Overview

We are one of the largest motion picture exhibitors in the United States and as of June 30, 2009 we owned, operated or had an interest in 247 theatres with 2,285 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 June 30, 2009, we had 225 theatres with 2,133 screens on a digital-based platform, including 192 theatres with 499 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 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 and six months ended June 30, 2009, we made voluntary pre-payments to reduce bank debt of $10 million and $15 million, respectively. 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.

In June 2009, the Board of Directors appointed S. David Passman III to serve as President and Chief Executive Officer of the Company and entered into an employment agreement with Mr. Passman (the "Commencement Date"). The agreement provides that Mr. Passman will receive an annual base salary of $630,000 and will be eligible to receive an annual bonus with a target amount of 50% of base salary. Additionally, Mr. Passman was granted stock options to purchase 200,000 shares of the Company's common stock at a per share exercise price equal to the fair market value of one share on the Commencement Date. Also, on the Commencement Date Mr. Passman was granted 50,000 shares of restricted common stock.

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 and Six Months Ended June 30, 2009 and June 30, 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                   Six Months Ended
                                                               June 30,                            June 30,
                                                       2009                2008               2009            2008
Average theatres                                               248                259                249          261
Average screens                                              2,286              2,318              2,288        2,329
Average attendance per screen (1)                            5,984              5,402             11,562       10,632
Average admission per patron (1)                 $            6.50    $          6.16    $          6.44    $    6.30
Average concessions and other sales per
patron (1)                                       $            3.23    $          3.29    $          3.21    $    3.24
Total attendance (in thousands) (1)                         13,680             12,524             26,451       24,763
Total revenues (in thousands)                    $         133,104    $       117,317    $       254,906    $ 233,455

(1) Includes activity from theatres designated as discontinued operations and reported as such in the consolidated statements of operations.

Total revenue increased approximately 13% to $133.1 million for the three months ended June 30, 2009 compared to $117.3 million for the three months ended June 30, 2008, due to an increase in total attendance from 12.5 million in the second quarter of 2008 to 13.7 million for the second quarter of 2009 and an increase in average admissions per patron from $6.16 in the second quarter of 2008 to $6.50 for the second quarter of 2009, offset by a decrease in average concessions and other sales per patron from $3.29 for the second quarter of 2008 to $3.23 for the second quarter of 2009.

Total revenue increased approximately 9% to $254.9 million for the six months ended June 30, 2009 compared to $233.5 million for the six months ended June 30, 2008, due to an increase in total attendance from 24.8 million for the 2008 period to 26.5 million for the 2009 period and an increase in average admissions per patron from $6.30 for the 2008 period to $6.44 for the 2009 period, offset by a decrease in average concessions and other sales per patron from $3.24 for the 2008 period to $3.21 for the 2009 period.

Admissions revenue increased approximately 16% to $88.9 million for the three months ended June 30, 2009 from $76.5 million for the same period in 2008, due to an increase in total attendance and an increase in average admissions per patron from $6.16 in the second quarter of 2008 to $6.50 for the second quarter of 2009.

Admissions revenue increased approximately 10% to $170.1 million for the six months ended June 30, 2009 from $154.3 million for the same period in 2008, due to an increase in total attendance and an increase in average admissions per patron from $6.30 for the 2008 period to $6.44 for the 2009 period.

Concessions and other revenue increased approximately 8% to $44.2 million for the three months ended June 30, 2009 compared to $40.8 million for the same period in 2008, due to an increase in total attendance offset by a decrease in average concessions and other sales per patron from $3.29 for the second quarter of 2008 to $3.23 for the second quarter of 2009.

Concessions and other revenue increased approximately 7% to $84.8 million for the six months ended June 30, 2009 compared to $79.2 million for the same period in 2008, due to an increase in total attendance offset by a decrease in average concessions and other sales per patron from $3.24 for the 2008 period to $3.21 for the 2009 period.

We operated 247 theatres with 2,285 screens at June 30, 2009 compared to 257 theatres with 2,308 screens at June 30, 2008.

Operating costs and expenses. The tables below summarize operating expense data for the periods presented.

                                                     Three Months Ended June 30,
  ($'s in thousands)                                2009           2008     % Change
  Film exhibition costs                           $  51,178      $ 43,655         17
  Concession costs                                $   4,701      $  4,415          6
  Other theatre operating costs                   $  53,007      $ 46,776         13
  General and administrative expenses             $   3,807      $  4,647        (18 )
  Depreciation and amortization                   $   8,778      $  9,128         (4 )
  Loss (gain) on sale of property and equipment   $    (105 )    $    232        n/m

                                                      Six Months Ended June 30,
  ($'s in thousands)                                2009           2008     % Change
  Film exhibition costs                           $  94,456      $ 85,251         11
  Concession costs                                $   8,528      $  8,547         (0 )
  Other theatre operating costs                   $ 104,242      $ 95,974          9
  General and administrative expenses             $   7,865      $ 10,298        (24 )
  Depreciation and amortization                   $  17,437      $ 18,258         (4 )
  Loss (gain) on sale of property and equipment   $    (151 )    $    243        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 as a percentage of revenues are generally higher for periods with more blockbuster films. Film exhibition costs for the three months ended June 30, 2009 increased to $51.2 million as compared to $43.7 million for the three months ended June 30, 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 June 30, 2009 were 57.6% as compared to 57.1% for the three months ended June 30, 2008 primarily as a result of a higher percentage of revenues generated by top tier films. Film exhibition costs for the six months ended June 30, 2009 increased to $94.5 million as compared to $85.3 million for the six months ended June 30, 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 six months ended June 30, 2009 were 55.5% as compared to 55.3% for the six months ended June 30, 2008 primarily as a result a higher percentage of revenues generated by top tier films.

Concession costs. Concession costs fluctuate with changes in concessions revenue and product sales mix and changes in our cost of goods sold. Concession costs increased to approximately $4.7 million for the three months ended June 30, 2009 from $4.4 million for the three months ended June 30, 2008 due to an increase in concessions and other sales revenue. As a percentage of concessions and other revenues, concession costs for the three months ended June 30, 2009 were 10.6% as compared to 10.8% for the three months ended June 30, 2008 primarily due to an increase in concession volume rebates and 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. Concessions costs were flat at $8.5 million for the six months ended June 30, 2009 and 2008 due to sales of higher margin products offset by a decrease in concessions and other sales revenue per patron. As a percentage of concessions and other revenues, concession costs were 10.1% for the six months ended June 30, 2009 and 10.8% for the six months ended June 30, 2008 due to an increase in concession volume rebates and concessions sales of higher margin products.

Other theatre operating costs. Other theatre operating costs for the three months ended June 30, 2009 increased to $53.0 million as compared to $46.8 million for the three months ended June 30, 2008. The increase in our other theatre operating costs is primarily the result of an increase in occupancy costs due to the opening of new theatres, an increase in salaries and wages expense, an increase in repair and maintenance costs and an increase in 3D equipment service charges. Other theatre operating costs for the six months ended June 30, 2009 increased to $104.2 million as compared to $96.0 million for the six months ended June 30, 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 offset in part by decreases in occupancy costs for theatres that were closed, an increase in salaries and wages expense, an increase in repair and maintenance costs and an increase in 3D equipment service charges.

General and administrative expenses. General and administrative expenses for the three months ended June 30, 2009 decreased to $3.8 million as compared to $4.6 million for the three months ended June 30, 2008. The decrease in our general and administrative expenses is due to reductions in salaries and wages, incentive compensation and legal and professional fees partially offset by an increase in travel costs. General and administrative expenses for the six months ended June 30, 2009 decreased to $7.9 million as compared to $10.3 million for the six months ended June 30, 2008. The decrease in our general and administrative expenses is due to reductions in salaries and wages, incentive compensation and legal and professional fees partially offset by an increase in travel expenses.

Depreciation and amortization. Depreciation and amortization expenses for the three and six months ended June 30, 2009 decreased approximately 4% as compared to the three and six months ended June 30, 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, prior period impairment 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 $105,000 on the sales of property and equipment for the three months ended June 30, 2009, as compared to a loss of $232,000 for the three months ended June 30, 2008. We recognized a gain of $151,000 on the sales of property and equipment for the six months ended June 30, 2009, as compared to a loss of $243,000 for the six months ended June 30, 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 six months ended June 30, 2009, as compared to no expense recorded for the three months ended June 30, 2008 and 2009 and six months ended June 30, 2008.

Operating Income. Operating income for the three months ended June 30, 2009 increased 39% to $11.7 million as compared to $8.5 million for the three months ended June 30, 2008. As a percentage of revenues, operating income for the three months ended June 30, 2009 was 8.8% as compared to 7.2% for the three months ended June 30, 2008. These fluctuations are primarily a result of the factors described above. Operating income for the six months ended June 30, 2009 increased 15% to $17.1 million as compared to $14.9 million for the six months ended June 30, 2008. As a percentage of revenues, operating income for the six months ended June 30, 2009 was 6.7% as compared to 6.4% for the six months ended June 30, 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 June 30, 2009 decreased 13% to $8.7 million from $10.1 million for the three months ended June 30, 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 $21,000 for the three months ended June 30, 2009 as compared to $25,000 for the same period in 2008. Interest expense, net for the six months ended June 30, 2009 decreased 16% to $17.8 million from $21.2 million for the six months ended June 30, 2008.

Income tax. During the first six months of 2008 and 2009 we did not recognize any tax benefit. At June 30, 2009 and December 31, 2008, our consolidated net deferred tax assets were $56.9 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 determination 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 or the realization of a current tax benefit is reasonably assured, then we will likely record income tax expense as a result of the Section 382 limitation on 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 June 30, 2009 and 2008, we closed one theatre and four theatres, respectively, and for the six months ended June 30, 2009 and 2008, we closed three and five theatres, respectively, and reported the results of these operations, including gains or losses on 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 June 30, 2009 of $174,000 as compared to a loss of $620,000 for the three months ended June 30, 2008. The results from discontinued operations include a loss of $75,000 on disposal of assets for the

three months ended June 30, 2009 as compared to a loss of $364,000 for the three months ended June 30, 2008. We recorded a loss from discontinued operations for the six months ended June 30, 2009 of $484,000 as compared to a loss of $238,000 for the six months ended June 30, 2008. The results from discontinued operations include a loss of $2,000 on disposal of assets for the six months ended June 30, 2009 as compared to a gain of $490,000 for the six months ended June 30, 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 $35.9 million as of June 30, 2009 compared to working capital deficit of $34.0 million at December 31, 2008.

At June 30, 2009, we had available borrowing capacity of $50 million under our revolving credit facility and approximately $17.6 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 $29.3 million for the six months ended June 30, 2009 compared to $7.9 million for the six months ended June 30, 2008. This increase in our cash provided by operating activities was due primarily to a reduction in accounts receivable and an increase in accounts payable and accrued expenses as compared to the prior period. Net cash used in investing activities was $5.3 million for the six months ended June 30, 2009 compared to $2.3 million for the six months ended June 30, 2008. The increase in our net cash used in investing activities is primarily due to an increase in cash used for the purchases of property and equipment and a decrease in proceeds from sales of property and equipment. Capital expenditures were $7.1 million for the six months ended June 30, 2009 and $4.5 million for the six months ended June 30, 2008 due to the opening of three new theatres in the first half of 2009 as compared to no theatre openings in the first half of 2008. Net cash used in financing activities was $17.2 million for the six months ended June 30, 2009 compared to $12.2 million for the six months ended June 30, 2008. The increase in our net cash used in financing activities is primarily due to $15 million of unscheduled prepayments of long-term debt for the six months ended June 30, 2009 compared to $5 million for the six months ended June 30, 2008. Our financing activities include $4.5 million of dividends paid during the six months ended June 30, 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 performance of films from time to time during the calendar year will have a dramatic impact on our cash flow.

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 six were closed during the six months ended June 30, 2009 (three of the theatres closed were determined to represent discontinued operations).

We plan to make a total of approximately $16 million in capital expenditures during 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 is 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 June 30, 2009, after generating approximately $1.2 million of estimated operating loss carryforwards for the three months ended June 30, 2009, we had federal and state net operating loss carryforwards of $20.0 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. These unusable net operating loss carryforwards are therefore not included in the amount of available net operating loss carryforwards disclosed above.

Credit Agreement and Covenant Compliance

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