive our revenues in cash prior to the payment of related expenses, we have an operating "float" which partially finances our operations. We had a working capital deficit of $36.3 million as of March 31, 2009 compared to working capital deficit of $34.0 million at December 31, 2008.

At March 31, 2009, we had available borrowing capacity of $50 million under our revolving credit facility and approximately $10.6 million in cash and cash equivalents on hand. The material terms of our revolving credit facility (including limitations on our ability to freely use all the available borrowing capacity) are described below in "Credit Agreement and Covenant Compliance."

Net cash provided by operating activities was $8.8 million for the three months ended March 31, 2009 compared to $1.3 million for the three months ended March 31, 2008. This increase in our cash provided by operating activities was due primarily to a reduction in accounts receivable and an increase in accrued expenses as compared to the prior period. Net cash used by investing activities was $2.9 million for the three months ended March 31, 2009 compared to $1.5 million for the three months ended March 31, 2008. The increase in our net cash used by investing activities is primarily due to an increase in cash used for the purchases of property and equipment and a decrease in proceeds from sale of property and equipment. Capital expenditures were $3.5 million for the three months ended March 31, 2009 and $2.7 million for the three months ended March 31, 2008. Net cash used by financing activities was $6.1 million for the three months ended March 31, 2009 compared to $3.7 million for the three months ended March 31, 2008. The increase in our net cash used in financing activities is primarily due to $5 million of unscheduled prepayments of long-term debt. Our financing activities include $2.2 million of dividends paid during the three months ended March, 2008.

Our liquidity needs are funded by operating cash flow and availability under our credit agreement. The exhibition industry is seasonal with the studios normally releasing their premiere film product during the holiday season and summer months. This seasonal positioning of film product makes our needs for cash vary significantly from quarter to quarter. Additionally, the ultimate performance of the films any time during the calendar year will have a dramatic impact on our cash needs.

We from time to time close older theatres or do not renew the leases, and the expenses associated with exiting these closed theatres typically relate to costs associated with removing owned equipment for redeployment in other locations and are not material to our operations. In 2009, we plan to close 12 to 16 of our underperforming theatres, of which three were closed during the three months ended March 31, 2009 (two of the theatres closed were determined to represent discontinued operations).

We plan to make a total of approximately $16 million in capital expenditures for calendar year 2009. Pursuant to the eighth amendment to our senior secured credit agreement, the aggregate capital expenditures that we may make, or commit to make for any fiscal year is limited to $30 million, provided that up to $10 million of the unused capital expenditures in a fiscal year may be carried over to the succeeding fiscal year.

In September 2008, our Board of Directors announced the decision to suspend our quarterly dividend in light of the continuing challenging conditions in the credit markets and the wider economy. At that time, we announced our plans to allocate our capital primarily to reducing our overall leverage. The cash dividend of $0.175 per share, paid on August 1, 2008 to shareholders of record at the close of business on July 1, 2008, was the last dividend declared by the Board of Directors prior to this decision. The payment of future dividends is subject to the Board of Directors' discretion and dependent on many considerations, including limitations imposed by covenants in our credit facilities, operating results, capital requirements, strategic considerations and other factors. We do not anticipate paying cash dividends in the foreseeable future.

Net Operating Loss Carryforward

As of March 31, 2009, after generating approximately $4.0 million of estimated operating loss carryforwards for the three months ended March 31, 2009, we had federal and state net operating loss carryforwards of $23.0 million, net of IRC
Section 382 limitations, to offset our future taxable income. The federal and state operating loss carryforwards begin to expire in the year 2020. In addition, our alternative minimum tax credit carryforward has an indefinite carryforward life.

We experienced an "ownership change" within the meaning of Section 382(g) of the Internal Revenue Code of 1986, as amended, during the fourth quarter of 2008. The ownership change has and will continue to subject our net operating loss carryforwards to an annual limitation, which will significantly restrict our ability to use them to offset taxable income in periods following the ownership change. In general, the annual use limitation equals the aggregate value of our stock at the time of the ownership change multiplied by a specified tax-exempt interest rate. The date of ownership change and the occurrence of more than one ownership change can significantly impact the amount of the annual limitation. The limitation is estimated to be $1.2 million per year, based on the information available. In total, we estimate that the effect of the 2008 ownership change will result in $97.8 million of net operating loss carryforwards expiring unused; such unusable net operating loss carryforwards are therefore not included in the amount disclosed in the first paragraph above.

Credit Agreement and Covenant Compliance

In 2005, we entered into a credit agreement that provides for senior secured credit facilities in the aggregate principal amount of $405 million consisting of:

• a $170 million seven year term loan facility maturing in May 2012;

• a $185 million seven year delayed-draw term loan facility maturing in May 2012; and

• a $50 million five year revolving credit facility available for general corporate purposes maturing in May 2010.

In addition, the credit agreement provides for future increases (subject to certain conditions and requirements) to the revolving credit and term loan facilities in an aggregate principal amount of up to $125 million.

As of March 31, 2009, we had the following amounts outstanding under each of the facilities described above:

• $155.8 million was outstanding under our $170 million term loan facility;

• $112.0 million was outstanding under our $185 million delayed-draw term loan facility; and

• no amounts were outstanding under our $50 million revolving credit facility.

Our long-term debt obligations mature as follows:

• the final maturity date of the revolving credit facility is May 19, 2010; and

• the final maturity date of the term loans is May 19, 2012.

The interest rate for borrowings under the credit agreement, as amended, is set to a margin above the London interbank offered rate ("LIBOR") or base rate, as the case may be, based on our consolidated leverage ratio as defined in the credit agreement, with the margin ranging from 3.00% to 3.50% for loans based on LIBOR and 2.00% to 2.50% for loans based on the base rate. At March 31, 2009 and 2008, the average interest rate was 5.80% and 6.55%, respectively.

The credit agreement requires that mandatory prepayments be made from (1) 100% of the net cash proceeds from certain asset sales and dispositions, other than a sales-leaseback transaction, and issuances of certain debt, (2) 85% of the net cash proceeds from sales-leaseback transactions, (3) various percentages (ranging from 0% to 75% depending on our consolidated leverage ratio) of excess cash flow as defined in the credit agreement, and (4) 50% of the net cash proceeds from the issuance of certain equity and capital contributions.

Debt Covenants

The senior secured credit facilities contain covenants which, among other things, restrict our ability, and that of its restricted subsidiaries, to:

• pay dividends or make any other restricted payments to parties other than to us;

• incur additional indebtedness;

• create liens on our assets;

• make certain investments;

• sell or otherwise dispose of our assets;

• consolidate, merge or otherwise transfer all or any substantial part of our assets; and

• enter into transactions with our affiliates.

The senior secured credit facilities also contain financial covenants measured quarterly that require us to maintain specified ratios of funded debt to adjusted EBITDA (the "leverage ratio") and adjusted EBITDA to interest expense (the "interest coverage ratio").

The credit agreement places certain restrictions on our ability to make capital expenditures. In addition to the dollar limitation described below, we may not make any capital expenditure if any default or event of default under the credit agreement has occurred and is continuing or would result, or if such default or event of default would occur as a result of a breach of certain financial covenants contained in the credit agreement on a pro forma basis after giving effect to the capital expenditure.

We have from time to time amended the credit agreement and the most recent amendments included, among other items:

• amending our leverage ratio such that from and after October 17, 2007 the ratio may not exceed 4.75 to 1.00 as of the last day of any quarter for the four-quarter period then ending;

• amending our interest coverage ratio such that from and after October 17, 2007 the ratio may not be less than 1.65 to 1.00 as of the last day of any quarter for the four-quarter period then ending;

• limiting the aggregate capital expenditures that we may make, or commit to make, to $30 million for any fiscal year, provided, that up to $10 million of unused capital expenditures in a fiscal year may be carried over to the succeeding fiscal year; and

• permitting sale-leaseback transactions of up to an aggregate of $175 million.

Debt Service

Our ability to service our indebtedness will require a significant amount of cash. Our ability to generate this cash will depend largely on future operations. Our 2007 and 2008 operating results were significantly lower than expectations, principally due to declines in box office attendance. Based upon our current level of operations and our 2009 business plan, we believe that cash flow from operations, available cash and available borrowings under our credit agreement will be adequate to meet our liquidity needs for the next 12 months. However, the possibility exists that, if our operating performance is worse than expected or we are unable to make our debt repayments, we could come into default under our debt instruments, causing the agents or trustees to accelerate maturity and declare all payments immediately due and payable.

The following are some factors that could affect our ability to generate sufficient cash from operations:

• further substantial declines in box office attendance, as a result of a continued general economic downturn, competition and a lack of consumers' acceptance of the movie products in our markets; and

• inability to achieve targeted admissions and concessions price increases, due to competition in our markets.

The occurrence of these conditions could require us to seek additional funds from external sources or to refinance all or a portion of our existing indebtedness in order to meet our liquidity requirements.

We are currently required to make principal repayments of the term loans in the amount of $0.7 million on the last day of each calendar quarter. Beginning on September 30, 2011 this repayment amount will increase to $65.4 million, due on each of September 30, 2011, December 31, 2011, March 31, 2012 and May 19, 2012 and would be reduced pro-ratably based on any future debt prepayments. Any amounts that may become outstanding under the revolving credit facility would be due and payable on May 19, 2010.

We cannot make assurances that we will be able to refinance any of our indebtedness or raise additional capital through other means, on commercially reasonable terms or at all. In particular, the current global financial crisis affecting the banking system and financial markets and the possibility that . . .