<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 3, 1996
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
READING ENTERTAINMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7832 23-2859312
(STATE OR OTHER
JURISDICTION OF
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION
(I.R.S. EMPLOYER
CODE NUMBER) IDENTIFICATION
INCORPORATION OR NUMBER)
ORGANIZATION)
ONE PENN SQUARE WEST
SUITE 1300
PHILADELPHIA, PENNSYLVANIA 19102
(215) 569-3344
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MR. JAMES A. WUNDERLE
ONE PENN SQUARE WEST
SUITE 1300
PHILADELPHIA, PENNSYLVANIA 19102
(215) 569-3344
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
MICHAEL H. MARGULIS, ESQ.
DUANE, MORRIS & HECKSCHER
122 EAST 42ND STREET
SUITE 2125
NEW YORK, NEW YORK 10168
(212) 499-0414
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the merger (the "Reorganization") described in the Proxy
Statement/Prospectus included herein have been satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$0.001
per share............ 4,973,174 shares $10 7/16 $51,907,504 $17,899
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) The number of shares of the Registrant's Common Stock being registered
hereunder is based upon the anticipated maximum number of shares required
to consummate the Reorganization. The Registrant will remove from
Registration by means of a post-effective amendment any shares being
registered hereunder which are not issued in connection with the
Reorganization.
(2) Pursuant to Rule 457(f)(l), the registration fee is based on the average
of the high and low prices reported on The NASDAQ Stock Market for the
Class A Common Stock of Reading Company on September 30, 1996 ($10 7/16).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE AN AMENDMENT HERETO WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF
REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBERS OF FORM S-4 AND
TITLE OF ITEM PROSPECTUS CAPTION
---------------------------- ------------------
<C> <S> <C>
A. Information About the
Transaction
---------------------
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus...... Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus..... Inside Front Cover Page; Available
Information; Incorporation by Reference
3. Risk Factors, Ratio of Earnings
to Fixed Charges and Other
Information................... Introduction; Summary
4. Terms of the Transaction....... Summary; Reorganization Proposal;
Stock Proposal
5. Pro Forma Financial
Information................... Unaudited Pro Forma Consolidated
6. Material Contacts with the Financial Statements
Company Being Acquired........ Stock Proposal
7. Additional Information Required
for Reoffering by Persons and
Parties Deemed to Be
Underwriters.................. Not Applicable
8. Interests of Named Experts and
Counsel....................... Independent Auditors
9. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................... Reorganization Proposal
B. Information About The
Registrant
---------------------
10. Information with Respect to S-3
Registrants................... Not Applicable
11. Incorporation of Certain
Information by Reference...... Not Applicable
12. Information with Respect to S-2
or S-3 Registrants............ Not Applicable
13. Incorporation of Certain
Information by Reference...... Not Applicable
14. Information with Respect to
Registrants Other than S-2 or
S-3 Registrants............... Accompanying Documents; Market Prices;
C. Information About The Company Exhibits H, I, N
Being Acquired
-----------------------------
15. Information with Respect to S-3
Companies..................... Not Applicable
16. Information with Respect to S-2
or S-3 Companies.............. Not Applicable
17. Information with Respect to
Companies Other than S-2 or S-
3 Companies................... Accompanying Documents; Market Prices;
D. Voting And Management Exhibits J, K, L, M
Information
---------------------
18. Information if Proxies,
Consents or Authorizations are
to be Solicited............... Introduction; Election of Directors;
Reorganization Proposal; Stock Proposal;
19. Information if Proxies, Independent Auditors; Voting and Proxies
Consents or Authorizations are
not to be Solicited or in an
Exchange Offer................ Not Applicable
</TABLE>
<PAGE>
[READING COMPANY LETTERHEAD APPEARS HERE]
October 4, 1996
Dear Stockholders:
Over the past three years, Reading has moved out of various real estate
ventures and into the Beyond the Home Entertainment Business. During this
period, Reading has actively pursued several potentially attractive theatre
circuit acquisitions and has, as a result of these efforts:
. Acquired and expanded the Cine Vista multiplex cinema chain in Puerto
Rico,
. Acquired a majority interest in the Angelika Film Center, one of the
most important venues for foreign and specialty film in the United
States, and launched a program for the development of similar theatres
in other urban areas in the United States, and
. Entered the Australian multiplex cinema market with the acquisition or
lease of several potential theatre locations and the retention of a well
qualified and experienced management team.
Reading has now reached a point in its development where it needs more capital,
if it is to effectively pursue the opportunities available to it in these and
other cinema markets.
Recognizing this fact, in May of this year, the Board of Directors directed
management to develop one or more proposals for the enhancement of Reading's
capital through a possible transaction with its affiliates Craig Corporation
and Citadel Holding Corporation. The Board of Directors also formed a special
committee comprised entirely of independent outside directors to review any
such proposal and to negotiate on behalf of the Company. The Independent
Committee, in turn, retained an independent investment banking firm and
independent counsel to advise it in such review and negotiations. Among the
members of the Independent Committee were one of the Company's largest
individual stockholders and an investment banker with specialized knowledge as
to the value of Craig Corporation's principal asset, an investment in a
Southern California based supermarket chain.
In September, agreement was reached among the Company, Craig and Citadel on a
transaction which will increase the Company's shareholders' equity from
approximately $70 million to over $150 million. This major infusion in capital
is being done on a basis that will result in:
. No dilution to market value: No stock will be issued at a price less
than that at which the Company's equity securities generally traded in
the period prior to the announcement of the transaction.
<PAGE>
. No dilution in earnings per share: There will be no dilution in earnings
per share on a pro forma basis.
Book value will decrease somewhat on a pro forma basis, but will still remain
at a 23% premium to market, calculated as of the date the transaction was
announced and assuming conversion of all securities issued in the transaction
into common stock.
The transaction is comprised of two parts, the formation of a new Delaware
holding company for Reading--which we have named Reading Entertainment, Inc.--
followed by the contribution to that new company by Craig and Citadel (or their
subsidiaries) of assets and cash valued at $88 million. Reading Entertainment
will issue preferred stock and common stock and grant to Citadel certain option
rights. The transactions are discussed in detail in the accompanying Proxy
Statement, which I urge you to read with care.
I have been in the film exhibition business for virtually my entire adult
life, both as an executive and as an owner, and in my view it is a good
business. But, if pursued prudently, the film exhibition business is also a
capital intensive business. Reading has made significant progress as a new
entrant breaking its way into this industry. However, if it is to take full
advantage of this progress, Reading now needs to substantially increase its
capital base.
I believe that the transactions described in the Proxy Statement will
reasonably and fairly accomplish this objective. With shareholders' equity of
over $150 million, Reading will, in my view, be able to compete more
effectively against other theatre chains. Moreover, Reading will have at least
one major advantage over most other chains, in that it will not be burdened
with any outmoded or obsolete theatres. Of course, the theatre business is
highly competitive, and, while I am pleased with our progress, our future
success will depend on many factors and cannot be assured.
We are in the middle of a major revolution in the cinema exhibition business.
With this infusion of capital, I believe that Reading will be well positioned
to participate in and to take advantage of this revolution.
Very truly yours,
James J. Cotter,
Chairman
<PAGE>
[READING COMPANY LETTERHEAD APPEARS HERE]
October 4, 1996
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Reading Company (the "Company") to be held on Tuesday, October 15, 1996, at
10:00 a.m., prevailing time, at The Union League of Philadelphia, 140 South
Broad Street, Philadelphia, Pennsylvania.
At the Annual Meeting, you will be asked to consider and vote upon several
matters, including proposals to effect a reorganization of the Company as a
holding company and to approve certain transactions which will increase the
equity capital of the Company from approximately $70 million to over $155
million.
The first proposal is to adopt an Agreement and Plan of Merger (the "Merger
Agreement") among the Company, Reading Entertainment, Inc., a Delaware
corporation ("Reading Entertainment"), a newly formed, wholly-owned subsidiary
of the Company, and Reading Merger Co. ("Merger Co."), a newly formed, wholly-
owned subsidiary of Reading Entertainment, pursuant to which the Company will
merge with Merger Co. (the "Reorganization"). In the Reorganization, each
outstanding share of Common Stock (other than shares of Common Stock as to
which dissenters' rights are perfected) and Class A Common Stock of the Company
will be converted into the right to receive one share of Common Stock of
Reading Entertainment and the outstanding shares of Merger Co. will be
converted into shares of Common Stock of the Company. As a result, the Company,
a Pennsylvania corporation, will become a wholly-owned subsidiary of Reading
Entertainment and the current shareholders of the Company will become
shareholders of Reading Entertainment, a Delaware corporation. The Company and
Reading Entertainment are collectively referred to as "Reading."
The second proposal is to approve the transactions (the "Stock Transactions")
contemplated by an Exchange Agreement (the "Exchange Agreement") among the
Company, Reading Entertainment, the Company's affiliate Craig Corporation
("Craig"), Craig Management, Inc., a wholly-owned subsidiary of Craig ("CMI"),
the Company's affiliate Citadel Holding Corporation ("Citadel"), and Citadel
Acquisition Corp., Inc., a wholly-owned subsidiary of Citadel ("CAC"). Pursuant
to the Exchange Agreement, following consummation of the Reorganization,
Reading Entertainment will issue 70,000 shares of a new series of Reading
Entertainment's Convertible Preferred Stock to CAC, and will grant certain
contractual rights to Citadel and CAC, for cash and will issue 550,000 shares
of a second series of Reading Entertainment's Convertible Preferred Stock and
2,476,190 shares of Reading Entertainment's Common Stock to Craig and CMI in
exchange for certain assets now held by Craig and CMI. Reading Entertainment
will grant Citadel and CAC certain rights, including an option for Citadel to
require Reading Entertainment to acquire all or substantially all of Citadel's
assets in exchange for Reading Entertainment Common Stock.
As a consequence of the Reorganization and the Stock Transactions:
. Each share of the Company's Common Stock and Class A Common Stock will be
converted into the right to receive one share of Reading Entertainment
Common Stock. Reading Entertainment's Common Stock will, upon issuance, be
listed for trading on the Nasdaq National Market System and the
Philadelphia Stock Exchange;
. The statutory and case law governing the internal affairs and corporate
governance of Reading will shift from that of Pennsylvania to that of
Delaware;
. Shareholders' equity will increase from approximately $70 million to
approximately $156 million, which will, in the opinion of the Board of
Directors, enhance Reading's ability to compete in the domestic and
international cinema markets;
<PAGE>
. Earnings per share for the six-month period ended June 30, 1996 will
increase from approximately $.21 on a historical basis to approximately
$.30 on a pro forma basis, which amount does not include a non-recurring
reversal of a deferred tax asset valuation allowance, which totals an
additional $2.79 per share on a pro forma basis;
. The book value per share of Reading's common equity will decrease from
approximately $14.02 to approximately $13.52 and to approximately $12.80
on a pro forma basis assuming immediate conversion of the Convertible
Preferred Stock to be issued in the Stock Transactions. However, since
the closing price for the Company's Class A Common Stock was $10 3/8 on
the day immediately preceding announcement of the Reorganization and
Stock Transactions book value per share, on a pro forma basis, will
remain above the market price for such shares on that date;
. Reading will become Citadel's principal shareholder, holding securities
representing approximately 39.5% of the voting power of the capital
stock of that company;
. The voting power of Craig--Reading's principal stockholder--will
increase from approximately 52.5% to approximately 77.4%; and
. The transfer restrictions on the Company's Class A Common Stock, which
are currently scheduled to expire January 1, 1997, will be extended with
respect to Reading Entertainment's Common Stock to January 1, 2003, in
order to reduce the possibility of the occurrence of a change in control
of Reading Entertainment. A change in control of Reading Entertainment
could reduce the amount of net operating loss carryovers available to
Reading Entertainment to offset taxable income. However, after the Stock
Transactions, shareholders will have greater flexibility to acquire
Reading shares, since the transfer ceiling will increase from
approximately 236,200 shares of the Company's Class A Common Stock or
Common Stock to approximately 353,800 shares of Reading Entertainment
Common Stock.
THE ACCOMPANYING PROXY STATEMENT PROVIDES A SUMMARY OF THE MERGER AGREEMENT
AND THE EXCHANGE AGREEMENT. PLEASE GIVE ALL OF THIS INFORMATION YOUR CAREFUL
ATTENTION.
The Board of Directors of the Company appointed a special Independent
Directors Committee to consider and negotiate the proposal for the Exchange
Agreement. Serving on the Independent Committee were John W. Sullivan, Albert
J. Tahmoush and Gregory R. Brundage. Messrs. Sullivan and Tahmoush have been
directors of the Company for more than the past 15 years, and Mr. Sullivan and
his family collectively own approximately 231,000 shares, representing
approximately 4.7%, of the Company's Class A Common Stock. Mr. Brundage has
been an investment banker for more than the past 15 years, most recently as a
Managing Director of Furman Selz Incorporated. Prior to Furman Selz, Mr.
Brundage was Managing Director and Office Manager of the Investment Banking
Division of PaineWebber Incorporated's Los Angeles office. In addition to his
generalized knowledge and expertise with respect to investment banking and
capital formation matters, Mr. Brundage brought to the Independent Committee
specialized knowledge and expertise concerning the principal asset transferred
to the Company by CMI in the Stock Transactions. The Independent Committee
retained Berwind Financial Group, L.P. ("Berwind") to advise it with respect
to financial matters and Dechert Price & Rhoads to advise it with respect to
legal matters. None of Messrs. Brundage, Sullivan or Tahmoush own any equity
interest in Craig or Citadel except as shareholders of the Company.
The Independent Committee has carefully reviewed and considered the terms
and conditions of the Exchange Agreement and has unanimously recommended the
approval of the Exchange Agreement to the Board of Directors. The Independent
Committee and the Board have received a written opinion of Berwind to the
effect that, as of the date of its opinion, the terms of the Exchange
Agreement, taken as a whole, are fair, from a financial point of view, to the
shareholders of the Company. BASED IN PART ON THE UNANIMOUS RECOMMENDATION OF
THE INDEPENDENT COMMITTEE, AS WELL AS SUCH OPINION OF THE FINANCIAL ADVISOR,
THE BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE EXCHANGE
AGREEMENT AND RECOMMENDS YOU VOTE FOR THEIR APPROVAL. Copies of the Merger
Agreement, the Exchange Agreement, and such opinion are attached as Exhibits
to the accompanying Proxy Statement. For a further discussion of these
matters, including a discussion of the interest of certain directors and
officers of the Company in such transactions, see "Reorganization Proposal"
and "Stock Proposal" in the Proxy Statement.
<PAGE>
Adoption of the Merger Agreement and approval of the Exchange Agreement
requires the affirmative vote of a majority of the votes cast on such matters
at the Annual Meeting by the holders of the Company's Common Stock and Class A
Common Stock, voting as a single class. Pursuant to the Exchange Agreement,
Craig has agreed to vote all shares of Class A Common Stock held by it in
favor of the Merger Agreement and the Exchange Agreement. IF CRAIG VOTES ALL
SUCH SHARES IN FAVOR OF THE PROPOSALS, THE PROPOSALS TO ADOPT THE MERGER
AGREEMENT AND APPROVE THE EXCHANGE AGREEMENT WILL BE APPROVED. No additional
votes will be required to adopt such proposals.
WHETHER OR NOT YOU ARE PERSONALLY ABLE TO ATTEND THE ANNUAL MEETING, PLEASE
COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE. This
action will not limit your rights to vote in person if you wish to attend the
Annual Meeting.
Sincerely,
/s/ S. Craig Tompkins
S. Craig Tompkins, President
<PAGE>
READING COMPANY
----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 15, 1996
----------------
TO THE SHAREHOLDERS OF READING COMPANY:
The Annual Meeting of Shareholders of Reading Company (the "Company") will
be held on Tuesday, October 15, 1996 at 10:00 a.m., prevailing time, at The
Union League of Philadelphia, 140 South Broad Street, Philadelphia,
Pennsylvania for the following purposes:
1. To elect six directors to serve until the expiration of their terms
and until their successors are duly elected;
2. To consider and take action upon a proposal to adopt an Agreement and
Plan of Merger among the Company, Reading Entertainment, Inc., a Delaware
corporation ("Reading Entertainment"), a newly formed, wholly-owned
subsidiary of the Company, and Reading Merger Co. ("Merger Co."), a newly
formed, wholly-owned subsidiary of Reading Entertainment, pursuant to which
the Company will merge with Merger Co. (the "Reorganization"), each
outstanding share of Common Stock (other than shares of Common Stock as to
which dissenters' rights are perfected) and Class A Common Stock of the
Company will be converted into the right to receive one share of Common
Stock of Reading Entertainment and the outstanding shares of Merger Co.
will be converted into shares of Common Stock of the Company, the Company,
a Pennsylvania corporation, will become a wholly-owned subsidiary of
Reading Entertainment and the current shareholders of the Company will
become shareholders of Reading Entertainment, a Delaware corporation;
3. To consider and take action upon a proposal to approve an Exchange
Agreement (the "Exchange Agreement") among the Company, Reading
Entertainment, the Company's affiliate Craig Corporation ("Craig"), Craig
Management, Inc., a wholly-owned subsidiary of Craig ("CMI"), the Company's
affiliate Citadel Holding Corporation ("Citadel"), and Citadel Acquisition
Corp., Inc., a wholly-owned subsidiary of Citadel ("CAC"), pursuant to
which, following consummation of the Reorganization, (i) Reading
Entertainment will issue 70,000 shares of Reading Entertainment's Series A
Voting Cumulative Convertible Preferred Stock to CAC for cash and 550,000
shares of Reading Entertainment's Series B Voting Cumulative Convertible
Preferred Stock and 2,476,190 shares of Reading Entertainment's Common
Stock to Craig and CMI in exchange for certain assets now held by Craig and
CMI and (ii) Reading Entertainment will grant Citadel and CAC certain
rights, including an option for Citadel to require Reading Entertainment to
acquire all or substantially all of Citadel's assets in exchange for
Reading Entertainment Common Stock; and
4. To transact such other business as may properly come before the Annual
Meeting and any adjournment thereof.
The Board of Directors has fixed the close of business on October 3, 1996 as
the record date for the determination of shareholders entitled to notice of
and to vote at the Annual Meeting.
A copy of the Company's Annual Report for the year ended December 31, 1995
and a quarterly report for the three and six-month periods ended June 30, 1996
are included in the accompanying Proxy Statement.
<PAGE>
Whether or not you expect to attend the Annual Meeting in person, please
complete, date, sign and return the enclosed form of proxy in the envelope
provided.
By Order of the Board of Directors,
/s/ S. Craig Tompkins
S. Craig Tompkins, President
Dated: October 4, 1996
<PAGE>
READING COMPANY
One Penn Square West, Suite 1300
Philadelphia, Pennsylvania 19102
215-569-3344
----------------
PROXY STATEMENT/PROSPECTUS
----------------
INTRODUCTION
This Proxy Statement/Prospectus (the "Proxy Statement") and the form of
proxy enclosed herewith, which are first being mailed to shareholders of
Reading Company (the "Company") on or about October 4, 1996, are furnished in
connection with the solicitation by the Board of Directors of the Company of
proxies to be voted at the Annual Meeting of Shareholders (the "Annual
Meeting") to be held on Tuesday, October 15, 1996 at 10:00 a.m., prevailing
time, and at any adjournment or postponement thereof, at The Union League of
Philadelphia, 140 South Broad Street, Philadelphia, Pennsylvania.
At the Annual Meeting, shareholders of the Company will be asked to consider
and vote upon, among other things, a proposal to adopt an Agreement and Plan
of Merger (the "Merger Agreement") among the Company, Reading Entertainment,
Inc., a Delaware corporation ("Reading Entertainment") which is a newly
formed, wholly-owned subsidiary of the Company, and Reading Merger Co., a
Pennsylvania corporation ("Merger Co.") which is a newly formed, wholly-owned
subsidiary of Reading Entertainment, pursuant to which the Company will merge
with Merger Co. (the "Reorganization"). In the Reorganization, each
outstanding share of the Company's Common Stock, par value $.01 per share (the
"Common Stock") (other than shares of Common Stock as to which dissenters'
rights are perfected), and Class A Common Stock, par value $.01 per share (the
"Class A Common Stock"), will be converted into the right to receive one share
of Reading Entertainment's Common Stock, par value $.001 per share (the
"Reading Entertainment Common Stock"), and the outstanding shares of Merger
Co. will be converted into shares of Common Stock of the Company. As a result,
the Company will become a wholly-owned subsidiary of Reading Entertainment and
the current shareholders of the Company will become shareholders of Reading
Entertainment. The Company and Reading Entertainment are collectively referred
to as "Reading." See "Reorganization Proposal."
Shareholders will also be asked at the Annual Meeting to approve the
transactions (the "Stock Transactions") contemplated by the Exchange Agreement
(the "Exchange Agreement") among the Company, Reading Entertainment, the
Company's affiliate Craig Corporation ("Craig"), Craig Management, Inc., a
wholly-owned subsidiary of Craig ("CMI"), the Company's affiliate Citadel
Holding Corporation ("Citadel"), and Citadel Acquisition Corp., Inc., a
wholly-owned subsidiary of Citadel ("CAC"). Pursuant to the Exchange
Agreement, following consummation of the Reorganization, Reading Entertainment
will issue (i) 70,000 shares of Reading Entertainment's Series A Voting
Cumulative Convertible Preferred Stock, par value $.001 per share (the "Series
A Preferred Stock"), to CAC, and will grant certain contractual rights to
Citadel and CAC, for $7 million in cash and (ii) 550,000 shares of Reading
Entertainment's Series B Voting Cumulative Convertible Preferred Stock, par
value $.001 per share (the "Series B Preferred Stock" and, together with the
Series A Preferred Stock, the "Convertible Preferred Stock"), and 2,476,190
shares of Reading Entertainment Common Stock to Craig and CMI in exchange for
certain assets now held by Craig and CMI. The assets to be transferred by
Craig and CMI (collectively, the "Craig Assets") consist of 693,650 shares of
the Series B Preferred Stock (the "Stater Stock") of Stater Bros. Holdings
Inc. ("Stater"), Craig's 50% membership interest (the "Cinemas Interest") in
Reading International Cinemas LLC, a Delaware limited liability company
("Reading International") of which an indirect wholly-owned subsidiary of the
Company is the sole other member, and 1,329,114 shares of the 3% Cumulative
Voting Convertible Preferred Stock, stated value $3.95 per share (the "Citadel
Preferred Stock"), of Citadel. Reading Entertainment will grant Citadel and
CAC certain rights, including an option for Citadel to require Reading
Entertainment to acquire all or substantially all of Citadel's assets in
exchange for Reading Entertainment Common Stock. See "Stock Proposal."
<PAGE>
As a consequence of the Reorganization and the Stock Transactions:
. Each share of the Company's Common Stock and Class A Common Stock will
be converted into the right to receive one share of Reading
Entertainment Common Stock. The Reading Entertainment Common Stock will,
upon issuance, be listed for trading on the Nasdaq National Market
System and the Philadelphia Stock Exchange;
. The statutory and case law governing the internal affairs and corporate
governance of Reading will shift from that of Pennsylvania to that of
Delaware;
. Shareholders' equity will increase from approximately $70 million to
approximately $156 million, which will, in the opinion of the Board of
Directors, enhance Reading's ability to compete in the domestic and
international cinema markets;
. Earnings per share for the six-month period ended June 30, 1996 will
increase from approximately $.21 on a historical basis to approximately
$.30 on a pro forma basis, which amount does not include a non-recurring
reversal of a deferred tax asset valuation allowance, which totals an
additional $2.79 per share on a pro forma basis; resulting from the
reduction of the deferred tax liabilities associated with the Stater
Stock;
. The book value per share of Reading's common equity will decrease from
approximately $14.02 to approximately $13.52 and to approximately $12.80
on a pro forma basis assuming immediate conversion of the Convertible
Preferred Stock to be issued in the Stock Transactions. However, since
the closing price for the Company's Class A Common Stock was $10 3/8 on
the day immediately preceding announcement of the Reorganization and
Stock Transactions, book value per share, on a pro forma basis, will
remain above the market price for such shares on that date;
. Reading will become Citadel's principal shareholder, holding securities
representing approximately 39.5% of the voting power of the capital
stock of that company;
. The voting power of Craig--Reading's principal stockholder--will
increase from approximately 52.5% to approximately 77.4%; and
. The transfer restrictions on the Class A Common Stock, which are
currently scheduled to expire January 1, 1997, will be extended with
respect to the Reading Entertainment Common Stock to January 1, 2003, in
order to reduce the possibility of the occurrence of a change in control
of Reading Entertainment. A change in control of Reading Entertainment
could reduce the amount of net operating loss carryovers available to
Reading Entertainment to offset taxable income. However, after the Stock
Transactions, shareholders will have greater flexibility to acquire
Reading shares, since the transfer ceiling will increase from
approximately 236,200 shares of the Company's Class A Common Stock or
Common Stock to approximately 353,800 shares of Reading Entertainment
Common Stock.
Adoption of the Merger Agreement and approval of the Stock Transactions
require the affirmative vote of a majority of the votes cast on such matters
at the Annual Meeting by the holders of the Common Stock and Class A Common
Stock, voting as a single class. Pursuant to the Exchange Agreement, Craig has
agreed to vote all shares of Class A Common Stock held by it in favor of the
Merger Agreement and the Exchange Agreement. IF CRAIG VOTES ALL SUCH SHARES IN
FAVOR OF THE PROPOSALS, THE PROPOSALS TO ADOPT THE MERGER AGREEMENT AND
APPROVE THE EXCHANGE AGREEMENT WILL BE APPROVED. No additional votes will be
required to adopt such proposals.
This Proxy Statement also serves as the prospectus for Reading Entertainment
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the issuance of up to 4,973,174 shares of Reading Entertainment
Common Stock in connection with the Reorganization. For further information
concerning the shares offered hereby, see "Reorganization Proposal--
Description of Reading Entertainment Capital Stock and Certain Changes in the
Rights of Shareholders."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
October 4, 1996
ii
<PAGE>
AVAILABLE INFORMATION
This Proxy Statement is also a prospectus delivered in compliance with the
Securities Act. A registration statement under the Securities Act has been
filed with the Securities and Exchange Commission (the "SEC") with respect to
the securities offered hereby (the "Registration Statement"). As permitted by
the rules and regulations of the SEC, this Proxy Statement omits certain
information contained in the Registration Statement. For further information
pertaining to the securities being offered, reference is made to the
Registration Statement, including exhibits filed as a part thereof.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance with
the Exchange Act, files reports, proxy statements and other information with
the SEC. These reports, proxy statements and other information, as well as the
Registration Statement, can be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices in Chicago (Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511) and
in New York (Seven World Trade Center, Suite 1300, New York, New York 10048),
and copies of such material can be obtained from the public reference section
of the SEC at prescribed rates by writing to the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549. Reports, proxy statements and other information
concerning the Company also may be inspected at the offices of the National
Association of Securities Dealers Automated Quotation System/National Market
System ("Nasdaq/NMS"), Reports Section, 1735 K Street, N.W., Washington, D.C.
2006 and at the offices of the Philadelphia Stock Exchange (the "Philadelphia
Exchange") at 1900 Market Street, Philadelphia, Pennsylvania 19103-3584.
Reading Entertainment was formed to effectuate the Reorganization. Reading
Entertainment has not previously been subject to the requirements of the
Exchange Act and there is currently no public market for its stock. However,
if the Reorganization is approved and consummated, Reading Entertainment will
become subject to the same information, reporting and proxy statement
requirements under the Exchange Act as currently apply to the Company and such
information will be available for inspection and copying at the offices of the
SEC set forth above. Reading Entertainment has applied to have the Reading
Entertainment Common Stock listed on Nasdaq/NMS and the Philadelphia Exchange
as of (or promptly following) the effective date of the Reorganization and, if
such applications are accepted, Exchange Act reports, proxy statements and
other information concerning Reading Entertainment will be available for
inspection and copying at the offices of Nasdaq/NMS and the Philadelphia
Exchange.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY, STATER OR CITADEL SINCE THE
DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
iii
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ACCOMPANYING REPORTS
The following documents filed with the SEC by the Company, Stater, and
Citadel (the "Accompanying Reports") are included as exhibits to this Proxy
Statement:
1. The Company's Annual Report on Form 10-K for the year ended December
31, 1995 (the "1995 Annual Report").
2. The Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996.
3. Stater's Annual Report on Form 10-K for the year ended September 24,
1995 (the "Stater Annual Report").
4. Stater's Quarterly Report on Form 10-Q for the quarter ended June 23,
1996.
5. Citadel's Annual Report on Form 10-K for the year ended December 31,
1995 (the "Citadel Annual Report").
6. Citadel's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996.
The information included in this Proxy Statement concerning Stater and
Citadel has been derived from such reports, and the Company disclaims any
responsibility for the accuracy or completeness of such reports.
iv
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
INTRODUCTION.............................................................. i
AVAILABLE INFORMATION..................................................... iii
ACCOMPANYING REPORTS...................................................... iv
SUMMARY................................................................... 1
Time, Date and Place of the Annual Meeting.............................. 1
Record Date; Shares Entitled to Vote.................................... 1
Purpose of the Annual Meeting........................................... 1
Election of Directors................................................... 1
Reorganization Proposal................................................. 1
Stock Proposal.......................................................... 6
Vote Required........................................................... 11
Selected Historical and Pro Forma Financial Information................. 12
ELECTION OF DIRECTORS..................................................... 15
Beneficial Ownership of Common Stock and Class A Common Stock........... 15
Nominees for Election................................................... 16
Director Compensation................................................... 18
Executive Officers...................................................... 19
Executive Compensation.................................................. 20
Employment Arrangements................................................. 21
Compensation Committee Interlocks and Insider Participation............. 21
Certain Transactions.................................................... 21
Section 16(a) Beneficial Ownership Reporting Compliance................. 23
Executive Committee of the Board of Directors Report on Compensation.... 23
Performance Graph....................................................... 25
REORGANIZATION PROPOSAL................................................... 26
General................................................................. 26
Vote Required........................................................... 26
Reasons for the Reorganization.......................................... 26
The Merger Agreement.................................................... 26
Management.............................................................. 27
Market and Dividends.................................................... 28
Description of Reading Entertainment Capital Stock and Certain Changes
in the Rights of Shareholders.......................................... 28
Dissenters' Rights...................................................... 34
Certain Federal Income Tax Consequences................................. 37
Accounting Treatment and Financial Statements........................... 38
STOCK PROPOSAL............................................................ 39
General................................................................. 39
Vote Required........................................................... 39
Background of the Exchange Agreement.................................... 39
Recommendations of the Independent Committee and the Board of
Directors.............................................................. 44
Opinion of Financial Advisor............................................ 46
Interests of Certain Persons in the Stock Transactions; Conflicts of
Interest............................................................... 46
Use of Craig Assets and Citadel Proceeds................................ 47
Certain Considerations.................................................. 47
Certain Shareholder Litigation.......................................... 49
</TABLE>
v
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
The Exchange Agreement................................................... 50
The Convertible Preferred Stock.......................................... 54
Dissenters' Rights....................................................... 55
Tax and Accounting Treatment............................................. 56
Certain Information Concerning Stater and the Stater Stock............... 56
Certain Information Concerning Citadel and the Citadel Preferred Stock... 56
MARKET PRICES.............................................................. 57
The Company.............................................................. 57
Citadel.................................................................. 57
Stater................................................................... 57
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS...................... 58
INDEPENDENT AUDITORS....................................................... 65
LEGAL MATTERS.............................................................. 65
VOTING AND PROXIES......................................................... 65
SHAREHOLDER PROPOSALS...................................................... 66
OTHER MATTERS.............................................................. 67
</TABLE>
<TABLE>
<C> <S>
EXHIBIT A Merger Agreement
EXHIBIT B Certificate of Incorporation of Reading Entertainment, as amended
EXHIBIT C Bylaws of Reading Entertainment
EXHIBIT D Dissenters' Rights Provisions of the Pennsylvania Business
Corporation Law
EXHIBIT E Opinion of Berwind Financial Group, L.P.
EXHIBIT F Exchange Agreement
EXHIBIT G Certificate of Designation of Convertible Preferred Stock
EXHIBIT H The Company's Annual Report on Form 10-K for the year ended December
31, 1995
EXHIBIT I The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996
EXHIBIT J Stater's Annual Report on Form 10-K for the year ended September 24,
1995
EXHIBIT K Stater's Quarterly Report on Form 10-Q for the quarter ended June
23, 1996
EXHIBIT L Citadel's Annual Report on Form 10-K for the year ended December 31,
1995
EXHIBIT M Citadel's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996
EXHIBIT N Financial Statements of Angelika Film Centers, Inc. as of and for
the year ended December 31, 1995 and as of and for the six-month
period ended June 30, 1996
</TABLE>
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<PAGE>
SUMMARY
The following is a summary of the more detailed information contained in this
Proxy Statement, the Exhibits hereto and the Accompanying Reports. STOCKHOLDERS
ARE URGED TO READ THIS PROXY STATEMENT, THE ACCOMPANYING REPORTS AND THE OTHER
EXHIBITS IN THEIR ENTIRETY.
TIME, DATE AND PLACE OF THE ANNUAL MEETING
The annual meeting (the "Annual Meeting") of Shareholders of Reading Company,
a Pennsylvania corporation (the "Company"), will be held on Tuesday, October
15, 1996 at 10:00 a.m., prevailing time, at The Union League of Philadelphia,
140 South Broad Street, Philadelphia, Pennsylvania.
RECORD DATE; SHARES ENTITLED TO VOTE
The shares entitled to vote at the Annual Meeting consist of the shares of
the Company's Common Stock, par value $.01 per share (the "Common Stock"), and
Class A Common Stock, par value $.01 per share (the "Class A Common Stock"),
with each holder of record as of the close of business on October 3, 1996 (the
"Record Date") entitled to one vote for each such share held. As of the Record
Date there were 8,677 shares of Common Stock and 4,964,497 shares of Class A
Common Stock outstanding and entitled to vote at the Annual Meeting. See
"Voting and Proxies."
PURPOSE OF THE ANNUAL MEETING
At the Annual Meeting, holders of the Common Stock and Class A Common Stock
will be asked to consider and vote upon (i) the election of six directors; (ii)
the adoption of an Agreement and Plan of Merger (the "Merger Agreement") among
the Company, Reading Entertainment, Inc., a Delaware corporation ("Reading
Entertainment") which is a newly formed, wholly-owned subsidiary of the
Company, and Reading Merger Co., a Pennsylvania corporation ("Merger Co.")
which is a newly formed, wholly-owned subsidiary of Reading Entertainment; and
(iii) approval of the transactions (the "Stock Transactions") contemplated by
the Exchange Agreement (the "Exchange Agreement") among the Company, Reading
Entertainment, the Company's affiliate Craig Corporation ("Craig"), Craig
Management, Inc., a wholly-owned subsidiary of Craig ("CMI"), the Company's
affiliate Citadel Holding Corporation ("Citadel"), and Citadel Acquisition
Corp., Inc., a wholly-owned subsidiary of Citadel ("CAC").
ELECTION OF DIRECTORS
At the Annual Meeting, shareholders will be asked to elect six directors,
each of whom is currently a director of the Company. See "Election of
Directors." THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE
NOMINEES.
REORGANIZATION PROPOSAL
Pursuant to the Merger Agreement, the Company will merge with Merger Co. (the
"Reorganization"). In the Reorganization, each outstanding share of the Common
Stock (other than shares of Common Stock as to which dissenters' rights are
perfected) and Class A Common Stock will be converted into the right to receive
one share of Reading Entertainment's Common Stock, par value $.001 per share
(the "Reading Entertainment Common Stock"), and the outstanding shares of
Merger Co. will be converted into shares of Common Stock of the Company. As a
result, the Company will become a wholly-owned subsidiary of Reading
Entertainment and the current shareholders of the Company will become
shareholders of Reading Entertainment. See "Reorganization Proposal."
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL TO ADOPT THE
MERGER AGREEMENT.
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REASONS FOR THE REORGANIZATION
The Board of Directors of the Company believes that the reorganization of the
Company as a Delaware holding company will provide more flexibility to the
Company, in particular in connection with raising capital and possibly in
connection with the acquisition of other businesses in the Beyond-the-Home
segment of the entertainment industry. As a holding company organized under
Delaware law, Reading Entertainment will be able to avail itself of what
management believes to be a more extensive and better developed body of
statutory and case law and a body of law which is, generally speaking, more
familiar to most investors and lenders. Moreover, as a holding company,
separate from the Company, Reading Entertainment may be able to raise capital
and make acquisitions without subjecting such capital and businesses to many of
the contingent liabilities of the Company's historical railroad businesses.
Also, as a result of the Reorganization, the Company's capital structure will
be simplified, since Reading Entertainment will have only one class of common
stock outstanding, whereas the Company currently has two classes of common
stock outstanding.
THE MERGER AGREEMENT
The Reorganization. Pursuant to the Merger Agreement, at the effective time
(the "Effective Time") of the Reorganization, (i) each outstanding share of
Common Stock (other than shares of Common Stock as to which dissenters' rights
are perfected) and Class A Common Stock will be converted into the right to
receive one share of Reading Entertainment Common Stock; (ii) the outstanding
shares of Merger Co. will then be converted into shares of Common Stock of the
Company (which shares of Common Stock will not be converted into the right to
receive Reading Entertainment Common Stock); (iii) each share of Reading
Entertainment Common Stock held by the Company will be cancelled; and (iv) any
outstanding stock options or other rights to acquire Common Stock or Class A
Common Stock will become options or rights to acquire Reading Entertainment
Common Stock. As a result, the Company will become a wholly-owned subsidiary of
Reading Entertainment and the current shareholders of the Company will become
shareholders of Reading Entertainment.
Delivery of Certificates. At the Effective Time, all of the outstanding
certificates formerly representing shares of Common Stock or Class A Common
Stock will be deemed for all purposes to evidence, and to represent, only the
right to receive shares of Reading Entertainment Common Stock. Promptly
following the Effective Time, holders of Common Stock and Class A Common Stock
will receive detailed instructions as to the procedure for surrendering their
stock certificates for certificates of Reading Entertainment Common Stock.
Shareholders are requested not to mail their stock certificates until they
receive instructions for the surrender of their certificates. The registered
owner of each outstanding certificate evidencing shares of Common Stock or
Class A Common Stock on the books and records of the Company will, unless and
until such certificate is surrendered for transfer, not have or be entitled to
exercise any and all transfer, voting or other rights with respect to, or to
receive any and all dividends or other distributions upon the shares of, the
Reading Entertainment Common Stock to which such person will be entitled. Upon
such surrender, the registered owner will have and be entitled to exercise all
transfer, voting or other rights with respect to, and will receive any and all
dividends or other distributions upon, such shares of Reading Entertainment
Common Stock.
MARKET
Contemporaneously with the Reorganization, the Reading Entertainment Common
Stock will be included in the National Association of Securities Dealers
Automated Quotation System/National Market System under the symbol RDGE and
admitted for trading on the Philadelphia Stock Exchange under the symbol RDG.
DESCRIPTION OF READING ENTERTAINMENT CAPITAL STOCK AND CERTAIN CHANGES IN THE
RIGHTS OF SHAREHOLDERS
After the Effective Time, the rights of shareholders will be governed by the
Delaware General Corporation Law (the "DGCL") and the Certificate of
Incorporation, as amended (the "Reading Entertainment Certificate"),
2
<PAGE>
and Bylaws (the "Reading Entertainment Bylaws") of Reading Entertainment. The
DGCL, the Reading Entertainment Certificate and the Reading Entertainment
Bylaws differ in certain respects from the Pennsylvania Business Corporation
Law (the "PBCL") and the Articles of Incorporation (the "Pennsylvania
Articles") and Bylaws of the Company (the "Pennsylvania Bylaws"). Certain of
the more significant of these differences are summarized below.
Authorized Shares. The Pennsylvania Articles authorize the issuance of
10,000,000 shares of Common Stock, par value $.01 per share, 15,000,000 shares
of Class A Common Stock, par value $.01 per share, and 5,000,000 shares of
preferred stock, par value $1.00 per share. By comparison, the Reading
Entertainment Certificate authorizes the issuance of 25,000,000 shares of
Reading Entertainment Common Stock, par value $0.001 per share, and 10,000,000
shares of preferred stock, par value $0.001 per share ("Reading Entertainment
Preferred Stock").
Transfer. The Pennsylvania Articles do not restrict the transfer of the
Common Stock. The Pennsylvania Articles provide restrictions on the transfer of
the Class A Common Stock until January 1, 1997 (or, in certain cases, an
earlier date). The restrictions are intended to reduce the risk of occurrence
of an "ownership change" within the meaning of Section 382(g) of the Internal
Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder
that would result in the limitation or elimination of the Company's utilization
of federal income tax net operating loss carryforwards ("NOL's"). In general,
the restrictions provide that any attempted sale, transfer, assignment or other
disposition of any shares of Class A Common Stock (a "Transfer") to any person
or group who, prior to such Transfer, owns (within the meaning of the Code and
such regulations) shares of Common Stock and Class A Common Stock having a fair
market value equal to or greater than 4.75% of the fair market value of all
outstanding shares of Common Stock and Class A Common Stock, shall be void ab
initio, unless the Board of Directors shall have given its prior written
approval to such Transfer.
The Reading Entertainment Certificate contains substantially identical
provisions with respect to the Reading Entertainment Common Stock, except that
the restrictions (i) also apply to other securities of Reading Entertainment
which are considered "stock" for purposes of Section 382 (the Common Stock and
such other securities being hereinafter referred to as "New Stock") and (ii)
will continue until January 1, 2003 (unless earlier terminated). Although the
percentage limitation will remain at 4.75%, following the Stock Transactions
shareholders will have greater flexibility to acquire Reading shares, since the
transfer ceiling will increase from approximately 236,200 shares of the
Company's Class A Common Stock or Common Stock to approximately 353,800 shares
of Reading Entertainment Common Stock.
In addition, as a mechanism for enforcing the transfer restrictions, the
Reading Entertainment Certificate provides that any transfer of shares of New
Stock or rights to acquire shares of New Stock ("Rights") in violation of the
transfer restrictions is automatically null and void as to that number of
shares or Rights, or both, which would cause the acquiror thereof (the
"Purported Owner") to exceed the 4.75% limitation (the shares or Rights which
would cause the Purported Owner to exceed such limitation are herein referred
to as the "Excess Shares"). The Purported Owner will not obtain any rights in
and to the Excess Shares. Until the Excess Shares are transferred to a person
whose acquisition thereof will not violate the 4.75% limitation (a "Permitted
Transferee"), (i) the Excess Shares will be voted by such person as shall be
appointed by Reading Entertainment's Board of Directors, which person will be
deemed to have been granted a proxy to vote the Excess Shares, (ii) the
purported transferor of the Excess Shares to the Purported Owner (the
"Purported Owner's Transferor") will be deemed to have retained the Excess
Shares and will hold and be entitled to exercise all other rights incident to
ownership of the Excess Shares, and (iii) if the Excess Shares are Rights, they
may not be converted, exchanged, or exercised until transferred to, and
converted, exchanged, or exercised in accordance with their terms by, the
Permitted Transferee. All Excess Shares will continue to be issued and
outstanding.
3
<PAGE>
The purported transfer of the Excess Shares to the Purported Owner will not
be recognized by Reading Entertainment. Instead, if necessary, the Purported
Owner will be instructed to deliver the Excess Shares to, or otherwise place
the Excess Shares under the control of, a trustee (the "Share Trustee") who
will proceed forthwith to sell the Excess Shares to a Permitted Transferee in
the market or otherwise. In such circumstances, Reading Entertainment's
transfer agent will be given appropriate instructions to record the Purported
Owner's Transferor as the record owner of the Excess Shares and Reading
Entertainment's Board of Directors may institute procedures to enjoin or
rescind any such transfer or acquisition. Once the Excess Shares are acquired
by a Permitted Transferee, the Permitted Transferee will have and will be
entitled to exercise all rights incident to the ownership of the Excess Shares.
Statutory Anti-Takeover Provisions. The PBCL contains a number of anti-
takeover provisions; however, the Pennsylvania Bylaws generally provide that
such provisions do not apply to the Company. The Pennsylvania Bylaws do not
"opt out" of Section 2538 of the PBCL, which generally requires approval by
disinterested shareholders of certain fundamental transactions between the
corporation and an "interested shareholder" unless (i) shareholders receive for
their stock the highest amount ever paid by the interested shareholder for its
stock or (ii) the transaction is approved by a majority of the board of
directors without counting the vote of directors who are affiliated with the
interested shareholder. In addition, in certain instances, the PBCL authorizes
corporations to restrict the voting of shares based upon the number of shares
held by an individual shareholder or a related group of shareholders or the
length of time the shares have been held, so long as such classifications are
not "manifestly unreasonable."
The DGCL contains a provision restricting the ability of a corporation to
engage in business combinations with an "interested stockholder." Under the
DGCL, except under certain circumstances (e.g., when such a combination with a
stockholder is approved by the corporation's Board of Directors prior to the
time when such stockholder becomes an interested stockholder), business
combinations with an interested stockholder are not permitted for a period of
three years following the date on which such stockholder became an interested
stockholder. The DGCL defines an "interested stockholder," generally, as a
stockholder who beneficially owns 15% or more of the voting power of the
corporation or who is an associate or affiliate of the corporation and within
the prior three years beneficially owned 15% of such voting power.
Dissenters' Rights. The DGCL provides dissenters' rights only upon
consummation of certain mergers or as otherwise provided in the certificate of
incorporation of the corporation. The Reading Entertainment Certificate does
not contain such a provision regarding "permissive dissenters' rights." In
addition, the DGCL further restricts dissenters' rights by providing that, as a
general matter, there is no right to dissent for any class of series of stock
that is either listed on a national securities exchange, designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. (a "Nasdaq/NMS Security"), or
held by at least 2,000 shareholders of record.
The PBCL provides substantially similar restrictions on dissenters' rights,
except that the types of corporate transactions under which a shareholder may
be entitled to dissenters' rights is expanded. For example, under the PBCL,
certain dissenters' rights are afforded to shareholders upon sales of all or
substantially all of a corporation's assets, while, under the DGCL, dissenters'
rights would not be available in any circumstance upon a sale of all or
substantially all of the corporation's assets. In addition, the PBCL does not
except from the dissenters' rights provisions Nasdaq/NMS Securities. The PBCL
allows for a corporation to grant permissive dissenters' rights, but neither
the Pennsylvania Articles nor the Pennsylvania Bylaws provide for such
permissive rights.
Officer and Director Liability. Under the PBCL, if a bylaw adopted by the
shareholders of a corporation so provides, a director is not personally liable
for monetary damages for any action taken unless the director has breached or
failed to perform the duties of his office and the breach or failure to perform
constitutes self-dealing, willful misconduct or recklessness. The Pennsylvania
Bylaws contain such a provision.
4
<PAGE>
Under the DGCL, a corporation's certificate of incorporation may contain a
provision eliminating or limiting the personal liability of directors to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director or officer, but such provision may not eliminate or limit
the liability of a director for (i) any breach of the director's duty of
loyalty to the corporation or its shareholders, (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) intentional or negligent payment of unlawful dividends or stock
purchases or redemptions or (iv) any transaction from which the director
derived an improper personal benefit. The Reading Entertainment Certificate
limits personal liability of directors and officers to the fullest extent
permissible under the DGCL.
Number of Directors. The Pennsylvania Bylaws provide that the number of
directors of the Company is six. The Reading Entertainment Bylaws provide that
the authorized number of directors constituting the Reading Entertainment Board
will be not less than three nor more than twelve, as established from time to
time by action of the directors. The Reading Entertainment Board has fixed the
number of directors comprising the Reading Entertainment Board at three until
the conclusion of the Annual Meeting, at which time the authorized number of
directors will be increased to six.
Actions by Consent. Under the DGCL, unless otherwise provided in the
certificate of incorporation, any action required or permitted to be taken at a
meeting of the shareholders may be taken without a meeting if a written consent
thereto is signed and delivered to the corporation by the holders of
outstanding stock entitled to cast not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote were present. The Reading Entertainment Certificate
does not provide for a different result. The PBCL generally requires a written
consent signed by all shareholders entitled to vote on the matter. However, the
bylaws of a Pennsylvania corporation may provide for shareholders to act by
written consent in substantially the same manner as the DGCL (unless the
corporation is, in general, a reporting company under the Exchange Act, in
which case such a provision must be in the articles of incorporation). Neither
the Pennsylvania Articles nor the Pennsylvania Bylaws contain such a provision.
DISSENTERS' RIGHTS
Because the Class A Common Stock is listed on the Philadelphia Stock
Exchange, holders of the Class A Common Stock will not be entitled to
dissenters' rights with regard to the Reorganization under the applicable
provisions of the PBCL.
Pursuant to the PBCL, the owners of shares of Common Stock who file a written
objection prior to the vote on the proposal to adopt the Merger Agreement and
do not vote in favor of such proposal have the right to demand an appraisal of
the "fair value" of their shares of Common Stock if the required procedures
under Subchapter 15D of the PBCL are followed. Dissenters' rights will be
forfeited if the requirements of Subchapter 15D are not fully and precisely
satisfied.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Neither the Company nor any of its shareholders, other than shareholders who
receive payment for their shares as a result of the exercise of dissenters'
rights, will recognize gain or loss for federal income tax purposes as a result
of the Reorganization. Any receipt of cash by a holder of Common Stock in
respect of the exercise by such holder of dissenters' rights will be a taxable
transaction for federal income tax purposes and may also be a taxable
transaction under applicable state, local and other tax laws.
ACCOUNTING TREATMENT
For financial reporting purposes, the Reorganization will be treated as a
reorganization of affiliated entities, with all assets and liabilities of the
Company recorded on the books of Reading Entertainment at their historical cost
basis.
5
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STOCK PROPOSAL
Pursuant to the Exchange Agreement, following consummation of the
Reorganization, Reading Entertainment will issue (i) 70,000 shares of Reading
Entertainment's Series A Voting Cumulative Convertible Preferred Stock, par
value $.001 per share (the "Series A Preferred Stock"), to CAC, and will grant
certain contractual rights to Citadel and CAC, for $7 million in cash and (ii)
550,000 shares of Reading Entertainment's Series B Voting Cumulative
Convertible Preferred Stock, par value $.001 per share (the "Series B Preferred
Stock" and, together with the Series A Preferred Stock, the "Convertible
Preferred Stock"), and 2,476,190 shares of Reading Entertainment Common Stock
to Craig and CMI in exchange for certain assets now held by Craig and CMI. The
assets to be transferred by Craig and CMI (collectively, the "Craig Assets")
consist of 693,650 shares of the Series B Preferred Stock (the "Stater Stock")
of Stater Bros. Holdings Inc. ("Stater"), Craig's 50% membership interest (the
"Cinemas Interest") in Reading International Cinemas LLC, a Delaware limited
liability company ("Reading International") of which an indirect wholly-owned
subsidiary of the Company is the sole other member, and 1,329,114 shares of the
3% Cumulative Voting Convertible Preferred Stock, stated value $3.95 per share
(the "Citadel Preferred Stock"), of Citadel. Reading Entertainment will grant
Citadel and CAC certain rights, including an option for Citadel to require
Reading Entertainment to acquire all or substantially all of Citadel's assets
in exchange for Reading Entertainment Common Stock. See "Stock Proposal."
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL TO APPROVE THE
STOCK TRANSACTIONS.
BACKGROUND AND DESCRIPTION OF THE EXCHANGE AGREEMENT
Authorization of Development of Stock Transaction Plan. Over the past three
years, the Company has focused its efforts on the Beyond-the-Home segment of
the entertainment industry. The Board of Directors and management believe that
there are significant opportunities in this market, but that, to reasonably
achieve them, the Company needs to increase its capital base and to simplify
the corporate structures which it has to date found necessary to utilize in
pursuing such opportunities. The Stock Transactions have been developed to
achieve these goals.
At meetings held on May 23, 1996, management presented to the Company's Board
of Directors and the Craig Board of Directors a business plan for the continued
development and expansion of the Company's Beyond-the-Home Entertainment
business. That report concluded that, while the Company currently has
sufficient funding available to meet its current commitments, management
believes that a plan to continue to expand the Company's business to take
advantage of the various opportunities that management has identified as
reasonably available to the Company would require significant additional
capital. The report further recommended that the Company should consider
looking to its affiliates, Craig and Citadel, as possible sources of such
capital.
Following these presentations, the Board of Directors of each of the Company
and Craig authorized and directed the managements of the Company and Craig to
work together to develop one or more proposals for the consolidation of the
assets of the three companies. Subsequently, the Board of Directors of Citadel
authorized and directed its management to cooperate with the Company and Craig
in these efforts. Each of the Company, Craig and Citadel formed an independent
committee comprised entirely of independent members of its board of directors.
The independent committees, in turn, retained legal and financial advisors to
advise the committees and to assist the committees in evaluating the plans and
proposals developed by management as a result of these cooperative efforts. The
Stock Transactions are the result of the efforts of the managements of the
Company, Craig and Citadel, as negotiated, reviewed and ultimately recommended
to the full Boards of Directors by the independent committees.
6
<PAGE>
Relationship among the Company, Craig and Citadel. Since 1989, Craig has been
the principal controlling shareholder of the Company. As of the date of this
Proxy Statement, Craig owns 2,610,826 shares of the Company's Class A Common
Stock, representing approximately 52.5% of the combined Common Stock and Class
A Common Stock. Also, since 1991, the Chairman of the Board of Craig has been
the Chairman of the Board and principal executive officer of the Company, and
the President of Craig has been the President and a director of the Company.
Until June 1996, when the composition of the Boards of the three companies was
modified to alleviate certain conflicts of interest in the context of
negotiating the transaction which ultimately became the Stock Transactions,
five of the six directors of Craig constituted five of the eight directors of
the Company.
As of the date of this Proxy Statement, the Company owns 1,564,473 shares of
Citadel's Common Stock, representing approximately 26.1% of the outstanding
shares of Citadel Common Stock and approximately 21.3% of the aggregate voting
power of all outstanding shares of Citadel's capital stock. Also as of the date
of this Proxy Statement, Craig owns 1,329,114 shares of Citadel Preferred Stock
(representing approximately 18.1% of the aggregate voting power of all
outstanding shares of Citadel's capital stock) and a warrant to purchase
666,000 shares of Citadel Common Stock (at an exercise price of $3.00 per
share). The Company also holds an option to purchase the Citadel Preferred
Stock and, under certain circumstances, such warrant from Craig. Without giving
effect to the conversion of the Citadel Preferred Stock or the exercise of such
warrant, the Company and Craig together hold approximately 39.5% of the
aggregate voting power of all outstanding shares of Citadel's capital stock. If
the Citadel Preferred Stock were converted into Citadel Common Stock and such
warrant were exercised, the Company and Craig could hold over a majority of the
aggregate voting power of such capital stock.
There is substantial overlap among the managements and Boards of the Company,
Craig and Citadel. The Chairman of the Board of the Company is also the
Chairman of the Board of Craig and Citadel. The President of the Company is
also the President and a director of Craig and the Vice Chairman of the Board
and the Principal Accounting Officer, Secretary and Treasurer of Citadel. The
Chairman and President of the Company and of Craig are also two of the four
directors of Citadel. Until the realignment of the memberships of the various
boards as described above, three of the five directors of Citadel were also
directors of Craig. Also, Citadel, through its President and Chief Executive
Officer, provides consulting services to, and is, in effect, the principal
United States real estate advisor to, the Company and Craig with respect to
cinema development matters.
Citadel is a company in transition. In August 1994, Citadel's principal
asset--a Southern California based savings and loan association--was
recapitalized, as a result of which Citadel's interest in that association was
reduced from 100% to essentially a 16% non-voting equity interest. Since the
recapitalization, Citadel has focused on the disposition of the remainder of
its interest in that association, the resolution of the various liabilities
remaining from or pertaining to the period during which it was the parent
holding company for that association, the management of a limited portfolio of
commercial properties which were previously owned by the association, and
reviewing its options with respect to the development of a future business
plan. As of June 30, 1996, Citadel's assets totalled approximately $35 million,
consisting principally of cash in the amount of approximately $19.2 million and
commercial real estate with a book value of approximately $14.9 million.
Description of the Stock Transactions. In the Stock Transactions, CAC will
contribute, in exchange for 70,000 shares of Series A Preferred Stock and
certain contractual rights, cash in the amount of $7 million.
Craig will contribute to Reading Entertainment, in exchange for 125,098
shares of Series B Preferred Stock and 563,210 shares of Reading Entertainment
Common Stock, the 50% Cinemas Interest in Reading International and the
1,329,114 shares of Citadel Preferred Stock. CMI will contribute to Reading
Entertainment, in exchange for 424,902 shares of Series B Preferred Stock and
1,912,980 shares of Reading Entertainment Common Stock, the 693,650 shares of
Stater Stock.
7
<PAGE>
The Convertible Preferred Stock will have a liquidation preference of $100
per share (the "Stated Value") and bear a cumulative dividend of 6.5%, payable
quarterly. The Series A Preferred Stock will rank senior to the Series B
Preferred Stock with respect to dividends and distributions on liquidation. The
Series A Preferred Stock will be convertible, at any time after 18 months after
the closing of the Stock Transactions (the "Closing"), or earlier after a
Change in Control (as defined), into shares of Reading Entertainment Common
Stock at a conversion price of $11.50 per share. The holders of the Series A
Preferred Stock will have the right, during the 90-day period beginning five
years after the Closing (provided Citadel has not exercised the asset put
option described below), to require Reading Entertainment to repurchase the
shares of Series A Preferred Stock for their aggregate Stated Value plus
accrued dividends. In addition, if Reading Entertainment shall fail to pay
dividends on the Series A Preferred Stock for four quarters, the holders of the
Series A Preferred Stock will have the right to require Reading Entertainment
to repurchase such shares, at the same redemption price, provided that such
right may not be exercised prior to 18 months after the Closing. Finally,
following a Change in Control (but not after the fifth anniversary of the
Closing), Citadel will have the right to require Reading Entertainment to
repurchase the shares of Series A Preferred Stock owned by Citadel and its
affiliates for the same redemption price plus a premium. Reading Entertainment
will have certain rights to require conversion of the Series A Preferred Stock
and the right under certain conditions to redeem the Series A Preferred Stock
at the Stated Value plus accrued and unpaid dividends plus a premium in certain
cases. The Series B Preferred Stock will be convertible, at any time after 18
months after the Closing, into shares of Reading Entertainment Common Stock at
a conversion price of $12.25 per share. Reading Entertainment will have the
right to redeem the Series B Preferred Stock after five years at the Stated
Value plus accrued and unpaid dividends plus a premium in certain cases.
Holders of each series of Convertible Preferred Stock will be entitled to 9.64
votes per share held on all matters brought to a vote of the shareholders of
Reading Entertainment, voting as a single class with the holders of the Reading
Entertainment Common Stock and the other series of Convertible Preferred Stock.
In addition, Citadel will have the option, exercisable at any time until 30
days after Reading Entertainment files its Annual Report on Form 10-K for the
year ending December 31, 1999, to exchange all or substantially all of its
assets for shares of Reading Entertainment Common Stock, subject to certain
limitations. Also, Citadel and CAC will have certain demand and piggy-back
registration rights with respect to the Reading Entertainment Common Stock
issuable on conversion of the Series A Preferred Stock or on such asset
exchange. Approval of the Stock Transactions by shareholders will also
constitute approval of the issuance of shares of Reading Entertainment Common
Stock on conversion of the Convertible Preferred Stock or on exercise by
Citadel of the foregoing rights, as well as the repurchase of shares of Series
A Preferred Stock on exercise by the holders of the Series A Preferred Stock or
Reading Entertainment of the foregoing rights. In addition, the Exchange
Agreement provides that Reading Entertainment will reimburse Citadel and CAC
for their reasonable out of pocket costs with respect to the Stock
Transactions, up to a maximum of $280,000.
Committee and Board Proceedings. At its May 23, 1996 meeting, the Board of
Directors of the Company formed a committee of independent directors (the
"Independent Committee"). The Board authorized and directed the Independent
Committee to review any proposal presented by management of the Company or any
other party; to negotiate the terms of any proposed transaction; to evaluate
the fairness of any consideration to be received or paid by the Company in, and
the other terms of, any such transaction; and to make a recommendation to the
Board with respect to such proposal.
Serving on the Independent Committee were John W. Sullivan, Albert J.
Tahmoush and Gregory R. Brundage. Messrs Sullivan and Tahmoush have been
directors of the Company for more than the past 15 years, and Mr. Sullivan and
his family collectively own approximately 231,000 shares, representing
approximately 4.7%, of the Company's Class A Common Stock. Mr. Brundage has
been an investment banker for more than the past 15 years, most recently as a
Managing Director of Furman Selz Incorporated. Prior to Furman Selz, Mr.
Brundage was Managing Director and Office Manager of the Investment Banking
Division of PaineWebber Incorporated's Los Angeles office. In addition to his
generalized knowledge and expertise with respect to investment banking and
capital formation matters, Mr. Brundage brought to the Independent Committee
specialized knowledge and expertise concerning the principal asset transferred
to the Company by CMI in the
8
<PAGE>
Stock Transactions. None of Messrs. Brundage, Sullivan or Tahmoush own any
equity interest in Craig or Citadel except as shareholders of the Company. The
Independent Committee retained Berwind Financial Group, L.P. ("Berwind") to
advise it with respect to financial matters and Dechert Price & Rhoads to
advise it with respect to legal matters.
Following a number of meetings of the Independent Committee and negotiations
with the independent committees of Craig and Citadel, the Independent Committee
unanimously determined to recommend that the Board of Directors approve the
Exchange Agreement. At a meeting on August 12, 1996, the Board of Directors
received the report and recommendation of the Independent Committee and
reviewed the terms of a draft letter of intent and a draft of the Exchange
Agreement. The Board of Directors unanimously (with one director absent)
approved the Independent Committee's recommendation of such terms, authorized
the execution of the letter of intent, and approved the Exchange Agreement
subject to management's approval of the definitive terms of the Exchange
Agreement. Later that day, the Company, Craig and Citadel entered into the
letter of intent, and the following business day the companies issued a press
release announcing the letter of intent.
On September 4, 1996, after completion of the definitive Exchange Agreement
and related documents, the parties executed the Exchange Agreement and issued a
press release announcing such signing.
RECOMMENDATIONS OF THE INDEPENDENT COMMITTEE AND THE BOARD OF DIRECTORS
The Board of Directors of the Company, based in part on the unanimous
favorable recommendation of the Independent Committee and the opinion of the
Independent Committee's financial advisor described below, has determined that
the Exchange Agreement and the Stock Transactions are fair and in the best
interests of the Company and its shareholders and has unanimously approved and
adopted the Exchange Agreement. In recommending the Exchange Agreement, the
Independent Committee and the Board of Directors considered a number of
factors, including without limitation the following: (i) that the Company's
principal purpose and objective in entering into the Stock Transactions is to
enable Reading Entertainment to secure the substantial capital needed to expand
Reading Entertainment's Beyond-the-Home Entertainment business on terms more
favorable to the Company than the Company believes would otherwise currently be
available to it (if at all) in the market; (ii) the advice of Berwind that the
Company's ability to raise equity in the public market would be limited and
more costly to the Company than the Stock Transactions, and that any equity
raising activity would need to be strongly supported by Craig; (iii) the
Board's belief, based on the directors' knowledge of the Company's assets,
businesses, financial condition, results of operations and prospects, that the
Exchange Agreement provides a fair price for the Convertible Preferred Stock
and Reading Entertainment Common Stock; (iv) the Board's belief, based on the
directors' knowledge of the Craig Assets, that the Exchange Agreement provides
a fair valuation of the Craig Assets; (v) the opinion of Berwind to the effect
that, as of the date of its written opinion and based upon and subject to
certain matters as stated in its written opinion, the terms of the Exchange
Agreement, taken as a whole, are fair, from a financial point of view, to the
shareholders of the Company; (vi) the determination by the Independent
Committee, Berwind and the Board, after considering a variety of alternative
transactions, including a public offering or a rights offering, that no other
transaction met the Company's goals as well as the Stock Transactions; (vii)
that, although the equity interest of Craig in the Company would substantially
increase, the Stock Transactions would not constitute a sale of control or
other change of control since Craig has been the controlling stockholder of the
Company for more than seven years; (viii) that, although the Company currently
has approximately $163 million in NOL's, approximately $123 million of such
amount will expire if not utilized by December 31, 1996; Reading Entertainment
will receive a carryover basis in the Stater Stock, and any gain from a taxable
disposition of such shares prior to December 31, 1996 should be able to be
offset against a portion of such otherwise expiring NOL's; (ix) that the
Company reasonably expects that Reading Entertainment will be able to utilize
the Stater Stock, or the proceeds of a disposition of the Stater Stock, to
support the expansion of the Company's Beyond-the-Home Entertainment business;
and (x) that the gain to CMI on the disposition of its Stater Stock would not
be eliminated, but only deferred.
9
<PAGE>
OPINION OF FINANCIAL ADVISOR
Berwind has acted as financial advisor to the Independent Committee in
connection with the Exchange Agreement. In connection with the approval of the
Exchange Agreement by the Independent Committee and Board of Directors, Berwind
provided the directors of the Company with its oral opinion to the effect that,
as of the date of such opinion and based upon the matters considered in
rendering such opinion, the terms of the Exchange Agreement, taken as a whole,
are fair, from a financial point of view, to the shareholders of the Company. A
copy of its written opinion, which sets forth the procedures followed,
assumptions made, areas of reliance upon others and other matters considered in
connection with rendering such opinion, is set forth as Exhibit E to this Proxy
Statement and should be read carefully in its entirety.
INTERESTS OF CERTAIN PERSONS IN THE STOCK TRANSACTIONS; CONFLICTS OF INTEREST
Shareholders should be aware that certain members of the Company's management
and Board of Directors have certain interests which may present them with
actual or potential conflicts of interest in connection with the Stock
Transactions. James J. Cotter, Chairman of the Board of the Company, is also
Chairman of the Board of each of Craig and Citadel, and is a principal
shareholder of Craig, holding 1,145,864 shares of Craig's common stock ("Craig
Common Stock"), 77,500 shares of Craig's Class A Common preference stock (the
"Craig Class A Stock") and options to acquire 300,000 shares of Craig Common
Stock. S. Craig Tompkins, President and a director of the Company, is President
and a director of Craig, holds 1,000 shares of Craig Class A Stock and options
to acquire 17,500 shares of Craig Class A Stock, and is the Vice Chairman,
Principal Accounting Officer, Secretary and Treasurer of Citadel. Edward L.
Kane, a director of the Company, was President of Craig from January 1988
through January 1993 and a director of Craig until June 1996. Mr. Kane owns
1,500 shares of Craig Common Stock. In addition, James A. Wunderle, the
Company's Executive Vice President, Chief Operating Officer, Chief Financial
Officer and Treasurer, owns 1,000 shares of Craig Class A Stock.
USE OF CRAIG ASSETS AND CITADEL PROCEEDS
Reading is considering various alternatives for utilizing the Stater Stock in
the funding of its Beyond-the-Home Entertainment business, the most likely
being the contribution of the Stater Stock to one or more of Reading
Entertainment's Australian affiliates to collateralize Australian Dollar
borrowings. In addition, Stater has the right to repurchase the Stater Stock
and has advised the Company that it is considering exercising such right prior
to the end of Stater's 1997 fiscal year in September 1997. However, no
assurance can be given that any such transaction will be completed.
Reading Entertainment may elect to convert the Citadel Preferred Stock into
Citadel Common Stock. In such event, Citadel has the right under certain
circumstances to instead redeem the Citadel Preferred Stock for cash, at a
premium. Reading Entertainment may also use the Citadel Preferred Stock, or any
Citadel Common Stock received on such conversion, to secure borrowings. Again,
no assurance can be given that any such transaction will be completed.
CERTAIN CONSIDERATIONS
In considering the Stock Transactions, shareholders should be aware of the
following: (i) certain potential conflicts of interest as described herein;
(ii) the increased level of ownership of Reading Entertainment by Craig
following completion of the Stock Transactions and the absence of any
definitive legal opinion as to the status of Craig under certain Federal
securities laws; (iii) the existence of certain considerations which may limit
the ability of the Company to use its NOL's; (iv) the absence of any existing
market for the Stater Stock and certain other matters with respect to the
Stater Stock; and (v) the rights of Citadel under the Exchange Agreement to
require Reading Entertainment to acquire substantially all of Citadel's assets
for shares of Reading Entertainment Common Stock and, under certain
circumstances, to require Reading Entertainment to repurchase the shares of
Series A Preferred Stock issued to CAC. Each of these matters was reviewed and
considered by the Independent Committee.
10
<PAGE>
DISSENTERS' RIGHTS
The holders of the Common Stock and Class A Common Stock will have no
dissenters' rights in connection with the approval of the Stock Transactions.
TAX AND ACCOUNTING TREATMENT
Neither the Company nor Reading Entertainment, nor any of their shareholders,
will recognize any gain or loss as a result of the issuance of the Reading
Entertainment Common Stock or the Convertible Preferred Stock in the Stock
Transactions. Reading Entertainment's tax basis in the Craig Assets will be
equal to Craig's and CMI's tax basis in the Craig Assets immediately prior to
the Closing. Management believes that any gain recognized by Reading
Entertainment on a taxable disposition of such assets would be offset by the
Company's existing NOL's (but see "Certain Considerations--Certain Tax
Matters").
For financial reporting purposes, the Stock Transactions will be treated as a
reorganization of affiliated entities, with the assets and liabilities received
from Craig and CMI recorded on the books of Reading Entertainment at their
historical cost basis.
VOTE REQUIRED
The affirmative vote of a plurality of the shares cast at the Annual Meeting
is necessary to elect the six directors. The affirmative vote of a majority of
the shares cast at the Annual Meeting is necessary for the adoption of the
Merger Agreement and the approval of the Exchange Agreement. The holders of the
Class A Common Stock and Common Stock will vote on such matters as a single
class.
11
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following information sets forth selected financial data for the five
years ended December 31, 1995 for the Company and Citadel and for the five
years ended September 24, 1995 of Stater. Such information has been derived
from the audited financial statements of the Company, Citadel and Stater. The
financial data for the six month periods ended June 30, 1996 and 1995 of the
Company and Citadel and the nine months ended June 23, 1996 and June 25, 1995
of Stater are derived from unaudited financial statements of the companies. The
unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which the Company, Citadel, and Stater consider necessary
for a fair presentation of the financial position and the results of operations
for these periods. Operating results for the interim periods presented are not
necessarily indicative of the results that may be expected for the entire year.
Pro forma financial information and per share data for the Company give effect
to the acquisition of an 83.3% interest in the Angelika Theater (the
"Angelika"), a Manhattan multiplex theater, in August 1996 (the "Angelika
Acquisition"), the Reorganization and the Stock Transactions. The following
tables are derived from, and should be read in conjunction with, the historical
and pro forma financial statements appearing elsewhere herein and the related
notes thereto.
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED
JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------- ------------------------------------------
1996(1) 1995(1) 1995(1) 1994(1) 1993 1992 1991
--------- ------- ------- ------- ------- ------- -------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
THE COMPANY
Revenues................ $ 10,686 $ 8,369 $19,973 $10,990 $ 3,509 $ 4,505 $ 6,188
Income (loss) before
cumulative effect of
accounting change...... 1,039 322 2,351 (1,652) (520) (3,424) 1,982
Cumulative effect of
accounting change...... 0 0 0 0 132 0 0
--------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 1,039 $ 322 $ 2,351 $(1,652) $ (388) $(3,424) $ 1,982
========= ======= ======= ======= ======= ======= =======
Per share information:
Income (loss) before
cumulative effect of
accounting change..... $ 0.21 $ 0.06 $ 0.47 $ (0.33) $ (0.11) $ (0.69) $ 0.40
Cumulative effect of
accounting change for
income taxes.......... 0.00 0.00 0.00 0.00 0.03 0.00 0.00
--------- ------- ------- ------- ------- ------- -------
Net income (loss) per
share................. $ 0.21 $ 0.06 $ 0.47 $ (0.33) $ (0.08) $ (0.69) $ 0.40
========= ======= ======= ======= ======= ======= =======
Balance sheet data (at
end of period):
Book value per
outstanding common
share................. $ 14.02 $ 13.41 $ 13.82 $ 13.29 $ 13.68 $ 13.76 $ 14.45
Total assets........... 80,077 73,104 75,544 72,716 70,121 71,509 76,272
Shareholders' equity... $ 69,703 $66,681 $68,712 $66,086 $68,026 $68,416 $71,841
THE COMPANY AND THE
ANGELIKA ACQUISITION--
PRO FORMA
Revenues................ $ 13,788 $26,865
Net income.............. 950 1,774
Per share information:
Net income per common
share................. $ 0.19 $ 0.36
========= =======
Balance sheet data (at
end of period):
Book value per
outstanding common
share................. $ 14.02
Total assets........... 84,514
Shareholders' equity... $ 69,703
THE COMPANY, THE
ANGELIKA ACQUISITION,
THE REORGANIZATION AND
THE STOCK
TRANSACTIONS--PRO FORMA
Revenues................ $ 17,807 $34,305
Net income(2)........... 4,342 8,780
Per share information:
Net income per common
share(3).............. $ 0.30 $ 0.60
========= =======
Balance sheet data (at
end of period):
Book value per
outstanding common
share(4).............. $ 13.52
Total assets........... 181,060
Redeemable Preferred
Stock................. 5,600
Shareholders' equity... $ 155,745
</TABLE>
- --------
(1) Results of operations of Cine Vista have been included since its
acquisition effective July 1, 1994.
(2) Prior to preferred dividends of $2,143,000 and $4,286,000 for the six
months and twelve months, respectively.
(3) Does not include a non-recurring reversal of a deferred tax asset valuation
allowance of $20,782,000 or $2.79 per pro forma common share resulting from
the reduction of the deferred tax liabilities associated with the Stater
Stock.
(4) Book value per share, assuming conversion of the Convertible Preferred
Stock, would be $12.80 per share.
12
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS
ENDED
JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------- ------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- ------- --------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CITADEL (HISTORICAL)(1)
Income from real estate
operations............. $ 3,312 $ 2,545 $ 6,112 $ 2,115
Gain on property sales.. 1,473 1,541 1,541
Net interest income
after provision for
estimated loan losses... $ 79,601 $ 92,264
Gain on sale of loans,
net.................... 1,117 2,118
Gains on sale of
mortgage-backed
securities............. 8,993
Gains (losses) on sales
of investment
securities............. 1
Other income (expense).. (6,602) (5,616)
Administrative charge
from Fidelity.......... 916
Gain (loss) related to
investment in Fidelity
Federal Bank(2)........ 4,000 (39) (41) (171,964) $ (103,628)
Operating expense....... 3,001 2,670 6,214 4,060 77,911 79,446
------- ------- ------- --------- ---------- ---------- ----------
Earnings (loss) before
income taxes........... 5,784 1,377 1,398 (174,825) (103,628) (3,795) 18,314
Income tax expense
(benefit).............. 0 0 0 0 (36,467) (5,841) 15,651
------- ------- ------- --------- ---------- ---------- ----------
Net earnings (loss)..... $ 5,784 $ 1,377 $ 1,398 $(174,825) $ (67,161) $ 2,046 $ 2,663
======= ======= ======= ========= ========== ========== ==========
Per share information:
Earnings (loss) per
common share and
common equivalent..... $ 0.70 $ 0.16 $ 0.16 $ (26.45) $ (11.56) $ 0.62 $ 0.81
Balance sheet data (at
end of period):
Book value per
outstanding common
share................. $ 3.02 $ 2.08 $ 2.08 $ 1.89 $ 28.41 $ 67.67 $ 67.05
Total assets........... 35,388 39,877 39,815 39,912 4,389,519 4,698,326 5,126,525
Long-term debt......... 10,372 16,252 16,186 14,846 794,230 968,400 931,150
Stockholders' equity... $23,387 $17,738 $17,720 $ 17,838 $ 187,403 $ 223,186 $ 221,140
</TABLE>
- --------
(1) Certain amounts in prior periods have been reclassified to conform to the
current period financial statement presentation.
(2) Gain in period ended June 30, 1996 was due to the non-recurring recognition
for financial statement purposes of previously deferred proceeds from the
bulk sale of loans and properties by Citadel's previously owned subsidiary,
Fidelity Federal Bank.
13
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE NINE
MONTHS ENDED AT OR FOR THE YEAR ENDED
---------------------- --------------------------------------------------------
JUNE 23, JUNE 25, SEPT. 24, SEPT. 25, SEPT. 26, SEPT. 27, SEPT. 29,
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATER (HISTORICAL)(1)
Sales................... $1,244,312 $1,177,288 $1,579,895 $1,539,717 $1,526,002 $1,539,758 $1,514,713
Gross Profit............ 285,066 262,864 352,540 339,923 330,603 338,691 324,755
Income (loss) before
extraordinary charge and
cumulative effect of
accounting change....... 12,323 5,315 6,727 8,789 5,692 7,747 3,719
---------- ---------- ---------- ---------- ---------- ---------- ----------
Extraordinary
charge(2).............. (8,036) (1,470)
Cumulative effect of
accounting change for
income taxes............ 372
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income.............. $ 12,323 $ 5,315 $ 6,727 $ 1,125 $ 5,692 $ 6,277 $ 3,719
========== ========== ========== ========== ========== ========== ==========
Per share information:
Income before
extraordinary charge
and cumulative effect
of accounting change... $ 126.75 $ 53.15 $ 67.27 $ 84.62 $ 53.69 $ 71.94 $ 25.35
Net income per common
share................. 126.75 53.15 67.27 7.98 53.69 57.24 25.35
Balance sheet data (at
end of period):
Book value per
outstanding common
share.................. (912.38) 121.66 135.78 68.51 407.02 353.33 296.07
Cash dividends declared
per common share....... 0.00 0.00 0.00 400.00 0.00 0.00 0.00
Total assets........... 328,546 311,588 314,082 306,489 264,484 262,887 244,185
Long-term debt......... 172,293 173,319 173,099 174,187 98,032 101,643 81,557
Redeemable Preferred
Stock................. 69,365 0 0 0 0 0 0
Shareholders' equity... $ (45,619) $ 12,166 $ 13,578 $ 6,851 $ 44,302 $ 36,933 $ 35,477
</TABLE>
- --------
(1) Certain amounts in prior periods have been reclassified to conform to the
current period financial statement presentation.
(2) Extraordinary charges in 1994 and 1992 represent the after-tax charge from
the early retirement of debt.
14
<PAGE>
ELECTION OF DIRECTORS
BENEFICIAL OWNERSHIP OF COMMON STOCK AND CLASS A COMMON STOCK
The following tables set forth certain information regarding the Common
Stock and Class A Common Stock of the Company owned on September 30, 1996 by
(i) each person or group who is known by the Company to own beneficially more
than 5% of the Company's Common Stock or Class A Common Stock, (ii) each of
the Company's directors, (iii) each executive officer named in the Summary
Compensation Table (set forth below) and (iv) all directors and officers of
the Company as a group.
5% BENEFICIAL OWNERS
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT OF
BENEFICIAL CLASS A
NAME AND ADDRESS OF BENEFICIAL OWNER CLASS OWNERSHIP(1) COMMON STOCK
- ------------------------------------ ----- ------------ ------------
<S> <C> <C> <C>
Craig Corporation........... Class A 2,610,826(2) 52.59
550 South Hope Street Common Stock
Los Angeles, California
90071
James J. Cotter............. Class A 271,232(2)(3) 5.19
550 South Hope Street Common Stock
Los Angeles, California
90071
Libra Advisors, Inc......... Class A 319,500(4) 6.44
c/o Ranjan Tandon Common Stock
277 Park Avenue, 26th Floor
New York, NY 10017
</TABLE>
SECURITY OWNERSHIP OF MANAGEMENT
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT OF
BENEFICIAL CLASS A
NAME OF BENEFICIAL OWNER OWNERSHIP(1) COMMON STOCK(1)
- ------------------------ ------------ ---------------
<S> <C> <C>
Gregory R. Brundage.......................... 0 *
James J. Cotter.............................. 271,232(2)(3) 5.19
Edward L. Kane............................... 9,000(5)(6) *
Robert F. Smerling........................... 9,500(7) *
John W. Sullivan............................. 172,359(5)(8) 3.47
Albert J. Tahmoush........................... 7,500(5) *
S. Craig Tompkins............................ 14,525(2)(9) *
James A. Wunderle............................ 11,000(10) *
All Directors and Officers As a Group (11
Persons).................................... 495,116(11) 10.07
</TABLE>
- --------
* Percentages of less than one percent have not been indicated.
(1) Includes outstanding shares of Class A Common Stock and Class A Common
Stock issuable within 60 days of September 30, 1996 upon the exercise of
outstanding stock options. All of the stock beneficially owned by the
directors and officers is Class A Common Stock.
(2) Craig filed a Schedule 13D dated June 19, 1989, as amended, stating that
the shares had been purchased for investment purposes. Share information
is presented based on the number of shares reported in the last amendment
filed to such Schedule 13D. James J. Cotter is Chairman of the Board of
the Company and Craig. S. Craig Tompkins is President of the Company and
Craig. James J. Cotter is also a principal shareholder of Craig. Each of
Messrs. Cotter and Tompkins disclaims beneficial ownership of the
Company's shares held by Craig.
(3) Includes 5,000 shares held in a pension plan and 1,000 shares held by the
James J. Cotter Profit Sharing Plan. Also includes 265,232 shares Mr.
Cotter is eligible to receive through the exercise of stock options.
15
<PAGE>
(4) Libra Fund, L.P., a Delaware limited partnership ("Libra"), Libra
Advisors, Inc., a New York corporation ("Advisors") and the general
partner of Libra, Ranjan Tandon and Chandrika Tandon jointly filed a
Schedule 13D with the SEC dated December 12, 1995, as amended, stating
that the shares have been purchased for investment purposes. Mr. Tandon
is the sole shareholder and president of Advisors. Mrs. Tandon is the
wife of Mr. Tandon. Libra, Advisors and Mr. Tandon may jointly be deemed
to be the beneficial owners of 211,000 shares of Class A Common Stock.
Mrs. Tandon is the beneficial owner of 108,500 shares of Class A Common
Stock. Mrs. Tandon disclaims beneficial ownership of the shares held by
Libra, Advisors and Mr. Tandon. Libra, Advisors and Mr. Tandon each
disclaim beneficial ownership of the shares owned by Mrs. Tandon.
However, in an exhibit to Amendment No. 1 to its Schedule 13D, Advisors
has characterized the shares held by Mrs. Tandon as being held by an
"affiliate" of Advisors.
(5) Includes 7,500 shares which may be acquired through the exercise of stock
options.
(6) Includes 1,500 shares held in a retirement account.
(7) Includes 6,000 shares which may be acquired through the exercise of stock
options.
(8) Includes 55,520 shares owned by a family trust for which Mr. Sullivan is
a trustee; 32,785 shares held in a trust for the benefit of Mr.
Sullivan's daughter for which Mr. Sullivan serves as trustee; and 29,636
shares held in custodial accounts for Mr. Sullivan's son for which Mr.
Sullivan serves as custodian. Excludes 100,920 shares held in a
charitable foundation of which Mr. Sullivan serves as a director, as well
as 66,100 share held by other trusts (of which Mr. Sullivan is not a
trustee) for the benefit of Mr. Sullivan's children, as to which
Mr. Sullivan disclaims beneficial ownership.
(9) Includes 13,125 shares which may be acquired through the exercise of
stock options. Excludes 200 shares held in Mr. Tompkins' wife's
retirement plan and 500 shares held in trust for Mr. Tompkins' minor
child as to which Mr. Tompkins disclaims beneficial ownership.
(10) Includes 11,000 shares which may be acquired through the exercise of
stock options.
(11) Includes 317,857 shares which may be acquired through the exercise of
stock options.
NOMINEES FOR ELECTION
Six directors are to be elected at the Annual Meeting. Each director will
serve for a term of one year and until his successor has been elected. Unless
otherwise instructed, proxy holders will vote the proxies received by them for
the election of the nominees named below, all of whom are currently directors
of the Company. If any nominee becomes unavailable for any reason, it is
intended that the proxies will be voted for a substitute nominee designated by
the Board of Directors. The Board of Directors has no reason to believe the
nominees named will be unable to serve if elected. Any vacancy occurring on
the Board of Directors for any reason may be filled by a majority of the
directors then in office until the next Annual Meeting of Shareholders. If the
proposal to adopt the Merger Agreement is approved and the Reorganization
consummated, the directors of the Company also will become, and be ratified
as, directors of Reading Entertainment.
The names of the nominees for director, together with certain information
regarding them, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
James J. Cotter (1)...... 58 Chairman of the Board, Chairman of the
Executive Committee of the Board and a
Director
S. Craig Tompkins........ 45 President and a Director
Edward L. Kane (1)(2).... 58 Director
John W. Sullivan (1)(2).. 62 Director
Albert J. Tahmoush (2)... 75 Director
Gregory R. Brundage...... 52 Director
</TABLE>
- --------
(1) Member of the Executive Committee. The Executive Committee is appointed
annually by the Board of Directors and exercises the authority of the
Board of Directors in the management of the business and affairs of the
Company between meetings of the Board of Directors. The Executive
Committee is responsible for recommending to the Board of Directors
remuneration for senior management and officers of the Company,
recommending adoption of compensation plans and the granting of options
under the Company's stock option plan. The Executive Committee held one
meeting in 1995.
16
<PAGE>
(2) Member of the Audit and Finance Committee. The Audit and Finance Committee
is appointed annually by the Board of Directors to recommend the selection
of independent auditors, review the scope and results of the annual audit,
review financial results and status, review and assess the adequacy of the
Company's accounting practices, financial controls and reporting systems
and assess the financial planning functions of the Company. During 1995,
the Audit and Finance Committee held two meetings.
During 1995, the Company's Board of Directors held eight meetings. No
Director attended fewer than 75% of the total number of meetings of the Board
of Directors and of the committees of the Board of Directors on which such
Director served.
Mr. Cotter has been Chairman of the Board of Directors since December 1991,
Chairman of the Company's Executive Committee since March 1992 and a director
since September 1990. Mr. Cotter is the principal executive officer of the
Company and serves as the Chairman and a Managing Director of Reading
International. Mr. Cotter has been Chairman of the Board of Craig since 1988,
and a director since 1985. Mr. Cotter has been a director and the Chairman of
the Board of Citadel since 1991. Mr. Cotter has been a director and Chief
Executive Officer of Townhouse Cinemas Corporation (motion picture exhibition)
since 1987, Executive Vice President and a director of The Decurion
Corporation (motion picture exhibition) since 1969 and a director of Stater
and its predecessors (retail grocery chain) since 1987. Townhouse Cinemas
Corporation is the parent of City Cinemas Corporation ("City Cinemas") (see
"Certain Transactions"). From 1988 through January 1992, Mr. Cotter also
served as the President and a director of Cecelia Packing Corporation (a
citrus grower and packer), a company wholly owned by Mr. Cotter. Mr. Cotter is
also a director and Executive Vice President of Pacific Theatres, Inc., a
wholly-owned subsidiary of The Decurion Corporation.
Mr. Tompkins has been President and a director of the Company since March
1993. He serves as the Chairman and Vice President of Reading Cinemas of
Puerto Rico, Inc. ("RCPR") and as a Managing Director of Reading
International. Mr. Tompkins is President and a director of Craig and has
served in such positions since March 1, 1993. Prior thereto, Mr. Tompkins was
a partner in the law firm of Gibson, Dunn & Crutcher for more than five years.
Mr. Tompkins has been a director of Citadel since May 1993, became Vice
Chairman in August 1994, and Secretary, Treasurer and Principal Accounting
Officer in September 1994. Mr. Tompkins has served as a director of G&L Realty
Corp., a New York Stock Exchange listed REIT, since December 1993.
Mr. Tompkins was elected President of the Company and to the Board of
Directors of the Company effective March 1, 1993. On the same date that he was
elected to the positions with the Company, Mr. Tompkins was elected by the
directors of Craig as the President and a director of that corporation.
Although the terms of Mr. Tompkins' employment with the Company and with Craig
are independent of one another, Mr. Tompkins has advised the Company that he
would not have accepted the positions with the Company if he had not been
elected that same day to his current positions at Craig and that it was his
understanding, based upon negotiations with the Chairman of the Board of the
Company and of Craig, that, subject to the approval of the directors of the
Company and of Craig, he would be serving in similar capacities at both the
Company and Craig. The Company has been advised by Craig that Craig has no
agreement or understanding with Mr. Tompkins with respect to his serving as an
officer or director of the Company either in his individual capacity or on
behalf of Craig. Mr. Tompkins' understanding with the Company concerning the
terms of his employment anticipates that he will serve as a director of the
Company in addition to serving as President.
Mr. Kane has been a director of the Company since 1989 and has been Chairman
of the Company's Audit and Finance Committee since October 1995. Mr. Kane
currently serves as a consultant. Mr. Kane served as Vice President of
SunSurgery Corporation from February through November 1995. Prior to its
acquisition by Sun Healthcare Group, Inc. in February 1995, Mr. Kane served as
Chairman, Chief Executive Officer and a director of Altis Outpatient Services,
Inc., which owned and operated ambulatory surgical centers, since February
1993. Mr. Kane served as President of the Company from December 1991 through
January 1993 and was President of Craig from January 1988 through January
1993. Mr. Kane is a director of BDI Investment Corporation and until June 1996
served as a director of Craig. Mr. Kane resigned his position as a director of
Craig in order to continue
17
<PAGE>
to serve as the Chairman of the Company's Audit and Finance Committee during
the development and negotiation of the Stock Transactions without any
potentially conflicting obligations to Craig.
Mr. Sullivan has been a director of the Company since January 1981. Mr.
Sullivan was Chairman of the Board of the Company from April 1986 through
December 1991. He was Chief Executive Officer of the Company from January 1981
to October 1986 and was President from January 1981 until April 1986.
Mr. Sullivan is engaged in real estate development.
Mr. Tahmoush has been a director of the Company since January 1981. From
March 1977 until his retirement in August 1985, he was Chairman, President and
Chief Executive Officer of Frank B. Hall & Co., Inc., an insurance broker. He
is also a director and Deputy Chairman of UBAF Arab American Bank.
Mr. Brundage has been a director of the Company since May 1996. Mr. Brundage
has been a Managing Director of Furman Selz Incorporated since May 1996. Prior
thereto, Mr. Brundage was the Managing Director and Office Manager of the
Investment Banking Division of PaineWebber Incorporated's Los Angeles office
since 1987. Mr. Brundage has served as the principal outside financial advisor
to Stater for more than the past five years. While a Managing Director of
PaineWebber Incorporated, Mr. Brundage advised Citadel in connection with its
1993 rights offering and advised Craig in connection with its 1990 public
offering of its Class A Common Preference Stock.
In connection with the development of the Stock Transactions, it was
determined that it would be in the best interests of the Company and Craig,
and their respective stockholders, if each were represented by an independent
committee comprised entirely of independent directors. Due to the substantial
overlap between the Boards of Directors of the Company and Craig, there was
only one Craig director who was not, at the time of meetings of the Boards
held in May 1996, also a director of the Company. There were, however three
directors of the Company (Messrs. Sullivan, Tahmoush and Brundage) who were
not directors of Craig and were independent of Craig and its principal
stockholders.
Accordingly, it was determined appropriate for Gerard P. Laheney and Ralph
B. Perry III, who were then directors of the Company, to resign as directors
of the Company so that they could serve as members of Craig's independent
committee and so that each of the Company and Craig could be represented by
independent committees of three directors each. Due to Edward L. Kane's status
as the Chairman of the Company's Audit and Finance Committee, it was also felt
prudent for Mr. Kane to resign as a director of Craig, even though he would
not be serving on the Company's Independent Committee, so that Mr. Kane would
be free from any potential conflict during the course of the negotiations of
the Stock Transactions with respect to his duties as the Chairman of the
Company's Audit and Finance Committee.
DIRECTOR COMPENSATION
Directors who are not employees of the Company receive an annual retainer of
$24,000, except for the Chairman of the Audit and Finance Committee who
receives an annual retainer of $26,000. The Chairman of the Board receives an
annual retainer of $150,000. No separate fees are paid for meetings of the
Board or committee meetings. In connection with the evaluation of the Stock
Transactions, the Board of Directors established an Independent Directors
Committee (the "Independent Committee"). Each member of the Independent
Committee has received the sum of $10,000 for his service on the Independent
Committee through August 15, 1996. See "Stock Proposal--Background of the
Exchange Agreement."
THE BOARD RECOMMENDS A VOTE FOR THE NOMINEES.
18
<PAGE>
EXECUTIVE OFFICERS
The names of the executive officers of the Company, other than nominees for
director, together with certain information regarding them, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Charles S. Groshon.............. 43 Vice President
Eileen M. Mahady................ 31 Controller
B. John Rochester............... 53 Chief Executive Officer, Australian Cinema
Operations and Reading Australia Pty. Ltd.
Robert F. Smerling.............. 61 Chief Executive Officer, Domestic and
Puerto Rico Cinema Operations and Reading
International
James A. Wunderle............... 44 Executive Vice President, Chief Operating
Officer, Chief Financial Officer and
Treasurer
</TABLE>
Mr. Groshon has been a Vice President of the Company since December 1988.
Prior thereto he served the Company in various accounting positions.
Ms. Mahady has been the Controller of the Company since April 1990. Prior to
joining the Company, she was a senior auditor with Ernst & Young.
Mr. Rochester has been the Chief Executive Officer of the Company's
Australian cinema operations since November 1995. From 1990 through 1995, Mr.
Rochester was the Managing Director of Television & Media Services Ltd.
(formerly Hoyts Entertainment Ltd.). He also served in several other executive
offices for that organization since 1987. Mr. Rochester has more than 21 years
of experience in the motion picture exhibition industry.
Mr. Smerling was retained in November 1993 to serve as the Chief Executive
Officer of the Company's cinema operations. Mr. Smerling is the President of
RCPR and the Chief Executive Officer of Reading International. He served as
President of Loews Theatre Management Corporation (now SONY Theatres), a
subsidiary of Sony Corporation, from May 1990 until November 1993. Mr.
Smerling also serves as President and Chief Executive Officer of City Cinemas.
Mr. Smerling has over 35 years experience in the motion picture exhibition
industry.
Mr. Wunderle has been Chief Operating Officer since February 1990 and
Executive Vice President, Treasurer and Chief Financial Officer since December
1988. He was Vice President of Finance, Chief Financial Officer and Treasurer
from January 1987 to December 1988 and prior thereto was Treasurer since March
1986.
19
<PAGE>
EXECUTIVE COMPENSATION
I. Summary Compensation Table
The following table shows, for the years ending December 31, 1995, 1994 and
1993, the cash compensation paid by the Company, as well as certain other
compensation paid or accrued for those years, to each of the most highly
compensated executive officers of the Company whose compensation exceeded
$100,000 in all capacities in which they served:
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION AWARDS
-------------------------------- ---------
OTHER ANNUAL
SALARY BONUS COMPENSATION OPTIONS
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) (#)
- --------------------------- ---- -------- ------- ------------ ---------
<S> <C> <C> <C> <C> <C>
James J. Cotter(2).............. 1995 $150,000
Chairman of the Board of
Directors 1994 150,000
1993 150,000
S. Craig Tompkins(3)............ 1995 $180,000
President 1994 180,000
1993 150,000 17,500
Robert F. Smerling.............. 1995 175,000
President, Reading Cinemas 1994 175,000
of Puerto Rico, Inc. 1993 20,192(4) 15,000
James A. Wunderle............... 1995 130,000 $52,500
Executive Vice President, 1994 120,000 50,000
Chief Operating Officer, Chief 1993 115,000 50,000
Financial Officer and Treasurer
</TABLE>
- --------
(1) In accordance with Company practice, Mr. Cotter has received a fee for his
services as Chairman of the Board of Directors of $150,000 per annum since
December 1991.
(2) Since December 1991, Mr. Cotter has been the principal executive officer
of the Company and may therefore be considered to have acted in a capacity
similar to the chief executive officer of the Company since that time.
(3) Mr. Tompkins was retained as President effective March 1, 1993. Amount set
forth for 1993 reflects salary for the period March 1 through December 31,
1993.
(4) Mr. Smerling was retained by the Company effective November 17, 1993.
II. Option Grant Table
No options were granted under the Company's 1992 Non-Qualified Stock Option
Plan (the "Option Plan") during the year ended December 31, 1995 to any of the
persons named in the Summary Compensation Table above.
III. Option Exercises and Year-End Table
The following sets forth information with respect to the options held by the
persons named in the Summary Compensation Table above as of December 31, 1995.
No options were exercised by such persons during the fiscal year ended
December 31, 1995 and none of the options held by such persons at December 31,
1995 had exercise prices which were below the market price of the Company's
Class A Common Stock as of that date. All of such options have an exercise
price of $14.00 per share, except those held by Mr. Wunderle which have
exercise prices of $12.50 to $15.54 per share.
20
<PAGE>
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED OPTIONS AT
12/31/95
------------------------
EXERCISABLE /
NAME UNEXERCISABLE
---- ------------------------
<S> <C> <C>
James J. Cotter................................... 265,232 / 0
S. Craig Tompkins................................. 13,125 / 4,375
Robert F. Smerling................................ 6,000 / 9,000
James A. Wunderle................................. 17,000 / 0
</TABLE>
EMPLOYMENT ARRANGEMENTS
Mr. Tompkins is entitled to a severance payment equal to his annual base
salary and continuation of medical and insurance benefits in the event that
his employment is involuntarily terminated and no change in control of the
Company has occurred. Mr. Tompkins is entitled to a severance payment equal to
two years annual salary in the event that a change in control of the Company
occurs.
Mr. Rochester is employed under the terms of an employment contract with an
initial term of two years beginning January 1, 1996, with automatic renewal
terms of one year each. The agreement provides for an incentive payment to Mr.
Rochester after the fourth anniversary of the agreement, based on a multiple
of cash flow of the Company's Australian operations. Under the agreement, in
the event Mr. Rochester's employment is terminated by the Company without
cause, he will be entitled to receive such incentive payment plus 17 payments,
each equal to his monthly remuneration, if such termination is during the
initial term, or 11 such monthly payments if such termination is after the
initial term. Mr. Rochester is entitled to receive a lump sum distribution of
such amounts, as applicable, if the Company and Craig both withdraw from any
material investment or involvement in the Australian operations and he is not
granted employment under comparable terms.
Messrs. Smerling, Wunderle and Groshon and Ms. Mahady are entitled to
receive payment equal to twelve, twelve, nine and four months, respectively,
of annual base salary in the event their individual employment with the
Company is involuntarily terminated.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Executive Committee of the Board of Directors performs certain functions
which are equivalent to those performed by a compensation committee. Mr.
Cotter is the principal executive officer of the Company and also a member of
the Executive Committee of the Board of Directors. Mr. Kane is a member of the
Executive Committee, and served as President of the Company from December 1991
through January 1993. Mr. Sullivan, also a member of the Executive Committee,
served as the President and Chief Executive Officer of the Company from 1981
through 1986.
CERTAIN TRANSACTIONS
Stock Purchases. In 1994, 1995 and 1996, the Company's Board of Directors
voted to waive the transfer restrictions imposed by the provisions of the
Company's Class A Common Stock to the extent necessary to permit James J.
Cotter and Craig to acquire additional shares of the Company's Class A Common
Stock. The transfer provisions prohibit a party from acquiring more than 4.75%
of the Company's outstanding capital stock without the permission of the
Company's Board of Directors and are intended to assure the continuing
availability of the Company's tax loss carryforwards by precluding a change in
control which could limit the value of the carryforwards. See "Reorganization
Proposal--Description of Reading Entertainment Capital Stock and Certain
Changes in the Rights of Shareholders." Craig currently owns approximately
52.5% of the Company's outstanding capital stock and has been granted approval
to acquire up to 55%. Prior to granting the
21
<PAGE>
waiver of the restrictions, the Board of Directors had determined that
acquisition of the shares by Mr. Cotter and Craig would not affect the
continuing availability of the Company's tax loss carryforwards.
City Cinemas. Mr. Smerling serves as the Chief Executive Officer of RCPR,
Reading International and City Cinemas, a New York motion picture theater
exhibitor. City Cinemas is an affiliate of Mr. Cotter, the Company's Chairman.
In November 1993, coincident to retaining Mr. Smerling, the Company and City
Cinemas entered into an Executive Sharing Agreement pursuant to which Mr.
Smerling provides services to both the Company and City Cinemas and the cost
of such services is shared by the parties, if such costs cannot be allocated
directly to such parties. Prior to retaining Mr. Smerling and entering into
the Executive Sharing Agreement, the Board of Directors had determined that
City Cinemas and the Company were not competitors and also noted that the
arrangement provided the Company with a chief executive officer with
background and experience which the Company could not otherwise afford based
upon its then present scope of operations.
On August 27, 1996, the Company and Sutton Hill Associates ("Sutton Hill"),
a partnership which is owned by Mr. Cotter and another principal stockholder
of Craig, acquired, for approximately $12,429,000, the Angelika Film Center
(the "Angelika"), a multiplex theatre located in New York City, which
management believes to be the premier specialty theatre in the United States.
The Company and Sutton Hill have formed a limited liability company, Angelika
Film Centers LLC ("AFC"), to hold their interest in the Angelika. AFC acquired
the Angelika assets with a combination of available cash, a fully collaterized
promissory note issued to the sellers and credit in full satisfaction of a
judgement encumbering the Angelika, with interest on such judgement at a rate
of 9% per annum. The Company had acquired such judgement from a bank for
$1,285,000 in November 1995.
The Company contributed 83.3% of the capital of AFC and Sutton Hill
contributed the remaining 16.7%. The operating agreement of AFC provides that
all depreciation and amortization (the "Special Deductions") will first be
allocated to Sutton Hill until the aggregate amount of such Special Deductions
equals Sutton Hill's initial investment. Thereafter, the Company will receive
all Special Deductions until the relative ownership interests are equal to the
initial ownership interests of the parties. Sutton Hill has agreed to
subordinate its interest in AFC to the Company's interest in order to permit
the Company to pledge AFC and its assets as collateral to secure borrowings by
the Company. In addition, Sutton Hill has agreed that the Company will be
entitled to receive up to 100% of the proceeds of borrowings by AFC, up to the
amount of the Company's initial capital contribution to AFC.
AFC is managed by City Cinemas pursuant to the terms of a management
agreement (the "Management Agreement"). The Management Agreement provides for
City Cinemas to manage the Angelika for a minimum annual fee of $125,000 plus
an incentive fee equal to 50% of annual cash flow (as defined in the
Management Agreement) over prespecified levels, provided however that the
maximum annual fee (minimum fee plus incentive fee) may not exceed 5% of the
Angelika's annual revenues.
Reading International. In November 1995, the Company and Craig formed
Reading International to develop and operate multiplex cinemas in Australia.
The Company and Craig each committed to make an initial contribution of $5
million, on an as needed basis, for an aggregate initial capitalization of $10
million. The provisions of the agreement which governs the activities of
Reading International provide, among other things, that each party will have
preemptive rights with respect to the provision of future capital and rights
of first refusal regarding any proposed disposition of the other's interest in
Reading International.
On March 29, 1996, the Company, Craig and CMI entered into a capital funding
agreement (the "Capital Funding Agreement") with respect to Reading
International pursuant to which they agreed to increase the capital committed
by the Company and Craig to Reading International from $10 million to
approximately $103 million through a combination of cash contributions and
secured capital funding undertakings. Under the terms of the Capital Funding
Agreement, the Company and Craig each agreed to immediately contribute to
Reading International an additional $12,500,000 in cash, for an aggregate
$25,000,000. These amounts have been fully funded by the parties. In addition,
the Company and Craig (directly or through CMI) have undertaken to contribute
up to an additional $37,500,000 each, for an aggregate future commitment of
$75,000,000 on an as
22
<PAGE>
needed basis. The commitments of the Company are secured by various assets,
and the commitments of Craig and CMI are secured by the Stater Stock. The
collateral pledged by Craig was reviewed by an independent committee of the
Company's Board of Directors comprised of outside directors who are
unaffiliated with Craig, and found to be adequate. The Capital Funding
Agreement and such pledges will be terminated pursuant to the Exchange
Agreement. See "Stock Proposal--The Exchange Agreement."
Citadel. On March 29, 1996, the Company purchased from Craig 1,564,473
shares of the common stock, par value $.01 per share, of Citadel (the "Citadel
Common Stock") for an aggregate purchase price of $3,324,505, representing
slightly less than $2.125 per share. The closing price of the Citadel Common
Stock on the American Stock Exchange on March 28, 1996 was $2.25 per share.
The Company paid Craig for the Citadel Common Stock with a five-year unsecured
promissory note in the principal amount of $3,324,505 which provided for the
payment of interest at a rate equal to the London Interbank Offered Rate plus
2.25%. The note was retired in July 1996. The Company also acquired from Craig
a one year option to acquire the 1,329,114 shares of Citadel Preferred Stock
held by Craig and an option (such options being collectively the "1996
Option") to acquire, under certain circumstances, a warrant held by Craig to
acquire 666,000 shares of Citadel Common Stock (the "Citadel Warrant"). See
"Item 1. Business--Subsequent Event" in the 1995 Annual Report for a
description of the terms of the 1996 Option. The transaction was separately
reviewed, negotiated and approved by a special committee composed of the
independent directors of the Company's Board of Directors. The 1996 Option
will be cancelled pursuant to the Exchange Agreement. See "Stock Proposal--The
Exchange Agreement."
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers, directors
and persons who own more than 10% of the Company's Common Stock or Class A
Common Stock to file reports to ownership and changes in ownership with the
SEC. The SEC rules also require such reporting persons to furnish the Company
with a copy of all Section 16(a) forms they file.
Based solely on a review of the copies of the forms which the Company
received and written representations from certain reporting persons, the
Company believes that, during the fiscal year ended December 31, 1995, all
filing requirements applicable to its reporting persons were complied with
except as follows: John W. Sullivan filed one late Form 4 to report two
transactions, the gift of shares directly owned by him to a charitable
foundation and the sale of shares by his wife, which transactions occurred in
December 1994. Also, two family trusts for which Mr. Sullivan serves as
trustee each filed late its initial report of beneficial ownership on Form 3.
Mr. Ralph B. Perry (a director of the Company until June 1996) filed one late
Form 5, to report one transaction, the sale of shares to Craig in 1995.
EXECUTIVE COMMITTEE OF THE BOARD OF DIRECTORS REPORT ON COMPENSATION
The Executive Committee of the Board of Directors serves as the Company's
Compensation Committee. The Executive Committee is responsible for
recommending to the Board of Directors the compensation policies of the
Company. Members of the Committee who are also executive officers of the
Company do not participate in decisions concerning their own compensation but
participate in the formulation of policies and specific decisions relating to
other officers of the Company.
Components of Officers' Compensation:
General Statement: The Company intends to expand its operations in the
Beyond-the-Home-Entertainment business through the acquisition or development
of operating businesses. Successful implementation of this strategic plan has
resulted in a transition away from the Company's historical business. In order
to attract and maintain superior management personnel to effect such a
transition, the Company must maintain a competitive salary and compensation
program. Since the Company's line of business is changing, the Executive
Committee views the scope of responsibilities of executive positions to be the
most relevant factor in
23
<PAGE>
determining competitive salary rather than comparisons with businesses in
similar historical lines of business. Other factors considered in establishing
compensation of the Company's officers include qualitative factors relating to
the Company's progress in making its transition, personal performance and the
amount which must be paid in the market in order to attract management capable
of redirecting the Company's operations.
The Executive Committee believes that compensation for officers should be
based in part upon the long-term financial performance of the Company and
believes that the Option Plan is an effective vehicle for creating incentives
for key employees and directors.
Specific components of officers' compensation follow:
Base Salary--Base salary is established based upon a general review by
the Executive Committee of comparable compensation for positions requiring
similar skills and capabilities and reflects the performance of the officer
in fulfilling his or her duties. Base salary does not directly reflect the
financial performance of the Company.
Discretionary Bonus--The Company may award officers an annual bonus in an
amount to be determined by the Executive Committee. The Executive Committee
considers such factors as it deems appropriate in determining such bonuses.
Factors considered in the past include acquisitions, resolution of
significant litigation, effectiveness in downsizing of Company operations,
the completion of asset sales, environmental remediation projects and
furtherance of the Company's strategic plan.
Stock Options--The Company adopted the Option Plan in order to provide
key employees and directors with a long-term incentive which is based upon
the Company's long-term return to shareholders. No options were granted
during 1995 or 1994. During 1993 all grants under the Option Plan were at
an exercise price of $14.00 which exercise price was at least 14% above the
closing market price of the Company's Class A Common Stock on the date of
grant. The grant at a premium to the market price was intended to provide a
long-term incentive to management and directors without benefit from the
then current price of the Company's Class A Common Stock. The amount of
grants is discretionary and the Executive Committee considers relative
compensation levels, past grants and individual performance in determining
the amount of grant.
Compensation of Chief Executive Officer
Mr. Cotter is the principal executive officer of the Company and has
therefore served in a capacity similar to the chief executive officer of the
Company. At the time Mr. Cotter became the Chairman of the Board of Directors
in December 1991, the Board of Directors approved a resolution which provided
that the Chairman of the Board is to receive an annual retainer of $150,000.
The amount of the retainer was based upon the Executive Committee's and the
Board of Directors' belief that a retainer of this amount was appropriate for
an executive of Mr. Cotter's experience and background and his anticipated
role in the redirection of the Company's operations. Payment of such retainer
is not dependent upon or related to the financial performance of the Company.
Stock Options: No options were granted in 1993, 1994, or 1995 to Mr. Cotter.
The Executive Committee believes that Mr. Cotter in his role as Chairman of
the Company will be instrumental in effecting the Company's transition and his
performance will be best gauged by the impact of his activities on the market
value of the Company's capital stock. The Executive Committee believes that
the 1992 grant of options to purchase 265,232 shares of Class A Common Stock
at an exercise price of $14.00 per share (the market price at the date of
grant was $9.50) provides such an incentive, and by establishing the option
exercise price well above market value, the Executive Committee has required
that there be meaningful increases in shareholder value in order for
Mr. Cotter to recognize value from such grants.
James J. Cotter, Chairman
Edward L. Kane
John W. Sullivan
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PERFORMANCE GRAPH
The following line graph compares the cumulative total stockholder return on
the Class A Common Stock from December 31, 1990 through December 31, 1995
against the cumulative total return of the Center for Research in Securities
Prices ("CRSP") Total Return Index for the NASDAQ Stock Market (U.S.
Companies), the cumulative total return of the Company's current peer group,
the CRSP Total Return Index for NASDAQ, New York Stock Exchange (NYSE), and
American Stock Exchange ("AMEX") Companies in the SIC Group Code 7830-7839
(motion picture theaters and allied businesses), and the cumulative total
return of the Company's former peer group, the CRSP Total Return Index for
NASDAQ Companies in the SIC Group Code 6500-6599 (real estate) over the same
period. The graph assumes a one hundred dollar ($100) investment on December
31, 1990 and reinvestment of all dividends on a daily basis.
The Company has in the past measured its performance against that of the
real estate industry in the compilation of this graph; that information is
presented here for continuity to prior periods. In light of recent
developments in the direction of the Company and its entry into the "Beyond-
the-Home" segment of the entertainment industry management believes current
performance is more appropriately compared to the new peer group and has
chosen to use results from all the major markets in order to present as
comprehensive a comparison as is available.
LOGO
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REORGANIZATION PROPOSAL
GENERAL
The Board of Directors of the Company has unanimously approved a proposal to
reorganize the Company into a holding company structure and, as part of such
reorganization, change the state of incorporation of the public parent company
from Pennsylvania to Delaware.
VOTE REQUIRED
Adoption of the Merger Agreement requires the affirmative vote of a majority
of the votes cast on the proposal by the holders of the Common Stock and Class
A Common Stock, voting together as a single class. Pursuant to the Exchange
Agreement, Craig has agreed to vote all of the shares of Class A Common Stock
held by it in favor of adoption of the Merger Agreement. If all such shares
are so voted, the Merger Agreement will be adopted. No additional votes will
be required to adopt such proposal.
THE BOARD RECOMMENDS A VOTE IN FAVOR OF ADOPTION OF THE MERGER AGREEMENT.
REASONS FOR THE REORGANIZATION
The Board of Directors of the Company believes that the reorganization of
the Company as a Delaware holding company will provide more flexibility to the
Company, in particular in connection with raising capital and possibly in
connection with the acquisition of other businesses in the Beyond-the-Home
segment of the entertainment industry. As a holding company organized under
Delaware law, Reading Entertainment will be able to avail itself of what
management believes to be a more extensive and better developed body of
statutory and case law and a body of law which is, generally speaking, more
familiar to most investors and lenders. Moreover, as a holding company,
separate from the Company, Reading Entertainment may be able to raise capital
and make acquisitions without subjecting such capital and businesses to many
of the contingent liabilities of the Company's historical railroad businesses.
Craig has specifically advised the Company that it would not be willing to
contribute additional assets to the Company unless it reorganizes as a holding
company. While the Company has from time to time engaged in negotiations with
third parties with respect to the possible acquisition of other such
businesses, there is no current proposal for any such acquisition or any other
capital transaction, other than the transactions set forth in the Exchange
Agreement. Also, as a result of the Reorganization, the Company's capital
structure will be simplified, since Reading Entertainment will have only one
class of common stock outstanding, whereas the Company currently has two
classes of common stock outstanding.
THE MERGER AGREEMENT
To implement the reorganization, the Company has formed Reading
Entertainment, which in turn has formed Merger Co., and the Company, Reading
Entertainment, and Merger Co. have entered into the Merger Agreement. A copy
of the Merger Agreement is attached hereto as Exhibit A and incorporated
herein by reference. The following is a summary of the principal terms of the
Merger Agreement.
The Reorganization. Pursuant to the Merger Agreement, at the effective time
(the "Effective Time") of the Reorganization, (i) each outstanding share of
Common Stock (other than shares of Common Stock as to which dissenters' rights
are perfected) and Class A Common Stock will be converted into the right to
receive one share of Reading Entertainment Common Stock; (ii) the outstanding
shares of Merger Co. will then be converted into shares of Common Stock of the
Company (which shares of Common Stock will not be converted into the right to
receive Reading Entertainment Common Stock); (iii) each share of Reading
Entertainment Common Stock held by the Company will be cancelled; and (iv) any
outstanding stock options or other rights to acquire Common Stock or Class A
Common Stock will become options or rights to acquire Reading Entertainment
Common Stock. As a result, the Company will become a wholly-owned subsidiary
of Reading Entertainment and the current shareholders of the Company will
become shareholders of Reading Entertainment.
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Holders of the 8,677 outstanding shares of Common Stock will have certain
dissenters' rights as a result of the Reorganization. See "Dissenters'
Rights." Even if the holders of all such shares perfect their rights to
receive payment for such shares, the Company does not believe the aggregate
amount of such payments would be material to the Company.
Delivery of Certificates. At the Effective Time, all of the outstanding
certificates formerly representing shares of Common Stock or Class A Common
Stock will be deemed for all purposes to evidence, and to represent, only the
right to receive shares of Reading Entertainment Common Stock. Promptly
following the Effective Time, holders of Common Stock and Class A Common Stock
will receive detailed instructions as to the procedure for surrendering their
stock certificates for certificates of Reading Entertainment Common Stock.
Shareholders are requested not to mail their stock certificates until they
receive instructions for the surrender of their certificates. The registered
owner of each outstanding certificate evidencing shares of Common Stock or
Class A Common Stock on the books and records of the Company will, unless and
until such certificate is surrendered for transfer, not have or be entitled to
exercise any and all transfer, voting or other rights with respect to, or to
receive any and all dividends or other distributions upon the shares of, the
Reading Entertainment Common Stock to which such person will be entitled. Upon
such surrender, the registered owner will have and be entitled to exercise all
transfer, voting or other rights with respect to, and will receive any and all
dividends or other distributions upon, such shares of Reading Entertainment
Common Stock.
Conditions to the Reorganization. The Merger Agreement is subject to the
fulfillment, at or before the Effective Time, of (i) the adoption of the
Merger Agreement by the affirmative vote of at least a majority of the votes
cast by the holders of the Common Stock and Class A Common Stock voting as a
single class and (ii) approval of the listing of the Reading Entertainment
Common Stock with the Nasdaq/NMS and on the Philadelphia Exchange.
Effectiveness of the Reorganization. The Reorganization will become
effective at the Effective Time by the filing of a Certificate of Merger with
the Secretary of State of the Commonwealth of Pennsylvania. Such filing will
be made only upon satisfaction or waiver of the conditions to the
Reorganization set forth above. It is expected that such filing will be made
as soon as practicable following the Annual Meeting.
Amendment or Termination. The Board of Directors of the Company is empowered
by the terms of the Merger Agreement to amend or terminate the Reorganization
at any time prior to the Effective Time (even after approval by shareholders)
so long as such amendment does not change (i) the amount or kind of shares,
obligations, cash, property or rights to be received in exchange for or on
conversion of all or any of the shares of the constituent corporations; (ii)
any term of the Articles of Incorporation of the Company as the surviving
corporation in the Reorganization; or (iii) any of the terms and conditions of
the Merger Agreement if the change would adversely affect the holders of any
shares of the constituent corporations.
MANAGEMENT
The directors of the Company will become the directors of Reading
Entertainment on the completion of the Reorganization. See "Election of
Directors." In adopting the Merger Agreement, shareholders of the Company will
be considered to have ratified the election of these persons as directors of
Reading Entertainment.
It is anticipated that the following persons will hold, at least initially,
in addition to the office or offices held with the Company, the offices of
Reading Entertainment indicated below:
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
James J. Cotter....... Chairman of the Board
S. Craig Tompkins..... President
Charles S. Groshon.... Vice President and Assistant Secretary
Eileen M. Mahady...... Controller
James A. Wunderle..... Executive Vice President, Chief Operating Officer,
Chief Financial Officer and Treasurer
Robert Ty Howard...... Secretary
</TABLE>
27
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MARKET AND DIVIDENDS
Contemporaneously with the Reorganization, the Reading Entertainment Common
Stock will be included in the Nasdaq/NMS under the symbol RDGE and admitted
for trading on the Philadelphia Exchange under the symbol RDG. The Class A
Common Stock will be simultaneously delisted from the Nasdaq/NMS and the
Philadelphia Exchange. The Common Stock is not listed on Nasdaq or any stock
exchange. Prior to the Reorganization, there will be no market for the Reading
Entertainment Common Stock.
No cash dividends have been paid on the Common Stock or the Class A Common
Stock. The Board of Directors does not intend to authorize the payment of
dividends on the Reading Entertainment Common Stock in the foreseeable future.
See also "Reorganization Proposal--Description of Reading Entertainment
Capital Stock and Certain Changes in the Rights of Shareholders" and "Item 5.
Market for the Registrant's Common Equity and Related Stockholder Matters" in
the 1995 Annual Report.
DESCRIPTION OF READING ENTERTAINMENT CAPITAL STOCK AND CERTAIN CHANGES IN THE
RIGHTS OF SHAREHOLDERS
After the Effective Time, the rights of shareholders will be governed by the
Delaware General Corporation Law (the "DGCL") and the Certificate of
Incorporation, as amended (the "Reading Entertainment Certificate"), and
Bylaws (the "Reading Entertainment Bylaws") of Reading Entertainment. The
present forms of the Reading Entertainment Certificate and Reading
Entertainment Bylaws are attached to this Proxy Statement as Exhibits B and C,
respectively. The DGCL, the Reading Entertainment Certificate and the Reading
Entertainment Bylaws differ in certain respects from the Pennsylvania Business
Corporation Law (the "PBCL") and the Articles of Incorporation (the
"Pennsylvania Articles") and Bylaws of the Company (the "Pennsylvania
Bylaws"). Although it is not practical to summarize all of the differences in
this Proxy Statement, the more significant of these differences are summarized
below.
Authorized Shares. The Pennsylvania Articles authorize the issuance of
10,000,000 shares of Common Stock, par value $.01 per share, 15,000,000 shares
of Class A Common Stock, par value $.01 per share, and 5,000,000 shares of
preferred stock, par value $1.00 per share. By comparison, the Reading
Entertainment Certificate authorizes the issuance of 25,000,000 shares of
Reading Entertainment Common Stock, par value $0.001 per share, and 10,000,000
shares of preferred stock, par value $0.001 per share ("Reading Entertainment
Preferred Stock"). Immediately after the Reorganization (and surrender by all
shareholders of their certificates for Common Stock or Class A Common Stock),
Reading Entertainment will have outstanding 4,973,174 shares of Common Stock
and no shares of Reading Entertainment Preferred Stock (assuming no changes in
the number of outstanding shares of Common Stock or Class A Common Stock
between the date of this Proxy Statement and the Effective Time and that no
holders of Common Stock perfect dissenters' rights, and without giving effect
to the transactions contemplated by the Exchange Agreement). All shares issued
as a result of the Reorganization will be fully paid and non-assessable.
The increase in authorized shares will provide greater flexibility to
Reading Entertainment by permitting the issuance of additional shares for,
among other purposes, any possible future stock dividends or stock splits,
possible future public offerings or possible future stock option or benefit
plans. In addition, the proposed increase in authorized shares of common stock
and preferred stock allows for prompt issuance of common stock or preferred
stock in the future in the event that attractive opportunities are presented
for the acquisition of other companies. The Company has no present plans,
agreements or understandings, other than those described herein, to issue any
shares of Reading Entertainment Common Stock or Reading Entertainment
Preferred Stock, but may determine to do so in the future. If, at any time in
the future, Craig should no longer own a majority of the shares of Reading
Entertainment Common Stock, the existence of authorized but unissued Reading
Entertainment Preferred Stock may enable the Board of Directors of Reading
Entertainment to render more difficult or to discourage an attempt to obtain
control of Reading Entertainment by means of a merger, tender offer, proxy
consent or otherwise. For example, if, in the due exercise of its fiduciary
obligations, the Board of
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<PAGE>
Directors were to determine that a takeover proposal is not in Reading
Entertainment's best interests, the Board of Directors could cause shares of
Reading Entertainment Preferred Stock to be issued without shareholder
approval in one or more private offerings or other transactions that might
dilute the voting or other rights of the proposed acquiror or insurgent
shareholder or shareholder group or create a substantial voting block in
institutional or other hands that might undertake to support the position of
the incumbent Board of Directors.
Under both the Pennsylvania Articles and the Reading Entertainment
Certificate, the respective Boards of Directors, by resolution and without
further action on the part of the shareholders, are authorized to issue
preferred stock in series and to fix the respective designations, rights, and
powers of each such series. The issuance of shares of Reading Entertainment
Preferred Stock pursuant to the Board of Director's authority described above
could decrease the amount of earnings and assets available for distribution to
holders of Reading Entertainment Common Stock and adversely affect the rights
and powers, including voting rights, of such holders and may have the effect
of delaying, deferring or preventing a change in control. The Board of
Directors does not currently intend to seek shareholder approval prior to any
issuance of Reading Entertainment Preferred Stock, unless otherwise required
by law.
The Company currently has no outstanding preferred stock. If the Merger
Agreement is adopted and the Exchange Agreement approved by the shareholders
of the Company at the Annual Meeting, the Board of Directors intends to file a
Certificate of Designation, establishing the terms of the Convertible
Preferred Stock, with the Secretary of State of Delaware shortly after the
Effective Time. See "Stock Proposal."
Voting. Under the Pennsylvania Articles, the holders of the Common Stock and
Class A Stock each have the right to cast one vote per share held, voting
together as a single class, on all matters presented to shareholders, except
as otherwise provided by law. Since the Reading Entertainment Common Stock is
a single class, the holders of the Reading Entertainment Common Stock will
also have the right to cast one vote per share held.
Dividends and Distributions. The rights of the holders of the Reading
Entertainment Common Stock with respect to dividends and distributions will be
identical to the rights of the holders of the Common Stock and Class A Common
Stock. Holders of the Reading Entertainment Common Stock will be entitled to
receive, and share equally on a per share basis, dividends when, as and if
declared by the Board of Directors out of funds legally available therefor,
and, on liquidation, any assets of Reading Entertainment available for
distribution after payment of or provision for all debts and obligations of
Reading Entertainment and any preferences attributable to any outstanding
Reading Entertainment Preferred Stock.
A Pennsylvania corporation, unless otherwise restricted by its bylaws, may
authorize and make distributions unless, after giving effect thereto, the
corporation would be unable to pay its debts as they become due in the usual
course of business or the total assets of the corporation would be less than
the sum of its total liabilities plus (unless otherwise provided in its
articles of incorporation) the amount that would be needed, if the corporation
were to be dissolved at the time as of which the distribution is measured, to
satisfy the preferential rights upon dissolution of shareholders whose
preferential rights are superior to those receiving the distribution. The
Pennsylvania Bylaws do not restrict the ability of the Company to pay
distributions beyond that provided in the PBCL, nor do the Pennsylvania
Articles contain any provision with respect to payment of distributions.
Generally, a director who votes for or assents to an illegal distribution is
liable to the corporation, jointly and severally with all other directors so
voting or assenting, for the value of the distribution in excess of the amount
that could have legally been paid.
Notwithstanding the foregoing, the Pennsylvania Bylaws (as permitted by the
PBCL) limit the personal liability of the Company's directors in connection
with the authorization of illegal distributions. See "Officer and Director
Liability."
Delaware law generally allows dividends to be paid out of surplus of the
corporation or, if there is no surplus, out of the net profits of the
corporation for the current fiscal year or the prior fiscal year. The
directors of a Delaware corporation are prohibited from making distributions
to shareholders except in the manner provided by the DGCL. In case of any
willful or negligent violation of the provisions of the DGCL governing
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<PAGE>
distributions, the directors under whose administration the violation occurred
(except for those directors who dissented) are, for a period of six years,
liable to the corporation for the full amount of the distribution made. See
"Officer and Director Liability."
Preemptive Rights. Neither the Pennsylvania Articles nor the Reading
Entertainment Certificate allows for preemptive rights to the holders of
Common Stock or Class A Common Stock or Reading Entertainment Common Stock.
Transfer. The Pennsylvania Articles do not restrict the transfer of the
Common Stock. The Pennsylvania Articles provide restrictions on the transfer
of the Class A Common Stock until January 1, 1997 (or, in certain cases, an
earlier date). The restrictions are intended to reduce the risk of occurrence
of an "ownership change" within the meaning of Section 382(g) of the Internal
Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder
that would result in the limitation or elimination of the Company's
utilization of federal income tax net operating loss carryforwards ("NOL's").
In general, the restrictions provide that any attempted sale, transfer,
assignment or other disposition of any shares of Class A Common Stock (a
"Transfer") to any person or group who, prior to such Transfer, owns (within
the meaning of the Code and such regulations) shares of Common Stock and Class
A Common Stock having a fair market value equal to or greater than 4.75% of
the fair market value of all outstanding shares of Common Stock and Class A
Common Stock, shall be void ab initio, unless the Board of Directors shall
have given its prior written approval to such Transfer.
The Reading Entertainment Certificate contains substantially identical
provisions with respect to the Reading Entertainment Common Stock, except that
the restrictions (i) also apply to other securities of Reading Entertainment
which are considered "stock" for purposes of Section 382 (the Common Stock and
such other securities being hereinafter referred to as "New Stock") and (ii)
will continue until January 1, 2003 (unless earlier terminated). Although the
percentage limitation will remain at 4.75%, following the Stock Transactions
shareholders will have greater flexibility to acquire Reading shares, since
the transfer ceiling will increase from approximately 236,200 shares of the
Company's Class A Common Stock or Common Stock to approximately 353,800 shares
of Reading Entertainment Common Stock.
In addition, as a mechanism for enforcing the transfer restrictions, the
Reading Entertainment Certificate provides that any transfer of shares of New
Stock or rights to acquire shares of New Stock ("Rights") in violation of the
transfer restrictions is automatically null and void as to that number of
shares or Rights, or both, which would cause the acquiror thereof (the
"Purported Owner") to exceed the 4.75% limitation (the shares or Rights which
would cause the Purported Owner to exceed such limitation are herein referred
to as the "Excess Shares"). The Purported Owner will not obtain any rights in
and to the Excess Shares. Until the Excess Shares are transferred to a person
whose acquisition thereof will not violate the 4.75% limitation (a "Permitted
Transferee"), (i) the Excess Shares will be voted by such person as shall be
appointed by Reading Entertainment's Board of Directors, which person will be
deemed to have been granted a proxy to vote the Excess Shares, (ii) the
purported transferor of the Excess Shares to the Purported Owner (the
"Purported Owner's Transferor") will be deemed to have retained the Excess
Shares and will hold and be entitled to exercise all other rights incident to
ownership of the Excess Shares, and (iii) if the Excess Shares are Rights,
they may not be converted, exchanged, or exercised until transferred to, and
converted, exchanged, or exercised in accordance with their terms by, the
Permitted Transferee. All Excess Shares will continue to be issued and
outstanding.
The purported transfer of the Excess Shares to the Purported Owner will not
be recognized by Reading Entertainment. Instead, if necessary, the Purported
Owner will be instructed to deliver the Excess Shares to, or otherwise place
the Excess Shares under the control of, a trustee (the "Share Trustee") who
will proceed forthwith to sell the Excess Shares to a Permitted Transferee in
the market or otherwise. In such circumstances, Reading Entertainment's
transfer agent will be given appropriate instructions to record the Purported
Owner's Transferor as the record owner of the Excess Shares and Reading
Entertainment's Board of Directors may institute procedures to enjoin or
rescind any such transfer or acquisition. Once the Excess Shares are acquired
by
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<PAGE>
a Permitted Transferee, the Permitted Transferee will have and will be
entitled to exercise all rights incident to the ownership of the Excess
Shares.
The proceeds of the sale to the Permitted Transferee will be distributed
first to the Share Trustee in an amount equal to the costs, if any, incurred
in respect of its administration of the Excess Shares; second, to the
Purported Owner, if known, in an amount up to the amount paid by the Purported
Owner, if determinable, for the Excess Shares; and third, to the Purported
Owner's Transferor, if known, and if not known, to Reading Entertainment to
hold on behalf of the Purported Owner's Transferor or any other person as
their interests may appear. Reading Entertainment is authorized by the terms
of the Reading Entertainment Certificate to make application to any court of
equitable jurisdiction within the State of Delaware for an adjudication of the
respective rights and interests in and to such proceeds and for leave to pay
the proceeds into such court.
Promptly following the Effective Time, the Company will provide notice of
the effectiveness of the Reorganization to its shareholders and will require
holders of Common Stock and Class A Common Stock to submit their existing
stock certificates for exchange to Reading Entertainment's transfer agent for
certificates representing Reading Entertainment Common Stock, which will bear
a legend disclosing the existence of the transfer restrictions.
Persons holding certificates representing shares of Common Stock or Class A
Common Stock who do not submit them for exchange will not be entitled to
transfer the shares represented by such certificates until the certificates
have been delivered to the transfer agent and new certificates for Reading
Entertainment Common Stock have been issued. The necessity for such submission
could interfere with a holder's delivery obligations upon a transfer. Further,
persons holding certificates representing shares of Common Stock or Class A
Common Stock who do not submit them for exchange will not be entitled to
receive any dividends from Reading Entertainment, should any be declared,
until such submission is effected. After submission, such persons will be
entitled to receive all dividends declared and unpaid before such submission.
Shareholder Meetings. Under the PBCL, written notice of every meeting of the
shareholders must be given at least five days prior to the day named for the
meeting; however, in certain instances such as a meeting called for the
purpose of acting on a proposed merger, consolidation, charter amendment or
liquidation of the corporation, the PBCL requires that written notice be given
at least 10 days prior to the day named for such meeting. Under the DGCL,
written notice of a shareholder meeting must be given not less than 10 nor
more than 60 days before the meeting; however, in certain instances such as a
meeting called for the purpose of acting on a proposed merger or
consolidation, the DGCL requires that written notice be given at least 20 days
prior to the day named for such meeting. Both the PBCL and the DGCL provide
procedures whereby such notice requirements may be waived.
Under the PBCL, the record date for determination of those shareholders
entitled to receive notice of, and to vote at, a shareholder meeting may not
be more than 90 days prior to the date of the meeting. The Board of Directors
of a Delaware corporation may fix a day not more than 60 nor less than ten
days before the holding of a shareholder meeting for determination of those
shareholders entitled to receive notice of, and to vote at, such meeting.
Failure to Timely Hold Annual Meeting. Under the PBCL, if the annual meeting
of shareholders is not called and held within six months after the designated
time for such meeting, any shareholder may call such meeting at any time
thereafter. The PBCL requires that at least one meeting of the shareholders
shall be held in each calendar year, unless otherwise provided in a
Pennsylvania corporation's articles of incorporation (the Pennsylvania
Articles contain no such provision). The DGCL requires that directors be
elected at the annual meeting of shareholders and, if any Delaware corporation
fails to hold its annual meeting within 30 days after the date designated or,
if no date is designated, for 13 months after the last annual meeting, any
shareholder or director may petition the Delaware Court of Chancery to order
the meeting to be held.
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Statutory Anti-Takeover Provisions. The PBCL contains a number of anti-
takeover provisions; however, the Pennsylvania Bylaws generally provide that
such provisions do not apply to the Company. The Pennsylvania Bylaws do not
"opt out" of Section 2538 of the PBCL, which generally requires approval by
disinterested shareholders of certain fundamental transactions between the
corporation and an "interested shareholder" unless (i) shareholders receive
for their stock the highest amount ever paid by the interested shareholder for
its stock or (ii) the transaction is approved by a majority of the board of
directors without counting the vote of directors who are affiliated with the
interested shareholder. In addition, in certain instances, the PBCL authorizes
corporations to restrict the voting of shares based upon the number of shares
held by an individual shareholder or a related group of shareholders or the
length of time the shares have been held, so long as such classifications are
not "manifestly unreasonable."
The DGCL contains a provision restricting the ability of a corporation to
engage in business combinations with an "interested stockholder." Under the
DGCL, except under certain circumstances (e.g., when such a combination with a
stockholder is approved by the corporation's board of directors prior to the
time when such stockholder becomes an interested stockholder), business
combinations with an interested stockholder are not permitted for a period of
three years following the date on which such stockholder became an interested
stockholder. The DGCL defines an "interested stockholder," generally, as a
stockholder who beneficially owns 15% or more of the voting power of the
corporation or who is an associate or affiliate of the corporation and within
the prior three years beneficially owned 15% of such voting power.
Mergers and Short Form Mergers. The PBCL provides for approval of most
mergers or other business combinations by majority vote of the shares voting.
The DGCL provides for approval of most mergers or other business combinations
by the affirmative vote of the holders of a majority of the shares entitled to
vote thereon. Under the PBCL, a plan of merger does not require the approval
of a corporation's shareholders when, immediately before adoption of the plan
of merger, another corporation that is a party to the merger owns 80% or more
of the outstanding shares of each class of the corporation that is being
merged into the corporation with such ownership. Under the DGCL, a corporation
that owns at least 90% of the outstanding shares of each class of stock of a
Delaware corporation can merge the other corporation into itself or another
corporation without shareholder approval.
Dissenters' Rights. The DGCL provides dissenters' rights only upon
consummation of certain mergers or as otherwise provided in the certificate of
incorporation of the corporation. The Reading Entertainment Certificate does
not contain such a provision regarding "permissive dissenters' rights." In
addition, the DGCL further restricts dissenters' rights by providing that, as
a general matter, there is no right to dissent for any class of series of
stock that is either listed on a national securities exchange, designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. (a "Nasdaq/NMS Security"), or
held by at least 2,000 shareholders of record.
The PBCL provides substantially similar restrictions on dissenters' rights,
except that the types of corporate transactions under which a shareholder may
be entitled to dissenters' rights is expanded. For example, under the PBCL,
certain dissenters' rights are afforded to shareholders upon sales of all or
substantially all of a corporation's assets, while, under the DGCL,
dissenters' rights would not be available in any circumstance upon a sale of
all or substantially all of the corporation's assets. In addition, the PBCL
does not except from the dissenters' rights provisions Nasdaq/NMS Securities.
The PBCL allows for a corporation to grant permissive dissenters' rights, but
neither the Pennsylvania Articles nor the Pennsylvania Bylaws provide for such
permissive rights.
Officer and Director Liability. Under the PBCL, if a bylaw adopted by the
shareholders of a corporation so provides, a director is not personally liable
for monetary damages for any action taken unless the director has breached or
failed to perform the duties of his office and the breach or failure to
perform constitutes self-dealing, willful misconduct or recklessness. The
Pennsylvania Bylaws contain such a provision.
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Under the DGCL, a corporation's certificate of incorporation may contain a
provision eliminating or limiting the personal liability of directors to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director or officer, but such provision may not eliminate or limit
the liability of a director for (i) any breach of the director's duty of
loyalty to the corporation or its shareholders, (ii) acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) intentional or negligent payment of unlawful dividends or stock
purchases or redemptions or (iv) any transaction from which the director
derived an improper personal benefit. The Reading Entertainment Certificate
limits personal liability of directors and officers to the fullest extent
permissible under the DGCL.
The provisions of the DGCL and PBCL are substantially similar with respect
to indemnification of officers and directors. Section 145 of the DGCL provides
that a corporation may indemnify any of its officers and directors who were or
are a party to any action, suit or proceeding by reason of the fact that he is
or was a director or officer of the corporation by, among other things, a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding; provided that such officer or director acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation. The Reading Entertainment Certificate
and Reading Entertainment Bylaws provide for indemnification of officers and
directors to the fullest extent permitted by Delaware law. The Reading
Entertainment Bylaws also provide for the advance of expenses incurred by
directors and officers in defending a proceeding, subject to an undertaking by
such director or officer to repay such amount should it be determined that he
is not entitled to be indemnified by Reading Entertainment.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Reading
Entertainment pursuant to the foregoing provisions, Reading Entertainment has
been informed that, in the opinion of the SEC, such indemnification is against
public policy and therefore unenforceable.
Number of Directors. The Pennsylvania Bylaws provide that the number of
directors of the Company is six. The Reading Entertainment Bylaws provide that
the authorized number of directors constituting the Reading Entertainment
Board will be not less than three nor more than twelve, as established from
time to time by action of the directors. The Reading Entertainment Board has
fixed the number of directors comprising the Reading Entertainment Board at
three until the conclusion of the Annual Meeting, at which time the authorized
number of directors will be increased to six.
Nominations for Directors. The Pennsylvania Bylaws provide nominations for
the election of directors made by shareholders must be made by written notice
delivered to the Secretary of the Company at the Company's principal executive
offices not less than 120 days prior to the first anniversary of the
immediately preceding annual meeting of shareholders at which directors are to
be elected. See "Shareholder Proposals" for the information which must be
contained in such notice. The Reading Entertainment Bylaws contain
substantially identical provisions.
Classification of Directors. Both the DGCL and the PBCL allow for
classification of the board of directors of a corporation. The PBCL generally
provides that a corporation may not have more than four classes of directors,
while the DGCL generally provides that a corporation may not have more than
three classes of directors. None of the Pennsylvania Articles, the
Pennsylvania Bylaws, the Reading Entertainment Certificate, or the Reading
Entertainment Bylaws provide for classification of directors.
Cumulative Voting. Under the PBCL, cumulative voting for the election of
directors is granted unless denied by the articles of incorporation. The
Pennsylvania Articles expressly deny cumulative voting rights. Under the DGCL,
cumulative voting for the election of directors is denied unless provided for
in the certificate of incorporation. The Reading Entertainment Certificate
does not grant cumulative voting rights.
Removal of Directors. Generally, under the PBCL, a director may be removed
from office without cause by vote of the shareholders entitled to elect the
director being removed. In addition, unless otherwise provided in
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a bylaw adopted by the shareholders, the board of directors may declare vacant
the office of a director who has been judicially declared of unsound mind or
who has been convicted of an offense punishable by imprisonment for a term of
more than one year or any other proper cause that the bylaws specify. The
Pennsylvania Bylaws contain no provisions with respect to removal of
directors.
A director of a Delaware corporation generally may be removed from office by
the holders of a majority of the shares entitled to vote. No provision is made
in the DGCL for removal of directors by the board of directors of the
corporation.
Vacancies on the Board of Directors. Both the PBCL and the DGCL generally
provide that all vacancies, including those caused by an increase in the
number of directors, may be filled by a majority of the remaining directors,
though less than a quorum.
Actions by Consent. Unless otherwise restricted by the certificate of
incorporation or bylaws, any action required or permitted to be taken at a
meeting of the board of directors of a Delaware corporation may be taken
without a meeting if a written consent thereto is signed by all the members of
the board. The PBCL provision is substantially similar. None of the Reading
Entertainment Certificate, the Reading Entertainment Bylaws, the Pennsylvania
Articles nor the Pennsylvania Bylaws contain a provision restricting action of
directors by written consent.
Under the DGCL, unless otherwise provided in the certificate of
incorporation, any action required or permitted to be taken at a meeting of
the shareholders may be taken without a meeting if a written consent thereto
is signed and delivered to the corporation by the holders of outstanding stock
entitled to cast not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote were present. The Reading Entertainment Certificate does not
provide for a different result. The PBCL generally requires a written consent
signed by all shareholders entitled to vote on the matter. However, the bylaws
of a Pennsylvania corporation may provide for shareholders to act by written
consent in substantially the same manner as the DGCL (unless the corporation
is, in general, a reporting company under the Exchange Act, in which case such
a provision must be in the articles of incorporation). Neither the
Pennsylvania Articles nor the Pennsylvania Bylaws contain such a provision.
Proxies. Both the DGCL and the PBCL provide that proxies are revocable at
will, unless such proxy is coupled with an interest. Under both the DGCL and
the PBCL, an unrevoked proxy is valid for three years unless a longer time is
expressly provided for in the proxy.
DISSENTERS' RIGHTS
Because the Class A Common Stock is listed on the Philadelphia Exchange,
holders of the Class A Common Stock will not be entitled to dissenters' rights
with regard to the Reorganization under the applicable provisions of the PBCL.
Pursuant to the PBCL, the owners of shares of Common Stock will have
dissenters' rights in connection with the Reorganization under Sections 1571
through 1580 of Subchapter 15D of the PBCL ("Subchapter 15D"), a copy of which
is included in this Proxy Statement as Exhibit D, and may object to the
Reorganization and demand in writing that the Company pay the fair value of
their shares of Common Stock.
If any beneficial holder of shares of Common Stock properly exercises
dissenters' rights in connection with the Reorganization under Subchapter 15D
(a "Dissenting Shareholder"), any shares of Common Stock held by such holder
will not be converted into the right to receive shares of Reading
Entertainment Common Stock, but instead will be converted into the right to
receive the fair value of such shares pursuant to Subchapter 15D. THE
FOLLOWING SUMMARY OF THE PROVISIONS OF SUBCHAPTER 15D IS NOT INTENDED TO BE A
COMPLETE STATEMENT OF SUCH PROVISIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUBCHAPTER 15D, A COPY OF WHICH (AS WELL AS A
COPY
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OF SECTION 1930 OF THE PBCL) IS ATTACHED TO THIS PROXY STATEMENT AS EXHIBIT D
AND INCORPORATED HEREIN BY REFERENCE. The Company will not give any notice of
the following requirements other than as described in this Proxy Statement and
as required by the PBCL.
General. Any holder of shares of Common Stock who has duly demanded the
payment of the fair value of his or her shares under Subchapter 15D will not,
after the Effective Time, be a shareholder of the Company (or of Reading
Entertainment) for any purpose or be entitled to the payment of dividends or
other distributions on any such shares of Common Stock; moreover, the shares
of Common Stock of any Dissenting Shareholder will be converted into the right
to receive either (i) the fair value of such shares of Common Stock,
determined in accordance with Subchapter 15D, or (ii) the right to receive the
shares of Reading Entertainment Common Stock which would have been issuable on
conversion of such shares of Common Stock, if such Dissenting Shareholder
effectively withdraws his or her demand for dissenters' rights.
SHAREHOLDERS OF THE COMPANY SHOULD NOTE THAT, UNLESS ALL THE REQUIRED
PROCEDURES FOR CLAIMING DISSENTERS' RIGHTS ARE FOLLOWED WITH PARTICULARITY,
DISSENTERS' RIGHTS WILL BE LOST. VOTING AGAINST THE REORGANIZATION, WHETHER IN
PERSON OR BY PROXY, IS NOT SUFFICIENT NOTICE TO PERFECT DISSENTERS' RIGHTS.
Filing Notice of Intention to Demand Fair Value. Before any shareholder vote
is taken on the proposal to adopt the Merger Agreement, a Dissenting
Shareholder must deliver to the Company a written notice of his or her
intention to demand fair value of the shares of Common Stock if the
Reorganization is effected. Such written notice may be sent to the Secretary
of the Company at the Company's address set forth on Page 1 of this Proxy
Statement. Neither the return of a proxy by the Dissenting Shareholder with
instructions to vote the shares of Common Stock represented thereby against
the proposal to adopt the Merger Agreement nor a vote against the proposal to
adopt the Merger Agreement or an abstention from voting on the proposal to
adopt the Merger Agreement is sufficient to satisfy the requirement of
delivering such a written notice to the Company. In addition, the Dissenting
Shareholder must not effect any change in the beneficial ownership of the
shares of Common Stock from the date of filing the notice with the Company
through the Effective Time, and the Dissenting Shareholder must not vote the
shares of Common Stock for which payment of fair value is sought in favor of
the proposal to adopt the Merger Agreement. The submission of a signed blank
proxy will serve to waive dissenters' rights if not revoked, but a failure to
vote, a vote against or an abstention from voting on the proposal to adopt the
Merger Agreement will not constitute a waiver of such rights. Proper
revocation of either a signed blank proxy or a signed proxy instructing a vote
for adoption and approval of the proposal to adopt the Merger Agreement will
also not constitute a waiver of dissenters' rights under the PBCL. Failure by
a Dissenting Shareholder to comply with any of the foregoing will result in
such Dissenting Shareholder forfeiting any right to payment of the fair value
of such Dissenting Shareholder's shares of Common Stock.
Record and Beneficial Owners. A record holder of shares of Common Stock may
assert dissenters' rights as to fewer than all the shares of Common Stock of
the same class or series registered in his or her name only if the holder
dissents with respect to all the shares of Common Stock beneficially owned by
any one person and discloses the name and address of the person or persons on
whose behalf he or she dissents. A beneficial owner of shares of Common Stock
who is not the record holder may assert dissenters' rights with respect to
shares of Common Stock held on his or her behalf if such Dissenting
Shareholder submits to the Company the written consent of the record holder
not later than the time of assertion of dissenters' rights. A beneficial owner
may not dissent with respect to less than all the shares of Common Stock of
the same class or series he or she owns, whether or not such shares of Common
Stock are registered in the beneficial owner's name.
Notice to Demand Payment. If the Reorganization is approved by the requisite
vote at the Annual Meeting, the Company shall mail to all Dissenting
Shareholders who gave due notice of their intention to demand payment of fair
value and who refrained from voting in favor of the Reorganization a notice
stating where and when a demand for payment must be sent, and stock
certificates representing the shares of Common Stock held by each Dissenting
Shareholder must be deposited to obtain payment. The notice shall be
accompanied by a copy of
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Subchapter 15D and include a form for demanding payment, which form shall have
a request for certification of the date that beneficial ownership of the
shares of Common Stock was acquired by the Dissenting Shareholder or the
person on whose behalf the Dissenting Shareholder dissents. The time set for
the receipt of a demand and the Dissenting Shareholder's stock certificates
shall not be less than 30 days from the mailing of the notice. Failure by a
Dissenting Shareholder to timely demand payment and deposit the stock
certificates pursuant to such notice will cause such Dissenting Shareholder to
lose all right to receive payment of the fair value of his or her shares of
Common Stock. All mailings to the Company are at the risk of the dissenter.
However, the Company recommends that the Notice of Intention to Dissent, the
Demand Form and the holder's stock certificates be sent by certified mail. If
the Reorganization has not been effected within 60 days after the date set for
demanding payment and depositing stock certificates, the Company shall return
any stock certificates that have been deposited. The Company, however, may at
any later time send a new notice regarding demand for payment and deposit of
stock certificates with like effect.
Payment of Fair Value of Shares of Common Stock. Promptly after the
Effective Time, or upon timely receipt of demand for payment if the
Reorganization has already been effected, the Company shall either remit to
Dissenting Shareholders who have made demand and deposited their stock
certificates the amount the Company estimates to be the fair value of the
shares of Common Stock or give written notice that no remittance will be made
under Section 1577 of the PBCL. Such remittance or notice shall be accompanied
by (i) the Company's closing balance sheet and statement of income for a
fiscal year ending not more than 16 months prior to the date of remittance or
notice, together with the latest available interim financial statements; (ii)
a statement of the Company's estimate of the fair value of the shares of
Common Stock; and (iii) a notice of the right of a Dissenting Shareholder to
demand payment or supplemental payment, as the case may be, accompanied by a
copy of Subchapter 15D.
If the Company does not remit the amount of its estimate of the fair value
of the shares of Common Stock, it will return all stock certificates that have
been deposited and may make a notation thereon that a demand for payment has
been made. If shares carrying such notation are thereafter transferred, each
new stock certificate issued therefor will bear a similar notation, together
with the name of the original dissenting holder or owner of such shares. A
transferee of such shares will not acquire by such transfer any rights in the
Company other than those which the original dissenter had after making demand
for payment of their fair value.
Estimate by Dissenting Shareholder of Fair Value of Shares of Common
Stock. If a Dissenting Shareholder believes that the amount estimated or paid
by the Company for his or her shares of Common Stock is less than their fair
value, the Dissenting Shareholder may send to the Company his or her own
estimate of the fair value, which shall be deemed a demand for payment of the
amount of the deficiency. If the Dissenting Shareholder does not file his or
her own estimate of the fair value within 30 days after mailing such
remittance or notice by the Company, the Dissenting Shareholder will be
entitled to no more than the amount estimated in the notice or remitted by the
Company.
Valuation Proceedings. Within 60 days after the latest of (i) the Effective
Time, (ii) timely receipt of any demands for payment and (iii) timely receipt
of any Dissenting Shareholder estimates of fair value, if any demands for
payment remain unsettled, the Company may file in court an application for
relief requesting that the fair value of the shares of Common Stock be
determined by the court. Each Dissenting Shareholder whose demands have not
been settled will be made a party to the proceeding and will be entitled to
recover the amount by which the fair value of such Dissenting Shareholder's
shares of Common Stock is found to exceed the amount, if any, previously
remitted. Such Dissenting Shareholder will also be entitled to interest on
such amount from the Effective Time until the date of payment. There is no
assurance, however, that the Company will file such an application. If the
Company fails to file an application within the 60-day period, any Dissenting
Shareholder who has not settled his or her claim may do so in the Company's
name within 30 days after the expiration of the 60-day period. If no
Dissenting Shareholder files an application within such 30-day period, each
Dissenting Shareholder who has not settled his or her claim will be paid no
more than the Company's estimate of the fair value of the shares of Common
Stock and may bring an action to recover any amount not previously remitted.
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Costs and Expenses of Valuation Proceedings. The costs and expenses of any
valuation proceeding, including the reasonable compensation and expenses of
any appraiser appointed by the court, will be determined by the court and
assessed against the Company, except that any part of such costs and expenses
may be assessed as the court deems appropriate against all or some of the
Dissenting Shareholders whose action in demanding supplemental payment is
found by the court to be dilatory, obdurate, arbitrary, vexatious or in bad
faith. The court may also assess the fees and expenses of counsel and experts
for any or all of the Dissenting Shareholders against the Company if it fails
to comply substantially with Subchapter 15D or acts in a dilatory, obdurate,
arbitrary or vexatious manner or in bad faith. The court may also assess any
such fees or expenses incurred by the Company against any Dissenting
Shareholder if such Dissenting Shareholder is found to have acted in a
dilatory, obdurate, arbitrary or vexatious manner or in bad faith. If the
court finds that the services of counsel for any Dissenting Shareholder were
of substantial benefit to the other Dissenting Shareholders and should not be
assessed against the Company, it may award to such counsel reasonable fees to
be paid out of the amounts awarded to the Dissenting Shareholders who were
benefited.
Under the PBCL, a shareholder of the Company has no right to obtain, in the
absence of fraud or fundamental unfairness, an injunction against the
Reorganization, nor any right to valuation and payment of the fair value of
the holder's shares because of the Reorganization, except to the extent
provided by the dissenters' rights provisions of Subchapter 15D. The PBCL also
provides that absent fraud or fundamental unfairness, the rights and remedies
provided by Subchapter 15D are exclusive.
The foregoing description of dissenters' rights under Subchapter 15D should
be read in conjunction with Exhibit D to this Proxy Statement, and is
qualified in its entirety by the provisions of Subchapter 15D.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon information provided by management of
the Company, the Code, existing and proposed regulations thereunder, reports
of congressional committees, judicial decisions and current administrative
rulings and practices. Any of these authorities could be repealed, overruled
or modified at any time after the date hereof. Any such change could be
retroactive and, accordingly, could modify the tax consequences discussed
herein. No ruling from the Internal Revenue Service with respect to the
matters discussed herein has been requested and there is no assurance that the
Internal Revenue Service would agree with the conclusions set forth herein.
This discussion is for general information only and does not address the
federal income tax consequences that may be relevant to particular
shareholders in light of their personal circumstances or to certain types of
shareholders (such as dealers in securities, insurance companies, foreign
individuals and entities, financial institutions and tax-exempt entities) who
may be subject to special treatment under the federal income tax laws. This
discussion also does not address any tax consequences under state, local or
foreign laws.
Neither the Company nor any of its shareholders, other than shareholders who
receive payment for their shares as a result of the exercise of dissenters'
rights, will recognize gain or loss for federal income tax purposes as a
result of the Reorganization. Each shareholder's adjusted tax basis in the
Reading Entertainment Common Stock received in the Reorganization will be
equal to that shareholder's adjusted tax basis in the Common Stock or Class A
Common Stock exchanged therefor. Each shareholder's holding period with
respect to Reading Entertainment Common Stock received in the Reorganization
will include the period during which the Common Stock or Class A Common Stock
for which it was exchanged was held, provided that such Common Stock or Class
A Common Stock was held as a capital asset.
Any receipt of cash by a holder of Common Stock in respect of the exercise
by such holder of dissenters' rights will be a taxable transaction for federal
income tax purposes and may also be a taxable transaction under applicable
state, local and other tax laws. For federal income tax purposes, each holder
of Common Stock who receives such payment will generally recognize gain or
loss equal to the difference between the amount of cash received by such
shareholder and such shareholder's tax basis in such shares. Gain or loss
recognized will be
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treated as a long-term capital gain or loss if such shares of Common Stock are
held as capital assets and have a holding period of more than one year at the
Effective Time.
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE REORGANIZATION OR THE EXERCISE OF
DISSENTERS' RIGHTS, INCLUDING THE APPLICABILITY OF ANY STATE, LOCAL OR FOREIGN
TAX LAWS, CHANGES IN APPLICABLE TAX LAWS AND ANY PENDING OR PROPOSED
LEGISLATION.
ACCOUNTING TREATMENT AND FINANCIAL STATEMENTS
For financial reporting purposes, the Reorganization will be treated as a
reorganization of affiliated entities, with all assets and liabilities of the
Company recorded on the books of Reading Entertainment at their historical
cost basis. See "Unaudited Pro Forma Consolidated Financial Statements" for
pro forma financial statements of Reading Entertainment giving effect to the
Reorganization and the transactions contemplated by the Exchange Agreement.
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STOCK PROPOSAL
GENERAL
The Board of Directors of the Company, based in part on the unanimous
recommendation of the Independent Committee and the opinion of the Independent
Committee's financial advisor described below, has unanimously approved the
Exchange Agreement and the Stock Transactions.
VOTE REQUIRED
The Company is submitting the Stock Transactions for approval of
shareholders in accordance with the Company's listing agreements with
Nasdaq/NMS and the Philadelphia Exchange, which, among other things, generally
require shareholder approval of a transaction or series of transactions which
involve the acquisition of assets by the Company and the present or potential
issuance of shares having in excess of 20% of the voting power of the shares
outstanding prior to such transactions, or more than 5% if an officer,
director or substantial shareholder has a 5% or greater interest in the assets
to be so acquired. Approval of the Stock Transactions requires the affirmative
vote of a majority of the votes cast by the holders of the Common Stock and
Class A Common Stock, voting together as a single class. Approval of the Stock
Transactions will also constitute approval of certain actions which may occur
as a result of the Stock Transactions, including the issuance of shares of
Reading Entertainment Common Stock on conversion of the Convertible Preferred
Stock or on exercise by Citadel of certain rights to require Reading
Entertainment to acquire Citadel's assets in exchange for Reading
Entertainment Common Stock, as well as the repurchase of shares of Convertible
Preferred Stock on exercise by the holders of the Series A Preferred Stock or
Reading Entertainment of certain rights to be granted to them. Pursuant to the
Exchange Agreement, Craig has agreed to vote all of the shares of Class A
Common Stock held by it in favor of approval of the Stock Transactions. If all
such shares are so voted, the Stock Transactions will be approved. No
additional votes will be required to adopt such proposal.
THE BOARD RECOMMENDS A VOTE IN FAVOR OF APPROVAL OF THE STOCK TRANSACTIONS.
BACKGROUND OF THE EXCHANGE AGREEMENT
Authorization of Development of Stock Transaction Plan. Over the past three
years, the Company has focused its efforts on the Beyond-the-Home segment of
the entertainment industry, directing its attention principally to pursuing
opportunities in the cinema exhibition business. The Board of Directors and
management believe that there are significant opportunities in this market,
but that, to reasonably achieve them, the Company needs to substantially
increase its capital base and to simplify the corporate structures which it
has to date found necessary to utilize in pursuing certain of such
opportunities. The Stock Transactions have been developed to achieve these
goals of significantly increasing the Company's capital base while
simultaneously simplifying its corporate structure (by eliminating the need
for joint ventures with its affiliates) and relationships with its publicly
traded affiliates.
At meetings held on May 23, 1996, management presented to the Company's
Board of Directors and the Craig Board of Directors a business plan for the
continued development and expansion of the Company's Beyond-the-Home
Entertainment business. That report concluded that, while the Company
currently has sufficient funding available to meet its current commitments,
management believes that a plan to continue to expand the Company's business
to take advantage of the various opportunities that management has identified
as reasonably available to the Company would require significant additional
capital. The report further recommended that the Company should consider
looking to its affiliates, Craig and Citadel, as possible sources of such
capital. See "Use of Craig Assets and Citadel Proceeds" below, "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" in the 1995 Annual Report and
"Item 2. Management's Discussion and Analysis of Financial Condition and
Results of
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Operations--Liquidity and Capital Resources" in the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996.
Following these presentations, the Board of Directors of each of the Company
and Craig authorized and directed the managements of the Company and Craig to
work together to develop one or more proposals for the consolidation of the
assets of the three companies. Subsequently, the Board of Directors of Citadel
authorized and directed its management to cooperate with the Company and Craig
in these efforts. Each of the Company, Craig and Citadel formed an independent
committee comprised entirely of independent members of its board of directors.
The independent committees, in turn, retained legal and financial advisors to
advise the committees and to assist the committees in evaluating the plans and
proposals developed by management as a result of these cooperative efforts.
The Stock Transactions are the result of the efforts of the managements of the
Company, Craig and Citadel, as negotiated, reviewed and ultimately recommended
to the full Boards of Directors by the independent committees. See "Committee
and Board Proceedings" and "Recommendations of the Independent Committee and
the Board of Directors."
Development of the Beyond-the-Home Business Plan. In 1993, the Company
determined to focus its activities on the Beyond-the-Home segment of the
entertainment industry. That year, the Company retained Robert Smerling, the
former head of what is now SONY Theatres, to head up its efforts to enter the
cinema exhibition market. After pursuing several possible entres into this
market, in August 1994 the Company acquired Cine Vista, a Puerto Rico based
theatre circuit which the Company has grown to 44 screens, with an additional
24 screens under development (including six replacement screens). Since that
time, the Company has also explored other possible theatre acquisitions and
development opportunities in Latin America.
From late 1994 through mid 1995, the Company focused on the possible
acquisition from Credit Lyonnais of its 400 screen MGM United Kingdom Theatre
Circuit ("MGMUK Cinemas"). Although the Company was able to acquire
commitments from several banks to finance the acquisition and, after several
rounds of bidding, was selected to enter into exclusive negotiations with
Credit Lyonnais for MGMUK Cinemas, the Company ultimately determined, after
completion of due diligence, that the price demanded by Credit Lyonnais was
excessive and determined not to proceed further with the transaction. Due to
the size of the acquisition, the Company found it necessary to form a
syndicate of equity investors (which included Craig) in order to pursue this
opportunity.
In mid 1995, the Company shifted its focus from the United Kingdom to
another English speaking market with characteristics analogous to those found
in England--Australia. Since that time, the Company has retained a well-
qualified group of Australian executives to guide the Company's entre into
this market, and has either acquired, leased or entered into letters of intent
with respect to several potential mutiplex sites in Australia. In light of the
magnitude of the undertaking and the opportunity, the Company again found it
advisable to joint venture with Craig to provide the capital necessary to
reasonably support its activities. In November 1995, the Company formed, on a
50/50 basis with Craig, Reading International to pursue the development of
multiplex cinemas in Australia. In March 1996 Reading entered into the Capital
Funding Agreement with Craig and CMI to provide, in the aggregate, up to $100
million in capital to that venture, again on a 50/50 basis. See "Election of
Directors--Certain Transactions."
Since the Australian market is currently dominated by two exhibitors, each
of whom has ties to major shopping center owners/developers, and since
Australia as a matter of governmental land use policy has historically favored
the development of entertainment activities in connection with city centers
and established retail and shopping center areas and disfavored the
development of entertainment activities in suburban areas or as stand alone
activities, Reading International has encountered staunch opposition to its
business plan of building large multiplex cinemas as part of free standing
entertainment complexes and not as part of existing shopping center
developments. However, the Company continues to believe that the Australian
market is attractive, and that, if well capitalized, and with its experienced
executives, Reading International will ultimately be able to develop complexes
that will be more attractive to consumers than existing facilities in that
market. While Reading International still faces substantial land use planning
and permitting battles, and while no
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assurance can be given that Reading International will be successful in its
efforts to break into the Australian market, Reading International does
currently have under development initiatives representing more than 65
screens, located in the principal urban centers of Australia.
Reading International's principal competitors in Australia are well
established and well financed. Village Roadshow Ltd. had a publicly reported
net worth of approximately $385 million at June 30, 1995. The Greater Union
organization does separately not publish financial reports, but its parent,
Amalgamated Holdings, had a publicly reported net worth of approximately $185
million at June 30, 1995. Hoyts Cinemas recently completed a public offering,
increasing its net worth to approximately $170 million.
In late 1995, the Company also entered into negotiations with the Samuel
Goldwyn Company ("SGC") concerning the acquisition of SGC's Landmark theatre
circuit ("Landmark"). With, at that time, approximately 140 screens, Landmark
was and continues to be the largest cinema chain focusing on the specialty
film market. While the Company made what it believed to be good progress in
negotiating an acquisition of Landmark and completed substantial due
diligence, SGC ultimately decided to sell all of its assets (including certain
film and television library and production assets as to which the Company had
no interest) to a single buyer--Metromedia Company ("Metromedia"). In July
1996, Metromedia completed its acquisition of SGC.
In August 1996, the Company, through AFC, acquired an 83.3% interest in the
Angelika, a multiplex theatre located in New York City, which management
believes to be the premier specialty theatre in the United States. See
"Election of Directors--Certain Transactions." In 1995, the Angelika had gross
revenues of approximately $7.4 million. See the audited and unaudited
financial statements of the Angelika attached as Exhibit N to this Proxy
Statement. The Company believes that, due to its position in the New York
market, the Angelika is well known and enjoys a good reputation with both
suppliers and patrons of specialty film product. The Company intends to
develop additional specialty theatres on the model of the Angelika (which
includes both a multiplex cinema and cafe operations) in a number of urban
areas, and is currently exploring sites in a number of cities.
Relationship among the Company, Craig and Citadel. Since 1989, Craig has
been the principal controlling shareholder of the Company. As of the date of
this Proxy Statement, Craig owns 2,610,826 shares of the Company's Class A
Common Stock, representing approximately 52.5% of the combined Common Stock
and Class A Common Stock. Also, since 1991, the Chairman of the Board of Craig
has been the Chairman of the Board and principal executive officer of the
Company, and the President of Craig has been the President and a director of
the Company. Until June 1996, when the composition of the Boards of the three
companies was modified to alleviate certain conflicts of interest in the
context of negotiating the transaction which ultimately became the Stock
Transactions, five of the six directors of Craig constituted five of the eight
directors of the Company.
As of the date of this Proxy Statement, the Company owns 1,564,473 shares of
Citadel Common Stock, representing approximately 26.1% of the outstanding
shares of Citadel Common Stock and approximately 21.3% of the aggregate voting
power of all outstanding shares of Citadel's capital stock. Also as of the
date of this Proxy Statement, Craig owns 1,329,114 shares of Citadel Preferred
Stock (representing approximately 18.1% of the aggregate voting power of all
outstanding shares of Citadel's capital stock) and the Citadel Warrant to
purchase 666,000 shares of Citadel Common Stock (at an exercise price of $3.00
per share). The Company also holds the 1996 Option to purchase the Citadel
Preferred Stock and, under certain circumstances, the Citadel Warrant from
Craig. See "Election of Directors--Certain Transactions" and "Item 1.
Business--Description of Business--Subsequent Event" in the 1995 Annual
Report. Without giving effect to the conversion of the Citadel Preferred Stock
or the exercise of the Citadel Warrant, the Company and Craig together hold
approximately 39.5% of the aggregate voting power of all outstanding shares of
Citadel's capital stock. If the Citadel Preferred Stock were converted into
Citadel Common Stock and the Citadel Warrant were exercised, the Company and
Craig could hold over a majority of the aggregate voting power of such capital
stock (depending on the market price of the Citadel Common Stock, since the
conversion price of the Citadel Preferred Stock is equal to a 60-trading day
average of the market price of the Citadel Common Stock). However, if the
conversion price of the Citadel Preferred Stock is less than $3.00 per share,
Citadel has the right, on exercise of the conversion right, to redeem the
Citadel Preferred Stock at its stated value plus accrued and unpaid dividends
plus a premium. At September 30, 1996, the conversion price was approximately
$2.49.
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There is substantial overlap among the managements and Boards of the
Company, Craig and Citadel. The Chairman of the Board of the Company is also
the Chairman of the Board of Craig and Citadel. The President of the Company
is also the President and a director of Craig and the Vice Chairman of the
Board and the Principal Accounting Officer, Secretary and Treasurer of
Citadel. The Chairman and President of the Company and of Craig are also two
of the four directors of Citadel. Until the realignment of the memberships of
the various boards as described above, three of the five directors of Citadel
were also directors of Craig. Also, Citadel, through its President and Chief
Executive Officer, provides consulting services to, and is, in effect, the
principal United States real estate advisor to, the Company and Craig with
respect to cinema development matters.
Citadel is a company in transition. In August 1994, Citadel's principal
asset--a Southern California based savings and loan association--was
recapitalized, as a result of which Citadel's interest in that association was
reduced from 100% to essentially a 16% non-voting equity interest. Since the
recapitalization, Citadel has focused on the disposition of the remainder of
its interest in that association, the resolution of the various liabilities
remaining from or pertaining to the period during which it was the parent
holding company for that association, the management of a limited portfolio of
commercial properties which were previously owned by the association, and the
review of its options with respect to the development of a future business
plan. As of June 30, 1996, Citadel's assets totalled approximately $35
million, consisting principally of cash in the amount of approximately $19.2
million and four pieces of commercial real estate with a book value of
approximately $14.9 million. Citadel has subsequently sold one property with a
book value of $.04 million.
General Overview of the Stock Transactions. In the Stock Transactions, CAC
will contribute to Reading Entertainment, in exchange for 70,000 shares of
Series A Preferred Stock and certain contractual rights, cash in the amount of
$7 million.
Craig will contribute to Reading Entertainment, in exchange for 125,098
shares of Series B Preferred Stock and 563,210 shares of Reading Entertainment
Common Stock, the 50% Cinemas Interest in Reading International and the
1,329,114 shares of Citadel Preferred Stock. CMI will contribute to Reading
Entertainment, in exchange for 424,902 shares of Series B Preferred Stock and
1,912,980 shares of Reading Entertainment Common Stock, the 693,650 shares of
Stater Stock.
The Convertible Preferred Stock will have a liquidation preference of $100
per share (the "Stated Value") and bear a cumulative dividend of 6.5%, payable
quarterly. The Series A Preferred Stock will rank senior to the Series B
Preferred Stock with respect to dividends and distributions on liquidation.
The Series A Preferred Stock will be convertible, at any time after 18 months
after the closing of the Stock Transactions (the "Closing"), or earlier after
a Change in Control (as defined below), into shares of Reading Entertainment
Common Stock at a conversion price of $11.50 per share. The holders of the
Series A Preferred Stock will have the right, during the 90-day period
beginning five years after the Closing (provided Citadel has not exercised the
asset put option described below), to require Reading Entertainment to
repurchase the shares of Series A Preferred Stock for their aggregate Stated
Value plus accrued dividends. In addition, if Reading Entertainment shall fail
to pay dividends on the Series A Preferred Stock for four quarters, the
holders of the Series A Preferred Stock will have the right to require Reading
Entertainment to repurchase such shares, at the same redemption price,
provided that such right may not be exercised prior to 18 months after the
Closing. Finally, following a Change in Control (but not after the fifth
anniversary of the Closing), Citadel will have the right to require Reading
Entertainment to repurchase the shares of Series A Preferred Stock owned by
Citadel and its affiliates for the same redemption price plus a premium.
Reading Entertainment will have certain rights to require conversion of the
Series A Preferred Stock and the right under certain conditions to redeem the
Series A Preferred Stock at the Stated Value plus accrued and unpaid dividends
plus a premium in certain cases. The Series B Preferred Stock will be
convertible, at any time after 18 months after the Closing, into shares of
Reading Entertainment Common Stock at a conversion price of $12.25 per share.
Reading Entertainment will have the right to redeem the Series B Preferred
Stock after five years at the Stated Value plus accrued and unpaid dividends
plus a premium in certain cases. Holders of each series of Convertible
Preferred Stock will be entitled to 9.64 votes per share held on all matters
brought to a vote of the shareholders of Reading Entertainment, voting as a
single class with the holders of the Reading Entertainment Common Stock and
the other series of Convertible Preferred Stock.
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In addition, Citadel will have the option, exercisable at any time until 30
days after Reading Entertainment files its Annual Report on Form 10-K for the
year ending December 31, 1999, to exchange all or substantially all of its
assets for shares of Reading Entertainment Common Stock, subject to certain
limitations. Also, Citadel and CAC will have certain demand and piggy-back
registration rights with respect to the Reading Entertainment Common Stock
issuable on conversion of the Series A Preferred Stock or on such asset
exchange. Approval of the Stock Transactions by shareholders will also
constitute approval of the issuance of shares of Reading Entertainment Common
Stock on conversion of the Convertible Preferred Stock or on exercise by
Citadel of the foregoing rights, as well as the repurchase of shares of Series
A Preferred Stock on exercise by the holders of the Series A Preferred Stock
or Reading Entertainment of the foregoing rights. In addition, the Exchange
Agreement provides that Reading Entertainment will reimburse Citadel and CAC
for their reasonable out-of-pocket costs with respect to the Stock
Transactions, up to a maximum of $280,000. See "The Exchange Agreement."
The foregoing provisions of the Exchange Agreement, in essence, grant to
Citadel the ability to review the implementation by Reading Entertainment of
its Beyond-the-Home Entertainment business plan and, if it approves of the
progress made by Reading Entertainment, to make a further investment in that
business through the exercise of its option to exchange all or substantially
all of its assets for Reading Entertainment Common Stock. If Citadel does not
approve of Reading Entertainment's progress, it can (i) sell its position
privately, (ii) through the exercise of its conversion and registration
rights, beginning 18 months after the Closing, sell its position publicly in
the public market for Reading Entertainment Common Stock, or (iii) for 90 days
beginning five years after the Closing, exercise its right to require Reading
Entertainment to repurchase the Series A Preferred Stock. In the interim,
while it continues to address its contingent liabilities and determine its
best course of action with respect to a future business plan, Citadel can
offer its stockholders the potential for equity returns through an
investment--via the Series A Preferred Stock or the underlying Reading
Entertainment Common Stock--in the Beyond-the-Home sector of the entertainment
industry.
Upon completion of the Stock Transactions, Reading Entertainment will have,
on a consolidated basis, assets with a book value of approximately $156
million, including cash of approximately $54 million, and will be able to
eliminate the cumbersome limited liability company structure currently
required with respect to its development activities in Australia. The Capital
Funding Agreement will be terminated. It is anticipated that the Craig Assets
will either be sold or pledged to acquire funds for the expansion of the
Company's Beyond-the-Home Entertainment business and that a substantial
portion of the Craig Assets or the proceeds of a disposition thereof may be
contributed to one or more of the Company's Australian affiliates to increase
their capital and support Australian-based borrowings. In the view of
management, Reading Entertainment will be a substantially stronger and easier
to understand company after the Stock Transactions than the Company is today
and will be better situated to provide for the current and future funding
needed to implement its Beyond-the-Home Entertainment business strategy.
Committee and Board Proceedings. At its May 23, 1996 meeting, the Board of
Directors of the Company formed the Independent Committee, consisting of John
W. Sullivan, Albert J. Tahmoush, and Gregory R. Brundage. Messrs Sullivan and
Tahmoush have been directors of the Company for more than the past 15 years,
and Mr. Sullivan and his family collectively own approximately 231,000 shares,
representing approximately 4.7%, of the Company's Class A Common Stock. Mr.
Brundage has been an investment banker for more than the past 15 years, most
recently as a Managing Director of Furman Selz Incorporated. Prior to Furman
Selz, Mr. Brundage was Managing Director and Office Manager of the Investment
Banking Division of PaineWebber Incorporated's Los Angeles office. Mr.
Brundage and such investment banking firms have provided and continue to
provide services from time to time to Stater; accordingly, in addition to his
generalized knowledge and expertise with respect to investment banking and
capital formation matters, Mr. Brundage brought to the Independent Committee
specialized knowledge and expertise concerning Stater and the Stater Stock.
None of the members of the Independent Committee is affiliated with the
Company, Craig or Citadel or any of their affiliates (other than in his
capacity as a director or stockholder of the Company). Each member of the
Independent Committee has received the sum of $10,000 for his service on the
Independent Committee through August 15, 1996.
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The Board authorized and directed the Independent Committee to review any
proposal presented by management of the Company or any other party; to
negotiate the terms of any proposed transaction; to evaluate the fairness of
any consideration to be received or paid by the Company in, and the other
terms of, any such transaction; and to make a recommendation to the Board with
respect to such proposal. The Board did not authorize the Independent
Committee to seek transactions such as the sale of the Company or any
substantial part of its assets, since the purposes of the Independent
Committee were to negotiate and evaluate proposals to increase the capital of
Reading, not to terminate the existence of Reading as a publicly traded
entity.
Thereafter, management of the Company began to evaluate various possible
transactions and the consequences of each to the Company. In late June 1996,
management informed the Independent Committee that management would shortly be
in a position to present alternatives to the Independent Committee and discuss
with its members the consequences of such alternatives. Accordingly, on June
25, 1996, the Independent Committee met. At that meeting, the Independent
Committee reviewed information provided by potential financial and legal
advisors, and subsequently retained Berwind Financial Group, L.P. ("Berwind")
as its financial advisor and Dechert Price & Rhoads ("Dechert Price") as legal
counsel. Neither firm had any prior relationship with the Company, Craig,
Citadel, or Mr. Cotter, except that Dechert Price represented Mr. Cotter and
an affiliate in connection with a 1988 acquisition of Common Stock of the
Company.
At meetings (telephonic and in person) from July 9 through August 9, 1996,
the Independent Committee met with Berwind and Dechert Price, as well as with
management and counsel to the Company, to discuss the alternatives presented
by management and the preliminary terms thereof. The Independent Committee
held approximately nine meetings during this period. In addition, the
Independent Committee, together with Berwind, Dechert Price and management,
met with the members of the independent committees of directors established by
the Boards of Directors of Craig and Citadel (the "Craig Committee" and the
"Citadel Committee," respectively) and their respective advisors, and
negotiated the terms of the potential transactions. There were also a number
of meetings and telephone discussions between representatives of the three
committees and their advisors.
At its August 9, 1996 meeting, the Independent Committee reviewed a draft
letter of intent that summarized substantially the terms ultimately embodied
in the definitive Exchange Agreement. At that meeting, the Independent
Committee considered a number of factors, including those described below, and
Berwind expressed its preliminary oral opinion that the terms of the Exchange
Agreement, taken as a whole, are fair, from a financial point of view, to the
shareholders of the Company. After extensive consideration, the Independent
Committee unanimously approved the terms of a non-binding letter of intent
that summarized the terms of the Stock Transactions and determined to
recommend that the Board of Directors approve the Stock Transactions in lieu
of other alternatives.
At a meeting on August 12, 1996, the following business day, the Board of
Directors received the report and recommendation of the Independent Committee
and reviewed the terms of the draft letter of intent and a draft of the
Exchange Agreement. The Board of Directors unanimously (with one director
absent) approved the Independent Committee's recommendation of such terms,
authorized the execution of the letter of intent, and approved the Exchange
Agreement subject to management's approval of the definitive terms of the
Exchange Agreement. Later that day, the Company, Craig and Citadel entered
into the letter of intent, and the following business day the companies issued
a press release announcing the letter of intent.
On September 4, 1996, after completion of the definitive Exchange Agreement
and related documents, the parties executed the Exchange Agreement and issued
a press release announcing such signing.
RECOMMENDATIONS OF THE INDEPENDENT COMMITTEE AND THE BOARD OF DIRECTORS
The Board of Directors of the Company, based in part on the unanimous
favorable recommendation of the Independent Committee and the opinion of
Berwind, has determined that the Exchange Agreement and the Stock Transactions
are fair and in the best interests of the Company and its shareholders and has
unanimously approved and adopted the Exchange Agreement. In recommending the
Exchange Agreement, the Independent Committee
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and the Board of Directors consulted with the Company's management, as well as
with the Company's legal counsel, Berwind, and (in the case of the Independent
Committee) Dechert Price, and considered a number of factors, including
without limitation the following:
1. The Company's principal purpose and objective with respect to the
Stock Transactions of enabling Reading Entertainment to secure the
substantial capital needed to compete in and to expand Reading
Entertainment's Beyond-the-Home Entertainment business on terms more
favorable to the Company than the Company believes would otherwise
currently be available to it (if at all) in the market.
2. The advice of Berwind that the Company's ability to raise equity in
the public market would be limited and more costly to the Company than the
Stock Transactions. Further, Berwind advised that any equity raising
activity would need to be strongly supported by Craig. Craig advised the
Company that, for it to participate significantly in capital raising for
the Company, Craig's contribution would need to be in the form of assets,
rather than cash, and that it would view as particularly attractive a
transaction structured to be tax-free to Craig.
3. The Board's belief, based on the directors' knowledge of the Company's
assets, businesses, financial condition, results of operations and
prospects, that the Exchange Agreement provides a fair price for the
Convertible Preferred Stock and Reading Entertainment Common Stock.
4. The Board's belief, based on the directors' knowledge of the Craig
Assets, including the assets, business, financial condition, results of
operations and prospects of Stater, Citadel, and Reading International,
that the Exchange Agreement provides a fair valuation of the Craig Assets.
5. The opinion of Berwind to the effect that, as of the date of its
written opinion and based upon and subject to certain matters as stated in
its written opinion, the terms of the Exchange Agreement, taken as a whole,
are fair, from a financial point of view, to the shareholders of the
Company. See "Opinion of Financial Advisor."
6. The determination by the Independent Committee, Berwind and the Board,
after considering a variety of alternative transactions, including a public
offering or a rights offering, that no other transaction met the Company's
goals as well as the Stock Transactions.
7. That, although the equity interest of Craig in the Company would
substantially increase, the Stock Transactions would not constitute a sale
of control or other change of control since Craig has been the controlling
stockholder of the Company for more than seven years, currently owning
approximately 52.5% of the outstanding common equity of the Company.
8. That, although the Company currently has approximately $163 million in
NOL's, approximately $123 million of such amount will expire if not
utilized by December 31, 1996. In considering the value of the Stater Stock
to the Company, the Independent Committee specifically considered the fact
that Reading Entertainment will be receiving a carryover basis in such
shares, and that any gain from a taxable disposition of such shares prior
to December 31, 1996 should be able to be offset against a portion of such
otherwise expiring NOL's.
9. That, as discussed under "Use of Craig Assets and Citadel Proceeds,"
the Company expects that Reading Entertainment will be able to utilize the
Stater Stock, or the proceeds of the disposition of the Stater Stock, to
support the expansion of the Beyond-the-Home Entertainment business.
10. That, in considering the value of the Series B Preferred Stock and
Reading Entertainment Common Stock to be issued to CMI, the gain to CMI on
the disposition of its Stater Stock would not be eliminated but only
deferred and would be recognized on a taxable disposition of the Series B
Preferred Stock and Reading Entertainment Common Stock received by CMI
pursuant to the Exchange Agreement.
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In view of the wide variety of factors considered in connection with their
evaluation of the Exchange Agreement and the Stock Transactions, the
Independent Committee and the Board of Directors did not find it practicable
to, and did not, quantify or otherwise assign relative weights to the
individual factors considered in reaching its determination.
OPINION OF FINANCIAL ADVISOR
Berwind has acted as financial advisor to the Independent Committee in
connection with the Exchange Agreement. In connection with the approval of the
Exchange Agreement by the Independent Committee and Board of Directors,
Berwind provided the directors of the Company with its oral opinion to the
effect that, as of the date of such opinion and based upon the matters
considered in rendering such opinion, the terms of the Exchange Agreement,
taken as a whole, are fair, from a financial point of view, to the
shareholders of the Company. A copy of its written opinion, which sets forth
the procedures followed, assumptions made, areas of reliance upon others and
other matters considered in connection with rendering such opinion, is set
forth as Exhibit E to this Proxy Statement and should be read carefully in its
entirety. As set forth therein, Berwind relied, without independent
verification, on the completeness and accuracy of all financial and other
information reviewed by it for purposes of rendering such opinion and has made
no independent evaluation or appraisal of the assets of the Company, Craig,
Citadel or Stater. The Committee's choice of Berwind was based upon, among
other things, Berwind's expertise, the professional nature of its
presentation, its availability and its fee arrangement. Berwind, as part of
its investment banking business, is regularly engaged in the valuation of
assets, securities and companies in connection with various types of asset and
security transactions.
Pursuant to an agreement between the Company, the Committee and Berwind,
Berwind is to receive a fee of $150,000, of which $25,000 was paid upon
engagement of Berwind and $125,000 was paid upon submission of its written
fairness opinion. In addition, Berwind is to receive a financial advisory fee
of $7,500 per month for the period from its engagement in June 1996 to the
earlier of the closing of the Stock Transactions and 18 months after its
engagement, with a minimum period of six months. Berwind is also entitled to
reimbursement of reasonable and authorized out-of-pocket expenses. Also, the
Company has agreed to indemnify Berwind against certain liabilities relating
to or arising out of its engagement.
Berwind was retained to render an opinion as to the fairness of the Exchange
Agreement, taken as a whole, from a financial point of view, to the public
shareholders of the Company and did not recommend the amount of consideration
to be paid. In arriving at its opinion, Berwind considered, among other
factors, the historical financial performance, current financial condition,
future prospects, stock market performance, comparisons with selected
comparable companies, selected comparable merger and acquisition transactions,
discounted cash flow analysis, liquidation analysis, and the financial terms
and conditions of the Exchange Agreement. No limitations were imposed by the
Company or the Independent Committee with respect to the opinion rendered by
Berwind, except that Berwind was not authorized to solicit and did not solicit
other potential investors in the Company. However, as indicated above (see
"Recommendations of the Independent Committee and the Board of Directors"),
Berwind advised the Independent Committee that the Company's ability to raise
equity in the public market would be limited and more costly to the Company
than the Stock Transactions.
INTERESTS OF CERTAIN PERSONS IN THE STOCK TRANSACTIONS; CONFLICTS OF INTEREST
Shareholders should be aware that certain members of the Company's
management and Board of Directors have certain interests which may present
them with actual or potential conflicts of interest in connection with the
Stock Transactions.
James J. Cotter, Chairman of the Board of the Company, is also Chairman of
the Board of each of Craig and Citadel, and is a principal shareholder of
Craig, holding 1,145,864 shares of Craig's common stock ("Craig Common
Stock"), 77,500 shares of Craig's Class A Common preference stock (the "Craig
Class A Stock") and options to acquire 300,000 shares of Craig Common Stock.
S. Craig Tompkins, President and a director of the Company, is President and a
director of Craig, holds 1,000 shares of Craig Class A Stock and options to
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acquire 17,500 shares of Craig Class A Stock, and is the Vice Chairman,
Principal Accounting Officer, Secretary and Treasurer of Citadel. Edward L.
Kane, a director of the Company, was President of Craig from January 1988
through January 1993 and a director of Craig until June 1996. Mr. Kane owns
1,500 shares of Craig Common Stock. In addition, James A. Wunderle, the
Company's Executive Vice President, Chief Operating Officer, Chief Financial
Officer and Treasurer, owns 1,000 shares of Craig Class A Stock.
See "Background of the Exchange Agreement" with respect to Craig's and the
Company's ownership of securities of Citadel.
USE OF CRAIG ASSETS AND CITADEL PROCEEDS
Reading intends to use the Stater Stock, the Citadel Preferred Stock and the
cash proceeds received from CAC in the Stock Transactions to fund the
development of Reading Entertainment's Beyond-the-Home entertainment business.
Currently, the principal components of that business plan are the development
of state of the art multiplex and megaplex cinemas, exhibiting conventional
film product, in Australia and Puerto Rico, and upper-end multiplex cinemas
featuring principally specialty film in the mainland United States.
Reading is considering various alternatives for utilizing the Stater Stock
in the funding of its Beyond-the-Home Entertainment business, the most likely
being the contribution of the Stater Stock to one or more of Reading
Entertainment's Australian affiliates to collateralize Australian Dollar
borrowings. Other alternatives under consideration might include a sale of the
Stater Stock to a third party. While the fair market value of the Stater Stock
was considered by the Independent Committee, Berwind and the Board, prior to
the execution of the Exchange Agreement, no attempt was made to find a buyer
for the Stater Stock and, to date, no broker or other professional has been
retained to assist in such a process. In addition, Stater has the right, which
is currently exercisable, to repurchase the Stater Stock and has advised the
Company that it is considering exercising such right prior to the end of
Stater's 1997 fiscal year in September 1997. A substantial redemption of the
Stater Stock would likely require a material restructuring of Stater's
existing indebtedness, and no assurance can be given that any such redemption
can or will be effected. See "Tax and Accounting Treatment."
Pursuant to the Exchange Agreement, Reading Entertainment has agreed that,
immediately following its receipt of the shares of Citadel Preferred Stock
from Craig, it will deliver such shares to Citadel for an equal number of
shares of a new series of preferred stock of Citadel (the "New Citadel
Preferred Stock;" the term "Citadel Preferred Stock" as used in this Proxy
Statement with respect to a time after the Closing shall mean the New Citadel
Preferred Stock). The terms of the New Citadel Preferred Stock are
substantially identical to the terms of the Citadel Preferred Stock except for
a reduction in the redemption premium and that the holders of the New Citadel
Preferred Stock will not (except on a change in control of Citadel) have the
right to convert the New Citadel Preferred Stock into Citadel Common Stock
during the one-year period commencing on the 15th day following the filing of
Citadel's Annual Report on Form 10-K for the year ending December 31, 1996.
See "The Exchange Agreement--Citadel Preferred Stock." Accordingly, it is
likely that Reading Entertainment will elect to convert the New Citadel
Preferred Stock into Citadel Common Stock prior to the commencement of such
one-year period. The Company's management believes that, in such event, and
provided that at such time the market price of the Citadel Common Stock has
not risen above current levels, it is likely that Citadel will exercise its
right to redeem the New Citadel Preferred Stock for cash, at a premium.
(Citadel will only have such right if the conversion price is then less than
$3.00 per share.) If Reading Entertainment were to exercise the right to
convert the Citadel Preferred Stock at December 31, 1996 and the conversion
price at such time were to be $2.50 per share, Reading Entertainment would
receive either 2,100,000 shares of Citadel Common Stock or approximately $6.2
million in cash. Reading Entertainment may also use the Citadel Preferred
Stock, or any Citadel Common Stock received on such conversion, to secure
borrowings to support its Beyond-the-Home Entertainment Business.
CERTAIN CONSIDERATIONS
In considering the Stock Transactions, shareholders should be aware of the
following considerations, each of which has been reviewed and considered by
the Independent Committee in reaching its unanimous recommendation of the
Exchange Agreement:
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Conflicts of Interest. Certain members of the Company's management,
including its Chairman of the Board and President, are officers, directors,
and shareholders of Craig and officers and directors of Citadel, and Craig is
the principal shareholder of the Company. Consequently, such persons have
interests which may be different from those of the public shareholders of the
Company with respect to the Stock Transactions. See "Interests of Certain
Persons in the Stock Transactions; Conflicts of Interest." The Company
believes it has minimized such conflicts through the activities of the
Independent Committee.
Certain Matters Related to Craig and Citadel. Following completion of the
Stock Transactions, Craig, directly and through CMI, will own approximately
77.4% of the voting power of the outstanding capital stock of Reading
Entertainment. In addition, Citadel, through CAC, will own approximately 5% of
the voting power of the outstanding capital stock of Reading Entertainment.
Since Craig already owns a majority of the voting stock of the Company, and
since the number of publicly owned shares of Reading Entertainment will be the
same as that of the Company, the Company does not believe that such change in
Craig's and Citadel's ownership will adversely affect the market price or
liquidity of the Reading Entertainment Common Stock as compared to that of the
Class A Common Stock. See "Background of the Exchange Agreement." The Company
has received no definitive legal opinion as to Craig's status under the
Investment Company Act of 1940 (the "ICA"). However, in the Exchange
Agreement, Craig has represented that it is not an investment company under
the ICA.
Certain Tax Matters. Reading Entertainment is considering various
alternatives for utilizing the Stater Stock in the funding of its Beyond-the-
Home Entertainment business, including the contribution of the Stater Stock to
one or more of Reading Entertainment's Australian affiliates to collateralize
Australian Dollar borrowings, a sale of the Stater Stock to a third party, or
a possible redemption of the Stater Stock by Stater, each of which would be a
taxable event for federal income tax purposes. Management believes that any
gain recognized by Reading Entertainment on such a transaction would be offset
by the Company's existing NOL's. See "Tax and Accounting Treatment." However,
the amount of NOL's currently carried on the books of the Company has not been
audited by the Internal Revenue Service (the "IRS"), and there can be no
assurance that the full amount of NOL's currently carried on the books of the
Company will be available. In addition, use of the NOL's is subject to certain
limitations, including those resulting from certain changes in the ownership
of the Company. While the transfer restrictions applicable to the Class A
Common Stock, and those which will be applicable to the Reading Entertainment
Common Stock, are intended to minimize the risk of such ownership changes,
ownership changes may have occurred despite or in violation of such
restrictions. In addition, the Code and related case law limit the ability to
use NOL's to offset certain "built-in" gains on contributed property, such as
the gain Reading Entertainment would recognize on the disposition of the
Stater Stock. Although the Company does not believe that such limitations on
the use of its NOL's should apply, there can be no assurance that the IRS
would not take a different position. Also, if the IRS were to determine that
the principal purpose of the Stock Transactions is to make use of the NOL's
and Reading Entertainment could not show otherwise, such use would not be
available. In any such case, the financial position of Reading Entertainment
could be materially adversely affected.
In addition, Reading Entertainment's ability to make use of its NOL's to
offset any gain that would be recognized by it in connection with any taxable
disposition of the Stater Stock may be adversely affected to the extent that
any person or persons increase their ownership of Craig Common Stock to a
level representing an interest of more than 5% of the Reading Entertainment
Common Stock. Neither the Company nor Craig has any power to prevent such an
event.
See "Tax and Accounting Treatment."
Stater Stock. There is no existing market for the Stater Stock. Although
Reading Entertainment will have certain demand and "piggyback" registration
rights with respect to the Stater Stock, there can be no assurance that any
market for the Stater Stock will develop or as to the liquidity of any market
that may develop. If Craig
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should no longer beneficially own the Stater Stock, the holders of the Stater
Stock will not be entitled to certain rights which CMI holds, including the
right to elect a director of Stater, the right to participate in the vote on
the election of other directors of Stater and the right to elect a majority of
the directors of Stater after certain defaults in payment of dividends
(although such holders of the Stater Stock would retain the right to elect two
directors after such a dividend payment default). The Company believes that,
so long as Craig owns a majority of the voting power of Reading
Entertainment's capital stock, Craig will continue to beneficially own the
Stater Stock and Reading Entertainment, as the owner of the Stater Stock, will
retain full voting rights. In addition, Stater has the option to repurchase
the Stater Stock for its liquidation preference plus accrued dividends at any
time until March 8, 2008. An agreement among Stater, Craig, and CMI provides
that, if the holder of the Stater Stock shall determine to sell the Stater
Stock in a public offering, the parties will work together to establish a
mechanism to assure Stater the benefits of such option. Accordingly, there can
be no assurance as to the ability of Reading Entertainment to sell or receive
any value for the Stater Stock or the price at which Reading Entertainment
would be able to sell the Stater Stock. See "Certain Information Concerning
Stater and the Stater Stock."
Citadel Puts. Under the Exchange Agreement, Citadel will have the option,
exercisable at any time until 30 days after Reading Entertainment files its
Annual Report on Form 10-K for the year ending December 31, 1999, to exchange
all or substantially all of its assets (subject to certain limitations) for
shares of Reading Entertainment Common Stock, valued (subject to certain
exceptions) at fixed prices. Such right could impair Reading Entertainment's
ability to raise capital through other means. In addition, under the terms of
the Series A Preferred Stock, the holders of the Series A Preferred Stock
(initially, CAC) will have the option to require Reading Entertainment to
repurchase the shares of Series A Preferred Stock at their Stated Value plus
accrued and unpaid dividends, at any time after five years after Closing or
earlier (but not prior to 18 months after Closing) if Reading Entertainment
shall fail to pay dividends on the Series A Preferred Stock for four quarters.
In addition, if a Change in Control occurs, Citadel will have the right to
require redemption of the shares of Series A Preferred Stock held by it or any
of its affiliates (including CAC) at such price plus a premium. See "The
Exchange Agreement--Asset Put Option" and "The Convertible Preferred Stock--
Redemption."
CERTAIN SHAREHOLDER LITIGATION
On September 18, 1996, an individual shareholder of Reading commenced a
purported class action on behalf of the Company's minority shareholders owning
Class A Common Stock (the "Shareholder Action"), entitled Walter Alphin v.
Reading Company, et. al., in the Philadelphia County Court of Common Pleas.
The complaint in the Shareholder Action (the "Complaint") named the Company,
Craig, former directors of the Company Gerard P. Laheney and Ralph B. Perry
III, and all of the current directors of the Company (other than Gregory R.
Brundage) as defendants. The Complaint alleges, among other things, that (i)
none of the directors of the Company are independent and each was appointed by
James J. Cotter, Craig or those controlled by them; (ii) the resignations of
Messrs. Laheney and Perry from the Board of Directors of the Company, and of
Edward L. Kane from the Board of Directors of Craig, were a sham designed to
give the "appearance" that each is disinterested, and that, in reality, none
of the defendants can exercise independent business judgment or protect the
interests of the Company's minority shareholders; (iii) the Stock Transactions
are "in violation of defendants' fiduciary duties owed" to the holders of the
Class A Common Stock and "in violation of Pennsylvania law," in that the Stock
Transactions lack a valid business purpose and are "designed and intended
solely to minimize the interests of" the holders of the Class A Common Stock
and "dilute their continued equity participation" in the Company, to the
advantage of Craig, Citadel, and their controlling shareholders; (iv) the
Board of Directors of the Company is unable to consider the Stock Transactions
in a way that reflects the "intrinsic value" of the Class A Common Stock; (v)
the defendants other than the Company have breached their fiduciary and other
duties to the purported class in that they have not exercised independent
business judgment, have acted to the detriment of the holders of the Class A
Common Stock in order to benefit defendants, and have participated in a plan
to dilute the interests of such shareholders for no proper business purpose,
particularly in that the investment in the Stater Stock is inconsistent with
the Company's identified business; (vi) the Company's Board of Directors had
"gone through the motions" of appointing the Independent Committee of
"purportedly independent directors"; (vii) the defendants have failed to
disclose the "full extent of the future earnings potential" of the
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Company as well as the value of its assets and the assets to be transferred to
it; and (viii) Craig will benefit unjustly by having its credit rating
upgraded and its balance sheet bolstered. The Complaint seeks preliminary and
permanent injunctive relief to prevent the consummation of the Stock
Transactions or any similar transaction, rescission of the Stock Transactions
if they are consummated, divestiture by the defendants of assets and shares of
the Company they may obtain as a result of the Stock Transactions, and
unspecified damages and other relief.
Reading believes that the allegations of the Complaint are without merit and
intends to vigorously defend itself against the Shareholder Action.
The Shareholder Action is currently in discovery.
THE EXCHANGE AGREEMENT
General. The following summary of the material terms of the Exchange
Agreement is qualified in its entirety by reference to the full text of the
Exchange Agreement, a copy of which (including the Put Agreement (as defined
below) and the terms of the New Citadel Preferred Stock) is attached hereto as
Exhibit F.
Shares to be Issued; Consideration. Pursuant to the Exchange Agreement, at
the Closing, Reading Entertainment will issue 70,000 shares of Series A
Preferred Stock to CAC and grant to Citadel the Asset Put Option (as defined
below) for $7 million in cash. Reading Entertainment will also issue 125,098
shares of Series B Preferred Stock and 563,210 shares of Reading Entertainment
Common Stock to Craig in exchange for the 50% Cinemas Interest in Reading
International and the 1,329,114 shares of Citadel Preferred Stock and 424,902
shares of Series B Preferred Stock and 1,912,980 shares of Reading
Entertainment Common Stock to CMI in exchange for the 693,650 shares of Stater
Stock. Reading Entertainment will pay to Craig and CMI in cash the amount of
any accrued and unpaid dividends as of the Closing on the Citadel Preferred
Stock or Stater Stock, respectively.
Representations and Warranties. In general, Reading Entertainment and the
Company represent and warrant to Craig, CMI, Citadel, and CAC (i) that the
Company and Reading Entertainment are duly organized and in good standing;
(ii) that the Company and Reading Entertainment have authorized, executed and
delivered the Exchange Agreement, subject to approval by the shareholders of
the Company, and that the Exchange Agreement is their binding and enforceable
obligation, subject to customary exceptions; (iii) that the Exchange Agreement
does not conflict with the organizational documents of the Company or Reading
Entertainment, any material obligations to which either is bound, or laws;
(iv) as to the capitalization of the Company and of Reading Entertainment; (v)
that the shares of Reading Entertainment Common Stock and Convertible
Preferred Stock to be issued under the Exchange Agreement or on conversion of
the Convertible Preferred Stock have been duly authorized and will be validly
issued, fully paid and non-assessable, and certain related matters, (vi) that
certain reports filed by the Company under the Exchange Act and other
information furnished by the Company do not contain an untrue statement of a
material fact or an omission of a material fact necessary to make the
statements made, in light of the circumstances under which they were made, not
misleading; (vii) as to the absence of material adverse changes in the assets,
business, financial condition, liabilities, or operations of the Company or
Reading Entertainment; (viii) as to consents which the Company and Reading
Entertainment are required to obtain from governmental authorities in
connection with the Stock Transactions; (ix) as to the absence of certain
litigation; (x) that the Company and Reading Entertainment are in substantial
compliance with laws; (xi) as to the absence of any broker representing the
Company or Reading Entertainment other than Berwind; and (xii) that Reading
Entertainment will acquire the Stater Stock and Citadel Preferred Stock for
investment, with no view towards the sale or distribution of such shares.
Each of Craig, CMI, Citadel, and CAC generally makes representations
comparable to those in clauses (i), (ii), (iii), (viii) and (xi) above. Craig
and CMI also represent that the Craig Assets are held by them free and clear
of any liens or encumbrances, with certain exceptions; that Reading
Entertainment will obtain title to the Craig Assets, free and clear of any
liens or encumbrances, with the same exceptions; that, to their knowledge,
there has been no material adverse change in the financial position of Stater
from that reflected in Stater's
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financial statements for its fiscal year ended September 24, 1995; and that
Craig has no present intention to liquidate or sell CMI or to cause CMI to
sell any of the Reading Entertainment Common Stock or Series B Preferred Stock
to be issued to CMI under the Exchange Agreement. In addition, each of Craig,
CMI, Citadel, and CAC represents and warrants that (i) it is acquiring the
shares of Reading Entertainment Common Stock and Convertible Preferred Stock
to be acquired by it, and the shares of Reading Entertainment Common Stock
underlying the Convertible Preferred Stock, for investment, with no view
towards the sale or distribution of such shares, and (ii) information
furnished by it for inclusion in this Proxy Statement or otherwise in
connection with the Stock Transactions does not contain an untrue statement of
a material fact or an omission of a material fact necessary to make the
statements made, in light of the circumstances under which they were made, not
misleading.
Certain Covenants. The parties to the Exchange Agreement have generally
agreed to use their commercially reasonable efforts to comply with regulatory
and other requirements, including in the case of the Company to hold the
Annual Meeting and consummate the Reorganization. Craig and CMI have also
agreed not to transfer or encumber any of the Craig Assets. Craig has also
agreed to vote all shares of Class A Common Stock held by it in favor of the
Reorganization and the Stock Transactions. The parties have also agreed to
provide each other access to certain information.
Conditions to Closing. The parties' obligations under the Exchange Agreement
are subject to a number of conditions. All parties' obligations are subject to
the approval of the Reorganization and the Stock Transactions by the Company's
shareholders and the consummation of the Reorganization; the receipt of
necessary consents and making of governmental filings; the approval of the
listing of the Reading Entertainment Common Stock on Nasdaq/NMS and the
Philadelphia Exchange; the absence of injunctions or certain government
proceedings; the condition that the opinion of Berwind regarding the Stock
Transactions, described above, not have been withdrawn or modified; and the
absence of dissenters' rights. The parties' obligations with respect to the
exchange with Craig, CMI, or CAC are also subject to the condition that the
exchanges with the other such parties have occurred.
In addition, the Company's and Reading Entertainment's obligations are
subject to the conditions that, as of the Closing, there shall have been no
material adverse change in the assets, business, financial condition, or
results of operations of Stater or Citadel, and that the Reorganization and
the Stock Transactions will not result in a "change of control" under the Code
which would have a material adverse affect on the NOL's of the Company. The
Company's and Reading Entertainment's obligations are also subject to
customary closing conditions including (i) the accuracy in all material
respects at Closing of the representations made by Craig, CMI, Citadel, and
CAC, (ii) the compliance by Craig, CMI, Citadel, and CAC with their covenants
in the Exchange Agreement, and (iii) receipt of customary closing documents,
including instruments transferring certain rights relating to the Craig
Assets, and legal opinions.
Also, the obligations of Craig, CMI, Citadel, and CAC (collectively, the
"Transferors") under the Exchange Agreement are subject to the conditions
that, as of the Closing, there shall have been no material adverse change in
the assets, business, financial condition, or results of operations of the
Company, that the Company's shareholders' equity, as reflected in the
Quarterly Report on Form 10-Q last filed by it prior to the Closing, not be
less than $66,218,000, and that the opinions of their respective financial
advisors not have been withdrawn or modified. The Transferor's obligations are
also subject to customary closing conditions including (i) the accuracy in all
material respects at Closing of the representations made by the Company and
Reading Entertainment, (ii) the compliance by the Company and Reading
Entertainment with their covenants in the Exchange Agreement, and (iii) the
receipt of customary closing documents, including instruments transferring or
terminating certain obligations relating to the Craig Assets, and legal
opinions.
The Company is not aware of any governmental consents required for
consummation of the Stock Transactions.
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Citadel Preferred Stock. Under the terms of the Citadel Preferred Stock,
Citadel has the right, at any time after November 10, 1997, to redeem the
Citadel Preferred Stock, in whole or in part, for a redemption price equal to
the stated value of the Citadel Preferred Stock ($3.95 per share), plus
accrued and unpaid dividends, plus a premium equal to an accrual from November
10, 1994 on the stated value at a percentage per annum (the "Accrual
Percentage") of 9% until November 10, 1998, decreasing 1% each year thereafter
until the Accrual Percentage reaches zero. In addition, if, at the date a
holder of shares of Citadel Preferred Stock elects to convert such shares into
Citadel Common Stock, the market price of the Citadel Common Stock is less
than $3.00 per share, Citadel has the right to redeem such shares of Citadel
Preferred Stock, at the same redemption price. Finally, if a change in control
(as defined) of Citadel occurs, each holder of Citadel Preferred Stock has the
right to require redemption of the shares of Citadel Preferred Stock held by
him, also at the same redemption price.
Pursuant to the Exchange Agreement, Reading Entertainment has agreed that,
immediately following its receipt of the shares of Citadel Preferred Stock
from Craig, it will deliver such shares to Citadel for an equal number of
shares of New Citadel Preferred Stock. The terms of the New Citadel Preferred
Stock are substantially identical to the terms of the Citadel Preferred Stock
except that (i) the Accrual Percentage will be 3% from and after the Closing
and (ii) except on a change in control of Citadel, the holders of the New
Citadel Preferred Stock will not have the right to convert the New Citadel
Preferred Stock into Citadel Common Stock during the one-year period
commencing on the 15th day following the filing of Citadel's Annual Report on
Form 10-K for the year ending December 31, 1996. The term "Citadel Preferred
Stock" as used in this Proxy Statement with respect to a time after the
Closing shall mean the New Citadel Preferred Stock.
Asset Put Option. Under an Asset Put and Registration Rights Agreement to be
entered into at the Closing (the "Put Agreement"), Citadel will have the right
(the "Asset Put Option"), exercisable at any time after the Closing and until
30 days after Reading Entertainment files its Annual Report on Form 10-K for
the year ending December 31, 1999, to require Reading Entertainment to acquire
substantially all of Citadel's assets, and assume related liabilities (such as
mortgages), for shares of Reading Entertainment Common Stock. Reading
Entertainment will not be obligated to acquire (i) the shares of Convertible
Preferred Stock or Reading Entertainment Common Stock held by CAC (or the
capital stock of CAC), (ii) such amount of cash or marketable securities as
the Citadel Committee determines to retain to provide necessary liquidity to
Citadel, (iii) such other assets as the Board of Directors of Reading
Entertainment reasonably determines are subject to liabilities reasonably
likely to be in excess of such assets' fair market values, (iv) assets
acquired by Citadel subsequent to Closing to the extent such after acquired
assets have a value in excess of $5,000,000 or (v) any assets exceeding
$30,000,000 in aggregate value. In exchange for Citadel's assets on exercise
of the Asset Put Option, Reading Entertainment will deliver to Citadel a
number of shares of Reading Entertainment Common Stock determined by dividing
the value of the Citadel assets, as determined by appraisal, by a stated value
of the Reading Entertainment Common Stock. Such value of the Reading
Entertainment Common Stock shall be (i) for the first $20,000,000 of assets
existing at the Closing and cash proceeds related thereto, $11.75 per share if
Citadel exercises the Asset Put Option on or before October 31, 1997, and
$12.25 thereafter, and (ii) for any additional existing assets, and for any
assets acquired after the Closing, the average, over the 20-trading day period
prior to Citadel giving notice of such exercise, of the closing prices of the
Reading Entertainment Common Stock. Also, if the closing price of the Reading
Entertainment Common Stock exceeds 130% of the price then in effect pursuant
to the foregoing clause (i) for 60 consecutive days, Reading Entertainment may
give notice of such event to Citadel and, if Citadel does not exercise the
Asset Put Option within 120 days thereafter, the value of the Reading
Entertainment Common Stock for all purposes of the Asset Put Option shall be
the value determined pursuant to clause (ii).
Registration Rights. Under the Put Agreement, Citadel and CAC will have
certain demand and piggyback registration rights with respect to the shares of
Reading Entertainment Common Stock issuable upon conversion of the Series A
Preferred Stock or on exercise of the Asset Put Option. Citadel and CAC shall
be entitled to two demand registrations of such shares of Reading
Entertainment Common Stock and to piggyback registration rights, in each case
at the expense of Reading Entertainment.
1996 Option. The Exchange Agreement provides that, effective on the Closing,
the 1996 Option, including the portion of it relating to the Citadel Warrant,
will be terminated.
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Expenses. The Exchange Agreement provides that the Company will reimburse
Citadel and CAC for their reasonable expenses in connection with the Stock
Transactions, up to $280,000. Except for the foregoing, each party is
responsible for its own expenses.
Termination and Amendment. The Exchange Agreement provides that it may be
terminated (i) by mutual consent of the Boards of Directors of the Company,
Reading Entertainment, Craig, CMI, Citadel, and CAC, or (ii) by the Board of
Directors of the Company, Craig, CMI, or Citadel if, by December 31, 1996, the
Reorganization and the Stock Transactions shall not have been consummated,
except as a result of the willful acts or omissions of such party (or, in the
case of Reading, Craig, or Citadel, its wholly-owned subsidiary, or in the
case of CMI, its parent).
The parties to the Exchange Agreement may amend the Exchange Agreement
before or after its approval by shareholders of the Company. The parties to
the Exchange Agreement may (i) extend the time for the performance of any of
the obligations or other acts of the other parties, (ii) waive any
inaccuracies in the representations and warranties contained in the Exchange
Agreement or in any document delivered pursuant thereto, and (iii) waive
compliance with any of the agreements or conditions contained in the Exchange
Agreement. Accordingly, the parties could elect not to terminate the Exchange
Agreement even if the requirements or conditions specified above were not met
or complied with at or prior to the Closing.
CAC. CAC has been formed by Citadel to effect the Stock Transactions. Since,
upon completion of the Stock Transactions, Reading Entertainment will own
approximately 39.5% of the voting power of Citadel's capital stock, CAC might
be unable to vote all or a portion of the Convertible Preferred Stock owned by
it (or of the Reading Entertainment Common Stock acquired by it on conversion
of such Convertible Preferred Stock) if it were found that Reading
Entertainment dominated or controlled CAC. Under its certificate of
incorporation (the "CAC Charter"), CAC may not engage in any activity other
than to acquire, own, hold, vote, dispose of, and otherwise deal in and with
shares of capital stock of the Company or Reading Entertainment. The CAC
Charter further provides that CAC may not vote any Reading Entertainment
capital stock except on the specific direction of a majority of independent
continuing directors (defined generally as directors who (i) are the initial
directors of CAC or are designated as independent continuing directors, prior
to or simultaneously with election as directors, by the independent continuing
directors then in office (or, if there are no independent continuing
directors, are elected by the stockholders of CAC) and (ii) are not officers
or directors of Reading Entertainment or any subsidiary of Reading
Entertainment or an officer of Citadel (or a member of the immediate family of
any such officer or director)). The CAC Charter also restricts certain
dispositions of Reading Entertainment capital stock by CAC and certain mergers
and consolidations. The voting and other restrictive provisions of the CAC
Charter will not be applicable after the earliest of (a) December 31, 1998,
(b) the date on which CAC becomes a subsidiary of any person other than
Citadel, (c) the date on which Citadel becomes a subsidiary of any person
(including Reading Entertainment), and (d) the date on which the independent
continuing directors receive an opinion of counsel confirming the voting by
CAC of Reading Entertainment capital stock in the absence of such provisions;
provided, that in no case will such provisions expire earlier than December
31, 1996. In the Exchange Agreement, Citadel has agreed not to cause a "short-
form" merger of CAC into Citadel or any other subsidiary of Citadel, or
otherwise take any action which, if taken by CAC, would violate the foregoing
provisions. The foregoing provisions are intended to ensure that, under
applicable law, CAC will not be considered to be dominated or controlled by
Reading Entertainment with respect to the voting of Reading Entertainment
capital stock, and thus will retain the right to vote the Convertible
Preferred Stock received by it in the Stock Transactions.
THE CONVERTIBLE PREFERRED STOCK
General. The following summary of the material terms of the Convertible
Preferred Stock is qualified in its entirety by reference to the full text of
the terms of the Convertible Preferred Stock, as set forth in Reading
Entertainment's Certificate of Designation relating to the Convertible
Preferred Stock, a copy of which is attached hereto as Exhibit G.
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Liquidation Preference. In the event of a liquidation of Reading
Entertainment, the holders of the Convertible Preferred Stock will be entitled
to receive, before any payment is made to the holders of the Reading
Entertainment Common Stock or other junior stock, the Stated Value of $100 per
share, plus accrued dividends. The Series B Preferred Stock ranks junior to
the Series A Preferred Stock in rights to distributions on liquidation. The
aggregate Stated Value of the shares of Convertible Preferred Stock to be
issued to CAC is $7,000,000 and to Craig and CMI is $55,000,000.
Dividends. Holders of the Convertible Preferred Stock will be entitled to
receive quarterly cumulative dividends at the annual rate of $6.50 per share
of Series A Preferred Stock and $6.50 per share of Series B Preferred Stock,
in each case before any dividends (other than dividends payable in Reading
Entertainment Common Stock) are paid to the holders of the Reading
Entertainment Common Stock or other junior stock. The Series B Preferred Stock
ranks junior to the Series A Preferred Stock in rights to receive dividends.
Dividends on the Convertible Preferred Stock will be payable in cash on each
March 31, June 30, September 30 and December 31 (each, a "Dividend Payment
Date").
Voting. Holders of each series of the Convertible Preferred Stock will be
entitled to cast 9.64 votes per share, voting together with the holders of the
Reading Entertainment Common Stock and the other series of Convertible
Preferred Stock, on any matter presented to shareholders of Reading
Entertainment. Such number of votes per share equals the Stated Value per
share divided by the closing sale price of the Class A Common Stock on the
Nasdaq/NMS on the business day prior to the execution of the letter of intent
relating to the Exchange Agreement. In addition, if Reading Entertainment
fails to pay dividends on either series of the Convertible Preferred Stock for
six quarterly periods, the holders of such series of the Convertible Preferred
Stock will be entitled to elect one director. Also, Reading Entertainment will
not, without the consent of the holders of a majority of the outstanding
shares of a series of Convertible Preferred Stock, (i) create or issue any
shares of a class ranking, either as to payment of dividends or distributions
of assets, on a parity with or senior to such series of the Convertible
Preferred Stock, (ii) change the preferences, rights, designations or powers
of such series of the Convertible Preferred Stock as a class or the provisions
of Article FOURTH of the Reading Entertainment Certificate (which contains the
transfer restrictions; see "Reorganization Proposal--Description of Reading
Entertainment Capital Stock and Certain Changes in the Rights of
Shareholders"), so as to affect such holders adversely, or (iii) increase the
total number of authorized shares of Convertible Preferred Stock.
Conversion. Each share of Series A Preferred Stock is convertible into
shares of Reading Entertainment Common Stock at a conversion price of $11.50,
and each share of Series B Preferred Stock is convertible into shares of
Reading Entertainment Common Stock at a conversion price of $12.25, each
subject to adjustment on certain events, at any time after 18 months after the
Closing. The shares of Series A Preferred Stock may also be converted at any
time within 90 days of a Change in Control (or, if later, within 30 days after
consummation of a transaction the announcement of which constituted a Change
in Control). A "Change in Control" is defined as occurrence of either of the
following events: (a) any person, entity or "group" (as defined in Section
13(d)(3) of the Exchange Act and the rules thereunder) other than Craig and
its successors and affiliates, shall publicly announce or disclose having
entered into a transaction as a result of which such person, entity or group
would acquire beneficial ownership of 50% or more of the outstanding Reading
Entertainment Common Stock or securities entitling such person to cast 50% or
more of the votes entitled to be cast at any regular election of directors of
Reading Entertainment or (b) certain changes in the directors of Reading
Entertainment. On optional conversion, no adjustment for interest or dividends
will be made.
Reading Entertainment will have the right to require conversion of the
Series A Preferred Stock if the average market price of the Reading
Entertainment Common Stock over a 180-calendar day period ending within 15
days of the date of notice of such redemption exceeds 135% of the conversion
price for the Series A Preferred Stock. Reading Entertainment may not require
conversion of the Series B Preferred Stock.
Redemption. Reading Entertainment may, at its option, at any time after the
fifth anniversary of the Closing, redeem the Series A Preferred Stock, in
whole or in part, at a redemption price equal to a percentage of the Stated
Value (initially, 108%, declining by 2% on the sixth and each subsequent
anniversary of the Closing
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until such percentage equals 100%) plus accrued and unpaid dividends. In
addition, until the fifth anniversary of the Closing, Reading Entertainment
may, at its option, by notice given within 120 days after a Change in Control
(or, if later, within 60 days after consummation of a transaction the
announcement of which constituted a Change in Control), redeem the Series A
Preferred Stock, in whole or in part, at a redemption price equal to the
Stated Value, plus accrued and unpaid dividends, plus a premium equal to an
accrual on the Stated Value at a percentage per annum equal to 8% until the
fourth anniversary of the Closing and 7% thereafter; provided, that Reading
Entertainment may not, pursuant to this sentence, redeem any shares of Series
A Preferred Stock held by Citadel or any of its affiliates unless Craig
assumes Reading Entertainment's obligations with respect to the Asset Put
Option and related registration rights. Reading Entertainment may, at its
option, at any time after the fifth anniversary of the Closing, redeem the
Series B Preferred Stock, in whole or in part, at a redemption price equal to
a percentage of the Stated Value (initially, 108%, declining by 2% on the
sixth and each subsequent anniversary of the Closing until such percentage
equals 100%) plus accrued and unpaid dividends.
The holders of a majority of the outstanding shares of Series A Preferred
Stock will have the right, at any time during the 90-day period beginning five
years after the Closing (provided Citadel has not exercised the Asset Put
Option), to require Reading Entertainment to repurchase all of the shares of
Series A Preferred Stock held by such holders, and by such other holders as
choose to have their shares redeemed, for their aggregate Stated Value plus
accrued and unpaid dividends. In addition, if Reading Entertainment shall fail
to pay dividends on the Series A Preferred Stock for four quarters, whether or
not consecutive, the holders of a majority of the outstanding shares of Series
A Preferred Stock will have the right to require Reading Entertainment to
repurchase all of the shares held by such holders, and by such other holders
as choose to have their shares redeemed, at the same redemption price,
provided that such right may not be exercised prior to 18 months after the
Closing. Finally, following a Change in Control (but not after the fifth
anniversary of the Closing), Citadel will have the right to require Reading
Entertainment to repurchase all but not less than all of the shares of Series
A Preferred Stock owned by Citadel and affiliates for the same redemption
price set forth above for a redemption at the option of Reading Entertainment
following such a Change in Control.
The holders of the Series B Preferred Stock have no rights to require
redemption of the Series B Preferred Stock.
DISSENTERS' RIGHTS
The holders of the Common Stock and Class A Common Stock will have no
dissenters' rights in connection with the approval of the Stock Transactions.
TAX AND ACCOUNTING TREATMENT
Neither the Company nor Reading Entertainment, nor any of their
shareholders, will recognize any gain or loss as a result of the issuance of
the Reading Entertainment Common Stock or the Convertible Preferred Stock in
the Stock Transactions, and Reading Entertainment will not recognize any gain
or loss as a result of the exchange of the Citadel Preferred Stock for the New
Citadel Preferred Stock. Reading Entertainment's tax basis in the Craig Assets
will be equal to Craig's and CMI's tax basis in the Craig Assets immediately
prior to the Closing.
As described under "Use of Craig Assets and Citadel Proceeds," Reading
Entertainment is considering various alternatives for utilizing the Stater
Stock in the funding of its Beyond-the-Home Entertainment business, including
the contribution of the Stater Stock to one or more of Reading Entertainment's
Australian affiliates to collateralize Australian Dollar borrowings, a sale of
the Stater Stock to a third party, or a possible redemption of the Stater
Stock by Stater, each of which would be a taxable event for federal income tax
purposes. Management believes that any gain recognized by Reading
Entertainment on such a transaction would be offset by the Company's existing
NOL's. See "Certain Considerations--Certain Tax Matters."
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For financial reporting purposes, the Stock Transactions will be treated as
a reorganization of affiliated entities, with the assets and liabilities
received from Craig and CMI recorded on the books of Reading Entertainment at
their historical cost basis.
CERTAIN INFORMATION CONCERNING STATER AND THE STATER STOCK
Stater. The following information is derived from the Stater Annual Report.
For further information concerning Stater, reference is made to the Stater
Annual Report and the other Accompanying Reports filed by Stater, which are
included as exhibits to this Proxy Statement.
Stater is a leading supermarket chain in Southern California, operating 110
supermarkets in the Inland Empire Region of Southern California. All of the
outstanding common stock of Stater is owned by La Cadena Investments ("La
Cadena"), a general partnership whose partners include three members of
Stater's senior management. Stater's Chairman of the Board, President and
Chief Executive Officer is the managing general partner of La Cadena.
The Stater Stock. For a description of the Stater Stock, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--The Option Agreement" and Note 12
to Stater's Consolidated Financial Statements in the Stater Annual Report.
Such summary of the material terms of the Stater Stock and related agreements
is qualified in its entirety by reference to the full text of the terms of the
Restated Certificate of Incorporation of Stater and such agreements, copies of
which have been filed as exhibits to the Registration Statement.
CERTAIN INFORMATION CONCERNING CITADEL AND THE CITADEL PREFERRED STOCK
For a description of Citadel's business and other information concerning
Citadel, see "Background of the Exchange Agreement" and the Citadel Annual
Report and other Accompanying Reports filed by Citadel, which are included as
exhibits to this Proxy Statement.
For a description of the terms of the Citadel Preferred Stock, see "Item 5.
Market for the Registrant's Common Equity and Related Stockholder Matters--
Dividends on 3% Voting Cumulative Convertible Preferred Stock" and Note 9 to
Citadel's Consolidated Financial Statements in the Citadel Annual Report. Such
summary of the material terms of the Citadel Preferred Stock is qualified in
its entirety by reference to the full text of the terms of the Certificate of
Designation of Citadel, a copy of which has been filed as an exhibit to the
Registration Statement. See also "The Exchange Agreement--Citadel Preferred
Stock" for a description of the differences between the Citadel Preferred
Stock and the New Citadel Preferred Stock.
56
<PAGE>
MARKET PRICES
THE COMPANY
The following table sets forth the high and low prices of the Class A Common
Stock from January 1, 1994 through September 30, 1996, as reported on the
Nasdaq/NMS. The Class A Common Stock has also been traded on the Philadelphia
Exchange since September 9, 1996. The Company's Common Stock trades
infrequently on the over-the-counter "pink sheet" market. Historical bid/asked
data is insufficient to provide high and low price information on the
Company's Common Stock during 1994, 1995, and 1996.
<TABLE>
<CAPTION>
1996
----------------------------
QUARTER 1ST 2ND 3RD
------- ------ ------ -------
<S> <C> <C> <C>
High........................................ 11 1/4 11 11 1/8
Low......................................... 8 7/8 10 10
<CAPTION>
1995
----------------------------
QUARTER 1ST 2ND 3RD 4TH
------- ------ ------ ------- ------
<S> <C> <C> <C> <C>
High........................................ 11 1/2 11 1/8 10 3/16 9 1/2
Low......................................... 9 5/8 9 7/8 9 8 1/2
<CAPTION>
1994
----------------------------
QUARTER 1ST 2ND 3RD 4TH
------- ------ ------ ------- ------
<S> <C> <C> <C> <C>
High........................................ 11 3/4 10 1/2 11 1/8 11 1/2
Low......................................... 9 7/8 9 1/2 9 3/4 11
</TABLE>
On August 12, 1996, the business day prior to the public announcement of the
Stock Transactions, the high, low, and closing prices for the Class A Common
Stock on the Nasdaq/NMS were each $10 3/8 per share. On September 30, 1996,
the high, low and closing prices of the Class A Common Stock were $10 1/2, $10
3/8, and $10 1/2, respectively. On September 30, 1996, there were
approximately 1,000 shareholders of record of the Class A Common Stock and
approximately 350 shareholders of record of the Common Stock, which amounts do
not include individual participants in security position listings.
CITADEL
The following table sets forth the high and low prices of the Citadel Common
Stock from January 1, 1994 through September 30, 1996, as reported by the
American Stock Exchange.
<TABLE>
<CAPTION>
1996
----------------------------
QUARTER 1ST 2ND 3RD
------- ------ ------ -------
<S> <C> <C> <C>
High......................................... 2 9/16 2 1/2 2 13/16
Low.......................................... 2 1/4 2 1/4 2 1/4
<CAPTION>
1995
----------------------------
QUARTER 1ST 2ND 3RD 4TH
------- ------ ------ ------- ------
<S> <C> <C> <C> <C>
High......................................... 3 1/8 2 7/16 2 3/8 2 1/2
Low.......................................... 2 1/16 2 2 2
<CAPTION>
1994
----------------------------
QUARTER 1ST 2ND 3RD 4TH
------- ------ ------ ------- ------
<S> <C> <C> <C> <C>
High......................................... 12 1/4 8 6 3/8 4 3/16
Low.......................................... 4 1/4 3 7/8 3 1/2 2 1/16
</TABLE>
On August 12, 1996, the business day prior to the public announcement of the
Stock Transactions, the high, low, and closing prices for the Citadel Common
Stock on the American Stock Exchange were each $2 1/2. On September 30, 1996,
the high, low and closing prices of the Citadel Common Stock were $2 11/16, $2
5/8, and $2 5/8, respectively. On September 30, 1996, there were approximately
250 shareholders of record of the Citadel Common Stock, which amount does not
include individual participants in security position listings.
There is no public market for the Citadel Preferred Stock, all of which is
owned by Craig.
STATER
There is no public market for Stater's common stock or the Stater Stock. All
of Stater's common stock is held by one holder of record, and all of the
Stater Stock is held by CMI.
57
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1996 gives
effect to (i) the Angelika Acquisition, (ii) the Reorganization and (iii) the
Stock Transactions as if all such transactions had been consummated on June
30, 1996.
The Unaudited Pro Forma Consolidated Statements of Operations for the year
ended December 31, 1995 and the six months ended June 30, 1996 give effect to
(i) the Angelika Acquisition, (ii) the Reorganization and (iii) the Stock
Transactions as if all such transactions had been consummated on the first day
of the respective periods.
The Unaudited Pro Forma Consolidated Financial Statements are presented for
information purposes only and are not necessarily indicative of the
consolidated financial results the Company or Reading Entertainment would have
achieved if such transactions had occurred on the respective dates indicated
or which may be realized in the future.
The Unaudited Pro Forma Consolidated Financial Statements should be read in
conjunction with the audited and unaudited financial statements of the
Company, Citadel and Stater contained in the accompanying reports and the
Audited Financial Statements of Angelika Film Centers, Inc. ("AFCI") for the
year ended December 31, 1995 and the unaudited financial statements of AFCI
for the six months ended June 30, 1996 which have been attached as Exhibit N
to this Proxy Statement.
THE ANGELIKA ACQUISITION
On August 27, 1996, the Company and Sutton Hill acquired the Angelika for a
purchase of approximately $12,429,000. The Company and Sutton Hill formed a
Delaware limited liability company, Angelika Film Centers LLC ("AFC"), to hold
their interest in the Angelika. AFC acquired the Angelika assets with a
combination of available cash, a $2,000,000 promissory note the ("Payment
Note") collateralized with a $2,000,000 cash escrow (the "Cash Escrow") issued
to the sellers and a credit in full satisfaction of a judgement encumbering
AFCI (in the amount of $1,285,000 plus accrued interest from November 1995
through closing at 9%) which judgement was acquired by the Company in November
1995 (the "Angelika Judgement").
AFC is managed by City Cinemas pursuant to the terms of a management
agreement (the "Management Agreement"). The Management Agreement provides for
City Cinemas to manage the Angelika for a minimum annual fee of $125,000 plus
an incentive fee equal to 50% of annual cash flow (as defined in the
Management Agreement) over prespecified levels, provided however, that the
maximum annual fee (minimum fee plus incentive fee) may not exceed 5% of the
Angelika annual revenues.
For accounting purposes, the Angelika Acquisition will be accounted for
under the purchase method and the operating results of AFC consolidated with
the results of the Company for periods subsequent to closing of the
transaction.
THE REORGANIZATION AND STOCK TRANSACTIONS
The Merger Agreement provides for the Company to merge with a wholly owned
subsidiary of Reading Entertainment, Merger Co. In the Reorganization, each
outstanding share of the Company's Common Stock, par value $.01 per share
(other than shares of Common Stock as to which dissenters' rights are
perfected), and Class A Common Stock, par value $.01 per share, will be
converted into the right to receive one share of Reading Entertainment Common
Stock, par value $.001 per share, and the outstanding shares of Merger Co.
will be converted into shares of Common Stock of the Company. As a result, the
Company will become a wholly-owned subsidiary of Reading Entertainment and the
current shareholders of the Company will become shareholders of Reading
Entertainment.
58
<PAGE>
The Stock Transactions include a contribution of assets to Reading
Entertainment by Craig, CMI, a wholly-owned subsidiary of Craig, and CAC, a
wholly-owned subsidiary of Citadel, in exchange for Convertible Preferred
Stock and Reading Entertainment Common Stock and, in the case of Citadel, the
Asset Put Option. Following consummation of the Reorganization, Reading
Entertainment will issue (i) 70,000 shares of Reading Entertainment's Series A
Voting Cumulative Convertible Preferred Stock, par value $.001 per share, and
the Asset Put Option, to CAC for $7,000,000 cash and (ii) 550,000 shares of
Reading Entertainment's Series B Voting Cumulative Convertible Preferred
Stock, par value $.001 per share, and 2,476,190 shares of Reading
Entertainment Common Stock to Craig and CMI in exchange for certain assets now
held by Craig and CMI. The assets to be transferred by Craig, and CMI, the
Craig Assets, are 693,650 shares of the Series B Preferred Stock of Stater
Bros. Holdings Inc., stated value $100 per share, Craig's 50% membership
interest in Reading International, and 1,329,114 shares of Citadel's 3%
Cumulative Voting Convertible Preferred Stock, stated value $3.95 per share.
The Series A Preferred Stock will (i) bear a cumulative dividend of 6.5%,
payable quarterly, and (ii) be convertible, at any time after 18 months from
issuance (or earlier upon a change in control of Reading Entertainment) into
shares of Reading Entertainment Common Stock at a conversion price of $11.50
per share. The Series B Preferred Stock will (i) bear a cumulative dividend of
6.5%, payable quarterly, and (ii) be convertible, at any time after 18 months
from issuance, into shares of Reading Entertainment Common Stock at a
conversion price of $12.25 per share. The Reorganization and Stock
Transactions will be treated as a reorganization of affiliated entities, with
all assets and liabilities recorded on the books of Reading Entertainment at
their historical basis.
59
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
ANGELIKA PRO FORMA REORGANIZATION
READING ACQUISITION AS ADJUSTED AND STOCK PRO FORMA
COMPANY ADJUSTMENTS FOR ACQUISITION TRANSACTIONS AS ADJUSTED
------- ----------- --------------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash, marketable
securities and cash
equivalents............ $32,431 $(8,476)(1) $23,955 $ 7,000 (1) $ 51,569
21,114 (5)
(500)(2)
Other current assets.... 1,861 11 (2) 1,872 776 (5) 2,648
------- -------- ------- ------- --------
Total Current Assets... 34,292 (8,465) 25,827 28,390 54,217
------- -------- ------- ------- --------
Other investments....... 2,277 (1,615)(3) 662 142 (4) 804
Investment in Reading
International.......... 13,174 13,174 13,174 (3) 0
(26,348)(5)
Investment in Stater.... 0 0 67,978 (3) 67,978
Investment in Citadel... 4,807 4,807 5,250 (3) 10,057
Restricted cash......... 214 2,000 (4) 2,214 2,214
Real estate held for
sale................... 1,107 1,107 1,107
Property and equipment
(net).................. 9,125 4,420 (2) 13,545 7,960 (5) 21,505
Intangible assets:
Beneficial leases--
net................... 15,081 15,081 15,081
Goodwill............... 0 8,097 (2) 8,097 8,097
------- -------- ------- ------- --------
Total Assets........... $80,077 $ 4,437 $84,514 $96,546 $181,060
======= ======== ======= ======= ========
LIABILITIES:
Accounts and film rent
payable................ $ 2,738 $ 365 (2) $ 3,103 $ 318 (5) $ 3,421
Accrued compensation.... 292 292 292
Accrued taxes and
other.................. 438 438 438
Other liabilities....... 1,063 1,063 1,063
Note payable............ 0 1,500 (4) 1,500 1,500
Note payable to
affiliate.............. 3,325 3,325 3,325
Property purchase
commitment............. 0 0 3,326 (5) 3,326
Deferred tax liability.. 0 0 22,042 (3) 1,260
(20,782)(4)
------- -------- ------- ------- --------
Total Current
Liabilities........... 7,856 1,865 9,721 4,904 14,625
------- -------- ------- ------- --------
Note payable............ 0 500 (4) 500 500
Other liabilities....... 2,518 2,518 2,518
Minority interest....... 0 2,072 (5) 2,072 2,072
Series A preferred
stock, stated value
$7,000 (redeemable).... 0 0 5,600 (1) 5,600
Shareholders' equity
Series B preferred
stock, stated value
$55,000............... 0 0 55 (3) 55
Common stock........... 1 1 (1)(6) 0
Class A common stock... 51 51 25 (3) 77
1 (6)
Other capital.......... 57,094 57,094 64,280 (3) 119,651
(2,623)(7)
1,400 (1)
(500)(2)
Retained earnings...... 15,237 15,237 20,782 (4) 36,019
Foreign currency
translation........... (57) (57) (57)
Class A common stock
held in treasury...... (2,623) (2,623) 2,623 (7) 0
------- -------- ------- ------- --------
Total Liabilities &
Shareholders Equity... $80,077 $ 4,437 $84,514 $96,546 $181,060
======= ======== ======= ======= ========
</TABLE>
See notes to Unaudited Pro Forma Consolidated Balance Sheet.
60
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
ANGELIKA ACQUISITION
1. Records payment of purchase price of $12,429,131 inclusive of estimated
expenses of $520,000 and assumed liabilities of $100,000, less minority
interest contribution of $2,072,000, a $1,359,460 credit for the Angelika
Judgement, cash acquired in the acquisition and unexpended transaction
expenses.
2. To reflect the estimated fair market value of the acquired assets and
liabilities. The difference between the purchase price (including expenses)
and the fair market value of the acquired assets and liabilities has been
reflected as Goodwill of $8,097,000.
3. To redeem the Angelika Judgement from "Investments" and reflect the
credit received against the purchase price for cancellation of the Angelika
Judgement.
4. To record the $2,000,000 contribution to "Restricted Cash" for the
portion of the purchase price which is placed in escrow and the issuance of
the $2,000,000 Payment Note, $1,500,000 of which is payable in April 1997 and
the balance of which is due upon resolution of certain contingencies.
5. To record capital contribution of Sutton Hill as a minority interest.
REORGANIZATION AND STOCK TRANSACTIONS
1. To record $7,000,000 in cash proceeds from CAC in exchange for 70,000
shares of Reading Entertainment Series A Preferred Stock and the granting of
the Asset Put Option. The portion of the proceeds relating to the Asset Put
Option has a fair value of $1,400,000 and is reflected as Other Capital.
2. To record estimated expenses of $500,000 incurred in connection with the
Reorganization and Stock Transactions.
3. To record contribution by Craig and CMI of Craig Assets which include
693,650 shares of Stater Series B Preferred Stock, a 50% membership interest
in Reading International and 1,329,114 shares of Citadel's 3% Cumulative
Voting Convertible Preferred Stock in exchange for 550,000 shares of Reading
Entertainment Series B Voting Cumulative Convertible Preferred Stock and
2,476,190 shares of Reading Entertainment Common Stock. Deferred taxes of $22
million have been provided for the difference between book and tax basis of
the Stater Stock.
4. To record the decrease in deferred taxes reflecting the tax benefits of
Reading Entertainment's net operating loss carryforwards.
5. To consolidate Reading International as a result of Reading Entertainment
owning 100% of Reading International after contribution of the Craig Assets to
Reading Entertainment.
6. To record conversion of all shares of Reading Company's Common Stock into
shares of Reading Entertainment Common Stock.
7. To retire existing Reading Company Class A Common Stock treasury shares
in Reorganization.
61
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED REORGANIZATION
READING ANGELIKA ACQUISITION FOR AND STOCK PRO FORMA
COMPANY FILM CENTER ADJUSTMENTS ACQUISITION TRANSACTIONS AS ADJUSTED
---------- ----------- ----------- ----------- -------------- -----------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Theater:
Admissions............ $ 5,557 $2,816 $ 8,373 $ 8,373
Concessions........... 2,064 532 2,596 2,596
Advertising and
other................ 388 14 402 402
Real estate........... 144 144 144
Interest and
dividends............ 1,076 $(260)(1) 816 $3,642 (1) 4,835
79 (2)
298 (3)
Equity in earnings of
affiliate............ 1,433 1,433 1,433
Other................. 24 24 24
---------- ------ ----- ---------- ------ ----------
10,686 3,362 (260) 13,788 4,019 17,807
---------- ------ ----- ---------- ------ ----------
EXPENSES:
Theater costs........... 6,112 1,839 63 (2) 8,014 8,014
Theater concession
costs.................. 347 449 796 796
Depreciation and
amortization........... 772 87 202 (3) 1,061 1,061
General and
administrative......... 2,087 674 (269)(4) 2,492 912 (3) 3,404
Equity loss from
investment in Reading
International.......... 307 307 (307)(3) 0
Interest expense........ 0 42 (33)(5) 9 9
---------- ------ ----- ---------- ------ ----------
Net income before
taxes and minority
interest............. 1,061 271 (223) 1,109 3,414 4,523
---------- ------ ----- ---------- ------ ----------
Income taxes............ 22 22 67 (6) 111 22 (5) 133
Minority interest....... 0 48 (7) 48 48
---------- ------ ----- ---------- ------ ----------
Net income............ 1,039 249 (338) 950 3,392 4,342
---------- ------ ----- ---------- ------ ----------
Less: preferred
dividends.............. 0 0 2,143 (4) 2,143
---------- ------ ----- ---------- ------ ----------
Earnings available to
common shareholders.. $ 1,039 $ 249 $(338) $ 950 $1,249 $ 2,199
========== ====== ===== ========== ====== ==========
Earnings per common
share.................. $ 0.21 $ 0.19 $ 0.30
Average common shares
outstanding............ 4,973,241 4,973,241 7,449,431
</TABLE>
Note: The Pro Forma Consolidated Statement of Operations excludes a non-
recurring reversal of a deferred tax asset valuation allowance of
$20,782,000 or $2.79 per pro forma common share resulting from the
reduction of the deferred tax liabilities associated with the Stater
Stock.
See notes to Unaudited Pro Forma Consolidated Statements of Operations
62
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA
ANGELIKA ANGELIKA AS ADJUSTED REORGANIZATION PRO FORMA
READING FILM ACQUISITION FOR AND STOCK AS
COMPANY CENTER ADJUSTMENTS ACQUISITION TRANSACTIONS ADJUSTED
---------- -------- ----------- ----------- -------------- ----------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Theater
Admissions............ $ 10,356 $6,207 $ 16,563 $ 16,563
Concessions........... 3,883 1,164 5,047 5,047
Advertising and
other................ 686 72 758 758
Real estate............. 272 0 272 272
Interest and dividends.. 2,435 0 $ (551)(1) 1,884 $7,283 (1) 9,324
157 (2)
Condemnation and other.. 2,341 0 2,341 2,341
---------- ------ ------- ---------- ------ ----------
19,973 7,443 (551) 26,865 7,440 34,305
---------- ------ ------- ---------- ------ ----------
EXPENSES:
Theater costs........... 10,784 4,293 125 (2) 15,202 15,202
Theater concession
costs.................. 640 978 1,618 1,618
Depreciation and
amortization........... 1,369 245 404 (3) 2,018 2,018
General and
administrative......... 4,200 1,353 (64)(4) 5,489 780 (3) 6,269
Equity loss from
investment in Reading
International.......... 390 0 390 (390)(3) 0
Interest expense........ 0 84 (66)(5) 18 18
---------- ------ ------- ---------- ------ ----------
Net income before
taxes and minority
interest............. 2,590 490 (950) 2,130 7,050 9,180
---------- ------ ------- ---------- ------ ----------
Income taxes............ 239 55 53 (6) 347 44 (5) 391
Minority interest....... 9 (7) 9 9
---------- ------ ------- ---------- ------ ----------
Net income............ 2,351 435 (1,012) 1,774 7,006 8,780
---------- ------ ------- ---------- ------ ----------
Less: preferred
dividends.............. 0 0 0 4,286 (4) 4,286
---------- ------ ------- ---------- ------ ----------
Earnings available to
common shareholders.. $ 2,351 $ 435 ($1,012) $ 1,774 $2,720 $ 4,494
========== ====== ======= ========== ====== ==========
Earnings per common
share.................. $ 0.47 $ 0.36 $ 0.60
Average common shares
outstanding............ 4,973,369 4,973,369 7,449,559
</TABLE>
Note: The Pro Forma Consolidated Statement of Operations excludes a non-
recurring reversal of a deferred tax asset valuation allowance of
$20,782,000 or $2.79 per pro forma common share resulting from the
reduction of the deferred tax liabilities associated with the Stater
Stock.
See notes to Unaudited Pro Forma Consolidated Statements of Operations
63
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
ANGELIKA ACQUISITION ADJUSTMENTS
1. To eliminate interest income on cash portion of purchase price.
2. To record management fee to City Cinemas.
3. To record amortization of $8,089,000 of Goodwill over 20 year life.
4. To reduce salary expense for services to be provided by City Cinemas
under management agreement. Certain historical expenses of AFCI, including but
not limited to, $404,000 and $235,000 of litigation expenses included in the
respective year and six month periods are non-recurring. Management believes
that the Management Agreement will permit the Angelika to significantly reduce
"General and administrative" expenses from historical levels to an amount
significantly less than the level included in the Pro Forma Consolidated
Statements of Operations.
5. To eliminate AFCI interest expense. No interest bearing liabilities are
to be assumed by the Company in the Acquisition.
6. To reflect federal, state and local taxes payable on pro forma income.
7. To reflect Sutton Hill's share (minority interest) of net income.
REORGANIZATION AND STOCK TRANSACTIONS
1. To record dividend income at the rate of 10.5% per annum on 693,650
shares of Stater Preferred Stock.
2. To record dividend income on 1,329,114 shares of Citadel Preferred Stock.
3. To consolidate Reading International. Reading Entertainment will own 100%
of Reading International after contribution of the Craig Assets to Reading
Entertainment.
4. To record 6.5% cumulative dividend payable on Reading Entertainment
Convertible Preferred Stock and amortization of discount on the Series A
Preferred Stock.
5. To provide for income taxes at the 34% marginal tax rate excluding
preferred dividends of $5,224,000 and $2,613,000 for the twelve and six month
periods, respectively, as a result of the dividend received exclusion.
64
<PAGE>
INDEPENDENT AUDITORS
The consolidated financial statements of the Company at December 31, 1995
and 1994, and for each of the three years in the period ended December 31,
1995, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon included elsewhere herein. Such financial
statements are included herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing. Ernst & Young
LLP has served as the Company's independent auditors since the Company's
fiscal year ended December 31, 1981. Representatives of Ernst & Young LLP are
expected to be present at the Annual Meeting, will have the opportunity to
make a statement if they desire to do so and are expected to be available to
respond to appropriate questions.
In addition to performing customary audit services, Ernst & Young LLP
assisted the Company with the preparation of its federal tax return. Ernst &
Young LLP charged the Company for such services at its customary billing
rates. Material non-audit services are approved by the Audit and Finance
Committee of the Board of Directors after review of the nature of and amount
of expense and the potential effect on the independence of the accountants.
The consolidated financial statements of Stater at September 24, 1995 and
September 25, 1994, and for each of the three years in the period ended
September 24, 1995, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included elsewhere herein. Such
financial statements are included herein in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
Citadel's financial statements at December 31, 1995 and 1994, and for each
of the three years in the period ended December 31, 1995, have been audited by
Deloitte & Touche LLP, independent auditors, as set forth in its report
thereon included elsewhere herein. Such financial statements are included
herein in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The financial statements of the Angelika at December 31, 1995, and for the
year then ended were examined by Miller and Company, independent auditors, as
set forth in its report thereon included elsewhere herein. Such financial
statements are included herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
The legality of the Reading Entertainment Common Stock offered hereby will
be passed on for Reading Entertainment by Duane, Morris & Heckscher.
VOTING AND PROXIES
Shares represented by proxies in the accompanying form, if properly signed
and returned and not revoked before their use, will be voted at the Annual
Meeting and any adjournment or postponement thereof in accordance with the
specifications made thereon. If a proxy is signed and returned without
indicating any voting instructions, the shares represented by the proxy will
be voted for the election of the nominees for director named in this Proxy
Statement, for the adoption of the Merger Agreement and for the approval of
the Exchange Agreement. A shareholder who signs and returns a proxy in the
accompanying form may revoke it at any time before it is voted by giving
written notice thereof to the Secretary of the Company immediately prior to
the commencement of the Annual Meeting. A proxy will also be deemed to be
revoked if the shareholder provides a later dated proxy or if the shareholder
attends and votes in person at the Annual Meeting.
The cost of solicitation of proxies in the accompanying form will be borne
by the Company, including expenses in connection with preparing and mailing
this Proxy Statement. Such solicitation will be made by mail
65
<PAGE>
and may also be made on behalf of the Company by the Company's regular
officers and employees in person or by telephone or telegram. The Company has
retained Corporate Investor Communications, Inc. to aid in the solicitation of
proxies, the fee for which is anticipated to be approximately $2,500 and which
will be paid by the Company. The Company, upon request therefor, will also
reimburse brokers or persons holding shares in their names or in the names of
nominees for their reasonable expenses in sending proxies and proxy material
to beneficial owners.
As of the close of business on October 3, 1996 (the "Record Date"), the
Company had outstanding 4,964,497 shares of Class A Common Stock and 8,677
shares of Common Stock. Shares of Common Stock and Class A Common Stock have
equal voting rights and a majority of the aggregate outstanding shares of
Common Stock and Class A Common Stock present in person or by proxy will
constitute a quorum at the Annual Meeting. Each share of Common Stock and
Class A Common Stock is entitled to one vote. Only holders of record of Common
Stock and Class A Common Stock at the close of business on the Record Date
will be entitled to notice of and to vote at the Annual Meeting. Cumulative
voting rights do not exist with respect to the election of directors.
The affirmative vote of a plurality of the shares cast at the Annual Meeting
is necessary to elect the six directors. The affirmative vote of a majority of
the shares cast at the Annual Meeting is necessary for the adoption of the
Merger Agreement and the approval of the Exchange Agreement. The holders of
the Class A Common Stock and Common Stock will vote on such matters as a
single class.
For the purpose of determining the number of votes cast with respect to a
matter, only those cast "for" or "withhold authority" (including any so cast
pursuant to discretionary authority or in the absence of voting instructions)
are included. Abstentions and broker non-votes (i.e., shares represented by
proxies delivered by brokers who are prohibited from exercising discretionary
authority for beneficial owners who have not provided voting instructions) are
counted only for purposes of determining whether a quorum is present at the
meeting.
SHAREHOLDER PROPOSALS
Any shareholder who, in accordance with and subject to the provisions of the
proxy rules of the SEC, wishes to submit a proposal for inclusion in the
Company's proxy statement for its 1997 Annual Meeting of Shareholders, must
deliver such proposal in writing to the Secretary of the Company at the
Company's principal executive offices at One Penn Square West, Suite 1300,
Philadelphia, Pennsylvania 19102, no later than May 5, 1997.
The Board of Directors will consider written nominations for directors from
shareholders. Nominations for the election of directors made by the
shareholders of the Company (or, following the Reorganization, of Reading
Entertainment) must be made by written notice delivered to the Secretary of
Reading at Reading's principal executive offices not less than 120 days prior
to the first anniversary of the immediately preceding annual meeting of
shareholders at which directors are to be elected. Such written notice must
set forth, among other things, the name, age, address, principal occupation or
employment, the number of shares of the Company's Common Stock and Class A
Common Stock (or, following the Reorganization, of Reading Entertainment
Common Stock) owned by such nominee and such other information as is required
by the proxy rules of the SEC with respect to a nominee of the Board of
Directors. Nominations not made in accordance with the foregoing procedure
will not be valid.
66
<PAGE>
OTHER MATTERS
The Board of Directors does not know of any matters to be presented for
consideration other than the matters described in the Notice of Annual
Meeting, but if any matters are properly presented, it is the intention of the
persons named in the accompanying proxy to vote on such matters in accordance
with their judgment.
By Order of the Board of Directors,
/s/ S. Craig Tompkins
S. Craig Tompkins, President
Dated: October 4, 1996
67
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
AMONG
READING COMPANY,
READING ENTERTAINMENT, INC.,
AND
READING MERGER CO.
AGREEMENT AND PLAN OF MERGER, dated September 4, 1996, by and among Reading
Company, a Pennsylvania corporation ("Reading"), Reading Entertainment, Inc., a
Delaware corporation ("Reading Entertainment"), and Reading Merger Co., a
Pennsylvania corporation ("Merger Co." and, together with Reading, the
"Constituent Corporations").
RECITALS
WHEREAS, Reading is a corporation duly organized and validly existing under
the laws of the Commonwealth of Pennsylvania and has authorized capital stock
consisting of 10,000,000 shares of Common Stock, par value $.01 per share
("Reading Common Stock"), of which 8,777 shares are issued and outstanding,
15,000,000 shares of Class A Common Stock, par value $.01 per share ("Reading
Class A Common Stock"), of which 4,964,397 shares are issued and outstanding,
and 5,000,000 shares of Preferred Stock, par value $1.00 per share, of which no
shares are issued and outstanding; and
WHEREAS, Reading Entertainment is a corporation duly organized and validly
existing under the laws of the State of Delaware and has authorized capital
stock consisting of 25,000,000 shares of Common Stock, par value $.001 per share
("Reading Entertainment Common Stock"), of which 100 shares are issued and
outstanding, and 10,000,000 shares of Preferred Stock, par value $.001 per
share, of which no shares are issued and outstanding; and
WHEREAS, Merger Co. is a corporation duly organized and validly existing
under the laws of the Commonwealth of Pennsylvania and has authorized capital
stock consisting of 1,000 shares of Common Stock, par value $.01 per share
("Merger Co. Common Stock"), of which 100 shares are issued and outstanding;
WHEREAS, all of the outstanding Reading Entertainment Common Stock is owned
by Reading and all of the outstanding Merger Co. Common Stock is owned by
Reading Entertainment;
WHEREAS, Reading Entertainment and the Constituent Corporations desire to
enter into this Agreement and Plan of Merger as a reorganization pursuant to
Sections 368(a)(1)(A) and 368(a)(2)(E) of the Internal Revenue Code of 1986, as
amended; and
WHEREAS, the Boards of Directors of Reading Entertainment and each of the
Constituent Corporations have by resolution approved this Agreement and Plan of
Merger and, in the case of Reading, directed that it be submitted to its
shareholders for adoption; and
<PAGE>
NOW, THEREFORE, in consideration of the premises and the mutual agreements
contained herein and in accordance with the laws of the Commonwealth of
Pennsylvania, the parties hereto agree that Merger Co. shall be merged with and
into Reading (the "Merger"), that Reading shall be the surviving corporation
(the "Surviving Corporation") in the Merger, and that the terms and conditions
of the Merger shall be as follows:
ARTICLE I
MERGER OF MERGER CO. INTO READING
---------------------------------
Section 1.1 At the effective time of the Merger, Merger Co. shall be
merged with and into Reading, which shall be the Surviving Corporation, and
Reading shall continue its corporate existence under the laws of the
Commonwealth of Pennsylvania.
Section 1.2 If this Agreement and Plan of Merger is adopted by the
affirmative vote of at least a majority of the votes cast on such adoption by
the holders of outstanding shares of Reading Common Stock and Reading Class A
Common Stock, voting as a single class, the Constituent Corporations shall as
promptly as practicable execute and file with the Secretary of State of the
Commonwealth of Pennsylvania Articles of Merger and such supporting documents
as are required, and the date and time of filing with such Secretary of State
shall be the effective time of the Merger and is hereafter referred to as the
"Effective Time."
ARTICLE II
EXCHANGE OF SHARES
------------------
Section 2.1(a)At the Effective Time, each outstanding share of Reading
Common Stock and Reading Class A Common Stock, by operation of the Merger, shall
be converted into and become the right to receive one share of Reading
Entertainment Common Stock.
(b) Following the consummation of the Merger, all rights with respect to
the shares of Reading Common Stock and Reading Class A Common Stock, other than
the foregoing right of the holders of the shares of Reading Common Stock and
Reading Class A Common Stock to receive shares of Reading Entertainment Common
Stock, shall forthwith cease to exist and all of the shares of Reading Common
Stock and Reading Class A Common Stock, including shares held in treasury stock
(but except as provided in Section 2.3), shall be cancelled and of no further
force and effect.
Section 2.2 At the Effective Time, each share of Reading Entertainment
Common Stock held by Reading immediately prior thereto shall be automatically
cancelled.
Section 2.3 At the Effective Time, and immediately after the conversion
referred to in Section 2.1, each share of Merger Co. Common Stock issued and
outstanding immediately prior thereto shall, by operation of the Merger and
without any action on the part of the sole holder thereof, be cancelled and
converted into one share of Reading Common Stock, which shares shall not be
converted into the right to receive Reading Entertainment Common Stock pursuant
to Section 2.1
2
<PAGE>
Section 2.4(a) After the Effective Time, all of the outstanding
certificates formerly representing shares of Reading Common Stock and Reading
Class A Common Stock shall be deemed for all purposes to evidence only the right
to receive the same number of shares of Reading Entertainment Common Stock, as
provided in Section 2.1. The registered owner of each outstanding certificate
evidencing shares of Reading Common Stock or Reading Class A Common Stock on the
books and records of Reading, unless and until such certificate is surrendered
in exchange for certificates evidencing Reading Entertainment Common Stock,
shall not have, or be entitled to exercise, any and all transfer, voting or
other rights with respect to, or to receive any and all dividends or other
distributions upon the shares of, Reading Entertainment Common Stock to which
such person will be entitled.
(b) Promptly after the Effective Time, Reading Entertainment shall mail or
cause to be mailed to each record holder of shares of Reading Common Stock or
Reading Class A Common Stock a form letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the certificate
or certificates representing shares of Reading Common Stock or Reading Class A
Common Stock owned by such record holder shall pass, only upon proper delivery
of such certificate or certificates to the agent selected by Reading
Entertainment (the "Exchange Agent")) and instructions for use in effecting the
surrender of the outstanding certificate or certificates which immediately prior
to the Merger represented shares of Reading Common Stock or Reading Class A
Common Stock (the "Certificate" or "Certificates") for issuance of Reading
Entertainment Common Stock therefor. Upon surrender to the Exchange Agent of
each Certificate together with such letter of transmittal duly executed, the
holder of such Certificate shall be entitled to receive in exchange therefor a
certificate representing a number of shares of Reading Entertainment Common
Stock equal to the number of shares of Reading Common Stock or Reading Class A
Common Stock formerly represented by such Certificate, and such Certificate
shall forthwith be cancelled.
(c) If issuance is to be made to a person other than the person in whose
name the Certificate surrendered in exchange therefor is registered, it shall be
a condition of issuance that the Certificate to surrendered is properly endorsed
or accompanied by appropriate stock powers, in either case signed exactly as the
name of the record holder appears on such Certificate, and otherwise in proper
form for transfer, and that the person requesting such issuance shall pay to
Reading Entertainment any transfer tax or other taxes required by law as a
result of such issuance to a person other than the record holder of the
Certificate surrendered, or establish to Reading Entertainment's satisfaction
that such tax has been paid or is not payable.
Section 2.5 At the Effective Time, any option or other right to acquire
shares of Reading Common Stock or Reading Class A Common Stock that has not been
exercised and has not lapsed shall, by operation of the Merger, be converted
into and become, without any action on the part of the holder thereof, an option
or right to acquire the identical number of shares of Reading Entertainment
Common Stock.
Section 2.6 The provisions of this Article II shall be subject to any
dissenters' rights which the holders of Reading Common Stock may have under
applicable law.
3
<PAGE>
ARTICLE III
LEGAL AND FINANCIAL ASPECTS OF SURVIVING CORPORATION
----------------------------------------------------
Section 3.1 The Articles of Incorporation of Reading in effect at the
Effective Time shall be the Articles of Incorporation of the Surviving
Corporation following the Merger until amended as provided by law.
Section 3.2 The By-laws of Reading in effect at the Effective Time
shall be the By-laws of the Surviving Corporation until amended as provided by
law.
Section 3.3 Until removed or replaced as provided by the By-laws of
the Surviving Corporation, the directors and officers of Reading shall continue
to serve as the directors and officers of the Surviving Corporation.
ARTICLE IV
EFFECTS OF MERGER
-----------------
From the Effective Time, the Merger shall have the effects provided by
Pennsylvania law. Without limiting the generality of the foregoing, upon the
Effective Time, the separate existence of Merger Co. shall cease, Merger Co.
shall be merged with and into Reading as the Surviving Corporation, and the
Surviving Corporation, without any further deed or action, shall possess all
assets and property of every description, and every interest therein, wherever
located, and all rights, privileges, immunities, powers, franchises, and
authority (of a public as well as of a private nature), of each of the
Constituent Corporations and all obligations belonging to or due each of the
Constituent Corporations. Title to any real estate, or any interest therein,
vested in each Constituent Corporation shall not revert or in any way be
impaired by reason of the Merger. The Surviving Corporation shall be liable for
all of the obligations of each Constituent Corporation. Any claim existing, or
action or proceeding pending, by or against either Constituent Corporation may
be prosecuted to judgment, with right of appeal, as if the Merger had not taken
place or the Surviving Corporation may be substituted in the place of such
Constituent Corporation. All rights of creditors of each Constituent
Corporation shall be preserved unimpaired, and all liens upon the property of
either Constituent Corporation shall be preserved unimpaired, but only on the
property affected by such liens immediately before the Effective Time. Whenever
a conveyance, assignment, transfer, deed, or other instrument or act is
necessary to vest property or rights in the Surviving Corporation, the officers
of the respective Constituent Corporations shall execute, acknowledge, and
deliver such instruments and do such acts. For such purposes, the existence of
the Constituent Corporations and the authority of their respective officers is
continued, notwithstanding the Merger.
ARTICLE V
CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THE MERGER
-------------------------------------------------------
The obligations of the parties to this Agreement and Plan of Merger
are subject to the fulfillment and satisfaction, at or prior to the Effective
Time, of each of the following conditions, any one or more of which may be
waived by Reading by a writing directed to the other parties:
4
<PAGE>
Section 5.1 All actions required by law to have been taken by the
Board of Directors of Reading Entertainment and the Board of Directors and
shareholders of the Constituent Corporations shall have been duly and validly
taken.
Section 5.2 Reading Entertainment shall have received approval of the
listing of the Reading Entertainment Common Stock for quotation on The NASDAQ
Stock Market, National Market System and the listing of the Reading
Entertainment Common Stock for trading on the Philadelphia Stock Exchange.
ARTICLE VI
MISCELLANEOUS
-------------
Section 6.1 This Agreement and Plan of Merger may be terminated by
the Board of Directors of either of the Constituent Corporations and the Merger
abandoned at any time prior to the Effective Time whether before or after
submission to or approval by the shareholders of Reading.
Section 6.2 Any provision of this Agreement and Plan of Merger may be
waived at any time by the party which is, or whose shareholders are, entitled to
the benefits thereof and this Agreement and Plan of Merger may be amended or
supplemented at any time prior to the Effective Time by the Board of Directors
of the Constituent Corporations. After approval hereof by the shareholders of
Reading, no amendment shall be made which (a) alters or changes the amount or
kind of shares of Reading Entertainment to be received on conversion of shares
of Reading Common Stock or Reading Class A Common Stock as provided in Section
2.1 hereof, (b) alters or changes any term of the Articles of Incorporation of
the Surviving Corporation to be effected by the Merger as provided in Section
3.1 hereof, or (c) alters or changes any of the terms and conditions of this
Agreement and Plan of Merger if such alteration or change would adversely affect
the rights of shareholders of Reading, without the further approval of such
shareholders.
Section 6.3 This Agreement and Plan of Merger shall be governed by
and interpreted in accordance with the laws of the Commonwealth of Pennsylvania.
Section 6.4 This Agreement and Plan of Merger may be executed in one
or more counterparts, each of which shall be deemed to be an original but all of
which shall together constitute one and the same agreement.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement and
Plan of Merger to be executed as of the date first stated above by their duly
authorized officers.
READING COMPANY
By: /s/ S. Craig Tompkins
--------------------------------------------
S. Craig Tompkins, President
READING MERGER CO.
By: /s/ James A. Wunderle
--------------------------------------------
James A. Wunderle, President
READING ENTERTAINMENT, INC.
By: /s/ S. Craig Tompkins
--------------------------------------------
S. Craig Tompkins, President
6
<PAGE>
EXHIBIT B
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
READING ENTERTAINMENT INTERNATIONAL, INC.
Pursuant to Section 242 of the General Corporation Law
The undersigned, being the Executive Vice President of Reading
Entertainment International, Inc. (the "Corporation"), hereby certifies as
follows:
FIRST: The Certificate of Incorporation is hereby amended to change the
name of the Corporation to Reading Entertainment, Inc. To reflect such change,
Article FIRST of the Certificate of Incorporation is amended in its entirety to
read as follows:
FIRST. The name of the Corporation is READING ENTERTAINMENT, INC.
SECOND: The foregoing amendment was authorized pursuant to Sections 228
and 242 of the General Corporation Law by unanimous written consent of the
directors of the Corporation and the written consent of the sole stockholder of
the Corporation.
IN WITNESS WHEREOF, the undersigned has executed this Certificate and
affirmed the statements made herein are true under penalties of perjury this
12th day of August, 1996.
/s/ James A. Wunderle
--------------------------------------------
James A. Wunderle, Executive Vice President
<PAGE>
CERTIFICATE OF INCORPORATION
OF
READING ENTERTAINMENT INTERNATIONAL, INC.
under
The Delaware General Corporation Law
<PAGE>
CERTIFICATE OF INCORPORATION
OF
READING ENTERTAINMENT INTERNATIONAL, INC.
----------------------------
FIRST. The name of the Corporation is READING ENTERTAINMENT INTERNATIONAL,
INC.
SECOND. The address of the Corporation's registered office in the State of
Delaware is 314 South State Street, in the city of Dover, County of Kent. The
name of its registered agent at such address is Capitol Corporate Services, Inc.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH.
A. The aggregate number of shares which the Corporation shall have
authority to issue is 35,000,000, of which 10,000,000 shares of the par value of
$0.001 per share shall be designated "Preferred Stock" and 25,000,000 shares of
the par value of $.001 per share shall be designated "Common Stock."
B. Authority is hereby expressly granted to the Board of Directors from
time to time to issue the Preferred Stock as Preferred Stock of any series and,
in connection with the creation of each such series, to fix by the resolution or
resolutions providing for the issue of shares thereof, the number of shares of
such series, and the designations, voting rights, if any, powers, preferences,
and rights, and the qualifications, limitations, and restrictions, of such
series, to the full extent now or hereafter permitted by the laws of the State
of Delaware.
C. No share of Common Stock, or of any other security of the Corporation
which is treated as stock for purposes of Section 382 of the Internal Revenue
Code of 1986, as amended (the "Code") (the Common Stock and any such other
securities being hereinafter referred to as "New Stock") shall be transferable
or assignable in any respect, either of record or beneficially, unless such
transfer or assignment is permitted under the following provisions:
1. Until the earliest of January 1, 2003, such date as the
Corporation shall no longer have any unutilized federal income tax net
operating loss carryforwards (the "Carryforwards") or such date after which
Section 382 of the Code is repealed or so substantially modified that in
the opinion of counsel to the Corporation the restrictions on transfer
described herein are no longer necessary to accomplish their intended
purpose: (a) any attempted sale, transfer, assignment or
<PAGE>
other disposition (including the granting of any option or entering into
any agreement for the sale, transfer, assignment or other disposition),
whether voluntary or involuntary, whether of record or beneficially and
whether by operation of law or otherwise (a "Transfer"), of any share or
shares of the New Stock of the Corporation or of any option, convertible
security or other right to purchase or acquire such stock (collectively,
"Rights") to any person or entity or group of persons or entities acting in
concert (a "Transferee") who or which, directly, indirectly or by
application of the constructive ownership rules set forth in
Section 382(1)(3) of the Code and the Income Tax Regulations as now in
effect or hereafter promulgated pursuant thereto (the "Regulations"), owns,
prior to the Transfer, an aggregate number of shares of the Corporation's
outstanding New Stock having a fair market value equal to or greater than
4.75 percent of the fair market value of the total number of shares of the
Corporation's outstanding New Stock shall be void ab initio insofar as it
purports to transfer ownership to such Transferee and (b) any attempted
Transfer of any share or shares of the New Stock of the Corporation or of
any Rights to any Transferee not described in clause (a) hereof who or
which, directly, indirectly or by application of the constructive ownership
rules in Section 382(1)(3) of the Code and the Regulations, would own as a
result of the Transfer, or as a result of a subsequent Transfer of any
share or shares of the New Stock or Rights, an aggregate number of shares
of the Corporation's outstanding New Stock having a fair market value equal
to or greater than 4.75 percent of the fair market value of the total
number of shares of the Corporation's outstanding New Stock, shall, as to
the number of shares or Rights representing such excess over 4.75 percent,
be void ab initio insofar as it purports to transfer ownership to such
Transferee of any shares of New Stock or Rights.
2. The restrictions contained in paragraph 1 of this Section C of
this Article FOURTH have been included herein for the purpose of reducing
the risk of occurrence of an "ownership change" within the meaning of
Section 382(g) of the Code and the Regulations that would result in the
limitation or elimination of the Corporation's utilization of the
Carryforwards.
3. Neither clause (a) nor clause (b) of paragraph 1 of this
Section C of this Article FOURTH shall restrict any Transfer of New Stock
of the Corporation or Rights if (a) the prior written approval of the Board
of Directors of the Corporation shall have been obtained with respect to
such Transfer and (b) if so requested by the Board of Directors, counsel to
the Corporation shall have delivered its opinion that such Transfer would
not result in an "ownership change" within the meaning of Section 382(g) of
the Code and Regulations that would result in the elimination or limitation
of the Corporation's utilization of the Carryforwards. The Board of
Directors shall have the authority, in its sole discretion, to adopt
procedures for the orderly and effective administration and implementation
of this Section C, and, in deciding whether to approve any proposed
Transfer of New Stock of the Corporation or Rights, the Corporation acting
through any officer may request all relevant information, as well as an
opinion of counsel, in form and substance reasonably satisfactory to the
Board of Directors. No employee or agent of the Corporation shall be
permitted to record any attempted or purported Transfer of New Stock of the
Corporation or Rights made in violation of this Article FOURTH and no
Transferee of New Stock of the Corporation or Rights effected in violation
of this Article FOURTH shall be deemed to have acquired ownership of New
Stock or Rights for any purpose. Such intended Transferee shall not be
entitled to any rights as a stockholder of the Corporation with respect to
such New Stock, including, but not limited to, the right to vote such New
Stock or to receive any distributions in respect thereof, whether as
dividends or in liquidation.
2
<PAGE>
4. If the procedures adopted by the Board of Directors so require,
the Corporation's transfer agent for any of the Corporation's securities
(the "Transfer Agent") shall not issue any certificates transferring,
assigning or disposing of or purporting to transfer, assign or otherwise
dispose of legal ownership of any shares of New Stock or Rights unless the
Transfer Agent receives from the proposed Transferee, in addition to any
other information requested by it, a certificate signed under penalty of
perjury attesting to the fact that the Transferee is not, and will not
become as a result of the proposed Transfer, an owner of an aggregate
number of shares of the Corporation's outstanding New Stock or Rights
having a fair market value equal to or greater than 4.75 percent of the
fair market value of the total number of shares of the Corporation's
outstanding New Stock. If at any time the Transfer Agent receives a request
to make a change in record ownership of shares of New Stock of the
Corporation or Rights which, if effected, would appear to the Transfer
Agent on the basis of information in its possession to constitute a
violation of this Article FOURTH, then, prior to registering such change in
ownership on the books of the Corporation, the Transfer Agent shall notify
the Corporation. If the Board of Directors or an officer of the Corporation
designated by the Board of Directors determines that the proposed change in
ownership would violate this Article FOURTH, then the Corporation shall so
advise the Transfer Agent and the Transfer Agent shall not make such change
in ownership on the books of the Corporation and shall return the
certificates representing such shares or Rights to the holder of record
thereof.
5. If, notwithstanding the foregoing prohibition, a Transferee
shall, voluntarily or involuntarily, purportedly become or attempt to
become the purported owner (the "Purported Owner") of shares of New Stock
or Rights, or both, in excess of the limitations set forth above (the
shares or Rights, including shares of New Stock issued in respect of
Rights, so exceeding such limitation being herein referred to as the
"Excess Shares"), then:
(a) The Purported Owner shall not obtain any rights in and to
the Excess Shares, and the purported Transfer of the Excess Shares to
the Purported Owner shall not be recognized by the Corporation or its
Transfer Agent. Until the Excess Shares are transferred to a person
whose acquisition thereof will not violate the foregoing limitations
(a "Permitted Transferee"), (i) the Excess Shares shall be voted by
such person as shall be appointed by the Corporation's Board of
Directors, which person shall be deemed to have been granted a proxy
to vote the Excess Shares, (ii) the transferor of the Excess Shares to
the Purported Owner (the "Purported Owner's Transferor") shall be
deemed to have retained the Excess Shares and shall hold and be
entitled to exercise all other rights incident to ownership of such
Excess Shares, and (iii) if the Excess Shares are Rights, they may not
be exercised, converted or exchanged until transferred to, and
exercised, converted or exchanged in accordance with their terms by, a
Permitted Transferee; provided, however, that the foregoing
notwithstanding, in the event shares of New Stock are issued in
respect of Rights which are Excess Shares prior to notice to the
Corporation or the Transfer Agent that such Rights are Excess Shares,
the shares of New Stock so issued shall be deemed to be issued and
outstanding shares of New Stock of the Corporation and shall be Excess
Shares deemed retained by the Purported Owner's Transferor. Rights
issued by the Corporation shall reflect the provisions of the
foregoing sentence. All Excess Shares will continue to be issued and
outstanding.
(b) If the Transfer Agent obtains possession of a certificate
or certificates representing the Excess Shares, the Transfer Agent
shall deliver such certificate or
3
<PAGE>
certificates to a trustee appointed by the Corporation's Board of
Directors (the "Share Trustee") who shall proceed forthwith to sell or
cause the sale of the Excess Shares to a Permitted Transferee. If the
Transfer Agent does not have possession of such certificate, upon
notice from the Corporation of the existence of Excess Shares and the
identity of the Purported Owner, the Share Trustee shall take all
lawful action to cause the Purported Owner to deliver or cause
delivery of the Excess Shares and any indicia of ownership thereof to
the Share Trustee and, upon obtaining possession thereof, the Share
Trustee shall proceed forthwith to sell or cause the sale of the
Excess Shares to a Permitted Transferee. The Share Trustee shall sell
or cause the sale of the Excess Shares in the then existing public
market or in such other commercially reasonable fashion as the
Corporation shall direct. In performing the duties herein imposed
upon it, the Share Trustee shall act at all times as the agent for the
Purported Owner's Transferor.
(c) Once the Excess Shares are acquired by a Permitted
Transferee, the Permitted Transferee shall have and shall be entitled
to exercise all rights incident to the ownership of such Excess
Shares.
(d) The Proceeds from the sale of the Excess Shares to the
Permitted Transferee (the "Proceeds") shall be distributed as follows:
(i) first, to the Share Trustee to cover its costs and expenses;
(ii) second, to the Purported Owner, if known, in an amount up to the
amount paid by the Purported Owner, if determinable, for the Excess
Shares; and (iii) finally, the remaining Proceeds, if any, shall be
distributed to the Purported Owner's Transferor, if known, and if not
known, such remaining Proceeds shall be held by the Corporation for
the benefit of the Purported Owner's Transferor or such other person
as their interests may appear. Notwithstanding anything in this
Article FOURTH to the contrary, the Corporation shall at all times be
entitled to make application to any court of equitable jurisdiction
within the State of Delaware for an adjudication of the respective
rights and interests of any person in and to the Proceeds pursuant to
this Article FOURTH and applicable law and for leave to pay the
Proceeds into such court.
6. Immediately upon the purported acquisition of any Excess Shares,
the Purported Owner thereof shall give, or cause to be given, written
notice thereof to the Corporation. Each owner of shares of New Stock and
Rights shall furnish to the Corporation all information reasonably
requested with respect to all shares of New Stock and Rights directly and
indirectly owned by such person.
7. Upon a determination by the Board of Directors that a person has
attempted or may attempt to transfer or to acquire Excess Shares, the Board
of Directors may take such action as it deems advisable to refuse to give
effect to such Transfer or acquisition on the books and records of the
Corporation, including without limitation to cause the Transfer Agent to
record the Purported Owner's Transferor as the record owner of the Excess
Shares, to refuse to issue shares of New Stock upon the purported exercise
of Rights which are Excess Shares, and to institute proceedings to enjoin
or rescind any such Transfer or acquisition.
8. To the extent permitted by regulations promulgated under
Section 382 of the Code, in determining whether any person has become a
Purported Owner of Excess Shares, the Corporation may rely on filings on
Schedules 13D and 13G as required by Rule 13d-1 of the Securities Exchange
Act of 1934, as amended.
4
<PAGE>
9. If any provision of this Article FOURTH or any application of any
such provision is determined to be invalid by any federal or state court
having jurisdiction over the issues, the validity of the remaining
provisions shall not be affected and other applications of such provision
shall be affected only to the extent necessary to comply with the
determination of such court.
10. All certificates representing shares of New Stock shall
conspicuously bear the following legend:
"The shares represented by this certificate are subject to
certain restrictions on transfer set forth in Article FOURTH of the
Corporation's Certificate of Incorporation, the full text of which is
available at the offices of or on request to the Corporation. ANY
ATTEMPT TO ACQUIRE STOCK OF THE CORPORATION IN VIOLATION OF SUCH
RESTRICTIONS SHALL BE NULL AND VOID AND MAY RESULT IN FINANCIAL LOSS
TO THE PERSON OR ENTITY ATTEMPTING SUCH ACQUISITION."
FIFTH. The name and mailing address of the incorporator is Michael H.
Margulis, Duane, Morris & Heckscher, Suite 2125, 122 East 42nd Street, New York,
New York 10168.
SIXTH. Election of directors need not be by written ballot.
SEVENTH. The Board of Directors is authorized to adopt, amend, or repeal
By-Laws of the Corporation except as and to the extent provided in the By-Laws.
EIGHTH. Any person who was or is a party or is threatened to be made a
party to any threatened, pending, or completed action, suit, or proceeding,
whether civil, criminal, administrative, or investigative (whether or not by or
in the right of the Corporation) by reason of the fact that he is or was a
director, officer, incorporator, employee, or agent of the Corporation, or is or
was serving at the request of the Corporation as a director, officer,
incorporator, employee, partner, trustee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise (including an employee
benefit plan), shall be entitled to be indemnified by the Corporation to the
full extent then permitted by law against expenses (including counsel fees and
disbursements), judgments, fines (including excise taxes assessed on a person
with respect to an employee benefit plan), and amounts paid in settlement
incurred by him in connection with such action, suit, or proceeding. Such right
of indemnification shall inure whether or not the claim asserted is based on
matters which antedate the adoption of this Article EIGHTH. Such right of
indemnification shall continue as to a person who has ceased to be a director,
officer, incorporator, employee, partner, trustee, or agent and shall inure to
the benefit of the heirs and personal representatives of such a person. The
indemnification provided by this Article EIGHTH shall not be deemed exclusive of
any other rights which may be provided now or in the future under any provision
currently in effect or hereafter adopted of the By-Laws, by any agreement, by
vote of stockholders, by resolution of disinterested directors, by provision of
law, or otherwise.
NINTH. No director of the Corporation shall be liable to the Corporation
or any of its stockholders for monetary damages for breach of fiduciary duty as
a director, provided that this provision does not eliminate the liability of the
director (i) for any breach of the director's duty of loyalty to the Corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of Title 8 of the Delaware Code, or (iv) for any transaction from
which the director derived an improper personal benefit. For purposes of the
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prior sentence, the term "damages" shall, to the extent permitted by law,
include without limitation, any judgment, fine, amount paid in settlement,
penalty, punitive damages, excise or other tax assessed with respect to an
employee benefit plan, or expense of any nature (including, without limitation,
counsel fees and disbursements). Each person who serves as a director of the
Corporation while this Article NINTH is in effect shall be deemed to be doing so
in reliance on the provisions of this Article NINTH, and neither the amendment
or repeal of this Article NINTH, nor the adoption of any provision of this
Certificate of Incorporation inconsistent with this Article NINTH, shall apply
to or have any effect on the liability or alleged liability of any director of
the Corporation for, arising out of, based upon, or in connection with any acts
or omissions of such director occurring prior to such amendment, repeal, or
adoption of an inconsistent provision. The provisions of this Article NINTH are
cumulative and shall be in addition to and independent of any and all other
limitations on or eliminations of the liabilities of directors of the
Corporation, as such, whether such limitations or eliminations arise under or
are created by any law, rule, regulation, by-law, agreement, vote of
shareholders or disinterested directors, or otherwise.
IN WITNESS WHEREOF, I have made, signed, and sealed this Certificate of
Incorporation this 25th day of July, 1996.
/s/ Michael H. Margulis (L.S.)
--------------------------------
Michael H. Margulis,
Incorporator
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EXHIBIT C
BY-LAWS
of
READING ENTERTAINMENT, INC.
As adopted July 25, 1996
<PAGE>
READING ENTERTAINMENT, INC.
A Delaware Corporation
BY-LAWS
ARTICLE I
Stockholders
Section 1.1 Annual Meeting.
An annual meeting of stockholders for the purpose of electing directors and
of transacting such other business as may come before it shall be held each year
at such date, time, and place, either within or without the State of Delaware,
as may be specified by the Board of Directors.
Section 1.2 Special Meetings.
Special meetings of stockholders for any purpose or purposes may be held at
any time upon call of the Chairman or Vice Chairman of the Board, if any, the
Chief Executive Officer, the President, or any three or more members of the
Board of Directors, at such time and place either within or without the State of
Delaware as may be stated in the notice. A special meeting of stockholders
shall be called by the President or the Secretary upon the written request,
stating time, place, and the purpose or purposes of the meeting, of stockholders
who together own of record shares of stock entitling them to cast a majority of
the votes entitled to be cast by the holders of the outstanding stock of all
classes entitled to vote at such meeting.
Section 1.3 Notice of Meetings.
Written notice of stockholders meetings, stating the place, date, and hour
thereof, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be given by the Chairman or Vice Chairman of
the Board, if any, the Chief Executive Officer, the President, any Vice
President, the Secretary, or an Assistant Secretary, to each stockholder
entitled to vote thereat at least ten days but not more than sixty days before
the date of the meeting, unless a different period is prescribed by law.
Section 1.4 Quorum.
Except as otherwise provided by law or in the Certificate of Incorporation
or these By-Laws, at any meeting of stockholders, the holders of shares of stock
entitling them to cast a majority of the votes entitled to be cast at the
meeting shall be present or represented by proxy in order to constitute a quorum
for the transaction of any business. In the absence of a quorum, a majority in
interest of the stockholders present or the chairman of the meeting may adjourn
the meeting from time to time in the manner provided in Section 1.5 of these By-
Laws until a quorum shall attend.
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Section 1.5 Adjournment.
Any meeting of stockholders, annual or special, may adjourn from time to
time to reconvene at the same or some other place, and notice need not be given
of any such adjourned meeting if the time and place thereof are announced at the
meeting at which the adjournment is taken. At the adjourned meeting, the
Corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting.
Section 1.6 Organization.
The Chairman of the Board, if any, or in his absence the Vice Chairman of
the Board, if any, or in their absence the Chief Executive Officer, or in their
absence the President, or in their absence any Vice President, shall call to
order meetings of stockholders and shall act as chairman of such meetings. The
Board of Directors or, if the Board fails to act, the stockholders may appoint
any stockholder, director, or officer of the Corporation to act as chairman of
any meeting in the absence of the Chairman of the Board, the President, and all
Vice Presidents.
The Secretary of the Corporation shall act as secretary of all meetings of
stockholders, but, in the absence of the Secretary, the chairman of the meeting
may appoint any other person to act as secretary of the meeting.
Section 1.7 Voting.
Except as otherwise provided by law or in the Certificate of Incorporation
or these By-Laws and except for the election of directors, at any meeting duly
called and held at which a quorum is present, a majority of the votes cast at
such meeting upon a given question by the holders of outstanding shares of stock
of all classes of stock of the Corporation entitled to vote thereon who are
present in person or by proxy shall decide such question. At any meeting duly
called and held for the election of directors at which a quorum is present,
directors shall be elected by a plurality of the votes cast by the holders
(acting as such) of shares of stock of the Corporation entitled to elect such
directors.
Section 1.8 Action By Consent of Stockholders.
Unless otherwise restricted by the Certificate of Incorporation, any action
required or permitted to be taken at any annual or special meeting of the
stockholders may be taken without a meeting, without prior notice and without a
vote, if a consent or consents in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and voted
and shall be delivered (by hand or by certified or registered mail, return
receipt requested) to the Corporation by delivery to its registered office in
the State of Delaware, its principal place of business, or an officer or agent
of the Corporation having custody of the book in which proceedings of minutes of
stockholders are recorded. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
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ARTICLE II
Board Of Directors
Section 2.1 Number and Term of Office.
The business, property, and affairs of the Corporation shall be managed by
or under the direction of a Board of three directors; provided, however, that
the Board, by resolution adopted by vote of a majority of the then authorized
number of directors, may increase or decrease the number of directors. The
directors shall be elected by the holders of shares entitled to vote thereon at
the annual meeting of stockholders, and each shall serve (subject to the
provisions of Article IV) until the next succeeding annual meeting of
stockholders and until his respective successor has been elected and qualified.
Section 2.2 Nomination of Stockholders
No stockholder shall be permitted to nominate a candidate for election as a
director at any annual meeting unless such stockholder shall provide in writing,
not later than 120 days before the first anniversary of the preceding annual
meeting of stockholders, to the Nominating Committee of the Board of Directors
or, in the absence of such committee, to the Secretary of the Corporation,
information about such candidate which, were such candidate a nominee of the
Board of Directors for whom the Corporation solicited proxies, would be required
to be disclosed in the proxy materials pursuant to which such proxies would be
solicited as set forth in Items 7-8 of Schedule 14A promulgated by the
Securities and Exchange Commission or any successor provisions.
Section 2.3 Chairman and Vice Chairman of the Board.
The directors may elect one of their members to be Chairman of the Board of
Directors and may elect one of the members to be the Vice Chairman of the Board
of Directors. The Chairman and Vice Chairman shall be subject to the control of
and may be removed by the Board of Directors. The Chairman and Vice Chairman
shall perform such duties as may from time to time be assigned to them by the
Board.
Section 2.4 Meetings.
Regular meetings of the Board of Directors may be held without notice at
such time and place as shall from time to time be determined by the Board.
Special meetings of the Board of Directors shall be held at such time and
place as shall be designated in the notice of the meeting whenever called by the
Chairman or Vice Chairman of the Board, if any, the Chief Executive Officer, the
President, or by any three of the directors then in office.
Section 2.5 Notice of Special Meetings.
The Secretary, or in his absence any other officer of the Corporation,
shall give each director notice of the time and place of holding of special
meetings of the Board of Directors by telecopy or electronic mail at least 48
hours before the meeting, or by mail at least two days before the meeting, or
by telegram, cable, radiogram, or personal service at least two days before the
meeting. Unless otherwise stated in the notice thereof, any and all business
may be transacted at any meeting without specification of such business in the
notice.
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Section 2.6 Quorum and Organization of Meetings.
A majority of the total number of members of the Board of Directors as
constituted from time to time shall constitute a quorum for the transaction of
business, but, if at any meeting of the Board of Directors (whether or not
adjourned from a previous meeting) there shall be less than a quorum present, a
majority of those present may adjourn the meeting to another time and place, and
the meeting may be held as adjourned without further notice or waiver. Except
as otherwise provided by law or in the Certificate of Incorporation or these By-
Laws, a majority of the directors present at any meeting at which a quorum is
present may decide any question brought before such meeting. Meetings shall be
presided over by the Chairman of the Board, if any, or in his absence by the
Vice Chairman of the Board, if any, or in their absence by the Chief Executive
Officer, or in their absence by the President, or in the absence of all of the
foregoing by such other person as the directors may select. The Secretary of
the Corporation shall act as secretary of the meeting, but in his absence the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
Section 2.7 Committees.
The Board of Directors may designate one or more committees, each committee
to consist of one or more of the directors of the Corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of a committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors, shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business,
property, and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers which may require it; but no such
committee shall have power or authority in reference to (i) approving or
adopting, or recommending to stockholders, any action or matter expressly
required by law to be submitted to stockholders for approval or (ii) adopting,
amending, or repealing these By-Laws. Each committee which may be established
by the Board of Directors pursuant to these By-Laws may fix its own rules and
procedures. Notice of meetings of committees, other than of regular meetings
provided for by the rules, shall be given to committee members. All action
taken by committees shall be recorded in minutes of the meetings.
Section 2.8 Action Without Meeting.
Nothing contained in these By-Laws shall be deemed to restrict the power of
members of the Board of Directors or any committee designated by the Board to
take any action required or permitted to be taken by them without a meeting.
Section 2.9 Telephone Meetings.
Nothing contained in these By-Laws shall be deemed to restrict the power of
members of the Board of Directors, or any committee designated by the Board, to
participate in a meeting of the Board, or committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other.
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ARTICLE III
Officers
Section 3.1 Executive Officers.
The executive officers of the Corporation shall be a Chief Executive
Officer or a President, or both, one or more Vice Presidents, a Treasurer, and a
Secretary, each of whom shall be elected by the Board of Directors. The Board of
Directors may elect or appoint such other officers (including a Controller and
one or more Assistant Treasurers and Assistant Secretaries) as it may deem
necessary or desirable. Each officer shall hold office for such term as may be
prescribed by the Board of Directors from time to time. Any person may hold at
one time two or more offices.
Section 3.2 Powers and Duties.
The Chairman of the Board, if any, or, in his absence, the Vice Chairman of
the Board, or in their absence the Chief Executive Officer, or in their absence
the President, shall preside at all meetings of the stockholders and of the
Board of Directors. The officers and agents of the Corporation shall each have
such powers and authority and shall perform such duties in the management of the
business, property, and affairs of the Corporation as generally pertain to their
respective offices, as well as such powers and authorities and such duties as
from time to time may be prescribed by the Board of Directors.
ARTICLE IV
Resignations, Removals, And Vacancies
Section 4.1 Resignations.
Any director or officer of the Corporation, or any member of any committee,
may resign at any time by giving written notice to the Board of Directors, the
Chairman or Vice Chairman of the Board, the Chief Executive Officer, the
President, or the Secretary of the Corporation. Any such resignation shall take
effect at the time specified therein or, if the time be not specified therein,
then upon receipt thereof. The acceptance of such resignation shall not be
necessary to make it effective.
Section 4.2 Removals.
The Board of Directors, by a vote of not less than a majority of the entire
Board, at any meeting thereof, or by written consent, at any time, may, to the
extent permitted by law, remove with or without cause from office or terminate
the employment of any officer or member of any committee and may, with or
without cause, disband any committee.
Any director or the entire Board of Directors may be removed, with or
without cause, by the holders of a majority of the shares entitled at the time
to vote at an election of directors.
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Section 4.3 Vacancies.
Any vacancy in the office of any director or officer through death,
resignation, removal, disqualification, or other cause, and any additional
directorship resulting from increase in the number of directors, may be filled
at any time by a majority of the directors then in office (even though less
than a quorum remains) or, in the case of any vacancy in the office of any
director, by the stockholders, and, subject to the provisions of this Article
IV, the person so chosen shall hold office until his successor shall have been
elected and qualified; or, if the person so chosen is a director elected to fill
a vacancy, he shall (subject to the provisions of this Article IV) hold office
for the unexpired term of his predecessor.
ARTICLE V
Capital Stock
Section 5.1 Stock Certificates.
The certificates for shares of the capital stock of the Corporation shall
be in such form as shall be prescribed by law and approved, from time to time,
by the Board of Directors.
Section 5.2 Transfer of Shares.
Shares of the capital stock of the Corporation may be transferred on the
books of the Corporation only by the holder of such shares or by his duly
authorized attorney, upon the surrender to the Corporation or its transfer agent
of the certificate representing such stock properly endorsed.
Section 5.3 Fixing Record Date.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof
or to express consent to corporate action in writing without a meeting, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion, or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix, in advance, a record date, which, unless
otherwise provided by law, shall not be more than sixty nor less than ten days
before the date of such meeting, nor more than sixty days prior to any other
action.
Section 5.4 Lost Certificates.
The Board of Directors or any transfer agent of the Corporation may direct
a new certificate or certificates representing stock of the Corporation to be
issued in place of any certificate or certificates theretofore issued by the
Corporation, alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate to be lost,
stolen, or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors (or any transfer agent of the Corporation
authorized to do so by a resolution of the Board of Directors) may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen, or destroyed certificate or certificates, or his
legal representative, to give the Corporation a bond in such sum as the Board of
Directors (or any transfer agent so authorized) shall direct to indemnify the
Corporation against any claim that may be made against the Corporation with
respect to the certificate alleged to have been
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<PAGE>
lost, stolen, or destroyed or the issuance of such new certificates, and such
requirement may be general or confined to specific instances.
Section 5.5 Regulations.
The Board of Directors shall have power and authority to make all such
rules and regulations as it may deem expedient concerning the issue, transfer,
registration, cancellation, and replacement of certificates representing stock
of the Corporation.
ARTICLE VI
Miscellaneous
Section 6.1 Corporate Seal.
The corporate seal shall have inscribed thereon the name of the Corporation
and shall be in such form as may be approved from time to time by the Board of
Directors, the year of its organization, and the words "Corporate Seal" and
"Delaware".
Section 6.2 Fiscal Year.
The fiscal year of the Corporation shall be determined by resolution of the
Board of Directors.
Section 6.3 Notices and Waivers Thereof.
Whenever any notice whatever is required by law, the Certificate of
Incorporation, or these By-Laws to be given to any stockholder, director, or
officer, such notice, except as otherwise provided by law, may be given
personally, or by mail, or, in the case of directors or officers, by telecopy,
electronic mail, telegram, cable, or radiogram, addressed to such address as
appears on the books of the Corporation. Any notice given by telecopy,
electronic mail, telegram, cable, or radiogram shall be deemed to have been
given when it shall have been delivered for transmission and any notice given by
mail shall be deemed to have been given when it shall have been deposited in
the United States mail with postage thereon prepaid.
Whenever any notice is required to be given by law, the Certificate of
Incorporation, or these By-Laws, a written waiver thereof, signed by the person
entitled to such notice, whether before or after the meeting or the time stated
therein, shall be deemed equivalent in all respects to such notice to the full
extent permitted by law. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
Section 6.4 Stock of Other Corporations or Other Interests.
Unless otherwise ordered by the Board of Directors, the Chief Executive
Officer, the President, the Secretary, and such attorneys or agents of the
Corporation as may be from time to time authorized by the Board of Directors or
the President, shall have full power and authority on behalf of this Corporation
to attend and to act and vote in person or by proxy at any meeting of the
holders of securities of any
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corporation or other entity in which this Corporation may own or hold shares or
other securities, and at such meetings shall possess and may exercise all the
rights and powers incident to the ownership of such shares or other securities
which this Corporation, as the owner or holder thereof, might have possessed
and exercised if present. The Chief Executive Officer, the President, the
Secretary, or such attorneys or agents, may also execute and deliver on behalf
of this Corporation powers of attorney, proxies, consents, waivers, and other
instruments relating to the shares or securities owned or held by this
Corporation.
ARTICLE VII
Amendments
The holders of shares entitled at the time to vote for the election of
directors shall have power to adopt, amend, or repeal the By-Laws of the
Corporation by vote of not less than a majority in interest of such shares, and
except as otherwise provided by law, the Board of Directors shall have power
equal in all respects to that of the stockholders to adopt, amend, or repeal
the By-Laws by vote of not less than a majority of the entire Board. However,
any By-Law adopted by the Board may be amended or repealed by vote of the
holders of a majority of the shares entitled at the time to vote for the
election of directors.
ARTICLE VIII
Indemnification
Section 8.1 Indemnification Generally.
The Corporation shall indemnify each person who was or is made a party or
is threatened to be made a party to or is involved in any threatened, pending,
or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (hereinafter a "Proceeding"), by reason of the
fact that he or she, or a person of which he or she is the legal representative,
is or was a director or officer, or had agreed to serve as a director or
officer, of the Corporation or is or was serving or has agreed to serve at the
request of the Corporation as a director, officer, employee, or agent of another
corporation or of a partnership, joint venture, trust, or other enterprise,
including service with respect to employee benefit plans, or by reason of any
act alleged to have been taken or omitted in such capacity, whether the basis of
such Proceeding is alleged action in an official capacity as a director,
officer, employee, or agent or alleged action in any other capacity while
serving as a director, officer, employee, or agent, to the maximum extent
authorized by the General Corporation Law of the State of Delaware, as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide prior
to such amendment), against all cost, expense, liability, and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties, and amounts
paid or to be paid in settlement) reasonably incurred by such person or on his
or her behalf in connection with such Proceeding, and such indemnification shall
continue as to a person who has ceased to be a director, officer, employee, or
agent and shall inure to the benefit of his or her heirs, executors, and
administrators. The right to indemnification conferred in this Article Eighth
shall be a contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such Proceeding in advance of
its final disposition; provided that, if the General Corporation Law so
requires, the payment of such expenses incurred by a director or officer in
advance of the final disposition of a Proceeding shall be made only
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upon receipt by the Corporation of an undertaking by or on behalf of such person
to repay all amounts so advanced if it shall ultimately be determined that such
person is not entitled to be indemnified by the Corporation as authorized in
this Article Eighth or otherwise and provided that the Corporation shall not be
required to advance expenses in connection with a Proceeding (or part thereof)
alleging liability under Section 16(b) of the Securities Exchange Act of 1934,
as amended (a "16(b) Claim"). The termination of any Proceeding by judgment,
order, settlement, or conviction, or upon a plea of nolo contendre or its
equivalent, shall not, of itself, create a presumption that the person did not
meet any standard of conduct for indemnification imposed by the General
Corporation Law. The Corporation shall be required to indemnify a person in
connection with a Proceeding (or part thereof) initiated by such person only if
such Proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
Section 8.2 Indemnification for Costs, Charges, and Expenses for
Successful Party.
Notwithstanding the other provisions of this Article Eighth, to the extent
that a director or officer of the Corporation has been successful on the merits
or otherwise, including, without limitation, the dismissal of an action without
prejudice, in defense of any Proceeding referred to in Section 8.1, or in the
defense of any claim, issue, or matter therein, he shall be indemnified against
all costs, charges, and expenses (including attorneys' fees) actually and
reasonably incurred by him or on his behalf in connection therewith.
Section 8.3 Determination of Right to Indemnification.
Any indemnification under Section 8.1 or 8.2 (unless ordered by a court)
shall be paid by the Corporation unless a determination is made (a) by the Board
of Directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit, or proceeding, or (b) if such a quorum is not
obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (c) by the
stockholders, that indemnification of the director or officer is not proper in
the circumstances because he has not met the applicable standards of conduct set
forth in the General Corporation Law.
Section 8.4 Advance of Costs, Charges and Expenses.
Costs, charges, and expenses (including attorneys' fees) incurred by a
person referred to in section 8.1 of this Article Eighth in defending a civil or
criminal Proceeding (including investigations by any government agency and all
costs, charges, and expenses incurred in preparing for any threatened
Proceeding) shall be paid by the Corporation in advance of the final disposition
of such Proceeding; provided, however, that the payment of such costs, charges,
and expenses incurred by a director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer) in advance of the final
disposition of such Proceeding shall be made only upon receipt of an undertaking
by or on behalf of the director or officer to repay all amounts so advanced if
it shall ultimately be determined that such director or officer is not entitled
to be indemnified by the Corporation as authorized in this Article Eighth and
provided that the Corporation shall not be required to advance expenses in
connection with a 16(b) Claim. No security shall be required for such
undertaking and such undertaking shall be accepted without reference to the
recipient's financial ability to make repayment. The Board of Directors may, in
the manner set forth above, and subject to the approval of such director or
officer, authorize the Corporation's counsel to represent such person in any
Proceeding, whether or not the Corporation is a party to such Proceeding.
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Section 8.5 Procedure for Indemnification.
Any indemnification under Section 8.1 or advance of costs, charges, and
expenses under Section 8.4 shall be made promptly, and in any event within 60
days, upon the written request of the director or officer directed to the
Secretary of the Corporation. The right to indemnification or advances as
granted by this Article Eighth shall be enforceable by the director or officer
in any court of competent jurisdiction if the Corporation denies such request,
in whole or in part, or if no disposition thereof is made within 60 days. Such
person's costs and expenses incurred in connection with successfully
establishing his or her right to indemnification or advances, in whole or in
part, in any such action shall also be indemnified by the Corporation. It shall
be a defense to any such action (other than an action brought to enforce a claim
for the advance of costs, charges, and expenses under Section 8.4 where the
required undertaking, if any, has been received by the Corporation) that the
claimant has not met the standard of conduct, if any, set forth in the General
Corporation Law, but, to the extent permitted by applicable law, the burden of
proving that such standard of conduct has not been met shall be on the
Corporation. To the extent permitted by applicable law, neither the failure of
the Corporation (including its Board of Directors, its independent legal
counsel, and its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of conduct,
if any, set forth in the General Corporation Law, nor the fact that there has
been an actual determination by the Corporation (including its Board of
Directors, its independent legal counsel, and its stockholders) that the
claimant has not met such applicable standard of conduct, shall be a defense to
the action or create a presumption that the claimant has not met the applicable
standard of conduct.
Section 8.6 Other Rights; Continuation of Right of Indemnification.
The indemnification provided by this Article Eighth shall not be deemed
exclusive of any other rights to which a person seeking indemnification may be
entitled under any law (common or statutory), agreement, vote of stockholders or
disinterested directors, or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding office, and shall
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of the estate, heirs, executors, and administrators of such
person. All rights to indemnification under this Article Eighth shall be deemed
to be a contract between the Corporation and each director and officer of the
Corporation who serves or served in such capacity at any time while this Article
Eighth is in effect. No amendment or repeal of this Article Eighth or of any
relevant provisions of the General Corporation Law or any other applicable laws
shall adversely affect or deny to any director or officer any rights to
indemnification which such person may have, or change or release any obligations
of the Corporation under this Article Eighth with respect to any costs,
charges, expenses (including attorneys' fees), judgments, fines, and amounts
paid in settlement which arise out of an Proceeding based in whole or
substantial part on any act, actual or alleged, which takes place before or
while this Article Eighth is in effect. The provisions of this Section 8.6
shall apply to any such Proceeding whenever commenced, including any such
Proceeding commenced after any amendment or repeal of this Article Eighth. The
right to indemnification and advancement of expenses conferred on any person by
this Article Eighth shall not limit the Corporation from providing any other
indemnification permitted by law.
-10-
<PAGE>
Section 8.7 Definitions.
For purposes of this Article Eighth:
"the Corporation" includes any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which, if
its separate existence continued, would have had power and authority to
indemnify its directors or officers, so that any person who is or was a director
or officer of such constituent corporation, or is or was serving at the request
of such constituent corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise,
shall stand in the same position under the provisions of this Article Eighth
with respect to the resulting or surviving corporation ass he would have with
respect to such constituent corporation if its separate existence had continued;
"other enterprises" includes employee benefit plans, including but not
limited to any employee benefit plans of the Corporation;
"serving at the request of the Corporation" includes, but is not limited
to, any service which imposes duties on, or involves services by, a director or
officer of the Corporation with respect to an employee benefit plan, its
participants, or beneficiaries, including acting as a fiduciary there;
"fines" shall include any penalties and any excise or similar taxes
assessed on a person with respect to an employee benefit plan;
a person who acted in good faith and in a manner he reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan shall be deemed to have acted in a manner "not opposed to the best
interests of the Corporation" as referred to in Section 8.1; and
service as a partner, trustee, or member of management or similar committee
of a partnership or joint venture, or as a director, officer, employee, or agent
of a corporation which is a partner, trustee, or joint venturer, shall be
considered service as a director, officer, employee, or agent of the
partnership, joint venture, trust, or other enterprise.
Section 8.8 Saving Clause.
If this Article Eighth or any portion hereof shall be invalidated on any
ground by a court of competent jurisdiction, then the Corporation shall
nevertheless indemnify each director and officer of the Corporation as to costs,
charges, expenses (including attorneys' fees), judgments, fines, and amounts
paid in settlement with respect to any action, suit, or proceeding, whether
civil, criminal, administrative, or investigative, including an action by or in
the right of the Corporation, to the full extent permitted by any applicable
portion of this Article Eighth that shall not have been invalidated and to the
full extent permitted by applicable law.
Section 8.9 Indemnification of Other Persons.
If authorized by the Board of Directors, the Corporation may indemnify and
advance expenses to any other person whom it has the power to indemnify under
the General Corporation Law to the fullest extent permitted by such statute.
-11-
<PAGE>
Section 8.10 Insurance.
The Corporation may purchase and maintain insurance, at its expense, to
protect itself and any director, officer, employee, or agent of the Corporation
or another corporation, partnership, joint venture, trust, or other enterprises
against any expense, liability or claim, whether or not the Corporation would
have the power to indemnify such person under the General Corporation Law.
-12-
<PAGE>
EXHIBIT D
DISSENTERS RIGHTS PROVISIONS OF THE
PENNSYLVANIA BUSINESS CORPORATION LAW
(S) 1930. Dissenters rights.
(a) General rule. If any shareholder of a domestic business corporation
that is to be a party to a merger or consolidation pursuant to a plan of merger
or consolidation objects to the plan of merger or consolidation and complies
with the provisions of Subchapter D of Chapter 15 (relating to dissenters
rights), the shareholder shall be entitled to the rights and remedies of
dissenting shareholders therein provided, if any. See also section 1906(c)
(relating to dissenters rights upon special treatment).
(b) Plans adopted by directors only. Except as otherwise provided pursuant
to section 1571(c) (relating to grant of optional dissenters rights), Subchapter
D of Chapter 15 shall not apply to any of the shares of a corporation that is a
party to a merger or consolidation pursuant to section 1924(1)(i) (relating to
adoption by board of directors).
(c) Cross references. See sections 1571(b) (relating to exceptions) and
1904 (relating to de facto transaction doctrine abolished).
SUBCHAPTER D
DISSENTERS RIGHTS
(S) 1571. Application and effect of subchapter.
(a) General rule. Except as otherwise provided in subsection (b), any
shareholder of a business corporation shall have the right to dissent from, and
to obtain payment of the fair value of his shares in the event of, any corporate
action, or to otherwise obtain fair value for his shares, where this part
expressly provides that a shareholder shall have the rights and remedies
provided in this subchapter. See:
Section 1906(c) (relating to dissenters rights upon special
treatment).
Section 1930 (relating to dissenters rights).
Section 1931(d) (relating to dissenters rights in share exchanges).
Section 1932(c) (relating to dissenters rights in asset transfers).
Section 1952(d) (relating to dissenters rights in division).
Section 1962(c) (relating to dissenters rights in conversion).
Section 2104(b) (relating to procedure).
Section 2324 (relating to corporation option where a restriction
on transfer of a security is held invalid).
Section 2325(b) (relating to minimum vote requirement).
Section 2704(c) (relating to dissenters rights upon election).
Section 2705(d) (relating to dissenters rights upon renewal of
election).
Section 2907(a) (relating to proceedings to terminate breach of
qualifying conditions).
Section 7104(b)(3) (relating to procedure).
(b) Exceptions.
(1) Except as otherwise provided in paragraph (2), the holders of the
shares of any class or series of shares that, at the record date fixed to
determine the shareholders entitled to notice of and to vote at the meeting
at which a plan specified in any of section 1930, 1931(d), 1932(c) or
1952(d) is to be voted on, are either:
(i) listed on a national securities exchange; or
(ii) held of record by more than 2,000 shareholders;
D-1
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shall not have the right to obtain payment of the fair value of any such shares
under this subchapter.
(2) Paragraph (1) shall not apply to and dissenters rights shall be
available without regard to the exception provided in that paragraph in the
case of:
(i) Shares converted by a plan if the shares are not converted solely
into shares of the acquiring, surviving, new or other corporation or
solely into such shares and money in lieu of fractional shares.
(ii) Shares of any preferred or special class unless the articles,
the plan or the terms of the transaction entitle all shareholders of
the class to vote thereon and require for the adoption of the plan or
the effectuation of the transaction the affirmative vote of a majority
of the votes cast by all shareholders of the class.
(iii) Shares entitled to dissenters rights under section 1906(c)
(relating to dissenters rights upon special treatment).
(3) The shareholders of a corporation that acquires by purchase, lease,
exchange or other disposition all or substantially all of the shares,
property or assets of another corporation by the issuance of shares,
obligations or otherwise, with or without assuming the liabilities of the
other corporation and with or without the intervention of another corporation
or other person, shall not be entitled to the rights and remedies of
dissenting shareholders provided in this subchapter regardless of the fact,
if it be the case, that the acquisition was accomplished by the issuance of
voting shares of the corporation to be outstanding immediately after the
acquisition sufficient to elect a majority or more of the directors of the
corporation.
(c) Grant of optional dissenters rights. The bylaws or a resolution of the
board of directors may direct that all or a part of the shareholders shall have
dissenters rights in connection with any corporate action or other transaction
that would otherwise not entitle such shareholders to dissenters rights.
(d) Notice of dissenters rights. Unless otherwise provided by statute, if
a proposed corporate action that would give rise to dissenters rights under this
subpart is submitted to a vote at a meeting of shareholders, there shall be
included in or enclosed with the notice of meeting:
(1) A statement of the proposed action and a statement that the
shareholders have a right to dissent and obtain payment of the fair value
of their shares by complying with the terms of this subchapter; and
(2) A copy of this subchapter.
(e) Other statutes. The procedures of this subchapter shall also be
applicable to any transaction described in any statute other than this part
that makes reference to this subchapter for the purpose of granting dissenters
rights.
(f) Certain provisions of articles ineffective. This subchapter may not
be relaxed by any provision of the articles.
(g) Cross references. See sections 1105 (relating to restriction on
equitable relief), 1904 (relating to de facto transaction doctrine abolished)
and 2512 (relating to dissenters rights procedure).
(S) 1572. Definitions.
The following words and phrases when used in this subchapter shall have
the meanings given to them in this section unless the context clearly indicates
otherwise:
"Corporation." The issuer of the shares held or owned by the
dissenter before the corporate action or the successor by merger,
consolidation, division, conversion or otherwise of that issuer. A
plan of division may designate which of the resulting corporations is
the successor corporation for the purposes of this subchapter. The
successor corporation in a division shall have the sole responsibility
for payments to dissenters and other liabilities under this subchapter
except as otherwise provided in the plan of division.
D-2
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"Dissenter." A shareholder of beneficial owner who is entitled to
and does assert dissenters rights under this subchapter and who has
performed every act required up to the time involved for the assertion
of those rights.
"Fair value." The fair value of shares immediately before the
effectuation of the corporate action to which the dissenter objects
taking into account all relevant factors, but excluding any
appreciation or depreciation in anticipation of the corporate action.
"Interest." Interest from the effective date of the corporate
action until the date of payment at such rate as is fair and equitable
under all the circumstances, taking into account all relevant factors
including the average rate currently paid by the corporation on its
principal bank loans.
(S) 1573. Record and beneficial holders and owners.
(a) Record holders of shares. A record holder of shares of a business
corporation may assert dissenters rights as to fewer than all of the shares
registered in his name only if he dissents with respect to all the shares of the
same class or series beneficially owned by any one person and discloses the name
and address of the person or persons on whose behalf he dissents. In that
event, his rights shall be determined as if the shares as to which he has
dissented and his other shares were registered in the names of different
shareholders.
(b) Beneficial owners of shares. A beneficial owner of shares of a
business corporation who is not the record holder may assert dissenters rights
with respect to shares held on his behalf and shall be treated as a dessenting
shareholder under the terms of this subchapter if he submits to the corporation
not later than the time of the assertion of dissenters rights a written consent
of the record holder. A beneficial owner may not dissent with respect to some
but less than all shares of the same class or series owned by the owner,
whether or not the shares so owned by him are registered in his name.
(S) 1574. Notice of intention to dissent.
If the proposed corporate action is submitted to a vote at a meeting of
shareholders of a business corporation, any person who wishes to dissent and
obtain payment of the fair value of his shares must file with the corporation,
prior to the vote, a written notice of intention to demand that he be paid the
fair value for his shares if the proposed action is effectuated, must effect no
change in the beneficial ownership of his shares from the date of such filing
continuously through the effective date of the proposed action and must refrain
from voting his shares in approval of such action. A dissenter who fails in any
respect shall not acquire any right to payment of the fair value of his shares
under this subchapter. Neither a proxy nor a vote against the proposed
corporate action shall constitute the written notice required by this section.
(S) 1575. Notice to demand payment.
(a) General rule. If the proposed corporate action is approved by the
required vote at a meeting of shareholders of a business corporation, the
corporation shall mail a further notice to all dissenters who gave due notice of
intention to demand payment of the fair value of their shares and who refrained
from voting in favor of the proposed action. If the proposed corporate action
is to be taken without a vote of shareholders, the corporation shall send to all
shareholders who are entitled to dissent and demand payment of the fair value of
their shares a notice of the adoption of the plan or other corporate action. In
either case, the notice shall:
(1) State where and when a demand for payment must be sent and
certificates for certificated shares must be deposited in order to
obtain payment.
(2) Inform holders of uncertificated shares to what extent transfer of
shares will be restricted from the time that demand for payment is
received.
(3) Supply a form for demanding payment that includes a request for
certification of the date on which the shareholder, or the person on whose
behalf the shareholder dissents, acquired beneficial ownership of the
shares.
D-3
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(4) Be accompanied by a copy of this subchapter.
(b) Time for receipt of demand for payment. The time set for receipt of the
demand and deposit of certificated shares shall be not less than 30 days from
the mailing of the notice.
(S) 1576. Failure to comply with notice to demand payment, etc.
(a) Effect of failure of shareholder to act. A shareholder who fails to
timely demand payment, or fails (in the case of certificated shares) to timely
deposit certificates, as required by a notice pursuant to section 1575 (relating
to notice to demand payment) shall not have any right under this subchapter to
receive payment of the fair value of his shares.
(b) Restriction on uncertificated shares. If the shares are not represented
by certificates, the business corporation may restrict their transfer from the
time of receipt of demand for payment until effectuation of the proposed
corporate action or the release of restrictions under the terms of section
1577(a) (relating to failure to effectuate corporate action).
(c) Rights retained by shareholder. The dissenter shall retain all other
rights of a shareholder until those rights are modified by effectuation of the
proposed corporate action.
(S) 1577. Release of restrictions or payment for shares.
(a) Failure to effectuate corporate action. Within 60 days after the date
set for demanding payment and depositing certificates, if the business
corporation has not effectuated the proposed corporate action, it shall return
any certificates that have been deposited and release uncertificated shares from
any transfer restrictions imposed by reason of the demand for payment.
(b) Renewal of notice to demand payment. When uncertificated shares have
been released from transfer restrictions and deposited certificates have been
returned, the corporation may at any later time send a new notice conforming to
the requirements of section 1575 (relating to notice to demand payment), with
like effect.
(c) Payment of fair value of shares. Promptly after effectuation of the
proposed corporate action, or upon timely receipt of demand for payment if the
corporate action has already been effectuated, the corporation shall either
remit to dissenters who have made demand and (if their shares are certificated)
have deposited their certificates the amount that the corporation estimates to
be the fair value of the shares, or give written notice that no remittance under
this section will be made. The remittance or notice shall be accompanied by:
(1) The closing balance sheet and statement of income of the issuer of
the shares held or owned by the dissenter for a fiscal year ending not more
than 16 months before the date of remittance or notice together with the
latest available interim financial statements.
(2) A statement of the corporation's estimate of the fair market value
of the shares.
(3) A notice of the right of the dissenter to demand payment or
supplemental payment, as the case may be, accompanied by a copy of this
subchapter.
(d) Failure to make payment. If the corporation does not remit the amount
of its estimate of the fair value of the shares as provided by subsection (c),
it shall return any certificates that have been deposited and release
uncertificated shares from any transfer restrictions imposed by reason of the
demand for payment. The corporation may make a notation on any such certificate
or on the records of the corporation relating to any such uncertificated shares
that such demand has been made. If shares with respect to which notation has
been so made shall be transferred, each new certificate issued therefor or the
records relating to any transferred uncertificated shares shall bear a similar
notation, together with the name of the original dissenting holder or owner of
such shares. A transferee of such shares shall not acquire by such transfer any
rights in the corporation other than those that the original dissenters had
after making demand for payment of their fair value.
D-4
<PAGE>
(S) 1578. Estimate by dissenter of fair value of shares.
(a) General rule. If the business corporation gives notice of its estimate
of the fair value of the shares, without remitting such amount, or remits
payment of its estimate of the fair value of a dissenters shares as permitted by
section 1577(c) (relating to payment of fair value of shares) and the dissenter
believes that the amount stated or remitted is less than the fair value of his
shares, he may send to the corporation his own estimate of the fair value of the
shares, which shall be deemed a demand for payment of the amount or the
deficiency.
(b) Effect of failure to file estimate. Where the dissenter does not file
his own estimate under subsection (a) within 30 days after the mailing by the
corporation of its remittance or notice, the dissenter shall be entitled to no
more than the amount stated in the notice or remitted to him by the corporation.
(S) 1579. Valuation proceedings generally.
(a) General rule. Within 60 days after the latest of:
(1) Effectuation of the proposed corporate action;
(2) Timely receipt of any demand for payment under section 1575
(relating to notice to demand payment); or
(3) Timely receipt of any estimates pursuant to section 1578 (relating
to estimate by dissenter of fair value of shares);
If any demands for payment remain unsettled, the business corporation may
file in court an application for relief requesting that the fair value of the
shares be determined by the court.
(b) Mandatory joinder of dissenters. All dissenters, wherever residing,
whose demands have not been settled shall be made parties to the proceeding as
in an action against their shares. A copy of the application shall be served on
each such dissenter. If a dissenter is a nonresident, the copy may be served on
him in the manner provided or prescribed by or pursuant to 42 Pa.C.S. Ch.53
(relating to bases of jurisdiction and interstate and international procedure).
(c) Jurisdiction of the court. The jurisdiction of the court shall be
plenary and exclusive. The court may appoint an appraiser to receive evidence
and recommend a decision on the issue of fair value. The appraiser shall have
such power and authority as may be specified in the order of appointment or in
any amendment thereof.
(d) Measure of recovery. Each dissenter who is made a party shall be
entitled to recover the amount by which the fair value of his shares is found to
exceed the amount, if any, previously remitted, plus interest.
(e) Effect of corporation's failure to file application. If the
corporation fails to file an application as provided in subsection (a), any
dissenter who made a demand and who has not already settled his claim against
the corporation may do so in the name of the corporation at any time within 30
days after the expiration of the 60-day period. If a dissenter does not file an
application within the 30-day period, each dissenter entitled to file an
application shall be paid the corporations estimate of the fair value of the
shares and no more, and may bring an action to recover any amount not previously
remitted.
(S) 1580. Costs and expenses of valuation proceedings.
(a) General rule. The costs and expenses of any proceeding under section
1579 (relating to valuation proceedings generally), including the reasonable
compensation and expenses of the appraiser appointed by the court, shall be
determined by the court and assessed against the business corporation except
that any part of the costs and expenses may be apportioned and assessed as the
court deems appropriate against all or some of the dissenters who are parties
and whose action in demanding supplemental payment under section 1578 (relating
to estimate by dissenter of fair value of shares) the court finds to be
dilatory, obdurate, arbitrary, vexatious or in bad faith.
D-5
<PAGE>
(b) Assessment of counsel fees and expert fees where lack of good faith
appears. Fees and expenses of counsel and of experts for the respective parties
may be assessed as the court deems appropriate against the corporation and in
favor of any or all dissenters if the corporation failed to comply substantially
with the requirements of this subchapter and may be assessed against either the
corporation or a dissenter, in favor of any other party, if the court finds that
the party against whom the fees and expenses are assessed acted in bad faith or
in a dilatory, obdurate, arbitrary or vexatious manner in respect to the rights
provided by this subchapter.
(c) Award of fees for benefits to other dissenters. If the court finds
that the services of counsel for any dissenter were of substantial benefit to
other dissenters similarly situated and should not be assessed against the
corporation, it may award to those counsel reasonable fees to be paid out of the
amounts awarded to the dissenters who were benefited.
D-6
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EXHIBIT E
[BERWIND LETTERHEAD]
August 23, 1996
The Independent Committee of the
Board of Directors
Reading Company
30 South Fifteenth Street
13th floor
Philadelphia, PA 19102
Attention: John W. Sullivan, Albert J. Tahmoush and Gregory R. Brundage
------------------------------------------------------------
Gentlemen:
You have requested the opinion of Berwind Financial Group, L.P. ("Berwind")
as to the fairness, from a financial point of view, as of the date hereof, to
the shareholders of Reading Company (the "Company") of the Exchange Agreement
among the Company, Reading Entertainment, Inc. ("Reading Entertainment"), a
newly formed, wholly-owned subsidiary of the Company, the Company's affiliate
Craig Corporation ("Craig"), Craig Management, Inc. ("CMI"), the Company's
affiliate Citadel Holding Corporation ("Citadel"), and Citadel Acquisition
Corp., Inc. ("CAC"), a wholly owned subsidiary of Citadel. Pursuant to this
Exchange Agreement, the terms of which are more fully described in the proxy
statement to be furnished to the shareholders of the Company, Reading
Entertainment will issue 550,000 shares of Series B Voting Cumulative
Convertible Preferred Stock ("Series B Preferred Stock"), $100 stated value per
share, and 2,476,190 shares of Common Stock to Craig and CMI in exchange for
certain assets now held by Craig and CMI and 70,000 shares of Series A Voting
Cumulative Convertible Preferred Stock ("Series A Preferred Stock"), $100 stated
value per share, to CAC for cash.
Reading Entertainment will issue 550,000 shares of Series B Preferred
Stock, with a conversion price of $12.25 per share, and 2,476,190 shares of
Common Stock for three assets held by Craig and CMI which are:
1) $69,365,000 face amount 10.5% Series B Preferred Stock of Stater Bros.
Holdings Inc. ("Stater");
2) Craig's 50% ownership interest and related interests in Reading
International Cinemas LLC; and
3) $5,250,000 face amount 3% Citadel convertible preferred stock.
<PAGE>
page 2
In addition, Reading Entertainment will issue 70,000 shares of Series A
Preferred Stock, with a conversion price of $11.50 per share, to CAC for
$7,000,000 cash. Reading Entertainment will also grant Citadel and CAC certain
rights, including an option for Citadel to require Reading Entertainment to
acquire all or substantially all of Citadel's existing assets, together with any
debt encumbering or related to such assets, in exchange for Reading
Entertainment Common Stock at a price of $11.75 per share through October, 1997
and $12.25 per share thereafter, for net assets of up to $20,000,000, an
additional $10,000,000 of net assets can be exchanged for Reading Entertainment
Common Stock priced at market.
Berwind, as part of its investment banking business, is regularly engaged
in the valuation of assets, securities and companies in connection with various
types of asset and security transactions, including mergers, acquisitions,
private placements and valuations for various other purposes, and in the
determination of adequate consideration in such transactions.
A. Factors Considered
------------------
In arriving at our opinions, we considered the following factors, among
others, which we deemed relevant:
1. Historical financial performances, current financial conditions
including net operating loss carryfowards and future prospects of the
Company, Craig, Citadel and Stater.
2. Industry information and trends as they related to the Company, Citadel
and Stater including, but not limited to, industry acquisition
multiples.
3. Stock market performance and trading activity of the Company, Craig,
Citadel and Stater, where applicable, and comparison to reasonably
similar public companies including, but not limited to, price to
earnings ratios and future growth prospects, where applicable.
4. Information, to the extent available, on merger and acquisition
transactions involving similar companies.
5. Discounted cash flow analysis and liquidation analysis, where
applicable, for the Company, Craig, Citadel and Stater.
6. Financial terms and conditions of the Reorganization, as more fully
described in the preliminary proxy statement, and the Exchange
Agreement.
B. Documentation and Information Examined
-------------------------------------
Our financial analysis was based upon, but not limited to, a review of the
following documents and information examined during the course of our analysis:
<PAGE>
Page 3
1. Preliminary Proxy Statement dated August 23, 1996 and its Exhibits.
2. SEC filings by the Company, Craig, Citadel and Stater, including
10-K's for the Company for fiscal years 1990-1995, and for Craig,
Citadel and Stater, for their respective fiscal years 1994 and 1995,
10-Q's for the quarters of the two most recent fiscal years and for
the quarters of the current 1996 fiscal year. In addition, the SEC
filing of the Exchange Offer of Stater dated July 21, 1994.
3. Internally prepared projected income statements for the Company for
the fiscal years 1996 through 2000, and for Stater for the fiscal
years 1996 through 1998, as well as other data provided to us by
these companies relating to their respective businesses. Stater
permitted us to review, but did not provide written documents for,
their projections.
4. Asset value analysis of the Company and Citadel as of July 2, 1996
and July 19, 1996, respectively, prepared by their respective
managements.
5. Appraisals of the real estate assets of the Company and Citadel as of
July 8, 1996 and July 16, 1996, respectively, prepared by their
respective managements and underlying documentation for such
appraisals.
C. Persons Interviewed
-------------------
During the course of our analysis, we met with certain persons and
discussed the Exchange Agreement and the respective companies' operations,
historical financial statements and future prospects, who in our judgment, were
capable of providing us with information necessary to completed the assignment.
These interviews and meetings included, but were not limited to, Mr. James A.
Wunderle, Executive Vice President, Chief Operating Officer, Chief Financial
Officer and Treasurer of the Company, Mr. Steve Wesson, President and Chief
Executive Officer of Citadel, Mr. Jack H. Brown, President of Stater, and Mr.
Dennis N. Beal, Chief Financial Officer of Stater.
D. Facilities Visited
------------------
As part of the development of information and our opinion, we visited the
Company's headquarters in Philadelphia, Pa., and Stater's headquarters in
Colson, Calif., as well as one of Stater's grocery stores. With respect to
Citadel's properties, we relied on valuations supplied by management and did not
inspect these properties.
Our opinion is given in reliance on information and representations made
or given by the Company, Craig, Citadel and Stater and its officers, directors,
auditors and other agents, and on filings, releases and other information issued
by these companies including financial statements, financial projections and
stock price data, as well as certain information from recognized independent
sources. We have not independently verified the information concerning these
companies nor other data which we have considered in our review and, for
purposes of the
<PAGE>
Page 4
opinion set forth below, we have assumed and relied upon the accuracy and
completeness of all such information and data. Additionally, we assume that the
Exchange Agreement is, in all respects, lawful under applicable corporate and
tax law.
With regard to financial and other information relating to the projected
performance of Company and Stater, we have assumed that such information has
been reasonably prepared and reflects the best currently available estimates and
judgments of the management of Reading and Stater as to their most likely future
performance. With respect to valuations, we have not assumed any responsibility
for any independent valuation or appraisal of any of the assets or liabilities
of the Company or Citadel. In using independent valuations or appraisals in our
analysis, we have accepted these valuations and appraisals as they have been
submitted to us by management and have not independently verified such
information. In rendering this opinion, we have assumed that, in the course of
obtaining the necessary regulatory approvals for the Exchange Agreement and in
preparation of the proxy statement, no conditions will be imposed that will have
a material adverse affect on the contemplated benefits of the Exchange Agreement
to the shareholders of the Company.
This opinion is necessarily based on economic, market, financial and other
conditions as they exist, and on the information made available to us, as of the
date of the letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion herein as to the
prices at which the common shares of the Company will actually trade at any
point in time. Our opinion does not constitute a recommendation to the
Independent Committee of the Board of Directors of the Company and does not
constitute a recommendation to any shareholder as to how such shareholder should
vote on the Exchange Agreement.
This letter is for the information of the Independent Committee of the
Board of Directors of the Company only in their evaluation of the Exchange
Agreement and may not be relied upon by any other person. This letter is not to
be quoted or referred to, in whole or in part, in any registration statement,
prospectus, or in any other document used in connection with the offering or
sale of securities, nor shall this letter be used for any other purposes,
without prior written consent, except that this opinion may be included in its
entirety as an appendix to the Company's proxy statement furnished to the
Company's shareholders in connection with the Exchange Agreement. The opinion
may be summarized and referred to in other sections of the proxy statement
subject to our review and approval.
Based on the foregoing and such other factors as we deem relevant, it is
our opinion that, as of the date hereof, the terms of the Exchange Agreement,
taken as a whole, are fair, from a financial point of view, to the shareholders
of the Company.
Sincerely,
Berwind Financial Group, L.P.
<PAGE>
EXHIBIT F
EXCHANGE AGREEMENT
DATED AS OF SEPTEMBER 4, 1996
BY AND AMONG
READING ENTERTAINMENT, INC.
READING COMPANY
CRAIG CORPORATION
CRAIG MANAGEMENT, INC.
CITADEL HOLDING CORPORATION
AND
CITADEL ACQUISITION CORP., INC.
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TABLE OF CONTENTS
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Page
1. DEFINITIONS........................................................... 1
2. EXCHANGE.............................................................. 4
2.1 Assets to be Exchanged by Craig................................. 4
2.2 Assets to be Exchanged by CMI................................... 4
2.3 Assets to be Transferred by CAC................................. 4
2.4 Assets to be Exchanged by Reading Entertainment and Citadel..... 4
2.5 Instruments of Conveyance and Transfer.......................... 4
2.6 Closing......................................................... 4
2.7 Dividends....................................................... 4
3. REPRESENTATIONS AND WARRANTIES OF READING AND
READING ENTERTAINMENT................................................. 5
3.1 Organization and Authorization.................................. 5
3.2 Non-Contravention............................................... 5
3.3 Capital Stock................................................... 5
3.4 SEC Reports..................................................... 7
3.5 No Adverse Changes.............................................. 7
3.6 Approvals....................................................... 8
3.7 Litigation...................................................... 8
3.8 Regulatory Compliance........................................... 8
3.9 Brokers......................................................... 8
3.10 Accuracy of Information Furnished............................... 8
3.11 Investment Representation....................................... 8
3.12 Title to Assets................................................. 9
3.13 Further Investment Representation............................... 9
4. REPRESENTATIONS AND WARRANTIES OF CRAIG AND CMI....................... 10
4.1 Organization and Authorization.................................. 10
4.2 Non-Contravention............................................... 10
4.3 Approvals....................................................... 11
4.4 Interest in Reading International............................... 11
4.5 Title to Assets................................................. 11
4.6 Accuracy of Information Furnished............................... 11
4.7 Securities Law Compliance....................................... 11
4.8 Brokers......................................................... 12
4.9 Stater Financial Condition...................................... 12
4.10 Investment Representation....................................... 12
4.11 CMI............................................................. 12
5. REPRESENTATIONS AND WARRANTIES OF CITADEL AND CAC..................... 13
5.1 Organization and Authorization.................................. 13
5.2 Non-Contravention............................................... 13
5.3 Approvals....................................................... 13
5.4 Accuracy of Information Furnished............................... 13
5.5 Securities Law Compliance....................................... 14
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5.6 Brokers......................................................... 14
5.7 Investment Representation....................................... 14
5.8 Independent Continuing Directors................................ 15
5.9 Capital Stock................................................... 15
6. SHAREHOLDER APPROVAL; PROXY AND REGISTRATION FILINGS.................. 15
6.1 Shareholder Approval............................................ 15
6.2 Proxy Statement and Registration Statement...................... 15
7. COVENANTS............................................................. 16
7.1 Covenants of Craig, CMI, Citadel and CAC........................ 16
7.2 Covenants of Reading and Reading Entertainment.................. 17
7.3 Access.......................................................... 18
7.4 Citadel Contributions........................................... 18
8. CONDITIONS............................................................ 18
8.1 Conditions Precedent to the Obligations of All Parties.......... 18
8.2 Additional Conditions Precedent to the Obligations of Reading
and Reading Entertainment....................................... 19
8.3 Additional Conditions Precedent to the Obligations of Craig
and CMI......................................................... 20
8.4 Additional Conditions Precedent to the Obligations of CAC and
Citadel......................................................... 21
9. TERMINATION........................................................... 23
9.1 Termination..................................................... 23
9.2 Written Notice.................................................. 23
9.3 Effect of Termination........................................... 23
10. GENERAL PROVISIONS.................................................... 23
10.1 Survival of Representations and Warranties...................... 23
10.2 Notices......................................................... 23
10.3 Amendment and Waiver............................................ 24
10.4 Counterparts.................................................... 25
10.5 Assignability................................................... 25
10.6 Entire Agreement................................................ 25
10.7 Applicable Law.................................................. 25
10.8 Headings........................................................ 25
10.9 Costs and Expenses.............................................. 25
Exhibit 1 - Certificate of Designations, Preferences, and Rights of Series
A Voting Cumulative Convertible Preferred Stock and Series B
Voting Cumulative Convertible Preferred Stock of Reading
Entertainment, Inc.
ii
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Exhibit 5.9 - Certificate of Designation of the Series B 3% Cumulative
Voting Convertible Preferred Stock of Citadel Holding
Corporation.
Exhibit 8.4(e) - Asset Put and Registration Rights Agreement
iii
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EXCHANGE AGREEMENT
This Exchange Agreement (the "Agreement") is made and entered into as of
this 4th day of September, 1996 by and among Reading Entertainment, Inc., a
Delaware corporation ("Reading Entertainment"), Reading Company, a Pennsylvania
corporation ("Reading"), Craig Corporation, a Delaware corporation ("Craig"),
Craig Management, Inc., a California corporation ("CMI"), Citadel Holding
Corporation, a Delaware corporation ("Citadel"), and Citadel Acquisition Corp.,
Inc., a Delaware corporation ("CAC"), with reference to the following:
A. Reading and Reading Entertainment desire that Reading
Entertainment exchange its securities for assets, including cash, as described
herein, for the purpose of enhancing its capitalization to further the
development and expansion of its Beyond-the-Home Entertainment business.
B. Craig currently participates with Reading in its Beyond-the-Home
Entertainment business and Craig desires to broaden its participation in
Reading's Beyond-the-Home Entertainment business by acquiring a further equity
interest in Reading Entertainment.
C. Citadel, which as a result of a recapitalization of its principal
asset in 1994, has assets currently consisting of cash and certain illiquid
assets, desires to deploy a portion of its available liquid assets in Reading's
Beyond-the-Home Entertainment business by acquiring an equity interest in
Reading Entertainment.
D. The parties hereto intend that the transaction qualify for
nonrecognition treatment as an exchange pursuant to Section 351 of the Internal
Revenue Code of 1986, as amended (the "Code").
E. Prior to the exchange transaction described herein Reading
Entertainment intends to form a wholly owned subsidiary ("Entertainment
Subsidiary"), and Entertainment Subsidiary shall be merged into Reading in a
transaction qualifying as a reorganization under Section 368(a)(1)(A) of the
Code, with each holder of Reading Class A Common Stock and Reading Common Stock
receiving shares of Reading Entertainment Common Stock (the "Reorganization").
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties and agreements set forth herein the parties hereto
agree as follows:
1. DEFINITIONS
For purposes of this Agreement the following terms shall have the
meanings set forth:
"Asset Put" shall have the meaning set forth in the Option Agreement.
"CAC" shall have the meaning set forth in the preface to this Agreement.
CAC is a wholly owned subsidiary of Citadel.
"Certificate of Designations" shall have the meaning set forth in
Section 3.3(a) of this Agreement.
1.
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"Citadel" shall have the meaning set forth in the preface to this
Agreement.
"Citadel Certificate of Designation" shall have the meaning set forth in
Section 5.9 of this Agreement.
"Citadel Common Stock" shall mean the Common Stock of Citadel.
"Citadel Preferred Stock" shall mean the 3% Cumulative Voting Convertible
Preferred Stock of Citadel, stated value $3.95 per share.
"Closing" and "Closing Date" shall have the meanings set forth in
Section 2.6 of this Agreement.
"CMI" shall have the meaning set forth in the preface to this Agreement.
CMI is a wholly owned subsidiary of Craig.
"Code" shall have the meaning set forth in the preface to this Agreement.
"Craig" shall have the meaning set forth in the preface to this
Agreement.
"Entertainment Subsidiary" shall have the meaning set forth in the
preface to this Agreement.
"Exchange" refers to and means the exchange of assets for Reading
Entertainment Preferred Stock described in Sections 2.1, 2.2 and 2.3 to this
Agreement.
"LLC Agreement" shall have the meaning set forth in Section 4.4 to this
Agreement.
"Option Agreement" shall have the meaning set forth in Section 8.4(e) to
this Agreement.
"Original Citadel Certificate of Designation" shall mean the Certificate
of Designation of the Citadel Preferred Stock.
"Prospectus" shall have the meaning set forth in Section 6.2(c) of this
Agreement.
"Proxy Statement" shall have the meaning set forth in Section 6.2(a) of
this Agreement.
"Reading" shall have the meaning set forth in the preface to this
Agreement.
"Reading Class A Common Stock" shall mean the Class A Common Stock of
Reading.
"Reading Common Stock" shall mean the Common Stock of Reading.
"Reading Entertainment" shall have the meaning set forth in the preface
to this Agreement.
"Reading Entertainment Common Stock" shall mean the $0.001 par value
Common Stock of Reading Entertainment.
2.
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"Reading Entertainment Preferred Stock" shall mean the Reading
Entertainment Series A Preferred Stock and the Reading Entertainment Series B
Preferred Stock, collectively.
"Reading Entertainment Series A Preferred Stock" shall mean the Series A
Voting Cumulative Convertible Preferred Stock of Reading Entertainment, $100
stated value per share, having the rights, preferences and privileges set forth
in Exhibit 1 to this Agreement.
"Reading Entertainment Series B Preferred Stock" shall mean the Series B
Voting Cumulative Convertible Preferred Stock of Reading Entertainment, $100
stated value per share, having the rights, preferences and privileges set forth
in Exhibit 1 to this Agreement.
"Reading Holdings" shall mean Reading Holdings, Inc., a Delaware
corporation. Reading Holdings is a wholly owned subsidiary of Reading.
"Reading International" shall mean Reading International Cinemas LLC, a
Delaware limited liability company. Reading International is owned equally by
Craig and Reading Investment.
"Reading Investment" shall mean Reading Investment Company, Inc., a
Delaware corporation. Reading Investment is an indirect wholly owned subsidiary
of Reading.
"Reading SEC Reports" shall have the meaning set forth in Section 3.4 of
this Agreement.
"Reading's Stock Option Plans" shall mean the 1982 Incentive Stock Option
Plan, the 1982 Non-qualified Option Plan and the 1992 Non-qualified Stock Option
Plan.
"Reading Shareholders" shall have the meaning set forth in Section 6.1 of
this Agreement.
"Registration Statement" shall have the meaning set forth in
Section 6.2(c) of this Agreement.
"Reorganization" shall have the meaning set forth in the preface to this
Agreement.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Securities Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"SEC" shall mean the Securities and Exchange Commission.
"Series B Citadel Preferred Stock" shall mean the Series B 3% Cumulative
Voting Convertible Preferred Stock of Citadel, stated value $3.95 per share.
"Stater" shall mean Stater Bros. Holdings Inc., a Delaware corporation.
"Stater Preferred Stock" shall mean the Series B Preferred Stock of
Stater.
3.
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2. EXCHANGE
2.1 Assets to be Exchanged by Craig. Subject to the terms and
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conditions of this Agreement, at the Closing, Craig shall deliver to Reading
Entertainment all of Craig's right, title and interest in and to (i) its
ownership interest in Reading International and (ii) its 1,329,114 shares of
Citadel Preferred Stock, in exchange for 125,098 shares of Reading Entertainment
Series B Preferred Stock and 563,210 shares of Reading Entertainment Common
Stock.
2.2 Assets to be Exchanged by CMI. Subject to the terms and conditions
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of this Agreement, at the Closing, CMI shall deliver to Reading Entertainment
all of CMI's right, title and interest in and to 693,650 shares of Stater
Preferred Stock in exchange for 424,902 shares of Reading Entertainment Series B
Preferred Stock and 1,912,980 shares of Reading Entertainment Common Stock.
2.3 Assets to be Transferred by CAC. Subject to the terms and
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conditions of this Agreement, at the Closing, CAC shall purchase from Reading
Entertainment 70,000 shares of Reading Entertainment Series A Preferred Stock,
for an aggregate cash purchase price of $7.0 million, by wire transfer of
immediately available funds.
2.4 Assets to be Exchanged by Reading Entertainment and Citadel.
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Subject to the terms and conditions of this Agreement, at the Closing, Reading
Entertainment shall deliver to Citadel all of Reading Entertainment's right,
title and interest in and to the 1,329,114 shares of Citadel Preferred Stock
which Craig shall have delivered to Reading Entertainment pursuant to
Section 2.1 above, in exchange for 1,329,114 shares of Series B Citadel
Preferred Stock. Upon such exchange, the 1,329,114 shares of Citadel Preferred
Stock shall be cancelled by Citadel.
2.5 Instruments of Conveyance and Transfer. The conveyance, transfer
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and delivery to Reading Entertainment of the assets being exchanged by Craig and
CMI as herein provided, shall be effected by such stock powers, assignments,
bills of sale, checks and other instruments of transfer and conveyance as shall
be in form reasonably acceptable to Reading Entertainment.
2.6 Closing. Subject to the conditions set forth in Article 8, unless
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this Agreement shall have been terminated as provided in Article 9, the
consummation of the transactions described in Sections 2.1, 2.2, 2.3 and 2.4
above (the "Closing") shall take place at the offices of Duane, Morris &
Heckscher, 1201 Market Street, Suite 1500, Wilmington, Delaware 19801-0195, on
the day of the meeting of shareholders of Reading described in Article 6 of this
Agreement, or as soon thereafter as is practicable (the "Closing Date").
2.7 Dividends. At the Closing, Reading Entertainment shall pay to
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Craig, by certified or cashiers check, any and all accrued but unpaid dividends
with respect to the Citadel Preferred Stock and shall pay to CMI, by certified
or cashiers check, any and all accrued but unpaid dividends with respect to the
Stater Preferred Stock (in each case, excluding dividends which have been
declared and are payable to holders of record on a date prior to the Closing
Date).
4.
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3. REPRESENTATIONS AND WARRANTIES OF READING AND READING ENTERTAINMENT
Reading and Reading Entertainment hereby jointly and severally represent
and warrant to Craig, CMI, Citadel and CAC as follows:
3.1 Organization and Authorization. Reading and Reading Entertainment
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are corporations duly organized, validly existing and in good standing under the
laws of the States of Pennsylvania and Delaware, respectively, and each has full
corporate power and all necessary authorizations to own all of its properties
and assets and to carry on its business as it is now being conducted. Reading
and Reading Entertainment are each duly qualified to do business and are in good
standing in each jurisdiction in which the nature of its or their business or
character of its or their properties requires such qualification and where the
failure to be so qualified would materially and adversely affect either
corporation or its or their business, properties or rights. Reading and Reading
Entertainment have delivered to Craig and Citadel complete and correct copies of
their Articles of Incorporation and Certificate of Incorporation, respectively,
and their By-Laws, as amended and in effect on the date of this Agreement.
Reading and Reading Entertainment each have all requisite corporate power to
execute, deliver and perform their obligations under this Agreement. The
execution, delivery and performance of this Agreement by Reading and Reading
Entertainment, and the consummation by each of them of the transactions
contemplated hereby, have been duly authorized by the Boards of Directors of
Reading and Reading Entertainment, subject only to obtaining shareholder
approval of the Reading Shareholders. This Agreement has been duly executed and
delivered by Reading and Reading Entertainment and constitutes a valid and
binding agreement of Reading and Reading Entertainment, enforceable in
accordance with its terms except to the extent the enforcement thereof may be
limited by bankruptcy, insolvency, rehabilitation, moratorium and similar laws
now or hereafter in effect relating to creditor's rights generally or by general
equitable principles.
3.2 Non-Contravention. The execution and delivery of this Agreement do
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not and the consummation of the transactions contemplated hereby will not
(a) violate the Articles of Incorporation or By-laws of Reading or the
Certificate of Incorporation or By-Laws of Reading Entertainment, (b) violate
any material provision of or result in the breach or the acceleration of or
entitle any party to accelerate (whether after the giving of notice or the lapse
of time or both) any material obligation under any material mortgage, lease,
agreement, judgment or decree, to which either Reading or Reading Entertainment
is a party or by which either is bound, (c) result in the creation or imposition
of any lien, charge, pledge, security interest or other encumbrance on any
property of Reading or Reading Entertainment, or (d) to the knowledge of either
Reading or Reading Entertainment, violate or conflict with any law, ordinance or
rule to which either is subject.
3.3 Capital Stock.
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(a) The authorized and outstanding capital stock of Reading is
as set forth in the Reading SEC Reports (subject only to changes in the
outstanding Reading Class A Common Stock which may occur through the Closing
solely from the exercise of options granted pursuant to Reading's Stock Option
Plans or the exchange of shares of Reading Common Stock for shares of Reading
Class A Common Stock) and the outstanding capital stock of Reading Entertainment
will at the Closing consist solely of Reading Entertainment
5.
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Common Stock, of which not more than 4,973,175 shares will be issued and
outstanding (plus any shares which may be issued and outstanding as a result of
the exercise of options granted pursuant to Reading's Stock Option Plans and the
shares of Reading Entertainment Common Stock and Reading Entertainment Preferred
Stock to be issued hereunder). All of such issued and outstanding shares of
capital stock are validly issued and outstanding, fully paid and nonassessable.
The shares of Reading Entertainment Preferred Stock and Reading Entertainment
Common Stock to be issued pursuant to this Agreement have been duly authorized,
and, when issued and paid for pursuant to the terms hereof, will be validly
issued, fully paid and non-assessable and will be entitled to all the rights,
preferences and privileges set forth in the Certificate of Designations,
Preferences and Rights of Series A Voting Cumulative Convertible Preferred Stock
and Series B Voting Cumulative Convertible Preferred Stock of Reading
Entertainment, Inc. (the "Certificate of Designations"), attached as Exhibit 1
hereto. The shares of Reading Entertainment Common Stock issuable upon
conversion of the Reading Entertainment Preferred Stock have been duly
authorized and reserved for issuance upon such conversion and, when issued and
delivered on such conversion in accordance with the terms of the Certificate of
Designations, will be validly issued, fully paid and non-assessable. The
certificates representing the shares of Reading Entertainment Preferred Stock
and Reading Entertainment Common Stock to be issued pursuant to this Agreement
will be in due and proper form. All corporate action required to be taken for
the authorization and issuance of the Reading Entertainment Preferred Stock and
the Reading Entertainment Common Stock to be issued pursuant to this Agreement
has been duly and validly taken. At or prior to the Closing, the Certificate of
Designations will have been filed with the Secretary of State of the State of
Delaware.
(b) Except as described herein and in the Reading SEC Reports,
there are no outstanding subscriptions, options, conversion rights, warrants or
other agreements or commitments of any nature whatsoever obligating either
Reading or Reading Entertainment to issue, deliver or sell, or cause to be
issued, delivered or sold, any additional shares of capital stock of either
Reading or Reading Entertainment or obligating either Reading or Reading
Entertainment to grant, extend or enter into any such agreement or commitment.
The shareholders of Reading and Reading Entertainment do not have any preemptive
rights or other rights to subscribe for additional shares of Reading or Reading
Entertainment, and no preemptive or similar rights will arise as a result of the
transactions contemplated by this Agreement. Except as set forth in the Reading
SEC Reports, there are no voting trusts, voting agreements, irrevocable proxies
or other agreements to which either Reading or Reading Entertainment is a party,
or of which either Reading or Reading Entertainment has knowledge, in effect
relating to the voting or transfer of any shares of Reading or Reading
Entertainment capital stock.
(c) Upon acquisition of the Reading Entertainment Series A
Preferred Stock pursuant to Section 2.3 of this Agreement, CAC will not be
prohibited or otherwise limited in any manner, including without limitation
under Delaware General Corporation Law Section 160(a), from voting in all
respects its shares of Reading Entertainment Series A Preferred Stock in
accordance with the Certificate of Incorporation of Reading Entertainment,
except that no such representation or warranty is given with respect to such
shares of Reading Entertainment Series A Preferred Stock, if any, as are
required by generally accepted accounting principles to be reflected on the
financial statements of Reading Entertainment as a reciprocal stockholding.
6.
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3.4 SEC Reports. All reports required to be filed by Reading with the
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SEC since December 1, 1995 (the "Reading SEC Reports") are in compliance in all
material respects with the respective report forms and were complete and correct
in all material respects as of the date on which the information was furnished.
As of the date each Reading SEC Report was filed with the SEC, such Reading SEC
Report did not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in order to make the
statements made, in the light of the circumstances under which they were made,
not misleading. The financial statements of Reading contained in the Reading
SEC Reports were prepared in accordance with the books and records of Reading
and were prepared in accordance with generally accepted accounting principles
applied on a consistent basis and present fairly the financial condition of
Reading as of the respective dates indicated therein and the results of
operations and changes in financial position for the periods so indicated.
3.5 No Adverse Changes. Except as set forth in the Reading SEC
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Reports, since March 31, 1996, Reading has conducted its business only in the
ordinary course, there has not been any material adverse change in the business,
financial condition, assets, liabilities, properties or business operations of
Reading or Reading Entertainment, and, except as contemplated by the
Reorganization or this Agreement, neither Reading nor Reading Entertainment has:
(a) issued or sold any stock, notes, bonds or other securities,
or any option to purchase the same, or entered into any agreement with respect
thereto, except the issuance of Reading Class A Common Stock upon the exercise
of options granted under Reading's Stock Option Plans or the issuance of Reading
Class A Common Stock in exchange for Reading Common Stock;
(b) declared, set aside or made any dividend or other
distribution on capital stock or redeemed, purchased or acquired any shares
thereof or entered into any agreement in effect to the foregoing;
(c) amended its Articles of Incorporation or By-Laws;
(d) other than in the ordinary course of business, purchased,
sold, assigned or transferred any material tangible assets (except for an
interest in the Angelika Film Center as to which Reading Investment has entered
into a binding contract of purchase) or any material license, franchise or other
intangible asset; except as disclosed in the SEC Reports, mortgaged, pledged,
granted or suffered to exist any lien or other encumbrance or charge on any
material assets or properties, tangible or intangible, other than liens for
taxes not yet delinquent and such other liens, encumbrances or charges which do
not materially adversely affect the business or financial condition of Reading
or Reading Entertainment; or waived any rights of material value or cancelled
any material debts or claims;
(e) entered into any material contract or commitment other than
contracts or commitments made in the ordinary course of business or pursuant to
or in connection with this Agreement or the Reorganization;
(f) made or suffered any material amendment, modification or
termination of any material contract, commitment or obligation to which Reading
is a party;
7.
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(g) borrowed or loaned any money other than pursuant to
agreements disclosed in the Reading SEC Reports;
(h) changed its method of accounting; or
(i) agreed, whether in writing or otherwise, to take any action
described in this Section 3.5.
3.6 Approvals. No consent, approval, order or authorization of, or
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registration, declaration or filing with any governmental authority is required
in connection with the execution and delivery of this Agreement by Reading and
Reading Entertainment or the consummation by Reading or Reading Entertainment of
the transactions contemplated hereby, except as contemplated by Article 6 of
this Agreement.
3.7 Litigation. Except as set forth in the Reading SEC Reports, there
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are no actions, suits or proceedings or investigations pending at law or in
equity in any court or before any foreign, federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality
or, to the knowledge of Reading, threatened against or affecting it which, if
adversely determined would be reasonably likely to materially and adversely
affect the business, operations or financial condition of Reading or Reading
Entertainment.
3.8 Regulatory Compliance. Except as set forth in the Reading SEC
---------------------
Reports, each of Reading and Reading Entertainment is in substantial compliance
with all material federal, state, local and foreign laws and regulations
applicable to it, including, without limitation, environmental laws.
3.9 Brokers. All negotiations relating to this Agreement and the
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transactions contemplated hereby have been carried on without the intervention
of any person acting on behalf of either Reading or Reading Entertainment who
has or may have a valid claim against any of the parties to this Agreement for
any broker's or finder's fee or similar compensation, other than such fee as may
be payable by Reading to Berwind Financial Group, L.P., the financial advisor to
the Independent Committee of the Board of Directors of Reading.
3.10 Accuracy of Information Furnished. The certificates, statements,
---------------------------------
and other information furnished to Craig, CMI, Citadel and CAC in writing by or
on behalf of Reading or Reading Entertainment in connection with the
transactions contemplated hereby do not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that no representation is made as to any
financial projections contained in such information other than that any such
financial projections were prepared in good faith based upon assumptions that
Reading believes are reasonable.
3.11 Investment Representation. Reading Entertainment represents and
-------------------------
warrants to Craig and CMI that the shares of Stater Preferred Stock and Citadel
Preferred Stock to be received by Reading Entertainment pursuant to Sections 2.1
and 2.2 hereof and any shares of Citadel Common Stock received upon conversion,
if any, of the Citadel Preferred Stock are being or will be acquired for
investment and not with a view to the sale or distribution of any part thereof,
and that it has no present intention of selling, granting participation in or
8.
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otherwise distributing the same in a transaction which would result in a
violation of the Securities Act. Reading Entertainment and Reading further
represent that there is no contract, undertaking, agreement or arrangement with
any person to sell, transfer or grant participations to such person or to any
third person with respect to any of the shares of Stater Preferred Stock or
Citadel Preferred Stock being acquired pursuant to Sections 2.1 and 2.2 hereof.
Reading Entertainment understands that the shares being acquired by it as
described above have not been registered under the Securities Act on the ground
that the exchange provided for in this Agreement and the issuance of securities
are exempt pursuant to Sections 4(1) and 4(2) of the Securities Act, and that
Craig's and CMI's reliance on such exemption is predicated on the
representations set forth herein. Each certificate representing the Stater
Preferred Stock and the Citadel Preferred Stock and any shares of Citadel Common
Stock issued upon conversion of shares of the Citadel Preferred Stock may be
endorsed with the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR
SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES AT OF 1933 (THE "ACT") OR
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT, THE
AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE
COMPANY.
Reading Entertainment understands that Stater and/or Citadel may instruct their
transfer agent not to register the transfer of any of its securities unless the
transfer is under conditions which do not violate the Securities Act.
3.12 Title to Assets. Upon consummation of the exchange contemplated by
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Section 2.1 of this Agreement, Reading will own and have, and at the Closing
will deliver to Citadel, to the extent received from Craig, good and marketable
title to its interest in the Citadel Preferred Stock being transferred
hereunder, free and clear of any mortgage, lien, pledge, charge, claim,
conditional sales or other agreement, lease, right or encumbrance, other than
the provisions of the Original Citadel Certificate of Designation.
3.13 Further Investment Representation. Reading Entertainment
---------------------------------
represents and warrants to Citadel that the shares of Series B Citadel Preferred
Stock to be received by it pursuant to Section 2.4 hereof and any shares of
Citadel Common Stock received upon conversion of said shares of Series B Citadel
Preferred Stock are being or will be acquired for investment and not with a view
to the sale or distribution of any part thereof, and that Reading Entertainment
has no present intention of selling, granting participation in or otherwise
distributing the same in a transaction which would result in a violation of the
Securities Act. Reading Entertainment further represents that it has no
contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participations to such person or to any third person with
respect to any of the shares of Series B Citadel Preferred Stock being acquired
pursuant to Section 2.4 hereof. Reading Entertainment understands that the
shares of Series B Citadel Preferred Stock being acquired hereunder and the
shares of Citadel Common Stock received upon any conversion of the Series B
Citadel Preferred Stock have not been and will not be registered under the
Securities Act on the ground that the exchange provided for in this Agreement
and the issuance of such securities are exempt pursuant to Section 4(2) of the
Securities Act, and that Citadel's reliance on such exemption is predicated on
the
9.
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representations set forth herein. Each certificate representing the Series B
Citadel Preferred Stock and any shares of Citadel Common Stock issued upon
conversion of shares of Series B Citadel Preferred Stock may be endorsed with
the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR
SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT, THE
AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE
COMPANY.
Citadel may also instruct its transfer agent not to register the transfer of any
securities unless the conditions specified in the foregoing legend are
satisfied.
4. REPRESENTATIONS AND WARRANTIES OF CRAIG AND CMI
Craig and CMI hereby jointly and severally represent and warrant to
Reading, Reading Entertainment, Citadel and CAC as follows:
4.1 Organization and Authorization. Craig and CMI are corporations
------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware and California, respectively, and each has the full corporate
power and all necessary authorizations to own all of its properties and assets
and to carry on its business as it is now being conducted. Craig and CMI are
each duly qualified to do business and are in good standing in each jurisdiction
in which the nature of its or their business or character of its or their
properties requires such qualification and where the failure to be so qualified
would materially and adversely affect either corporation or its or their
business, properties or rights. Craig and CMI have each delivered to Reading and
Reading Entertainment complete and correct copies of their Certificate of
Incorporation and Articles of Incorporation, respectively, and their By-Laws, as
amended and in effect on the date of this Agreement. Craig and CMI each have all
requisite corporate power to execute, deliver and perform their obligations
under this Agreement. The execution, delivery and performance of this Agreement
by Craig and CMI, and the consummation by each of them of the transactions
contemplated hereby, have been duly authorized by the Boards of Directors of
Craig and CMI and the shareholder of CMI, and no shareholder approval of Craig
is required. Neither Craig nor CMI is an "investment company" as defined in the
Investment Company Act of 1940, as amended. This Agreement has been duly
executed and delivered by Craig and CMI and constitutes a valid and binding
agreement of Craig and CMI, enforceable in accordance with its terms except to
the extent the enforcement thereof may be limited by bankruptcy, insolvency,
rehabilitation, moratorium and similar laws now or hereafter in effect relating
to creditor's rights generally or by general equitable principles.
4.2 Non-Contravention. The execution and delivery of this Agreement do
-----------------
not and the consummation of the transactions contemplated hereby will not (a)
violate the Articles of Incorporation or By-Laws of CMI or the Certificate of
Incorporation or By-Laws of Craig, (b) violate any provision of or result in the
breach or the acceleration of or entitle any party to accelerate (whether after
the giving of notice or the lapse of time or both) any material obligation under
any mortgage, lease, agreement, license or instrument, or any order, arbitration
award, judgment or decree, to which Craig or CMI is a party or by which either
is bound, (c)
10.
<PAGE>
result in the creation or imposition of any lien, charge, pledge, security
interest or other encumbrance on any property of Craig or CMI, or (d) to the
knowledge of either Craig or CMI, violate or conflict with any law, ordinance or
rule to which either is subject.
4.3 Approvals. No consent, approval, order or authorization of, or
---------
registration, declaration or filing with any governmental authority is required
in connection with the execution and delivery of this Agreement by Craig and CMI
or the consummation by Craig or CMI of the transactions contemplated hereby.
4.4 Interest in Reading International. Craig owns a membership
---------------------------------
interest in Reading International entitling it to a 50% allocable share in the
net profits, net losses and similar items and in distributions from Reading
International. Craig's interest in Reading International is as set forth in
(i) the Limited Liability Company Agreement (the "LLC Agreement") entered into
as of November 9, 1995 between Craig and Reading Investment, which LLC Agreement
is in full force and effect and has not been modified or amended, and (ii) the
RC Revocable Trust dated as of November 9, 1995 between Craig, Reading
Investment and CMI as the trustee relating to rights upon the liquidation of
Reading International, which agreement is in full force and effect and has not
been modified or amended.
4.5 Title to Assets. Craig owns and has, and Reading Entertainment
---------------
will receive, good and marketable title to its interest in Reading International
and the Citadel Preferred Stock being transferred hereunder, free and clear of
any mortgage, lien, pledge, charge, claim, conditional sales or other agreement,
lease, right or encumbrance, other than the provisions of the LLC Agreement with
respect to the interest in Reading International and the provisions of the
Original Citadel Certificate of Designation and the Stock Purchase and Sale
Agreement dated as of March 27, 1996 by and between Craig and Reading Holdings,
Inc. with respect to the Citadel Preferred Stock. CMI owns and has, and Reading
Entertainment will receive, good and marketable title to the Stater Preferred
Stock being transferred to Reading Entertainment pursuant to Section 2.2 hereof,
free and clear of any mortgage, lien, pledge, charge, claim, conditional sales
or other agreement, lease, right or encumbrance, except for the provisions and
restrictions set forth in the Option Agreement described in Section 8.3(e) of
this Agreement.
4.6 Accuracy of Information Furnished. The certificates, statements,
---------------------------------
and other information furnished to Reading and Reading Entertainment in writing
by or on behalf of Craig or CMI in connection with the transactions contemplated
hereby, do not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that no representation is made as to any financial projections contained in such
information other than that any such financial projections were prepared in good
faith based upon assumptions that Craig believes are reasonable.
4.7 Securities Law Compliance. None of the information supplied by
-------------------------
Craig or CMI in writing for inclusion in the Proxy Statement, the Registration
Statement or the Prospectus, or any amendments thereof or supplements thereto,
at the time of mailing of such Proxy Statement or such amendments or
supplements, at the time of any meeting of shareholders to be held in connection
herewith, at the time the Registration Statement becomes effective and at the
mailing of the Proxy Statement and the Prospectus, will contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
11.
<PAGE>
4.8 Brokers. All negotiations relating to this Agreement and the
-------
transactions contemplated hereby have been carried on without the intervention
of any person acting on behalf of Craig or CMI who has or may have a valid claim
against any of the parties to this Agreement for any broker's or finder's fee or
similar compensation, other than such fee as may be payable by Craig to Houlihan
Lokey Howard & Zukin, the financial advisor to the Independent Committee of the
Board of Directors of Craig.
4.9 Stater Financial Condition. To the best knowledge of Craig and
--------------------------
CMI, there has been no material adverse change in the financial condition of
Stater from that reflected in its audited financial statements for the year
ended September 24, 1995.
4.10 Investment Representation. Craig and CMI each represent and
-------------------------
warrant to Reading Entertainment that the shares of Reading Entertainment Common
Stock and Reading Entertainment Series B Preferred Stock to be received by them
pursuant to Sections 2.1 and 2.2 hereof and any shares of Reading Entertainment
Common Stock received upon conversion of said shares of Reading Entertainment
Series B Preferred Stock are being or will be acquired for investment and not
with a view to the sale or distribution of any part thereof, and that neither
has any present intention of selling, granting participation in or otherwise
distributing the same in a transaction which would result in a violation of the
Securities Act. Craig and CMI further represent that neither has any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person with respect to any of the
shares of Reading Entertainment Common Stock and Reading Entertainment Series B
Preferred Stock being acquired pursuant to Sections 2.1 and 2.2 hereof. Craig
and CMI understand that the shares of Reading Entertainment Common Stock and
Reading Entertainment Series B Preferred Stock being acquired hereunder and the
shares of Reading Entertainment Common Stock received upon any conversion of the
Reading Entertainment Series B Preferred Stock have not been and will not be
registered under the Securities Act on the ground that the exchange provided for
in this Agreement and the issuance of such securities are exempt pursuant to
Section 4(2) of the Securities Act, and that Reading Entertainment's reliance on
such exemption is predicated on the representations set forth herein. Each
certificate representing the Reading Entertainment Common Stock and Reading
Entertainment Series B Preferred Stock and any shares of Reading Entertainment
Common Stock issued upon conversion of shares of Reading Entertainment Series B
Preferred Stock may be endorsed with the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR
SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT, THE
AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE
COMPANY.
Reading Entertainment may also instruct its transfer agent not to register the
transfer of any securities unless the conditions specified in the foregoing
legend are satisfied.
4.11 CMI. Craig has no present intention to liquidate CMI or to sell,
---
transfer or assign its ownership interest in CMI, nor to cause CMI to sell,
transfer or assign any of the Reading Entertainment Common Stock or Reading
Entertainment Series B Preferred Stock to be received by CMI pursuant to this
Agreement. CMI has no present intention to liquidate or
12.
<PAGE>
to sell, transfer or assign any of the Reading Entertainment Common Stock or
Reading Entertainment Series B Preferred Stock to be received pursuant to this
Agreement.
5. REPRESENTATIONS AND WARRANTIES OF CITADEL AND CAC
Citadel and CAC hereby jointly and severally represent and warrant to
Reading, Reading Entertainment, Craig and CMI as follows:
5.1 Organization and Authorization. CAC and Citadel are corporations
------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware, and each has the corporate power and all necessary
authorizations to own all of its properties and assets and to carry on its
business as it is now being conducted. CAC and Citadel are each duly qualified
to do business and are in good standing in each jurisdiction in which the nature
of its or their business or character of its or their properties requires such
qualification and where the failure to be so qualified would materially and
adversely affect CAC or Citadel or its or their business, properties or rights.
CAC and Citadel have each delivered to Reading and Reading Entertainment
complete and correct copies of their Certificates of Incorporation and By-Laws,
as amended and in effect on the date of this Agreement. CAC and Citadel have
all requisite corporate power to execute, deliver and perform their obligations
under this Agreement. The execution, delivery and performance of this Agreement
by CAC and Citadel, and the consummation by CAC and Citadel of the transactions
contemplated hereby, have been duly authorized by the Board of Directors of CAC
and Citadel, and, except as may be required with respect to an exercise by
Citadel of the Asset Put, no approval of Citadel or CAC shareholders is
required. This Agreement has been duly executed and delivered by CAC and
Citadel and constitutes a valid and binding agreement of CAC and Citadel,
enforceable in accordance with its terms except to the extent the enforcement
thereof may be limited by bankruptcy, insolvency, rehabilitation, moratorium and
similar laws now or hereafter in effect relating to creditor's rights generally
or by general equitable principles.
5.2 Non-Contravention. The execution and delivery of this Agreement do
-----------------
not and the consummation of the transactions contemplated hereby will not
(a) violate the Certificate of Incorporation or By-Laws of either CAC or
Citadel, (b) violate any provision of or result in the breach or the
acceleration of or entitle any party to accelerate (whether after the giving of
notice or the lapse of time or both) any material obligation under any mortgage,
lease, agreement, license or instrument, or any order, arbitration award,
judgment or decree, to which CAC or Citadel is a party or by which it is bound,
(c) result in the creation or imposition of any lien, charge, pledge, security
interest or other encumbrance on any property of CAC or Citadel, or (d) to the
knowledge of either Citadel or CAC, violate or conflict with any law, ordinance
or rule to which either is subject.
5.3 Approvals. No consent, approval, order or authorization of, or
---------
registration, declaration or filing with any governmental authority is required
in connection with the execution and delivery of this Agreement by CAC or
Citadel or the consummation by CAC or Citadel of the transactions contemplated
hereby, except as may be required with respect to an exercise by Citadel of the
Asset Put.
5.4 Accuracy of Information Furnished. The certificates, statements,
---------------------------------
and other information furnished to Reading and Reading Entertainment in writing
by or on behalf of CAC or Citadel in connection with the transactions
contemplated hereby, do not contain any
13.
<PAGE>
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that no representation is made as
to any financial projections contained in such information other than that any
such financial projections were prepared in good faith based upon assumptions
that Citadel believes are reasonable.
5.5 Securities Law Compliance. None of the information supplied by CAC
-------------------------
or Citadel in writing for inclusion in the Proxy Statement, the Registration
Statement or the Prospectus, or any amendments thereof or supplements thereto,
at the time of mailing of such Proxy Statement or such amendments or
supplements, at the time of any meeting of stockholders to be held in connection
herewith, at the time the Registration Statement becomes effective and at the
mailing of the Proxy Statement and the Prospectus, will contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
5.6 Brokers. All negotiations relating to this Agreement and the
-------
transactions contemplated hereby have been carried on without the intervention
of any person acting on behalf of CAC or Citadel who has or may have a valid
claim against any of the parties to this Agreement for any broker's or finder's
fee or similar compensation, other than such fee as may be payable by Citadel or
CAC to Crowell, Weedon & Co., the financial advisor to the Independent Committee
of the Board of Directors of Citadel.
5.7 Investment Representation. CAC represents and warrants to Reading
-------------------------
Entertainment that the shares of Reading Entertainment Series A Preferred Stock
to be received by CAC pursuant to Section 2.3 hereof and any shares of Reading
Entertainment Common Stock received upon conversion of said shares are being or
will be acquired for investment and not with a view to the sale or distribution
of any part thereof, and that it has no present intention of selling, granting
participation in or otherwise distributing the same in a transaction which would
result in a violation of the Securities Act. Citadel and CAC further represent
that there is no contract, undertaking, agreement or arrangement with any person
to sell, transfer or grant participations to such person or to any third person
with respect to any of the shares of Reading Entertainment Series A Preferred
Stock being acquired pursuant to Section 2.3 hereof. CAC understands that the
shares being acquired by it hereunder and the shares of Reading Entertainment
Common Stock received upon any conversion thereof have not been and will not be
registered under the Securities Act on the ground that the exchange provided for
in this Agreement and the issuance of such securities are exempt pursuant to
Section 4(2) of the Securities Act, and that Reading Entertainment's reliance on
such exemption is predicated on the representations set forth herein. Each
certificate representing the Reading Entertainment Series A Preferred Stock and
any shares of Reading Entertainment Common Stock issued upon conversion of
shares of Reading Entertainment Series A Preferred Stock may be endorsed with
the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR
SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT, THE
AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE
COMPANY.
14.
<PAGE>
Reading Entertainment may also instruct its transfer agent not to register the
transfer of any securities unless the conditions specified in the foregoing
legend are satisfied.
5.8 Independent Continuing Directors. As of the date hereof and the
--------------------------------
Closing Date, CAC has and will have not less than two Independent Continuing
Directors (as defined in Article IX of the Certificate of Incorporation of CAC).
5.9 Capital Stock. The shares of Series B Citadel Preferred Stock to
-------------
be issued pursuant to this Agreement have been duly authorized, and, when issued
and paid for pursuant to the terms hereof, will be validly issued, fully paid
and non-assessable and will be entitled to all the rights, preferences and
privileges set forth in the Certificate of Designation of the Series B 3%
Cumulative Voting Convertible Preferred Stock of Citadel Holding Corporation
(the "Citadel Certificate of Designation"), attached as Exhibit 5.9 hereto. The
shares of common stock of Citadel issuable upon conversion of the Series B
Citadel Preferred Stock have been duly authorized and reserved for issuance upon
such conversion and, when issued and delivered on such conversion in accordance
with the terms of the Citadel Certificate of Designation, will be validly
issued, fully paid and non-assessable. The form of certificates representing the
shares of Series B Citadel Preferred Stock to be issued pursuant to this
Agreement will comply with the Delaware General Corporation Law, as amended. All
corporate action required to be taken for the authorization and issuance of the
Series B Citadel Preferred Stock to be issued pursuant to the Agreement has been
duly and validly taken. At or prior to the Closing, the Citadel Certificate of
Designation will have been filed with the Secretary of State of the State of
Delaware.
6. SHAREHOLDER APPROVAL; PROXY AND REGISTRATION FILINGS
6.1 Shareholder Approval. A meeting of the shareholders of Reading
--------------------
(the "Reading Shareholders") shall be held in accordance with the laws of the
State of Pennsylvania on or before November 30, 1996 (or such later date or
dates as may be approved by the Boards of Directors of all of the parties to
this Agreement) to, among other things, consider and act upon the Exchange and
the Reorganization.
6.2 Proxy Statement and Registration Statement.
------------------------------------------
(a) Reading has prepared and filed with the SEC a Proxy Statement
and related proxy material meeting the requirements of Regulation 14A of the
Securities Exchange Act to be mailed to shareholders in connection with the
meeting of the Reading Shareholders (the "Proxy Statement") referred to above,
and Reading shall use its commercially reasonable efforts to clear these
materials with the SEC and mail said materials to the Reading Shareholders on or
before October 21, 1996, or as soon as practicable thereafter. Reading further
covenants that the Proxy Statement at the time of mailing to the Reading
Shareholders and at the time of the meeting of shareholders held to approve the
Reorganization and Exchange will not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading and the Proxy Statement will comply as to form in all material
respects with the provisions of the Securities Exchange Act.
(b) Craig, CMI, Citadel and CAC shall furnish in writing for
inclusion in the Proxy Statement and the Registration Statement, described
below, such information as may
15.
<PAGE>
be reasonably necessary to comply with the provisions of the Securities Act and
the Securities Exchange Act and the rules and regulations thereunder and shall
have been requested in writing by Reading.
(c) Reading shall prepare a registration statement (the
"Registration Statement") including a form of prospectus (the "Prospectus") and
one or more amendments thereto, on Form S-4 or other appropriate form covering
the shares of Reading Entertainment Common Stock to be issued pursuant to the
Reorganization and shall use its commercially reasonable efforts to cause the
Registration Statement to become effective on or before October 21, 1996, or as
soon as practicable thereafter. Reading shall deliver to Craig, CMI, Citadel and
CAC copies of the Registration Statement and each amendment thereto filed or
proposed to be filed (and of each related preliminary prospectus). The
Registration Statement and the Prospectus, as amended at the time the
Registration Statement becomes effective, are herein called the "Registration
Statement" and the "Prospectus." Reading shall advise Craig, CMI, Citadel and
CAC and shall confirm in writing (i) when the Registration Statement or any
post-effective amendment thereto shall have become effective and when any
amendment of or supplement to the Prospectus is filed with the SEC, (ii) when
the SEC shall make a request or suggestion for any amendment to the Registration
Statement or the Prospectus or for additional information and the nature and
substance thereof, relating solely to the Reorganization or Exchange, and (iii)
of the issuance by the SEC of a stop order suspending the effectiveness of the
Registration Statement, and shall use its commercially reasonable efforts to
prevent the issuance of a stop order and, if such order shall be issued, to
obtain the withdrawal thereof at the earliest possible time. Reading represents
and warrants to Craig, CMI, Citadel and CAC that the Registration Statement and
the Prospectus (including the information therein provided by Reading) and any
other amendments and supplements thereto, will, when they become effective,
conform in all material respects to the requirements of the Securities Act and
the rules and regulations thereunder, and will not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; provided,
however, that Reading makes no representation or warranty as to statements or
omissions therein supplied by Craig, CMI, Citadel and CAC.
(d) If, at any time prior to the Closing Date, it shall be
necessary to amend or supplement the Proxy Statement or the Registration
Statement to correct any statement or omission with respect to Reading, Reading
Entertainment, Craig, CMI, Citadel or CAC in order to comply with any applicable
legal requirements, the appropriate party to this Agreement shall supply in
writing the necessary information to Reading. To the extent necessary to comply
with applicable legal requirements, Reading shall amend or supplement the Proxy
Statement and amend or supplement the Registration Statement and Prospectus.
7. COVENANTS
7.1 Covenants of Craig, CMI, Citadel and CAC.
----------------------------------------
(a) Craig, CMI, Citadel and CAC each hereby covenant and agree
that from the date of this Agreement until the Closing Date (or until the items
referred to have either been accomplished or, in good faith, abandoned), except
with the prior written consent of Reading, it:
16.
<PAGE>
(i) shall use its commercially reasonable efforts to
promptly furnish such information to Reading or Reading Entertainment as shall
be necessary for Reading to comply with all filing and regulatory requirements
imposed on Reading or Reading Entertainment with respect to the Exchange and the
Reorganization; and
(ii) with respect to Craig and CMI, will not transfer,
pledge, encumber or allow a mortgage, lien or other charge to be placed upon any
of the assets to be transferred to Reading Entertainment pursuant to Section 2.1
or 2.2 hereunder.
(b) Subject to the terms of this Agreement, Craig agrees to vote
all shares of its Reading Class A Common Stock in favor of the Reorganization
and Exchange at the meeting of Reading Shareholders held to consider the same.
(c) Citadel hereby covenants and agrees that, so long as the
provisions of Article IX of the Certificate of Incorporation of CAC remain
applicable in accordance with their terms, Citadel (i) shall use its
commercially reasonable efforts to ensure that CAC at all times has at least one
Independent Continuing Director (as defined in such Article IX), and (ii) shall
not and shall not permit any of its subsidiaries to cause a "short-form" merger
of CAC into Citadel or any subsidiary of Citadel, or otherwise take any action
which, if taken by CAC, would violate the provisions of such Article IX.
(d) Craig covenants and agrees that at the Closing it will
transfer and assign to Reading Entertainment all of Craig's rights, and Reading
Entertainment covenants and agrees that it will assume all of Craig's
obligations, under the Preferred Stock Purchase Agreement entered into on
November 10, 1994. Citadel consents to such transfer, assumption and assignment
and agrees that the provisions of such Preferred Stock Purchase Agreement shall
apply to the Series B Citadel Preferred Stock (and the shares of Citadel Common
Stock issuable upon conversion of the Series B Citadel Preferred Stock) as if
such shares were the "Shares" as defined in such Preferred Stock Purchase
Agreement.
7.2 Covenants of Reading and Reading Entertainment.
----------------------------------------------
(a) Reading and Reading Entertainment hereby covenant and agree
that from the date of this Agreement until the Closing Date, except with the
prior written consent of Craig, CMI, Citadel and CAC, which will not be
unreasonably withheld or delayed, it:
(i) shall use its commercially reasonable efforts to
comply with all filing and regulatory requirements which may be imposed on
Reading and Reading Entertainment with respect to the Exchange and the
Reorganization, including the filing with the SEC of the Proxy Statement and the
Registration Statement;
(ii) shall use its commercially reasonable efforts to
obtain any consent, authorization or approval of, any governmental authority or
agency or other third party required to be obtained in connection with the
Exchange and the Reorganization or the taking of any action in connection with
the consummation thereof; and
(iii) use its commercially efforts to consummate the
Reorganization and hold a meeting of Reading Shareholders to approve the
Reorganization and the Exchange.
17.
<PAGE>
(b) Reading and Reading Entertainment hereby covenant and agree
that prior to the Closing, the Reading Entertainment Common Stock issuable upon
conversion of the Reading Entertainment Series A and Series B Preferred Stock
shall have been reserved for issuance by Reading Entertainment out of its
authorized but unissued shares of Common Stock and the Reading Entertainment
Common Stock issuable upon such conversion and the Reading Entertainment Common
Stock being issued pursuant to Section 2.1 and 2.2 hereof shall have been
approved for listing on NASDAQ National Market as well as any stock exchange
where Reading Entertainment Common Stock may be listed, subject to official
notice of issuance.
7.3 Access. From the date of this Agreement to the Closing Date,
------
Reading shall afford to Craig, CMI, Citadel and CAC and to the officers and
authorized representatives of each such entity (including, without limitation,
counsel, financial advisors and independent accountants) reasonable access to
its properties, personnel, books and records at such reasonable times and in
such manner as not to disrupt normal business operations; and the officers of
Reading will furnish such officers and representatives with such additional
financial and operating data and other information as to its business and
properties as may be reasonably requested. Likewise Craig shall afford to
Reading, Citadel and CAC and to the authorized representatives of each such
entity (including without limitation, counsel, financial advisors and
independent accountants) reasonable access to all information held by Craig with
respect to Stater. Each of the parties hereto shall insure that all
confidential information which such party or any of its officers, directors,
employees, counsel, agents, investment bankers, or accountants may receive under
this Section 7.3 or pursuant to Section 6.2(c)(ii) shall be kept confidential
and not published, disclosed, or made accessible by any of them to any other
person, except the persons referred to in this sentence who are advised of and
agree to maintain the confidential nature of such information; provided,
however, that the restrictions of this sentence shall not apply as may otherwise
be required by law, as may be necessary or appropriate in connection with the
enforcement of this Agreement, or to the extent such information shall have
otherwise become publicly available.
7.4 Citadel Contributions. Prior to the Closing, Citadel agrees to
---------------------
contribute $7.0 million to the capital of CAC to enable CAC to complete the
transfer described in Section 2.3 of this Agreement.
8. CONDITIONS
8.1 Conditions Precedent to the Obligations of All Parties.
------------------------------------------------------
Notwithstanding any other provision of this Agreement, the obligations of the
parties to effect the Exchange shall be subject to the fulfillment, as of the
Closing, of each of the following conditions (unless waived by the written
consent of the parties hereto):
(a) the Exchange and the Reorganization shall have been validly
approved and adopted by the affirmative vote of the holders of at least a
majority of the votes cast by the holders of the issued and outstanding shares
of Reading Class A Common Stock and Reading Common Stock, voting together as a
single class, at a duly called and held meeting of the Reading Shareholders at
which a quorum is present, and the Reorganization shall have been consummated;
18.
<PAGE>
(b) all permits, approvals and consents of any governmental body
or agency or other third party necessary or appropriate for consummation of the
Exchange and the Reorganization shall have been obtained;
(c) the Registration Statement shall have become effective under
the Securities Act and no stop order suspending the effectiveness of the
Registration Statement shall have been issued or proceedings for that purpose
instituted by the SEC; the Reading Entertainment Common Stock issuable upon
conversion of the Reading Entertainment Series A and Series B Preferred Stock
shall have been reserved for issuance by Reading Entertainment out of its
authorized but unissued shares of Common Stock and the Reading Entertainment
Common Stock issuable upon such conversion and the Reading Entertainment Common
Stock being issued pursuant to Section 2.1 and 2.2 hereof shall have been
approved for listing on NASDAQ National Market as well as any stock exchange
where Reading Entertainment Common Stock may be listed, subject to official
notice of issuance;
(d) there shall not be in effect an order or decision of a court
of competent jurisdiction or a governmental agency or authority which prevents,
or would materially alter the terms of, the Exchange or the Reorganization;
(e) there shall not be any action or proceeding commenced by or
before any governmental agency or authority or threatened by any governmental
agency or authority that enjoins, restrains or prohibits or seeks to enjoin,
restrain or prohibit the Exchange or the Reorganization;
(f) the requirement to close the transfers described in Sections
2.1, 2.2, 2.3 and 2.4 of this Agreement are conditioned on all such transfers
closing simultaneously;
(g) Reading and Reading Entertainment shall have received, on or
prior to the mailing date of the Proxy Statement, an opinion reasonably
satisfactory to them from Berwind Financial Group, L.P. to the effect that the
Exchange is fair from a financial point of view to Reading and Reading
Entertainment and said opinion shall not have been withdrawn or modified in a
manner which is not reasonably satisfactory to Reading or Reading Entertainment;
and
(h) the holders of Reading's Class A Common Stock shall not have
had any dissenter's rights under Pennsylvania law in connection with the
Reorganization.
8.2 Additional Conditions Precedent to the Obligations of Reading and
-----------------------------------------------------------------
Reading Entertainment. In addition to the conditions contained in Section 8.1,
- ---------------------
the obligations of Reading and Reading Entertainment to effect the Exchange
shall also be subject to the fulfillment as of the Closing Date of each of the
following conditions (unless waived in writing by Reading and Reading
Entertainment):
(a) the representations and warranties of Craig, CMI, Citadel and
CAC contained in Section 4 and 5, respectively, shall be true in all material
respects at and as of the date hereof and as of the Closing Date as if made at
and as of the Closing Date; Craig, CMI, Citadel and CAC shall have each duly
performed and complied in all material respects with all agreements, covenants
and conditions required by this Agreement to be performed or
19.
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complied with by them prior to or on the Closing Date; and each of Craig, CMI,
Citadel and CAC shall have delivered to Reading and Reading Entertainment a
certificate dated the Closing Date and signed by its President or its Chief
Financial Officer to the effect set forth in this subparagraph.
(b) Reading and Reading Entertainment shall have received an
opinion letter from Troy & Gould Professional Corporation, counsel to Craig and
CMI, dated the Closing Date, substantially in the form previously delivered to
counsel to Reading.
(c) Reading and Reading Entertainment shall have received an
opinion letter from Gibson, Dunn & Crutcher, special counsel to CAC, and
Citadel, dated the Closing Date, substantially in the form previously delivered
to counsel to Reading. Reading and Reading Entertainment shall have received an
opinion letter from its counsel, Duane, Morris & Heckscher, dated the Closing
Date, substantially in the form of the draft dated the date hereof, previously
delivered to Reading.
(d) All necessary corporation action on the part of the directors
of Craig, CMI, Citadel and CAC in connection with the transactions contemplated
in this Agreement shall have been duly and validly taken.
(e) From the date hereof, there shall have been no material
adverse change in the assets, business, financial condition or results of
operations of Stater and its subsidiaries, taken as a whole, or Citadel and its
subsidiaries, taken as a whole.
(f) The consummation of the Exchange and the Reorganization shall
not result in a "change of control" under the Code such that there would be a
material adverse impact on the net operating loss carryforwards of Reading or
Reading Entertainment.
(g) The Stater Stockholders Agreement, as amended, shall have been
terminated.
8.3 Additional Conditions Precedent to the Obligations of Craig and
---------------------------------------------------------------
CMI. In addition to the conditions contained in Section 8.1, the obligations of
- ---
Craig and CMI to effect the Exchange shall also be subject to the fulfillment at
the Closing Date of each of the following conditions (unless waived in writing
by Craig and CMI):
(a) the representations and warranties of Reading and Reading
Entertainment contained in Section 3 and the representations and warranties of
Citadel and CAC contained in Section 5 shall be true in all material respects at
and as of the date hereof and as of the Closing Date as if made at and as of the
Closing Date; Reading, Reading Entertainment, Citadel and CAC shall each have
duly performed and complied in all material respects with all agreements,
covenants and conditions required by this Agreement to be performed or complied
with prior to or at the Closing Date; and Reading, Reading Entertainment,
Citadel and CAC shall have each delivered to Craig and CMI a certificate dated
the Closing Date and signed by its President or Chief Financial Officer to the
respective effect set forth in this subparagraph;
(b) Craig and CMI shall have received an opinion letter from
Duane, Morris & Heckscher, counsel to Reading and Reading Entertainment, dated
the Closing Date,
20.
<PAGE>
substantially in the form previously delivered to counsel to Craig. Craig and
CMI shall have received an opinion letter from Duane, Morris & Heckscher, dated
the Closing Date, substantially in the form of the draft dated the date hereof,
previously delivered to counsel to Craig.
(c) All necessary corporate action on the part of the directors
and shareholders of Reading and the directors of Reading Entertainment and
Reading Entertainment Subsidiary and the directors and shareholder of CAC in
connection with the transactions contemplated in this Agreement shall have been
taken by the Closing.
(d) From the date hereof, there shall have been no material
adverse change in the assets, business, financial condition or results of
operations of Reading or Reading Entertainment and its or their subsidiaries,
taken as a whole.
(e) Reading Entertainment shall have delivered to CMI its
agreement to be bound by the provisions of Article I and II of that Option
Agreement entered into as of September 3, 1993 by and among Stater, Craig and
CMI with respect to the Stater Preferred Stock.
(f) Immediately prior to the Closing, Reading International and
Reading Investment shall have terminated any and all obligations of Craig and
CMI under that Amended and Restated Capital Funding Agreement entered into as of
March 8, 1996 by and among Craig, Reading Investment and CMI, and Reading
Holdings shall have terminated all of its rights with respect to the Warrant
Purchase Option set forth in Section 3.1 and the Preferred Purchase Option set
forth in Section 2.1 of the Stock Purchase and Sale Agreement entered into as of
March 27, 1996 by and between Craig and Reading Holdings.
(g) The opinion of the law firm of Morris, Nichols, Arsht &
Tunnell that no approval of the shareholders of Craig is required under Delaware
law in connection with the Exchange shall have been reissued and dated as of the
Closing Date and shall not have been modified in a manner not reasonably
satisfactory to legal counsel for Craig.
(h) The opinion of Duane, Morris & Heckscher dated as of the date
of this Agreement, and delivered to Craig and CMI shall have been reissued and
dated as of the Closing Date and shall not have been modified in a manner not
reasonably satisfactory to legal counsel for Craig.
(i) The fairness opinion of Houlihan Lokey Howard & Zukin
addressed to the Board of Directors of Craig and dated as of the date of this
Agreement shall not have been withdrawn or modified in a manner not reasonably
satisfactory to Craig.
(j) The total shareholders' equity of Reading as reflected in
financial statements set forth in the Form 10-Q filed with the SEC for the
quarter ended closest to the Closing shall not be less than $66,218,000.
8.4 Additional Conditions Precedent to the Obligations of CAC and
-------------------------------------------------------------
Citadel. In addition to the conditions contained in Section 8.1, the
- -------
obligations of CAC and Citadel to effect the Exchange shall also be subject to
the fulfillment at the Closing Date of each of the following conditions (unless
waived in writing by CAC and Citadel):
21.
<PAGE>
(a) the representations and warranties of Reading and Reading
Entertainment contained in Section 3 and the representations of Craig and CMI
contained in Section 4 shall be true in all material respects at and as of the
date hereof and as of the Closing Date as if made at and as of the Closing Date;
each of Reading, Reading Entertainment, Craig and CMI shall each have duly
performed and complied in all material respects with all agreements, covenants
and conditions required by this Agreement to be performed or complied with prior
to or at the Closing Date; and each of Reading, Reading Entertainment, Craig and
CMI shall have delivered to CAC and Citadel a certificate dated the Closing Date
and signed by its President or Chief Financial Officer to the respective effect
set forth in this subparagraph.
(b) CAC and Citadel shall have received an opinion letter from
Duane, Morris & Heckscher, counsel to Reading and Reading Entertainment, dated
the Closing Date, substantially in the form of the draft previously delivered to
counsel to Citadel. CAC and Citadel shall have received an opinion letter from
Duane, Morris & Heckscher, dated the Closing Date, substantially in the form of
the draft dated the date hereof previously delivered to counsel to Citadel.
(c) All necessary corporate action on the part of the directors
and shareholders of Reading and the directors of Reading Entertainment and
Reading Entertainment Subsidiary and the directors of Craig and CMI in
connection with the transactions contemplated in this Agreement shall have been
taken by the Closing.
(d) From the date hereof, there shall have been no material
adverse change in the assets, business, financial condition, or results of
operations of Reading or Reading Entertainment and its or their subsidiaries,
taken as a whole.
(e) Each of Reading Entertainment and Craig shall have executed
and delivered to Citadel and CAC an Asset Put and Registration Rights Agreement
substantially in the form attached hereto as Exhibit 8.4(e) (the "Option
Agreement").
(f) The fairness opinion of Crowell, Weedon & Co. addressed to the
Board of Directors of Citadel and dated as of the date of this Agreement shall
not have been withdrawn or modified in a manner not reasonably satisfactory to
Citadel.
(g) The opinion of Duane, Morris & Heckscher dated as of the date
of this Agreement and delivered to Citadel and CAC shall have been reissued and
dated as of the Closing Date and shall not have been modified in a manner not
reasonably satisfactory to legal counsel for Citadel.
(h) The total shareholders' equity of Reading as reflected in
financial statements set forth in the Form 10-Q filed with the SEC for the
quarter ended closest to the Company shall not be less than $66,218,000.
22.
<PAGE>
9. TERMINATION
9.1 Termination. This Agreement may be terminated at any time prior to
-----------
the Closing Date, whether before or after approval by the Reading Shareholders;
(a) by mutual consent of the respective Boards of Directors of
Reading, Reading Entertainment, Craig, CMI, Citadel and CAC;
(b) by any of the respective Boards of Directors of Reading,
Craig, CMI, and Citadel if the Exchange and the Reorganization shall not have
been consummated on or before December 31, 1996, except as a result of the
wilful acts or omissions of the party (or, in the case of Reading, Citadel or
Craig, its wholly owned subsidiary, or, in the case of CMI, its parent) seeking
to cancel this Agreement.
9.2 Written Notice. In order to terminate this Agreement pursuant to
--------------
Section 9.1, the party or parties so acting shall give written notice of such
termination to the other parties.
9.3 Effect of Termination. In the event of the termination of this
---------------------
Agreement pursuant to Section 9.1, the provisions of this Agreement shall become
void and have no effect, with no liability on the part of any party or its
shareholders or directors or officers in respect thereof, unless such
termination shall have occurred as a result of the wilful breach of this
Agreement by any party hereto.
10. GENERAL PROVISIONS
10.1 Survival of Representations and Warranties. Other than with respect
------------------------------------------
to Sections 3.3, 3.11, 4.5, 4.10, 5.7 and 5.9 of this Agreement, the
representations and warranties set forth in this Agreement shall survive the
Closing for a period of one year. The representations and warranties set forth
in Sections 3.3, 3.11, 4.5, 4.10, 5.7 and 5.9 of this Agreement shall survive in
perpetuity.
10.2 Notices. All notices, requests, demands or other communications
-------
required or authorized or contemplated to be given by this Agreement shall be in
writing and shall be deemed to have been duly given made and received when
delivered against receipt, upon receipt of a facsimile transmission, when
deposited in the United States mails (first class postage prepaid) or when
deposited with Federal Express, and addressed as follows:
If to Reading or
Reading Entertainment: Reading Company
The Graham Building
One Penn Square West
30 South 15th Street,
Suite 1300
Philadelphia, PA 19102
Attn: James A. Wunderle
Fax: (215) 569-2862
Copies to: Duane, Morris & Heckscher
23.
<PAGE>
One Liberty Place
Philadelphia, PA 19103
Attn: Sheldon M. Bonovitz, Esq.
Fax: (215) 979-1020
and
Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103
Attn: Henry N. Nassau, Esq.
Fax: (215) 994-2222
If to Craig or CMI: Craig Corporation
550 S. Hope Street,
Suite 1825
Los Angeles, CA 90071
Attn: Robin Skophammer
Fax: (213) 239-0548
Copy to: Troy & Gould Professional Corporation
1801 Century Park East,
16th Floor
Los Angeles, CA 90067
Attn: James C. Lockwood, Esq.
Fax: (310) 201-4746
If to CAC or Citadel: Citadel Holding Corporation
550 S. Hope Street
Suite 1825
Los Angeles, CA 90071
Attn: Steve Wesson
Fax: (213) 239-0549
Copy to: Gibson, Dunn & Crutcher LLP
333 S. Grand Avenue
Los Angeles, CA 90071
Attn: Dhiya El-Saden, Esq.
Fax: (213) 229-7520
or such other address and fax number as any of the parties hereto may from time
to time designate in writing, prior to the giving of such notice.
10.3 Amendment and Waiver. No amendment or waiver of any provision of
--------------------
this Agreement shall in any event be effective, unless the same shall be in
writing signed by the parties hereto, and then such amendment, waiver or consent
shall be effective only in a specific instance and for the specific purpose for
which given, except that the parties to this Agreement may (i) extend the time
for the performance of any of the obligations or other acts of the other
parties, (ii) waive any inaccuracies in the representations and warranties
contained
24.
<PAGE>
in this Agreement or in any document delivered pursuant hereto, and (iii) waive
compliance with any of the covenants or conditions contained in this Agreement.
10.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement.
10.5 Assignability. This Agreement shall not be assigned by any party
-------------
without the prior written consent of all of the parties hereto. In the event of
such assignment, this Agreement shall bind and inure to the benefit of the
parties named herein and their respective successors and assigns.
10.6 Entire Agreement. This Agreement and the documents referred to
----------------
herein contain the entire understanding among the parties with respect to the
transactions contemplated hereby and supersede all prior and contemporaneous
agreements and understandings whether oral or written, relating to the subject
matter hereof.
10.7 Applicable Law. This Agreement shall be governed by and construed
--------------
in accordance with the laws of the State of Delaware, notwithstanding any
Delaware or other conflict-of-law provisions to the contrary.
10.8 Headings. The section and other headings contained in this
--------
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of the terms and conditions contained therein or of
this Agreement.
10.9 Costs and Expenses. Each party hereto shall bear its own costs and
------------------
expenses (including fees and disbursements of legal counsel) incurred in
connection with the negotiation and preparation of this Agreement and the
consummation of the transactions provided for herein, except that Reading
Entertainment agrees to reimburse Citadel and CAC, regardless of whether the
Closing occurs, for their aggregate reasonable out-of-pocket costs and expenses
(including reasonable fees and expenses of legal counsel and financial advisors)
related to this Agreement and the transactions contemplated hereby up to a
maximum of $280,000.
25.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective duly authorized officers as of the date first above
written.
READING COMPANY
By: /S/ JAMES A. WUNDERLE
--------------------------------
Its: Chief Operating Officer
READING ENTERTAINMENT, INC.
By: /S/ JAMES A. WUNDERLE
-----------------------------
Its: Chief Operating Officer
CRAIG CORPORATION
By: /S/ S. CRAIG TOMPKINS
-------------------------------
Its: President
CRAIG MANAGEMENT, INC.
By: /S/ S. CRAIG TOMPKINS
-------------------------------
Its: President
CITADEL HOLDING CORPORATION
By: /S/ STEVE WESSON
------------------------------
Its: President
CITADEL ACQUISITION CORP., INC.
By: /S/ STEVE WESSON
-----------------------------
Its: President
26.
<PAGE>
EXHIBIT 5.9
CERTIFICATE OF DESIGNATION
OF THE SERIES B 3% CUMULATIVE VOTING CONVERTIBLE PREFERRED STOCK
(Par Value $.01 Per Share)
OF
CITADEL HOLDING CORPORATION
______________________
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
______________________
Citadel Holding Corporation, a Delaware corporation (the "Company"),
-------
certifies that pursuant to the authority conferred upon the Board of Directors
of the Company (the "Board of Directors") by the Certificate of Incorporation of
------------------
the Company (the "Certificate of Incorporation"), and in accordance with the
----------------------------
provisions of Section 151 of the General Corporation Law of the State of
Delaware, as amended (the "GCL"), the Board of Directors, on
---
___________________, 1996, adopted the following resolution creating a series of
its Preferred Stock, par value $.01 per share:
RESOLVED, that a class of the Company's authorized preferred stock, par
value $.01 per share, which shall consist of 1,329,114 shares of Preferred
Stock, be hereby created, and that the designation and amount thereof and the
voting powers, preferences, limitations, restrictions and relative rights and
the qualifications, limitations and restrictions thereof are as follows:
1. Designation, Issuance and Stated Value. The designation of such series
---------------------------------------
of the Preferred Stock authorized by this resolution shall be the Series B 3%
Cumulative Voting Convertible Preferred Stock (the "Preferred Stock"). The
---------------
maximum number of shares of Preferred Stock shall be 1,329,114. The shares of
Preferred Stock shall be issued by the Company for their Stated Value (as
defined herein), in such amounts, at such times and to such persons as shall be
specified by the Board of Directors from time to time. For the purposes hereof,
the "Stated Value" of each share of Preferred Stock (regardless of its par
------------
value) shall be $3.95 per share.
2. Rank. The Preferred Stock shall, with respect to dividend rights and
----
rights upon liquidation, winding up and dissolution, rank prior to the Company's
common stock, par value $.01 per share (the "Common Stock"), and to all other
------------
classes and series of equity securities of the Company now or hereafter
authorized, issued or outstanding (the Common Stock and such other classes and
series of equity securities may be referred to herein collectively as the
"Junior Stock"), other than any class or series of equity securities of the
- -------------
Company ranking on a parity with (the "Parity Stock") or senior to (the "Senior
------------ ------
Stock") the Preferred Stock as to dividend rights and/or rights upon
- -----
liquidation, dissolution or winding up of the Company. The Preferred Stock
shall be subordinate to and rank junior to all indebtedness of the Company now
or hereafter outstanding. The Preferred Stock shall be subject to creation of
Senior Stock, Parity Stock and Junior Stock, to the extent not expressly
prohibited by the Certificate of Incorporation, with respect to the payment of
dividends and/or rights upon liquidation, dissolution or winding up of the
Company.
<PAGE>
3. Cumulative Dividends; Priority.
-------------------------------
(a) Payment of Dividends. The holder of record of each share of
--------------------
Preferred Stock shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available therefor, a quarterly per
share dividend (the "Quarterly Dividend") equal to (i) one-fourth of 3% of the
------------------
Stated Value of such share (pro-rated for any portion of a Dividend Period (as
defined below) that such share shall have been issued and outstanding), plus
(ii) accrued but unpaid per share dividends as to which a Dividend Payment Date
(as defined below) has occurred. Dividends shall accrue from the last Dividend
Payment Date (as defined below) prior to the Closing Date (the "Closing Date")
of the Exchange Agreement by and among Reading Company, the Company, Craig
Corporation, Reading Entertainment, Inc., Craig Management, Inc. and Citadel
Acquisition Corp., Inc. and be payable (subject to declaration) quarterly on the
fifteenth day of January, April, July and October in each year (or if such day
is a non-business day, on the next business day), commencing on the first
Dividend Payment Date to occur after the Closing Date, in respect of the
immediately preceding calendar quarter (each of such dates a "Dividend Payment
----------------
Date"). Each declared dividend shall be payable to holders of record as they
- ----
appear on the stock books of the Company at the close of business on such record
dates as are determined by the Board of Directors or a duly authorized committee
thereof (each of such dates a "Record Date"), which Record Dates shall be not
-----------
more than 45 calendar days nor fewer than ten calendar days preceding the
Dividend Payment Dates therefor. Quarterly dividend periods (each a "Dividend
--------
Period") shall be the calendar quarters that commence on and include the first
- ------
day of January, April, July and October of each year and shall end on and
include the end of the calendar quarter that commenced with each of such dates.
Dividends on the Preferred Stock shall be fully cumulative and shall accrue
(whether or not declared), on a daily basis, from the first day of each Dividend
Period; provided, however, that the initial quarterly dividend payable on the
first Dividend Payment Date to occur after the Closing Date, and the amount of
any dividend payable for any other Dividend Period shorter than a full Dividend
Period shall be computed on the basis of a 360-day year composed of twelve 30-
day months and the actual number of days elapsed in the relevant Dividend
Period.
(b) Priority as to Dividends. No full dividend shall be declared by
the Board of Directors or paid or set apart for payment by the Company on any
Parity Stock for any period unless full cumulative dividends have been or
contemporaneously are declared and paid or declared and a sum set apart
sufficient for such payment on the Preferred Stock through the most recent
Dividend Payment Date. If any dividends are not paid or set apart in full, as
aforesaid, upon the shares of the Preferred Stock and any Parity Stock, all
dividends declared upon the Preferred Stock and any Parity Stock shall be
declared pro rata so that the amount of dividends declared per share on the
Preferred Stock and such Parity Stock shall in all cases bear to each other the
same ratio that accrued dividends per share on the Preferred Stock and such
Parity Stock bear to each other. Unless full cumulative dividends, if any,
accrued on all outstanding shares of the Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum set apart
sufficient for such payment through the most recently completed Dividend Period,
no dividend shall be declared or paid or set aside for payment or other
distribution declared or made upon the Common Stock or upon any other Junior
Stock (other than a dividend or distribution paid in shares of, or warrants,
rights or options exercisable for or convertible into, Common Stock or any other
Junior Stock), nor shall any Common Stock nor any other Junior Stock be
redeemed, purchased or otherwise acquired for any consideration, nor may any
moneys be paid to or made available for a sinking fund for the redemption of any
shares of any such securities, by the Company, except by conversion into or
exchange for Junior Stock. Unless full cumulative dividends, if any, accrued on
all outstanding shares of the Senior Stock have been or contemporaneously are
declared and paid or declared and a sum set apart sufficient for such payment
through the most recently completed dividend period therefor, no dividend shall
be declared or paid or set aside for payment or other distribution declared or
made upon the Preferred Stock (other than a dividend or distribution paid in
shares of, or warrants, rights or options exercisable for or convertible into,
Preferred Stock), nor shall any Preferred Stock be redeemed, purchased or
otherwise acquired for any consideration, nor may any moneys be paid to or made
available for a sinking fund for the redemption of any shares of any such
securities, by the Company, except by conversion into or exchange for Preferred
Stock, Parity Stock or Junior Stock. Holders of the shares of the Preferred
Stock shall not be entitled to any dividends, whether payable in cash, property
or stock, in excess of full cumulative dividends as provided in Section (3)(a).
2
<PAGE>
(c) Miscellaneous Provisions Relating to Dividends. Payment of
----------------------------------------------
dividends shall be subject to the following provisions:
(i) Subject to the foregoing provisions of this Section 3, the
Board of Directors may declare and the Company may pay or set apart for payment
dividends and other distributions on any of the Junior Stock or Parity Stock,
and may redeem, purchase or otherwise acquire out of funds legally available
therefor any Junior Stock, and the holders of the shares of the Preferred Stock
shall not be entitled to share therein;
(ii) Any dividend payment made on shares of the Preferred Stock
shall first be credited against the earliest accrued but unpaid dividend due
with respect to shares of the Preferred Stock;
(iii) All dividends paid with respect to shares of the Preferred
Stock pursuant to this Section 3 shall be paid pro rata to the holders entitled
thereto; and
(iv) Holders of shares of the Preferred Stock shall be entitled
to receive the dividends provided for in this Section 3 in preference to and in
priority over any dividends upon any of the Junior Stock; and
(v) Accrued but unpaid dividends on preferred stock shall not
earn interest or compound.
4. Redemption at the Option of the Company.
----------------------------------------
(a) General. Except as expressly provided herein, the Company shall
not have any right to redeem shares of the Preferred Stock prior to November
10, 1997. Thereafter, the Company shall have the right, at its sole option and
election, subject to Section 6, to redeem outstanding shares of the Preferred
Stock, in whole or in part at any, time and from time to time at a per share
price (the "Redemption Price") equal to the sum of:
----------------
(i) the Stated Value; plus
(ii) all accrued but unpaid Quarterly Dividends, whether or not
declared, plus
(iii) the "Premium," which shall mean:
-------
(A) if the Redemption Date (as defined below) is on or
prior to November 10, 1998, an amount equal to an accrual on the Stated
Value of 9% per annum (not compounded) from November 10, 1994 to the
Closing Date, plus an amount equal to an accrual on the Stated Value of 3%
per annum (not compounded) from the Closing Date to the Redemption Date; or
(B) if the Redemption Date is after November 10, 1998 and
on or prior to November 10, 1999, an amount equal to an accrual on the
Stated Value of 8% per annum (not compounded) from November 10, 1994 to the
Closing Date, plus an amount equal to an accrual on the Stated Value of 3%
per annum (not compounded) from the Closing Date to the Redemption Date; or
(C) if the Redemption Date is after November 10, 1999 and
on or prior to November 10, 2000, an amount equal to an accrual on the
Stated Value of 7% per annum (not compounded) from November 10, 1994 to the
Closing Date, plus an amount equal to an accrual on the Stated Value of 3%
per annum (not compounded) from the Closing Date to the Redemption Date; or
(D) if the Redemption Date is after November 10, 2000 and
on or prior to November 10, 2001, an amount equal to an accrual on the
Stated Value of 6% per annum (not
3
<PAGE>
compounded) from November 10, 1994 to the Closing Date, plus an amount
equal to an accrual on the Stated Value of 3% per annum (not compounded)
from the Closing Date to the Redemption Date; or
(E) if the Redemption Date is after November 10, 2001 and
on or prior to November 10, 2002, an amount equal to an accrual on the
Stated Value of 5% per annum (not compounded) from November 10, 1994 to the
Closing Date, plus an amount equal to an accrual on the Stated Value of 3%
per annum (not compounded) from the Closing Date to the Redemption Date; or
(F) if the Redemption Date is after November 10, 2002 and
on or prior to November 10, 2003, an amount equal to an accrual on the
Stated Value of 4% per annum (not compounded) from November 10, 1994 to the
Closing Date, plus an amount equal to an accrual on the Stated Value of 3%
per annum (not compounded) from the Closing Date to the Redemption Date; or
(G) if the Redemption Date is after November 10, 2003 and
on or prior to November 10, 2004, an amount equal to an accrual on the
Stated Value of 3% per annum (not compounded) from November 10, 1994 to the
Closing Date, plus an amount equal to an accrual on the Stated Value of 3%
per annum (not compounded) from the Closing Date to the Redemption Date; or
(H) if the Redemption Date is after November 10, 2004 and
on or prior to November 10, 2005, an amount equal to an accrual on the
Stated Value of 2% per annum (not compounded) from November 10, 1994 to the
Closing Date, plus an amount equal to an accrual on the Stated Value of 3%
per annum (not compounded) from the Closing Date to the Redemption Date; or
(I) if the Redemption Date is after November 10, 2005 and
on or prior to November 10, 2006, an amount equal to an accrual on the
Stated Value of 1% per annum (not compounded) from November 10, 1994 to the
Closing Date, plus an amount equal to an accrual on the Stated Value of 3%
per annum (not compounded) from the Closing Date to the Redemption Date; or
(J) if the Redemption Date is after November 10, 2006,
zero.
Holders of shares of Preferred Stock to be redeemed who fail to claim the
Redemption Price on the Redemption Date shall not be entitled to interest on the
Redemption Price after the Redemption Date.
(b) Notice of Redemption. The Company shall mail notice of redemption
--------------------
of the Preferred Stock (a "Redemption Notice") at least 30, but no more than 60,
-----------------
days prior to the date fixed for redemption (the "Redemption Date") to each
---------------
holder of Preferred Stock to be redeemed, at such holder's address as it appears
on the books of the Company.
(c) Deposit. If such notice of redemption shall have been so mailed,
-------
and if on or before the Redemption Date specified in such notice all said funds
necessary for such redemption shall have been irrevocably deposited in trust
(which deposit shall not be made sooner than the 15th day following the date of
the Company's mailing of the notice of redemption pursuant to Section 4(b)), for
the account of the holder of the shares of the Preferred Stock to be redeemed
(and so as to be and continue to be available therefor), with a bank or trust
company named in such notice doing business in the State of California and
having combined capital and surplus of at least $50,000,000, thereupon and
without awaiting the Redemption Date, all shares of the Preferred Stock with
respect to which such notice shall have been so mailed and such deposit shall
have been so made shall be deemed to be no longer outstanding, and all rights
with respect to such shares of the Preferred Stock shall forthwith upon such
deposit in trust cease and terminate, except only the right of the holders
thereof on or after the Redemption Date to receive from such deposit the amount
payable on redemption thereof, but without interest, upon surrender (and
4
<PAGE>
endorsement or assignment to transfer, if required by the Company) of their
certificates. In case the holders of shares of the Preferred Stock that shall
have been redeemed shall not within two years (or any longer period if required
by law) after the Redemption Date claim any amount so deposited in trust for the
redemption of such shares, such bank or trust company shall, upon demand and if
permitted by applicable law, pay over to the Company any such unclaimed amount
so deposited with it, and shall thereupon be relieved of all responsibility in
respect thereof, and thereafter the holders of such shares shall, subject to
applicable escheat laws, look only to the Company for payment of the redemption
price thereof, but without interest.
5. Redemption Following Change in Control.
--------------------------------------
(a) Redemption at Option of Holder of Preferred Stock. In the event
-------------------------------------------------
of a Change in Control (as defined below), each holder of shares of Preferred
Stock shall have the right, at the sole option and election of such holder
exercisable on or before the 90th day following the earliest event constituting
a Change in Control, to require the Company to redeem some or all of the shares
of Preferred Stock owned by such holder at the Redemption Price. For purposes
of this Section 5, a "Change in Control" shall mean the occurrence of either of
------------------
the following events:
(i) any person, entity or "group" (as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and the rules thereunder) other than Craig Corporation, a Delaware
corporation ("Craig"), and its successors and affiliates, acquires
beneficial ownership of over 35% of the outstanding voting securities of
the Company ("affiliate" of a person shall mean any person directly or
---------
indirectly controlling, controlled by or under common control with such
person, and "control" of a person shall mean the power to direct the
-------
affairs of such person by reason of ownership of voting stock, contract or
otherwise); or
(ii) the directors of the Company as of October 10, 1994 (the
"Current Directors"), and any future directors ("Continuing Directors") of
----------------- --------------------
the Company who have been elected or nominated by a majority of the Current
Directors or the Continuing Directors cease to constitute a majority of the
Board of Directors.
(b) Exercise of Redemption Rights. The holder of any shares of the
-----------------------------
Preferred Stock seeking to exercise its redemption rights pursuant to Section
5(a) may exercise its right to require the Company to redeem such shares by
surrendering for such purpose to the Company, at its principal office or at
such other office or agency maintained by the Company for that purpose, a
certificate or certificates representing the shares of Preferred Stock to be
redeemed accompanied by a written notice stating that such holder elects to
require the Company to redeem all or a specified integral number of such shares
in accordance with the provisions of this Section 5. As promptly as
practicable, and in any event within ten business days after the surrender of
such certificates and the receipt of such notice relating thereto, the Company
shall deliver or cause to be delivered to the holder of the shares being
redeemed payment for such shares in immediately available funds and, if less
than the full number of shares of the Preferred Stock evidenced by the
surrendered certificate or certificates are being redeemed, a new certificate or
certificates, of like tenor, for the number of shares evidenced by such
surrendered certificate or certificates less the number of shares redeemed.
Such redemptions shall be deemed to have been made at the close of business on
the date of such payment and the rights of the holder thereof, except for the
right to receive the payment for the redeemed shares in accordance herewith,
shall cease on such date.
6. General Provisions Relating to Redemptions. Redemptions pursuant to
------------------------------------------
Sections 4 and 5 shall be subject to the following terms and conditions:
(a) Pro-Rata Redemption. If less than all of the Preferred Stock at
-------------------
the time outstanding is to be redeemed, the shares so to be redeemed shall be
selected by lot, pro-rata or in such other manner as the Board of Directors may
determine to be fair and proper.
(b) Payment of Taxes. The Company shall not be required to pay any
----------------
tax that may be payable in respect of any payment in respect of a redemption of
shares of Preferred Stock to a name
5
<PAGE>
other than that of the registered holder of Preferred Stock redeemed or to be
redeemed, and no such redemption payment shall be made unless and until the
person requesting such payment has paid to the Company the amount of any such
tax or has established, to the satisfaction of the Company, that such tax has
been paid.
(c) Status of Shares Redeemed. Shares of Preferred Stock redeemed,
-------------------------
purchased or otherwise acquired for value by the Company shall, after such
acquisition, be retired, and shall thereafter have the status of authorized and
unissued shares of preferred stock and may be reissued by the Company at any
time as shares of any series of preferred stock.
(d) Conversion Prior to Redemption. From the date of a Redemption
------------------------------
Notice until the earlier of the Redemption Date or the date the deposit of funds
in trust is made pursuant to Section 4(c), holders of shares of Preferred Stock
subject to a Redemption Notice shall retain their right to an Optional
Conversion (as defined in Section 7) of their shares.
7. Optional Conversion. Subject to the provisions of this Section 7 and
-------------------
of Section 8, shares of Preferred Stock shall be convertible, at the option of
the holder thereof (an "Optional Conversion"), into shares of Common Stock at a
-------------------
conversion ratio (the "Conversion Ratio") of one share of Preferred Stock for a
----------------
fraction of a share of Common Stock, the numerator of which is the sum of the
Stated Value plus any accrued but unpaid per share Quarterly Dividends, and the
denominator of which is the average of the closing prices per share of the
Common Stock on the American Stock Exchange (the "AMEX") for each of the 60
----
business days immediately preceding the Original Conversion Date (as defined
below), as quoted in The Wall Street Journal, or if the Common Stock is not
listed or admitted to trade on AMEX, the average of the closing prices per share
of the Common Stock on the principal national securities exchange on which the
Common Stock is listed or admitted to trade for each of the 60 business days
immediately preceding the Original Conversion Date (as defined below), as quoted
in The Wall Street Journal, or if the Common Stock is not listed or admitted to
trade on any such exchange, the average of the closing bid and asked prices for
Common Stock as reported by NASDAQ for each of the 60 business days immediately
preceding the Original Conversion Date (as defined below), as quoted in The Wall
Street Journal, or other similar organization if NASDAQ is no longer reporting
such information, or if not so available, the fair market price as determined in
good faith by the Board of Directors of the Company (the "Market Price"),
------------
subject to the following:
(a) Limits on Market Price. If the Market Price for any Optional
----------------------
Conversion would exceed $5.00, the Conversion Ratio shall be calculated as if
the Market Price were $5.00.
(b) Option of the Company to Redeem Tendered Preferred Stock. Subject
--------------------------------------------------------
to the provisions of this Section 7(b), if the Market Price for any Optional
Conversion shall be below $3.00, the Company shall have the option, exercisable
for 30 days after receipt by the Company of the Notice of Conversion (as defined
below) by written notice to the holder, to redeem any or all of the shares of
Preferred Stock that have been tendered for conversion by the holder thereof
(the "Tendered Preferred Stock") at the Redemption Price pursuant to Section
------------------------
4(a); provided, however, that the Company shall complete such redemption within
90 days of the Company's notice of redemption and the Premium shall be
calculated through the date of redemption using the accrual rate, as provided in
Section 4(a)(iii), in effect on the Original Conversion Date (as defined below).
(c) Exercise of Optional Conversion Rights. The holder of any shares
--------------------------------------
of the Preferred Stock seeking to exercise its optional conversion rights
pursuant to Section 7(a) may exercise its right to require the Company to
convert such shares by surrendering for such purpose to the Company, at its
principal office or at such other office or agency maintained by the Company for
that purpose, a certificate or certificates representing the shares of Tendered
Preferred Stock to be converted accompanied by a written notice stating that
such holder elects to require the Company to convert all or a specified integral
number of such shares into shares of Common Stock in accordance with the
provisions of this Section 7 (the "Notice of Conversion"), and the date of
--------------------
delivery to the Company of such Notice of Conversion shall be the "Original
--------
Conversion Date" for such shares of Tendered Preferred Stock. Subject to
- ---------------
Section 7(b), as promptly as practicable, the Company shall deliver or cause to
be delivered to the holder of the shares of
6
<PAGE>
Tendered Preferred Stock,(i) a new certificate or certificates representing the
number of shares of Common Stock into which the Tendered Preferred Stock has
been converted, and (ii) if less than the full number of shares of Preferred
Stock evidenced by the surrendered certificate(s) are being converted, a new
certificate or certificates, of like tenor, for the number of shares of
Preferred Stock that have not been converted and that the holder shall retain.
Such conversions shall be deemed to have been made at the close of business on
the Original Conversion Date and the rights of the holder thereof, except the
right to receive the new certificate or certificates, shall cease on the
Original Conversion Date or the Final Conversion Date (as defined below), as
applicable.
(d) Limits on Time of Conversion. Holders of shares of Preferred
----------------------------
Stock shall not be entitled to convert shares of Preferred Stock into shares of
Common Stock for a one-year period commencing on the 15th day following the
filing of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, except in the event of a Change in Control of the Company.
8. General Provisions Relating to Conversion. Conversions pursuant to
-----------------------------------------
Sections 7 shall be subject to the following terms and conditions:
(a) Conversion Restrictions Pursuant to AMEX Rules. If an Optional
----------------------------------------------
Conversion would result, on the Original Conversion Date, in the issuance of a
number of shares of Common Stock (the "Issuable Common Stock") that exceeds 20%
---------------------
of the then-outstanding shares of Common Stock and if the AMEX rules and
regulations, including, but not limited to, (S)713 of the AMEX Company Guide
(the "AMEX Rules") shall require the affirmative vote of the stockholders of the
----------
Company with respect to such issuance before it will approve such excess shares
of Issuable Common Stock for listing on AMEX (the "Ineligible Common Stock"),
-----------------------
then, subject to any rights the Company may have to redeem the Preferred Stock
in accordance with Section 7(b), the Company shall convert into Common Stock
only the number of shares of Preferred Stock that will not result in the
issuance of any Ineligible Common Stock, and shall deliver to the holder of the
shares of Preferred Stock that were the subject of the Optional Conversion or
Automatic Conversion a certificate for evidencing the shares of Preferred Stock
that would have been converted but for the issuance of Ineligible Common Stock
(the "Unconverted Preferred Stock"). The holder shall retain the Unconverted
---------------------------
Preferred Stock until the next annual or special meeting of the stockholders of
the Company at which the Company, subject to any rights it may have to redeem
the Unconverted Preferred Stock in accordance with Section 7(b), shall submit a
proposal for stockholder approval of the issuance of the Ineligible Common
Stock. Pending such stockholder approval, the Unconverted Preferred Stock shall
continue to be outstanding and entitled to all rights and privileges hereunder.
(i) If such stockholder approval is obtained, the Unconverted
Preferred Stock shall, as soon as practically possible and on a date selected by
the Board of Directors (the "Final Conversion Date"), be converted into shares
---------------------
of Common Stock at the ratio applicable to the Original Conversion Date upon (A)
surrender to the Company of the certificate(s) representing the Unconverted
Preferred Stock, (B) the Company's remittance to the holder of such Unconverted
Preferred Stock of the benefits such holder would have received had the
Unconverted Preferred Stock been converted into the Ineligible Common Stock on
the Original Conversion Date, including, but not limited to, the benefits of any
cash dividends, stock dividends, stock splits, reverse stock splits, and
recapitalizations of the Common Stock, declared (and not rescinded) or
effective, during the period from the Original Conversion Date through the Final
Conversion Date (the "Stockholder Approval Period"), and (C) such holder's
forfeiture or refund to the Company of any Quarterly Dividends on the
Unconverted Preferred Stock that have accrued or been paid in respect of the
Unconverted Preferred Stock during the Stockholder Approval Period.
(ii) If such stockholder approval is not obtained, the Company shall
redeem the Unconverted Preferred Stock at the Redemption Price; provided,
however, that the Premium shall be calculated through the date of redemption
using the accrual rate in effect on the Original Conversion Date.
(b) Request of Majority for Stockholder Vote. At any time before a
----------------------------------------
conversion described in Section 8(a) occurs, the Company shall, upon the request
of a majority of the outstanding
7
<PAGE>
shares of Preferred Stock, submit a proposal for stockholder approval of the
issuance of all shares of Common Stock issuable upon conversion of the Preferred
Stock, including, without limitation, the Ineligible Common Stock, at the next
meeting of stockholders of the Company that follows such request.
(c) Conversion Restrictions Pursuant to Number of Authorized Shares of
------------------------------------------------------------------
Common Stock. If there are an insufficient number of authorized shares of
- ------------
Common Stock to satisfy an Optional Conversion or an Automatic Conversion, the
number of shares of Preferred Stock that would have been converted in the
absence of such insufficiency shall be exchanged by the Company for a new class
of preferred shares (the "New Shares") having the same aggregate stated value as
the shares exchanged therefor and a stated value per share equal to the Market
Price (up to a maximum of $5.00); provided, however, that such new class shall
have identical rights, privileges and preferences as those of the Preferred
Stock, except as stated in this Section 8(c). If there are an insufficient
number of authorized New Shares to satisfy such exchange, the holders of shares
of Preferred Stock to be so exchanged shall each receive a pro rata allocation
of available New Shares for such exchange, and each such holder shall have the
right, exercisable by written notice of such exercise delivered to the Company
within 30 days of such exchange accompanied by certificates evidencing the
remainder of their shares of Preferred Stock that would have been so exchanged
but for such insufficiency, to require the Company to redeem such remaining
shares at the Redemption Price in effect on the date of such exchange and in
accordance with the provisions of Section 6.
(d) Pro-Rata Conversion. If less than all of the Preferred Stock at
-------------------
the time outstanding is to be converted, the shares so to be converted shall be
selected by lot, pro-rata or in such other manner as the Board of Directors may
determine to be fair and proper.
(e) No Fractional Shares. No fractional shares or scrip representing
--------------------
fractional shares of Common Stock shall be issued upon the conversion of any
shares of Preferred Stock. Instead of any fractional interest in a share of
Common Stock that would otherwise be deliverable upon the conversion of
Preferred Stock, the Company shall pay to the holder an amount in cash (computed
to the nearest cent) equal to the Market Price. If more than one share shall be
surrendered for conversion at one time by the same holder, the number of full
shares of Common Stock issuable upon conversion thereof shall be computed on the
basis of the aggregate number of shares of Preferred Stock so surrendered.
(f) Payment of Taxes. The Company will pay any and all documentary,
----------------
stamp or similar issue or transfer taxes payable in respect of the issue or
delivery of shares of Common Stock on the conversion of shares of Preferred
Stock pursuant to this Section 8; provided, however, that the Company shall not
be required to pay any tax that may be payable in respect of any registration of
transfer involved in the issue or delivery of shares of Common Stock in a name
other than that of the registered holder of Preferred Stock converted or to be
converted, and no such issue or delivery shall be made unless and until the
person requesting such issue has paid to the Company the amount of any such tax
or has established, to the satisfaction of the Company, that such tax has been
paid.
(g) Status of Shares Converted. Shares of Preferred Stock converted
--------------------------
by the Company, shall, after such conversion, be retired, and shall thereafter
have the status of authorized and unissued shares of preferred stock and may be
reissued by the Company at any time as shares of any series of preferred stock.
9. Voting Rights. The holders of Preferred Stock shall have the
-------------
following voting rights:
(a) One Vote Per Share. Except as provided herein or by law, each
------------------
share of Preferred Stock shall entitle the holder thereof to one vote on all
matters submitted to a vote of the Company's stockholders.
(b) Voting With Common Stock. Except as otherwise provided herein or
------------------------
by law, the holders of Preferred Stock and the holders of Common Stock shall
vote together as one class on all matters submitted to a vote of the Company's
stockholders.
8
<PAGE>
(c) Dividend Arrearages and Election of Director. If dividends in an
--------------------------------------------
amount equal to two Quarterly Dividends have accrued and remain unpaid for two
consecutive Dividend Periods, the holders of the Preferred Stock will thereupon
have the right to vote as a separate class to elect one special director to the
Board of Directors (in addition to the then authorized number of directors) and
at each succeeding annual meeting of stockholders thereafter until such right is
terminated as hereinafter provided. Upon payment of all dividend arrearages,
the holders of Preferred Stock will be divested of such voting rights (until any
future time when dividends in an amount equal to two Quarterly Dividends have
accrued and remained unpaid for two consecutive Dividend Periods) and the term
of the special director will thereupon terminate and the authorized number of
directors will be reduced by one.
(d) Parity or Senior Stock. So long as any shares of the Preferred
----------------------
Stock are outstanding (except when notice of the redemption of all outstanding
shares of Preferred Stock has been given pursuant to Section 4(b) and shares of
Common Stock and any necessary funds have been deposited in trust for such
redemption pursuant to Section 4(c)), the Company shall not, without the
affirmative vote or consent of the holders of at least a majority of the
outstanding shares of Preferred Stock and any other series of preferred stock
entitled to vote thereon at the time outstanding voting or consenting, as the
case may be, together as one class, given in person or by proxy, either in
writing or by resolution adopted at an annual or special meeting called for the
purpose, create, authorize or issue any new class of Parity Stock or Senior
Stock.
(e) Matters Affecting the Rights of Holders of Preferred Stock. So
----------------------------------------------------------
long as any shares of the Preferred Stock are outstanding (except when notice of
the redemption of all outstanding shares of Preferred Stock has been given
pursuant to Section 4(b) and shares of Common Stock and any necessary funds have
been deposited in trust for such redemption pursuant to Section 4(c)), the
Company shall not, without the affirmative vote or consent of the holders of at
least a majority of the outstanding shares of Preferred Stock and any other
series of preferred stock entitled to vote thereon at the time outstanding
voting or consenting, as the case may be, together as one class, given in person
or by proxy, either in writing or by resolution adopted at an annual or special
meeting called for the purpose, amend the Certificate of Incorporation or this
Certificate of Designation, directly or indirectly, whether through a merger or
otherwise, so as to affect materially and adversely the specified rights,
preferences, privileges or voting rights of holders of shares of Preferred
Stock.
(f) Matters Deemed Not to Affect the Rights of Holders of Preferred
---------------------------------------------------------------
Stock. Except as set forth in Section 9(d) above, the creation, authorization
- -----
or issuance of any shares of any Junior Stock, Parity Stock or Senior Stock, the
creation of any indebtedness of any kind of the Company, or the increase or
decrease in the amount of authorized capital stock of any class, including
Preferred Stock, shall not require the consent of the holders of Preferred Stock
and shall not be deemed to affect materially and adversely the rights,
preferences, privileges or voting rights of holders of shares of Preferred
Stock.
(g) Nomination of Director. Subject to the fiduciary duty of the
----------------------
Board of Directors the holders of a majority of the outstanding shares of the
Preferred Stock shall have, in addition to their rights under Section 9(c), the
right to nominate one director nominee to the slate of director nominees
submitted to the stockholders of the Company by the Board of Directors.
10. No Sinking Fund. No sinking fund will be established for the
---------------
retirement or redemption of shares of Preferred Stock.
11. Preemptive Rights. Each holder of any of the shares of Preferred
-----------------
Stock shall be entitled to a preemptive right to purchase or subscribe for any
unissued voting stock of any class of the Company, or any unissued stock or
unissued other instrument which is, or may, upon the occurrence of certain
condition(s), be convertible into voting stock of the Company, that the Board
of Directors may propose to issue by means of an increase of the outstanding
shares of capital stock of any class, or the issuance of bonds, certificates of
indebtedness, debentures or other securities convertible into voting stock of
the Company (the "Proposed Voting Securities"). Such preemptive rights shall
extend only to the extent necessary to allow such holder of shares of Preferred
Stock to maintain its proportionate share of the outstanding voting stock of the
Company and the number of shares (or dollar amount, as applicable) of
9
<PAGE>
Proposed Voting Securities each holder of Preferred Stock shall be entitled to
purchase or subscribe for shall be the amount determined by multiplying the
number of shares (or dollar amount, as applicable) of Proposed Voting Securities
by a fraction, the numerator of which shall be the number of shares of Preferred
Stock held by such holder, and the denominator of which shall be the number of
votes entitled to be cast by all outstanding voting securities of the Company
before the proposed issuance.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be executed by Steve Wesson, its President as of
_________________________, 1996.
CITADEL HOLDING CORPORATION
By:
----------------------------------------
Name: Steve Wesson
Title: President and Chief Executive Officer
10
<PAGE>
EXHIBIT 8.4(e)
--------------
ASSET PUT AND
REGISTRATION RIGHTS AGREEMENT
This Asset Put and Registration Rights Agreement (this "Agreement") is
---------
entered into as of this --------- day of ----------, 1996 by and among Reading
Entertainment, Inc., a Delaware corporation ("Reading Entertainment"), Citadel
---------------------
Holding Corporation, a Delaware corporation ("Citadel"), and Citadel Acquisition
-------
Corp., Inc., a Delaware corporation ("CAC"), with reference to the following:
---
A. The parties to this Agreement are also parties to an Exchange Agreement
dated as of August --, 1996 (the "Exchange Agreement") pursuant to which CAC is
------------------
purchasing 70,000 shares (the "Preferred Shares") of Reading Entertainment's
----------------
Series A Voting Cumulative Convertible Preferred Stock, stated value $100 per
share (the "Series A Preferred Stock"), for an aggregate cash purchase price of
------------------------
$7,000,000.
B. As conditions to CAC's purchase of the Preferred Shares, Reading
Entertainment has agreed that (i) Citadel shall have an option to exchange all
or substantially all of its assets (other than Excluded Assets as defined below)
for shares (the "Exchange Shares") of Reading Entertainment's Common Stock,
---------------
$0.001 par value (the "Common Stock"), and (ii) Reading Entertainment will under
------------
certain circumstances register under the Securities Act of 1933, as amended (the
"Act"), the Exchange Shares and any shares of Common Stock, received upon
---
conversion of the Preferred Shares (the "Conversion Shares"), all in accordance
-----------------
with and subject to the terms of this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the agreements set
forth herein, the parties hereto agree as follows:
ARTICLE ONE
ASSET PUT
1.1 Asset Put.
---------
(a) Commencing on the date hereof, Citadel shall have the right, by
giving written notice to Reading Entertainment prior to 11:59 p.m. on the
thirtieth (30th) day following the date on which Reading Entertainment files its
Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the
"Exchange Notice"), to exchange (the "Asset Put") all or substantially all of
---------------
its assets (other than the Excluded Assets as defined below), together with any
debt encumbering or related to such assets, including without limitation,
mortgages and leases (collectively, the "Citadel Assets"), for such number of
--------------
shares of Common Stock as are determined with reference to the Citadel Asset
Valuation and the Common Stock Value, as described below. The term "Excluded
--------
Assets" shall mean (i) all Preferred Shares and Conversion Shares (or all shares
- ------
of capital stock of CAC, if the sole assets of CAC are Excluded Assets), (ii)
such cash and/or marketable securities as a special committee comprised of the
independent directors of the Board of Directors of Citadel may reasonably
determine are necessary in order to maintain an appropriate level of liquidity
for Citadel and its subsidiaries, (iii) any assets that, in the reasonable
opinion of the Board of Directors of Reading Entertainment, are subject to
liabilities (including, without limitation, contingent or environmental
liabilities) reasonably likely to be in excess of the fair market value of such
assets, (iv) After Acquired Assets (as defined below) to the extent the After
Acquired Assets Value (as defined in Section 1.2) exceeds $5,000,000 and (v)
assets to the extent the Citadel Asset Valuation (as defined in Section 1.2)
exceeds $30,000,000. "After Acquired Assets" shall mean any assets other than
---------------------
cash and assets owned by Citadel or its subsidiaries on the date hereof and cash
proceeds of the sale thereof. If any assets are excluded by reason of clause
(iv) or (v), Reading Entertainment shall determine
<PAGE>
in good faith which assets shall be Excluded Assets on such basis. Subject to
Section 1.1(e), the Asset Put shall be consummated (the "Closing") on the tenth
business day following the Determination Date (as defined below), or such later
date as the parties may agree, at the executive offices of Citadel at 10:00 a.m.
local time (the "Closing Date"). At the Closing, Citadel shall deliver such
------------
stock powers, assignments, bills of sale, deeds, consents, cash by wire transfer
and other instruments of transfer and conveyance as shall be necessary, within
the reasonable requirements of Reading Entertainment, to transfer the Citadel
Assets to Reading Entertainment and, subject to Section 1.1(c), Reading
Entertainment shall deliver to Citadel the Exchange Shares, together with such
assumption agreements, acknowledgments and other documents as shall be
necessary, within the reasonable requirements of Citadel, to transfer and assign
the Citadel Assets to Reading Entertainment and for Reading Entertainment to
assume any and all debt encumbering the Citadel Assets.
(b) Subject to Sections 1.1(c) and 1.3, the aggregate number of Exchange
Shares to be delivered to Citadel at the Closing shall be determined by dividing
the Citadel Asset Valuation by the Common Stock Value, rounded to the nearest
whole number of shares.
(c) In the event the issuance to Citadel, upon Citadel's exercise of the
Asset Put, of the number of shares of Common Stock determined pursuant to
Section 1.1(b) would result in an "owner shift" (as defined in Section 382 of
the Internal Revenue Code, as amended (the "Code")) of Reading Entertainment
----
which, when added to all other "owner shifts" that have occurred during the
"testing period," would result in aggregate "owner shifts" that count against
the 50 percentage point limit (under Section 382(g) of the Code) in excess of 45
percentage points (the "Owner Shift Threshold"), Reading Entertainment shall
---------------------
issue to Citadel the maximum number of shares of Common Stock which would not
result in the crossing of such Owner Shift Threshold. Reading Entertainment may
elect not to issue the shares of Common Stock (the "Excess Shares") which would
-------------
exceed the number of shares determined by the preceding sentence. In such case,
Reading Entertainment shall either: (i) issue to Citadel debt securities (the
"Debt Securities") in an aggregate principal amount equal to the number of
---------------
Excess Shares multiplied by the average of the closing sales prices of Common
Stock on the Nasdaq National Market (or, if that shall not be the principal
market on which the Common Stock shall be trading or quoted, then on such
principal market)(the "Closing Price") for the thirty (30) consecutive trading
-------------
days in which trading of the Common Stock occurs immediately preceding the
Closing Date (the "Excess Share Value") or (ii) pay to Citadel cash, in
------------------
immediately available funds, in an amount equal to the Excess Shares Value (the
"Cash Portion"). The economic terms of the Debt Securities, if any, shall be
determined by an investment banking firm which shall be independent of Citadel
and Reading (the "Independent Investment Banker"), and which shall be chosen by
-----------------------------
Reading Entertainment, subject to Citadel's consent (not to be unreasonably
withheld). All fees and expenses of, and any other charges incurred by the
Independent Investment Banker shall be borne by Reading Entertainment. The form
and terms of the Debt Securities shall be as otherwise agreed by Reading
Entertainment and Citadel in good faith.
(d) As promptly as practicable after receipt of the Exchange Notice,
Reading Entertainment shall notify Citadel whether Reading Entertainment
anticipates issuing to Citadel any Debt Securities and, if so, the aggregate
principal amount of Debt Securities Reading Entertainment estimates it will
issue (provided, that an inaccuracy in such estimate shall not limit Reading
Entertainment's right to issue the full amount of Debt Securities permitted to
be issued pursuant to Section 1.1(c)). If, within ninety (90) days from the
date of such notice, Citadel notifies Reading Entertainment of Citadel's bona
fide intention to sell all, but not less than all, the Debt Securities, if
requested by Citadel in such notice, Reading Entertainment shall take all
reasonable actions to assist Citadel in the sale of all or any portion of the
Debt Securities to a third party or parties and shall, upon consummation of such
sale: (i) reimburse Citadel for all out-of-pocket expenses incurred by Citadel
in connection with the issuance of the Debt Securities and the negotiation and
consummation of such sale, including, without limitation, reasonable fees and
expenses of legal counsel, accountants, financial advisors, brokers and
investment bankers and
2
<PAGE>
(ii) pay to Citadel in cash by wire transfer in immediately available funds, the
amount by which the net proceeds received by Citadel (without duplication of
amounts reimbursed under clause (i) above) from the sale of the Debt Securities
is less than the Excess Shares Value.
(e) In the event Citadel's legal counsel advises Citadel that the
exercise of the Asset Put and consummation of the transactions contemplated
thereby will require the approval of Citadel's stockholders:
(i) Within thirty (30) calendar days of the date of the Exchange
Notice, Citadel shall prepare and file with the Securities and Exchange
Commission (the "SEC") a proxy statement and related proxy material meeting
---
the requirements of Regulation 14A of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), to be mailed to stockholders in connection
------------
with a meeting of the Citadel stockholders (the "Proxy Statement") or as
---------------
soon as practicable thereafter, and use its commercially reasonable efforts
to clear such materials with the SEC and mail such materials to the Citadel
stockholders within sixty (60) calendar days of originally filing such
materials with the SEC, or as soon as practicable thereafter. In such event,
Citadel covenants that the Proxy Statement at the time of mailing to the
Citadel stockholders and at the time of the meeting of stockholders held to
approve the consummation of the Asset Put (the "Meeting") will not contain
-------
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading (other than
statements or omissions therein supplied by Reading Entertainment in writing
for use therein) and the Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act.
(ii) Reading Entertainment shall furnish in writing for inclusion in
the Proxy Statement such information as may be reasonably necessary to
comply with the provisions of the Exchange Act and the rules and regulations
thereunder and shall have been requested in writing by Citadel.
(iii) As an additional condition to Citadel's obligation to
consummate the Asset Put, Citadel may elect to receive at Citadel's expense,
on or prior to the mailing date of the Proxy Statement, an opinion,
reasonably satisfactory to Citadel, from a financial advisor selected by
Citadel that the consummation of the Asset Put is fair from a financial
point of view to Citadel and such opinion shall not have been withdrawn or
modified in a manner which is not reasonably satisfactory to Citadel.
(iv) Reading Entertainment and Craig Corporation, a Delaware
corporation ("Craig"), agree that any Citadel voting securities which it, or
-----
any of their respective subsidiaries or affiliates, may hold on the record
date of any such meeting will be voted to approve the exercise and Closing
of the Asset Put.
(v) The Closing shall take place on or before the fifth business day
next following the Meeting. If, at any time prior to the Closing Date, it
shall be necessary to amend or supplement the Proxy Statement to correct any
statement or omission with respect to Citadel, CAC or Reading Entertainment
in order to comply with any applicable legal requirements, the appropriate
party shall supply in writing the necessary information to Citadel and
Citadel shall amend or supplement the Proxy Statement to the extent
necessary to comply with applicable legal requirements.
(f) The risk of loss or damage by fire or other casualty or cause to
the Citadel Assets until the Closing shall be upon Citadel. In the event of
loss or damage to a material amount of any
3
<PAGE>
Citadel Assets following Citadel's delivery of the Exchange Notice and prior to
the Closing, Citadel shall promptly notify Reading Entertainment in writing of
such event describing with such particularity as is possible the extent of such
loss or damage and the extent to which such loss or damage may be covered by any
insurance policy of Citadel. Within ten (10) days after receipt of written
notice from Citadel of such loss or damage, Reading Entertainment shall, at its
option, either (i) have Citadel assign to Reading Entertainment at the Closing
all insurance proceeds to which Citadel would be entitled as a result of such
loss or damage or (ii) exclude such assets from the Citadel Assets; provided
that Reading Entertainment shall have no right to exclude such assets under this
Section 1.1(f) if Citadel promptly repairs the damaged asset substantially to
its previous condition. If any assets are substituted or excluded pursuant to
this Section 1.1(f), the Citadel Asset Valuation shall be adjusted accordingly.
1.2 Citadel Asset Valuation.
-----------------------
(a) (i) The Exchange Notice shall set forth the name and address
of a qualified Member of Appraisal Institute ("MAI") real estate appraiser
to appraise the value of real estate assets which are part of the Citadel
Assets (the "Real Estate Assets") and a qualified appraiser to appraise the
------------------
value of the non-real estate assets, if any, which are part of the Citadel
Assets (the "Non-Real Estate Assets"), each appraiser chosen by Citadel
----------------------
(the "Citadel Appraisers") (such aggregate value being referred to as the
------------------
"Citadel Asset Valuation"). Within fifteen (15) business days of the date
-----------------------
of the Exchange Notice, Reading Entertainment shall give Citadel notice of
the names and addresses of a qualified MAI real estate appraiser to
appraise the value of the Real Estate Assets and a qualified appraiser to
appraise the value of the Non-Real Estate Assets, each chosen by Reading
Entertainment (the "Reading Entertainment Appraisers"). Each of the Citadel
--------------------------------
Appraisers and Reading Entertainment Appraisers (collectively, the
"Appraisers") shall value the Citadel Assets to be appraised by them as of
----------
the date the last of the Appraisers is retained (the "Valuation Date"). The
--------------
Appraisers shall be requested to separately appraise any After Acquired
Assets. The Appraisers, in appraising any Citadel Assets, shall take into
account any liabilities (including, without limitation, contingent or
environmental liabilities) relating to or encumbering such Citadel Assets
and the "value" thereof shall be determined net of any such liabilities
which will encumber the Citadel Assets following the Closing. Any mortgage
debt relating to any asset shall be deemed to be a liability equal to its
outstanding principal amount as of the Valuation Date, which amount shall
be deducted (without duplication) from the value otherwise attributable to
such asset, unless such debt is repaid by Citadel at or prior to the
Closing.
(ii) Within thirty (30) days of the date of the Exchange Notice,
Citadel and Reading Entertainment shall cause the Citadel and the Reading
Entertainment Appraisers, respectively, to deliver to both Reading
Entertainment and Citadel their respective appraisal reports setting forth
the value of the Citadel Assets appraised by them. Thereafter, Reading
Entertainment and Citadel agree to use their best efforts to agree on the
Citadel Asset Valuation and the value of the After Acquired Assets (such
value of the After Acquired Assets being the "After Acquired Asset
Valuation;" the excess of the Citadel Asset Valuation over the After
-----
Acquired Asset Valuation is hereinafter referred to as the "Existing Asset
------------------------ --------------
Valuation"). If an agreement on both valuations can be reached within five
---------
(5) business days of the latest to be delivered of the Appraisers' reports,
those valuations shall be the Citadel Asset Valuation and After Acquired
Asset Valuation. If no agreement on either or both such matters can be
reached within such five (5) business day period, the parties shall select
and jointly engage, a third set of appraisers (the "Third Appraisers") who
----------------
shall be directed, as promptly as practicable, to value the Citadel Assets
as of the Valuation Date and shall affirm the valuation of either the
Reading Entertainment Appraisers or the Citadel Appraisers. Such
determination by the Third Appraisers shall be binding upon Citadel and
Reading Entertainment and the valuations affirmed by the Third Appraisers
shall be the Citadel Asset Valuation and After Acquired Asset Valuation.
The date when the Citadel Asset
4
<PAGE>
Valuation and After Acquired Asset Valuation are determined as provided
above shall be the "Determination Date."
------------------
(iii) If required by either Citadel or Reading Entertainment, the
parties shall request the Appraisers to update their procedures, as set
forth above, to a date not later than forty-five (45) days prior to the
anticipated Closing Date, which date shall thereupon become the Valuation
Date. Upon delivery of such reports, Citadel and Reading Entertainment
shall, to the extent necessary as a result of any difference in such
reports from the original reports of the Appraisers, repeat the procedures
set forth in Section 1.2(a)(ii), and the dates and valuations, determined
by such repeated procedures, shall be substituted for the dates and
valuations as originally determined.
(iv) With respect to the liabilities encumbering or relating to the
Citadel Assets which require the consent of the other party for the
assignment of such liabilities to Reading Entertainment, at or prior to the
Closing, Citadel and Reading Entertainment shall cooperate with each other
to obtain any such consent. In the event any such consent cannot be
obtained, Reading Entertainment shall, at its own expense, refinance any or
all of such debt to permit the transfer of such assets to Reading
Entertainment.
(v) Citadel shall be entitled to all income earned or accrued and
shall be responsible for all liabilities and obligations incurred or
payable in connection with the Citadel Assets through the close of business
on the Closing Date and Reading Entertainment shall be entitled to all
income earned or accrued and shall be responsible for all assumed
liabilities incurred or payable in connection with the Citadel Assets after
the close of business on the Closing Date. At the Closing, all assumed
liabilities, accrued but unpaid expenses (including accrued interest) and
prepaid expenses relating to the Citadel Assets shall be apportioned
between Reading Entertainment and Citadel in accordance with generally
accepted accounting principles ("GAAP") as of the close of business on the
----
Closing Date and the Citadel Asset Valuation shall be adjusted accordingly.
The Citadel Asset Valuation shall also be adjusted for changes in the
principal amount of any indebtedness to be assumed by Reading Entertainment
between the Valuation Date and the Closing Date; provided however, that in
the event Reading Entertainment refinances any such debt at the Closing,
the Citadel Asset Valuation shall be determined immediately prior to the
repayment or refinance of such debt. At or prior to the Closing, the
parties will prepare a preliminary closing statement which shall set forth
the final Citadel Asset Valuation and specify on a preliminary basis all
adjustments to the Citadel Asset Valuation between the Valuation Date and
the Closing Date. Promptly following the Closing, the parties will finalize
such closing statement, making such adjustments as may be appropriate.
(b) If the parties are unable to agree upon the Third Appraisers
within the time periods set forth above, either Reading Entertainment or
Citadel, by giving seven (7) days written notice to the other, may apply to the
American Arbitration Association for the purpose of selecting the Third
Appraisers and the parties agree that the decision of the American Arbitration
Association selecting the Third Appraisers shall be final and binding.
(c) Citadel and Reading Entertainment shall each be responsible for
the fees and expenses of its own Appraisers. The fees and expenses of the Third
Appraisers, if required, shall be paid by the party whose valuation is rejected
and not affirmed by the Third Appraisers.
(d) The Citadel Assets shall be valued at their fair market value as
the assets are then constituted, assuming a willing buyer and a willing seller
dealing at arms-length and unaffiliated with the other.
5
<PAGE>
(e) All Real Estate Assets may be transferred to Reading Entertainment
subject to all debt encumbering or related to such assets, which shall, in such
event, be taken into consideration in connection with the valuation of the Real
Estate Assets.
(f) Citadel shall pay and be responsible for any transfer taxes or
fees or prepayment penalties payable as a result of the transfer of the Citadel
Assets. Reading Entertainment shall reimburse Citadel at the Closing or credit
Citadel in computing the Citadel Asset Valuation for the amount of any liability
incurred by Citadel for assumption fees relating to the assumption of any debt
encumbering the Citadel Assets.
1.3 Common Stock Valuation.
----------------------
(a) Subject to Section 1.3(b), the "Common Stock Value" shall be
------------------
calculated as follows:
(i) The Common Stock Value with respect to the first $20,000,000
of Existing Assets Valuation shall be (A) $11.75 per share if the Exchange
Notice is given on or before October 31, 1997 or (B) $12.25 per share if
the Exchange Notice is after October 31, 1997.
(ii) The Common Stock Value with respect to the excess of the
Existing Assets Valuation over $20,000,000, and with respect to the After
Acquired Asset Valuation up to $5,000,000, shall be the average of the
Closing Prices for the thirty (30) consecutive trading days in which
trading of Common Stock occurs immediately preceding the Closing Date (the
"FMV Value")
---------
(iii) Unless Reading Entertainment shall consent, Citadel shall
not be entitled to exchange After Acquired Assets to the extent the After
Acquired Asset Valuation is in excess of $5,000,000.
(iv) Unless Reading Entertainment shall consent, Citadel shall
not be entitled to exchange Citadel Assets to the extent the Citadel Asset
Valuation exceeds $30,000,000.
(b) In the event the average of the Closing Price over any sixty (60)
consecutive calendar days exceeds 130% of the Common Stock Value then in effect
under Section 1.3(a)(i), Reading Entertainment may, at its option, give Citadel
notice of such event. If Citadel does not deliver the Exchange Notice within
120 days of such notice, the Common Stock Value for all purposes shall then be
the FMV Value.
1.4 Conditions to Asset Put Closing.
-------------------------------
(a) The obligation of Citadel to convey the Citadel Assets to Reading
Entertainment as provided in Section 1.1 of this Agreement is subject to the
fulfillment, on or before the Closing Date, of each of the following conditions
(unless waived by the written consent of Citadel):
(i) Reading Entertainment shall deliver to Citadel a stock
certificate representing the Exchange Shares and such shares shall be
validly issued, fully paid and non-assessable, not subject to any
preemptive or similar right (other than as set forth in Reading
Entertainment's Certificate of Incorporation), and free and clear of any
adverse claims whatsoever;
(ii) Reading Entertainment shall deliver to Citadel certificates
representing the Debt Securities, if any, and the Debt Securities, when
delivered and paid for in accordance with
6
<PAGE>
the Agreement, will be legal, valid and binding obligations of Reading
Entertainment, enforceable in accordance with their terms, and free and
clear of any liens, charges or other encumbrances;
(iii) Reading Entertainment shall deliver to Citadel the Cash
Portion, if any;
(iv) Reading Entertainment shall deliver to Citadel such
assumption agreements, acknowledgments and other documents as Citadel may
reasonably request, in such form as shall be reasonably satisfactory to
Citadel, to transfer the Citadel Assets to Reading Entertainment and for
Reading Entertainment to assume the debt encumbering the Citadel Assets,
including without limitation, any currently existing mortgages and then
existing leases;
(v) The representations and warranties of Reading Entertainment
contained in Article Three shall be true in all material respects at and as
of the date hereof and as of the Closing Date as if made at and as of the
Closing Date and as if made with respect to the issuance of the Exchange
Shares and Debt Securities, if any, except for any changes therein which
(x) have been disclosed by Reading Entertainment in reports or statements
filed by it under the Exchange Act, prior to the date of the Exchange
Notice or (y) have otherwise been disclosed by Reading Entertainment to
Citadel and, in the case of this clause (y), are reasonably acceptable to
Citadel; Reading Entertainment shall have duly performed and complied in
all material respects with all agreements, covenants and conditions
required by this Article One to be performed or complied with prior to or
at the Closing Date; and Reading Entertainment shall have delivered to
Citadel a certificate dated the Closing Date and signed by its President or
Chief Financial Officer to the effect set forth in this subparagraph;
(vi) There shall not be in effect (x) any order or decision of a
court of competent jurisdiction or governmental agency or authority or (y)
any action or proceeding commenced by or before any court, governmental
agency or authority or threatened by any governmental agency or authority
that enjoins, restrains or prohibits or seeks to enjoin, restrain or
prohibit the consummation of the transactions provided in Section 1.1 of
this Agreement;
(vii) All consents to the assignment of any contracts to be
assigned to Reading Entertainment requiring the consent of the other party
thereto shall have been obtained pursuant to written instruments
satisfactory to Citadel or waived by Reading Entertainment; and
(viii) If required, the consummation of the Asset Put shall have
been validly adopted at the Meeting by the affirmative vote of the holders
of at least a majority of the votes cast by the Citadel stockholders
entitled to vote on the matter, and the Meeting shall have been duly called
with a quorum present.
(b) The obligation of Reading Entertainment to issue the Exchange
Shares and Debt Securities, if any, to Citadel as provided in Section 1.1 of
this Agreement is subject to the fulfillment, on or before the Closing Date, of
each of the following conditions (unless waived by the written consent of
Reading Entertainment):
(i) Citadel shall deliver to Reading Entertainment such stock
powers, assignments, bills of sale, deeds, title insurance policies,
consents, cash by wire transfer and other instruments of transfer and
conveyance as Reading Entertainment may reasonably request, in such form as
shall be reasonably satisfactory to Reading Entertainment;
(ii) The representations and warranties of Citadel contained in
Article Three shall be true in all material respects at and as of the date
hereof and as of the Closing Date as if
7
<PAGE>
made at and as of the Closing Date; Citadel shall have duly performed and
complied in all material respects with all agreements, covenants and
conditions required by this Article One to be performed or complied with by
Citadel prior to or on the Closing Date; and Citadel shall have delivered
to Reading Entertainment a certificate dated the Closing Date and signed by
its President or its Chief Financial Officer to the effect set forth in
this subparagraph;
(iii) There shall not be in effect (x) any order or decision of a
court of competent jurisdiction or governmental agency or authority or (y)
any action or proceeding commenced by or before any court, governmental
agency or authority or threatened by any governmental agency or authority
that enjoins, restrains or prohibits or seeks to enjoin, restrain or
prohibit the consummation of the transactions provided in Section 1.1 of
this Agreement;
(iv) All consents to the assignment of any contracts to be
assigned to Reading Entertainment requiring the consent of the other party
thereto shall have been obtained pursuant to written instruments
satisfactory to Reading Entertainment or waived by Citadel;
(v) Citadel shall have made such filing with, and obtained such
consents of, such governmental agencies as shall be required to be made or
obtained by Citadel to effect the transfer of the Citadel Assets to Reading
Entertainment; and
(vi) All title insurance policies on the Real Estate Assets, as
Reading Entertainment shall reasonably determine as necessary (and which
shall be obtained at Reading Entertainment's expense), shall not be subject
to any encumbrances other than encumbrances disclosed to and taken into
account by the Appraisers in determining the Citadel Asset Valuation.
(c) (i) In the event Citadel's acquisition of the Exchange Shares and
Debt Securities, if any, shall be in connection with a plan of distribution
of such Exchange Shares and Debt Securities to Citadel's stockholders or
the reorganization, restructuring, recapitalization, liquidation,
dissolution or winding up of Citadel, Reading Entertainment shall, at its
own expense, prepare a registration statement, information statement or
other documents and take such actions covering or otherwise relating to the
Exchange Shares and Debt Securities, if any, as may be required under the
Act and any other applicable state or federal securities law for Citadel to
consummate such plan of distribution, reorganization, restructuring,
recapitalization, liquidation, dissolution or winding up.
(ii) In the event Citadel's acquisition of the Exchange Shares and
Debt Securities, if any, are not in connection with such a plan,
reorganization, restructuring, recapitalization, liquidation, dissolution
or winding up, Citadel shall deliver an investment representation by
Citadel with respect to the Exchange Shares and Debt Securities, if any, in
form and substance equivalent to the investment representation made by CAC
with respect to the Series A Preferred Stock set forth in Section 5.7 of
the Exchange Agreement.
ARTICLE TWO
REGISTRATION RIGHTS
2.1 Definitions. For purposes of this Article Two only, the following
-----------
definitions shall apply.
(a) The terms "register," "registered," and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Act and the declaration or ordering of effectiveness of such
registration statement by the SEC.
8
<PAGE>
(b) The term "Registrable Securities" refers to the Conversion Shares
and the Exchange Shares owned by (or issuable upon conversion of shares of
Series A Preferred Stock owned by) the Holders, except that the Conversion
Shares and the Exchange Shares shall cease to be Registrable Securities at the
earliest date when (i) a registration statement with respect to the sale of such
shares has become effective under the Act and the shares have been disposed of
in accordance with such registration statement; (ii) such shares may be sold to
the public pursuant to paragraph (k) of Rule 144 under the Act ("Rule 144") or
--------
any successor provision; (iii) such shares shall have been transferred (under
Rule 144 or otherwise), new certificates for the shares not bearing a legend
restricting further transfer (other than as provided in Reading Entertainment's
Certificate of Incorporation) shall have been delivered by Reading Entertainment
and subsequent disposition of the shares does not require registration or
qualification under the Act or state law then in force in the opinion of legal
counsel for Reading Entertainment; or (iv) such shares cease to be outstanding.
(c) The term "Holder" means a holder of record of Registrable
------
Securities on the books and records of Reading Entertainment which is either
CAC, Citadel (if it exercises the Asset Put), or an assignee of a Holder who
succeeds to the rights as a Holder in accordance with Section 2.9 hereof.
(d) The number of shares of "Registrable Securities then outstanding"
---------------------------------------
shall be determined by the number of shares of Common Stock which are
Registrable Securities and the number of shares of Common Stock issuable
pursuant to then convertible securities which are convertible into Registrable
Securities.
2.2 Request for Registration.
------------------------
(a) Subject to Sections 2.2(b) and 2.2(c), if Reading Entertainment
shall receive a written request (specifying that it is being made pursuant to
this Article Three), from Holders of a majority of the Registrable Securities
then outstanding, that Reading Entertainment file a registration statement under
the Act, or a similar document pursuant to any other statute then in effect
corresponding to the Act, covering the registration of at least a majority of
the Registrable Securities then outstanding, then Reading Entertainment shall,
within ten (10) business days of the receipt thereof, give written notice of
such request to all Holders at their respective addresses and shall file as soon
as practicable, and in any event within sixty (60) days of the receipt of such
request, a registration statement under the Act covering all Registrable
Securities which the Holders request to be registered within 30 days of the
mailing of such notice to all Holders.
(b) Notwithstanding the foregoing, (i) Reading Entertainment shall not
be obligated to effect a registration pursuant to this Section 2.2 during the
period starting with the date 60 days prior to Reading Entertainment's estimated
date of filing of, and ending on a date six months following the effective date
of, a registration statement pertaining to an underwritten public offering of
securities for the account of Reading Entertainment, provided that Reading
Entertainment is actively employing in good faith all reasonable efforts to
cause such registration statement to become effective and that Reading
Entertainment's estimate of the date of filing such registration statement is
made in good faith; (ii) if Reading Entertainment shall furnish to the Holders
initiating the registration request hereunder (the "Initiating Holders") a
------------------
certificate signed by the President of Reading Entertainment stating that in the
good faith judgment of the Board of Directors it would be seriously detrimental
to Reading Entertainment or its shareholders for a registration statement to be
filed in the near future, then Reading Entertainment's obligation to file a
registration statement shall be deferred for a period not to exceed six months;
provided, however, that Reading Entertainment may furnish such a certificate to
the Initiating Holders only once in any one-year time period, and (iii) if the
managing underwriter advises the Initiating Holders in writing that marketing
factors require a limitation of the number of shares to be underwritten, then
the Initiating Holders shall so advise all Holders which would otherwise be
underwritten pursuant hereto, and the
9
<PAGE>
number of shares of Registrable Securities that may be included in the
underwriting shall be allocated among all Holders thereof in proportion to the
amount of Registrable Securities owned by each Holder; provided, however, that
the number of shares of Registrable Securities to be included in such
underwriting shall not be reduced unless all other securities are first entirely
excluded from the underwriting.
(c) Reading Entertainment shall be obligated to effect only two
registrations pursuant to this Section 2.2, provided however, that if the
Holders who demand registration under this Section 2.2 are unable to register at
least ninety percent (90%) of the Registrable Securities requested to be
included in such registration, then the number of registrations which Reading
Entertainment shall be obligated to effect under this Section 2.2 shall be
increased by one.
2.3 "Piggyback" Registration.
-----------------------
(a) Subject to Section 2.3(b), if at any time Reading Entertainment
determines to register (including for this purpose a registration effected by
Reading Entertainment for stockholders other than the Holders) any shares of
Common Stock under the Act in connection with the public offering of such
securities solely for cash on an SEC Form that would also permit the
registration of the Registrable Securities (other than Forms S-4 and S-8),
Reading Entertainment shall, each such time while Registrable Securities are
outstanding, promptly give each Holder written notice of such determination.
Upon the written request of each Holder given within 20 days after mailing of
any such notice by Reading Entertainment, Reading Entertainment shall, subject
to the provisions of Section 2.7, cause to be registered under the Act all of
the Registrable Securities that each such Holder has requested be registered;
provided however, that Reading Entertainment shall not be required to proceed
with such registration if the offering is abandoned in its entirety and no other
securities are offered for sale.
(b) Reading Entertainment shall not be required under this Section 2.3
to include any Registrable Securities in such underwriting unless the Holders
accept reasonable and customary terms of the underwriting as agreed upon between
Reading Entertainment and the underwriters selected by it.
2.4 Obligations of Reading Entertainment. Notwithstanding any other
------------------------------------
provision hereof, whenever required under this Article Two to effect the
registration of any Registrable Securities, Reading Entertainment shall, as
expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its commercially reasonable
efforts to cause such registration statement to become effective, and, upon the
request of the Holders of a majority of the Registrable Securities registered
thereunder, to keep such registration statement effective for up to 90 days.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them.
(d) Use its commercially reasonable efforts to register and qualify
the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be necessary for the
Holders to dispose of the Registrable Securities, provided that Reading
Entertainment shall not be required in connection therewith or as a condition
thereto to qualify to do
10
<PAGE>
business or to file a general consent to service of process or subject itself to
taxation in any such states or jurisdictions.
(e) Enter into and perform its obligations under an underwriting
agreement, in usual and customary form, with the managing underwriter, if any,
of such offering. Each Holder participating in such underwriting shall also
enter into and perform its obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
(g) Furnish, at the request of any Holder requesting registration of
Registrable Securities pursuant to this Article Two, on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with a registration pursuant to this Article Two, (i) an opinion, dated such
date, of the counsel representing Reading Entertainment for the purposes of such
registration, in form and substance as is customarily given to underwriters in
an underwritten public offering, addressed to the underwriters and to the
Holders requesting registration of Registrable Securities and (ii) a letter
dated such date, from the independent certified public accountants of Reading
Entertainment, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters and to the Holders requesting registration of
Registrable Securities.
(h) Make generally available to its stockholders an earnings statement
satisfying the provisions of Section 11(a) of the Act (including by means of
satisfying the provisions of Rule 158 under the Act) as soon as reasonably
practical covering the 12-month period beginning with the first month of Reading
Entertainment's first fiscal quarter commencing after the effective date of the
registration statement.
(i) Whenever any notice is required to be given under this Article
Two, such notice may be given personally or by mail. Any notice given to a
Holder shall be sufficient if given to the Holder at the last address set forth
for such Holder on the stock transfer records of Reading Entertainment. Any
notice given by mail shall be deemed to have been given when deposited in the
United States mail with postage thereon prepaid.
2.5 Furnish Information. The selling Holders shall furnish to
-------------------
Reading Entertainment such information regarding themselves, the Registrable
Securities held by them, and the intended method of disposition of such
securities as shall be required to effect the registration of the Registrable
Securities.
2.6 Expenses of Registration. All expenses other than underwriting
------------------------
discounts and commission incurred in connection with any registration, filing or
qualification pursuant to Sections 2.2 and 2.3, including, without limitation,
all registration, filing and qualification fees, printers' and accounting fees,
fees and disbursements of counsel for Reading Entertainment, and the reasonable
fees and disbursements of a single counsel for the selling Holders selected by
the Holders of a majority of the Registrable Securities then outstanding shall
be borne by Reading Entertainment; provided, however, that Reading Entertainment
shall not be required to pay for any expenses of any registration proceeding
begun pursuant to Section 2.2 if the registration request is subsequently
withdrawn at the request of the Holders of a majority of the Registrable
Securities to be registered (in which case all participating Holders shall bear
such expenses), unless, at the time of such withdrawal, the Holders have learned
of a material adverse change in the condition, business or prospects of Reading
Entertainment from that known to the Holders
11
<PAGE>
at the time of their request, in which case the Holders shall not be required to
pay any such expenses and shall retain all rights pursuant to Section 2.2.
2.7 Underwriting Requirements. In connection with any offering
-------------------------
involving an underwriting of shares being issued by Reading Entertainment,
Reading Entertainment shall not be required under Section 2.3 to include any of
the Holders' securities in such underwriting unless they accept the terms of the
underwriting as agreed upon between Reading Entertainment and the underwriters
selected by it, and then only in such quantity as will not, in the reasonable
opinion of the underwriters, jeopardize the success of the offering by Reading
Entertainment. If the total amount of securities, including Registrable
Securities, requested by stockholders to be included in such offering exceeds
the amount of securities to be sold other than by Reading Entertainment that
the underwriters reasonably believe compatible with the success of the offering,
then Reading Entertainment shall be required to include in the offering only
that number of such securities, including Registrable Securities, which the
underwriters believe will not jeopardize the success of the offering (the
securities so included to be apportioned pro rata among the selling stockholders
according to the total amount of securities entitled to be included therein
owned by each selling stockholder or in such other proportions as shall mutually
be agreed to by such selling stockholders); provided, however, that in no event
shall any securities of selling Holders be excluded until all securities of
selling employees of, or consultants and advisors to, Reading Entertainment are
excluded.
2.8 Indemnification and Contribution. In the event any Registrable
--------------------------------
Securities are included in a registration statement under this Article Two:
(a) To the extent permitted by law, Reading Entertainment will
indemnify and hold harmless each Holder, the officers and directors of each
Holder, any underwriter (as defined in the Act) for such Holder and each
person, if any, who controls such Holder or underwriter within the meaning of
the Act or the Exchange Act, against any losses, claims, damages or liabilities
(joint or several) to which they may become subject under the Act, the Exchange
Act or other federal or state law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively, a
"Violation"): (i) any untrue statement or alleged untrue statement of a material
---------
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, or (iii) any violation or alleged violation by Reading
Entertainment of the Act, the Exchange Act, any state securities law or any rule
or regulation promulgated under the Act, the Exchange Act or any state
securities law; and Reading Entertainment will reimburse each such Holder,
officer or director, underwriter or controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that Reading Entertainment shall not be liable in any such case for any such
loss, claim, damage, liability or action to the extent that it arises out of or
is based upon (x) a Violation which occurs in reliance upon and in conformity
with written information furnished expressly for use in connection with such
registration by any such Holder, officer, director or controlling person of such
Holder or underwriter or (y) any untrue statement or alleged untrue statement
made in, or omission or alleged omission from, any preliminary prospectus or
final prospectus, if the final prospectus or the final prospectus as amended or
supplemented, respectively, which shall have been furnished, to the underwriter
or Holder claiming indemnification, prior to the time such underwriter sent
written confirmation of or the Holder made such sale to the person alleging such
statement, alleged statement, omission or alleged omission, does not contain
such statement, alleged statement, omission or alleged omission and a copy of
such final prospectus or such prospectus as amended or supplemented,
respectively, shall not have been sent or given to such person; and provided,
further, that in no case shall Reading Entertainment be liable for amounts paid
in settlement of any such loss, claim, damage, liability,
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or action if such settlement is effected without the written consent of Reading
Entertainment, which consent shall not be unreasonably withheld.
(b) To the extent permitted by law, each selling Holder will indemnify
and hold harmless Reading Entertainment, each of its directors, each of its
officers who have signed the registration statement and any underwriters,
against any losses, claims, damages or liabilities (joint or several) to which
Reading Entertainment or any such director, officer, controlling person or
underwriter may become subject, under the Act, the Exchange Act or other federal
or state law, insofar as such losses, claims, damages or liabilities (or actions
in respect thereto) arise out of or are based upon any Violation, in each case
to the extent (and only to the extent) that such Violation occurs in reliance
upon and in conformity with written information furnished by or on behalf of
such Holder expressly for use in connection with such registration; and each
such Holder will reimburse any legal or other expenses reasonably incurred by
Reading Entertainment or any such director, officer, controlling person or
underwriter in connection with investigating or defending any such loss, claim,
damage, liability, or action; provided, however, that the indemnity agreement
contained in this Section 2.8(b) shall not apply to amounts paid in settlement
of any such loss, claim, damage, liability or action if such settlement is
effected without the consent of the Holder, which consent shall not be
unreasonably withheld; provided further that, in no event shall any indemnity
under this Section 2.8(b) exceed the net proceeds from the offering received by
such Holder.
(c) Promptly after receipt by an indemnified party under this Section
2.8 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 2.8, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
reasonably satisfactory to the parties; provided, however, that an indemnified
party shall have the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if representation of such indemnified
party by the counsel retained by the indemnifying party would be inappropriate
due to actual or potential differing interests between such indemnified party
and any other party represented by such counsel in such proceeding.
(d) In order to provide for just and equitable contribution under the
Act in any case in which (i) any indemnified party makes claim for
indemnification pursuant to this Section 2.8, but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case notwithstanding the
fact the express provisions of this Section 2.8 provide for indemnification, or
(ii) contribution under the Act may be required on the part of any indemnified
party; then the indemnifying party in lieu of indemnifying such indemnified
party hereunder shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities, in
such proportion as is appropriate to reflect the relative fault of the
indemnifying parties on the one hand and of the indemnified parties on the other
in connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative fault of the indemnifying parties and of the
indemnified parties shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party, or by the indemnified party, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The parties further agree that it would not be just and equitable if
contribution pursuant to this Section 2.8(d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
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The amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities or actions in respect thereof referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 2.8(d), in no
event shall any contribution under this Section 2.8(d) exceed the net proceeds
from the offering received by such Holder. No person guilty of fraudulent
misrepresentations (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
(e) The obligations of Reading Entertainment and Holders under this
Section 2.8 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Article Two.
2.9 Assignment of Registration Rights. The rights to cause Reading
---------------------------------
Entertainment to register Registrable Securities pursuant to this Article Two
may be assigned by a Holder to any transferee or assignee of any amount of such
securities; provided, in each case that (i) Reading Entertainment is, within a
reasonable time after such transfer, furnished with written notice of the name
and address of such transferee or assignee and the securities with respect to
which such registration rights are being assigned; (ii) such assignment shall be
effective only if, immediately following such transfer, the further disposition
of such securities by the transferee or assignee is restricted under the Act and
(iii) the transferee or assignee agrees in writing to assume all the obligations
of the transferor under this Article Two.
2.10 Limitations on Subsequent Registration Rights. From and after
---------------------------------------------
the date of this Agreement, Reading Entertainment shall not, without the prior
written consent of the Holders of a majority of the outstanding Registrable
Securities, enter into any agreement with any holder or prospective holder of
any securities of Reading Entertainment which would allow such holder or
prospective holder (a) to include such securities in any registration filed
under Section 2.2 hereof, unless, under the terms of such agreement, such holder
or prospective holder may include such securities in any such registration only
to the extent that the inclusion of its securities will not reduce the amount of
the Registrable Securities of the Holders which is included or (b) to make a
demand registration which could result in such registration statement being
declared effective within 120 days of the effective date of any registration
effected pursuant to Section 2.2.
2.11 Amendment of Registration Rights. Any provision of this Article
--------------------------------
Two may be amended and the observance thereof may be waived (either generally or
in a particular instance and either retroactively or prospectively), only with
the written consent of Reading Entertainment and the holders of a majority of
the Registrable Securities then outstanding. Any amendment or waiver effected
in accordance with this Section 2.11 shall be binding upon each Holder of
Registrable Securities, each future holder of all such securities and Reading
Entertainment.
ARTICLE THREE
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of Reading Entertainment. Reading
-------------------------------------------------------
Entertainment hereby represents and warrants to each of Citadel and CAC as
follows:
(a) The representations and warranties of Reading Entertainment set
forth in Section 3 of the Exchange Agreement are hereby incorporated by
reference and are true and correct in all respects; and
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(b) The representations and warranties of Reading Entertainment set
forth in Section 3 of the Exchange Agreement relating to the Exchange Agreement
and the consummation of the transactions contemplated thereby are true and
correct in all respects as if made with respect to this Agreement and the
consummation of the transactions contemplated hereby, other than, with respect
to Section 3.6 of the Exchange Agreement, as required by Article Two hereof and
other than any consent, approval, order, authorization, registration,
declaration, or filing with a governmental authority which may be required to
consummate the transactions contemplated by Article One hereof.
3.2 Representations and Warranties of Citadel and CAC. Citadel and
-------------------------------------------------
CAC hereby jointly and severally represent and warrant to Reading Entertainment
as follows:
(a) The representations and warranties of each of Citadel and CAC set
forth in Section 5 of the Exchange Agreement (except Section 5.5) are hereby
incorporated by reference and are true and correct in all respects; and
(b) The representations and warranties of Citadel and CAC set forth in
Section 5 of the Exchange Agreement relating to the Exchange Agreement and the
consummation of the transactions contemplated thereby are true and correct in
all respects as if made with respect to this Agreement and the consummation of
the transactions contemplated hereby, other than, with respect to Sections 5.1
and 5.3 of the Exchange Agreement, representations and warranties relating to
or necessary in connection with approval of the stockholders of Citadel, which
if required, will be obtained on or prior to the Closing Date.
ARTICLE FOUR
READING ENTERTAINMENT CHANGE OF CONTROL
4.1 Redemption By Reading Entertainment. In the event of any "Change
-----------------------------------
in Control" (as defined in Reading Entertainment's Certificate of Designation,
Preferences and Rights of the Series A Preferred Stock and Reading
Entertainment's Series B Voting Cumulative Convertible Preferred Stock (the
"Certificate")), Reading Entertainment shall not be entitled to redeem any
-----------
Series A Preferred Stock held by Citadel, CAC or any of their respective
affiliates pursuant to the first sentence of Section 5.1(a) of the Certificate
unless, prior to or simultaneously with such redemption, Craig assumes, pursuant
to an assumption agreement in form and substance satisfactory to Citadel in its
reasonable discretion, all obligations of Reading Entertainment under Articles
One, Two (as it relates to the Exchange Shares) and Five hereunder.
Notwithstanding the foregoing, such assumption agreement by Craig shall provide:
(a) In lieu of Common Stock, Citadel will be entitled to exchange the
Citadel Assets (to the extent it would otherwise have been entitled to exchange
the Citadel Assets for Common Stock) for Craig's Class A Common Preference
Stock, par value $0.01 per share ("Craig Stock"),
-----------
(b) For purposes of Section 1.3(a)(i), the Common Stock Value shall be
determined by multiplying: (i) the average of the Closing Prices of the Craig
Stock for the twenty (20) consecutive trading days on which trading of the Craig
Stock occurs immediately prior to the date of the event which results in such
Change of Control (the "Change of Control Date") by (ii) a fraction, the
----------------------
denominator of which shall be the Closing Price of the Common Stock on the
Change of Control Date and the numerator of which shall be the applicable Common
Stock Value of the Common Stock under Section 1.3(a)(i). For all other
purposes, in determining the "Common Stock Value" with respect to the Craig
Stock, Craig and the Craig Stock shall be deemed substituted for Reading
Entertainment and the Common Stock.
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(c) Craig shall represent and warrant to Citadel and CAC as to the
matters covered by the representations and warranties of Reading Entertainment
set forth in Article Three as if made by Craig with respect to such assumption
agreements, this Agreement and the consummation of the transactions covered
thereby and hereby.
(d) References to the representations and warranties of Reading
Entertainment in Section 1.4(a)(v) shall refer to representations and warranties
of Craig as if made by Craig with respect to Craig.
ARTICLE FIVE
GENERAL PROVISIONS
5.1 General Provisions.
------------------
(a) Subject to Section 2.4(i), all notices, requests, demands or other
communications required or authorized or contemplated to be given by this
Agreement shall be in writing and shall be deemed to have been duly given, made
and received when delivered against receipt, upon receipt of a facsimile
transmission, when deposited in the United States mails (first class postage
prepaid) or when deposited with Federal Express, and addressed as provided in
Section 10.2 of the Exchange Agreement or to such other address and fax number
as any of the parties hereto may from time to time designate in writing, prior
to the giving of such notice.
(b) Except as set forth in Article Two, no amendment or waiver of any
provision of this Agreement shall in any event be effective, unless the same
shall be in writing signed by the parties hereto, and then such amendment,
waiver or consent shall be effective only in a specific instance and for the
specific purpose for which given.
(c) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same Agreement.
(d) Except as set forth in Article Two, this Agreement shall not be
assigned by any party without the prior written consent of the other party
hereto.
(e) This Agreement and the documents and agreements referred to herein
contain the entire understanding among the parties with respect to the
transactions contemplated hereby and supersede all prior and contemporaneous
agreements and understandings whether oral or written, relating to the subject
matter hereof.
(f) This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, notwithstanding any Delaware or other
conflict-of-law provisions to the contrary.
(g) Each party hereto shall execute and deliver such further
agreements and instruments, and take such further actions, as the other party
may reasonably request in order to carry out the purpose and intent of this
Agreement.
(h) Except as provided in Section 1.2, should any party institute any
arbitration, action, suit or other proceeding arising out of or relating to this
Agreement, the prevailing party shall be entitled to receive from the losing
party reasonable attorneys' fees and costs incurred in connection therewith.
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(i) Other than as specifically provided herein, each party shall bear
its own costs and expenses (including fees and disbursements of legal counsel)
incurred in connection with the consummation of the transactions provided for
herein.
(j) No party, nor its respective counsel, shall be deemed the drafter
of this Agreement for purposes of construing the provisions of this Agreement,
and all language in all parts of this Agreement shall be construed in accordance
with its fair meaning, and not strictly for or against any party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed by their respective duly authorized officers as of the date first
above written.
READING ENTERTAINMENT, INC.
By:____________________________________
Name:__________________________________
Its:___________________________________
CITADEL ACQUISITION CORP., INC.
By:____________________________________
Name:__________________________________
Its:___________________________________
CITADEL HOLDING CORPORATION
By:____________________________________
Name:__________________________________
Its:___________________________________
Acknowledged and agreed, as to the matters set forth in Section 1.1(e)(iv) and
Article Four:
CRAIG CORPORATION
By:_________________________
Name:_______________________
Its:________________________
17
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EXHIBIT G
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES A VOTING CUMULATIVE CONVERTIBLE PREFERRED STOCK
AND
SERIES B VOTING CUMULATIVE CONVERTIBLE PREFERRED STOCK
OF
READING ENTERTAINMENT, INC.
Reading Entertainment, Inc., a Delaware corporation (the
"Corporation"), hereby certifies that, pursuant to the authority contained in
Article FOURTH of its Certificate of Incorporation, and in accordance with the
provisions of Section 151 of the General Corporation Law of the State of
Delaware, the Corporation's Board of Directors has duly adopted the following
resolution creating two series of its Preferred Stock, $.001 par value per
share, designated as Series A Voting Cumulative Convertible Preferred Stock and
Series B Voting Cumulative Convertible Preferred Stock:
RESOLVED, that two series of the class of the authorized Preferred
Stock of the Corporation be created hereby, and that the designations and
amounts thereof and the voting powers, preferences and relative, participating,
optional and other special rights of the shares of each such series, and the
qualifications, limitations or restrictions thereof, are as follows:
1. Designations and Numbers of Shares. Seventy thousand (70,000)
----------------------------------
shares of the Preferred Stock of the Corporation are hereby constituted as a
series of Preferred Stock, $.001 par value per share, and designated as "Series
A Voting Cumulative Convertible Preferred Stock" (hereinafter called the "Series
A Stock") and five hundred fifty thousand (550,000) shares of the Preferred
Stock of the Corporation are hereby constituted as a series of Preferred Stock,
$.001 par value per share, and designated as "Series B Voting Cumulative
Convertible Preferred Stock" (hereinafter called the "Series B Stock"; the
Series A Stock and the Series B Stock are hereinafter collectively called the
"Convertible Preferred Stock").
2. Liquidation. Upon any voluntary or involuntary dissolution,
-----------
liquidation or winding up of the Corporation (a "Liquidation"), the holder of
each share of each series of Convertible Preferred Stock then outstanding shall
be entitled to be paid out of the assets of the Corporation available for
distribution to its stockholders, before any distribution of assets shall be
made to the holders of Common Stock of the Corporation or to the holders of
other stock of the Corporation that ranks junior to such series of the
Convertible Preferred Stock in respect to distributions upon a Liquidation of
the Corporation ("Junior Stock"), an amount equal to $100 per share (the "Stated
Value"), plus an amount equal to all dividends (whether or not declared or due)
accrued and unpaid on such share on the date fixed for distribution of assets of
the Corporation to the holders of the Convertible Preferred Stock. The Series B
Stock shall rank junior to the Series A Stock in right to distributions on
Liquidation and shall be "Junior Stock" with respect to the Series A Stock.
Neither a consolidation or merger of the Corporation with or into any other
entity, nor a merger of any other entity with or into the Corporation, nor a
sale or transfer of all or any part of the Corporation's assets for cash or
securities or any other property, shall be
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considered a Liquidation. Written notice of any Liquidation shall be given to
the holders of the Convertible Preferred Stock not less than thirty days prior
to any payment date stated therein.
3. Dividends.
---------
3.1 The holders of Convertible Preferred Stock shall be
entitled to receive, when and as declared by the Board of Directors, but only
out of surplus and capital legally available for the payment of dividends,
cumulative dividends at the annual rate of $6.50 per each share of Series A
Stock, and at the annual rate of $6.50 per each share of Series B Stock
("Regular Dividends"), in each case before any dividends or other distributions
(other than dividends in Common Stock or any other stock which ranks junior in
respect to such series of the Convertible Preferred Stock in respect to
dividends) are paid to the holders of the Common Stock or any other stock which
is Junior Stock with respect to such series. The Series B Stock shall rank
junior to the Series A Stock in right to dividends and shall be "Junior Stock"
with respect to the Series A Stock. Such dividends shall accumulate on each
share of Convertible Preferred Stock from the date of its original issuance and
from day to day and shall be payable (subject to declaration by the Board of
Directors and the existence of surplus and capital legally available for the
payment of such dividends) in equal quarterly installments on the last day of
March, June, September and December of each year (except that, if such date is
not a business day, the dividend shall be payable on the first immediately
succeeding business day); provided, however, that the initial quarterly dividend
-------- -------
payment payable on any share of Convertible Preferred Stock shall be an amount
equal to the product determined by multiplying the Regular Dividend for a
quarter by a fraction, the numerator of which is the number of days from (but
not including) the date of issuance of such share to the end of the dividend
quarter during which such share of Convertible Preferred Stock is issued and the
denominator of which is the total number of days in such dividend quarter.
3.2 Dividends at the rate specified in Section 3.1 hereof shall
accumulate whether or not they have been declared and whether or not there is
surplus and capital legally available for the payment of dividends.
3.3 To the extent any dividends on the Convertible Preferred
Stock accumulate and are in arrears, such dividend shall not bear interest.
4. Conversion Rights.
-----------------
4.1(a) Shares of Series A Stock may be converted, at the option
of the holder thereof, in whole or in part, upon delivery of a certificate
representing such shares to the Corporation, together with a notice specifying
the number of shares to be converted (the date of such delivery, or of delivery
of shares of Series B Stock on conversion thereof as hereinafter provided, is
hereinafter referred to as the "Conversion Date"), (i) at any time after the
date which is 18 months after the first issuance of the Convertible Preferred
Stock (the date of such first issuance being the "Original Issue Date") or (ii)
at any time prior to the later of (A) the 90th day after the earliest event
constituting a Change in Control (as hereinafter defined) and (B) the 30th day
after the consummation of the transaction the announcement of which constituted
such Change in Control (the period from the date of such Change in Control to
the later of such 90th or 30th day being the "Change in Control Period"). A
"Change in Control" shall mean the occurrence of either of the following events:
(x) any person, entity or "group" (as defined in Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended, and the rules thereunder) other
than Craig Corporation and its successors and affiliates (collectively,
"Craig"), shall publicly announce or disclose having entered into a transaction
as a result of which such person, entity or group would acquire beneficial
ownership of 50% or more of the outstanding Common Stock or securities entitling
such person, entity or group to cast 50% or more of the votes entitled to be
cast at any regular election of directors of the Corporation (where "affiliate"
of a person means a person directly or indirectly controlling, controlled by or
under common control with such person and "control" means the power to direct
the affairs of such person by reason of ownership of voting securities, contract
or otherwise) or (y) the directors of the Corporation as of the Original Issue
Date (the "Current Directors") and any future directors (the
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<PAGE>
"Continuing Directors") elected or nominated by a majority of the Current
Directors or Continuing Directors cease to constitute a majority of the Board of
Directors of the Corporation.
(b) Shares of Series B Stock may be converted, at the option of the
holder thereof, in whole or in part, upon delivery of a certificate representing
such shares to the Corporation, together with a notice specifying the number of
shares to be converted, at any time after the date which is 18 months after the
Original Issuance Date.
(c) Notwithstanding the foregoing, a holder of shares of
Convertible Preferred Stock may not convert any shares of Convertible Preferred
Stock that have been called for redemption after 5:00 p.m. Eastern Time on the
date for such redemption.
4.2 Each share of Series A Stock shall be convertible into
shares of the Corporation's Common Stock at a conversion price of $11.50 per
share (as adjusted, the "Series A Conversion Price"), subject to certain
adjustments as described below; and each share of Series B Stock shall be
convertible into shares of the Corporation's Common Stock at a conversion price
of $12.25 per share (as adjusted, the "Series B Conversion Price"; the Series A
Conversion Price and the Series B Conversion Price are each hereinafter referred
to as a "Conversion Price"), subject to certain adjustments as described below.
The number of shares of Common Stock to be delivered on conversion of any shares
of Convertible Preferred Stock shall equal the aggregate Stated Value thereof
divided by the applicable Conversion Price then in effect, calculated to the
nearest 1/100th of a share, subject to Section 4.5. Except as provided in
Section 4.7, the Corporation shall make no payment or adjustment on the account
of any unpaid cumulative dividends on the shares of Convertible Preferred Stock
surrendered for conversion or on account of any dividends on the Common Stock.
4.3 If the Corporation shall (a) pay a dividend or make a
distribution on its outstanding shares of Common Stock in shares of its Common
Stock, (b) subdivide its outstanding shares of Common Stock, or (c) combine its
outstanding shares of Common Stock into a smaller number of shares, then each
Conversion Price in effect immediately prior to such action shall be adjusted so
that the holder of any shares of Convertible Preferred Stock thereafter
surrendered for conversion shall be entitled to receive the number of shares of
capital stock of the Corporation which he would have owned immediately following
such action had such shares of Convertible Preferred Stock been converted
immediately prior thereto. An adjustment made pursuant to this Section 4.3
shall become effective immediately after the record date in the case of a
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification.
The Corporation shall give notice to the holders of the Convertible Preferred
Stock of any adjustment pursuant to this Section 4.3 (stating the adjusted
Conversion Prices and the reasons therefor) not less than 10 days prior to the
record date for such dividend, distribution, subdivision, combination or
reclassification.
4.4 If the Corporation shall consolidate or merge into or with
another corporation, or if the Corporation shall sell or convey to any other
person or persons all or substantially all of the assets of the Corporation, or
shall issue by reclassification of its shares of Common Stock any shares of
capital stock of the Corporation, each holder of Convertible Preferred Stock
then outstanding shall have the right thereafter to convert each share of
Convertible Preferred Stock held by him into the kind and amount of shares of
stock, other securities, cash and property receivable upon such consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
into which such share might have been converted immediately prior to such
consolidation, merger, sale or conveyance, and shall have no other conversion
rights. In any such event, effective provision shall be made, in the
certificate of incorporation of the resulting or surviving corporation or
otherwise or in any contracts of sale and conveyance so that, so far as
appropriate and as nearly as reasonably may be, the provisions set forth herein
for the protection of the conversion rights of the shares of the Convertible
Preferred Stock shall thereafter be made applicable.
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<PAGE>
4.5 In connection with the conversion of any shares of the
Convertible Preferred Stock hereunder, no fractions of shares of Common Stock
shall be issued, but the Corporation shall pay a cash adjustment in respect of
such fractional interest in an amount equal to a like fraction of an amount
equal to the closing sales price (the "Closing Price") of a share of the
Corporation's Common Stock on the National Association of Securities Dealers
Automated Quotation National Market System (or, if that shall not be the
principal market on which the Common Stock shall be trading or quoted, then on
such principal market) on the business day next preceding the Conversion Date.
4.6 The Corporation shall at all times reserve and keep available
out of its authorized Common Stock the full number of shares of Common Stock of
the Corporation issuable upon the conversion of that number of shares of the
Convertible Preferred Stock permitted to be converted into Common Stock
hereunder.
4.7 (a) In the event that the average of the Closing Prices of the
Common Stock, over any 180 consecutive trading day period ending within 15 days
of the date of the notice provided for in Section 4.7(b) (each such Closing
Price having been adjusted in proportion to any adjustment in the Conversion
Prices made after the date of such Closing Price), exceeds 135% of the Series A
Conversion Price then in effect, the Corporation may, at its option, require the
holders of all, but not less than all, of the issued and outstanding shares of
Series A Stock to convert such shares into Common Stock of the Corporation at
the Series A Conversion Price.
(b) Not less than ten nor more than sixty days prior to the
date fixed for mandatory conversion of the Series A Stock pursuant to Section
4.7(a) ("Mandatory Conversion"), notice by mail, postage prepaid, shall be given
to each holder of shares of Convertible Preferred Stock required to be
converted. On or after the date fixed for Mandatory Conversion, as stated in
such notice, each holder of the shares required to be converted shall surrender
his certificate(s) evidencing such shares to the Corporation at the place
designated in such notice and shall thereupon be entitled to receive the shares
of Common Stock deliverable upon conversion plus any accrued and any unpaid
dividends on such shares of Convertible Preferred Stock. If such notice of
Mandatory Conversion shall have been duly given, and if, on the date fixed for
Mandatory Conversion, funds necessary for the payment of dividends, if any,
shall be available therefor, then, notwithstanding that the certificates
evidencing any shares required to be converted shall not have been surrendered,
from and after the date fixed for Mandatory Conversion, dividends with respect
to the shares so converted shall cease to accrue, the shares shall no longer be
deemed outstanding, the holders thereof shall cease to be holders of the shares
of Convertible Preferred Stock, all rights whatsoever with respect to the shares
so converted shall forthwith terminate except only the right of the holders to
receive the previously accrued dividends without interest thereon and the shares
of Common Stock deliverable on conversion, upon surrender of their certificates
therefor, and such holders shall for all purposes be deemed holders of such
shares of Common Stock.
4.8 The issuance of certificates for shares of Common Stock upon
the conversion of shares of Convertible Preferred Stock shall be made without
charge to the holders of shares of Convertible Preferred Stock for any issue or
stamp tax in respect of the issuance of such certificates, and such certificates
shall be issued in the respective names of, or in such names as may be directed
by, the holders of shares of Convertible Preferred Stock converted; provided,
however, that the Corporation shall not be required to pay any tax which may be
payable in respect of transfer involved in the issuance and delivery of any such
certificate in a name other than that of the holder of shares of Convertible
Preferred Stock converted, and the Corporation shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Corporation the amount of such tax or
shall have established to the satisfaction of the Corporation that such tax has
been paid. If less than all of the shares of Convertible Preferred Stock
represented by a certificate surrendered for conversion are converted, the
Corporation shall deliver to the holder of such shares a new certificate for the
shares not so converted.
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4.9 The Corporation from time to time may reduce either Conversion
Price by any amount for any period of time in the discretion of the Board of
Directors.
4.10 No adjustment in either Conversion Price shall be required
unless such adjustment would result in an increase or decrease of at least 1% in
such Conversion Price as then in effect; provided, however, that any adjustments
that by reason of this Section 4.10 are not required to be made shall be carried
forward and taken into account in any subsequent adjustment.
5. Redemption.
-----------
5.1(a) The shares of Series A Stock may be redeemed at the
option of the Corporation, in whole or in part, upon prior written notice of
such redemption given by the Corporation in accordance with Section 5.2 hereof
at any time prior to the later of (i) the 120th day after the earliest event
constituting a Change in Control and (ii) the 60th day after the consummation of
the transaction the announcement of which constituted such Change in Control, at
the Change in Control Redemption Price (as hereinafter defined); provided, that
the Corporation may not, pursuant to this sentence, redeem shares of Series A
Preferred Stock held by Citadel Holding Corporation ("Citadel") or any of its
affiliates unless, prior to or simultaneously with such redemption, Craig
assumes certain obligations of the Corporation as provided in Section 4.1 of the
Asset Put and Registration Rights Agreement, dated the Original Issue Date,
among the Corporation, Craig, Citadel, and Citadel Acquisition Corp., Inc. (the
"Put Agreement"), and provided further that the Corporation may not redeem any
shares of Series A Stock pursuant to this sentence after the fifth anniversary
of the Original Issue Date. In addition, any or all of the shares of Series A
Stock may be redeemed at the option of the Corporation, upon prior written
notice of such redemption given by the Corporation in accordance with Section
5.2 hereof, at any time after the fifth anniversary of the Original Issue Date,
at the Standard Redemption Price (as hereinafter defined). The "Change in
Control Redemption Price" of each share of Series A Stock at any date shall mean
an amount equal to the sum of (x) the Stated Value thereof, (y) an accrual on
the Stated Value, from the date of issuance of such share to the date of
redemption, at a percentage per annum (not compounded) equal to 8% if such
redemption is on or before the fourth anniversary of the Original Issue Date or
7% if thereafter, and (z) all accrued and unpaid dividends thereon to the date
fixed for redemption; and the "Standard Redemption Price" of each share of
Convertible Preferred Stock at any date shall mean an amount equal to the
percentage for such date, as set forth below, of the Stated Value thereof, plus
an amount equal to all accrued and unpaid dividends thereon to the date fixed
for redemption:
<TABLE>
<CAPTION>
Anniversary of Original Issue Date Percentage
---------------------------------- ----------
<S> <C>
On or after the fifth anniversary and until the
sixth anniversary 108%
On or after the sixth anniversary and until the
seventh anniversary 106%
On or after the seventh anniversary and until
the eighth anniversary 104%
On or after the eighth anniversary and until the
ninth anniversary 102%
On or after the ninth anniversary 100%
</TABLE>
(b)(i) Subject to the provisions hereof, the holders of
a majority of the outstanding shares of Series A Stock (the "Requesting
Holders") may require that the Corporation purchase all, but (except as
otherwise provided in this Section 5.1(b)) not less than all, of the outstanding
shares of Series A Stock held by the Requesting Holders and those other holders
(the "Nonrequesting Holders") who so request as provided below, by notice (the
"Holders' Notice") given by the Requesting Holders to the Corporation at any
time (A) after 18 months after the Original Issue Date, if at the time of giving
such notice the quarterly dividends payable on the Series A Stock as provided in
Section 3 hereof are in arrears in an aggregate amount equal to at least four
full quarterly dividends (which need
-5-
<PAGE>
not be consecutive), or (B) within the 90-day period beginning on the fifth
anniversary of the Original Issue Date (but not, in the case of this clause (B),
after the exercise by Citadel of the Asset Put (as defined in the Put
Agreement)), in either case at a redemption price equal to the Stated Value
thereof plus all accrued and unpaid dividends thereon to the date fixed for
redemption. As promptly as practicable, and in any case within ten days, after
receipt of a Holders' Notice, the Corporation shall give a notice to each
Nonrequesting Holder, offering to redeem the shares of Series A Stock held by
such Nonrequesting Holder on the same terms, and subject to the same
limitations, as the shares held by the Requesting Holders, provided such
Nonrequesting Holder, within 10 days of the Corporation's notice (the "Response
Period"), gives notice to the Corporation stating that such Nonrequesting Holder
desires to have his shares redeemed. The Nonrequesting Holders who do not elect
to have their shares redeemed shall have no subsequent right to require
redemption pursuant to this Section 5.1(b)(i).
(ii) Citadel may require that the Corporation purchase
all, but (except as otherwise provided in this Section 5.1(b)) not less than
all, of the outstanding shares of Series A Stock owned by it and its affiliates,
by notice given by it to the Corporation at any time during the Change in
Control Period (but not after the fifth anniversary of the Original Issue Date)
at the Change in Control Redemption Price.
(iii) As promptly as practicable, and in any case
within ten days, after the expiration of the Response Period, in the case of a
redemption pursuant to Section 5.1(b)(i), or the notice given by Citadel, in the
case of a redemption pursuant to Section 5.1(b)(ii), the Corporation shall give
a notice of redemption pursuant to Section 5.2 and thereafter proceed to
effectuate such redemption as promptly as practicable.
(iv) Notwithstanding the foregoing, if, at the time
the Corporation is required to redeem shares of the Series A Stock, the funds of
the Corporation legally available for such redemption are insufficient to redeem
in full the shares of the Series A Stock required to be redeemed, (A) the
Corporation shall utilize the funds legally available to redeem the maximum
number of such shares which can be legally redeemed and (B) the remaining such
shares shall remain outstanding and not be redeemed.
(c) The shares of Series B Stock may be redeemed at
the option of the Corporation, in whole or in part, at any time after the fifth
anniversary of the Original Issue Date, upon prior written notice of such
redemption by the Corporation in accordance with Section 5.2, at a per share
redemption price equal to the Standard Redemption Price thereof.
(d) Notwithstanding the foregoing, the Corporation
may not, pursuant to Section 5.1(a) or (c), redeem less than all of the
outstanding shares of a series of Convertible Preferred Stock while any
additional dividends are accumulated and unpaid on such series pursuant to
Section 3 hereof without first declaring and paying all such additional
dividends on such series.
(e) If fewer than all of the outstanding shares of a
series of Convertible Preferred Stock are to be redeemed pursuant to this
Section 5.1 (other than pursuant to Section 5.1(b)(ii)), such shares shall be
redeemed pro rata from each holder of such series of Convertible Preferred Stock
--- ----
(with adjustments to avoid redemptions of fractional shares).
5.2 (a) Not less than thirty nor more than sixty days
prior to the date fixed for redemption, notice by mail, postage prepaid, shall
be given to each holder of shares of the Convertible Preferred Stock to be
redeemed. The redemption notice shall specify the date of redemption, the
certificates to be redeemed, and the applicable redemption price (the
"Redemption Price"); but failure to mail such notice or any defect therein or in
the mailing thereof shall not affect the validity of the proceeding for the
redemption of any shares so to be redeemed. On or after the date fixed for
redemption,
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<PAGE>
as stated in the notice, each holder of the shares called for redemption shall
surrender his certificate(s) evidencing such shares to the Corporation at the
place designated in such notice and shall thereupon be entitled to receive
payment of the Redemption Price thereof. In case less than all of the shares of
Convertible Preferred Stock represented by any such surrendered certificate are
redeemed, a new certificate shall be issued representing the unredeemed shares.
(b) Anything herein to the contrary notwithstanding,
if notice of redemption shall be given as provided in Section 5.2(a) above and
if, on or at any time prior to the date fixed for redemption therein, an amount
equal to the Redemption Price times the number of shares of Convertible
Preferred Stock called for redemption shall be deposited in trust for the
benefit of the holders of the shares of Convertible Preferred Stock called for
redemption with a bank or trust company having a combined capital and surplus of
at least $50 million according to its last published statement of condition,
then, notwithstanding that any certificates for shares of Convertible Preferred
Stock so called for redemption shall not have been surrendered for redemption,
such shares shall be deemed to be redeemed upon the date fixed for redemption
and shall cease to be outstanding for any purpose, the right to receive
dividends thereon shall cease to accrue from and after the date fixed for
redemption and all rights of the holders of the shares of Convertible Preferred
Stock called for redemption shall forthwith on the date fixed for redemption
cease and terminate except for the right of the holders thereof, upon
presentation and surrender of their respective certificates representing such
shares, to receive from such bank or trust company on or after the date fixed
for redemption the amount payable upon the redemption thereof, but without
interest. The Corporation shall be entitled to any interest payable on the funds
so deposited. Any funds so deposited and otherwise unclaimed at the end of three
years shall be repaid to the Corporation, after which holders of the redeemed
stock shall look only to the Corporation for payment of the amount payable upon
redemption thereof, but without interest thereon.
6. Voting Rights.
-------------
6.1 The holders of the shares of Convertible Preferred Stock
shall initially be entitled to cast 9.64 votes per share held on all matters
submitted to a vote of the Corporation's stockholders. The number of votes
entitled to be cast per share of Convertible Preferred Stock shall be adjusted
in inverse proportion to any adjustment in the Conversion Prices.
6.2 Except as otherwise provided herein or by law, the
holders of Convertible Preferred Stock and the holders of Common Stock shall
vote together as one class on all matters submitted to a vote of the
Corporation's stockholders.
6.3 (a) In the event that the quarterly dividends payable
on a series of the Convertible Preferred Stock as provided in Section 3 hereof
are in arrears in an aggregate amount equal to at least six full quarterly
dividends (which need not be consecutive), the number of directors constituting
the Board of Directors of the Corporation shall be increased by one for each
such series so in default and the holders of each series of the Convertible
Preferred Stock as to which dividends are so in default shall have, in addition
to the rights set forth in Sections 6.1, 6.2 and 6.4 hereof, the special right,
voting separately as a single class, to elect one director of the Corporation to
fill such newly created directorship at the next succeeding annual meeting of
stockholders thereafter or at a special meeting of the holders of such series of
the Convertible Preferred Stock called as hereinafter provided, until such right
shall terminate as hereinafter provided.
(b) At any time when the special voting rights provided in
Section 6.3(a) shall have so vested in the holders of a series of the
Convertible Preferred Stock, the Secretary of the Corporation may, and upon the
written request of the holders of 25% or more of the number of shares of such
series of Convertible Preferred Stock then outstanding shall, call a special
meeting of the holders of such series of the Convertible Preferred Stock for the
election of the directors, to be held at the place and upon the notice provided
by law and in the Bylaws for the holding of meetings of stockholders; except
that the Secretary shall not be required to call such a special meeting in the
case of any such request received less than 90 days before the date fixed for
the next annual or other special meeting of stockholders. No such
-7-
<PAGE>
special meeting and no adjournment thereof shall be held on a date less than 30
days before the annual meeting of the stockholders (or a special meeting held in
place thereof) next succeeding the time when the holders of such series of the
Convertible Preferred Stock become entitled to elect directors as provided in
Section 6.3(a). The Corporation shall include, in any notice of such meeting,
any nominee for director who has been proposed by the holders of twenty-five
percent or more of the shares of such series of Convertible Preferred Stock then
outstanding. The directors so elected shall serve until the next annual meeting
or until their respective successors shall be elected and qualify.
(c) At each meeting of stockholders at which the holders of
a series of the Convertible Preferred Stock shall have the right to vote as a
class, as provided in this Section 6.3, the presence in person or by proxy of
the holders of a majority of the total number of shares of such series of the
Convertible Preferred Stock then outstanding shall be necessary and sufficient
to constitute a quorum of such class for such election by such stockholders as a
class. At any such meeting or adjournment thereof:
(i) the absence of a quorum of the holders of a
series of the Convertible Preferred Stock shall not prevent the election of
directors other than those to be elected by the holders of such series of the
Convertible Preferred Stock and the absence of a quorum of the holders of any
other class of stock for the election of such other directors shall not prevent
the election of the directors to be elected by the holders of a series of the
Convertible Preferred Stock; and
(ii) in the absence of either or both such quorums,
the holders of a majority of the shares present in person or by proxy of the
respective class or classes which lack a quorum shall have the power to adjourn
the meeting for the election of directors which they are entitled to elect from
time to time for a period of up to 30 days without notice, other than
announcement at the meeting, until a quorum shall be present.
(d) Each director elected by the holders of a series of the
Convertible Preferred Stock as provided in this Section 6.3 shall hold office
until the annual meeting of stockholders next succeeding his election or until
his successor, if any, is elected by such holders and qualified.
(e) If any vacancy shall occur among the directors elected
by the holders of a series of the Convertible Preferred Stock as provided in
this Section 6.3, such vacancy shall be filled for the unexpired portion of the
term by the vote of the stockholders of such series given at a special meeting
of such stockholders called for that purpose.
(f) Whenever all dividends accrued and unpaid on a series of
the Convertible Preferred Stock shall have been paid, the special right of the
holders of such series of the Convertible Preferred Stock to elect directors as
provided in this Section 6.3 shall terminate, but subject always to the same
provisions for the vesting of such special right of the holders of such series
of the Convertible Preferred Stock to elect directors in the case of future
unpaid dividends as hereinabove provided.
(g) Any director elected by the holders of a series of
Convertible Preferred Stock may be removed by, and shall not be removed
otherwise than by, the vote of the holders of a majority of the outstanding
shares of such series.
(h) Upon any termination of the right of the holders of a
series of the Convertible Preferred Stock to vote for directors as herein
provided, the term of office of all directors then in office elected by holders
of such series shall terminate immediately.
6.4 The consent of the holders of at least a majority of the
outstanding shares of a series of the Convertible Preferred Stock, voting
separately as a single class, in person or by proxy, either
-8-
<PAGE>
in writing without a meeting or at a special or annual meeting of stockholders
called for the purpose, shall be necessary to (i) create or issue any shares of
a class of capital stock ranking, either as to payment of dividends or
distribution of assets, on a parity with or senior to such series of the
Convertible Preferred Stock, (ii) alter or change the preferences, rights,
designations or powers of the shares of such series of Convertible Preferred
Stock as a class, or the provisions of Article FOURTH of the Corporation's
Certificate of Incorporation, in either case so as to affect such holders
adversely, or (iii) increase the total number of authorized shares of
Convertible Preferred Stock.
7. Holders; Notices. The term "holder" or "holders" wherever used
----------------
herein with respect to a holder or holders of shares of Convertible Preferred
Stock shall mean the holder or holders of record of such shares as set forth on
the stock transfer records of the Corporation. Whenever any notice is required
to be given under this Certificate of Designation, such notice may be given
personally or by mail. Any notice given to a holder of any share of Convertible
Preferred Stock shall be sufficient if given to the holder of record of such
share at the last address set forth for such holder on the stock transfer
records of the Corporation. Any notice given by mail shall be deemed to have
been given when deposited in the United States mail with postage thereon
prepaid.
-9-
<PAGE>
IN WITNESS WHEREOF, said Reading Entertainment, Inc. has caused this
Certificate of Designation, Preferences and Rights of Series A Voting Cumulative
Convertible Preferred Stock and Series B Voting Cumulative Convertible Preferred
Stock to be executed by its duly authorized officers this twelfth day of
September, 1996.
READING ENTERTAINMENT, INC.
Attest:
By: /s/ James A. Wunderle By: /s/ S. Craig Tompkins
---------------------------------- ----------------------------
Name: James A. Wunderle Name: S. Craig Tompkins
Title: Chief Operating Officer Title: President
-10-
<PAGE>
EXHIBIT H
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ............... to ...............
Commission file number 1-649
READING COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 23-6000773
(State of incorporation) (I.R.S. Employer Identification No.)
30 South Fifteenth Street
13th Floor
Philadelphia, Pennsylvania 19102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 215-569-3344
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.01 par value
(Title of class)
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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 28, 1996, 4,961,186 shares of Class A Common Stock and 12,218
shares of Common Stock were outstanding and the aggregate market value of voting
stock held by nonaffiliates of the Registrant was approximately $22,799,231.25.
Documents incorporated by reference:
Part III: Portion of proxy statement for 1995 Annual Meeting of Reading
Company shareholders.
<PAGE>
PART I
Item 1. Business
General
The Company was organized under the laws of Pennsylvania in 1833. It
operated the Reading Railroad until April 1, 1976, when substantially all of the
Company's railroad assets were conveyed to Consolidated Rail Corporation
("Conrail").
In 1993, the Company determined to focus its activities on the
"Beyond-the-Home" segment of the entertainment industry, acquiring Theater
Acquisitions of Puerto Rico, Inc. ("TAPR") for a cash purchase price of $22.7
million in mid-1994. At the time of acquisition, TAPR operated six motion
picture exhibition theaters with a total of 36 screens in the Commonwealth of
Puerto Rico. Renamed Cine Vista in 1994, the theater circuit currently consists
of 44 screens in 7 locations with an additional 16 screens under development.
Cine Vista is also in negotiations with respect to several additional theater
locations.
During 1995, the Company initiated theater development activities in
Australia. In November 1995, the Company and Craig Corporation ("Craig"), the
owner of approximately 49.3% of the Company's outstanding capital stock, formed
Reading International Cinemas LLC (referred to herein together with its
Australian subsidiaries as "Reading International"), a limited liability
corporation owned equally by the Company and Craig to exploit opportunities in
Australia. Reading International has acquired a 43 acre site in Melbourne, New
South Wales and is currently seeking permits for the developments of a 24 screen
multiplex cinema on this site. Reading International is also currently in
negotiations with respect to several additional locations.
The Company also currently owns approximately 27 parcels of real estate
located primarily in Pennsylvania and is a participant in two real estate joint
ventures in center city Philadelphia.
Description of Business
The Company also has been liquidating certain of its assets since its
emergence from bankruptcy in 1981. By late 1993, the various operating
businesses owned by the Company had been sold.
In late 1993, following a review of investment opportunities in a number
of industries, the Company determined to focus on acquiring or developing
businesses in the "Beyond-the-Home" segment of the entertainment industry. The
Company entered into two other development projects in the "Beyond-the-Home"
segment of the entertainment industry in 1993 and early 1994: a joint venture
project with Pacific Theatres ("Pacific") to develop multiplex cinemas in
California and Hawaii ("PRT") and a project to develop a theme park based on the
Wizard of Oz in Kansas (the "Oz Project"). Effective July 1, 1994, the Company
acquired Cine Vista for a cash purchase price of $22.7 million, inclusive of
$323,000 of acquisition expenses. Cine Vista operates 7 motion picture theaters
in Puerto Rico. With the acquisition of Cine Vista, the development of internal
operating capabilities, and the focusing of the Company's attention on foreign
exhibition opportunities, the Company determined to terminate PRT and to make no
additional financial commitments to the Oz Project. The Company continues to
seek acquisitions and development opportunities in the "Beyond-the-Home" segment
of the entertainment industry, but is currently emphasizing cinema exhibition
opportunities. During 1995, the Company initiated theater development activities
in Australia. In November 1995, the Company and Craig formed Reading
International, a limited liability corporation owned equally by the Company and
Craig, to exploit opportunities in Australia.
The Company's real estate activities include the sale or development of
certain center city Philadelphia property, the sale of parcels outside center
city and participation in two real estate joint ventures. Proceeds from the
Company's real estate activities and sales of operating businesses, to the
extent not needed to fund the Company's real estate operations, development and
acquisition activities or to reduce indebtedness, have been held in readily
marketable securities issued by the United States Treasury and federal agency
securities, with the intent of preserving capital until needed in accordance
with the Company's business plan to develop or acquire
2
<PAGE>
operating businesses. The Company attempts to avoid investment risk to the
maximum extent practicable by holding federal agency securities and United
States Treasury obligations with maturities consistent with presently
anticipated cash requirements.
Cine Vista
- ----------
Cine Vista operates motion picture exhibition theaters in seven leased
locations in Puerto Rico. Cine Vista currently has 16 screens under development
in two locations, including a ten screen complex to replace an existing six
screen facility. Cine Vista is also involved in negotiations for additional
theater sites in Puerto Rico. While no assurances can be given, the Company
anticipates a net increase of at least 12 screens over the next 24 months. Cine
Vista continues to seek additional sites for the development of multiscreen
movie theaters in Puerto Rico.
All of Cine Vista's theaters are modern multiscreen facilities.
Number of
Existing Theaters Location Screens
----------------- -------- -------
Plaza de las Americas Mall San Juan 10
El Senorial Shopping Center San Juan 4
Cinema Centro Bayamon * 6
Plaza del Norte Shopping Center Hatillo 6
Mayaguez Mall 1 Hormigueros ** 6
Cayey Shopping Center Cayey 4
Plaza Palma Real Humacao 8
Under Development
-----------------
Mayaguez Shopping Center Mayaguez 6
Mayaguez Mall 1 Hormigueros ** 10
* San Juan metropolitan area
** Mayaguez metropolitan area
1 Cine Vista is negotiating to demolish the building housing four of the
existing six screens at the Mayaguez Mall and build a 10-plex on the
site. After completion of the 10-plex, the remaining two screens at the
Mayaguez Mall would be returned to the landlord.
Puerto Rico is a self-governing Commonwealth of the United States with a
population of approximately 3.8 million people. The Commonwealth exercises
control over internal affairs similar to states; however, the relationship with
the United States Federal Government is different than that of a state.
Residents of Puerto Rico are citizens of the United States but do not vote in
national elections and, with certain exceptions, do not pay federal income
taxes. Income taxes are paid instead under a system established by the
Commonwealth. In recent years there have been two major views concerning the
future relationship with the United States Government, one favoring statehood
and the other favoring continuation of commonwealth status. In 1993, Puerto Rico
voters were asked in a plebiscite to express their preference for statehood
(48.4%), commonwealth status (46.2%) or independence (4.4%). The United States
mainland is Puerto Rico's largest trading partner.
During the last four years, the Commonwealth has undergone significant
retail shopping center development during which period the number of multiplex
theaters has increased substantially. With approximately one screen per 24,000
of population, versus approximately one screen per 10,000 in the mainland United
States, the Company believes that Cine Vista has an opportunity to expand its
operations through the development of new multiplex theaters and improvement of
its existing operations.
3
<PAGE>
Cine Vista derives approximately 70% of its revenues from box office
receipts. Ticket prices vary by location, and provide for reduced rates for
senior citizens and children. Box office receipts are reported net of a 10%
excise tax imposed by the Commonwealth. Show times and features are placed in
advertisements in local newspapers with the costs of such advertisements paid by
Cine Vista. Film distributors may supplementally advertise certain feature films
with the costs generally paid by distributors.
Concession sales account for approximately 25% of total revenues.
Concession products primarily include popcorn, candy, and soda. Cine Vista has
implemented training programs and incentive programs and experiments with
product mix changes in order to increase the amount and frequency of concession
purchases by theater patrons.
Screen advertising revenues contribute approximately 4% of total revenues.
Cine Vista has agreements with a major soft-drink bottler and an independent
advertising production company to show advertisements on theater screens prior
to feature film showings. Other sources of revenue include revenues from theater
rentals for meetings, conferences, special film exhibitions and vending and
video machine receipts or rentals.
Films are licensed under agreements with major film distributors and
several local distributors specializing in films of special interest to the
Commonwealth. Commonwealth regulations generally require that film exhibitors be
provided with an opportunity to view films prior to submitting bids, that film
distributors provide advance notice of films which will be provided to the
market, and are generally designed to preclude anticompetitive practices. Films
are licensed on a film-by-film, theater-by-theater basis. Generally, film
payment terms provide for payment to film distributors under a percentage of
gross box office receipts formula or an adjusted gross receipts formula. Under
the gross receipts formula, the film distributor receives a specified percentage
of the gross box office receipts. Ordinarily, the percentage will decline from a
range of 60-70% in the first playweek to a low of 30% after 4-5 weeks. Under an
adjusted gross receipts formula, the film distributor receives a specified
percentage (usually 90%) of the box office receipts over the "House Allowance,"
a negotiated allowance for theater expenses.
Cine Vista licenses film from substantially all of the major United States
studios and is not dependent upon any one film distributor for all of its
products. However, in the event the Company was unable to license film from a
major studio, such lack of supply could have a material effect upon Cine Vista's
business. Cine Vista believes that the popularity of the Puerto Rico exhibition
market and the Commonwealth rules governing film licensing make such a situation
unlikely. In 1995, films licensed from Cine Vista's 4 largest film suppliers
accounted for approximately 65% of Cine Vista's box office revenues.
Competition - The Company believes there are approximately 30 first-run
-----------
movie theaters in daily operation with approximately 156 screens in Puerto Rico.
Based upon number of screens, box office revenues and number of theaters, Cine
Vista is the second largest exhibitor in the Commonwealth. The three largest
exhibitors are believed to account for over 98% of the box office revenues
recorded in 1995 by theaters in daily operation. Competition among the theater
exhibitors exists not only for theater patrons within certain geographic areas,
but also for the licensing of films and the development of new theater sites.
The number of sites suitable for multiplex cinema is limited. Competitors of
Cine Vista are expected to open competitive theaters with approximately 30
screens during the next twelve months, certain of which are in locations
competitive with those of Cine Vista's. It is likely that these new theaters
will attract business that would otherwise have gone to theaters owned by Cine
Vista.
Seasonality - Most major films are released to coincide with the summer
-----------
months, when schools are closed, or the winter holiday seasons. Accordingly,
Cine Vista has historically recorded greater revenues and earnings during the
second half of the calendar year.
Reading International LLC
- -------------------------
In November 1995, the Company and Craig formed Reading International to
develop and operate multiplex cinemas in Australia. Reading and Craig each
committed to make an initial contribution of $5 million on an as needed basis
for an aggregate initial capitalization of $10 million. The provisions of the
agreement which governs the activities of Reading International provide, among
other things, that each party will have preemptive rights with
4
<PAGE>
respect to the provision of future capital and rights of first refusal regarding
any proposed disposition of the other's interest in Reading International.
Reading International has retained the services of several key executive
employees resident in Australia to assist in the implementation of its plan to
be a major participant in the Australian market for multiplex theaters. A site
has been acquired in Melbourne, Australia, on which the Company intends to
develop a 24 screen multiplex theater, subject to obtaining the necessary
governmental land use entitlements and approvals. The contracts with respect to
that site provide for a total purchase price of approximately $6.5 million. In
addition, corporate joint venture agreements between Reading International and
an existing owner and operator of cinemas in Australia are currently being
negotiated with respect to the development and management of certain additional
cinema sites. Reading International is also in negotiation with several
developers and landlords with respect to other potential locations.
On March 29, 1996, the Company and Craig entered into a capital funding
agreement (the "Capital Funding Agreement") with respect to Reading
International pursuant to which they agreed to increase the capital committed by
the Company and Craig to Reading International from $10 million to approximately
$103 million through a combination of cash contributions and secured capital
funding undertakings. Under the terms of the Capital Funding Agreement, the
Company and Craig each agreed to immediately contribute to Reading International
$12,500,000 in cash, for an aggregate $25,000,000. In addition, the Company and
Craig have undertaken to contribute up to an additional $37,500,000 each, for an
aggregate future commitment of $75,000,000 on an as needed basis. The
commitments of the Company and Craig are secured by various assets of the two
parties. The collateral pledged by Craig was reviewed by an independent
committee of the Company's Board of Directors comprised of outside directors who
are unaffiliated with Craig, and found to be adequate.
Although the Company believes that there are significant opportunities for
multiplex cinema development in Australia, several substantial and well
capitalized competitors are already well established and active in this market.
Accordingly, although Reading International believes that it has retained
talented and experienced senior executives to lead its operations in Australia,
no assurance can be given that Reading International will be able to
successfully develop sites or to compete successfully in this market. Reading
International activities in this market are currently entirely developmental in
nature.
Other Acquisition and Development Activities
- --------------------------------------------
On November 8, 1995, the Company, for a price of $1,285,000, acquired from
a major bank a judgement encumbering, among other things, a controlling interest
in a Company which owns a Manhattan multiplex theater. The judgement has been
acquired as part of the Company's plan to acquire, in conjunction with
Manhattan-based City Cinemas Corp. ("City Cinemas"), all or at least a
controlling interest in this multiplex theater. James J. Cotter, Chairman of the
Company, has an ownership interest in City Cinemas. The Company has also
acquired options to obtain shares representing 5/13ths of the voting power of
the company owning the multiplex theater and to obtain certain other creditor
claims against that company. No assurance can be given that the Company's plan
to acquire the theater will ultimately prove successful.
In January 1994, the Company and an affiliate of Pacific formed PRT as a
California general partnership in order to fund the development of new multiplex
theaters to be built and managed by Pacific in California and Hawaii. In early
1995, the Company and Pacific dissolved PRT in order to permit the Company to
focus on international theater exhibition opportunities and its expansion of
Cine Vista.
The Company loaned Oz Resorts and Entertainment, Inc. ("OREI") a total of
$795,000 in late 1993 and early 1994. The loans were made as part of a
transaction intended to result in the acquisition by the Company of a
controlling interest in OREI, which owns the rights to the Oz Project, a planned
destination theme park, hotel and golf complex in Kansas City, Kansas. In May
1994, the Company entered into an agreement with OREI which provided the Company
with a right, but no obligation, to participate in future debt or equity
offerings by OREI. The Company elected to write off the $795,000 loan to OREI
during 1994 due to the developmental nature of the project. As a result of the
Company's acquisition of Cine Vista and its decision to explore international
theater
5
<PAGE>
exhibition opportunities, the Company has determined not to enter into
further financial commitments with respect to the Oz Project.
Real Estate
- -----------
The Company's real estate activities include the managed sale of certain
of its real properties, the possible future development of certain center city
Philadelphia properties and participation in two real estate joint ventures.
The Company owns property in the Market Street East area which is situated
at the hub of center city Philadelphia. Company-owned holdings in Market Street
East include several parcels leased to a parking lot operator near the site of
the Pennsylvania Convention Center, which total approximately .67 acres. See
"Properties."
In addition to its properties in center city Philadelphia, the Company
also owns a viaduct, a raised structure which was used to carry trains (the
"Viaduct"), north of Vine Street to Fairmount Avenue and adjacent parcels which
collectively total approximately 6.75 acres. The Company also owns approximately
23 parcels and other properties, including rights-of-way, located primarily in
eastern Pennsylvania totaling approximately 425 acres. The Company is a
participant in two real estate joint ventures, Parametric Garage Associates and
S.R. Developers. See "Properties."
Employees
- ---------
Cine Vista employment is seasonal with the number of employees ranging
from approximately 165 to 220 depending upon the time of the year. Approximately
15 projectionists are covered by a collective bargaining agreement which expires
in May 1997. In late 1993, certain part-time employees voted to be represented
by a collective bargaining unit. Approximately 80 employees would be covered by
the collective bargaining agreement. To date, no agreement has been signed
between the union representing the employees and Cine Vista.
Reading International employs eight people on a full-time or substantially
full time basis. In addition to Cine Vista employees and Reading International
employees, the Company has ten full-time employees and two part-time employees.
Classes of Common Stock
- -----------------------
As of December 31, 1995, the Company had available approximately $163
million in tax loss carryforwards. In order to preserve these carryforwards, the
Company in 1989 in essence replaced its Common Stock with a new issue of Class A
Common Stock. Substantially all of the Company's outstanding capital stock is
now comprised of Class A Common Stock, which limits the ability of a holder
thereof to acquire more than 4.75% of the Company's outstanding capital stock
unless waived by the Board of Directors of the Company. The Board of Directors
has waived certain restrictions on the transfer of Class A Common Stock in order
to permit Craig to acquire up to approximately 49.9% of the Company's
outstanding capital shares and an unrelated investment partnership to acquire up
to 7%. Craig currently owns approximately 49.3% of the Company's outstanding
capital shares and the investment partnership owns approximately 5.4%.
Subsequent Event
- ----------------
On March 29, 1996 the (Company purchased from Craig 1,564,473 shares of
the common stock, par value $.01 per share, of Citadel Holding Corporation
("Citadel" and the "Citadel Common Stock", respectively) for an aggregate
purchase price of $3,324,505, representing slightly less than $2.125 per share.
The closing price of Citadel Common Stock on the American Stock Exchange on
March 28, 1996 was $2.25 per share. The Company paid Craig for the Citadel
Common Stock with a five year, unsecured promissory note which provides for the
payment of interest at a rate equal to the London Interbank Offered Rate
("LIBOR") plus 2.25%. The Company also acquired from Craig a one year option to
acquire 1,329,114 shares of the 3% Cumulative Voting Convertible Preferred
Stock, stated value $3.95 per share of Citadel (the "Citadel Preferred Stock")
and an option to acquire a warrant to acquire 666,000 shares of Citadel Common
Stock (the "Warrant").
6
<PAGE>
The option to acquire the Citadel Preferred Stock (the "Preferred Share
Option") will be exercisable commencing on the later to occur of July 1, 1996 or
ten business days after the date of the next Citadel Annual Meeting of
Stockholders. The Preferred Share Option is exercisable for a period of twelve
months at an exercise price equal to the fair market value of the Citadel
Preferred Stock as determined by an investment banking firm to be mutually
agreed upon or, if the Company determines to proceed with a transaction or
series of transactions pursuant to which the Company acquires sufficient
additional shares of Citadel Common Stock to permit the consolidation of the
Company and Citadel for Federal income tax purposes (an "Acquisition
Transaction") the exercise price shall be in the amount and form of the price
paid by the Company to an unrelated stockholder pursuant to such Acquisition
Transaction. In all other cases the exercise price for the Preferred Share
Option is payable by delivery by the Company of its promissory note having the
same terms (including due date) of the note issued by the Company to acquire the
Citadel Common Stock. The Company paid an option fee of $50,000 in cash upon
acquisition of the Preferred Share Option, which will be credited against the
Preferred Share Option exercise price if exercised. The Company may extend the
exercise period for the Preferred Share Option for an additional 12 months by
paying an additional option fee of $50,000 prior to expiration of the original
12-month option period, which additional $50,000 will also be credited against
the option exercise price, if exercised.
The option to acquire the Warrant (the "Warrant Option") is exercisable if
the Company determines to proceed with an Acquisition Transaction and remains
exercisable for a period of twelve months, provided that any closing on the
exercise of the Warrant Option is conditioned upon consummation of an
Acquisition Transaction. No separate consideration was paid by the Company for
the grant of the Warrant Option. The Warrant Option exercise price will be the
price per share paid to an unrelated Citadel stockholder in an Acquisition
Transaction less $3.00 (the exercise price of the Warrant); provided, however,
that if Craig exercises the Warrant prior to exercise of the Warrant Option, the
Warrant Option shall become an option to purchase the Citadel Common Stock
issued on exercise of the Warrant for an option price equal to the full price
paid to an unrelated Citadel stockholder in an Acquisition Transaction.
If the Company determines to proceed with an Acquisition Transaction,
Craig has the right under the agreement to require the Company to purchase the
Preferred Shares and the Warrant (or Common Stock issued on exercise of the
Warrant) on the same terms as if the Company had exercised the Preferred Share
Option and the Warrant Option.
The transaction was separately reviewed, negotiated and approved by a
special committee composed of the independent directors of the Board of
Directors.
7
<PAGE>
Item 2. Properties
Center City Philadelphia Properties
- -----------------------------------
The Company's properties in center city Philadelphia, all of which are
owned in fee, consist of several parcels of land aggregating approximately .67
acres located near or adjacent to the site of the Convention Center currently
leased to a parking lot operator, the Viaduct north of Vine Street to Fairmount
Avenue and adjacent parcels, comprising approximately 6.75 acres, and properties
owned by partnerships in which the Company has interests. In 1993, the Company
sold the Reading Terminal Headhouse, a vacant nine-story building located at
12th and Market Streets containing approximately 196,000 gross rentable square
feet, and received gross proceeds of approximately $4.3 million. A center city
Philadelphia parcel, totaling .28 acres, was sold in March 1994 generating
gross proceeds of approximately $550,000.
Partnership Properties
- ----------------------
S.R. Developers: A subsidiary of the Company is a general partner in S.R.
---------------
Developers, a partnership which owns one property in center city
Philadelphia.
Parametric Garage Associates: A subsidiary of the Company is a general
----------------------------
partner in Parametric Garage Associates, a partnership which owns the
750-car Gallery II Parking Garage (the "Garage"). The Garage is adjacent
to the Pennsylvania Convention Center Complex. The Company has primary
responsibility for the leasing and management of 19,000 gross rentable
square feet of retail space on the ground level of the Garage pursuant to
a management agreement and provides certain other management services to
the partnership.
Other Domestic Real Estate
- --------------------------
When the Company's railroad assets were conveyed to Conrail, the Company
retained fee ownership of approximately 650 parcels of real estate located
throughout Pennsylvania, Delaware, and New Jersey. In addition, the Company
retained portions of 52 abandoned rights-of-way with about 200 more parcels
abutting these rights-of-way. Approximately 23 parcels and rights-of-way located
outside of center city Philadelphia are still owned by the Company. The parcels
consist primarily of vacant land and buildings, some of which are leased.
Cine Vista Properties
- ---------------------
All of Cine Vista's real properties are leased. The seven theaters are
leased pursuant to long-term leases with remaining terms and renewal options
ranging from 12 to 38 years. Cine Vista has executed an additional theater
lease, which lease term commences with occupancy, expected in late 1996. The
landlord of one of Cine Vista's theaters has the right to terminate the lease
relating to space presently housing two theaters, subject to six months' notice.
All of Cine Vista's theater leases provide for the payment of minimum fixed
rental payments and, in certain cases, may require additional payments based
upon a percentage of theater revenues. Cine Vista also leases approximately
6,100 square feet of warehouse space and 2,200 square feet of office space.
Reading International Properties
- --------------------------------
Reading International maintains leased offices in Melbourne and Sydney,
Australia pursuant to short term leases. The total space leased is approximately
2,300 square feet. In December 1995, Reading International acquired a site of
approximately 43 acres in a suburban area outside of Melbourne. Reading
International has also entered into a purchase agreement to acquire an
additional six acres adjacent to the acquired site. Reading International
intends to build a 24 screen multiplex theater on this site and is in the
process of securing necessary permits to permit such development. No assurances
can be given that the Company will be successful in this development effort.
Reading International is also aggressively pursuing other locations in and about
Sydney and Melbourne and elsewhere in Australia upon which it may develop
theater operations. It has made several refundable deposits related to lease
and purchase proposals.
8
<PAGE>
Item 3. Legal Proceedings
Reading Railroad Employee Health Claims
- ---------------------------------------
The Company is a defendant in actions instituted in the United States
District Court for the Eastern District of Pennsylvania or the [Pennsylvania
State] Court of Common Pleas by or on behalf of persons who had been employed by
the Reading Railroad prior to its reorganization under the federal bankruptcy
laws in 1980. In general, these actions also name Conrail, which acquired
substantially all of Reading's railroad assets in connection with the Company's
reorganization, as a defendant. Approximately 115 plaintiffs seek damages under
the Federal Employers Liability Act ("FELA") in varying amounts for illnesses or
death allegedly caused by exposure to asbestos fibers while employed by the
Reading Railroad and, in some cases, by Conrail. Approximately 122 plaintiffs in
pending actions seek damages in varying amounts for alleged impaired hearing
suffered while employed by the Reading Railroad prior to its reorganization and,
in some cases, by Conrail. The underlying actions are proceeding to trial.
The eventual outcome of the above-described litigation cannot be predicted
at this time, and the Company's liability, if any, cannot be accurately
determined. However, during 1990, the Company and its insurance carriers entered
into an agreement (the "Settlement Agreement") which provided the Company with
reimbursement for prior payments made to claimants in certain personal injury
actions and which provides for the Company to receive reimbursement of amounts
expended in conjunction with the matters described above or, if the Company
elects, to receive reimbursement from the parties to the Settlement Agreement
prior to expenditures. Three participants in the insurance settlement are
insolvent. Unreimbursed claims by these three carriers have totaled $61,000. The
Company believes that it may be entitled to reimbursement of such amounts from
the other parties to the Settlement Agreement and may file for an arbitration
hearing on such matters. The Company believes that the amounts available under
the Settlement Agreement are sufficient to prevent the above-described
litigation from having a materially adverse effect on the financial position,
results of operations, or liquidity of the Company.
Cine Vista
- ----------
A landlord of Cine Vista has alleged that Cine Vista underpaid rent by
approximately $480,000 for the thirty month period ended December 31, 1995. The
Company is contesting the landlord's claim and believes the claim to be without
merit. If the landlord were to prevail in its assertion, the Company is
indemnified by TALP for the amount due at June 30, 1994 ($180,000) and the
Company believes it would be entitled to a reduction in the purchase price of
TAPR relating not only to the 18 months ended December 31, 1995 but also
relating to the 17 1/2 future years under the lease. Such purchase price
reduction would be funded, in part, from the proceeds of the TAPR purchase
escrow.
Environmental Litigation
McAdoo Site
- -----------
The Company is one of approximately 63 private parties (the "Settlors")
which in 1988 signed a consent decree (the "1988 Consent Decree") to perform a
remedial action (the "RA") on a Superfund site located on land owned largely by
the Company in McAdoo, Pennsylvania ("McAdoo"). Apart from future operation and
maintenance ("O&M") expenses, the entire RA is complete. Under the 1988 Consent
Decree, a portion of the costs the Settlors incurred to perform the RA before
O&M is reimbursable from the Hazardous Substance Superfund (the "Fund"). In
1992, the Settlors submitted to the Fund a claim for reimbursement of such
pre-O&M expenses (the "Claim").
To protect their right to seek contribution towards O&M from certain
potentially responsible parties ("PRPs") who had refused to join in the 1988
Consent Decree (the "Non-Settlors"), the Settlors in 1992 attempted to intervene
in the attempted settlement of the federal civil action which the United States
had instituted against the Non-Settlors (the "Non-Settlors Litigation"). An
agreement in principle to settle the Non-Settlors Litigation (the "Tentative
Settlement") has now been reached and is being documented by the United States.
The Company anticipates that the Settlors will approve the Tentative Settlement.
9
<PAGE>
Under the Tentative Settlement, the Settlors would withdraw the Claim and
instead recover most of the reimbursement sought thereby from funds which the
Non-Settlors had deposited, before the Settlors attempted intervention, into a
court registry to settle the Non-Settlors Litigation. The amount recovered by
the Settlors from the court registry, along with an additional amount newly
contributed by the Non-Settlors, would be dedicated to performing the remaining
O&M at McAdoo and would also be used to perform certain additional ground water
monitoring sought by the United States. The Company has been advised that, in
the likely event that the Tentative Settlement is finalized, it is unlikely that
any additional amounts will be required to meet any of the Settlors' obligations
under either the 1988 Consent Decree or the Tentative Settlement. Any amounts
which might be so required would not be material.
Douglassville Site
- ------------------
Reading Company ("Reading") and a wholly-owned subsidiary, Reading
Transportation Company ("RTC"), have each been advised by the Environmental
Protection Agency ("EPA") that they are PRPs under environmental laws including
Federal Superfund legislation ("Superfund") for a site located in Douglassville,
Pennsylvania. The EPA issued an Administrative Order under Superfund against 34
PRPs requiring, among other things, that the named parties be required to
incinerate materials at the site pursuant to a June 30, 1989 Record of Decision
("ROD"). The ROD estimated that the incineration would cost approximately $53
million. Thirty-six PRPs were also named in a civil action brought by the United
States which seeks to recover alleged costs incurred at the site by the United
States of approximately $22 million. Reading and RTC have each been named in a
third-party action instituted by the majority of the 36 PRPs sued by the United
States. The actions instituted against the Company and approximately 300 PRPs
seek to have the parties contribute to reimbursement for past costs and any
costs associated with further remediation at the site.
On September 14, 1995, the federal district court judge who presided over
Reading's reorganization ruled that all liability asserted against Reading
relating to the site was discharged pursuant to the consummation order issued in
conjunction with the Company's amended plan of reorganization on December 31,
1980. The United States Department of Justice and a named defendant in the above
described Administrative Order have filed appeals of the decision. The judge's
decision did not affect the potential liability of RTC for the site. RTC has no
assets and therefore cannot fund a settlement or judgement relating to this
matter and the Company believes that the potential liability of RTC, if any, is
not in excess of $300,000. Based upon the appeal and possible alternate attempts
by the PRPs to obtain Reading's participation in funding for the site as well as
the existence of the other environmental matters set forth below, the Company
has not reduced its provision for these matters, which totals $1.2 million.
Reading Terminal Train Shed Litigation
- --------------------------------------
In 1991, the Company filed a lawsuit in the United States District Court
for the Eastern District of Pennsylvania against the Southeastern Pennsylvania
Transportation Authority ("SEPTA"), Conrail, the City of Philadelphia and other
parties which sought to recover a portion of the approximately $9 million
expended by the Company in conjunction with the cleanup of polychlorinated
biphenyls ("PCBs") in the Reading Terminal Train Shed and a portion of the
viaduct south of Vine Street. The action also sought a declaratory judgement as
to future costs which could be incurred in cleaning up the remaining portions of
the Viaduct. In January 1995, the parties agreed in principle to settle the
claim for approximately $2.35 million which amount the Company anticipates
receiving during 1996. The defendants have also agreed to pay an amount ranging
from 52% to 55% of costs incurred by the Company, if any, relating to possible
PCB contamination on the Viaduct.
Atlantic City Site
- ------------------
During 1995, the Company settled an action seeking the recovery of
$3,800,000 of alleged environmental cleanup costs from five defendants under
various provisions of New Jersey law for $235,000 which approximates the amount
previously accrued by the Company to provide for its share of the liability.
10
<PAGE>
Other Environmental
- -------------------
The Company removed six underground storage tanks at a site owned by the
Company in 1991 and in conjunction with such activities submitted an
environmental assessment of the site to the Pennsylvania Department of
Environmental Protection ("DEP"). DEP has advised the Company that no further
action is required at the site. With the advance knowledge and consent of DEP,
the Company extinguished a fire at a Company-owned site which had been used as a
landfill by the Reading Railroad. The Company neither anticipates nor faces any
administrative action against it by DEP concerning the site.
The Company believes that the Viaduct may be contaminated by PCBs resulting
from former railroad operations on that property conducted by or on behalf of
the Reading Railroad, Conrail, the City of Philadelphia or SEPTA. The Company
has advised the EPA of the potential contamination. The Company has not
determined the scope or extent of any such PCB contamination. However, the
Company has been advised by counsel that, given the lack of regulatory attention
to the Viaduct in the eleven years which have elapsed since EPA was notified of
the likelihood of contamination, it is unlikely that the Company will be
required to decontaminate the Viaduct or incur costs related thereto. In the
event that the Company was required to incur expenditures to remove PCB
contamination on the Viaduct, under terms of the settlement described above,
Conrail, the City of Philadelphia and SEPTA would be required to fund 52% to 55%
of such costs.
Prior to the Company's reorganization, the Company had extensive railroad
and related operations. Such operations may have contributed to environmental
contamination of properties now owned by the Company, previously sold or leased
by the Company, or to which the Company, prior to its reorganization, sent
waste. The ultimate extent of liabilities, if any, with respect to such matters,
as well as the timing of cash disbursements, if any, cannot be determined.
However, management is of the opinion, based on the information currently
available to it, that while the ultimate liability resulting from such matters
could have a material effect upon the results of operations in a given year,
they will not have a material adverse effect upon the Company's financial
position or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
11
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
---- --- --------
James J. Cotter 57 Chairman of the Board of Directors
S. Craig Tompkins 45 President and Director
Robert F. Smerling 61 Chief Executive Officer,
Domestic and Puerto Rico Cinema Operations,
Reading Cinemas and Cine Vista
John Rochester 52 Chief Executive Officer, Australian Cinemas
Operations and Reading Australia Pty Ltd.
James A. Wunderle 43 Executive Vice President, Chief Operating
Officer, Treasurer and Chief Financial
Officer
Charles S. Groshon 42 Vice President
Eileen M. Mahady 30 Controller
Mr. Cotter has been Chairman of the Board of Directors since December
1991, Chairman of the Company's Executive Committee since March 1993 and a
director since September 1990. Mr. Cotter has been Chairman of the Board of
Craig since 1988 and a director since 1985. Mr. Cotter has been a director and
the Chairman of the Board of Citadel Holding Corporation ("Citadel") since 1991.
From October 1991 to June 1993, Mr. Cotter also served as the acting Chairman of
Citadel's wholly-owned subsidiary, Fidelity Federal Bank, FSB ("Fidelity"), and
served as a director of Fidelity until December 1994. Mr. Cotter has been a
director and Chief Executive Officer of Townhouse Cinemas Corporation (motion
picture exhibition) since 1987, Executive Vice President and a director of The
Decurion Corporation (motion picture exhibition) since 1969 and a director of
Stater Bros. Holdings, Inc. (retail grocery chain) and its predecessors since
1987. From 1988 through January 1993, Mr. Cotter also served as the President
and a director of Cecelia Packing Corporation (a citrus grower and packer), a
company wholly owned by Mr. Cotter. Mr. Cotter is also a director and Executive
Vice President of Pacific, a wholly-owned subsidiary of Decurion.
Mr. Tompkins has been President and a director of the Company since March
1994. Mr. Tompkins is also President and a director of Craig and has served in
such positions since March 1, 1994. Prior thereto, Mr. Tompkins was a partner in
the law firm of Gibson, Dunn & Crutcher for more than five years. Mr. Tompkins
has been a director of Citadel since May 1994 and a director of G&L Realty
Corp., a New York Stock Exchange listed REIT (Real Estate Investment
Trust), since December 1994. He serves as the Vice Chairman of Reading Cinemas
and Managing Director of Reading International.
Mr. Smerling has been President of Reading Cinemas, Inc. since November
1994. Mr. Smerling also serves as the President of Cine Vista and the Chief
Executive Officer of Reading International. Mr. Smerling served as president of
Loews Theater Management Corporation, a subsidiary of Sony Corporation, from May
1990 until November 1994. Mr. Smerling also serves as President and Chief
Executive Officer of City Cinemas, a motion picture exhibitor located in
New York City, New York. City Cinemas is an affiliate of James J. Cotter and has
entered into an Executive Sharing Agreement with the Company with respect to the
services of Mr. Smerling.
Mr. Rochester has been Chief Executive Officer of the Australian Cinemas
Operations since November 1995. From 1990 through 1995, Mr. Rochester was the
Managing Director of Television & Media Services Ltd. (formerly Hoyts
Entertainment Ltd.). He also served in several other executive offices for that
organization since 1987.
12
<PAGE>
Mr. Wunderle has been Chief Operating Officer since February 1990 and
Executive Vice President, Treasurer, and Chief Financial Officer since December
1988. He was Vice President of Finance, Chief Financial Officer and Treasurer
from January 1987 to December 1988.
Mr. Groshon has been Vice President of the Company since December 1988. He
was an internal auditor with the Company from August 1984 until December 1988,
and a staff accountant prior thereto.
Ms. Mahady has been Controller of the Company since April 1990. Prior to
joining the Company, she was a senior auditor with Ernst & Young. Ms. Mahady is
a Certified Public Accountant.
13
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Common Stock Summary
- --------------------
The following table sets forth the high and low prices of the Company's
Class A Common Stock from January 1, 1994 through December 31, 1995, as reported
on the National Market System of the National Association of Securities Dealers,
Inc. ("NASDAQ"). The Company's Common Stock trades infrequently on the
over-the-counter "pink sheet" market. Historical bid/asked data is insufficient
to provide high and low price information on the Company's Common Stock during
1994 and 1995. No cash dividends have been paid on either class of the Company's
common stock during any of the periods indicated. Management does not intend to
authorize the payment of dividends in the foreseeable future.
1995
Quarter 1st 2nd 3rd 4th
------- --- --- --- ---
High 11 1/2 11 1/8 10 3/16 9 1/2
Low 9 5/8 9 7/8 9 8 1/2
1994
Quarter 1st 2nd 3rd 4th
------- --- --- --- ---
High 11 3/4 10 1/2 11 1/8 11 1/2
Low 9 7/8 9 1/2 9 3/4 11
On March 28, 1996, the high, low, and closing prices of the Company's
Class A Common Stock were $10.81, $10.63 and $10.63, respectively. On March 28,
1996, there were approximately 1,200 shareholders of record of the Company's
Class A Common Stock and approximately 350 shareholders of record of the
Company's Common Stock, which amounts do not include individual participants in
security position listings.
14
<PAGE>
Item 6. Selected Financial Data
The following table sets forth certain historical consolidated financial
information for the Company. This table is based on, and should be read in
conjunction with, the Consolidated Financial Statements included elsewhere
herein and the related notes thereto.
(in thousands, except per share information)
<TABLE>
<CAPTION>
Year ended December 31, 1995/(1)/ 1994/(1)/ 1993 1992 1991
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $19,973 $10,990 $3,509 $4,505 $6,188
Income (loss) before cumulative
effect of accounting change 2,351 (1,652) (520) (3,424) 1,982
Cumulative effect of accounting
change 0 0 132 0 0
- ----------------------------------------------------------------------------------------
Net income (loss) $2,351 ($1,652) ($388) ($3,424) $1,982
========================================================================================
Per share information:
Income (loss) before cumulative
effect of accounting change $0.47 ($0.33) ($0.11) ($0.69) $0.40
Cumulative effect of accounting
change 0 0 0.03 0 0
- ----------------------------------------------------------------------------------------
Net income (loss) per share $0.47 ($0.33) ($0.08) ($0.69) $0.40
========================================================================================
- ----------------------------------------------------------------------------------------
December 31, 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------
Total assets $75,544 $72,716 $70,121 $71,509 $76,272
Shareholders' equity $68,712 $66,086 $68,026 $68,416 $71,841
========================================================================================
</TABLE>
/(1)/ Results of operations of Cine Vista have been included since its
acquisition effective July 1, 1994.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Due to the nature of the Company's historical business activities, the
Company's revenues and earnings have varied significantly reflecting the results
of real estate and other asset sales. In addition, the operating results of Cine
Vista are only included in the consolidated operating results of the Company
since July 1, 1994 (see Note 2 to the Consolidated Financial Statements
contained elsewhere herein and "Item 1. Business"). Accordingly, year-to-year
comparisons of operating results will not be indicative of future financial
results.
Revenues:
- --------
Revenues increased to $19,973,000 in 1995 from $10,990,000 in 1994 and
$3,509,000 in 1993 due largely to the inclusion of $14,991,000 and $8,100,000 in
revenue from Cine Vista for the year and six months ended December 31, 1995 and
December 31, 1994, respectively. Cine Vista's business is seasonal and the
second six months of the year have historically provided more than a
proportionate share of annual revenue.
"Real estate" revenues include gains and losses from real estate sales,
rental income and real estate development activities. "Real estate" revenues
decreased to $272,000 in 1995 from $697,000 in 1994 and $533,000 in 1993 due in
part to fewer sales of the Company's remaining real estate parcels. Real estate
revenues included
15
<PAGE>
$179,000 in 1994 representing the Company's share of fire
insurance proceeds from the S.R. Developers joint venture and in 1993 included
$294,000 relating to the Rutherford Industrial Center joint venture as well as a
$151,000 loss from the sale of the Reading Terminal Headhouse (gross proceeds
received from the sale totaled $4,300,000). The Company has approximately 23
parcels and rights-of-way located outside of center city Philadelphia, all of
which are for sale, and several properties in center city Philadelphia which it
may sell or develop. Other than the parcels located in center city Philadelphia,
the size and location of the remaining properties limit their salability.
Accordingly, the Company believes that future proceeds from sales of real estate
will continue to decrease.
"Interest and dividends" revenues in 1995 increased $301,000 to $2,435,000
from 1994 and decreased $338,000 from $2,773,000 in 1993. The increase in
"Interest and dividends" revenue in 1995 versus 1994 was a result of higher
interest yields on invested funds. The reduction between 1993 and 1994 was due
to lower investable fund balances (due primarily to the $22,700,000 purchase of
Cine Vista) and lower interest yields in 1994 versus 1993.
"Condemnation and other" revenues increased to $2,341,000 in 1995 from
$79,000 in 1994 and $203,000 in 1993. In 1995, these revenues included
$1,146,000 in condemnation proceeds, $425,000 received by the Company in
settlement of certain litigation, $319,000 received in settlement of two matters
related to the Company's former railroad operations and $223,000 related to
unclaimed reorganization debt-holders' obligations (See Note 13 to the
Consolidated Financial Statements contained elsewhere herein).
Expenses:
- --------
"Theater costs,""Theater concession costs" and substantially all of
"Depreciation and amortization" expense reflect the direct theater costs of Cine
Vista's operations since Cine Vista's acquisition, effective July 1, 1994.
"General and administrative" expenses decreased $353,000 in 1995 from
$4,553,000 in 1994 to $4,200,000 in 1995. In 1995, these expenses included
$922,000 related to Cine Vista's operations for the twelve months ended December
31, 1995 versus $427,000 in such expenses for the six months ended December 31,
1994, both of which amounts are net of management fees paid to Reading Company
by Cine Vista. The increase associated with the inclusion of Cine Visa's general
and administrative expenses for a full year in 1995 was offset by a $795,000
charge in 1994 to fully reserve a loan to OREI (See Note 4 to the Consolidated
Financial Statements contained elsewhere herein). "General and administrative"
expenses increased $764,000 in 1994 from $3,789,000 in 1993 due primarily to the
inclusion of the $795,000 loan provision described above and $427,000 in Cine
Vista general and administrative expenses offset in part by a reduction in costs
resulting from the 1993 sale of the Reading Terminal Headhouse.
"Equity loss from investment in Australian theater developments" reflects
the Company's 50% share of the initial general and administrative expenses in
Australia and noncapitalized development expenditures relating to new theater
site analysis and selection (See Note 5 to the Consolidated Financial Statements
contained elsewhere herein). The Company does not anticipate material revenues
from Reading International during the next 18 months and therefore anticipates
continuing losses during such period as new theaters are developed and
operations initiated. The investment in and operating results of Reading
International are reported under the equity method.
During 1994, the Company increased its "Provision for environmental
matters" by $1,306,000, including $1,200,000 for the Douglassville Disposal Site
based upon the advice of the Company's counsel, who estimated that the likely
range of possible outcomes for the site was from $0 to $3,000,000, and an amount
paid of $106,000 (See "Item 3. Legal Proceedings" and Note 10 to the
Consolidated Financial Statements contained elsewhere herein). The Company
recorded a provision for environmental matters of $241,000 in 1993 and paid
environmental costs of $249,000, $133,000, and $676,000 during 1995, 1994 and
1993, respectively.
The "Condemnation and other" revenues of $2,341,000 comprised the
Company's net income of $2,351,000 in 1995 versus a loss of $1,652,000 in 1994
and a loss before the cumulative effect of an accounting change of $520,000 in
1993. Cine Vista contributed approximately $1,271,000 and $900,000 in earnings
for 1995 and the six months ended December 31, 1994, respectively.
16
<PAGE>
Liquidity and Capital Resources:
The Company's existing financial resources are sufficient to fund the
Company's existing operations, obligations and the present development plans of
Cine Vista and Reading International. In November 1995, the Company and Craig
formed Reading International in order to make available additional capital and
liquidity to develop other theater opportunities in Australia. Reading
International is actively seeking properties to develop in Australia and has
acquired one site and has made deposits for several other real property
purchases or leases. On March 29, 1996, the Company and Craig entered into a
Capital Funding Agreement with respect to Reading International pursuant to
which they agreed to increase the capital committed by the Company and Craig to
Reading International from $10 million to approximately $103 million through a
combination of cash contributions and secured capital funding undertakings (See
Note 16 to the Consolidated Financial Statements contained elsewhere herein).
The Company and Craig each agreed to immediately contribute to Reading
International $12,500,000 in cash and have undertaken to contribute up to an
additional $37,500,000 on an as needed basis (the "Funding Commitment"). To
secure the Funding Commitment, the Company pledged its interest in Cine Vista
and Government agency securities. The Company may substitute collateral for the
Funding Commitment provided that the fair market value of the collateral
substituted is equal to at least 125% of the Funding Commitment or, in the case
of government or government agency securities, equal to 100% of the Funding
Commitment. The Company is also negotiating to acquire a theater in Manhattan
(See Note 4 to the Consolidated Financial Statements contained elsewhere herein)
and Cine Vista has two new theaters under development and is seeking additional
theater sites in Puerto Rico.
Cine Vista entered into a revolving credit agreement in December 1995
(the "Credit Agreement"). In accordance with the terms of the Credit Agreement,
Cine Vista may borrow up to $15,000,000 to repay certain loans payable to a
wholly-owned subsidiary of the Company and fund certain new theater development
expenditures (See Note 14 to the Consolidated Financial Statements contained
elsewhere herein). No amounts are presently outstanding under the Credit
Agreement. The Company may use funds available under the Credit Agreement to
fund its other theater development activities provided that a portion of such
funds are utilized to fund certain Cine Vista development projects.
On March 29, 1996, the Company purchased from Craig 1,564,473 shares of
the common stock of Citadel Holding Corporation, a real estate management
company ("Citadel" and the "Citadel Common Stock", respectively) for an
aggregate purchase price of $3,324,505 (See Note 16 to the Consolidated
Financial Statements contained elsewhere herein). The Company paid Craig for the
Citadel Common Stock with a five year unsecured promissory note which provides
for the payment of interest at a rate equal to LIBOR plus 2.25%. The Company
also acquired from Craig a one year option to acquire, at fair market value, as
determined by the parties, 1,329,114 shares of the 3% Cumulative Voting
Convertible Preferred Stock, stated value $3.95 per share of Citadel (the
"Citadel Preferred Stock") and an option to acquire a warrant to acquire 666,000
shares of Citadel Common Stock. If the Company elects to exercise the option to
acquire the Citadel Preferred Stock, the Company may pay for the acquisition
with the issuance of a note with the same terms as the note issued in payment of
the Citadel Common Stock.
In January 1995, the Company and several parties agreed to settle
litigation whereby the Company sought to recover certain environmental cleanup
costs previously expended by the Company on properties it formerly owned (See
Note 16 to the Consolidated Financial Statements contained elsewhere herein).
The agreement provides for the Company to receive payments totalling $2.35
million to recover these costs, which amount the Company anticipates receiving
in 1996. The parties to the settlement also agreed to pay an amount ranging from
52% to 55% of certain future costs, if any, the Company may incur in cleaning
environmental contamination on the Viaduct (See Note 10 to the Consolidated
Financial Statements contained elsewhere herein and "Legal Proceedings --
Reading Terminal Train Shed Litigation").
Prior to the Company's reorganization, the Company had extensive
railroad and related operations. Such operations may have contributed to
environmental contamination of properties now owned by the Company, previously
sold by the Company, or to which the Company, prior to its reorganization, sent
waste. The ultimate extent of liabilities, if any, with respect to such matters,
as well as the timing of cash disbursements, if any, cannot be determined.
However, management is of the opinion, based on the information currently known,
that while the
17
<PAGE>
ultimate liability resulting from such matters could have a material
effect upon the results of operations in a given year, they will not have a
material adverse effect upon the Company's financial position or liquidity.
1995:
- ----
"Unrestricted cash and cash equivalents" together with "Available-for-sale
securities" decreased $747,000 in 1995 from $44,936,000 in 1994 to $44,189,000
at December 31, 1995. Working capital decreased $717,000 from $43,383,000 at
December 31, 1994 to $42,666,000 at December 31, 1995.
While not necessarily indicative of its results of operations determined
under generally accepted accounting principles. Cine Vista's operating cash flow
(income before depreciation and amortization) of $2,625,000 contributed to the
Company's liquid funds in 1995. Other principal sources of liquid funds in 1995
were $2,435,000 in "Interest and dividends" income, $2,341,000 in "Condemnation
and other" proceeds from litigation (See Note 13 to the Consolidated Financial
Statements contained elsewhere herein), a decrease of $664,000 in "Insurance
proceeds receivable", a decrease of $208,000 in "Restricted cash" and $185,000
in proceeds from real estate joint venture investments.
In addition to operating expenses, principal uses of liquid funds in 1995
include a $1,040,000 increase in amounts "Due from affiliate" related to the
Company's advance to Reading International on behalf of Craig for their share of
certain capital contributions to the entity (See Note 5 to the Consolidated
Financial Statements contained elsewhere herein) which amount was reimbursed by
Craig to the Company in February 1996, $1,828,000 for the purchase of property,
plant and equipment related primarily to Cine Vista's new eight screen multiplex
theater which commenced operations during December 1995 (See Note 11 to the
Consolidated Financial Statements contained elsewhere herein) and $1,285,000 for
the purchase of a judgement encumbering certain cinema assets located in
Manhattan (See Note 4 to the Consolidated Financial Statements contained
elsewhere herein). Other uses of funds include $392,000 in payments of other
liabilities and an increase of $529,000 in "Amounts receivable."
1994:
- ----
"Unrestricted cash and cash equivalents" together with "Available-for-sale
securities" decreased $21,378,000 in 1994 from $66,314,000 at December 31, 1993
to $44,936,000 at December 31, 1994 due primarily to the $22,700,000 purchase of
Cine Vista. Working capital decreased accordingly. "Available-for-sale
securities" consist of liquid treasury securities having maturities in excess of
three months at the time of acquisition.
While not necessarily indicative of its results of operations determined
under generally accepted accounting principles, Cine Vista's operating cash
flows (income before depreciation and amortization) of $1,573,000 for the period
subsequent to July 1, 1994 (the acquisition effective date) contributed to the
Company's liquid funds in 1994. Other principal sources of liquid funds were
$2,114,000 in "Interest and dividends" income and receipt of $1,000,000 in full
repayment of a loan made in 1993 to an officer of Reading Cinemas in accordance
with the terms of his employment by the Company (see Note 12 to the Consolidated
Financial Statements contained elsewhere herein).
Other sources of liquid funds included $570,000 in proceeds from sales of
real estate and a net increase of $829,000 in "Accounts payable and accrued
expenses," primarily due to Cine Vista operations subsequent to the purchase
date. In addition to the purchase of Cine Vista, principal uses of liquid funds
include a net increase of $654,000 in insurance proceeds receivable, a $470,000
loan to OREI, and a net decrease of $458,000 in other liabilities which loan was
repaid in 1994.
1993:
- ----
Principal sources of liquid funds in 1993 included $4,470,000 in proceeds
from sales of real estate and "Interest and dividends" income of $2,773,000. In
addition to operating expenses, principal uses of liquid funds included a
reduction in accrued expenses and accounts payable of $660,000 which expenses
related to the extinguishment of a fire on land owned by the Company in the
fourth quarter of 1992. Principal uses of funds also
18
<PAGE>
included payment of $298,000 in accrued professional fees and the $1,000,000
loan to the officer of Reading Cinemas in accordance with the terms of his
employment by the Company.
Effects of Inflation
The Company does not believe that inflation has a material effect upon its
existing operations.
Effects of a Change in Accounting Principle
The Company adopted the Statement of Financial Accounting Standard
("SFAS") No. 109, "Accounting for Income Taxes" on January 1, 1994 without
restating prior years' financial statements. The cumulative effect of $132,000
resulting from this change in accounting principle was recorded in the
Consolidated Statement of Operations for the three months ended March 31, 1994.
This amount is equivalent to the deferred tax asset recorded for the tax
benefits which are more likely than not to be realized from the Company's net
operating loss carryforwards.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123,
which must be adopted in 1996, establishes financial accounting and reporting
standards for stock-based employee compensation plans, and establishes
accounting standards for issuance of equity instruments to acquire goods and
services from non-employees.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 121, which must be adopted in 1996, establishes accounting
standards for the, impairment, or disposal of long-lived assets, and certain
intangible assets.
The Company does not expect that adoption of SFAS 121 and 123 will have a
material effect on its consolidated financial position, consolidated statement
of operations or liquidity.
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated by reference to
pages F-1 through F-22.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
19
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item, to the extent that it relates to
directors of the Company, is incorporated by reference to the Company's proxy
statement with respect to its 1996 Annual Meeting of Shareholders and, to the
extent that it relates to executive officers, appears in Part I hereof.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the
Company's proxy statement with respect to its 1996 Annual Meeting of
Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the
Company's proxy statement with respect to its 1996 Annual Meeting of
Shareholders.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
Company's proxy statement with respect to its 1996 Annual Meeting of
Shareholders.
20
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
<TABLE>
<CAPTION>
(a)(1) Financial Statements PAGE
<S> <C> <C>
Consolidated Balance Sheets as of December 31, 1995 and F-1 -- F-2
December 31, 1994.
Consolidated Statements of Operations for the years ended F-3
December 31, 1995, December 31, 1994 and
December 31, 1993.
Consolidated Statements of Cash Flows for the years ended F-4 -- F-5
December 31, 1995, December 31, 1994 and
December 31, 1993.
Consolidated Statements of Shareholders' Equity for the years F-6
ended December 31, 1995, December 31, 1994 and
December 31, 1993.
Notes to Consolidated Financial Statements. F-7 -- F- 21
Report of Independent Auditors -- Ernst & Young LLP. F- 22
(a)(2) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts S-1
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the related
instructions or are not applicable and therefore have been omitted.
(a)(3) Exhibits
2(a) Purchase Agreement dated July 8, 1994 by and among Theater
Acquisitions, L.P., Theater Acquisitions of Puerto Rico, Inc., and
Reading Company. (Incorporated by reference to Exhibit 2(a) to the
Company's Form 10-Q for the period ended June 30, 1994.)
2(b) Letter Agreement dated August 9, 1994 by and among Theater
Acquisitions, L.P., Theater Acquisitions of Puerto Rico, Inc., and
Reading Company. (Incorporated by reference to Exhibit 2(b) to the
Company's Form 10-Q for the period ended June 30, 1994.)
3.1 Articles of Incorporation of Registrant. (Incorporated by reference
to Exhibit 3(A) in Registration Statement No. 2-87410, as amended.)
3.2 Form of Amended and Restated Articles of Incorporation of
Registrant. (Incorporated by reference to Exhibit 3(C) in
Registration Statement No. 2-87410, as amended.)
21
<PAGE>
3.3 Copy of Amendment to Articles of Incorporation filed October 13,
1989. (Incorporated by reference to Exhibit 3.4 in registrant's
annual report on Form 10-K for the year ended December 31, 1989.)
3.4 Copy of Amendment to Articles of Incorporation filed October 13,
1989. (Incorporated by reference to Exhibit 3.5 in registrant's
annual report on Form 10-K for the year ended December 31, 1989.)
3.5 By-Laws of Registrant, as amended March 4, 1992. (Incorporated by
reference to Exhibit 3.6 in registrant's annual report on Form 10-K
for the year ended December 31, 1991.)
3.6 By-Laws of Registrant, as amended February 26, 1993. (Incorporated
by reference to Exhibit 3.6 in registrant's annual report on Form
10-K for the year ended December 31, 1993.)
3.7 By-Laws of Registrant, as amended October 6, 1995.
4.1 Instruments Defining the Rights of Security Holders. (Incorporated
by reference to Exhibits 3.1 and 3.5 hereof and to Exhibit 4 in
Registration Statement No. 2-87410, as amended.)
10.1 Reading Company 1982 Non-Qualified Stock Option Plan, as Amended.
(Incorporated by reference to Exhibit 4(b) to Registration Statement
No. 2-83039, as amended).
10.2 Reading Company 1982 Incentive Stock Option Plan, as Amended.
(Incorporated by reference to Exhibit 4(a) to Registration Statement
No. 2-83039, as amended.)
10.3 Reading Company 1992 Non-Qualified Stock Option Plan. (Incorporated
by reference to Exhibit 4(B) to Registration Statement No. 33-57222,
as amended.)
10.4 Executive Sharing Agreement by and between Reading Cinemas, Inc. and
City Cinemas Corp. dated as of November 1, 1993. (Incorporated by
reference to Exhibit 10.1 to registrant's annual report on Form 10-K
for the year ended December 31, 1993).
10.5 Lease Agreement between Plaza Las Americas, Inc. and Wometco de
Puerto Rico, Inc. dated as of August 24, 1979, as amended.
(Incorporated by reference to Exhibit 10.5 to registrant's annual
report on Form 10-K for the year ended December 31, 1994).
10.6 Lease Agreement between TJAC (Hatillo), S.E. and Theater
Acquisitions of Puerto Rico, Inc. dated as of May 11, 1992.
(Incorporated by reference to Exhibit 10.6 to registrant's annual
report on Form 10-K for the year ended December 31, 1994).
10.7 Agreement of Lease between Cinema Centro, S.E. and Theater
Acquisitions of Puerto Rico, Inc. dated as of May 16, 1994.
(Incorporated by reference to Exhibit 10.7 to registrant's annual
report on Form 10-K for the year ended December 31, 1994).
10.8 Memorandum of Understanding by and between Reading Company and
Robert Kory dated May 19, 1994. (Incorporated by reference to
Exhibit 10.8 to
22
<PAGE>
registrant's annual report on Form 10-K for the year ended December
31, 1994).
10.9 Lease Agreement between Palma Real Associates, S.E. and Theater
Acquisitions of Puerto Rico, Inc. dated as of July 13, 1994.
10.10 The First Amendment dated May 10, 1995 between Palma Real
Associates, S.E. and Reading Cinemas of Puerto Rico, Inc. (successor
by merger to Theater Acquisitions of Puerto Rico, Inc.) to the Lease
Agreement between Palma Real Associates, S.E. and Theater
Acquisitions of Puerto Rico, Inc. dated as of July 13, 1994.
10.11 Credit Agreement by and between Reading Cinemas of Puerto Rico,
Inc., and Citibank, N.A., as administrative agent for the Lenders
thereunder dated as of December 20, 1995.
10.12 The First Amendment dated February 7, 1996 to the Credit Agreement
by and between Reading Cinemas of Puerto Rico, Inc., and Citibank,
N.A., as administrative agent for the Lenders thereunder dated as of
December 20, 1995.
10.13 Limited Liability Company Agreement of Reading International Cinemas
LLC dated November 9, 1995.
10.14 RC Revocable Trust Agreement between Reading Investment Company,
Inc. and Craig Corporation and Craig Management, Inc. as trustee,
dated November 9, 1995.
10.15 Lease Agreement between Mayaguez Shopping Center, S.E. and Reading
Cinemas of Puerto Rico, Inc. dated as of August 10, 1995.
10.16 Contract of Sale of Real Estate between Brick & Pipe Industries LTD
and Burgundy Two Pty LTD dated October 10, 1995.
10.17 Contract of Sale of Real Estate between Royal Society for the
Prevention of Cruelty to Animals (Victoria) Incorporated and
Burgundy Two Pty LTD dated November 9, 1995.
10.18 Stock Purchase and Sale Agreement dated as of March 30, 1996 by and
between Reading Holdings, Inc. and Craig Corporation.
10.19 Amended and Restated Capital Funding Agreement by and between
Reading Investment Company, Inc., Craig Corporation, Craig
Management Inc., and Reading International Cinemas LLC.
21.1 Registrant's Subsidiaries.
23.1 Consent of Independent Auditors - Ernst & Young LLP.
(b) Reports on Form 8-K.
NONE
(c) See item 14(a)(3) above.
(d)(1) Not applicable.
23
<PAGE>
(d)(2) Not applicable.
(d)(3) Not applicable.
27. FINANCIAL DATA SCHEDULE
24
<PAGE>
Reading Company and Subsidiaries
Consolidated Balance Sheets
(in thousands, except shares and per share amounts)
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------
1995 1994
- -----------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $44,147 $9,413
Available-for-sale securities 42 35,523
Amounts receivable, less allowance
of $291 in 1995 and $339 in 1994 624 280
Due from affiliate 1,040 0
Restricted cash 360 333
Inventories 112 86
Prepayments and other current assets 498 593
Due from insurance companies 87 751
Deferred tax asset 0 132
- -----------------------------------------------------------------------
Total current assets 46,910 47,111
- -----------------------------------------------------------------------
Other investments 1,771 438
Equity investment in Australian
theater developments 640 0
Restricted cash 362 597
Real estate held for sale or development,
less valuation
allowance of $42 1,110 1,111
Property and equipment:
Buildings 733 720
Capitalized premises lease 538 538
Leasehold improvements 5,095 3,560
Equipment 3,787 2,811
Construction-in-progress 236 103
--- ---
10,389 7,732
Less: Accumulated depreciation 1,176 726
----- ----
9,213 7,006
Intangible assets:
Beneficial leases - net of accumulated
amortization of $1,370
in 1995 and $455 in 1994 15,538 16,453
- -----------------------------------------------------------------------
28,634 25,605
- -----------------------------------------------------------------------
$75,544 $72,716
=======================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-1
<PAGE>
Reading Company and Subsidiaries
Consolidated Balance Sheets (continued)
(in thousands, except shares and per share amounts)
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $2,279 $1,468
Accrued compensation 222 218
Accrued taxes and other 528 627
Film rent payable 299 359
Other liabilities 916 1,056
- --------------------------------------------------------------------------
Total current liabilities 4,244 3,728
- --------------------------------------------------------------------------
Capitalized lease, less current portion 521 525
Other liabilities 2,067 2,377
- --------------------------------------------------------------------------
Total long term liabilities 2,588 2,902
- --------------------------------------------------------------------------
Commitments and contingencies (See Note 10)
Shareholders' Equity
Preferred stock, par value $1.00 per share:
Authorized -- 5,000,000 shares
Common stock, par value $.01 per share:
Authorized -- 10,000,000 shares
Issued 1995 -- 11,530 shares; 1994 -- 12,291
shares 1 1
Class A common stock, par value $.01 per share:
Authorized -- 15,000,000 shares
Issued 1995 -- 5,145,161 shares;
1994 -- 5,144,400 shares 51 51
Unrealized loss on available-for-sale
securities 0 (286)
Other capital 56,257 55,057
Retained earnings 15,035 13,884
Foreign currency translation adjustment (10) 0
Class A common stock in treasury, at cost:
1995 -- 183,397 shares; 1994 -- 183,250 (2,622) (2,621)
- --------------------------------------------------------------------------
Total shareholders' equity 68,712 66,086
- --------------------------------------------------------------------------
$75,544 $72,716
==========================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
Reading Company and Subsidiaries
Consolidated Statements of Operations
(in thousands, except shares and per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Theater:
Admissions $10,356 $5,633 $0
Concessions 3,883 2,141 0
Advertising and other 686 306 0
Real estate 272 697 533
Interest and dividends 2,435 2,134 2,773
Condemnation and other 2,341 79 203
- --------------------------------------------------------------------------------
19,973 10,990 3,509
- --------------------------------------------------------------------------------
EXPENSES:
Theater costs 10,784 5,742 0
Theater concession costs 640 360 0
Depreciation and amortization 1,369 681 11
General and administrative 4,200 4,553 3,789
Provision for environmental
matters 0 1,306 241
Equity loss from investment in
Australian theater developments 390 0 0
- --------------------------------------------------------------------------------
17,383 12,642 4,041
Income (loss) before income taxes and
cumulative effect of accounting
change 2,590 (1,652) (532)
Federal income tax (benefit) 239 0 (12)
- --------------------------------------------------------------------------------
Income (loss) before cumulative effect
of accounting change 2,350 (1,652) (520)
Cumulative effect of
accounting change 0 0 132
- --------------------------------------------------------------------------------
Net income (loss) $2,350 ($1,652) ($388)
- --------------------------------------------------------------------------------
Per share information:
Income (loss) before cumulative effect
of accounting change $0.47 ($0.33) ($0.11)
Cumulative effect of accounting
change 0.00 0.00 0.03
- --------------------------------------------------------------------------------
Net income (loss) $0.47 ($0.33) ($0.08)
================================================================================
Average shares outstanding 4,973,369 4,973,548 4,973,649
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
Reading Company and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $2,351 ($1,652) ($388)
Adjustments to reconcile net income (loss) to
net cash provided from (used for) operating
activities:
Condemnation award (1,146) 0 0
Cumulative effect of accounting change 0 0 (132)
Gain on real estate joint venture investments 0 (179) (294)
Gain on sale of other real estate 0 (308) (32)
Discharge of reorganization obligations (223) 0 0
Depreciation 453 226 12
Amortization 916 455 0
Deferred rent expense 165 82 0
Deferred income tax expense 132 0 0
Equity loss from investment in
Australian theater developments 390 0 0
Provision for environmental matters 0 1,306 241
Valuation provision for loan to OREI 0 795 0
Changes in operating assets and liabilities:
(Increase) decrease in amounts receivable (529) 89 (59)
(Increase) decrease in inventories (26) 24 0
Decrease (increase) in prepaids and
other current assets 95 (119) 70
Decrease (increase) in insurance
proceeds receivable 664 (654) 125
Decrease (increase) in notes receivable due
from officer of subsidiary 0 1,000 (1,000)
(Decrease) increase in accounts payable and
accrued expenses (119) 829 (1,107)
Decrease in film rent payable (60) (65) 0
Decrease in other liabilities (392) (458) (132)
Other, net (49) 4 23
- --------------------------------------------------------------------------------
Net cash provided from (used for) operating
activities 2,622 1,375 (2,673)
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
Reading Company and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net cash provided from (used for) operating
activities $2,622 $1,375 ($2,673)
- ----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of TAPR (See Note 2) 0 (22,720) 0
Decrease in restricted cash (See Note 2) 208 83 177
Purchase of property, plant and equipment (1,828) (66) (25)
Net proceeds from condemnation award 1,146 0 0
Net proceeds from real estate joint venture
investments 185 138 161
Net proceeds from sales of real estate 0 570 4,470
Purchases of available-for-sale securities (552) (12,261) (50,240)
Sales and maturities of available-for-sale
securities 36,319 42,589 48,198
Loan to OREI 0 (470) (325)
Increase in due from affiliate (1,040) 0 0
Investment in Australian theater developments (See Note 5) (1,040) 0 0
Purchase of judgement (See Note 4) (1,285) 0 0
- ----------------------------------------------------------------------------------------------
Net cash provided from investing activities 32,113 7,863 2,416
- ----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Purchase of treasury stock (1) (2) (2)
- ----------------------------------------------------------------------------------------------
Net cash used for financing activities (1) (2) (2)
- ----------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 34,734 9,236 (259)
Cash and cash equivalents at beginning of year 9,413 177 436
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $44,147 $9,413 $177
==============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
Reading Company and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1995, 1994, 1993
(in thousands, except shares)
<TABLE>
<CAPTION>
Foreign
Class A Unrealized Currency Treasury
Common Stock Common Stock Gains Transla- Stock
-------------------------------------- and Other Retained tion -------------------
Shares Amount Shares Amount (Losses) Capital Earnings Adjustment Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 29,606 $1 5,127,085 $51 $0 $54,925 $16,056 $0 (182,954) ($2,617)
Net loss (388)
Realization of tax benefit resulting
from pre-quasi-reorganization
operating loss carryforwards 132 (132)
Common stock converted to
Class A common stock (15,457) 15,457
Treasury stock purchased (162) (2)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 14,149 1 5,142,542 51 0 55,057 15,536 0 (183,116) (2,619)
Net loss (1,652)
Adjustment to beginning balance
for change in accounting method
net of income taxes of $19 38
Change in unrealized gains and
losses net of income taxes of $19 (324)
Common stock converted to
Class A common stock (1,858) 1,858
Treasury stock purchased (134) (2)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 12,291 1 5,144,400 51 (286) 55,057 13,884 0 (183,250) (2,621)
Net income 2,351
Change in unrealized gains and
losses 286
Realization of tax benefit resulting
from pre-quasi-reorganization
operating loss carryforwards 1,200 (1,200)
Foreign currency translation
adjustment: Investment in
Australian theater developments (10)
Common stock converted to
Class A common stock (761) 761
Treasury stock purchased (147) (1)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 11,530 $1 5,145,161 $51 $0 $56,257 $15,035 ($10) (183,397) ($2,622)
===================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
Reading Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995
(amounts in tables in thousands, except shares and per share data)
Reading Company (the "Company") has operated motion picture exhibition
theaters in leased locations in the Commonwealth of Puerto Rico since the
acquisition of Theater Acquisitions of Puerto Rico, Inc. ("TAPR") in 1994. In
November 1995, the Company and Craig Corporation ("Craig"), the owner of
approximately 49.3% of the Company's capital stock, formed Reading International
Cinemas LLC ("Reading International"), a limited liability company owned equally
by the Company and Craig, which has initiated theater development activities in
Australia. The Company's remaining real estate activities include the managed
sale of certain of its real properties, the possible future development of
certain center city Philadelphia properties and participation in two real estate
joint ventures.
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation: The consolidated financial statements of Reading
Company and Subsidiaries (the "Company") include the accounts of Reading Company
and its majority-owned subsidiaries. Significant intercompany transactions and
accounts have been eliminated. TAPR was acquired as of July 1, 1994 and the
results of TAPR have been consolidated with the Company's operating results
since that date (See Note 2). On December 31, 1994, TAPR was merged into its
parent corporation, Reading Cinemas of Puerto Rico, Inc. ("RCPR") with RCPR the
successor corporation and the operating name changed to Cine Vista (unless
otherwise required by the context, TAPR, RCPR and Cine Vista may be used
interchangeably herein).
Income Taxes: The Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 109, "Accounting for Income Taxes," on January 1, 1993,
without restating prior years' financial statements. The cumulative effect
resulting from this change in accounting principle was recorded in the
Consolidated Statement of Operations for the year ended December 31, 1993. This
amount is equivalent to the deferred tax asset recorded for the tax benefits
which are more likely than not to be realized from the Company's net operating
loss carryforwards. Under SFAS No. 109, an income tax provision is recorded in
the statement of operations using the enacted income tax rates and the deferred
asset is amortized in an amount equivalent to the tax provision as the tax
benefits are realized.
The Company underwent a quasi-reorganization in 1981. The
quasi-reorganization did not require restatement of any assets or liabilities or
any other modification of capital accounts. The Company is required to make a
transfer from "Retained earnings" to "Other capital" in the Consolidated
Statement of Shareholders' Equity in an amount equal to the tax benefit
resulting from utilization of federal net operating loss carryforwards which
relate to periods prior to the quasi-reorganization.
Cash Equivalents: The Company considers all highly liquid investments with
maturities of three months or less at the time of acquisition to be cash
equivalents. Cash equivalents are stated at cost plus accrued interest, which
approximates fair market value, and consist principally of federal agency
securities and short-term money market instruments.
Available-for-Sale Securities: The Company adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," on January
1, 1994, without restating prior years' financial statements. Debt securities
that a company does not have both the intent and ability to hold to maturity are
to be classified as available-for-sale and carried at fair value with unrealized
holding gains and losses, net of tax, reported as a separate component of
shareholders' equity.
Management classifies treasury and federal agency securities held by the
Company with maturities in excess of three months at the time of purchase as
available-for-sale as such investments together with "Cash and cash equivalents"
are expected to be used to fund expansion of theater operations, acquisition or
other development activities.
F-7
<PAGE>
Reading Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1995
(amounts in tables in thousands, except shares and per share data)
The amortized cost of securities available-for-sale is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization and the interest related to these securities are included in
"Interest and Dividends" revenues. Any realized gains and losses and declines in
value judged to be other-than-temporary on available-for-sale securities are
included in earnings.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Inventories: Inventories are comprised of confection goods used in Cine
Vista's operations and are stated at the lower of cost (first-in, first-out
method) or net realizable value.
Real Estate Held for Sale or Development: Real estate held for sale or
development is carried at the lower of cost, including related holding costs, or
estimated net realizable value and is classified as a noncurrent asset due to
the inherent difficulty in estimating the timing of future sales.
Property and Equipment: Property and equipment is carried at cost.
Depreciation of buildings, capitalized premises lease, leasehold improvements
and equipment is recorded on a straight-line basis over the estimated lives of
the assets or, if the assets are leased, the remaining lease term (inclusive of
options, if likely to be exercised), whichever is shorter. The estimated useful
lives are generally as follows:
Building and Improvements 40 years
Equipment 15 years
Furniture and Fixtures 7 years
Leasehold Improvements 20 years
Intangible Assets: Intangible assets are comprised of beneficial theater
leases used in Cine Vista's operations. The amount of the TAPR purchase price
ascribed to the beneficial leases was determined by an independent appraiser
computing the present value of the excess of market rental rates over the rental
rates in effect under TAPR's leases at the time of the Company's acquisition of
TAPR and allocating such amount as a component of the purchase price of TAPR.
The beneficial leases are amortized on a straight-line basis over the remaining
term of the underlying leases, which approximates 19 years.
Translation of Non-U.S. Currency Amounts: The financial statements and
transactions of Reading International's (See Note 5) Australian operations are
maintained in their functional currency (Australian dollars) and translated into
U.S. dollars in accordance with SFAS No. 52 "Foreign Currency Translation."
Assets and liabilities are translated at exchange rates in effect at the balance
sheet date and shareholders' equity is translated at historical exchange rates.
Revenues and expenses are translated at the average exchange rate for the
period. Translation adjustments are reported as a separate component of
shareholders' equity.
Income (Loss) Per Share: Income (loss) per share (Common Stock and Class A
Common Stock) is calculated by dividing net income (loss) by the aggregate of
the weighted average shares outstanding during the period and the dilutive
effect, if any, of common stock equivalents that are outstanding.
Reclassifications: Certain amounts in previously issued financial
statements have been reclassified to conform with the current presentation.
F-8
<PAGE>
Reading Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1995
(amounts in tables in thousands, except shares and per share data)
Accounting Changes: In October 1995, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 123, "Accounting for Stack-Based Compensation."
SFAS No. 123 must be adopted in 1996 and establishes financial accounting and
reporting standards for stock-based employee compensation plans, and establishes
accounting standards for issuance of equity instruments to acquire goods and
services from non-employees.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
must be adopted in 1996 establishes accounting standards for the impairment of
long-lived assets, certain intangible assets and costs in excess of net assets
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of.
The Company does not expect that adoption of SFAS No. 121 and SFAS No. 123
will have a material effect on its consolidated financial statements.
NOTE 2 -- ACQUISITIONS
Effective July 1, 1993, the Company acquired TAPR from Theater
Acquisitions, LP ("TALP") for an aggregate cash purchase price of approximately
$22,700,000, inclusive of acquisition costs of $323,000. Cine Vista operates
motion picture exhibition theaters in seven leased locations with a total of 44
screens in the Commonwealth of Puerto Rico. At the time of its acquisition, TAPR
operated 36 screens in six leased locations. The acquisition was accounted for
using the purchase method and TAPR's operating results since July 1, 1994 have
been consolidated with the operating results of the Company.
The purchase price was subject to the satisfaction of certain
contingencies in accordance with the provisions of a purchase agreement by and
among TAPR, TALP and the Company dated July 1, 1994 (the "Purchase Agreement").
The landlord of one of Cine Vista's theaters has the right to terminate the
lease relating to space presently housing two theaters, subject to six months'
notice. Accordingly, $1 million of the purchase price was escrowed and was
payable over 36 months provided the landlord did not cancel the lease during
such period or assert other claims relating to the lease, in which case the
escrow is available for set off. The landlord has asserted certain claims
relating to the computation of the rent (See Note 10) and the Company and TALP
therefore amended the terms under which the payments are made from the escrow.
Under amended terms, payments of $30,000 are paid monthly to TALP. This escrow,
which is invested in short term treasury securities, has been classified as
"Restricted cash." At December 31, 1995, $707,000 was due to TALP under this
arrangement and has been classified as an "Other liability."
F-9
<PAGE>
Reading Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1995
(amounts in tables in thousands, except shares and per share data)
The pro forma consolidated operating results set forth below assume that
the acquisition of TAPR was completed at the beginning of 1994 and include the
impact of certain adjustments, including amortization of intangibles,
depreciation and reductions in "Interest and dividend" income resulting from
payment of the purchase price.
Year Ended
December 31,
-----------------------
1994 1993
------- --------
Revenues $17,015 $ 15,628
======= ========
Net loss before cumulative
effect of accounting change ($1,617) ($70)
======= ========
Per Share:
Net loss before cumulative
effect of accounting change ($ 0.33) ($.01)
======= ========
NOTE 3 -- AVAILABLE-FOR-SALE SECURITIES
The net adjustment for unrealized holding losses on available-for-sale
securities, included as a separate component of shareholders' equity, totaled $0
and $286,000 as of December 31, 1995 and 1994, respectively. As of December 31,
1994, the net adjustment consisted of an unrealized gain of $38,000, net of tax,
recorded on January 1, 1994 as a result of the change in accounting method and
an unrealized loss of $324,000, net of tax, recorded for the year ended December
31, 1994.
As of December 31, 1995, the amortized cost and estimated fair value of
the "Available-for-sale securities" was $42,000. The contractual maturity of
these securities as of December 31, 1995 was six months or less.
Accrued interest as of December 31, 1994 was $478,000 and is included in
"Available-for-sale securities" on the Consolidated Balance Sheet.
NOTE 4 -- INVESTMENTS
On November 8, 1995, the Company acquired from a major bank for $1,285,000,
a judgement encumbering, among other things, a controlling interest in a company
which has as its principal asset a Manhattan multiplex theater. The judgement
has been acquired as part of the Company's plan to acquire, in conjunction with
Manhattan-based City Cinemas (J. Cotter, Chairman of the Company, has an
ownership interest in City Cinemas), all of or at least a controlling interest
in this theater. The Company also acquired options to purchase shares
representing 5/13ths of the voting power of the company that owns the multiplex
theater and to obtain certain other creditor claims against that company. No
assurance can be given that the Company's plan to acquire the theater will
ultimately prove successful.
Management believes that the December 31, 1995 carrying amounts of this
investment and the Company's other investments totalling $486,000 approximate
their fair value.
F-10
<PAGE>
Reading Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1995
(amounts in tables in thousands, except shares and per share data)
NOTE 5 -- EQUITY INVESTMENT / ACQUISITION ACTIVITIES
In November 1995, the Company and Craig formed Reading International to
develop and operate multiplex cinemas in Australia and other markets. A wholly
owned subsidiary of Reading International has retained the services of several
executive employees in Australia who provide services with respect to such
Australian operations on a full time or substantially full time basis. Reading
International is equally owned by the Company and Craig, each of which committed
to make an initial contribution of $5 million, on an as needed basis, for an
aggregate initial investment of $10 million. (See Note 17).
The Company accounts for its investment in Reading International and its
foreign subsidiaries by the equity method. Summarized financial information for
Reading International as of December 31, 1995 is as follows:
Current assets $ 225
Noncurrent assets 4,534
------
Total assets $4,759
======
Current liabilities 3,480
Shareholders' equity 1,279
------
Total liabilities and shareholders' equity $4,759
======
Reading International's net loss from its inception through December 31,
1995 was $781,000, consisting primarily of general and administrative expenses
and development costs incurred with its theater development activities. The
Company's equity loss from Reading International was $390,000, which is included
in the Consolidated Statement of Operations.
As of December 31, 1995, advances and contributions amounting to
approximately $2,080,000 have been made to the joint venture by Reading and
Craig inclusive of $1,040,000 advanced on behalf of Craig classified as "Due
from affiliate" on the Company's Consolidated Balance Sheet. This advance was
repaid during the first quarter of 1996. These funds were used to finance
capital expenditures and general and administrative expenses. Reading
International's noncurrent assets at December 31, 1995 are comprised principally
of $4,223,000 related to the purchase of land and development costs and $351,000
of refundable property deposits. The land purchase was made pursuant to a real
estate purchase contract with the seller which provided for installment
payments, including $3,144,000 due on December 20, 1996 which is included in
current liabilities on Reading International's balance sheet at December 31,
1995. Reading International is also in negotiation with several developers and
landlords with respect to other potential locations.
In the fourth quarter of 1995, the Company acquired from a major bank, for
$1,285,000, a judgement encumbering among other things, a controlling interest
in a company which has as its principal asset a Manhattan multiplex theater (See
Note 4).
NOTE 6 -- REAL ESTATE HELD FOR SALE OR DEVELOPMENT
As described in Note 1, "Real estate held for sale or development" is
carried at the lower of cost or estimated net realizable value. The Company is
exploring development and sale options for its center city Philadelphia
properties which are adjacent to the Pennsylvania Convention Center site and is
actively seeking buyers for its properties located outside center city
Philadelphia.
F-11
<PAGE>
Reading Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1995
(amounts in tables in thousands, except shares and per share data)
NOTE 7 -- OTHER LIABILITIES
Other liabilities consisted of the following at December 31:
1995 1994
--------------- --------------
Reserve for guarantee obligations of
SWS Industries, Inc. (See Note 10) $ 406 $ 555
Obligations related to past railroad operations
and environmental issues (See Note 10) 1,251 1,489
Reorganization obligations 13 236
Cine Vista deferred purchase price (See Note 2) 707 917
Minimum rent obligations 247 82
Other 359 154
--------------- --------------
2,983 3,433
Less estimated current portion (916) (1,056)
--------------- --------------
$2,067 $ 2,377
=============== ==============
The reorganization obligations represent the Company's remaining liability
to reorganization debt-holders. In accordance with the provisions of the
Company's Plan of Reorganization, the Company was obligated to repay a portion
of such indebtedness if certain debt-holders presented their claims for payment
to the Company on or before December 24, 1995. In December 1995, the Company
recorded $223,000 as "Condemnation and other revenues" in the Consolidated
Statement of Operations equal to the total of the unclaimed amounts. These funds
are presently available for use by the Company in accordance with the provisions
of the Company's Plan of Reorganization.
NOTE 8 -- STOCK OPTION PLANS
The Company has options outstanding under three Stock Option Plans, the
1982 Incentive Stock Option Plan, the 1982 Non-qualified Option Plan
(collectively, the "1982 Plans") and the 1992 Non-qualified Stock Option Plan
(the "1992 Plan"). Each plan was approved by shareholders in the year of
adoption. No further grants may be made under the 1982 Plans and all options
outstanding thereunder are currently exercisable at prices of $12.50 to $15.54
per share. All options granted under the 1982 Plans were at fair market value on
the date of grant.
The 1992 Plan reserved 500,000 shares for grant and provides for one-third
of options granted to be immediately exercisable, one-third exercisable on the
first anniversary of the date of grant, and the final one-third exercisable upon
the second anniversary date of the date of grant unless the Executive Committee
of the Board of Directors (the "Committee"), in its discretion, decides
otherwise. Options granted under the 1992 Plan shall not be for less than 100
percent of the fair market value on the date of grant and are eligible for
exercise for a period of ten years from the date of grant and may contain
certain other terms and conditions as determined by the Committee.
F-12
<PAGE>
Reading Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1995
(amounts in tables in thousands, except shares and per share data)
Changes in the number of shares subject to options under the plans are
summarized as follows:
1995 1994 1993
-------- -------- --------
1982 Plans:
Outstanding at beginning
and end of period: 17,000 17,000 17,000
======== ======== ========
1992 Plan:
Outstanding at beginning of period 357,732 357,732 325,232
Granted (at $14.00 per share) 40,000
Canceled (at $14.00 per share) (15,000) (7,500)
-------- -------- --------
Outstanding at end of period 342,732 357,732 357,732
======== ======== ========
Total Outstanding at December 31,
1995 ranging in price from $12.50 to
$15.54 per share 359,732
Exercisable at December 31, 1995 324,982
NOTE 9 -- INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR INCOME TAXES
As described in Note 1, the Company adopted SFAS No. 109, "Accounting for
Income Taxes," on January 1, 1993, without restating prior years' financial
statements. The cumulative effect of $132,000 ($.03 per share) resulting from
this change in accounting principle was recorded in the Consolidated Statement
of Operations. This amount is equivalent to the deferred tax asset recorded for
the tax benefits which were determined by management to be more likely than not
to be realized from the Company's net operating loss carryforwards. The Company
recorded a $132,000 tax provision in the 1995 Consolidated Statement of
Operations related to the realization of such tax benefits in that period.
Effective December 31, 1981, after approval by its shareholders, the
Company eliminated its accumulated deficit by a charge to "Other capital." This
quasi-reorganization did not require the restatement of any assets or
liabilities or any other modification of capital accounts. Tax benefits realized
from the carryforwards of pre-quasi-reorganization losses have been included in
the determination of net income and then reclassified from "Retained earnings"
to "Other capital." Had such tax benefits been excluded from net income, the
Company would have reported net income of $1,152,000 or $.23 per share for the
twelve months ended December 31, 1995.
F-13
<PAGE>
Reading Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1995
(amounts in tables in thousands, except shares and per share data)
Carryforwards and temporary differences which give rise to the deferred
tax asset at December 31, 1995 and 1994 are as follows:
1995 1994
-------- --------
Net operating loss carryforwards $ 55,325 $ 56,695
Reserves 1,004 1,044
Other, net 242 108
-------- --------
Gross deferred asset 56,571 57,847
Valuation allowance (56,571) (57,715)
-------- --------
Net deferred asset $ 0 $ 132
======== ========
Based on an analysis of the likelihood of realizing the Company's gross
deferred tax asset (taking into consideration applicable statutory carryforward
periods), the Company concluded that under SFAS No. 109, a valuation allowance
for the entire amount was necessary.
The Company's federal tax net operating loss carryforwards expire as
follows:
Year Amount
------------------- ------------
1996................ $123,097
1997................ 13
1998................ 2,096
1999................ 0
2000................ 26,915
2001................ 0
2002................ 7,382
2003................ 589
2004................ 0
2005................ 0
2006................ 0
2007................ 1,443
2008................ 1,155
2009................ 32
------------
$162,722
============
The Company is required to pay federal alternative minimum tax ("AMT") for
1995. AMT is calculated separately from the regular federal income tax and is
based on a flat rate applied to a broader tax base. Amounts payable thereunder
cannot be totally eliminated through the application of net operating loss
carryforwards. The Company recorded AMT expense in 1995 of $87,000 and recorded
no AMT expenses in 1994. The Company recorded an AMT benefit of $12,000 in 1993.
F-14
<PAGE>
Reading Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1995
(amounts in tables in thousands, except shares and per share data)
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
SWS Industries, Inc.
- -------------------
The Company sold a subsidiary, SWS Industries, Inc. ("SWS") in 1987. SWS
subsequently filed for bankruptcy in 1988. Under the terms of the SWS sales
agreement, the Company remained liable as guarantor on various performance bonds
issued on behalf of SWS. The Company's liability under the performance bond
guarantees has been reduced as the related contracts have been completed or
settled. Completion activities will continue into 1996. Management believes the
reserve at December 31, 1995 is adequate for the remaining obligations of the
Company.
Cine Vista
- ----------
A landlord of Cine Vista has alleged that Cine Vista underpaid rent by
approximately $480,000 for the thirty month period ended December 31, 1995. The
Company is contesting the landlord's claim and believes the claim to be without
merit. If the landlord were to prevail in its assertion, the Company is
indemnified by TALP for the amount due at June 30, 1994 ($180,000) and the
Company believes it would be entitled to a reduction in the purchase price of
TAPR relating not only to the 18 months ended December 31, 1995 but also
relating to the 17 1/2 future years under the lease. Such purchase price
reduction would be funded, in part, from the proceeds of the TAPR purchase
escrow (See Note 2).
Historical Railroad Operations
- ------------------------------
The Company is a defendant in various personal injury legal actions
relating to its railroad operations prior to reorganization and has insurance
coverage relating to such actions. In accordance with the provisions of a 1990
settlement agreement (the "Settlement Agreement") with its insurance carriers,
the Company receives quarterly reimbursement for certain personal injury legal
actions. At December 31, 1995, $87,000 was reimbursable to the Company for
amounts expended in defense and settlement of such actions. This amount has been
classified as "Due from insurance companies." Three participants in the
insurance settlement are insolvent. Unreimbursed claims insured by these
insolvent companies totaled $61,000 from 1992 through December 31, 1995. The
Company believes that it may be entitled to reimbursement of such amounts from
the other parties to the agreement and may request an arbitration hearing on
such matters. Based upon the backlog of pending personal injury cases and the
Company's experience in settling such cases, the Company has established a
reserve of $146,000 reflecting the potential effect of such insolvencies on
future insurance reimbursement if no recovery is received from either the
insolvent carriers or the other parties to the Settlement Agreement. The reserve
associated with such insolvencies may increase if additional claims are filed;
however, the Company does not believe that such amount will be material.
Environmental
- -------------
Reading Company ("Reading") and a wholly-owned subsidiary, Reading
Transportation Company ("RTC"), have each been advised by the Environmental
Protection Agency ("EPA") that they are potentially responsible parties ("PRPs")
under environmental laws including Federal Superfund legislation ("Superfund")
for a site located in Douglassville, Pennsylvania. The EPA issued an
Administrative Order under Superfund against 34 PRPs requiring, among other
things, that the named parties be required to incinerate materials at the site
pursuant to a June 30, 1989 Record of Decision ("ROD"). The ROD estimated that
the incineration would cost approximately $53 million. Thirty-six PRPs were also
named in a civil action brought by the United States Government which seeks to
recover alleged costs incurred at the site by the United States of approximately
$22 million. Reading and RTC have each been named in a third-party action
instituted by the majority of the 36 PRPs sued by the United States. The actions
instituted
F-15
<PAGE>
Reading Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1995
(amounts in tables in thousands, except shares and per share data)
against the Company and approximately 300 PRPs seek to have the parties
contribute to reimbursement for past costs and any costs associated with further
remediation at the site.
During 1994, based upon the Company's and counsel's evaluation of possible
outcomes in the matter, the Company increased its "Provision for environmental
matters" by $1,200,000. On September 14, 1995, the federal district court judge
who presided over Reading's reorganization ruled that all liability asserted
against Reading relating to the site was discharged pursuant to the consummation
order issued in conjunction with the Company's amended plan of reorganization on
December 31, 1980. The United States Department of Justice and a named defendant
in the above described Administrative Order have filed appeals of the decision.
The judge's decision did not affect the potential liability of RTC for the site.
RTC has no assets and therefore cannot fund a settlement or judgement relating
to this matter and the Company believes that the potential liability of RTC, if
any, is not in excess of $300,000. Based upon the appeal and possible alternate
attempts by the PRPs to obtain Reading's participation in funding for the site
as well as the existence of the other environmental matters set forth below, the
Company has not reduced its "Provision for environmental matters."
The Company is a party to a consent decree relating to a Superfund site
located on land owned by the Company. Apart from future operation and
maintenance expenses ("O&M"), remediation is complete. During 1994, the Company
paid approximately $106,000 as its estimated share of ten years of O&M and
charged such amount to "Provisions for environmental matters" expense. The
Company believes that the amounts expended to date will be adequate to fund O&M
at the site. If additional amounts are required, such amounts would not be
material.
During 1995, the Company settled an action seeking the recovery of
$3,800,000 of alleged environmental cleanup costs from five defendants under
various provisions of New Jersey law for $235,000, which approximates the amount
previously accrued by the Company to provide for its share of the liability.
The Company believes that one of its properties, the Viaduct may be
contaminated by polychlorinated biphenyls ("PCBs") resulting from former
railroad operations on that property conducted by or on behalf of the Reading
Railroad, Conrail, the City of Philadelphia or the Southeastern Pennsylvania
Transportation Authority ("SEPTA"). The Company has advised the Environmental
Protection Agency of the potential contamination. The Company has not determined
the scope and extent of any such PCB contamination. However, the Company has
been advised by counsel that, given the lack of regulatory attention to the
Viaduct in the eleven years which have elapsed since EPA was notified of the
likelihood of contamination, it is unlikely that the Company will be required to
decontaminate the Viaduct or incur costs related thereto. In the event that the
Company is required to incur expenditures to remove PCB contamination from the
Viaduct, under terms of a settlement of certain litigation (See Note 16),
Conrail, the City of Philadelphia and SEPTA would be required to fund 52 to 55%
of such costs.
Prior to the Company's reorganization, the Company had extensive railroad
and related operations. Such operations could have contributed to environmental
contamination of properties now owned by the Company, previously sold or leased
by the Company, or to which the Company, prior to its reorganization, sent
waste. The ultimate extent of liabilities, if any, with respect to such matters,
as well as the timing of cash disbursements, if any, cannot be determined.
However, management is of the opinion that while the ultimate liability
resulting from such matters could have a material effect upon the results of
operations in a given year, they will not have a material adverse effect upon
the Company's financial position or liquidity.
F-16
<PAGE>
Reading Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1995
(amounts in tables in thousands, except shares and per share data)
The following is an analysis of the Company's accrual for environmental
claims:
Balance at January 1, 1993 $ 771
Provisions 241
Payments (676)
------
Balance at December 31, 1993 336
Provisions 1,306
Payments (133)
------
Balance at December 31, 1994 1,509
Provisions 0
Payments (248)
------
Balance at December 31, 1995 $1,261
======
NOTE 11 -- LEASE AGREEMENTS
Cine Vista conducts all of its operations in leased premises. The leases
relate to motion picture theaters with remaining terms of approximately 6.5 to
27 years with certain leases containing options to extend the leases for up to
an additional 30 years. The minimum remaining lease term, inclusive of any
renewal options, for any of Cine Vista's theaters is approximately 17.5 years.
Cine Vista also leases office, warehouse space and various equipment. Certain
theater leases provide for contingent rentals based upon a specified percentage
of theater revenues with a guaranteed minimum. Performance under one lease has
been guaranteed by the Company. Substantially all of the leases require the
payment of property taxes, insurance and other costs applicable to the property.
The Company also leases office space and various equipment under noncancelable
operating leases. With the exception of one capital lease, all leases are
accounted for as operating leases.
Cine Vista determines annual base rent expense by amortizing total minimum
lease obligations on a straight-line basis over the lease terms. Base rent
expense under operating leases totaled $2,139,000, $1,097,000, and $75,000, in
1995, 1994, and 1993, respectively. In 1995 and 1994, contingent rental expense
under the Cine Vista operating leases totaled $197,000 and $111,000,
respectively.
F-17
<PAGE>
Reading Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1995
(amounts in tables in thousands, except shares and per share data)
Future minimum lease payments, by year and in the aggregate, under
noncancelable operating leases and the capital lease consist of the following at
December 31, 1995:
Capital Operating
Lease Leases
----- ------
1996 $95 $1,411
1997 95 1,328
1998 95 1,401
1999 95 1,413
2000 95 1,401
Thereafter 1,258 14,526
----- ------
Total net minimum lease payments 1,733 $21,480
=======
Less amount representing interest (1,208)
------
Present value of net minimum lease
payments under capital lease $ 525
======
In May 1995, Cine Vista and a landlord amended a lease originally executed
in July 1994 for a new eight-plex motion picture theater. The lease became
effective and operations at the theater commenced in December 1995. Cine Vista
was responsible for certain construction costs of the theater.
In June 1995, Cine Vista entered into a lease agreement for a new six-plex
motion picture theater. The lease provides for a 20-year term with an average
annual base rent of approximately $195,000 with options to extend the lease up
to an additional 10 years. The lease will be effective after completion of
construction of the new theater. Cine Vista is responsible for certain
construction costs of the theater which are presently estimated to total $1.2
million. Completion of construction and commencement of theater operations is
scheduled to occur in late 1996 or early 1997. The lease provides for contingent
rentals based upon a specified percentage of theater revenues with a guaranteed
minimum and requires the payment of property taxes, insurance and other costs
applicable to the property.
NOTE 12 -- RELATED PARTY TRANSACTIONS
Robert F. Smerling serves as president of Cine Vista. In accordance with
the terms of Mr. Smerling's employment, the Board of Directors authorized and
extended a $1,000,000 loan to Mr. Smerling in December 1993. Principal relating
to the fully secured loan, which accrued interest at the prime rate of interest
plus one percent, was repaid by Mr. Smerling in April 1994.
In 1994 and 1995, the Company's Board of Directors voted to waive the
transfer restrictions imposed by the provisions of the Company's Class A Common
Stock to the extent necessary to permit James J. Cotter, Chairman of the Board
of Directors of the Company and Craig to acquire additional shares of the
Company's Class A Common Stock. The transfer provisions prohibit a party from
acquiring more than 4.75% of the Company's outstanding capital stock without the
permission of the Company's Board of Directors and are intended to assure the
continuing availability of the Company's tax loss carryforwards by precluding a
change in control which could limit the value of the carryforwards. Prior to
granting the waiver of the restrictions, the Board of Directors had determined
that acquisition of the shares by Mr. Cotter and Craig would not effect the
continuing availability of the Company's tax loss carryforwards.
The Company is presently negotiating to acquire a multiplex theater
loacated in New York City (See Note 4). The theater will be owned jointly by
City Cinemas, a Manhattan-based theater operator (or its affiliates) and
F-18
<PAGE>
Reading Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1995
(amounts in tables in thousands, except shares and per share data)
the Company. It is anticipated that City Cinemas, owned in part by James J.
Cotter, the Company's Chairman, will operate the theater pursuant to a
management agreement. The terms of that management agreement have not yet been
negotiated. Robert F. Smerling, President of Cine Vista, also serves as
President of City Cinemas.
NOTE 13 - CONDEMNATION AND OTHER INCOME
During 1995, the Company and the Commonwealth of Pennsylvania Department
of Transportation ("PennDot") agreed to settle certain litigation related to
PennDot's 1985 condemnation of a bridge which connected sections of a
right-of-way which was owned by the Company and located in center city
Philadelphia. The Company received $1,146,000 in settlement of this claim during
the fourth quarter of 1995 and the income related thereto has been recorded as
"Condemnation and other" income in the Company's Consolidated Statement of
Operations.
"Condemnation and other" income also includes $425,000 received by the
Company from ARAMARK in accordance with a litigation settlement which
encompassed disputes relating to ARAMARK's tenancy in One Reading Center, a
32-story office tower in which the Company conveyed its interest in 1985.
Additionally, $319,000 was received in settlement of two matters relating to the
Company's former railroad operations and $223,000 relating to certain unclaimed
reorganization obligations (See Note 7) were also included in "Condemnation and
other" in the Company's Consolidated Statement of Operations.
NOTE 14 -- LONG-TERM DEBT
In December 1995, Cine Vista entered into a $15 million eight year
revolving credit agreement (the "Credit Agreement") with a bank. Under terms of
the Credit Agreement, Cine Vista may borrow up to $15 million to repay Cine
Vista acquisition loans, which loans are payable to a wholly-owned subsidiary of
the Company (the "Subsidiary Loans"), and fund certain new theater development
expenditures (the "Development Expenditures"). During the initial 30 months of
the eight-year term, Cine Vista may borrow and repay amounts outstanding under
the Credit Agreement. Amounts outstanding at the end of the 30 month period are
payable in increasing quarterly installments over the balance of the loan term.
At December 31, 1995, no amounts were outstanding under this agreement.
As security for the loan, Cine Vista has pledged substantially all of its
assets. In addition, the stock of Cine Vista's parent company has been pledged
as security for the loan. In conjunction with the loan, the Company has also
agreed to subordinate to the lender its right to payment of the Subsidiary Loans
as well as certain other fees payable by Cine Vista to the Company under certain
circumstances. In addition, the Company has agreed to contribute funds to Cine
Vista in the event that estimated unpaid Development Expenditures exceed the
amount of funds available to Cine Vista under the Credit Agreement.
The provisions of the Credit Agreement require Cine Vista to maintain a
minimal level of net worth and other financial ratios, restrict the payment of
dividends, and limit additional borrowings and capital expenditures. Borrowings
under the Credit Agreement accrue interest at LIBOR (the London Interbank
Offered Rate) plus 2.25%, the cost of Section 936 deposits (deposits held by
lenders in Puerto Rico which are qualified under Section 936 of the Internal
Revenue Code) to the lender (currently 4.91%) plus 2.25%, or the base rate plus
1/2 of 1%, at Cine Vista's election. In accordance with the provisions of the
Credit Agreement, Cine Vista is required to pay a commitment fee on the unused
commitment equal to 1/2 of 1%.
F-19
<PAGE>
Reading Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1995
(amounts in tables in thousands, except shares and per share data)
NOTE 15 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for 1995 and 1994 is summarized below:
<TABLE>
<CAPTION>
First Second Third Fourth
1995: Quarter Quarter Quarter Quarter
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues $3,808 $4,561 $7,309 $4,295
Net (loss) income ($79) $401 $2,065 ($36)
=========== =========== =========== ============
Per share information:
Net (loss) income ($.02) $.08 $.42 ($.01)
=========== =========== =========== ============
First Second Third Fourth
1994: Quarter Quarter Quarter Quarter
----------- ----------- ----------- ------------
Revenues $755 $945 $5,437 $3,853
Net (loss) income ($125) $147 ($1,393) ($281)
=========== =========== =========== ============
Per share information:
Net (loss) income ($.03) $.03 ($.28) ($.05)
=========== =========== =========== ============
</TABLE>
1995:
- ----
The operating results of Cine Vista are included in each quarter's
financial information. The second quarter results include $425,000 received in
settlement of certain litigation between the Company and ARAMARK (See Note 13)
and $165,000 in expenses related to the review of theater acquisitions (See Note
4). The third quarter results include revenues of $1,146,000 in condemnation
proceeds (See Note 13) as well as $319,000 received in settlement of two matters
related to the Company's former railroad operations. Also included in the third
quarter was a $290,000 equity loss from Reading International. The fourth
quarter results include revenues of $223,000 related to unclaimed reorganization
debt-holders' obligations (See Note 7) and a $100,000 equity loss from Reading
International.
1994:
- ----
The operating results of Cine Vista are included in the quarterly
financial information after June 30. The third quarter results include
$4,924,000 in theater revenues and $3,768,000 in theater cost of sales
(inclusive of depreciation and amortization). Fourth quarter results include
$3,177,000 in theater revenues and $3,000,000 in theater cost of sales
(inclusive of depreciation and amortization). The second quarter results include
a $265,000 gain on sale of real estate which was located in center city
Philadelphia. Third quarter results also include a $1,305,000 provision for
environmental matters and a $795,000 charge related to loans the Company made to
OREI. Fourth quarter revenues include a gain of $179,000 from the S.R. joint
venture.
F-20
<PAGE>
Reading Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1995
(amounts in tables in thousands, except shares and per share data)
NOTE 16 -- SUBSEQUENT EVENT I
In 1991, the Company filed a lawsuit against SEPTA, Conrail, the City of
Philadelphia, and other parties which sought to recover costs expended by the
Company in conjunction with the cleanup of PCBs in the Reading Terminal Train
Shed and a portion of the viaduct south of Vine Street. In January 1996, the
Company and several parties agreed to settle this litigation by providing for
the Company to receive payments totaling $2.35 million which amount the Company
anticipates receiving in 1996. The parties to the settlement also agreed to pay
an amount ranging from 52% to 55% of certain future costs the Company may incur
in cleaning environmental contamination on the Viaduct.
NOTE 17--SUBSEQUENT EVENTS II
On March 29, 1996, the Company and Craig entered into a capital funding
agreement (the "Capital Funding Agreement") with respect to Reading
International pursuant to which they agreed to increase the capital committed by
the Company and Craig to Reading International from $10 million to approximately
$103 million through a combination of cash contributions and secured capital
funding undertakings. Under the terms of the Capital Funding Agreement, the
Company and Craig each agreed to immediately contribute to Reading International
$12,500,000 in cash, for an aggregate $25,000,000. In addition, the Company and
Craig have undertaken to contribute up to an additional $37,500,000 each, for an
aggregate future commitment of $75,000,000 on an as needed basis. The
commitments of the Company and Craig are secured by various assets of the two
parties. The collateral pledged by Craig was reviewed by an independent
committee of the Company's Board of Directors comprised of outside directors who
are unaffiliated with Craig, and found to be adequate.
On March 29, 1996, the Company purchased from Craig 1,564,473 shares of the
common stock of Citadel Holding Corporation ("Citadel" and the "Citadel Common
Stock", respectively) for an aggregate purchase price of $3,324,505,
representing slightly less than $2.125 per share. The closing price of Citadel
Common Stock on the American Stock Exchange on March 28, 1996 was $2.25 per
share. The Company paid Craig for the Citadel Common Stock with a five year
unsecured promissory note which provides for the payment of interest at a rate
equal to LIBOR plus 2.25%. The Company also acquired from Craig a one year
option to acquire, at fair market value, as determined by an investment banker
selected by the parties, 1,329,114 shares of the 3% Cumulative Voting
Convertible Preferred Stock, stated value $3.95 per share of Citadel and an
option to acquire a warrant to acquire 666,000 shares of Citadel Common Stock.
The transaction was separately reviewed, negotiated and approved by an
independent committee of the Company's Board of Directors comprised of outside
directors who are unaffiliated with Craig, and found to be adequate.
F-21
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Reading Company
We have audited the consolidated balance sheets of Reading Company and
subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Reading
Company and subsidiaries at December 31, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in 1993 the
Company changed its method of accounting for income taxes.
/s/ Ernst & Young LLP
Philadelphlia, Pennsylvania
February 16, 1996, except Note 17,
the date of which is March 29, 1996
F-22
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
READING COMPANY AND SUBSIDIARIES
(in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
- -----------------------------------------------------------------------------------------------------------------------------------
Balance Balance
DESCRIPTION at Beginning Charged to Costs Charged to Other Deductions- at End
of Period and Expenses Accounts - Describe Describe of Period
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts $ 339 $ 1 $49 (1) $291
Valuation provision for loan to
OREI (Development expense) 795 795
Real estate valuation provision 42 42
Year ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful accounts $ 360 $ 10 $31 (1) $339
Valuation provision for loan to
OREI (Development expense) 0 795 795
Real estate valuation provision 42 42
Year ended December 31, 1993:
Deducted from asset accounts:
Allowance for doubtful accounts $ 343 $ 86 $69 (1) $360
Real estate valuation provision 3,404 3,362 (2) 42
</TABLE>
(1) Uncollectible accounts written off and cash receipts.
(2) Property sales.
S-1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this annual report to be
signed on its behalf by the undersigned thereunto duly authorized.
READING COMPANY
By: /s/ S. Craig Tompkins
----------------------------------
S. Craig Tompkins, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title Date
/s/ James J. Cotter
- -------------------------------------
James J. Cotter Chairman and Director 3/28/96
(Principal Executive Officer)
/s/ S. Craig Tompkins
- -------------------------------------
S. Craig Tompkins President and Director 3/28/96
/s/ James A. Wunderle
- -------------------------------------
James A. Wunderle Executive Vice President, 3/28/96
Chief Operating Officer and
Treasurer
(Principal Financial Officer)
/s/ Eileen M. Mahady
- -------------------------------------
Eileen M. Mahady Controller 3/28/96
(Principal Accounting Officer)
/s/ Edward L. Kane
- -------------------------------------
Edward L. Kane Director 3/28/96
<PAGE>
/s/ Gerard P. Laheney
- -------------------------------------
Gerard P. Laheney Director 3/28/96
/s/ Ralph B. Perry III
- -------------------------------------
Ralph B. Perry III Director 3/28/96
/s/ John W. Sullivan
- -------------------------------------
John W. Sullivan Director 3/28/96
/s/ Albert J. Tahmoush
- -------------------------------------
Albert J. Tahmoush Director 3/28/96
<PAGE>
EXHIBITS
3.7 By-Laws of Registrant, as amended October 6, 1995.
10.9 Lease Agreement between Palma Real Associates, S.E. and Theater
Acquisitions of Puerto Rico, Inc. dated as of July 13, 1994.
10.10 The First Amendment dated May 10, 1995 between Palma Real Associates,
S.E. and Reading Cinemas of Puerto Rico, Inc. (successor by merger to
Theater Acquisitions of Puerto Rico, Inc.) to the Lease Agreement between
Palma Real Associates, S.E. and Theater Acquisitions of Puerto Rico, Inc.
dated as of July 13, 1994.
10.11 Credit Agreement by and between Reading Cinemas of Puerto Rico, Inc.,
and Citibank, N.A., as administrative agent for the Lenders thereunder
dated as of December 20, 1995.
10.12 The First Amendment dated February 7, 1996 to the Credit Agreement by and
between Reading Cinemas of Puerto Rico, Inc., and Citibank, N.A., as
administrative agent for the Lenders thereunder dated as of December 20,
1995.
10.13 Limited Liability Company Agreement of Reading International Cinemas
LLC dated November 9, 1995.
10.14 RC Revocable Trust Agreement between Reading Investment Company, Inc.
and Craig Corporation and Craig Management, Inc. as trustee, dated
November 9, 1995.
10.15 Lease Agreement between Mayaguez Shopping Center, S.E. and Reading
Cinemas of Puerto Rico, Inc. dated as of August 10, 1995.
10.16 Contract of Sale of Real Estate between Brick & Pipe Industries LTD and
Burgundy Two Pty LTD dated October 10, 1995.
10.17 Contract of Sale of Real Estate between Royal Society for the Prevention
of Cruelty to Animals (Victoria) Incorporated and Burgundy Two Pty LTD
dated November 9, 1995.
10.18 Stock Purchase and Sale Agreement dated as of March 30, 1996 by and
between Reading Holdings, Inc. and Craig Corporation.
10.19 Amended and Restated Capital Funding Agreement by and between Reading
Investment Company, Inc., Craig Corporation, Craig Management Inc., Craig
Corporation and Reading International Cinemas LLC.
21.1 Registrant's Subsidiaries.
23.1 Consent of Independent Auditors - Ernst & Young LLP.
<PAGE>
FORM 10-K/A
Amendment No. 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
---------- ----------
Commission file number 1-649
READING COMPANY
- ------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-6000773
- ----------- ------------
(State of incorporation) (I.R.S. Employer Identification No.)
30 South Fifteenth Street
13th Floor
Philadelphia, Pennsylvania 19102
- -------------- ------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 215-569-3344
Securities registered pursuant to Section 12(b) of the Act: None
<PAGE>
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.01 par value
(Title of class)
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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of March 28, 1996, 4,962,272 shares of Class A Common Stock and 10,955
shares of Common Stock were outstanding and the aggregate market value of voting
stock held by nonaffiliates of the Registrant was approximately $22,160,159.
Part III, Items 10-13 are amended in their entirety as set forth herein.
PART III
Item 10. Directors and Executive Officers of the Registrant
Name Age Position
- ---- --- --------
James J. Cotter (1) 58 Chairman of the Board, Chairman of the
Executive Committee of the Board and a Director
S. Craig Tompkins 45 President and a Director
Edward L. Kane (1)(2) 58 Chairman of the Audit and Finance Committee of
the Board and a Director
Gerard P. Laheney 58 Director
Ralph B. Perry III (1) 60 Director
John W. Sullivan (1)(2) 61 Director
Albert J. Tahmoush (2) 74 Director
Charles S. Groshon 42 Vice President
Eileen M. Mahady 30 Controller
B. John Rochester 52 Chief Executive Officer, Australian Cinema
Operations and Reading Australia Pty Ltd.
Robert F. Smerling 61 Chief Executive Officer, Domestic and Puerto
Rico Cinema Operations and Reading
International Cinemas LLC
James A. Wunderle 44 Executive Vice President, Chief Operating
Officer, Chief Financial Officer and Treasurer
- --------
(1) Member of the Executive Committee. The Executive Committee is appointed
annually by the Board of Directors and exercises the authority of the Board
of Directors in the management of the business and affairs of the Company
between meetings of the Board of Directors. The Executive Committee is
responsible for recommending to the Board of Directors remuneration for
senior management and officers of the Company, recommending adoption of
compensation plans and the granting of options under the Company's stock
option plan and recommending to the Board of Directors nominees to be
elected to the Board of Directors by the shareholders or by the Board of
Directors in the case of vacancies which occur between meetings of the
shareholders. The Executive Committee held one meeting in 1995.
(2) Member of the Audit and Finance Committee. The Audit and Finance Committee
is appointed annually by the Board of Directors to recommend the selection
of independent auditors, review the scope and results of the annual audit,
review financial results and status, review and assess the adequacy of the
Company's accounting practices, financial controls and reporting systems and
assess the financial planning functions of the Company. During 1995, the
Audit and Finance Committee held two meetings.
- 1 -
<PAGE>
Mr. Cotter has been Chairman of the Board of Directors since December 1991,
Chairman of the Company's Executive Committee since March 1992 and a director
since September 1990. Mr. Cotter is the principal executive officer of the
Company. Mr. Cotter has been Chairman of the Board of Craig since 1988, and a
director since 1985. Mr. Cotter has been a director and the Chairman of the
Board of Citadel since 1991. From October 1991 to June 1992, Mr. Cotter also
served as the acting Chairman of Citadel's wholly-owned subsidiary, Fidelity
Federal Bank, FSB ("Fidelity"), and served as a director of Fidelity until
December 1994. Mr. Cotter has been a director and Chief Executive Officer of
Townhouse Cinemas Corporation (motion picture exhibition) since 1987, Executive
Vice President and a director of The Decurion Corporation (motion picture
exhibition) since 1969 and a director of Stater Bros. Holdings, Inc. and its
predecessors (retail grocery chain) since 1987. From 1988 through January 1992,
Mr. Cotter also served as the President and a director of Cecelia Packing
Corporation (a citrus grower and packer), a company wholly owned by Mr. Cotter.
Mr. Cotter is also a director and Executive Vice President of Pacific, a
wholly-owned subsidiary of The Decurion Corporation.
Mr. Tompkins has been President and a director of the Company since March
1993. He serves as the Vice Chairman of Reading Cinemas and Managing Director of
Reading International. Mr. Tompkins is President and a director of Craig and has
served in such positions since March 1, 1993. Prior thereto, Mr. Tompkins was a
partner in the law firm of Gibson, Dunn & Crutcher for more than five years. Mr.
Tompkins has been a director of Citadel since May 1993, became Vice Chairman in
August 1994, and Secretary, Treasurer and Principal Accounting Officer in
September 1994. Mr. Tompkins has served as a director of G&L Realty Corp., a New
York Stock Exchange listed REIT, since December 1993.
Mr. Tompkins was elected President of the Company and to the Board of
Directors of the Company effective March 1, 1993. On that same date that he was
elected to the positions with the Company, Mr. Tompkins was elected by the
directors of Craig as the President and as a member of the Board of Directors of
that corporation. Although the terms of Mr. Tompkins' employment with the
Company and with Craig are independent of one another, Mr. Tompkins has advised
the Company that he would not have accepted the positions with the Company if he
had not been elected that same day to his current positions at Craig and that it
was his understanding, based upon negotiations with the Chairman of the Board of
the Company and of Craig, that, subject to the approval of the Directors of the
Company and of Craig, he would be serving in similar capacities at both the
Company and Craig. The Company has been advised by Craig that Craig has no
agreement or understanding with Mr. Tompkins with respect to his serving as an
officer or director of the Company either in his individual capacity or on
behalf of Craig. Mr. Tompkins' understanding with the Company concerning the
terms of his employment anticipates that he will serve as a director of the
Company in addition to serving as President.
Mr. Kane has been a director of the Company since 1989 and has been
Chairman of the Company's Audit and Finance Committee since October 1995. Mr.
Kane currently serves as a consultant to SunSurgery Corporation, a subsidiary of
Sun Healthcare Group, Inc. Mr. Kane served as Vice President of SunSurgery
Corporation from February through November 1995. Prior to its acquisition by Sun
Healthcare Group, Inc. in February 1995, Mr. Kane served as Chairman, Chief
Executive Officer and a director of Altis Outpatient Services, Inc., which owned
and operated ambulatory surgical centers, since February 1993. Mr. Kane served
as President of the Company from December 1991 through January 1993 and was
President of Craig from January 1988 through January 1993. From 1970 until March
1989, Mr. Kane was a member of Haskins, Nugent, Newnham, Kane & Zvetina, a
professional law corporation. Mr. Kane is a director of Craig and BDI Investment
Corporation.
Mr. Laheney has been a director of the Company since November 1993. Since
July 1995 Mr. Laheney has been a portfolio manager for Portfolio Resources Group
overseeing global equities, fixed income and foreign exchange investments. Mr.
Laheney has been President of Aegis Investment Management Company, an investment
advisory firm specializing in global investment portfolio management, since
January 1, 1994. Mr. Laheney was Vice President of The Partners Financial Group,
Inc. from December 1993 through June 1995 and Vice President of Dean Witter
Reynolds from April 1990 until December 1993. He was Vice President, Investments
of Prudential Bache Securities Inc. from July 1985 to April 1990. He is also a
director of Craig.
Mr. Perry has been a director of the Company since December 1988. Mr. Perry
is a member in the Los Angeles, California law firm of Graven Perry Block Brody
& Qualls Inc., a professional corporation. Since 1985
- 2 -
<PAGE>
Mr. Perry has also been a director of Craig, Fidelity, and Gateway Investments,
Inc. (a licensed broker/dealer wholly owned by Fidelity).
Mr. Sullivan has been a director of the Company since January 1981. Mr.
Sullivan was Chairman of the Board of the Company from April 1986 through
December 1991. He was Chief Executive Officer of the Company from January 1981
to October 1986 and was President from January 1981 until April 1986. Mr.
Sullivan is engaged in real estate development.
Mr. Tahmoush has been a director of the Company since January 1981. From
March 1977 until his retirement in August 1985, he was Chairman, President and
Chief Executive officer of Frank B. Hall & Co., Inc., an insurance broker. He is
also a director and Deputy Chairman of UBAF Arab American Bank.
Mr. Groshon has been a Vice President of the Company since December 1988.
Prior thereto he served with the Company in various accounting positions.
Ms. Mahady has been the Controller of the Company since April 1990. Prior
to joining the Company, she was a senior auditor with Ernst & Young.
Mr. Rochester has been the Chief Executive Officer of the Company's
Australian cinema operations since November 1995. From 1990 through 1995, Mr.
Rochester was the Managing Director of Television & Media Services Ltd.
(formerly Hoyts Entertainment Ltd.). He also served in several other executive
offices for that organization since 1987.
Mr. Smerling was retained in November 1993 to serve as President of Reading
Cinemas, Inc. Mr. Smerling is President of Reading Cinemas of Puerto Rico, Inc.
("RCPR"). He served as president of Loews Theatre Management Corporation, a
subsidiary of Sony Corporation, from May 1990 until November 1993. Mr. Smerling
also serves as President and Chief Executive Officer of City Cinemas, a motion
picture exhibitor located in New York City, New York. Mr. Smerling has over 35
years experience in the motion picture exhibition industry.
Mr. Wunderle has been Chief Operating Officer since February 1990 and
Executive Vice President, Treasurer, and Chief Financial Officer since December
1988. He was Vice President of Finance, Chief Financial Officer and Treasurer
from January 1987 to December 1988 and prior thereto was Treasurer since March
1986.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers, directors and persons who own more than 10% of the
Company's Common Stock or Class A Common Stock to file reports to ownership and
changes in ownership with the Securities Exchange Commission (the "SEC"). The
SEC rules also require such reporting persons to furnish the Company with a copy
of all Section 16(a) forms they file.
Based solely on a review of the copies of the forms which the Company
received and written representations from certain reporting persons, the Company
believes that, during the fiscal year ended December 31, 1995, all filing
requirements applicable to its reporting persons were complied with except as
follows: John W. Sullivan failed to report his indirect acquisition of shares by
a foundation in which he exercises shared voting and dispositive control in
1992, Mr. Sullivan failed to report the disposition of shares directly
controlled by him to the same foundation in 1994 and Mr. Ralph B. Perry failed
to report the disposition of shares he sold to Craig Corporation in 1995. Craig
Corporation filed a timely Form 4 with respect to Mr. Perry's transaction. Mr.
Perry has since filed a Form 5 with the SEC.
- 3 -
<PAGE>
Item 11. Executive Compensation
I. SUMMARY COMPENSATION TABLE
The following table shows, for the years ending December 31, 1995, 1994 and
1993, the cash compensation paid by the Company, as well as certain other
compensation paid or accrued for those years, to each of the most highly
compensated executive officers of the Company whose compensation exceeded
$100,000 in all capacities in which they served:
<TABLE>
<CAPTION>
Long Term
Annual Compensation Awards
------------------- ------
Other Annual
Salary Bonus Compensation Options
Name and Principal Position Year ($) ($) ($)(2) (#)
- --------------------------- ---- ------ ------ ------------- -------
<S> <C> <C> <C> <C> <C>
James J. Cotter (1) 1995 $150,000
Chairman of the Board of
Directors 1994 150,000
1993 150,000
S. Craig Tompkins (3) 1995 $180,000
President
1994 180,000
1993 150,000 17,500
Robert F. Smerling (4) 1995 175,000
President, Reading Cinemas
of Puerto Rico, Inc. 1994 175,000
1993 20,192 15,000
James A. Wunderle 1995 130,000 $52,500
Executive Vice President,
Chief Operating Officer, 1994 120,000 50,000
Chief Financial Officer
and Treasurer 1993 115,000 50,000
</TABLE>
(1) Since December 1991, Mr. Cotter has been the principal executive officer of
the Company and may therefore be considered to have acted in a capacity
similar to the chief executive officer of the Company since that time.
(2) In accordance with Company practice, Mr. Cotter has received a fee for his
services as Chairman of the Board of Directors of $150,000 per annum since
December 1991.
(3) Mr. Tompkins was retained as President effective March 1, 1993. Amount set
forth for 1993 reflects salary for the period March 1 through December 31,
1993.
(4) Mr. Smerling was retained by the Company effective November 17, 1993.
Amount set forth reflects salary for 1993.
Directors who are not employees of the Company receive an annual retainer
of $24,000, except for the chairman of the Audit and Finance Committee who
receives an annual retainer of $26,000. The Chairman of the
- 4 -
<PAGE>
Board of Directors receives an annual retainer of $150,000. No separate fees are
paid for meetings of the Board or committee meetings.
Mr. Tompkins is entitled to a severance payment equal to his annual base
salary and continuation of medical and insurance benefits in the event that his
employment is involuntarily terminated and no change in control of the Company
has occurred. Mr. Tompkins is entitled to a severance payment equal to two years
annual salary in the event that a change in control of the Company occurs.
Mr. Smerling is entitled to a severance payment equal to his annual base
salary if he is terminated by the Company. Mr. Smerling also may borrow up to
four percent of the capitalization of the Company's theater subsidiaries or, one
million dollars, whichever amount is less, from the Company to invest in stock
of the Company's theater subsidiaries.
Messrs. Wunderle and Groshon and Ms. Mahady are entitled to receive
payments equal to twelve, nine and four months, respectively, of annual base
salary in the event their individual employment with the Company is
involuntarily terminated.
II. OPTION GRANT TABLE
No options were granted under the Company's 1992 Non-Qualified Stock Option
Plan during the year ended December 31, 1995 to any of the persons named in the
Summary Compensation Table above.
III. OPTION EXERCISES AND YEAR-END TABLE
The following sets forth information with respect to the options held by
the persons named in the Summary Compensation Table above as of December 31,
1995. No options were exercised by such persons during the fiscal year ended
December 31, 1995 and none of the options held by such persons at December 31,
1995 had exercise prices which were below the market price of the Company's
Class A common stock as of that date.
<TABLE>
<CAPTION>
Fiscal Year-End Option Values
Number of
Unexercised
Options at 12/31/95
-------
# Exercisable /
Name Unexercisable
- ------ ---------------
<S> <C>
James J. Cotter 265,232 / 0
S. Craig Tompkins 13,125 / 4,375
Robert F. Smerling 6,000 / 9,000
James A. Wunderle 17,000 / 0
</TABLE>
Compensation Committee Interlocks and Insider Participation
The Executive Committee of the Board of Directors performs certain
functions which are equivalent to those performed by a compensation committee.
Mr. Cotter is the principal executive officer of the Company and also a member
of the Executive Committee of the Board of Directors. Mr. Kane is a member of
the Executive Committee, and served as President of the Company from December
1991 through January 1993. Mr. Sullivan, also a member of the Executive
Committee, served as the President and Chief Executive Officer of the Company
from 1981 through 1986.
- 5 -
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
Beneficial Ownership of Common Stock and Class A Common Stock
The following tables set forth certain information regarding the Common
Stock and Class A Common Stock of the Company owned on April 22, 1996 by (i)
each person or group who is known by the Company to own beneficially more than 5
percent of the Company's Common Stock or Class A Common Stock, (ii) each of the
Company's directors and (iii) all directors and officers of the Company as a
group.
5% Beneficial Owners
<TABLE>
<CAPTION>
Amount and
Nature of Percent of
Beneficial Class A
Name and Address of Beneficial Owner Class Ownership (1) Common Stock
- ------------------------------------ ------------ ----------------- ------------
<S> <C> <C> <C>
Craig Corporation Class A 2,452,526 (2) 49.43
550 South Hope Street Common Stock
Los Angeles, California 90071
James J. Cotter Class A 337,732 (2)(3) 6.46
550 South Hope Street Common Stock
Los Angeles, California 90071
Libra Advisors, Inc. Class A 268,500 (4) 5.41
c/o Ranjan Tandon Common Stock
277 Park Avenue, 26th Floor
New York, NY 10017
</TABLE>
Security Ownership of Management
<TABLE>
<CAPTION>
Amount and
Nature of Percent of
Beneficial Class A
Name of Beneficial Owner Ownership (1) Common Stock (1)
- ------------------------------------ ------------------- ----------------
<S> <C> <C>
James J. Cotter...................... 337,732 (2)(3) 6.46
Edward L. Kane....................... 9,000 (2)(5)(6) *
Gerard P. Laheney.................... 7,500 (2)(5) *
Ralph B. Perry III................... 31,000 (2)(5)(7) *
Robert F. Smerling................... 9,500 (8) *
John W. Sullivan..................... 210,858 (5)(9) 4.24
Albert J. Tahmoush................... 7,500 (5) *
S. Craig Tompkins.................... 10,150 (2)(10) *
James A. Wunderle.................... 17,000 (11) *
All Directors and Officers As a
Group (12 Persons).................. 643,616 (12) 12.16
</TABLE>
* Percentages of less than one percent have not been indicated.
(1) Includes outstanding shares of Class A Common Stock and Class A Common
Stock issuable within 60 days of April 22, 1996 upon the exercise of
outstanding stock options. All of the stock beneficially owned by the
directors or officers is Class A Common Stock.
- 6 -
<PAGE>
(2) Craig Corporation, a Delaware corporation, filed a Schedule 13D dated June
19, 1989, stating that the shares have been purchased for investment purposes.
Share information is presented as of a report filed on Form 4 with the SEC
dated February 8, 1996. James J. Cotter, is Chairman of the Board of the
Company and Craig. S. Craig Tompkins, is President of the Company and Craig.
Edward L. Kane, Gerard P. Laheney and Ralph B. Perry III are all members of
Craig's Board of Directors. James J. Cotter is also a principal shareholder of
Craig. Messrs. Cotter, Tompkins, Kane, Laheney and Perry all disclaim
beneficial ownership of the Company's shares held by Craig.
(3) Includes 4,500 shares held in a pension plan and 1,000 shares held by the
James J. Cotter Profit Sharing Plan. Mr. Cotter is eligible to acquire 265,232
shares through the exercise of stock options.
(4) Libra Fund, L.P., a Delaware limited partnership ("Libra"), Libra Advisors,
Inc., a New York corporation ("Advisors") and the general partner of Libra,
Ranjan Tandon and Chandrika Tandon, jointly filed a Schedule 13D with the SEC
dated December 12, 1995, stating that the shares have been purchased for
investment purposes. Mr. Tandon is the sole shareholder and president of
Advisors. Mrs. Tandon is the wife of Mr. Tandon. Libra, Advisors, and Mr.
Tandon may jointly be deemed to be the beneficial owners of 209,500 shares of
Class A common stock. Mrs. Tandon is the beneficial owner of 59,000 shares of
Class A common stock. Mrs. Tandon disclaims beneficial ownership of the shares
held by Libra, Advisors, and Mr. Tandon. Libra, Advisors, and Mr. Tandon each
disclaim beneficial ownership of the shares owned by Mrs. Tandon.
(5) Includes 7,500 shares which may be acquired through the exercise of stock
options.
(6) Includes 1,500 shares held in a retirement account.
(7) Includes 3,500 shares held in a retirement account.
(8) Includes 6,000 shares which may be acquired through the exercise of stock
options.
(9) Includes 100,920 shares owned by a foundation of which Mr. Sullivan is a
director. Mr. Sullivan has shared voting and dispositive power with respect to
such shares. Excludes 128,581 shares owned by Mr. Sullivan's children as to
which Mr. Sullivan disclaims beneficial ownership.
(10)Includes 13,125 shares which may be acquired through the exercise of stock
options. Excludes 200 shares held in Mr. Tompkins' wife's retirement plan
and 500 shares held in the trust of Mr. Tompkins' minor child as to which
Mr. Tompkins disclaims beneficial ownership.
(11)Includes 17,000 shares which may be acquired through the exercise of stock
options.
(12) Includes 338,857 shares which may be acquired through the exercise of stock
options.
Item 13. Certain Relationships and Related Transactions
Mr. Smerling serves as President of RCPR and City Cinemas, a New York
motion picture theater exhibitor. City Cinemas is an affiliate of Mr. Cotter,
the Company's Chairman. RCPR and City Cinemas have entered into an Executive
Sharing Agreement pursuant to which Mr. Smerling provides services to both RCPR
and City Cinemas entities and the cost of such services is shared by the
parties, if such costs cannot be allocated directly to such parties. Prior to
retaining Mr. Smerling and entering into the Executive Sharing Agreement, the
Board of Directors had determined that City Cinemas and RCPR are not competitors
and also noted that the arrangement provided RCPR with a chief executive officer
with background and experience which Reading Cinemas could not otherwise afford
based upon its present scope of operations.
- 7 -
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
READING COMPANY
By: /s/ James A. Wunderle
----------
James A. Wunderle
Executive Vice President and
Chief Operating Officer
April 29, 1996
- 8 -
<PAGE>
Exhibit I
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarterly period ended June 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition from ........ to ........
Commision file number 1-649
READING COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 23-6000773
(State of incorporation) (I.R.S. Employer Identification No.)
One Penn Square West
30 South Fifteenth Street, Suite 1300
Philadelphia, Pennsylvania 19102-4813
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 215-569-3344
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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes[X] No[_]
There were 4,964,533 shares of Class A Common Stock and 8,678 shares of
Common Stock outstanding as of July 27, 1996.
<PAGE>
INDEX
READING COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
PART I. - FINANCIAL INFORMATION PAGE
- ------------------------------- ----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- June 30, 1996
(Unaudited) and December 31, 1995................................................................... 3-4
Condensed Consolidated Statements of Operations -- Three Months and Six Months
Ended June 30, 1996 and 1995 (Unaudited)............................................................ 5
Condensed Consolidated Statements of Cash Flows -- Six Months
Ended June 30, 1996 and 1995 (Unaudited)............................................................ 6
Notes to Condensed Consolidated Financial Statements (Unaudited)....................................... 7-20
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 21-24
PART II. - OTHER INFORMATION
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K........................................................................ 25
Signatures....................................................................................................... 26
</TABLE>
-2-
<PAGE>
PART I - Financial Information
Item 1. Financial Statements
Reading Company and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except shares and per share amounts)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(Unaudited)
June 30, December 3,
1996 1995*
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $32,431 $44,147
Available-for-sale securities 49 42
Amounts receivable 726 624
Due from affiliates 96 1,040
Restricted cash 360 360
Inventories 88 112
Prepayments and other current assets 479 498
Due from insurance companies 63 87
- -------------------------------------------------------------------------------------------------
Total current assets 34,292 46,910
- -------------------------------------------------------------------------------------------------
Investment in Australian joint venture 13,174 640
Other investments 7,084 1,771
Restricted cash 214 362
Real estate held for sale or development 1,107 1,110
Property and equipment:
Buildings 733 733
Capitalized premises lease 538 538
Leasehold improvements 5,214 5,095
Equipment 3,761 3,787
Construction-in-progress 348 236
- -------------------------------------------------------------------------------------------------
10,594 10,389
Less: Accumulated depreciation 1,469 1,176
- -------------------------------------------------------------------------------------------------
9,125 9,213
Intangible assets:
Beneficial leases - net of accumulated amortization of $1,827 15,081 15,538
in 1996 and $1,370 in 1995
- -------------------------------------------------------------------------------------------------
45,785 28,634
- -------------------------------------------------------------------------------------------------
$80,077 $75,544
=================================================================================================
</TABLE>
* The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See Notes to Condensed Consolidated Financial Statements.
-3-
<PAGE>
Reading Company and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
(in thousands, except shares and per share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
(Unaudited)
June 30, December 3,
1996 1995*
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,955 $ 2,279
Accrued compensation 292 222
Accrued taxes and other 438 528
Film rent payable 783 299
Other liabilities 1,063 916
Note payable to affiliate 3,325 0
- -----------------------------------------------------------------------------------------------------
Total current liabilities 7,856 4,244
- -----------------------------------------------------------------------------------------------------
Capitalized lease, less current portion 519 521
Other liabilities 1,999 2,067
- -----------------------------------------------------------------------------------------------------
Total long term liabilities 2,518 2,588
- -----------------------------------------------------------------------------------------------------
Commitments and contingencies (See Note 10)
Shareholders' equity
Preferred stock, par value $1.00 per share:
Authorized -- 5,000,000 shares
Common stock, par value $.01 per share:
Authorized -- 10,000,000 shares
Issued 1996 -- 8,828 shares; 1995 -- 11,530 shares 1 1
Class A common stock, par value $.01 per share:
Authorized -- 15,000,000 shares
Issued 1996 -- 5,147,863 shares; 1995 -- 5,145,161 shares 51 51
Other capital 57,094 56,257
Retained earnings 15,237 15,035
Foreign currency translation adjustment (57) (10)
Class A common stock in treasury, at cost:
1996 -- 183,480 shares; 1995 -- 183,397 (2,623) (2,622)
- -----------------------------------------------------------------------------------------------------
Total shareholders' equity 69,703 68,712
- -----------------------------------------------------------------------------------------------------
$80,077 $75,544
=====================================================================================================
</TABLE>
* The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See Notes to Condensed Consolidated Financial Statements.
-4-
<PAGE>
Reading Company and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except shares and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
- --------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Theater:
Admissions $2,781 2,376 $5,557 $4,637
Concessions 1,043 901 2,064 1,710
Advertising and other 174 150 388 294
Real estate 70 68 144 135
Interest and dividends 491 594 1,076 1,103
Equity in earnings of affiliate 1,433 0 1,433 0
Other 9 472 24 490
- --------------------------------------------------------------------------------------------------------------
6,001 4,561 10,686 8,369
- --------------------------------------------------------------------------------------------------------------
EXPENSES:
Theater costs 3,141 2,586 6,112 4,917
Theater concession costs 179 153 347 293
Depreciation and amortization 386 341 772 678
General and administrative 917 1,066 2,087 2,004
Equity loss from Australian theater developments 52 0 307 0
- --------------------------------------------------------------------------------------------------------------
4,675 4,146 9,625 7,892
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 1,326 415 1,061 477
Income tax provision 13 14 22 155
- --------------------------------------------------------------------------------------------------------------
Net income $1,313 $401 $1,039 $322
==============================================================================================================
Per share information:
Net income $0.26 $0.08 $0.21 $0.06
==============================================================================================================
Average shares outstanding 4,973,222 4,973,368 4,973,241 4,973,398
==============================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-5-
<PAGE>
<TABLE>
<CAPTION>
Reading Company and Subsidiaries
Condensed Consolidated Statement of Cash Flows (Unaudited)
(in thousands)
Six Months Ended
June 30,
- -------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,039 $ 322
Adjustments to reconcile net income to
net cash provided from operating activities:
Depreciation 293 231
Amortization 476 455
Deferred rent expense 82 82
Equity in earnings from affiliate (1,433) 0
Equity loss from Australian theater developments 307 0
Deferred income tax expense 0 132
Changes in operating assets and liabilities:
Increase in amounts receivable (102) (338)
Decrease in inventories 24 4
(Increase) decrease in prepaids and other current assets (72) 145
Decrease in insurance proceeds receivable 24 514
Decrease in accounts payable and accrued expenses (344) (316)
Increase in film rent payable 484 233
Decrease in other liabilities (3) (206)
Other, net 54 (24)
- --------------------------------------------------------------------------------------
Net cash provided from operating activities 829 1,234
- --------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment (206) (270)
Investment in Australian joint venture (See Note 5) (12,888) 0
Purchase of Citadel preferred stock option (See Note 4) (50) 0
Angelika acquisition organization costs (See Note 4) (231) 0
Net proceeds from real estate joint venture investments 0 185
Decrease in restricted cash 148 60
Purchases of available-for-sale securities (91) (451)
Sales and maturities of available-for-sale securities 84 26,051
Decrease in due from affiliate 944 0
- -------------------------------------------------------------------------------------
Net cash (used for) provided from investing activities (12,290) 25,575
- -------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payments of debt financing costs (254) 0
Purchase of treasury stock (1) 0
- -------------------------------------------------------------------------------------
Net cash used for financing activities (255) 0
- -------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (11,716) 26,809
Cash and cash equivalents at beginning of year 44,147 9,413
- -------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 32,431 $36,222
=====================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-6-
<PAGE>
READING COMPANY AND SUBSIDIARIES
Notes to Condensed Financial Statements (unaudited)
June 30, 1996
(amounts in tables in thousands)
NOTE 1 -- OWNERSHIP AND BASIS OF PRESENTATION
Reading Company (the "Company") has operated motion picture exhibition
theaters in leased locations in the Commonwealth of Puerto Rico since the
acquisition of Theater Acquisitions of Puerto Rico, Inc. ("TAPR") in 1994. In
November 1995, the Company and Craig Corporation ("Craig"), currently the owner
of approximately 52.5% of the Company's capital stock, formed Reading
International Cinemas LLC ("Reading International"), a limited liability company
owned equally by the Company and Craig which has initiated theater development
activities in Australia. The Company's remaining real estate activities include
the managed sale of certain of its real properties, the possible future
development of certain center city Philadelphia properties and participation in
two real estate joint ventures.
The condensed consolidated financial statements of Reading Company and
Subsidiaries ("the Company") include the accounts of Reading Company and its
majority-owned subsidiaries. Significant intercompany transactions and accounts
have been eliminated. Certain amounts in previously issued financial statements
have been reclassified to conform with current classifications.
TAPR was acquired as of July 1, 1994 and the results of TAPR have been
consolidated with the Company's operating results since that date (See Note 3).
On December 31, 1994, TAPR was merged into its parent corporation, Reading
Cinemas of Puerto Rico, Inc. ("RCPR") with RCPR the surviving corporation and
the operating name changed to Cine Vista (unless otherwise required by the
context, TAPR, RCPR, and Cine Vista may be used interchangeably herein).
The financial statements have been prepared in accordance with generally
accepted accounting principles for interim information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments of a recurring nature considered necessary for a fair presentation
of the results for the interim periods presented have been included. Operating
results for the six months ended June 30, 1996 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1996. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1995.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Consolidated Statement of Cash Flows: For purposes of the Balance
Sheet and Statement of Cash Flows, the Company considers all highly liquid
investments with maturities of three months or less at the time of acquisition
to be cash equivalents. Cash equivalents are stated at cost plus accrued
interest, which approximates market value, and consist principally of federal
agency securities and short-term money market instruments.
Available-for-Sale Securities: Management classifies government securities
held by the Company with maturities in excess of three months at the time of
purchase as available-for-sale as such investments together with "Cash and cash
equivalents" are expected to be used to fund expansion of theater operations,
acquisition or other development activities.
-7-
<PAGE>
READING COMPANY AND SUBSIDIARIES
Notes to Condensed Financial Statements (unaudited)
June 30, 1996
(amounts in tables in thousands)
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
INVENTORIES: Inventories are comprised of confection goods used in Cine
Vista's operations and are stated at the lower of cost (first-in, first-out
method) or net realizable value.
INCOME PER SHARE: Income per share (Common Stock and Class A Common Stock)
is calculated by dividing net income (loss) by the aggregate of the weighted
average shares outstanding during the period and the dilutive effect, if any, of
common stock equivalents that are outstanding. There were 359,732 and 374,732
Class A Common shares issuable under stock option plans on June 30, 1996 and
1995, respectively. These options were anti-dilutive and were therefore
excluded from the per share calculation.
PROPERTY AND EQUIPMENT: Property and equipment is carried at cost.
Depreciation of buildings, capitalized premises lease, leasehold improvements
and equipment is recorded on a straight line basis over the estimated lives of
the assets or, if the assets are leased, the remaining lease term (inclusive of
options, if likely to be exercised), whichever is shorter. The estimated useful
lives are generally as follows:
Building and Improvements 40 years
Equipment 15 years
Furniture and Fixtures 7 years
Leasehold Improvements 20 years
INTANGIBLE ASSETS: Intangible assets are comprised of beneficial theater
leases used in Cine Vista's operations. The amount of the TAPR purchase price
ascribed to the beneficial leases was determined by an independent appraiser by
computing the present value of the excess of market rental rates over the rental
rates in effect under TAPR's leases at the time of the Company's acquisition of
TAPR and allocating such amount as a component of the purchase price of TAPR.
The beneficial leases are amortized on a straight-line basis over the remaining
term of the underlying leases which approximates 17 years.
TRANSLATION OF NON-U.S. CURRENCY AMOUNTS: The financial statements and
transactions of Reading International's (See Note 5) Australian operations are
maintained in their functional currency (Australian dollars) and translated into
U.S. dollars in accordance with SFAS No. 52 "Foreign Currency Translation".
Assets and liabilities are translated at exchange rates in effect at the balance
sheet date and shareholders' equity is translated at historical exchange rates.
Revenues and expenses are translated at the average exchange rate for the
period. Translation adjustments are reported as a separate component of
shareholders' equity.
NOTE 3 -- ACQUISITION OF CINE VISTA
Effective July 1, 1994, the Company acquired TAPR from Theater
Acquisitions, LP ("TALP") for an aggregate cash purchase price of approximately
$22,700,000, inclusive of acquisition costs of $323,000. Cine Vista operates
motion picture exhibition theaters in seven leased locations with a total of 44
screens in the Commonwealth of Puerto Rico. At the time of its acquisition, TAPR
operated 36 screens in six leased locations. The acquisition was accounted for
using the purchase method and TAPR's operating results since July 1, 1994 have
been consolidated with the operating results of the Company.
-8-
<PAGE>
READING COMPANY AND SUBSIDIARIES
Notes to Condensed Financial Statements (unaudited)
June 30, 1996
(amounts in tables in thousands)
The purchase price was subject to the satisfaction of certain contingencies
in accordance with the provisions of a purchase agreement by and among TAPR,
TALP and the Company dated July 1, 1994 (the "Purchase Agreement"). The landlord
of one of Cine Vista's theaters has the right to terminate the lease relating to
space presently housing two theaters, subject to six months notice. Accordingly,
$1 million of the purchase price was escrowed and was payable over 36 months
provided the landlord did not cancel the lease during such period or assert
other claims relating to the lease, in which case the escrow is available for
set off. The landlord has asserted certain claims relating to the computation of
the rent and the Company and TALP therefore amended the terms under which the
payments are made from the escrow. Under amended terms, payments of $30,000 are
paid monthly to TALP. This escrow, which is invested in short term commercial
paper, has been classified as "Restricted cash." At June 30, 1996, $557,000 was
due to TALP under this arrangement and has been classified as an "Other
liability" (See Note 10).
Cine Vista currently has three new theaters under development and is
seeking additional theater sites in Puerto Rico.
NOTE 4 -- INVESTMENTS
On November 8, 1995, the Company acquired from a major bank, for
$1,285,000, a judgement (the "Angelika Judgement") encumbering, among other
things, a controlling interest in Angelika Film Centers, Inc. ("AFCI") which has
as its principal asset a Manhattan multiplex theater, the Angelika. The
judgement was acquired as part of the Company's plan to acquire, in conjunction
with Manhattan-based City Cinemas Corporation ("City Cinemas") (James J. Cotter,
Chairman of the Company, has an ownership interest in City Cinemas), a
controlling interest in the Angelika. The Company also has acquired options to
purchase shares representing 5/13ths of the voting power of AFCI and to obtain
certain other creditor claims against AFCI. In July 1996 the Company signed a
definitive purchase agreement to acquire the Angelika, pursuant to which the
Company will, in effect, receive a credit against the purchase price equal to
the amount of the judgement, plus interest thereon at a rate of 9% per annum.
On March 29, 1996, the Company purchased from Craig 1,564,473 shares of the
common stock of Citadel Holding Corporation, ("Citadel" and the "Citadel Common
Stock", respectively) for an aggregate purchase price of $3,324,505,
representing slightly less than $2.125 per share and ownership of approximately
26.1% of Citadel Common Stock. The Company paid Craig for the Citadel Common
Stock with a five year unsecured promissory note (the "Reading Note") which
provides for the payment of interest at a rate equal to LIBOR plus 2.25%. The
Reading Note is recorded on the Condensed Consolidated Balance Sheet at June 30,
1996 as "Note payable to affiliate" and was retired on July 29, 1996. The
Company accounts for its investment in the Citadel Common Stock by the equity
method. Citadel's net earnings for the three months ended June 30, 1996 were
$5,541,000, inclusive of revenues of $1,573,000, a nonrecurring gain on the sale
of real estate of $1,473,000 and nonrecurring income of $4,000,000 from the
recognition for financial statement purpose of previously deferred proceeds from
the bulk sale of loans by a previously owned subsidiary of Citadel. Citadel's
net income available to common stockholders was $5,500,000 of which the
Company's share for the same period was $1,434,000 which amount is included in
the Condensed Consolidated Statement of Operations for the six months ended June
30, 1996.
Pro forma operating results reflecting the acquisition of Citadel are set
forth below for the six months ended June 30, 1996 and 1995. For purposes of
preparing the pro forma operating statements, the acquisition of the Citadel
investment was assumed to be completed at the beginning of each period presented
and certain adjustments
-9-
<PAGE>
READING COMPANY AND SUBSIDIARIES
Notes to Condensed Financial Statements (unaudited)
June 30, 1996
(amounts in tables in thousands)
have been made, including reductions in "Interest and dividend" income and the
recording of interest expense resulting from payment of the purchase price.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996 June 30, 1995
<S> <C> <C>
Revenues $10,739 $8,707
================ ================
Net income $ 1,029 $ 526
================ ================
Per Share:
Net income: $ .21 $ .11
================ ================
</TABLE>
The Company also acquired from Craig (for $50,000) a one year option to
acquire, at fair market value, as determined by an investment banker selected by
the parties, 1,329,114 shares of the 3% Cumulative Voting Convertible Preferred
Stock, stated value $3.95 per share, of Citadel and an option to acquire, under
certain circumstances, a warrant to acquire 666,000 shares of Citadel Common
Stock at an exercise price of $3 per share.
Management believes that the June 30, 1996 carrying amounts of the above-
mentioned investments and the Company's other investments totalling $661,000,
approximate fair value.
NOTE 5 -- READING INTERNATIONAL CINEMAS LLC
In November 1995, the Company and Craig formed Reading International to
develop and operate multiplex cinemas in Australia and other markets. A wholly
owned subsidiary of Reading International has retained the services of several
executive employees in Australia who provide services with respect to such
Australian operations on a full time or substantially full time basis. Reading
International is equally owned by the Company and Craig.
On March 29, 1996, the Company and Craig entered into a capital funding
agreement (the "Capital Funding Agreement") with respect to Reading
International pursuant to which they agreed to increase the capital committed by
the Company and Craig to Reading International from $10 million to approximately
$103 million through a combination of cash contributions and secured capital
funding undertakings. Under the terms of the Capital Funding Agreement, the
Company and Craig each immediately contributed to Reading International
$12,500,000 in cash, for an aggregate $25,000,000. In addition, the Company and
Craig have undertaken to contribute up to an additional $37,500,000 each, for an
aggregate future commitment of $75,000,000 on an as needed basis. The
commitments of the Company and Craig are secured by various assets of the two
parties. The collateral pledged by Craig was reviewed by an independent
committee of the Company's Board of Directors comprised of outside directors who
are unaffiliated with Craig, and found to be adequate to secure Craig's
commitment under the Capital Funding Agreement. The Company pledged its
interest in Cine Vista and government agency securities. The Company may
substitute collateral for the Funding Commitment, provided that the fair market
value of the collateral
-10-
<PAGE>
READING COMPANY AND SUBSIDIARIES
Notes to Condensed Financial Statements (unaudited)
June 30,1996
(amounts in tables in thousands)
substituted is equal to at least 125% of the Funding Commitment or, in the case
of government or government agency securities, equal to 100% of the Funding
Commitment.
The Company accounts for its investment in Reading International and its
foreign subsidiaries by the equity method. Summarized financial information for
Reading International as of June 30, 1996 is as follows:
<TABLE>
<S> <C>
Cash and cash equivalents $ 21,114
Other current assets 776
----------
Total current assets 21,890
Property and developments 7,922
Other noncurrent assets 181
----------
Total noncurrent assets 8,103
----------
Total assets $ 29,983
==========
Current liabilities 3,644
Shareholders' equity 26,349
----------
Total liabilities and shareholder's equity $ 29,993
==========
</TABLE>
Reading International's net loss for the six months ended June 30, 1996 was
$614,000, consisting primarily of general and administrative expenses and
development costs incurred with respect to its theater development activities.
The Company's share of the loss from Reading International was $307,000, which
is included in the Consolidated Statement of Operations for the six months ended
June 30, 1996.
As of June 30, 1996, advances and contributions amounting to approximately
$27,856,000 have been made to Reading International by Reading and Craig.
Pursuant to a land purchase contract, Reading International is required to make
an installment payment of $3,326,000 on December 20, 1996 which amount is
included in current liabilities on Reading International's balance sheet at June
30, 1996.
NOTE 6 -- LEASES
Cine Vista conducts all of its operations in leased premises. The leases
relate to motion picture theaters with remaining terms of approximately 7 to 26
years with certain leases containing options to extend the leases for up to an
additional 30 years. The minimum remaining lease term, inclusive of any renewal
options, for any of Cine Vista's theaters is approximately 17 years. Cine Vista
also leases office, warehouse space and various equipment. Certain theater
leases provide for contingent rentals based upon a specified percentage of
theater revenues with a guaranteed minimum. Performance under one lease has
been guaranteed by the Company. Substantially all of the leases require the
payment of property taxes, insurance and other costs applicable to the property.
With the exception of one capital lease, all leases are accounted for as
operating leases. Cine Vista determines annual base rent expense by amortizing
total minimum lease obligations on a straight-line basis over the lease terms.
Cine Vista's future minimum lease payments, by year and in the aggregate,
under noncancellable operating leases and the capital lease consist of the
following at June 30:
-11-
<PAGE>
READING COMPANY AND SUBSIDIARIES
Notes to Condensed Financial Statements (unaudited)
June 30, 1996
(amounts in tables in thousands)
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASES
----- ------
<S> <C> <C>
1997 $ 95 $ 1,315
1998 95 1,301
1999 95 1,426
2000 95 1,401
2001 95 1,401
Thereafter 1,211 13,826
---------- ----------
Total net minimum lease payments 1,686 $20,670
==========
Less amount representing interest (1,163)
----------
Present value of net minimum lease payments
under capital lease $ 523
==========
</TABLE>
In June 1995, Cine Vista entered into a lease agreement for a new six-plex
motion picture theater. The lease provides for a 20-year term with an average
annual base rent of approximately $185,000 with options to extend the lease up
to an additional 10 years. The lease also provides for contingent rentals based
upon a specified percentage of theater revenues with a guaranteed minimum and
requires the payment of property taxes, insurance and other costs applicable to
the property. The lease will be effective after completion of construction of
the new theater. Cine Vista is responsible for certain construction costs of
the theater which are presently estimated to total $1.2 million. Completion of
construction and commencement of theater operations is scheduled to occur in
1996.
NOTE 7 -- REAL ESTATE HELD FOR SALE OR DEVELOPMENT
"Real estate held for sale or development" at June 30, 1996 is carried at
the lower of cost or estimated net realizable value and is classified as a
noncurrent asset due to the inherent difficulty in estimating the timing of
future sales. The Company is exploring development and sale options for its
center city Philadelphia properties which are adjacent to the Pennsylvania
Convention Center site and is actively seeking buyers for its properties located
outside center city Philadelphia.
-12-
<PAGE>
READING COMPANY AND SUBSIDIARIES
Notes to Condensed Financial Statements (unaudited)
June 30, 1996
(amounts in tables in thousands)
NOTE 8 -- OTHER LIABILITIES
Other liabilities consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------------- ---------------
<S> <C> <C>
Reserve for guarantee obligations of
SWS Industries, Inc. (See Note 10) $ 406 $ 406
Obligations related to past railroad operations
and environmental issues (See Note 10) 1,248 1,251
Cine Vista deferred purchase price (See Note 3) 557 707
Minimum rent obligations 329 247
Other 522 372
--------------- ---------------
3,062 2,983
Less estimated current portion (1,063) (916)
--------------- ---------------
$ 1,999 $2,067
=============== ===============
</TABLE>
NOTE 9 -- INCOME TAXES
The Company accounts for income taxes under SFAS No. 109 "Accounting Income
Taxes". Under SFAS No. 109, an income tax provision is recorded in the statement
of operations using the enacted federal rates. Effective December 31, 1981,
after approval by its shareholders, the Company eliminated its accumulated
deficit by a charge to "Other capital". This quasi-reorganization did not
require the restatement of any assets or liabilities or any other modification
of capital accounts. Tax benefits realized from the carryforwards of pre-quasi-
reorganization losses have been included in the determination of net income and
then reclassified from "Retained earnings" to "Other capital". Had such tax
benefits been excluded from net income, the Company would have reported net
income of $202,000 or $.04 per share for the six months ended June 30, 1996 and
a net loss of $43,000 or $.01 per share for the six months ended June 30, 1995.
At December 31, 1995, net operating loss carryforwards totalled $162.7
million of which $123.1 million expires at the end of 1996 unless utilized prior
thereto and $39.6 million will expire in various amounts between 1997 and 2009
unless utilized prior thereto.
-13-
<PAGE>
READING COMPANY AND SUBSIDIARIES
Notes to Condensed Financial Statements (unaudited)
June 30,1996
(amounts in tables in thousands)
Carryforwards and temporary differences which give rise to the deferred tax
asset are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ -------------
<S> <C> <C>
Net operating loss carryforwards $ 54,581 $ 55,325
Reserves 1,004 1,004
Other, net 242 242
------------ -------------
Gross deferred asset 55,827 56,571
Valuation allowance (55,827) (56,571)
------------ -------------
Net deferred asset $ 0 $ 0
============ =============
</TABLE>
Based on an analysis of the likelihood of realizing the Company's gross
deferred tax assets (taking into consideration applicable statutory carryforward
periods), the Company concluded that under SFAS No. 109, a valuation allowance
for the entire asset was necessary.
The Company is required to pay federal alternative minimum tax ("AMT"). AMT
is calculated separately from the regular federal income tax and is based on a
flat rate applied to a broader tax base. Amounts payable thereunder cannot be
totally eliminated through the application of net operating loss carryforwards.
The Company recorded AMT expense of $22,000 and $23,000 in the six months ended
June 30, 1996 and 1995, respectively. Upon adoption of SFAS No. 109 in 1993, a
deferred tax asset of $132,000 was recorded for the tax benefits which were
determined by management to be more likely than not to be realized from the
Company's net operating loss carryforwards. The Company recorded a $132,000 tax
provision in the Condensed Consolidated Statement of Operations for the six
months ended June 30, 1995 related to the realization of such tax benefits in
that period.
NOTE 10-- COMMITMENTS AND CONTINGENCIES
SWS Industries, Inc.
- --------------------
The Company sold a subsidiary, SWS Industries, Inc. ("SWS"), in 1987. SWS
subsequently filed for bankruptcy in 1988. Under the terms of the SWS sales
agreement, the Company remained liable as guarantor on various performance bonds
issued on behalf of SWS. The Company's liability under the performance bond
guarantees has been reduced as the related contracts have been completed or
settled. Completion activities will continue throughout 1996. Management
believes the remaining reserve at June 30, 1996 is adequate for the remaining
obligations of the Company.
Cine Vista
- ----------
A landlord of Cine Vista has alleged that Cine Vista underpaid rent by
approximately $587,000 for the thirty-six month period ended June 30, 1996.
Cine Vista is finalizing a settlement of this claim under which Cine Vista will
pay approximately $130,000 and the former owner of Cine Vista will pay
approximately $220,000. Future rental rates may also increase as a result of
the settlement. A provision for the settlement has been reflected in Cine
Vista's financial results for the six months ended June 30, 1996.
-14-
<PAGE>
READING COMPANY AND SUBSIDIARIES
Notes to Condensed Financial Statements (unaudited)
June 30, 1996
(amounts in tables in thousands)
Historical Railroad Operations
- ------------------------------
The Company is a defendant in various personal injury legal actions
relating to its railroad operations prior to reorganization and has insurance
coverage relating to such actions. In accordance with the provisions of a 1990
settlement agreement (the "Settlement Agreement") with its insurance carriers,
the Company receives quarterly reimbursement for certain personal injury legal
actions. At June 30, 1996, $63,000 was reimbursable to the Company for amounts
expended in defense and settlement of such actions. This amount has been
classified as "Due from insurance companies." Three participants in the
insurance settlement are insolvent. Unreimbursed claims insured by these
insolvent companies totaled $64,000 from 1992 through June 30, 1996. The Company
believes that it may be entitled to reimbursement of such amounts from the other
parties to the agreement and may request an arbitration hearing on such matters.
Based upon the backlog of pending personal injury cases and the Company's
experience in settling such cases, the Company has established a reserve of
$146,000 reflecting the potential effect of such insolvencies on future
insurance reimbursement if no recovery is received from either the insolvent
carriers or the other parties to the Settlement Agreement. The reserve
associated with such insolvencies may increase if additional claims are filed;
however, the Company does not believe that such amount will be material.
Environmental
- -------------
The Company and a wholly-owned subsidiary, Reading Transportation Company
("RTC"), have each been advised by the Environmental Protection Agency ("EPA")
that they are potentially responsible parties ("PRPs") under environmental laws
including Federal Superfund legislation ("Superfund") for a site located in
Douglassville, Pennsylvania. The EPA issued an Administrative Order under
Superfund against 34 PRPs requiring, among other things, that the named parties
be required to incinerate materials at the site pursuant to a June 30, 1989
Record of Decision ("ROD"). The ROD estimated that the incineration would cost
approximately $53 million. Thirty-six PRPs were also named in a civil action
brought by the United States Government which seeks to recover alleged costs
incurred at the site by the United States of approximately $22 million. Reading
and RTC have each been named in a third-party action instituted by the majority
of the 36 PRPs sued by the United States. The actions instituted against the
Company and approximately 300 PRPs seek to have the parties contribute to
reimbursement for past costs and any costs associated with further remediation
at the site.
During 1994, based upon the Company's and counsel's evaluation of possible
outcomes in the matter, the Company increased its "Provision for environmental
matters" by $1,200,000. In September 1995, the federal district court judge who
presided over Reading's reorganization ruled that all liability asserted against
Reading relating to the site was discharged pursuant to the consummation order
issued in conjunction with the Company's amended plan of reorganization on
December 31, 1980. The United States Department of Justice and a named defendant
in the above described Administrative Order have appealed the decision and the
appeal was heard in July 1996. The judge's decision did not affect the
potential liability of RTC for the site. RTC has no assets and therefore cannot
fund a settlement or judgement relating to this matter and the Company believes
that the potential liability of RTC, if any, is not in excess of $300,000.
Based upon the appeal and possible alternate attempts by the PRPs to obtain
Reading's participation in funding for the site as well as the existence of the
other environmental matters set forth below, the Company has not reduced its
"Provision for environmental matters."
The Company is a party to a consent decree relating to a Superfund site
located on land owned by the Company. Apart from future operation and
maintenance expenses ("O&M"), remediation is complete. During 1994, the Company
paid approximately $106,000 as its estimated share of ten years of O&M and
charged such amount to "Provisions for environmental matters" expense. The
Company believes that the amounts expended to
-15-
<PAGE>
READING COMPANY AND SUBSIDIARIES
Notes to Condensed Financial Statements (unaudited)
June 30, 1996
(amounts in tables in thousands)
date will be adequate to fund O&M at the site. If additional amounts are
required, such amounts would not be material.
In 1991, the Company filed a lawsuit against the Southeastern Pennsylvania
Transportation Authority ("SEPTA"), Conrail, the City of Philadelphia, and other
parties which sought to recover costs expended by the Company in conjunction
with the cleanup of polychlorinated biphenyls ("PCBs") in the Reading Terminal
Train Shed and a portion of the viaduct south of Vine Street. In January 1996,
the Company and several parties agreed to settle this litigation by providing
for the Company to receive payments totalling $2.35 million which amount the
Company anticipates receiving in 1996. The parties to the settlement also
agreed to pay an amount ranging from 52% to 55% of certain future costs the
Company may incur in cleaning environmental contamination on one of its other
properties, the Viaduct, which the Company believes may be contaminated by PCBs
resulting from former railroad operations on that property conducted by, or on
behalf of the Reading Railroad, Conrail, the City of Philadelphia or the SEPTA.
The Company has advised the Environmental Protection Agency of the potential
contamination. The Company has not determined the scope and extent of any such
PCB contamination. However, the Company has been advised by counsel that, given
the lack of regulatory attention to the Viaduct in the eleven years which have
elapsed since EPA was notified of the likelihood of contamination, it is
unlikely that the Company will be required to decontaminate the Viaduct or incur
costs related thereto.
Prior to the Company's reorganization, the Company had extensive railroad
and related operations. Such operations could have contributed to environmental
contamination of properties now owned by the Company, previously sold or leased
by the Company, or to which the Company, prior to its reorganization, sent
waste. The ultimate extent of liabilities, if any, with respect to such matters,
as well as the timing of cash disbursements, if any, cannot be determined.
However, management is of the opinion that while the ultimate liability
resulting from such matters could have a material effect upon the results of
operations in a given year, they will not have a material adverse effect upon
the Company's financial position or liquidity.
The following is an analysis of the Company's accrual for environmental
claims:
<TABLE>
<S> <C>
Balance at January 1, 1994 $ 336
Provisions 1,306
Payments (133)
----------
Balance at December 31, 1994 1,509
Provisions 0
Payments (248)
----------
Balance at December 31, 1995 1,261
Provisions 0
Payments (3)
----------
Balance at June 30, 1996 $ 1,258
==========
</TABLE>
-16-
<PAGE>
READING COMPANY AND SUBSIDIARIES
Notes to Condensed Financial Statements (unaudited)
June 30, 1996
(amounts in tables in thousands)
NOTE 11 -- RELATED PARTY TRANSACTIONS
In 1994, 1995 and 1996, the Company's Board of Directors voted to waive the
transfer restrictions imposed by the provisions of the Company's Class A Common
Stock to the extent necessary to permit James J. Cotter, Chairman of the Board
of Directors of the Company and Craig, to acquire additional shares of the
Company's Class A Common Stock. The transfer provisions prohibit a party from
acquiring more than 4.75% of the Company's outstanding capital stock without the
permission of the Company's Board of Directors and are intended to assure the
continuing availability of the Company's tax loss carryforwards by precluding a
change in control which could limit the value of the carryforwards. Craig
currently owns approximately 52.5% of the Company's outstanding capital stock
and has been granted approval to acquire up to 55%. Prior to granting the waiver
of the restrictions, the Board of Directors had determined that acquisition of
the shares by Mr. Cotter and Craig would not affect the continuing availability
of the Company's tax loss carryforwards.
The Company has signed an agreement to acquire Angelika (See Note 4 and
Note 13). The theater will be owned jointly by the Company and Sutton Hill
Associates, a California general partnership ("Sutton Hill") affiliated with
City Cinemas, a Manhattan-based theater operator. City Cinemas (owned indirectly
in equal parts by James J. Cotter, the Company's Chairman, and Mr. Michael
Forman) will operate the theater pursuant to a management agreement. Mr. Cotter
is a principal shareholder of Craig. Mr. Forman beneficially owns 16.4% of
Craig's common stock. Robert F. Smerling, President of Cine Vista, also serves
as President of City Cinemas.
On March 29, 1996, the Company purchased from Craig 1,564,473 shares of
Citadel Common Stock and acquired an option to acquire 1,329,114 shares of
Citadel's 3% Cumulative Voting Preferred Stock and under certain circumstances a
warrant to acquire 666,000 shares of Citadel Common Stock at an exercise price
of $3 per share. The purchase of Citadel Common Stock was paid by the issuance
of a five year unsecured $3,324,505 promissory note payable to Craig, which note
was retired on July 29, 1996. An independent committee comprised of outside
directors not affiliated with Craig reviewed, negotiated and approved the
provisions of the Citadel Stock Purchase Agreement and the Option Agreement.
(See Note 4 and Note 12).
In November 1995, the Company and Craig formed Reading International to
develop and operate multiplex cinemas in Australia and other markets. On March
29, the Company and Craig entered into a Capital Funding Agreement pursuant to
each of the parties contributed $12,500,000 and pledged to contribute an
additional $37,500,000 each to Reading International. The Company and Craig each
pledged various assets as security for the additional capital commitments. An
independent committee comprised of outside directors not affiliated with Craig
reviewed and determined that the collateral pledged by Craig as security for its
funding commitment was adequate. (See Note 5.)
NOTE 12 -- LONG-TERM DEBT
In December 1995, Cine Vista entered into a $15 million eight year
revolving credit agreement (the "Credit Agreement") with a bank. Under terms of
the Credit Agreement, Cine Vista may borrow up to $15 million to repay Cine
Vista acquisition loans, which loans are payable to a wholly-owned subsidiary of
the Company (the "Subsidiary Loans"), and fund certain new theater development
expenditures (the "Development Expenditures"). During the initial 30 months of
the eight-year term, Cine Vista may borrow and repay amounts outstanding under
the Credit Agreement. Any amounts outstanding during the initial term would be
payable in increasing quarterly installments over the balance of the loan term.
At June 30, 1996, no amounts were outstanding under this agreement.
-17-
<PAGE>
READING COMPANY AND SUBSIDIARIES
Notes to Condensed Financial Statements (unaudited)
June 30, 1996
(amounts in tables in thousands)
As security for the loan, Cine Vista has pledged substantially all of its
assets. In addition, the stock of Cine Vista's parent company has been pledged
as security for the loan. In conjunction with the loan, the Company has also
agreed to subordinate to the lender its right to payment of the Subsidiary Loans
as well as certain other fees payable by Cine Vista to the Company under certain
circumstances. In addition, the Company has agreed to contribute funds to Cine
Vista in the event that estimated unpaid Development Expenditures exceed the
amount of funds available to Cine Vista under the Credit Agreement.
The provisions of the Credit Agreement require Cine Vista to maintain a
minimal level of net worth and other financial ratios, restrict the payment of
dividends, and limit additional borrowings and capital expenditures. Borrowings
under the Credit Agreement accrue interest at LIBOR (the London Interbank
Offered Rate) plus 2.25%, the cost of Section 936 deposits (deposits held by
lenders in Puerto Rico which are qualified under Section 936 of the Internal
Revenue Code) to the lender (currently 5.29%) plus 2.25%, or the base rate plus
1/2 of 1%, at Cine Vista's election. In accordance with the provisions of the
Credit Agreement, Cine Vista is required to pay a commitment fee on the unused
commitment equal to 1/2 of 1%.
The Company paid Craig for the Citadel Common Stock with a five year
unsecured promissory note which provides for payment of interest at a rate equal
to LIBOR plus 2.25% (See Note 4). This promissory note is recorded on the
Condensed Consolidated Balance Sheets as "Note payable to affiliate" at June 30,
1996. On July 29, 1996, the note was repaid in full.
NOTE 13 - SUBSEQUENT EVENTS
In July 1996, the Company and the owners of AFCI entered into an asset
purchase and sale agreement under which terms the Company will acquire for
approximately $10,582,000 an 83.3% interest in the Angelika. The Company will
acquire these assets with a combination of available cash, a fully
collateralized promissory note to be issued to the sellers and by receiving a
credit for the Angelika Judgement (See Note 4) together with interest thereon at
a rate equal to 9%. The remaining ownership interest in Angelika will be
acquired by Sutton Hill, an affiliate of City Cinemas which operates an
additional 20 screens in seven cinemas in New York City. The Company and Sutton
Hill have formed a Delaware limited liability company, Angelika Film Centers,
LLC ("AFC"), to hold their interest in the Angelika. The Company anticipates
settlement on this transaction to occur during August 1996. Management believes
the Angelika is the premier specialty theater in the United States.
The Company will contribute 83.3% of the capital to AFC and City Cinemas
will contribute the remaining 16.7%. The provisions of the joint venture
agreement provide that all depreciation and amortization (the "Special
Deductions") will first be allocated to Sutton Hill until the aggregate amount
of such Special Deductions equal Sutton Hill's initial investment. Thereafter,
the Company will receive all Special Deductions until the relative ownership
interests are equal to the initial ownership interests of the parties. Sutton
Hill has agreed to subordinate its interest in AFC to the Company's interest in
order to permit the Company to pledge AFC as collateral for borrowings and
receive 100% of the proceeds of any such borrowings. In addition Sutton Hill
has agreed to subordinate its membership interest to the extent necessary to
permit the Company to receive up to 100% of the proceeds of borrowings by AFC up
to the amount of the Company's initial capital contribution in AFC.
AFC will be managed by City Cinemas pursuant to the terms of a management
agreement (the "Management Agreement"). The Management Agreement provides for
City Cinemas to manage the Angelika for a minimum fee of $125,000 plus an
incentive fee equal to 50% of annual cash flow (as defined in the Management
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<PAGE>
READING COMPANY AND SUBSIDIARIES
Notes to Condensed Financial Statements (unaudited)
June 30, 1996
(amounts in tables in thousands)
Agreement) over $2,000,000, provided however that the maximum fee (minimum fee
plus incentive fee) does not exceed 5% of the Angelika revenues.
For accounting purposes, the acquisition will be accounted for under the
purchase method and accordingly, the operating results of the Angelika will be
included in the Condensed Consolidated Statement of Operation beginning with the
date of settlement.
In July 1996, the Company received $1,250,000 in full settlement of its
claim against TPI Enterprises, Inc. ("TPI"). The matter related to the
Company's 1993 offer to acquire from TPI a partnership interest in a partnership
which operates motion picture exhibition theaters. This amount, net of related
expenses, will be recorded as income in the Condensed Consolidated Statement of
Operations for the three months ending September 30, 1996.
Also in July 1996, the Company and the landlord of one of Cine Vista's
theaters reached a preliminary understanding relating to a claim the landlord
had asserted regarding the computation of rent (See Note 10). The agreement,
when finalized will require the Company and TALP to pay $130,000 and $220,000,
respectively, to the landlord. The Company recorded $130,000 in the Condensed
Consolidated Statement of Operations for the three months ended June 30, 1996 as
an estimate of additional rent expense for this matter and will record monthly
rent expense to this landlord at a slightly higher amount than in periods prior
to this agreement.
On August 12, 1996, the Company, with the approval of the Board of
Directors entered into a letter of intent (the "Letter of Intent")
contemplating two transactions. The first transaction is a reorganization of
the Company (the "Reorganization") pursuant to a proposed Agreement and Plan of
Merger (the "Merger Agreement") among the Company, Reading Entertainment, Inc.,
a Delaware corporation ("Reading Entertainment") which is a newly formed,
wholly-owned subsidiary of the Company, and Reading Merger Co., a Pennsylvania
corporation ("Merger Co.") which is a newly formed, wholly-owned subsidiary of
Reading Entertainment. Pursuant to the Reorganization, the Company will merge
with Merger Co. In the Reorganization, each outstanding share of the Company's
Common Stock, par value $.01 per share (the "Common Stock") (other than shares
of Common Stock as to which dissenters' rights are perfected), and Class A
Common Stock, par value $.01 per share (the "Class A Common Stock"), will be
converted into the right to receive one share of Reading Entertainment's Common
Stock, par value $.001 per share (the "Reading Entertainment Common Stock"), and
the outstanding shares of Merger Co. will be converted into shares of Common
Stock of the Company. As a result, the Company will become a wholly-owned
subsidiary of Reading Entertainment and the current shareholders of the Company
will become shareholders of Reading Entertainment. Among other changes in the
rights of shareholders resulting from the Reorganization, the transfer
restrictions on the Company's Class A Common Stock, which are currently
scheduled to expire January 1, 1997, will be extended with respect to the
Reading Entertainment Common Stock to January 1, 2003, in order to reduce the
possibility that a change-in-control of Reading Entertainment will occur, which
change could reduce the amount of its net operating loss carryforwards available
to offset taxable income.
The second transaction (the "Stock Transaction") is a contribution of
assets to Reading Entertainment by Craig, Craig Management, Inc., a wholly-owned
subsidiary of Craig ("CMI"), and Citadel in exchange for Reading Entertainment
convertible preferred and common stock. Following consummation of the
Reorganization, Reading Entertainment will issue (i) 70,000 shares of Reading
Entertainment's Series A Voting Cumulative Convertible Preferred Stock, par
value $.01 per share (the "Series A Preferred Stock") to Citadel Acquisition
Corp., Inc. ("CAC"), a newly formed, wholly owned subsidiary of Citadel, for
$7,000,000 cash and (ii) 550,000 shares of Reading Entertainment's Series B
Voting Cumulative Convertible Preferred Stock, par value $.001 per share (the
"Series B Preferred Stock" and, together with the Series A Preferred Stock, the
"Convertible Preferred Stock"),
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<PAGE>
READING COMPANY AND SUBSIDIARIES
Notes to Condensed Financial Statements (unaudited)
June 30, 1996
(amounts in tables in thousands)
and 2,476,190 shares of Reading Entertainment Common Stock to Craig and CMI in
exchange for certain assets now held by Craig. The assets to be transferred by
Craig consist of 693,650 shares of the Series B Preferred Stock of Stater Bros.
Holdings Inc., Craig's 50% membership interest in Reading International, and
1,329,114 shares of Citadel's 3% Cumulative Voting Convertible Preferred Stock,
stated value $3.95 per share, which assets have been valued for the transaction
at $81,000,000.
The Series A Preferred Stock will (i) bear a cumulative dividend of 6.5%,
payable quarterly, and (ii) be convertible, at any time after 18 months from
issuance (or earlier upon a change in control of Reading Entertainment) into
shares of Reading Entertainment Common Stock at a conversion price of $11.50 per
share. The Series B Preferred Stock will (i) bear a cumulative dividend of 6.5%,
payable quarterly, and (ii) be convertible, at any time after 18 months from
issuance, into shares of Reading Entertainment Common Stock at a conversion
price of $12.25 per share. Holders of each series of Convertible Preferred Stock
will be entitled to 9.64 votes per share held on all matters brought to a vote
of the shareholders of Reading Entertainment, voting as a single class with the
holders of the Reading Entertainment Common Stock and the other series of
Convertible Preferred Stock.
In addition, Citadel will have the option, exercisable at any time after
closing of the Stock Transaction through a date 30 days after the Company's 1999
Form 10-K is filed, to exchange all or substantially all of its assets for
shares of Reading Entertainment Common Stock. Also, Citadel and CAC will have
certain demand and piggyback registration rights with respect to the Reading
Entertainment Common Stock issuable on conversion of the Series A Preferred
Stock or on such asset exchange. In addition, if Reading Entertainment fails to
pay dividends on the Series A Preferred Stock for 4 consecutive quarters after
18 months from issuance, CAC will have the option to require Reading
Entertainment to repurchase such shares at their aggregate liquidation value
plus accumulated dividends. Citadel will also have a right to require redemption
of the Series A Preferred Stock in the event of a change in control of the
Company and after 5 years from the date of issuance. In addition, the Company
has agreed to reimburse Citadel for its out of pocket costs with respect to the
Stock Transaction, up to a maximum of $280,000.
The Letter of Intent is non-binding on each of the companies and
consummation of the Stock Transaction and the Reorganization is subject to
certain conditions, including execution of definitive agreements, approval of
the stockholders of the Company, delivery of written fairness opinions from the
respective financial advisors and certain other standard and customary
conditions. No stockholder approval is required with respect to Craig and
Citadel. Craig, which owns approximately 52.5% of the Company's capital stock,
has agreed to vote its shares in favor of the transactions, and, accordingly,
the vote of no other Reading stockholder is required for approval of the
transactions.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Due to the nature of the Company's historical business activities,
revenues and earnings have varied significantly reflecting the results of real
estate and other asset sales as well as the amount and timing of development
activities. In addition, Reading International is acquiring properties and
entering into leases for sites in Australia which it will develop into motion
picture theaters. Until the theaters have been constructed and are placed in
operation, Reading International will have no material revenues and can be
expected to generate losses. Accordingly, period-to-period comparisons of
operating results will not be indicative of future financial results. Cine
Vista's business is seasonal and the results of Cine Vista included in the six-
month period ended June 30, 1996 may not be indicative of Cine Vista's annual
operating results.
Revenues in the six-month period ended June 30, 1996 increased
$2,317,000 to $10,686,000 from $8,369,000 in the corresponding six-month period
last year. The increase was due primarily to a 21% increase in theater revenues
recorded by Cine Vista (which increase resulted from higher box office revenues
at existing theaters and the opening of a new 8-screen theater in late 1995) and
the equity earnings of $1,433,000 from the Company's investment in Citadel (See
Note 4). These equity earnings include a nonrecurring gain on sale of real
estate of $1,473,000 and nonrecurring income of $4,000,000 from the recognition
for financial statement purposes of previously deferred proceeds from the bulk
sale of loans by a previously owned subsidiary of Citadel. Revenues in the six-
month period last year included a $425,000 litigation settlement.
"Theater costs", "Theater concession costs" and "Depreciation and
amortization" reflect the direct theater costs of Cine Vista's operations. These
costs increased $1,343,000 from $5,888,000 in the six months ending June 30,
1995 to $7,231,000 in this year's six-month period due primarily to increased
costs associated with higher revenues and the operating expenses associated with
the opening of a new 8-screen theater in late 1995. Significant increases in the
current six-month period include a $519,000 increase in film rent (a 2%
increase as a percentage of box office revenues), an increase in concession
costs of $54,000 (which costs remained constant as a percentage of concession
revenues from the prior year), a $98,000 increase in contingent rent under
facility leases and increased wage and salary expense (which amount remained
constant as a percentage of sales).
"General and administrative" expenses in the current six-month period
remained consistent with the prior year six-month period.
"Equity loss from investment in Australian joint venture" reflects the
Company's 50% share of the initial general and administrative expenses in
Australia and noncapitalized development expenditures relating to new theater
site analysis and selection (See Note 5). The Company does not anticipate
material revenues from Reading International during the next 12 months and
therefore anticipates continuing losses during such period as new theaters are
developed and operations initiated. The investment in and operating results of
Reading International are reported under the equity method.
The Company recorded AMT expense of $22,000 and $23,000 in the six
months ended June 30, 1996 and 1995, respectively. Upon adoption of SFAS No. 109
in 1993, a deferred tax asset of $132,000 was recorded for the tax benefits
which were determined by management to be more likely than not to be realized
from the Company's net operating loss carryforwards. The Company recorded a
$132,000 tax provision in the Condensed Consolidated Statement of Operations for
the six months ended June 30, 1995 related to the realization of such tax
benefits in that period.
The Company recorded net income of $1,039,000 and net income of
$322,000 for the six months ended June 30, 1996 and 1995, respectively.
-21-
<PAGE>
Revenues for the three months ended June 30, 1996 increased $1,440,000
to $6,001,000 from $4,561,000 compared with the three months ended June 30,
1995. The increase was due primarily to an increase in revenues from Cine Vista
of $571,000 and the inclusion of $1,433,000 of equity earnings from the Citadel
investment (See Note 4). These equity earnings include a nonrecurring gain on
sale of real estate of $1,473,000 and nonrecurring income of $4,000,000 from the
recognition for financial statement purposes of previously deferred proceeds
from the bulk sale of loans by a previously owned subsidiary of Citadel. The
increase in revenues in the current six-month period was offset somewhat by the
inclusion of $425,000 received in the prior year quarter in settlement of
certain litigation.
"General and Administrative" expense decreased $149,000 from
$1,066,000 in the corresponding three months period last year. The decrease was
due mainly to lower professional fees.
LIQUIDITY AND CAPITAL RESOURCES:
The Company has sufficient funding available to meet its current
commitments. However, the Company believes that there are significant expansion
opportunities in the cinema exhibition business and, that if it is to fully
exploit the opportunities for growth in the exhibition business, the Company
needs to increase its capital base and simplify the corporate structures which
it has to date found necessary to utilize in pursuing such opportunities.
Accordingly, the Stock Transaction (See Note 13) has been developed to achieve
the goals of significantly increasing the Company's capital base while
simultaneously simplifying its corporate structure. Pursuant to the terms of the
Stock Transaction, the Company would receive 693,650 shares of Series B
Preferred Stock of Stater Bros. Holdings, Inc. (aggregate par value
$69,365,000), Craig's 50% membership interest in Reading International
(increasing the Company's ownership to 100% of Reading International), 1,329,114
shares of the 3% Cumulative Voting Convertible Preferred Stock of Citadel
(stated value of $5,250,000) and $7,000,000 in cash. In payment for the assets,
the Company would issue common and preferred stock to Craig and Citadel. It is
believed by the Company that the non-cash assets may be hypothecated or sold in
order to significantly increase the Company's base of liquid funds for
investment in the cinema exhibition business. Implementation of the Stock
Transactions is dependent upon a shareholder vote, which vote will be secured at
the Company's 1996 Annual Meeting of Shareholders. Craig currently owns
approximately 52.5% of the Company's voting securities, and has agreed to vote
its shares in favor of the Stock Transaction.
In November 1995, the Company and Craig formed Reading International
in order to make available additional capital and liquidity to develop other
theater opportunities in Australia. Reading International is actively seeking
properties to develop in Australia and has acquired two sites and has made
deposits for several other real property purchases or leases. On March 29, 1996,
the Company and Craig entered into a Capital Funding Agreement with respect to
Reading International pursuant to which they agreed to increase the capital
committed by the Company and Craig to Reading International from $10 million to
approximately $103 million through a combination of cash contributions and
secured capital funding undertakings (See Note 5). The Company and Craig each
immediately contributed to Reading International $12,500,000 in cash and have
undertaken to contribute up to an additional $37,500,000 on an as needed basis
(the "Funding Commitment"). To secure the Funding Commitment, the Company
pledged its interest in Cine Vista and certain government securities and Craig
pledged its interest in Stater Brothers Holdings, Inc. The Company may
substitute collateral for the Funding Commitment provided that the fair market
value of the collateral substituted is equal to at least 125% of the unfunded
Funding Commitment or, in the case of government or government agency
securities, equal to 100% of the unfunded portion of the Funding Commitment. The
Company has signed an agreement to acquire an 83.3% interest in the Angelika
theater in Manhattan (See Note 4 and Note 13) for approximately $10,582,000. The
Company anticipates closing of this transaction to occur in August 1996 at which
time these funds would be disbursed. Cine Vista has three new theaters under
development and is seeking additional theater sites in Puerto Rico.
Cine Vista entered into a revolving credit agreement in December 1995
(the "Credit Agreement"). In accordance with the terms of the Credit Agreement,
Cine Vista may borrow up to $15,000,000 to repay certain loans payable to a
wholly-owned subsidiary of the Company and fund certain new theater development
expenditures
-22-
<PAGE>
(See Note 12). No amounts are presently outstanding under the Credit Agreement.
The Company may use funds available under the Credit Agreement to fund its other
theater development activities provided that a portion of such funds are
utilized to fund certain Cine Vista development projects.
On March 29, 1996, the Company purchased from Craig 1,564,473 shares
of Citadel Common Stock for an aggregate purchase price of $3,324,505 (See Note
4). The Company paid Craig for the Citadel Common Stock with a five year
unsecured promissory note which provides for the payment of interest at a rate
equal to LIBOR plus 2.25%. In July 1996 the note together with accrued interest
was repaid. The Company also acquired from Craig (for $50,000) a one year option
to acquire, at fair market value, as determined by an investment banker selected
by the parties, 1,329,114 shares of the 3% Cumulative Voting Convertible
Preferred Stock, stated value $3.95 per share of Citadel and an option to
acquire, under certain circumstances, a warrant to acquire 666,000 shares of
Citadel Common Stock.
In January 1996, the Company and the other parties agreed to settle
litigation whereby the Company sought to recover certain environmental cleanup
costs previously expended by the Company on properties it formerly owned. The
agreement provides for the Company to receive payments totalling $2.35 million
to recover these costs, which amount the Company anticipates receiving in 1996.
The parties to the settlement also agreed to pay an amount ranging from 52% to
55% of certain future costs, if any, the Company may incur in cleaning
environmental contamination on the Viaduct (See Note 10).
Prior to the Company's reorganization, the Company had extensive
railroad and related operations. Such operations may have contributed to
environmental contamination of properties now owned by the Company, previously
sold by the Company, or to which the Company, prior to its reorganization, sent
waste. The ultimate extent of liabilities, if any, with respect to such matters,
as well as the timing of cash disbursements, if any, cannot be determined.
However, management is of the opinion, based on the information currently known,
that while the ultimate liability resulting from such matters could have a
material effect upon the results of operations in a given year, they will not
have a material adverse effect upon the Company's financial position or
liquidity.
"Cash and cash equivalents" together with "Available-for-sale
securities" decreased $11,709,000 from $44,189,000 at December 31, 1995 to
$32,480,000 at June 30, 1996 due primarily to $12,888,000 in capital
contributions to Reading International (See Note 5) and a decrease in "Accounts
payable and accrued expenses" of $344,000. While not necessarily indicative of
cash flows determined under generally accepted accounting principles, Cine
Vista's operating cash flow (income before depreciation and amortization)
totaled $983,000 in the six month period ended June 30, 1996 verses $1,029,000
in the prior year six month period. Current period Cine Vista operating cash
flow includes $130,000 in additional rent expense recorded as a result of the
settlement with a landlord (See Note 13). In addition to Cine Vista's operating
cash flow, other significant sources of liquid funds during this period included
"Interest and dividends" revenue of $1,076,000, a decrease in due from affiliate
of $944,000 (related to the payment by Craig of amounts advanced by the Company
on Craig's behalf for Reading International) and an increase of $484,000 in film
rent payable.
Principal sources of liquid funds in the prior year six-month period
included $1,029,000 from Cine Vista's operating cash flow, $1,103,000 in
"Interest and dividends" revenue and a decrease in insurance proceeds receivable
of $514,000. In addition to operating expenses, the principal uses of liquid
funds for the six months ended June 30, 1995, included a decrease in "Amounts
receivable" of $338,000, a decrease in "Accounts payable and accrued expenses"
of $316,000, a decrease in "Other liabilities" of $206,000 and $207,000 used to
purchase property, plant and equipment for Cine Vista's operations.
For accounting purposes, the acquisition will be accounted for under
the purchase method and accordingly, the operating results of the Angelika will
be included in the Condensed Consolidated Statement of Operation beginning with
the date of settlement.
In July 1996, the Company received $1,250,000 in full settlement of
its claim against TPI Enterprises, Inc.
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<PAGE>
("TPI"). The matter related to the Company's 1993 offer to acquire from TPI a
partnership interest in a partnership which operates motion picture exhibition
theaters. This amount, net of related expenses, will be recorded as income in
the Condensed Consolidated Statement of Operations for the three months ended
September 30, 1996.
Also in July 1996, the Company and the landlord of one of Cine Vista's
theaters reached a preliminary understanding relating to a claim the landlord
had asserted regarding the computation of rent (See Note 10). The agreement,
when finalized will require the Company and TALP to pay $130,000 and $220,000,
respectively to the landlord. The Company recorded $130,000 in the Condensed
Consolidated Statement of Operations for the three months ended September 30,
1996 as an estimate of additional rent expense in relation to this matter and
will record monthly rent expense to this landlord at a slightly higher amount
than in periods prior to this agreement.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.8 By-Laws of Registrant, as amended May 23, 1996.
10.20 Service Deed between Australia Cinema Management Pty Limited
and John Rochester dated May 7, 1996.
10.21 Letter of Intent dated August 12, 1996 by and between Reading
Company, Citadel Holding Corporation and Craig Corporation.
27 Financial Data Schedule
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
READING COMPANY, REGISTRANT
Date: August 14, 1996 By: /s/ James A. Wunderle
-------------------------- -----------------------------------
James A. Wunderle
Executive Vice President,
Chief Operating Officer
and Treasurer
(Duly Authorized Officer and
Principal Financial Officer)
Date: August 14, 1996 By: /s/ Eileen M. Mahady
-------------------------- -----------------------------------
Eileen M. Mahady
Controller
(Principal Accounting Officer)
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<PAGE>
Exhibit J
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended: September 24, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition from ____ to ____
Commission file number 001-13222
---------
STATER BROS. HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0350671
----------------------------------- --------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
21700 Barton Road
Colton, California 92324
--------------------------- --------------
(Address of principal (Zip Code)
executive offices)
(909) 783-5000
--------------
Registrant's telephone number,
including area code
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X No .
-- --
No voting stock of the registrant is held by non-affiliates of the
registrant.
Number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of September 24, 1995--Class A Common Stock - 50,000 shares;
Common Stock - 50,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
STATER BROS. HOLDINGS INC.
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
------
Page Number
-----------
<S> <C> <C>
Item 1 Business.................................................. 3
Item 2 Properties................................................ 7
Item 3 Legal Proceedings......................................... 8
Item 4 Submission of Matters to a Vote of Security Holders....... 9
<CAPTION>
PART II
-------
<S> <C> <C>
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters......................... 9
Item 6 Selected Financial Data.................................. 10
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 12
Item 8 Financial Statements and Supplementary Data.............. 19
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 19
<CAPTION>
PART III
--------
<S> <C> <C>
Item 10 Directors and Executive Officers of the Registrant...... 20
Item 11 Executive Compensation.................................. 22
Item 12 Security Ownership of Certain Beneficial Owners
and Management.................................... 24
Item 13 Certain Relationships and Related Transactions.......... 25
<CAPTION>
PART IV
-------
<S> <C> <C>
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K.............................. 27
Signatures............................................. 30
</TABLE>
2
<PAGE>
PART I
------
Item 1. Business
General
Stater Bros. Holdings Inc. was incorporated in Delaware in 1989 and together
with its wholly-owned subsidiaries, Stater Bros. Markets and Stater Bros.
Development, Inc., (collectively "Stater Bros." or the "Company") were founded
in 1936 when the first Stater Bros. Market opened in Yucaipa, California. The
Company is a leading supermarket chain in Southern California, operating 110
supermarkets in the Inland Empire Region of Southern California.
The Company has grown, primarily by constructing supermarkets in its primary
trading areas and through the enlargement of existing supermarkets. The Company
offers its customers a high level of customer service, broad selections of
grocery, meat, produce, liquor and general merchandise. All of the Company's
supermarkets have full-service meat departments and many of the supermarkets
have service delicatessens and service bakery departments. All of the Company's
supermarkets have expanded selections of produce merchandise.
The Company utilizes a central warehouse and distribution facility which
provides the Company's supermarkets with approximately 80% of the merchandise
they offer for sale. The Company's warehouse and distribution facilities
encompass approximately 955,000 square feet and include a 118,000 square foot
modern produce facility that was constructed in 1989 as well as facilities for
grocery, meat, frozen foods, health and beauty aids and bakery products.
Ownership of the Company
The Company has two shareholders and two classes of common stock issued and
outstanding; 50,000 shares of Common Stock which are entitled to one vote per
share are held by Craig Corporation ("Craig") and 50,000 shares of Class A
Common Stock which are entitled to 1.1 votes per share are held by La Cadena
Investments ("La Cadena"). Accordingly, approximately 52% of the voting power of
the Company is held by La Cadena. La Cadena is a California General Partnership
whose partners include three members of senior management of the Company,
including Jack H. Brown, Chairman of the Board, President and Chief Executive
Officer of the Company. Mr. Brown has a majority interest in La Cadena and is
the managing general partner with the power to vote the shares of the Company
held by La Cadena.
Recapitalization Transaction
In March 1994, the Company completed a Recapitalization Transaction (the
"Recapitalization") which transferred effective voting control of the Company to
La Cadena, reclassified the Company's outstanding equity, provided for certain
cash payments and distributions to Craig and provided the Company with an
3
<PAGE>
option to acquire Craig's remaining equity in Stater Bros. Holdings Inc. The
Recapitalization Transaction was funded through an offering of $165.0 million of
11% Senior Notes due 2001 (the "Initial Notes") under Rule 144A of the
Securities Act of 1933, as amended. Proceeds from the Initial Notes were used to
(a) repay $75.5 million of 9.8% Senior Notes, together with a prepayment
premium, (b) repay outstanding bank loans and mortgages of approximately $12.0
million, (c) repay an outstanding capital expenditure revolving credit facility
of $9.0 million, (d) fund a $5.0 million five-year consulting agreement and
covenant not to compete with Craig, (e) fund a payment of $14.6 million to
purchase an option to acquire Craig's remaining interest in the Company, (f) pay
$20.0 million in dividends on the Company's Common Stock (held by Craig) and (g)
pay fees and expenses associated with the Recapitalization.
In August of 1994, all of the Initial Notes were exchanged for a like amount of
New Notes which are listed and trade on the American Stock Exchange.
Business Strategy
Store Profile and Locations
The Company's existing supermarkets have well-established locations and low
overhead expenses, including fixed rent payments in most stores. In addition,
the Company believes that its existing supermarkets are well-maintained and
generally require capital expenditures only for customary maintenance. An
average Stater Bros. supermarket is approximately 28,700 square feet, while
newly constructed Stater Bros. supermarkets range from approximately 35,300 to
40,600 square feet. Stater Bros. supermarkets typically utilize approximately
72% of total square feet for retail selling space. The Company operates its
supermarkets with minimal back-room storage space because of the close proximity
of its distribution facility to its store locations. Generally, all Stater
Bros. supermarkets are similarly designed and stocked thereby allowing Stater
Bros. customers to find items easily in any of the Company's supermarkets.
Substantially all of the Company's 110 supermarkets are located in neighborhood
shopping centers in well-populated residential areas. The Company endeavors to
locate its supermarkets in growing areas that will be convenient to potential
customers and will accommodate future expansion.
Management actively pursues the acquisition of sites for new supermarkets. In
an effort to determine sales potential, new supermarket sites are carefully
researched and analyzed by management for population shifts, zoning changes,
traffic patterns, nearby new construction and competitive locations. Stater
Bros. works with developers to attain the Company's criteria for potential
supermarket sites, and to insure adequate parking and a complementary co-tenant
mix.
Store Expansion and Remodeling
4
<PAGE>
The Company has historically focused its expansion in the Inland Empire. Such
expansion has been accomplished through improving and remodeling existing stores
and constructing new supermarkets rather than by acquiring other supermarket
operations. The number of supermarkets operated by the Company has grown from
82 in September 1979 to 110 as of September 24, 1995. The Company intends to
continue to expand its existing supermarket operations by enlarging and
remodeling existing supermarkets and constructing new supermarkets. The Company
may also make selective acquisitions of existing supermarkets within the Inland
Empire, if such opportunities arise.
The Company monitors sales and profitability of its operations on a store-by-
store basis and enlarges, remodels or replaces stores in light of their
performance and management's assessment of their future potential.
Approximately 60% of the Company's supermarkets have been either newly
constructed or remodeled within the last five years. Minor remodels usually
include new fixtures, a change in decor, and the addition of one or more
specialty service departments such as a delicatessen or bakery. Major remodels
typically involve more extensive refurbishment of the store's interior and often
increase the retail selling space per store. Expansions entail enlargement of
the store building. The primary objectives of remodelings and expansions are to
improve the attractiveness of supermarkets, increase sales of higher margin
product categories and, where feasible, to increase selling area. The Company
conducts all of its new construction and remodeling through its wholly-owned
subsidiary, Stater Bros. Development, Inc., which serves as the general
contractor for all Company construction projects.
5
<PAGE>
Store Expansion and Remodeling (contd.)
The following table sets forth certain statistical information with respect to
the Company's supermarket expansion and remodeling for the periods indicated.
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------
Sept. 29, Sept. 27, Sept. 26, Sept. 25, Sept. 24,
1991 1992 1993 1994 1995
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Number of supermarkets:
Opened.................... 5 4 2 3 0
Closed/Replaced........... 1 3 - 1 1
Total at end of year...... 106 107 109 111 110
Minor Remodel............. 13 10 10 4 8
Major Remodel............. 1 - - - -
Expansion................. - - - - 1
</TABLE>
Beyond 1995, the Company plans to open approximately two to four new stores per
year, based upon a number of factors, including customer demand, market
conditions, profitability, costs of opening, and availability of financing for
such new stores. The Company's plans with respect to major and minor remodels,
expansion and new construction are reviewed continually and are revised, if
appropriate, to take advantage of marketing opportunities. The Company finances
its new store construction primarily from cash provided by operating activities
and short-term borrowings under its credit facilities. Long-term financing of
new stores generally will be obtained through either sale/leaseback transactions
or secured long-term financings. However, no assurances can be made as to the
availability of such financings.
Warehouse and Distribution Facilities
The Company's warehouse and distribution facilities and administrative offices
are located in Colton, California, and encompass approximately 955,000 square
feet. The facilities include warehouses for grocery, produce and deli products,
meats and frozen products, health and beauty aids and bakery merchandise.
Management believes that its existing warehouse and distribution facilities are
adequate to meet its currently identified expansion plans. Approximately 80% of
the products offered for sale in the Company's supermarkets are processed
through the Company's warehouse and distribution facilities.
The Company's warehouse and distribution facilities are centrally located and
are an average distance of approximately 30 miles from its supermarkets. Most
stores can be reached without using the most congested portions of the Southern
California freeway system.
The Company's transportation fleet consists of modern well-maintained vehicles.
As of September 24, 1995, the Company operated approximately 92 tractors and 261
trailers, approximately 31% of which were leased by the Company. The Company
also operates a fuel and repair terminal at the Colton distribution facility.
Purchasing and Marketing
The Company uses an Everyday Low Price ("EDLP") format as an integral part of
its purchasing and marketing strategy to provide its customers with the best
overall supermarket value in its primary market areas. The Company supplements
its everyday low price structure with chain-wide temporary price reductions on
selected food and non-food merchandise. The geographic location of the
Company's supermarkets allows it to reach its target consumers through a variety
of media and the Company aggressively advertises its everyday low prices through
local and regional newspapers, direct mail and printed circulars as well as
advertisements on radio and television.
6
<PAGE>
Purchasing and Marketing (contd.)
A key factor in the Company's business strategy is to provide its customers with
a variety of quality brand-name merchandise as well as alternative selections of
high-quality private label and generic brands of merchandise. To meet the needs
of customers, most supermarkets are stocked with approximately 35,000 items.
The Company places particular emphasis on the freshness and quality of its meat
and produce merchandise and maintains high standards for these perishables by
processing and distributing the merchandise through its perishable warehouses
and distribution facilities.
Retail Operations
The Company's supermarkets are well maintained, have sufficient off-street
parking and generally are open from 7:00 a.m. until 10:00 p.m. or 11:00 p.m.,
seven days a week, including all holidays with the exception of Christmas Day.
Because Stater Bros. operates all its supermarkets under a single format,
management believes it is able to achieve certain operating economies.
Store Management. Each of the Company's supermarkets is managed by a store
manager and an assistant manager, each of whom receives a base salary and may
receive a bonus based on the individual supermarket's overall performance and
management of labor costs within the supermarket. The store manager and
assistant manager are supported by their store management staff who have the
training and skills necessary to provide proper customer service, operate the
store and manage personnel in each department. Additionally, the store manager
is supported by individual department managers for grocery, meat, produce, and
where applicable, bakeries and delicatessens. Store managers report to one of
six district managers, each of whom is responsible for an average of 18
supermarkets.
Customer Service. The Company considers customer service and customer
confidence to be critical to the success of its business strategy. This
strategy, to provide courteous and efficient customer service through specific
programs and training, is a focus of the executive officers and is implemented
at all levels of employees. The Company maintains an intensive checker training
school to train prospective checkers and to provide a refresher program for
existing checkers. All of the Company's supermarkets provide customers with
purchase carry-out service and have express check-out lanes for purchases of 10
items or less.
Management Information Systems
The Company's management information systems and point-of-sale scanning
technology reduce the labor costs attributable to product pricing and customer
check-out, and provide management with information that facilitates purchasing,
receiving and management of inventory and accounts payable. The Company has
point-of-sale scanning checkout technology in all of its stores. All stores use
electronic systems for employee time and attendance records and inventory
ordering.
Approximately one-half of the Company's supermarkets currently utilize
electronic labor scheduling, which assists store management in developing a more
efficient and customer-sensitive work schedule.
Employees
The Company has approximately 8,300 employees, approximately 500 of whom are
management and administrative employees and approximately 7,800 of whom are
hourly employees. Approximately 68% of the Company's employees work part-time.
Substantially all of the Company's hourly employees are members of either the
Retail Clerks, Meatcutters or Teamsters labor unions and are represented by
several different collective bargaining agreements. The Company's collective
bargaining agreements, with the Meatcutters and Retail Clerks, which covers the
largest number of employees, were renewed in October 1995 and expire in October
1999. The Teamsters collective bargaining agreement was renewed in September
1994 and expires in 1998.
7
<PAGE>
Employees (contd.)
The Company values its employees and believes its relationship with them is good
and that employee loyalty and enthusiasm are key elements of its operating
performance.
Competition
The Company operates in a highly competitive industry characterized by narrow
profit margins. Competitive factors include price, quality and variety of
products, customer service, and store location and condition. The Company
believes that its competitive strengths include its specialty services, everyday
low prices, breadth of product selection, high product quality, one-stop
shopping convenience, attention to customer service, convenient store locations
and a long history of community involvement.
Given the wide assortment of products it offers, the Company competes with
various types of retailers, including local, regional and national supermarket
retailers, convenience stores, retail drug stores, national general
merchandisers and discount retailers, membership clubs and warehouse stores.
The Company's primary competitors include Lucky, Vons, Hughes, Albertson's,
Ralphs, Smith's Food & Drug and a number of independent supermarket operators.
Government Regulation
The Company is subject to regulation by a variety of governmental authorities,
including federal, state and local agencies that regulate trade practices,
building standards, labor, health, safety and environmental matters and regulate
the distribution and sale of alcoholic beverages, tobacco products, milk and
other agricultural products and other food items.
Environmental
Environmental remediation costs incurred over the past five years have been
approximately $100,000 in the aggregate including remediation costs of
approximately $30,000 in 1994 and $8,000 in 1995. Management believes that any
such future remediation costs will not have an adverse material effect on the
financial condition or results of operations of the Company.
Item 2. Properties
The Company leases its warehouse and distribution facilities located in Colton,
California, and management believes that its warehouse and distribution
facilities are well maintained and are adequate to serve the currently
identified expansion plans of the Company. The following schedule presents the
Company's warehouse and distribution facilities by product classification and
the size of each such facility as of September 24, 1995.
<TABLE>
<CAPTION>
Square
Facility Feet
- -------- -------
<S> <C>
Grocery............................. 416,000
Forward-buy grocery................. 175,000
Produce/deli........................ 118,000
Meat/frozen......................... 116,000
Health and beauty aids.............. 35,000
Bakery.............................. 21,000
Support and administrative offices.. 74,000
-------
Total............................ 955,000
=======
</TABLE>
8
<PAGE>
Item 2. Properties (contd.)
The Company owns 31 of its supermarkets and leases the remaining 79
supermarkets. Management believes that its supermarkets are well maintained and
adequately meet the expectations of its customers. The Company operates 110
supermarkets in the Southern California counties of San Bernardino, Riverside,
Orange, Los Angeles and Kern. The following schedule reflects the Company's
store counts by size, county, and the number of stores that are either leased or
owned as of September 24, 1995.
<TABLE>
<CAPTION>
No. of Stores Total Square Feet
------------------------- -----------------------------------------
Under 25,000- 30,001- 35,001- 40,001-
County Total Owned Leased 25,000 30,000 35,000 40,000 45,000
- ---------------- ------- ------- ------- ------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
San Bernardino.. 45 13 32 6 18 7 11 3
Riverside....... 35 10 25 10 14 5 5 1
Orange.......... 14 5 9 3 10 - 1 -
Los Angeles..... 14 2 12 3 10 - 1 -
Kern............ 2 1 1 - - 1 1 -
------- ------- ------- ------- ------ ------ ------ ------
Total........... 110 31 79 22 52 13 19 4
======= ======= ======= ======= ====== ====== ====== ======
</TABLE>
Item 3. Legal Proceedings
In the ordinary course of its business, the Company is party to various legal
actions which the Company believes are incidental to the operation of the
business of the Company and its subsidiaries. The Company has recorded reserves
for loss contingencies based on the specific circumstances of each case. Such
reserves are recorded when the occurrence of loss is probable and can be
reasonably estimated. The Company believes that the outcome of such legal
proceedings to which the Company is currently a party will not have a material
adverse effect upon its results of operations or its consolidated financial
condition.
On May 2, 1993, the Company was named as a defendant along with all of the other
major supermarket chains located in the Los Angeles County area in a class
action complaint filed in the California Superior Court in Los Angeles,
California, alleging among other things that the milk pricing policies of each
of the defendants violate certain antitrust laws and regulations under
California law. In this class action lawsuit, Barela et al. v. Ralphs Grocery
Co. et al., plaintiffs seek unspecified damages. The principal allegations of
the complaint are that milk prices of the defendants operating in the Los
Angeles County area are higher than milk prices for the same products in the San
Francisco Bay area and that the prices for such products in Los Angeles County
are higher than the prices charged in Riverside and San Bernardino counties.
Because the Company does not conduct business in the San Francisco Bay area and
its prices for milk are generally consistent throughout all of its supermarkets
in the Los Angeles County area and Riverside and San Bernardino counties, the
Company believes the claim is without merit with respect to the Company and the
Company intends to vigorously defend such litigation. The Company believes that
the ultimate outcome of this litigation will not have a material adverse effect
on the Company's results of operations or its consolidated financial condition.
Environmental Matters
Environmental remediation costs incurred during the last five years have been
approximately $100,000 in the aggregate including remediation costs of
approximately $30,000 in 1994 and $8,000 in 1995. Management believes that any
such future remediation costs will not have an adverse material effect on the
financial condition or results of operations of the Company.
9
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
-------
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
(a) Market Information
There is no established public trading market for the Company's common equity.
(b) Holders
The Company has two classes of common equity and two stockholders, Craig
Corporation and La Cadena Investments. Craig Corporation is the beneficial
owner of 50,000 shares of the Company's Common Stock and La Cadena Investments
holds 50,000 shares of the Company's Class A Common Stock.
(c) Dividends
The Company has from time to time and in the ordinary course of business, paid
dividends on its common equity. In March 1994, the Company declared a dividend
of $400 per share of Common Stock payable to holders of record on the day
following the completion of the Recapitalization Transaction. Accordingly, a
dividend of $20.0 million was paid to Craig Corporation in March 1994. No
dividends were paid in fiscal 1995 and the Company does not intend to pay
dividends on its common equity in the foreseeable future.
10
<PAGE>
Item 6. Selected Financial Data
The following table sets forth historical financial data derived from the
audited financial statements of the Company as of and for the fiscal years ended
September 29, 1991, September 27, 1992, September 26, 1993, September 25, 1994
and September 24, 1995. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations", the Consolidated Financial Statements of the Company
and related notes thereto contained elsewhere herein. The information included
in "Other Operating and Financial Data" and "Store Data" is unaudited.
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------------------------------------------------
Sept. 29, Sept. 27, Sept. 26, Sept. 25, Sept. 24,
1991 1992 1993 1994 1995
------------------- ----------- ----------- ----------- -----------
(In thousands of dollars except per share and store data)
<S> <C> <C> <C> <C> <C>
Statement of Earnings Data:
Sales................................ $1,514,713 $1,539,758 $1,526,002 $1,539,717 $1,579,895
Cost of goods sold................... 1,189,958 1,201,067 1,195,399 1,199,794 1,227,355
---------- ---------- ---------- ---------- ----------
Gross profit......................... 324,755 338,691 330,603 339,923 352,540
Selling, general and administrative
expenses............................ 292,417 302,547 300,826 297,474 308,332
Depreciation and amortization........ 8,491 9,230 9,910 11,656 11,756
Consulting fees/(1)/................. 8,000 4,400 - 830 1,500
---------- ---------- ---------- ---------- ----------
Total operating expenses............. 308,908 316,177 310,736 309,960 321,588
---------- ---------- ---------- ---------- ----------
Operating Profit..................... 15,847 22,514 19,867 29,963 30,952
Interest and other income............ 535 454 436 775 1,049
Interest expense..................... (9,628) (9,901) (10,292) (15,501) (20,076)
Equity in earnings (loss) from
unconsolidated affiliate............ 901 296 107 (592) (980)
---------- ---------- ---------- ---------- ----------
Income before income taxes,
extraordinary charge and
cumulative effect of a change
in accounting for income taxes...... 7,655 13,363 10,118 14,645 10,945
Income taxes......................... 3,936 5,616 4,426 5,856 4,218
---------- ---------- ---------- ---------- ----------
Income before extraordinary charge
and cumulative effect of a change
in accounting for income taxes...... 3,719 7,747 5,692 8,789 6,727
Extraordinary (charge)/(2)/.......... - (1,470) - (8,036) -
Cumulative effect of a change in
accounting for income taxes/(5)/.... - - - 372 -
---------- ---------- ---------- ---------- ----------
Net income........................... 3,719 6,277 5,692 1,125 6,727
Preferred dividends.................. 1,184 553 323 327 -
---------- ---------- ---------- ---------- ----------
Income available to common
stockholders........................ $ 2,535 $ 5,724 $ 5,369 $ 798 $ 6,727
========== ========== ========== ========== ==========
Earnings per common share before
extraordinary charge and
cumulative effect of a change
in accounting for income taxes...... $25.35 $71.94 $53.69 $84.62 $67.27
Earnings per common share............ $25.35 $57.24 $53.69 $7.98 $67.27
</TABLE>
(footnotes on following page)
11
<PAGE>
Item 6. Selected Financial Data (contd.)
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------------------------------------------
Sept. 29, Sept. 27, Sept. 26, Sept. 25, Sept. 24,
1991 1992 1993 1994 1995
---------- ----------- ----------- ----------- ----------
(In thousands of dollars except per share and store data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (end of fiscal year):
Working capital........................... $ 8,095 $ 25,947 $ 21,596 $ 41,422 $ 45,014
Total assets.............................. 244,185 262,887 264,484 306,489 314,082
Long-term notes and mortgages
payable.................................. 66,466 89,750 87,576 165,000 165,000
Long-term capitalized lease
obligations.............................. 15,091 11,893 10,456 9,187 8,099
Other long-term liabilities............... 8,200 13,014 15,736 15,765 13,772
Series A Preferred Stock.................. 5,870 1,600 3,600 - -
Common stockholders' equity............... 29,607 35,333 40,702 6,851 13,578
Dividends declared per share:
Common Stock............................. - - - 400 -
Class A Common Stock..................... - - - - -
Other Operating and Financial Data:
Sales increases (decreases):
Total stores............................. 3.8% 1.7% (0.9%) 0.9% 2.6%
Like stores.............................. 2.9% (2.0%) (1.9%) (0.7%) 1.2%
EBITDA/(3)/............................... $ 25,774 $ 32,494 $ 30,320 $ 45,802 $ 42,777
Operating profit.......................... $ 15,847 $ 22,514 $ 19,867 $ 29,963 $ 30,952
Ratio of earnings to fixed charges/(4)/... 1.14x 1.47x 1.36x 1.47x 1.36x
Gross profits as a percentage
of sales................................. 21.44% 22.00% 21.66% 22.08% 22.31%
Selling, general and administrative
expenses as a percentage of sales........ 19.30% 19.65% 19.71% 19.32% 19.52%
Store Data:
Number of stores (at end of
fiscal year)............................. 106 107 109 111 110
Average sales per store (000s)............ $ 14,565 $ 14,458 $ 14,130 $ 13,997 $ 14,298
Average store size:
Total square feet........................ 27,747 28,079 28,309 28,617 28,717
Selling square feet...................... 20,131 20,323 20,484 20,708 20,773
Total square feet (at end of
fiscal year) (000s)...................... 2,941 3,004 3,086 3,177 3,159
Total selling square feet (at end
of fiscal year) (000s)................... 2,134 2,175 2,233 2,299 2,285
Sales per average total sq. ft............ $528 $518 $501 $492 $499
Sales per average selling sq ft........... $727 $715 $692 $680 $689
</TABLE>
(1) Consulting fees were paid pursuant to consulting agreements between the
Company and La Cadena and Craig under which La Cadena and Craig provided
consultation and advice to the Company in connection with general
business, financial, management, real estate acquisition and development,
and product diversification matters.
(footnotes continued on following page)
12
<PAGE>
Item 6. Selected Financial Data (contd.)
(2) Extraordinary charges in 1992 and 1994 represent the after-tax charge from
the early retirement of debt.
(3) EBITDA represents earnings before extraordinary charge, interest expense,
depreciation and amortization, standstill fees and income tax expense.
The Company has included information concerning EBITDA here as it is
relevant for covenant analysis under the Notes and because it is used by
certain investors as a measure of a company's ability to service its debt.
EBITDA should not be used as an alternative to, or be construed as more
meaningful than, operating profit or cash flows as an indicator of the
Company's operating performance.
(4) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of income before income taxes and the extraordinary
charge, amortization of previously capitalized interest and undistributed
earnings or loss from less than 50% owned subsidiaries and includes fixed
charges. Fixed charges consist of interest expense whether expensed or
capitalized, amortization of deferred debt expense, preferred stock
dividends adjusted to represent pretax earnings requirements and such
portion of rental expense as can be deemed by management to be
representative of the interest factor in the particular case.
(5) The Company adopted SFAS No. 109 ("Accounting for Income Taxes") effective
at the beginning of fiscal 1994 as a cumulative effect of a change in
accounting principle.
(6) Certain amounts in prior periods have been reclassified to conform to the
current period financial statement presentation.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparisons between the 1993, 1994 and 1995 fiscal years are difficult due to
the Recapitalization Transaction (the "Recapitalization") the Company entered
into on March 8, 1994. The Recapitalization Transaction consisted of a series
of transactions that included incurring $165.0 million in new debt, the proceeds
of which were primarily used to retire certain outstanding debt together with a
prepayment premium, pay a dividend to holders of the Company's Common Stock,
fund covenant not to compete provisions included in a Consulting Agreement and
to acquire an option to purchase securities of the Company held by a
stockholder.
Results of Operation
The following table sets forth certain income statement components expressed as
a percent of sales for the 52 week fiscal years ended September 26, 1993,
September 25, 1994 and September 24, 1995.
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Sales 100.00% 100.00% 100.00%
Gross Profit 21.66 22.08 22.31
Selling, general and
administrative expense 19.71 19.32 19.52
Depreciation and amortization .65 .76 .74
Consulting expense - .05 .09
Other (income) (net) (.03) (.01) -
Interest expense .67 1.01 1.27
Earnings before income taxes,
cumulative effect of a change
in accounting for income taxes
and extraordinary loss .66% .95% .69%
</TABLE>
13
<PAGE>
Results of Operation (contd.)
Total sales amounted to $1.580 billion in 1995 compared to $1.540 billion in
1994 and $1.526 billion in 1993. Like store sales increased 1.2% in fiscal 1995
compared to decreases of .7% and 1.9% in fiscals 1994 and 1993, respectively.
The increase in like store sales in fiscal 1995 compared to decreases in like
store sales in fiscal years 1994 and 1993 is due to many factors including
decreases in competitor store openings, slight improvements in the Southern
California economy and favorable customer response to the Company's introduction
of prepackaged gourmet vegetables and fresh cut flowers.
Gross profits increased to $352.5 million or 22.31% of sales in 1995 compared to
$339.9 million or 22.08% of sales in 1994 and $330.6 million or 21.66% of sales
in 1993. The increase in gross profits, as a percent of sales in fiscal years
1995 and 1994 was due to increased efficiencies in the Company's warehousing and
transportation departments, the introduction of higher gross margin products
such as prepackaged gourmet vegetables and fresh cut flowers and a decrease in
the number of competitive new store openings when compared to prior years.
Operating expenses include selling, general and administrative expenses,
depreciation and amortization, and consulting fees expenses. For fiscal 1995,
selling, general and administrative expenses were $308.3 million or 19.52% of
sales. For fiscal 1994, selling, general and administrative expenses decreased
to $297.5 million or 19.32% of sales compared to $300.8 million or 19.71% of
sales in 1993. Selling and general and administrative expenses in 1995 reflect
reductions in expense categories such as workers' compensation and general
liability self-insurance expenses of $2.8 million, which was offset by increases
in direct labor, store supplies and advertising expenses. Additional expenses
were incurred in 1995 to operate the new stores opened in June and August of
fiscal 1994. Selling, general and administrative expenses for 1994 included
certain non-recurring expenses including a $4.0 million standstill fee (paid in
conjunction with the Recapitalization Transaction) and a one-time payment of
$3.4 million to members of the Retail Clerks collective bargaining unit. Such
non-recurring expenses in 1994 were partially offset by a non-recurring
reduction in employer contributions to a collective bargaining unit health and
welfare benefits trust of $13.6 million.
Depreciation and amortization expenses amounted to $11.8 million in 1995, $11.7
million in 1994 and $9.9 million in 1993 and includes amortization of $1.0
million in 1995 and $558,000 in 1994 from a $5.0 million prepaid five-year
covenant not to compete included in a Consulting Agreement between the Company
and Craig, which became effective March 8, 1994 as part of the Recapitalization
Transaction.
Since January 1, 1989, the Company has entered into various consulting
agreements with its stockholders, La Cadena and Craig, that required them to
provide consultation and advice to the Company in connection with general
business, financial, management consulting, real estate acquisition and
development, and product diversification matters. In February 1992, the Company
entered into consulting agreements with its stockholders which terminated on
September 26, 1993. Throughout 1993, the stockholders were negotiating with
each other and with the Company with respect to the Recapitalization. During
this period, consulting services rendered were de minimis and accordingly it was
determined during the third quarter of 1993, that no fees were payable under the
terms of the consulting agreement for fiscal 1993. In March 1994, the Company
entered into a new five-year consulting agreement with Craig Corporation,
whereby the Company will pay Craig $1.5 million per year (payable quarterly in
arrears) and Craig will provide the Company with consultation and advice in
connection with general business issues, financial management consulting, real
estate acquisition and development and product diversification matters.
Consulting fees expense amounted to $1.5 million in 1995 and $830,000 in 1994.
14
<PAGE>
Results of Operation (contd.)
Operating profits increased to $31.0 million or 1.96% of sales in 1995 compared
to $30.0 million or 1.95% of sales in 1994 and amounted to $19.9 million or
1.30% of sales in 1993.
Interest expense amounted to $20.1 million, $15.5 million and $10.3 million for
the 1995, 1994 and 1993 fiscal years, respectively. The increase in interest
expense in 1995, when compared to 1994, and the increase in interest expense in
1994, when compared to 1993, is due to additional debt incurred in March 1994 to
facilitate the Recapitalization Transaction. Such debt was outstanding during
all of fiscal 1995 and was outstanding since March 8, 1994 in fiscal 1994.
Interest expense includes amortization of fees and expenses incurred to acquire
debt of $1.2 million and $721,000, respectively for 1995 and 1994.
Income before income taxes and the cumulative effect of a change in accounting
for income taxes and extraordinary loss amounted to $10.9 million, $14.6 million
and $10.1 million for the 1995, 1994 and 1993 fiscal years, respectively.
Income before the cumulative effect of a change in accounting for income taxes
and extraordinary item for the 1995, 1994 and 1993 fiscal years amounted to $6.7
million or .43% of sales, $8.8 million or .57% of sales and $5.7 million or .37%
of sales, respectively.
Effective the beginning of fiscal 1994, the Company adopted Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" and
realized a gain of $.4 million from the cumulative effect of a change in
accounting for income taxes.
In connection with the March 8, 1994 Recapitalization, the Company entered into
a series of transactions that included the sale of $165.0 million of 11% Senior
Notes due 2001, the early retirement of the outstanding 9.8% Senior Notes due
2001 and certain bank financings. The early retirement of debt resulted in an
after tax extraordinary charge to earnings of $8.0 million in the Company's 1994
second quarter.
Net income amounted to $6.7 million in 1995, $1.1 million in 1994 and $5.7
million in 1993.
Liquidity and Capital Resources
The Company historically has funded its daily cash flow requirements through
funds generated from operations and from borrowings from short-term revolving
credit facilities. The Company's credit agreement consists of a revolving
credit facility for working capital of $11.0 million, which was available at
September 24, 1995 and a standby letter of credit facility with a maximum
availability of $28.0 million, of which $8.9 million was available at September
24, 1995. Such standby letter of credit facility is maintained pursuant to the
Company's workers' compensation and general liability self-insurance
requirements.
The Company had no short-term borrowings outstanding at year end 1995 and 1994
compared to $9,000,000 in 1993. The average daily amount of short-term
borrowings outstanding was $10,563,000, $5,420,000 and $129,000 in 1993, 1994
and 1995, respectively. The weighted average interest rates during the periods
were 4.98%, 4.40% and 9.68% in 1993, 1994 and 1995, respectively.
Working capital amounted to $45.0 million at September 24, 1995, $41.4 million
at September 25, 1994 and $21.6 million at September 26, 1993, and the Company's
current ratios were 1:40:1, 1.38:1 and 1.20:1, respectively. Fluctuations in
working capital and current ratios are not unusual in the industry.
Net cash provided by operating activities amounted to $18.9 million, $18.6
million and $9.5 million for fiscal years 1995, 1994 and 1993, respectively.
Fluctuations in operating assets and liabilities are not unusual in the
supermarket industry. Net cash provided by operating activities in
15
<PAGE>
1994 included certain components of the Recapitalization Transaction in the
16
<PAGE>
Liquidity and Capital Resources (contd.)
changes of operating assets and liabilities. The increase in other assets in
1994 included approximately $8.0 million of fees and expenses incurred to issue
debt and $5.0 million from the prepayment of a five-year covenant not to compete
included in the Consulting Agreement with Craig.
Net cash used in financing activities in fiscal year 1995 amounted to $1.2
million. Net cash provided by financing activities in fiscal years 1994 and
1993 amounted to $15.6 million and $3.1 million, respectively. Net cash used in
financing activities in 1995 reduced amounts due under capitalized lease
obligations by $1.2 million. During March 1994, the Company completed the
Recapitalization which included proceeds from the sale of $165.0 million of 11%
Senior Notes due 2001. Such proceeds were used to fund the early retirement of
$75.5 million of 9.8% Senior Notes due 2001, the early retirement of secured
financings of $12.2 million, the prepayment of $9.0 million of capital
expenditure financing, the prepayment premiums from the early retirement of debt
of $12.9 million and the redemption of $3.6 million of the Company's Series A
Preferred Stock. In addition, the 1994 debt offering proceeds were used to pay
a dividend on the Company's Common Stock of $20.0 million and $14.7 million of
the proceeds were used to acquire an option to purchase the equity interest in
the Company held by Craig. Net cash provided by financing activities in 1993
consisted primarily of increases in short-term borrowings used to finance the
1993 new store construction costs.
Net cash used in investing activities for the 1995, 1994 and 1993 fiscal years,
amounted to $12.7 million, $14.4 million and $16.7 million, respectively. The
difference in net cash used in investing activities between the comparable
periods in 1995, 1994 and 1993 is due to the Company's capital expenditures
during such periods, net of proceeds from asset dispositions. Capital
expenditures amounted to $13.2 million in 1995, $19.4 million in 1994 and $17.2
million in 1993. During fiscal 1994, and in conjunction with the
Recapitalization Transaction, the Company paid Craig $4.0 million in the form of
Craig Common Stock held by the Company for investment purposes in accordance
with the terms of a certain Standstill Agreement between the Company and Craig.
Capital expenditures for fiscal 1995 included supermarket minor remodels, the
acquisition and installation of technology and equipment required to implement
the Stater Express choice of payment system and the completion of a supermarket
major remodel and expansion. The Stater Express system is a combined supermarket
technology platform that includes enhanced systems for check verification and
acceptance and alternative pay choices such as VISA, MasterCard, American
Express and direct debit bank cards issued by most nationally recognized
financial institutions. Management believes the Stater Express system will help
the Company reduce its bad check expense while providing customers with
alternative methods of payment. Stater Express was installed in each of the
Company's supermarkets during fiscal 1995. The Stater Express mark is an
intellectual property of Stater Bros. Markets.
During the 1994 fiscal year, the Company opened three new stores, one of which
replaced a smaller and less efficient store. The new stores opened in 1994 are
located in the Company's primary trading area.
Capital expenditures in 1995 and 1994 were financed primarily from cash provided
by operating activities.
Management believes that operating cash flow, supplemented by capital
expenditures financings obtained through capital and operating leases, will be
sufficient to meet the Company's currently identified operating needs and
scheduled capital expenditures. However, there can be no assurance that such
lease financings will be available to the Company.
The Company operated 110 supermarkets at September 24, 1995, 111 supermarkets at
September 25, 1994 and 109 supermarkets at September 26, 1993.
17
<PAGE>
Liquidity and Capital Resources (contd.)
The Company's supermarkets had 3.2 million total retail square feet at September
24, 1995 and September 25, 1994 and 3.1 million total retail square feet at
September 26, 1993.
The Bank Facilities
Stater Bros. Markets and Bank of America National Trust and Savings Association
(the "Bank") have entered into a credit agreement (as amended) whereby the Bank
provides Stater Bros. Markets with a revolving operating line of credit (the
"Operating Facility") with a maximum availability of $11.0 million and a
revolving letter of credit facility (the "LC Facility") with a maximum
availability of $28.0 million (collectively, the "Bank Facilities"). The Bank
Facilities will expire on June 1, 1996. The Company intends to renew or replace
the Bank Facilities on or before June 1, 1996. Interest on the outstanding
principal balance on the Operating Facility is payable monthly at either the
Bank's reference rate plus one percent per annum or a fixed rate of interest.
Borrowings under the Bank Facilities are unsecured general obligations of Stater
Bros. Markets and are guaranteed by Stater Bros. Development, Inc. The Bank
Facilities contain customary cross-default provisions with respect to the
Company's 11% Senior Notes due 2001.
The Bank Facilities also contain certain financial and other covenants
applicable to Stater Bros. Markets, including without limitation, requirements
to (i) maintain a minimum current ratio of at least 1.20:1; (ii) maintain
minimum tangible net worth plus debt subordinated to the Bank of at least $134.0
million; (iii) maintain a ratio of total liabilities to tangible net worth plus
debt subordinated to the Bank of not in excess of 1.30:1; (iv) maintain a
minimum fixed charge coverage ratio (as defined) of at least 1.10:1 for each
consecutive four fiscal quarters beginning with the four fiscal quarters ending
on Stater Bros. Markets' 1995 fiscal year end; (v) limit the sale of assets;
(vi) prohibit additional indebtedness except for normal trade credit and
indebtedness secured only by real property constructed or acquired within the
prior twelve months; (vii) prohibit additional liens except for liens for
indebtedness secured by real property pursuant to clause (v); (viii) prohibit
the acquisition of other business entities; (ix) restrict the payment of
dividends (as discussed below); (x) prohibit changes of ownership; (xi) prohibit
the liquidation, consolidation or merger of the business; and (xii) repay all
advances outstanding under the Operating Facility and not draw any new advances
for at least 5 calendar days each month. As of September 24, 1995, for
purposes of the Bank Facilities, Stater Bros. Markets was in compliance with all
restrictive convenants and had (i) a current ratio of 1.40:1, (ii) tangible net
worth and debt subordinated to the Bank of $176.4 million; (iii) a ratio of
total liabilities to tangible net worth and debt subordinated to the Bank of
0.76:1 and (iv) a fixed charge coverage ratio (as defined in the Bank
Facilities) of 1.30:1. However, there can be no assurance that Stater Bros.
Markets will be able to achieve the expected operating results or implement the
capital expenditure strategy upon which the covenants in the Bank Facilities are
based. If for any reason Stater Bros. Markets is unable to comply with the
terms of the Bank Facilities, including the covenants contained therein, such
noncompliance would result in an event of default under the Bank Facilities, and
could result in acceleration of the payment of indebtedness then outstanding
under Bank Facilities or, in certain situations, the prohibition of the payment
of dividends to the Company. In addition, no amendment, waiver or supplement
may be made to the Indenture without the prior written consent of the Bank if
such amendment, waiver or supplement adversely affects the rights of the Bank as
lender to Stater Bros. Markets.
The financial and operational covenants contained in the Bank Facilities
significantly limit Stater Bros. Markets' ability to pay dividends and make
loans or advances to the Company, the primary source of anticipated cash for the
Company and could limit the Company's ability to respond to changing business
and economic conditions and to finance future operations or capital needs
including the Company's ability to achieve its plans to remodel and expand
existing supermarkets and open new supermarkets.
The Company is subject to certain covenants associated with its 11% Senior Notes
due 2001. As of September 24, 1995, the Company was in compliance with all such
covenants.
18
<PAGE>
Liquidity and Capital Resources (contd.)
The Bank Facilities (continued)
However, there can be no assurances that the Company will be able to achieve the
expected operating results or implement the capital expenditure strategy upon
which future compliance with such covenants is based.
The Company believes that cash flow from operations and proceeds from borrowings
expected to be available under the Bank Facilities will be adequate to meet the
Company's currently identifiable working capital requirements.
The Option Agreement
The Company has acquired, for $14.7 million, an option to purchase all, but not
less than all, shares of the Common Stock held by Craig immediately after
the Recapitalization Closing for a purchase price, in cash, of $60.0 million
plus an adjustment factor equal to 8.833% per annum from the time of the
Recapitalization Closing, compounded annually. The Company has the right to
exercise the option with respect to such Common Stock at any time prior to March
8, 1996. Pursuant to the Option Agreement, the Company also has the right, at
its option, to convert the Common Stock into 693,650 shares of Series B
Preferred Stock any time prior to March 8, 1996. At such time, if the Company
has not exercised its right to convert such Common Stock into Series B Preferred
Stock, the option will expire. If the Company has exercised its right to
convert such Common Stock into Series B Preferred Stock, the purchase option
will remain in effect until the twelfth anniversary of the Recapitalization
Closing and will entitle the Company to purchase all, but not less than all,
such shares of the Series B Preferred Stock. In addition, the Option Agreement
prohibits the Company and its subsidiaries from issuing or selling any shares of
their capital stock to any person or entity, unless and until the Common Stock
is converted into Series B Preferred Stock.
With respect to the Series B Preferred Stock, the exercise price of the option
will be $69.4 million, plus accrued and unpaid dividends. The Company currently
intends to exercise its right to convert the Common Stock into Series B
Preferred Stock. If converted, dividends on the Series B Preferred Stock will
commence to accrue on the second anniversary of the Recapitalization Closing
(the "Accrual Date"), at the rate of 10.5% per annum for the first 78 months
following the Accrual Date. Commencing with the 79th month following the
Accrual Date, the dividend rate will increase to 12% per annum, and will further
increase each twelfth month thereafter by 100 basis points per year, to a
maximum rate of 15% per annum. In the event the Company elects to acquire
Craig's equity interest in the Company, such transaction would require the use
of a combination of any of the following sources of funds: internally generated
funds, proceeds from additional borrowings and proceeds from the issuance of
equity securities. No assurance can be made, however, that internally generated
funds, additional borrowings or access to funds through the issuance of equity
securities will be available to the Company at such time.
In the event the Company elects to convert the Common Stock held by Craig into
Series B Preferred Stock, Common Stockholders' equity will decrease by $69.4
million and Series B Preferred Stock outstanding, which will not be included in
stockholders' equity, will increase by $69.4 million.
Labor Relations
The Company and other major supermarket employers in Southern California
negotiated a four-year contract, beginning October 1995, with the United Food
and Commercial Workers Union. The Company's collective bargaining agreement
with the International Brotherhood of Teamsters was renewed in 1994 and expires
in 1998. Management believes it has good relations with its employees.
19
<PAGE>
Compliance With Accounting Standards
The Financial Accounting Standards Board has issued SFAS No. 109, "Accounting
for Income Taxes," which was adopted by the Company for the fiscal year
beginning September 27, 1993 (fiscal 1994). SFAS No. 109 established financial
accounting and reporting standards for the effects of income taxes that result
from an enterprise's activities during the current and preceding years. SFAS
No. 109 requires an asset and liability approach for financial accounting and
reporting for income taxes. The impact of adopting SFAS No. 109 resulted in a
gain of $372,000.
Inflation
The Company's performance is affected by inflation. In recent years the impact
of inflation on the operations of the Company has been moderate. As inflation
has increased expenses, the Company has recovered, to the extent permitted by
competition, the increase in expenses by increasing prices over time. However,
the economic environment in Southern California continues to challenge the
Company to become more cost efficient as its ability to recover increases in
expenses through price increases is diminished. The future results of
operations of the Company will depend upon the ability of the Company to adapt
to the current economic environment as well as to the current competitive
conditions.
20
<PAGE>
Item 8. Financial Statements and Supplementary Data
Information called for by this item is set forth in the Company's financial
statements and supplementary data contained in this report. Specific financial
statements and supplementary data can be found at the pages listed in the
following index.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Report of Independent Auditors................................. F-2
Consolidated Balance Sheets at September 26, 1993,
September 25, 1994 and September 24, 1995................... F-3
Fiscal years ended September 26, 1993, September 25, 1994 and
September 24, 1995:
Consolidated Statements of Income.......................... F-5
Consolidated Statements of Cash Flows...................... F-6
Consolidated Statements of Stockholders' Equity............ F-8
Notes to Consolidated Financial Statements..................... F-9
</TABLE>
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None
21
<PAGE>
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information with respect to the current
executive officers and directors of the Company, their ages and principal
occupations for at least the past five years. Directors of the Company each
serve for a term of one year, or until their successors are elected. The
officers serve at the discretion of the Board of Directors of the Company.
<TABLE>
<CAPTION>
Name Age Position
- --------------------------- --- ----------------------------------------------
<S> <C> <C>
Jack H. Brown.............. 56 Chairman of the Board, President
and Chief Executive Officer
Richard C. Moseley......... 66 Executive Vice President
H. Harrison Lightfoot...... 57 Group Senior Vice President - Retail
Operations
A. Gayle Paden............. 59 Group Senior Vice President - Administration
Donald I. Baker............ 54 Group Senior Vice President - Human Resources
and Distribution
Dennis N. Beal............. 45 Vice President - Finance and Chief Financial
Officer
Bruce D. Varner............ 59 Director and Secretary
James J. Cotter............ 57 Director
Thomas W. Field, Jr........ 62 Director
</TABLE>
Background of Directors and Executive Officers
Jack H. Brown has been President and Chief Executive Officer of the Company
since June 1981 and Chairman of the Board since 1986. From September 1978 to
June 1981, Mr. Brown served as President of Pantry Food Markets, Inc. and
American Community Stores Corporation, Inc., both wholly-owned subsidiaries of
Cullum Companies, Inc., a publicly held corporation. From 1972 to 1978, Mr.
Brown served as Corporate Vice President of Marsh Supermarkets, Inc., a publicly
held corporation. Mr. Brown has been employed in various capacities in the
supermarket industry for 43 years. Mr. Brown has a majority interest and is the
managing general partner of La Cadena Investments.
Richard C. Moseley has been Executive Vice President since September 1995 and
was Group Senior Vice President-Marketing of the Company from 1986 to 1995. Mr.
Moseley has served the Company for 43 years in various capacities including
store manager, buyer, general supervisor and Vice President. Mr. Moseley is a
general partner of La Cadena Investments.
H. Harrison Lightfoot has been Group Senior Vice President-Retail Operations
of the Company since June 1986. Mr. Lightfoot has served the Company for 41
years in various capacities, including store manager, buyer, general supervisor
and Vice President. Mr. Lightfoot is a general partner of La Cadena
Investments.
22
<PAGE>
Background of Directors and Executive Officers (contd.)
A. Gayle Paden joined the Company in 1986 as Group Senior Vice President-
Administration. Mr. Paden was previously with Lucky Stores for 35 years where
he served in various capacities, the most recent of which was President of the
Southern California Food Division.
Donald I. Baker joined the Company in November 1983 as Vice President-
Warehouse and Transportation and has been Group Senior Vice President-Human
Resources and Distribution since July 1992. From August 1986 to July 1992, Mr.
Baker was Senior Vice President-Human Resources and Distribution. Prior to
joining the Company, Mr. Baker was employed by American Community Stores
Corporation, Inc., a subsidiary of Cullum Companies, Inc., a publicly held
corporation, from 1972 to 1983 in various capacities including Vice President of
Retail Operations, and was also employed by Kroger Company from 1966 to 1972.
Dennis N. Beal has been Vice President of Finance and Chief Financial Officer
of the Company since September 1992. Mr. Beal was Vice President and Controller
of American Stores Company from 1989 to 1992 and Vice President and Controller
of subsidiaries of American Stores Company from 1987 to 1989 and served in
various financial positions since 1981. Mr. Beal, a certified public
accountant, was also a partner in the accounting firm of Bushman, Daines,
Rasmussen & Wisan and served in various capacities with the firm from 1974 to
1981.
Bruce D. Varner has been a director of Stater Bros. Markets since September
1985 and director of Stater Bros. Holdings Inc. since May 1989. Since 1967, Mr.
Varner has been a partner with the law firm of Gresham, Varner, Savage, Nolan &
Tilden where he specializes in business and corporate matters. Mr. Varner and
the law firm of Gresham, Varner, Savage, Nolan & Tilden have performed legal
services in the past for the Company and the Company expects such services to
continue in the future.
James J. Cotter has been a director of Stater Bros. Markets since March 1987
and director of Stater Bros. Holdings Inc. since May 1989. Mr. Cotter has been
Chairman of the Board of Craig since 1988 and a director since 1985. Mr. Cotter
has also been the Chairman of the Board of Reading Company since 1991 and has
served as a director of that company since September 1990. Craig is a 50% owner
of the Company's Common Stock, which votes approximately 48% of the Company's
common equity, and is a 49% owner of Reading Company. Mr. Cotter has been a
director and Chairman of the Board of Citadel Holding Corporation (which Craig
has approximately 37% of the aggregate voting power) since 1991. From October
1991 to June 1992, Mr. Cotter also served as the acting Chairman and served as a
director of Citadel Holding Corporation's wholly-owned subsidiary, Fidelity
Federal Bank, and Mr. Cotter served as a director from February 1986 to May 1988
and from June 1991 to December 1993.
Thomas W. Field, Jr., has been Chairman of the Board of ABCO Markets since
December 1991, and President of Field and Associates since 1989. From 1988 to
1989, Mr. Field was Chairman of the Board, President and Chief Executive Officer
of McKesson Corporation and was its President since 1984, and President and
Chief Executive Officer from 1986 to 1988. Mr. Field has held various positions
in the Supermarket Industry for over 40 years and serves as a Director for
several companies including, Campbell Soup Company, Bromar Inc., Maxicare and
ABCO Markets.
23
<PAGE>
Item 11. Executive Compensation
The following table summarizes the compensation for services rendered during the
prior three fiscal years paid to the CEO and the four most highly compensated
executive officers other than the CEO of the Company:
<TABLE>
<CAPTION>
Annual Compensation
=============================================
Other Annual All Other
Name and Salary Bonuses Compensation Compensation
Principal Position Year ($) ($)(4)(5) ($) ($)(1)(2)(3)
============================ ==== ======== ========== ============ =============
<S> <C> <C> <C> <C> <C>
Jack H. Brown 1995 $683,385 $ - - $ 26,500
Chairman, President and 1994 $677,460 $1,361,000 - $ 27,528
Chief Executive Officer 1993 $636,000 $ - - $ 27,634
Richard C. Moseley 1995 $267,077 $ - - $ -
Executive Vice- 1994 $266,692 $ 95,000 - $ 2,028
President 1993 $252,000 $ - - $ 2,134
H. Harrison Lightfoot 1995 $267,077 $ - - $ -
Group Senior Vice- 1994 $266,692 $ 95,000 - $ 2,028
President, Retail 1993 $252,000 $ - - $ 2,134
Operations
A. Gayle Paden 1995 $244,616 $ - - $ -
Group Senior Vice- 1994 $244,384 $ 25,000 - $ 2,028
President, Administration 1993 $231,000 $ - - $ 2,134
Donald I. Baker 1995 $169,615 $ - - $ -
Group Senior Vice- 1994 $163,269 $ 45,000 - $ 1,404
President, Human Resources 1993 $145,615 $ - - $ 1,569
and Distribution
</TABLE>
(1) The dollar value of perquisites and other personal benefits, if any, for
each of the Named Executive Officers was less than the reporting thresholds
established by the Securities and Exchange Commission.
(2) Amounts shown for the Named Executive Officers represent the Company's
contributions to the Company's Profit Sharing Plan, a defined contribution
plan, for the account of each Named Executive Officer. Plan participants
become fully vested in the plan after seven years of service.
(3) Includes Mr. Brown's Director Fees for 1993, 1994 and 1995 which
amounted to $25,500, $25,500, and $26,500, respectively.
(4) The Board of Directors of Stater Bros. Holdings Inc. unanimously
awarded Mr. Brown a one-time bonus for his expertise in handling the
Recapitalization Transaction. The amount is included in his 1994 Bonus.
24
<PAGE>
(5) Bonuses to be paid to the Named Executive Officers for fiscal 1995
had neither been calculated nor awarded as of December 20, 1995, the
latest practical date.
Stock Options and SARs
None
25
<PAGE>
Item 11. Executive Compensation (contd.)
Pension Plan
The Company's Pension Plan for Salaried Employees (the "Pension Plan") is a non-
contributory, defined benefit plan which applies to all salaried employees who
have completed one year of qualified service, including directors who are
employees. For each year of credited service, the annual pension to which an
employee is entitled under the Pension Plan upon normal retirement at age 65 is
an amount equal to three quarters of one percent of the employee's compensation
for each year up to the social security wage base, plus 2.15 percent of the
employee's compensation for each year in excess of the social security wage
base. The Named Executive Officers have the following years of credited service
under the Pension Plan as of September 24, 1995: Jack H. Brown - 14 years;
Richard C. Moseley - 43 years; H. Harrison Lightfoot - 41 years; A. Gayle Paden
- - 9 years; and Donald I. Baker - 12 years.
The amounts shown in the following table are estimated annual retirement
benefits under the Pension Plan (assuming payments are made on the normal life
annuity and not under any of the various survivor forms of benefits) based upon
retirement at age 65, after various years of service at selected salary levels.
Benefits under the Pension Plan do not become fully vested until the employee
has five years of credited service with the Company. The Internal Revenue Code
of 1986, as amended, places certain limitations on pension benefits that can be
paid from a tax-qualified pension plan and trust, as well as the compensation
that may be taken into account in determining such benefits. Such limitations
are not reflected in the table below. The maximum annual benefit for 1995
retirees with ten or more years of service at retirement is $120,000. The
maximum annual compensation that may be considered for 1995 retirees is
$150,000.
<TABLE>
<CAPTION>
Pension Plan Table
Years of Service
------------------------------------------------
Remuneration 15 20 25 30 35
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$100,000...... $ 24,312 $ 32,416 $ 40,520 $ 48,624 $ 56,728
150,000...... 40,437 53,916 67,395 80,874 94,353
200,000...... 56,562 75,416 94,270 113,124 131,978
250,000...... 72,687 96,916 121,145 145,374 169,603
300,000...... 88,812 118,416 148,020 177,624 207,228
350,000...... 104,937 139,916 174,895 209,874 244,853
400,000...... 121,062 161,416 201,770 242,124 282,478
450,000...... 137,187 182,916 228,645 274,374 320,103
500,000...... 153,312 204,416 255,520 306,624 357,728
</TABLE>
Compensation of Directors
Directors of the Company are paid an annual fee of $25,000 plus $500 for each
board meeting attended.
Employment and Severance Agreements
There are no written employment contracts between the Company and any Named
Executive Officer. The Company's severance policies generally provide for two
weeks, up to a maximum of twelve weeks, severance pay to full-time non-
bargaining unit employees for every year of service to the Company.
26
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth, as of September 24, 1995, the number and
percentage of outstanding shares of Class A Common Stock and Common Stock
beneficially owned by (a) each person known by the Company to beneficially own
more than 5% of such stock, (b) each director of the Company, (c) each of the
Named Executive Officers, and (d) all directors and executive officers of the
Company as a group:
<TABLE>
<CAPTION>
Shares of
Class A Common Percentage of Shares of
Stock Class A Common Stock Percentage of
Name and Address Beneficially Common Stock Beneficially Common Stock
of Beneficial Owner Owned Outstanding Owned Outstanding
- -------------------------------- -------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
La Cadena Investments /(1)/..... 50,000 100% -- --
Craig Management, Inc. /(2)/.... -- -- 50,000 100%
Craig Corporation /(2)/......... -- -- 50,000 100%
Jack H. Brown /(1)(3)/.......... 50,000 100% -- --
Richard C. Moseley /(1)(3)/..... 50,000 100% -- --
H. Harrison Lightfoot /(1)(3)/.. 50,000 100% -- --
A. Gayle Paden /(3)/............ -- -- -- --
Donald I. Baker /(3)/........... -- -- -- --
James J. Cotter /(2)(4)/........ -- -- 50,000 100%
Bruce D. Varner /(3)/........... -- -- -- --
Thomas W. Field, Jr. /(3)/...... -- -- -- --
All directors and executive
officers as a group
/ (8 persons) (1)(2)/.......... 50,000 100% 50,000 100%
</TABLE>
- ----------
(1) The general partners of La Cadena Investments are Jack H. Brown, Richard
C. Moseley and H. Harrison Lightfoot. Mr. Brown has a majority interest
and is the managing general partner of La Cadena Investments and has the
power to vote the shares of the Company owned by La Cadena Investments,
except with respect to certain fundamental corporate changes of the
Company including the disposition of such shares. Accordingly, Messrs.
Brown, Moseley and Lightfoot may be deemed to have shared voting power or
shared investment power with respect to the shares owned by La Cadena
Investments, and such individuals therefore may be deemed to be the
beneficial owners thereof. The address of La Cadena Investments is 3750
University Avenue, Suite 610, Riverside, California 92501.
(2) All of the issued and outstanding stock of Craig Management, Inc. is owned
by Craig Corporation. Accordingly, Craig Corporation may be deemed to
share beneficial ownership of shares of Common Stock owned of record by
Craig Management, Inc. The address of Craig Management, Inc. and Craig
Corporation is c/o Craig Corporation, 550 South Hope Street, Suite 1825,
Los Angeles, California 90071. As of September 24, 1995, Mr. Cotter had
voting power with respect to in excess of 36% of the outstanding shares of
equity securities of Craig Corporation. Accordingly, Mr. Cotter may be
deemed to have beneficial ownership with respect to the shares owned of
record by Craig Corporation and Craig Management, Inc.
(3) The address of Messrs. Brown, Moseley, Lightfoot, Paden, Baker, Varner and
Field is c/o the Company at 21700 Barton Road, Colton, California 92324.
(4) The address of Mr. Cotter is c/o Craig Corporation, 550 South Hope Street,
Suite 1825, Los Angeles, California 90071.
27
<PAGE>
Change of Control Arrangements
As of September 3, 1993, the Company, La Cadena, Craig and certain of their
affiliates entered into a series of separate agreements, as subsequently
amended, and took certain actions, for the purpose of reclassifying the
Company's outstanding equity, providing for effective operating control of the
Company by La Cadena, making certain cash payments and distributions to Craig,
and providing the Company with the option to acquire Craig's equity interest in
the Company, all of which were completed simultaneously with the closing of the
Recapitalization Transaction.
Item 13. Certain Relationships and Related Transactions
Since January 1, 1989, the Company has entered into various consulting
agreements (the "Agreements") with its stockholders, La Cadena and Craig, that
required them to provide consultation and advice to the Company in connection
with general business, financial, management consulting, real estate acquisition
and development, and product diversification matters. The Agreements entered
into in February 1992 provided for the stockholders to continue to render
consulting services through fiscal 1993 and terminated on September 26, 1993.
Expenses of $8.0 million and $4.4 million were incurred under the consulting
agreements in 1991 and 1992, respectively. Throughout fiscal 1993, the
stockholders were negotiating with each other and the Company with respect to
the recapitalization of the Company. During this period, consulting services
rendered pursuant to these Agreements were de minimis and, accordingly, it was
determined that no fees were payable under the terms of the Agreements for the
fiscal year ended September 26, 1993. The Company has entered into a prepaid
five year covenant not to compete and a new consulting agreement with Craig,
pursuant to which the Company paid Craig an initial payment of $5.0 million at
the closing of the Recapitalization Transaction and will pay an annual
consulting fee of $1.5 million for five years thereafter. The covenant not to
compete and consulting arrangements with Craig are unique, based upon the
confidential information available to Craig and its experience with, and
relationship to the Company. Accordingly, the Company has no basis to determine
whether comparable services could be obtained from unaffiliated third parties on
similar or more favorable terms. The Company expects that no consulting fees
will be paid to La Cadena in the foreseeable future and that the payment of any
such fees to La Cadena would be subject to restrictions and covenants governing
such distributions contained in the Company's Credit Agreement with the Bank of
America and in the Senior Note Indenture.
During 1994, the Company, La Cadena, Craig and certain of their affiliates
entered into a series of separate agreements, as subsequently amended, and took
certain actions, for the purpose of reclassifying the Company's outstanding
equity, providing for effective operating control of the Company by La Cadena,
making certain cash payments and distributions to Craig, and providing the
Company with the option to acquire Craig's equity interest in the Company. See
Item 1, "The Recapitalization Transaction".
As of September 24, 1995, Craig was the beneficial owner of 50% of the Company's
Common Equity, representing approximately 48% of the Company's voting power, and
La Cadena was the holder of record and beneficial owner of 50% of the Company's
Common Equity, representing approximately 52% of the Company's voting power.
See "Security Ownership of Certain Beneficial Owners and Management".
Mr. Cotter is a director of the Company and is a director and the Chairman of
the Board of Craig. As of September 24, 1995, Mr. Cotter had voting power with
respect to in excess of 36% of the outstanding shares of equity securities of
Craig.
28
<PAGE>
Item 13. Certain Relationships and Related Transactions (contd.)
The general partners of La Cadena are Jack H. Brown, Richard C. Moseley and H.
Harrison Lightfoot and Mr. Brown has a majority interest and is the managing
general partner. Mr. Brown is a director of the Company and Messrs. Brown,
Moseley and Lightfoot are Named Executive Officers of the Company. Mr. Brown
has the power to vote the shares of the Company owned by La Cadena, except with
respect to certain fundamental corporate changes of the Company, including the
disposition of such shares. Accordingly, Messrs. Brown, Moseley and Lightfoot
may be deemed to have shared voting power with respect to shares of the Company
owned by La Cadena.
Mr. Varner is an officer and a director of the Company and Mr. Varner and the
law firm of Gresham, Varner, Savage, Nolan & Tilden, of which Mr. Varner is a
partner, have performed legal services in the past for the Company. The total
cost of such legal services incurred by the Company during fiscal 1995 was
approximately $1.6 million. The Company believes that the terms and costs of
such legal services provided by Mr. Varner and Gresham, Varner, Savage, Nolan &
Tilden were at least as fair to the Company as could have been obtained from
unaffiliated law firms. The Company expects such services to continue in the
future.
29
<PAGE>
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K
(a) Document list
(1) Financial Statements
See Financial Statement Index included in Item 8 of Part II of
this Form 10-K
(2) Financial Statement Schedules
The Financial Statement Schedules required by Item 14(d) for
which provision is made in the applicable accounting regulations
of the Securities and Exchange Commission, are not required
under the related instructions or are inapplicable and
therefore, have been omitted.
(3) Exhibits
Exhibits as required by Item 14(c) are as follows:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1 (1) Certificate of Incorporation of the Company.
3.2 (1) By-Laws of the Company.
4.1 (1) Indenture between the Company and IBF Schroder Bank
& Trust Company, as Trustee, for $165,000,000 11%
Senior Notes due 2001, dated as of March 8,
1994 (the "Indenture").
4.2 (1) Global Notes of the Company issued pursuant to the
Indenture
4.3 (1) Registration Rights Agreement among the Company and
PaineWebber Incorporated dated March 8, 1994.
10.1 (1) Reclassification Agreement dated September 3, 1993, by and
among the Company, Craig and La Cadena.
10.2 (1) Amendment to Reclassification Agreement, dated January 12,
1994, by and among the Company, Craig and La Cadena.
10.3 (1) Agreement of Stockholders dated May 10, 1989, by and
among the Company, Craig and La Cadena.
10.4 (1) Amendment to Agreement of Stockholders dated September 3,
1993, by and among the Company, Craig, Craig
Management, Inc. ("CMI") and La Cadena.
10.5 (1) Option Agreement dated September 3, 1993, by and between
the Company and Craig.
</TABLE>
30
<PAGE>
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K
<TABLE>
<CAPTION>
(a)(3) Exhibits (contd.)
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.6 (1) Amendment to Option Agreement dated January 12, 1994, by
and between the Company and Craig.
10.7 (1) Consulting Agreement dated September 3, 1993 by and
between the Company, Craig and CMI.
10.8 (1) Letter Agreement regarding Consulting Agreement, dated
March 8,1994, by and Between the Company, Craig and
CMI.
10.9 (1) Second Amended and and Restated Stock Agreement dated
January 12, 1994, by and among the Company, Craig
CMI, La Cadena and James J. Cotter.
10.10 (1) Security Agreement dated March 8, 1994, by and between the
Company and Craig.
10.12 (1) Credit Agreement dated March 8, 1994, by and between
Stater Bros. Markets and Bank of America Trust and
Savings Association.
10.12 (a) (2) Amendment dated June 23, 1995 to the Credit Agreement
dated March 8, 1995, by between Stater Bros. Markets
and Bank of America Trust and Savings Association.
10.13 (1) Continuing Guaranty dated March 8, 1994, of Stater Bros.
Development, Inc. in favor of Bank of America Trust and
Savings Association.
10.15 (1) Subordination Agreement dated March 8, 1994, by and
among the Company, Stater Bros. Markets and Bank of
America Trust and Savings Association.
10.16 (1) Amended and Restated Sublease Agreement dated June 1,
1983, between Wren Leasing Corp., as Lessor, and Stater
Bros. Markets, as Lessee.
10.17 (1) Preferred Stock Agreement dated March 22, 1983, between
Stater Bros. Markets and Petrolane Incorporated.
10.18 (1) Escrow Agreement dated September 19, 1985, by and among
Stater Bros. Markets, Petrolane Incorporated and First
Interstate Bank of California.
</TABLE>
31
<PAGE>
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K
<TABLE>
<CAPTION>
(a)(3) Exhibits (contd.)
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
11 Calculation of Earnings per common share.
12 Computation of ratio of earnings to fixed charges.
21 (1) Subsidiaries of the Company.
-----------------------------------------------------------------------------------
(1) Previously filed with the Securities and Exchange Commission as and exhibit to
the Registration Statement S-4 No. 33-77296 dated July 21, 1994.
(2) Previously filed with the Securities and Exchange Commission as an exhibit to
the Registrant's Quarterly Report on Form 10-Q dated June 25,
1995 and filed on August 8, 1995.
Copies of Exhibits listed herein can be obtained by writing and requesting such
Exhibits from: Corporate Secretary, P. O. Box 150, Colton, California 92324.
(b) Reports on Form 8-K
None
</TABLE>
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
December 20, 1995 Stater Bros. Holdings Inc.
----------------------
Date
By: /s/ Jack H. Brown
-------------------
Jack H. Brown
Chairman of the Board,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Jack H. Brown Chairman of the Board, President December 20, 1995
------------------------ and Chief Executive Officer -----------------
Jack H. Brown and Director (Principal
Executive Officer)
/s/ Bruce D. Varner Secretary and Director December 20, 1995
------------------------ -----------------
Bruce D. Varner
/s/ Dennis N. Beal Vice President - Finance December 20, 1995
------------------------ and Chief Financial Officer -----------------
Dennis N. Beal (Principal Accounting Officer)
/s/ James J. Cotter Director December 20, 1995
------------------------ -----------------
James J. Cotter
/s/ Thomas W. Field, Jr. Director December 20, 1995
------------------------- -----------------
Thomas W. Field, Jr.
33
<PAGE>
STATER BROS. HOLDINGS INC.
Calculation of Earnings Per Common Share
(in thousands, except number of shares and per share amounts)
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Income before cumulative
effect of a change in
accounting for income taxes
and extraordinary loss $5,692 $8,789 $6,727
Less preferred dividends (323) (327) -
------- ------- -------
Income available to common
shareholders before cumulative
affect of a change in
accounting for income taxes
and extraordinary loss 5,369 8,462 6,727
Cumulative effect of a change
in accounting for income taxes - 372 -
Extraordinary (loss) - (8,036) -
------- ------- -------
Net income available
to common shareholders $5,369 $798 $6,727
======= ======= =======
Earnings per common share:
Before cumulative effect of a
change in accounting for income
taxes and extraordinary charge $53.69 $84.62 $67.27
Cumulative effect of a change
in accounting for income taxes - 3.72 -
Extraordinary (loss) - (80.36) -
------- ------- -------
Earnings per common share $53.69 $7.98 $67.27
======= ======= =======
Average common shares outstanding 100,000 100,000 100,000
======= ======= =======
</TABLE>
34
<PAGE>
STATER BROS. HOLDINGS INC.
Computation of Ratio of Earnings to Fixed Charges
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Fiscal Years Ended
--------------------------------------------------
Sept. 29, Sept. 27, Sept. 26, Sept. 25, Sept. 24,
1991 1992 1993 1994 1995
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings:
Income before income taxes. $ 7,655 $13,363 $10,118 $14,645 $10,945
Share of undistributed
(income) loss of
less-than-50%-owned
affiliates................ (901) (297) (107) 592 980
Amortization of capitalized
interest.................. 132 160 169 180 192
Interest................... 10,393 10,194 10,592 15,217 18,946
Less interest capitalized
during the period......... (765) (393) (417) (437) (50)
Net amortization of debt
discount and premium
and issuance expense...... - 100 117 721 1,180
Interest portion of rental
expense................... 13,553 14,140 14,380 13,985 13,588
------- ------- ------- ------- -------
Earnings as adjusted... $30,067 $37,267 $34,852 $44,903 $45,781
======= ======= ======= ======= =======
Fixed Charges:
Interest................... $10,393 $10,194 $10,592 $15,217 $18,946
Net amortization of debt
discount and premium
and issuance expense...... - 100 117 721 1,180
Interest portion of rental
expense................... 13,553 14,140 14,380 13,985 13,588
Preferred stock dividends.. 2,437 954 574 545 -
------- ------- ------- ------- -------
Fixed Charges.......... $26,383 $25,388 $25,663 $30,468 $33,714
======= ======= ======= ======= =======
Ratio of Earnings to
Fixed Charges......... 1.14 1.47 1.36 1.47 1.36
======= ======= ======= ======= =======
</TABLE>
35
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Report of Independent Auditors................................. F-2
Consolidated Balance Sheets at September 26, 1993,
September 25, 1994 and September 24, 1995................... F-3
Fiscal years ended September 26, 1993, September 25, 1994 and
September 24, 1995:
Consolidated Statements of Income.......................... F-5
Consolidated Statements of Cash Flows...................... F-6
Consolidated Statements of Stockholders' Equity............ F-8
Notes to Consolidated Financial Statements..................... F-9
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Stater Bros. Holdings Inc.
We have audited the accompanying consolidated balance sheets of Stater
Bros. Holdings Inc. and subsidiaries as of September 26, 1993, September 25,
1994 and September 24, 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the 52-week periods then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Stater Bros. Holdings Inc. and subsidiaries as of September 26, 1993,
September 25, 1994 and September 24, 1995, and the consolidated results of their
operations and their cash flows for each of the 52-week periods then ended, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Riverside, California
November 17, 1995
F-2
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
<TABLE>
<CAPTION>
SEPT. 26, SEPT. 25, SEPT. 24,
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents....................... $ 1,548 $ 21,289 $ 26,308
Receivables..................................... 16,306 16,503 15,877
Inventories..................................... 99,374 103,655 107,146
Prepaid expenses................................ 3,631 3,421 3,591
Deferred income taxes........................... 5,061 3,276 2,792
Properties held for sale........................ 2,090 2,964 2,933
-------- -------- --------
Total current assets.............................. 128,010 151,108 158,647
Investment in unconsolidated affiliate............ 10,822 10,230 9,250
Investment in stock............................... 4,000 - -
Property and equipment
Land............................................ 20,574 20,678 20,653
Buildings and improvements...................... 84,538 92,808 96,653
Store fixtures and equipment.................... 53,467 61,208 68,338
Property subject to capital leases.............. 14,678 14,368 14,368
-------- -------- --------
173,257 189,062 200,012
Less accumulated depreciation and amortization.. 64,289 72,902 81,385
-------- -------- --------
108,968 116,160 118,627
Deferred income taxes............................. 1,891 5,351 4,975
Deferred debt issuance costs, net................. 1,746 7,630 6,423
Lease guarantee escrow............................ 3,481 4,446 5,584
Other assets...................................... 5,566 11,564 10,576
-------- -------- --------
Total assets...................................... $264,484 $306,489 $314,082
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPT. 26, SEPT. 25, SEPT. 24,
1993 1994 1995
--------- ---------- ----------
<S> <C> <C> <C>
Current Liabilities
Notes payable....................................... $ 9,000 $ - $ -
Accounts payable.................................... 56,036 63,538 67,604
Accrued payroll and related expenses................ 17,130 21,289 22,289
Other accrued liabilities........................... 22,971 23,704 22,653
Current portion of long-term debt................... 164 - -
Current portion of capital lease obligations........ 1,113 1,155 1,087
-------- -------- --------
Total current liabilities............................. 106,414 109,686 113,633
Long-term debt, less current portion.................. 87,576 165,000 165,000
Capital lease obligations, less current portion....... 10,456 9,187 8,099
Long-term portion of self-insurance reserves.......... 15,736 15,765 13,772
Stockholders' equity
Series A Preferred Stock, $25 stated value:
Authorized shares - 250,000
Issued and outstanding shares - 144,000 in 1993,
0 in 1994 and 1995............................... 3,600 - -
Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares - 100,000 in 1993,
50,000 in 1994 and 1995.......................... 1 1 1
Class A Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares - 0 in 1993,
50,000 in 1994 and 1995.......................... - 1 1
Additional paid-in capital.......................... 12,715 12,715 12,715
Retained earnings................................... 27,986 8,784 15,511
Less option to acquire stock........................ - (14,650) (14,650)
-------- -------- --------
Total stockholders' equity............................ 44,302 6,851 13,578
-------- -------- --------
Total liabilities and stockholders' equity............ $264,484 $306,489 $314,082
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------
SEPT. 26, SEPT. 25, SEPT. 24,
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Sales...................................................... $1,526,002 $1,539,717 $1,579,895
Cost of goods sold......................................... 1,195,399 1,199,794 1,227,355
---------- ---------- ----------
Gross profit............................................... 330,603 339,923 352,540
Operating expenses
Selling, general and administrative expenses............. 300,826 297,474 308,332
Depreciation and amortization............................ 9,910 11,656 11,756
Consulting fees.......................................... - 830 1,500
---------- ---------- ----------
Total operating expenses................................... 310,736 309,960 321,588
---------- ---------- ----------
Operating profit........................................... 19,867 29,963 30,952
Interest income............................................ 171 384 952
Interest expense........................................... (10,292) (15,501) (20,076)
Equity in earnings (loss) from unconsolidated affiliate.... 107 (592) (980)
Other income - net......................................... 265 391 97
---------- ---------- ----------
Income before income taxes and the cumulative effect of a
change in accounting for income taxes and extraordinary
loss.................................................... 10,118 14,645 10,945
Income taxes............................................... 4,426 5,856 4,218
---------- ---------- ----------
Income before cumulative effect of a change in accounting
for income taxes and extraordinary loss.................. 5,692 8,789 6,727
Cumulative effect of a change in accounting for income
taxes.................................................... - 372 -
---------- ---------- ----------
Income before extraordinary loss........................... 5,692 9,161 6,727
Extraordinary loss from early extinguishment of debt
($13,856 less tax effect of $5,820)...................... - (8,036) -
---------- ---------- ----------
Net income................................................. 5,692 1,125 6,727
Less preferred dividends................................. 323 327 -
---------- ---------- ----------
Net income available to common shareholders................ $ 5,369 $ 798 $ 6,727
========== ========== ==========
Earnings per common share:
Before cumulative effect of a change in accounting for
income taxes and extraordinary loss..................... $53.69 $84.62 $67.27
Cumulative effect of a change in accounting for income
taxes................................................... - 3.72 -
Extraordinary loss....................................... - (80.36) -
------ ------ ------
Earnings per common share.................................. $53.69 $7.98 $67.27
====== ===== ======
Average common shares outstanding.......................... 100,000 100,000 100,000
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------
SEPT. 26, SEPT. 25, SEPT. 24,
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income....................................................... $ 5,692 $ 1,125 $ 6,727
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of a change in accounting for
income taxes.................................................. - (372) -
Extraordinary loss related to early extinguishment
of debt....................................................... - 13,856 -
Depreciation and amortization.................................. 9,910 11,656 11,756
Deferred income taxes.......................................... 129 (1,303) 860
(Gain) on disposals of assets.................................. (265) (391) (97)
Net undistributed (earnings) loss in unconsolidated affiliate.. (107) 592 980
Changes in operating assets and liabilities:
(Increase) decrease in receivables............................ 302 (197) 626
(Increase) decrease in inventories............................ (612) (4,281) (3,491)
(Increase) decrease in prepaid expenses....................... 32 210 (170)
(Increase) decrease in other assets........................... (50) (14,695) (359)
Increase (decrease) in accounts payable....................... (5,719) 7,502 4,066
Increase (decrease) in accrued liabilities and long-term
portion of self-insurance reserves............................ 152 4,921 (2,044)
------- -------- -------
Net cash provided by operating activities........................ 9,464 18,623 18,854
------- -------- -------
FINANCING ACTIVITIES:
Proceeds from notes payable...................................... 5,000 - -
Proceeds from long-term debt..................................... - 165,000 -
Payment on notes payable......................................... - (9,000) -
Redemption of preferred stock.................................... - (3,600) -
Premiums paid on early retirement of debt........................ - (12,893) -
Principal payments on long-term debt and capital
lease obligations............................................... (1,558) (88,967) (1,156)
Dividends paid on preferred stock................................ (323) (327) -
Dividends paid on common stock................................... - (20,000) -
Option to acquire stock.......................................... - (14,650) -
------- -------- -------
Net cash provided by (used in) financing activities.............. $ 3,119 $ 15,563 $(1,156)
------- -------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------
SEPT. 26, SEPT. 25, SEPT. 24,
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Purchase of property and equipment........................... $(17,178) $(19,409) $(13,178)
Proceeds from sale of property and equipment and properties
held for sale............................................... 530 964 499
Decrease in investment in stock.............................. - 4,000 -
-------- -------- --------
Net cash (used in) investing activities...................... (16,648) (14,445) (12,679)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents......... (4,065) 19,741 5,019
Cash and cash equivalents at beginning of period............. 5,613 1,548 21,289
-------- -------- --------
Cash and cash equivalents at end of period................... $ 1,548 $ 21,289 $ 26,308
======== ======== ========
Interest paid................................................ $ 10,931 $ 17,120 $ 19,537
Income taxes paid............................................ $ 2,174 $ 1,753 $ 4,633
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
OPTION
SERIES A CLASS A ADDITIONAL TO
PREFERRED COMMON COMMON PAID-IN RETAINED ACQUIRE
STOCK STOCK STOCK CAPITAL EARNINGS STOCK
--------- ------ ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances at September 27, 1992........... $ 1,600 $ 1 $ - $ 12,715 $ 22,617 $ -
Issuance of 80,000 shares of Series A
Preferred Stock...................... 2,000 - - - - -
Net income for 52 weeks ended
September 26, 1993................... - - - - 5,692 -
Preferred stock dividends paid......... - - - - (323) -
--------- ------ ------- ---------- -------- --------
Balances at September 26, 1993........... 3,600 1 - 12,715 27,986 -
Preferred stock redeemed............... (3,600) - - - - -
Common Stock exchanged for Class A
Common Stock......................... - - 1 - - -
Option to acquire stock................ - - - - - (14,650)
Net income for 52 weeks ended
September 25, 1994................... - - - - 1,125 -
Preferred stock dividends paid......... - - - - (327) -
Common stock dividends paid............ - - - - (20,000) -
--------- ------ ------- ---------- -------- --------
Balances at September 25, 1994........... - 1 1 12,715 8,784 (14,650)
Net income for 52 weeks ended
September 24, 1995................... - - - - 6,727 -
--------- ------ ------- ---------- -------- --------
Balances at September 24, 1995........... $ - $ 1 $ 1 $ 12,715 $ 15,511 $(14,650)
========= ====== ======= ========== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 24, 1995
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Stater Bros. Holdings Inc. (the "Company") is engaged primarily in the
operation of retail supermarkets. As of September 24, 1995, the Company
operated 110 retail food supermarkets under the name "Stater Bros." The
Company's supermarkets are located principally in the "Inland Empire" area of
Southern California - San Bernardino, Riverside and the eastern portions of Los
Angeles, Orange and Kern counties. The Company and its predecessor companies
have operated retail grocery stores under the "Stater Bros." name in the Inland
Empire since 1936.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Stater Bros. Markets ("Markets") and Stater Bros.
Development, Inc. All significant inter-company transactions have been
eliminated in consolidation.
Fiscal Year
The Company's fiscal year ends on the last Sunday in September. The fiscal
years ended September 26, 1993, September 25, 1994 and September 24, 1995 were
52-week years.
Cash and Cash Equivalents
Cash and cash equivalents are reflected at cost, which approximates their
fair value, and consist primarily of overnight repurchase agreements,
certificates of deposit and money market funds with maturities of less than
three months when purchased.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Accounts Receivable
Accounts receivable represents amounts expected to be received during the
next operating cycle of the Company. The carrying amount reported in the
balance sheet for accounts receivable approximates their fair value.
Properties Held for Sale
Properties expected to be sold within one year are classified as current
assets and are stated at the lower of cost or estimated net realizable value and
consist of land, buildings and equipment.
Deferred Debt Issuance Costs
Direct costs incurred as a result of financing transactions are capitalized
and amortized to interest expense over the terms of the applicable debt
agreements.
Self-insurance Reserves
The Company provides reserves, subject to certain retention levels, for
workers' compensation, general and automobile liability claims. Consulting
actuaries assist the Company in developing reserve estimates for its self-
insured liabilities. Such reserves are discounted using an 8% rate. The
Company is self-insured, subject to certain retention levels, for healthcare
costs of eligible non-bargaining unit employees. Such healthcare reserves are
not discounted.
F-9
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTD.)
Property and Equipment
Property and equipment are stated at cost and are depreciated or amortized,
principally on the straight-line method over the estimated useful lives of the
assets, and for capitalized leases over the lesser of the initial term of the
leases or the economic life of the asset.
The average economic lives are as follows:
<TABLE>
<CAPTION>
Range Most Prevalent
------------- ----------------
<S> <C> <C>
Buildings and improvements............. 8 - 30 Years 25 Years
Store furniture and equipment.......... 3 - 10 Years 5 Years
Property subject to capital leases..... Life of Lease 25 Years
</TABLE>
Income Taxes
The Company provides for deferred income taxes as timing differences arise
between income and expenses recorded for financial and income tax reporting
purposes.
Cost of Goods Sold
Costs of goods sold include certain warehousing, transportation and
distribution costs.
Reclassifications
Certain amounts in the prior periods have been reclassified to conform to the
current period financial statement presentation.
NOTE 2 - DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
Sept. 26, Sept. 25, Sept. 24,
1993 1994 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
11% senior notes payable, due March 1, 2001...... $ - $165,000 $165,000
9.8% senior notes payable, due
December 1, 2001.............................. 75,500 - -
Note payable to bank, 11.00% effective interest
rate, secured by real property, with
monthly principal payments of $5,000,
due August 1, 1995............................ 7,189 - -
Note payable to bank, 11.07% effective interest
rate, secured by real property, with
quarterly principal payments of $4,000,
due April 1, 1996............................. 2,438 - -
Note payable to bank, 9.99% effective interest
rate, secured by real property, with
quarterly principal payments of $5,000,
due February 1, 1997.......................... 2,254 - -
Other notes...................................... 359 - -
-------- -------- --------
Total Debt.................................... 87,740 165,000 165,000
Less current portion............................. 164 - -
-------- -------- --------
Long-term debt................................... $ 87,576 $165,000 $165,000
======== ======== ========
</TABLE>
F-10
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - DEBT (CONTD.)
As of September 24, 1995, no principal payments were due in the next five
years.
Interest on the 11.0% Senior Notes is payable semi-annually on September 1
and March 1. The 11.0% Senior Notes are due March 1, 2001.
The 9.8% Senior Notes payable, due December 1, 2001 and the notes payable to
banks, were redeemed by the Company on March 8, 1994, including a prepayment
premium of $13.9 million.
Interest capitalized during fiscal years 1993, 1994 and 1995 amounted to
$417,000, $437,000 and $50,000, respectively. Interest expense incurred, before
the effect of capitalized interest, during 1993, 1994 and 1995 amounted to
$10,709,000, $15,938,000 and $20,126,000, respectively.
The fair value of the Company's long-term debt, based on the quoted market
rates on the last trading day prior to year end, was approximately $166.7
million.
The Company had no short-term borrowings outstanding at year end 1995 and
1994 compared to $9,000,000 in 1993. The average daily amount of short-term
borrowings was $10,563,000, $5,420,000 and $129,000 in 1993, 1994 and 1995,
respectively. The weighted average interest rates were 4.98%, 4.40% and 9.68% in
1993, 1994 and 1995, respectively.
The Company is subject to certain covenants associated with its 11% Senior
Notes due 2001. As of September 24, 1995, the Company was in compliance with all
such covenants.
NOTE 3 - UNCONSOLIDATED AFFILIATE
The Company owns 49.6% of Santee Dairies, Inc. ("Santee"), an operator of a
fluid milk processing plant located in Los Angeles, California, and is not the
controlling stockholder. Accordingly, the Company accounts for its investment in
Santee using the equity method and recognized earnings of $107,000 during 1993
and recognized losses of $592,000 and $980,000 during 1994 and 1995,
respectively. The Company is a significant customer of Santee which supplies the
Company with a substantial portion of its fluid milk and dairy products.
NOTE 4 - BANK FACILITIES
Stater Bros. Markets and Bank of America National Trust and Savings
Association (the "Bank") have entered into a credit agreement (as amended)
whereby the Bank provides Stater Bros. Markets with a revolving operating line
of credit (the "Operating Facility") with a maximum availability of $11.0
million and a revolving letter of credit facility (the "LC Facility") with a
maximum availability of $28.0 million (collectively, the "Bank Facilities"). The
Bank Facilities will expire on June 1, 1996. The Company intends to renew or
replace the Bank Facilities on or before June 1, 1996. Interest on the
outstanding principal balance on the Operating Facility is payable monthly at
either the Bank's reference rate plus one percent per annum or a fixed rate of
interest. Borrowings under the Bank Facilities are unsecured general obligations
of Stater Bros. Markets and are guaranteed by Stater Bros. Development, Inc. The
Bank Facilities contain customary cross-default provisions with respect to the
Company's 11% Senior Notes due 2001.
F-11
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - BANK FACILITIES (CONTD.)
The Bank Facilities also contain certain financial and other covenants
applicable to Stater Bros. Markets, including without limitation, requirements
to (i) maintain a minimum current ratio of at least 1.20:1; (ii) maintain
minimum tangible net worth plus debt subordinated to the Bank (as defined) of at
least $134.0 million; (iii) maintain a ratio of total liabilities to tangible
net worth plus debt subordinated to the Bank of not in excess of 1.30:1; (iv)
maintain a minimum fixed charge coverage ratio (as defined) of at least 1.10:1
for each consecutive four fiscal quarters beginning with the four fiscal
quarters ending on Stater Bros. Markets' 1995 fiscal year end; (v) limit the
sale of assets; (vi) prohibit additional indebtedness except for normal trade
credit and indebtedness secured only by real property constructed or acquired
within the prior twelve months; (vii) prohibit additional liens except for liens
for indebtedness secured by real property pursuant to clause (v); (viii)
prohibit the acquisition of other business entities; (ix) restrict the payment
of dividends (as discussed below); (x) prohibit changes of ownership; (xi)
prohibit the liquidation, consolidation or merger of the business; and (xii)
repay all advances outstanding under the Operating Facility and not draw any new
advances for at least 5 calendar days each month. As of September 24, 1995, for
purposes of the Bank Facilities, Stater Bros. Markets was in compliance with all
restrictive convenants and had (i) a current ratio of 1.40:1, (ii) tangible net
worth and debt subordinated to the Bank of $176.4 million; (iii) a ratio of
total liabilities to tangible net worth and debt subordinated to the Bank of
0.76:1 and (iv) a fixed charge coverage ratio (as defined in the Bank
Facilities) of 1.30:1. If for any reason Stater Bros. Markets is unable to
comply with the terms of the Bank Facilities, including the covenants contained
therein, such noncompliance would result in an event of default under the Bank
Facilities, and could result in acceleration of the payment of indebtedness then
outstanding under Bank Facilities or, in certain situations, the prohibition of
the payment of dividends to the Company. In addition, no amendment, waiver or
supplement may be made to the Indenture without the prior written consent of the
Bank if such amendment, waiver or supplement adversely affects the rights of the
Bank as lender to Stater Bros. Markets.
The financial and operational covenants contained in the Bank Facilities
significantly limit Stater Bros. Markets' ability to pay dividends and make
loans or advances to the Company, the primary source of anticipated cash for the
Company, and could limit the Company's ability to respond to changing business
and economic conditions, and to finance future operations or capital needs
including the Company's ability to achieve its plans to remodel and expand
existing supermarkets and open new supermarkets.
F-12
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - LEASES
The Company leases the majority of its retail stores, offices, warehouses and
distribution facilities. Certain leases provide for additional rents based on
sales. Primary lease terms range from 10 to 99 years and substantially all
leases provide for renewal options.
A portion of the Company's lease obligations are guaranteed by Petrolane
Incorporated ("Petrolane") (see Note 6). The leases guaranteed by Petrolane had
initial terms of 20 years and expire in the year 2003. Lease payments for the
properties subject to the Petrolane guarantees are approximately $10.0 million
per year. Under the terms of the agreement related to the Company's acquisition
of Stater Bros. Markets from Petrolane in 1983, as amended in 1985, Stater Bros.
Markets is required to make annual deposits into an escrow account. The amount
of each annual deposit is to be based on (a) a percentage of sales of 20
supermarkets, as specified in the agreement, to the extent they exceed a defined
base; and (b) a percentage of rents adjusted for increases in the Consumer Price
Index for certain rental property, including the Company's office and warehouse
complex. The Company deposited $765,000, $844,000 and $861,000 into the escrow
account in 1993, 1994 and 1995, respectively.
Upon termination of the leases, or the termination of the Petrolane lease
guarantees, all amounts deposited into the escrow account, plus interest
thereon, less any amounts disbursed, will be returned to the Company. At
September 24, 1995, the escrow account had a cumulative balance of $5,584,000,
compared to $4,446,000 and $3,481,000 as of September 25, 1994 and September 26,
1993, respectively.
Petrolane, or its successor, has the right to cause the escrow holder to
disburse funds from the amounts held in the escrow account any amounts which
Petrolane or its successor may be required to pay as guarantor of the lease
obligations of Stater Bros. Markets.
Following is a summary of future minimum lease payments as of September 24,
1995:
<TABLE>
<CAPTION>
Operating
Leases
Capital Minimum
Fiscal Year Leases Payment
----------- ------- ---------
(In thousands)
<S> <C> <C>
1996..................................... $ 1,844 $ 18,113
1997..................................... 1,844 16,496
1998..................................... 1,814 15,499
1999..................................... 1,760 15,342
2000..................................... 1,693 14,471
Thereafter............................... 3,418 52,827
------- --------
Total minimum lease payments............. 12,373 $132,748
========
Less amounts representing interest....... 3,187
-------
Present value of minimum lease payments.. 9,186
Less current portion..................... 1,087
-------
Long-term portion........................ $ 8,099
=======
</TABLE>
F-13
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - LEASES (CONTD.)
Rental expense and sublease income were as follows:
<TABLE>
<CAPTION>
52 Weeks Ended
----------------------------------------------
Sept. 26, 1993 Sept. 25, 1994 Sept. 24, 1995
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Minimum rentals......... $ 20,919 $ 19,708 $ 17,906
Rentals based on sales.. $ 4,517 $ 4,432 $ 5,179
Sublease income......... $ 984 $ 1,066 $ 1,018
</TABLE>
Aggregate sublease income to be received subsequent to September 24, 1995 is
approximately $5,482,000.
NOTE 6 - PREFERRED STOCK
Stater Bros. Markets has issued and outstanding 10 shares of its $11.00
Cumulative Redeemable Preferred Stock due in 2003 for $1,000 plus accrued and
unpaid dividends. Dividends are accrued at the rate of $11.00 per share per
annum. The preferred stock was issued in conjunction with a guarantee of Stater
Bros. Markets lease obligations by Petrolane Incorporated (see Note 5). For as
long as the $11.00 Cumulative Redeemable Preferred Stock remains outstanding,
Stater Bros. Markets is subject to certain covenants. The most restrictive
covenant limits the amount of dividends that may be paid to its stockholders to
amounts that may be legally paid under applicable state laws. At September 24,
1995, accumulated earnings available for dividend distributions were
approximately $165.0 million. In the event of non-compliance by Stater Bros.
Markets, the holders of the preferred stock may elect the Board of Directors of
Stater Bros. Markets. At September 24, 1995, Stater Bros. Markets was in
compliance with these covenants.
In September 1993 and September 1992, the Company exchanged $2.0 million and
$1.6 million of notes payable to stockholders for 80,000 and 64,000 shares,
respectively, of the Company's Series A Preferred Stock. As part of the
Recapitalization Transaction (see Note 8), all of the outstanding Series A
Preferred Stock was redeemed on March 8, 1994.
NOTE 7 - INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
52 Weeks Ended
------------------------------------------------
Sept. 26, 1993 Sept. 25, 1994 Sept. 24, 1995
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Current
Federal.. $ 4,019 $ 5,493 $ 2,991
State.... 1,030 1,563 944
--------- --------- ---------
5,049 7,056 3,935
--------- --------- ---------
Deferred
Federal.. (616) (976) 213
State.... (7) (224) 70
--------- --------- ---------
(623) (1,200) 283
--------- --------- ---------
$ 4,426 $ 5,856 $ 4,218
========= ========= =========
</TABLE>
F-14
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - INCOME TAXES (CONTD.)
The current portion of Federal and State income taxes for fiscal year ended
September 25, 1994 does not include the tax benefits associated with the
extraordinary loss from the early extinguishment of debt. Such Federal and State
tax benefits in 1994 amounted to $4,850,000 and $970,000.
A reconciliation of the provision for income taxes to amounts computed at the
federal statutory rate is as follows:
<TABLE>
<CAPTION>
52 Weeks Ended
------------------------------------------------
Sept. 26, 1993 Sept. 25, 1994 Sept. 24, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Statutory federal income tax rate.. 34.0% 34.3% 35.0%
State franchise tax rate, net of
federal income tax benefit....... 6.1 6.1 6.1
Other.............................. 3.6 (.4) (2.6)
---- ---- ----
43.7% 40.0% 38.5%
===== ====== =====
</TABLE>
Deferred income taxes resulted from timing differences in recognizing revenue
and expense for tax and financial statement purposes. The sources of these
timing differences and the income tax (benefit) of each were as follows:
<TABLE>
<CAPTION>
52 Weeks Ended
------------------------------------------------
Sept. 26, 1993 Sept. 25, 1994 Sept. 24, 1995
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Accrued liabilities............... $ (445) $ (1,057) $ 366
California franchise tax.......... (45) 307 (258)
Uniform capitalization............ 9 (20) 18
Depreciation...................... (404) (154) 542
Other, net........................ 262 (276) (385)
--------- --------- --------
$ (623) $ (1,200) $ 283
========== ========== =========
</TABLE>
The Company adopted Statement of Financial Accounting Standard No. 109
"Accounting for Income Taxes" (SFAS No. 109) effective at the beginning of
fiscal 1994. Adoption of this statement in fiscal 1994 resulted in a gain of
$372,000 from the cumulative effect of a change in accounting principle and a
corresponding increase to deferred income taxes benefit of $372,000.
F-15
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - INCOME TAXES (CONTD.)
SFAS No. 109 provides that income taxes are accounted for using the liability
method. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Prior to the adoption of
SFAS No. 109, income tax expense was determined using the deferred method.
Deferred tax assets and liabilities were based on items of income and expense
that were reported in different years in the financial statements and tax
returns and were measured at the tax rate in effect in the year the differences
originated.
Components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
Sept. 25, 1994 Sept. 24, 1995
-------------- --------------
(In thousands)
<S> <C> <C>
Deferred income tax assets:
--------------------------
Property and equipment $ 2,117 $ 1,542
Self-insurance reserves 5,727 4,313
Accrued payroll and related liabilities 2,022 2,218
Inventories 1,200 1,140
------- -------
Total deferred income tax assets 11,066 9,213
Deferred income tax liabilities:
-------------------------------
Investment in dairy (1,046) (630)
Other (1,393) (816)
------- -------
Total deferred income tax liabilities (2,439) (1,446)
------- -------
Net deferred income tax assets $ 8,627 $ 7,767
======= =======
</TABLE>
Although there can be no assurances as to future taxable income of the
Company, the Company believes that its expectations of future taxable income,
when combined with the income taxes paid in prior years, will be adequate to
realize the deferred income tax assets.
NOTE 8 - RELATED PARTY TRANSACTIONS
Investment in Stock
During 1989, the Company acquired 311,404 shares of Common Stock of Craig
Corporation (the "Craig Common Stock") for $4.0 million. Craig Corporation
("Craig") is a stockholder of the Company. The Company had the right to require
Craig to purchase the Craig Common Stock for $4.0 million in May 1994. In 1993,
the Company entered into a series of separate agreements (the
"Recapitalization") with Craig (see Note 12). Upon the earlier of the completion
of the Recapitalization Transaction or March 31, 1994, subject to applicable
California law governing distributions to shareholders, the Company was
obligated to sell, transfer and assign the Common Stock of Craig to Craig in
exchange for Craig's agreement not to exercise its rights under, or be entitled
to certain benefits of the Agreement of Stockholders of Stater Bros. Holdings
Inc. dated as of May 10, 1989, as amended effective September 3, 1993 and to
stand still during the time period from October 1, 1993 to the earlier of the
completion of the Recapitalization or March 31, 1994 in order to allow the
Company time to complete the Recapitalization. The Company transferred the
311,404 shares of Common Stock of Craig to Craig in August 1994.
F-16
<PAGE>
Consulting Agreements and Covenant Not to Compete
Since January 1, 1989, the Company has entered into various consulting
agreements (the "Agreements") with its stockholders, La Cadena Investments, a
California general
F-17
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - RELATED PARTY TRANSACTIONS (CONTD.)
Consulting Agreements and Covenant Not to Compete (contd.)
partnership, and Craig, that required La Cadena and Craig to provide
consultation and advice to the Company in connection with general business,
financial, management consulting, real estate acquisition and development, and
product diversification matters (collectively the "Consulting Services"). All
fees payable under the Agreements were subject to and subordinate to provisions
of the Company's credit agreements. The Agreements entered into in February 1992
provided for the stockholders to continue to render consulting services through
fiscal 1993 and terminated on September 26, 1993. Throughout fiscal 1993, the
stockholders were negotiating with each other and the Company with respect to
the Recapitalization Transaction (see Note 12). During fiscal 1993, consulting
services rendered pursuant to these Agreements were de minimis and, accordingly,
it was determined that no fees were payable under the terms of the Agreements
for the fiscal year ended September 26, 1993. Pursuant to a Consulting Agreement
dated as of September 3, 1993 (the "Consulting Agreement"), which became
effective and commenced as of the Recapitalization Closing, Craig will render
consulting services to the Company for a five-year period and Craig has agreed
not to engage in any business that competes with the Company in any of the five
counties in which the Company operates until the end of the five-year period of
the Consulting Agreement. In consideration for such consulting services, the
Company will pay Craig $1.5 million per year thereafter, payable quarterly
during the term of the Consulting Agreement. Expenses of $.8 million and $1.5
million were incurred under the various consulting agreements in 1994 and 1995,
respectively. Additionally, at the Recapitalization Closing, the Company paid
Craig $5.0 million which is amortized to earnings over the five-year term of the
covenant not to compete included in the Consulting Agreement.
NOTE 9 - RETIREMENT PLANS
Pension Plan
The Company has a noncontributory defined benefit pension plan covering
substantially all non-union employees. The plan provides for benefits based on
an employee's compensation during the three years before retirement. The
Company's funding policy for this plan is to contribute annually at a rate that
is intended to provide sufficient assets to meet future benefit payment
requirements.
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
52 Weeks Ended
------------------------------------------------
Sept. 26, 1993 Sept. 25, 1994 Sept. 24, 1995
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned during
the period.............................. $ 689 $ 653 $ 619
Interest cost on projected benefit
obligation.............................. 701 762 862
Actual return on assets.................. (444) 240 (735)
Net amortization and deferral............ 53 (808) 200
-------- -------- --------
Net periodic pension cost $ 999 $ 847 $ 946
======== ======== ========
Assumptions used for accounting were:
Discount rate............................ 8.0% 8.0% 8.0%
Rate of increase in compensation levels.. 5.0% 5.0% 5.0%
Expected long-term rate of return on
assets.................................. 9.0% 9.0% 9.0%
</TABLE>
F-18
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - RETIREMENT PLANS (CONTD.)
Pension Plan (contd.)
The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheet at:
<TABLE>
<CAPTION>
Sept. 26, 1993 Sept. 25, 1994 Sept. 24, 1995
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation....................... $ 6,485 $ 7,551 $ 9,400
========== ========== ==========
Accumulated benefit obligation.................. $ 6,687 $ 7,803 $ 9,717
========== ========== ==========
Projected benefit obligation..................... $ (9,435) $ (10,845) $ (13,484)
Plan assets at fair value,
primarily notes and bonds....................... 6,746 6,821 8,138
---------- ---------- ----------
Projected benefit obligation in
excess of plan assets........................... (2,689) (4,024) (5,346)
Unrecognized net loss............................ 1,254 2,227 3,407
Unrecognized prior service cost.................. 32 29 (76)
Unrecognized net obligations established
October 1, 1987................................. 297 270 243
---------- ---------- ----------
Pension (liability) recognized in the
balance sheet................................... $ (1,106) $ (1,498) $ (1,772)
========== ========== ==========
</TABLE>
Expenses recognized for this retirement plan were $1,617,000, $1,085,000 and
$967,000 in 1993, 1994 and 1995, respectively.
Profit Sharing Plan
The Company has a noncontributory defined contribution profit sharing plan
covering substantially all non-union employees. Union employees may participate
if their collective bargaining agreement specifically provides for their
inclusion. The Company may contribute up to 7.5% of total compensation paid or
accrued during the year to each plan participant subject to limitations imposed
by the Internal Revenue Code. The Company recognized expenses for this plan in
the amount of $277,000, $320,000 and $357,000 in 1993, 1994 and 1995,
respectively.
Multi-Employer Plans
The Company also contributes to multi-employer defined benefit retirement
plans in accordance with the provisions of the various labor agreements that
govern the plans. Contributions to these plans are generally based on the number
of hours worked. Information for these plans as to vested and non-vested
accumulated benefits and net assets available for benefits is not available.
F-19
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - RETIREMENT PLANS (CONTD.)
Multi-Employer Plans (contd.)
The Company's expense for these retirement and health and welfare plans
consisted of the following:
<TABLE>
<CAPTION>
52 Weeks Ended
----------------------------------------------
Sept. 26, 1993 Sept. 25, 1994 Sept. 24, 1995
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Multi-Employer Pension Plans....... $ 4,367 $ 7,234 $ 5,688
Multi-Employer Health and Welfare.. 35,568 20,901 36,320
-------- -------- --------
Total Multi-Employer Benefits...... $ 39,935 $ 28,135 $ 42,008
======== ======== ========
</TABLE>
In conjunction with a three-year collective bargaining agreement entered into
in 1993, the Company received a $13.7 million credit which was applied against
employer contributions to multi-employer health and welfare benefit plans which
was recovered monthly during fiscal 1994. The Company received an additional
$0.8 million credit applied against employer contributions during the fourth
quarter of fiscal 1995.
NOTE 10 - LABOR RELATIONS
The Company entered into a four-year collective bargaining agreement with the
retail clerks and meat cutters collective bargaining units in October 1995 and
entered into a four-year collective bargaining agreement in September 1994 with
the teamsters collective bargaining units.
NOTE 11 - LITIGATION MATTERS
In the ordinary course of its business, the Company is party to various legal
actions which the Company believes are incidental to the operation of the
business of the Company and its subsidiaries. The Company has recorded reserves
for loss contingencies based on the specific circumstances of each case. Such
reserves are recorded when the occurrence of loss is probable and can be
reasonably estimated. The Company believes that the outcome of such legal
proceedings to which the Company is currently a party will not have a material
adverse effect upon its results of operations or its consolidated financial
condition.
On May 2, 1993, the Company was named as a defendant along with all of the
other major supermarket chains located in the Los Angeles County area in a class
action complaint filed in the California Superior Court in Los Angeles,
California, alleging among other things that the milk pricing policies of each
of the defendants violate certain antitrust laws and regulations under
California law. In this class action lawsuit, Barela et al. v. Ralphs Grocery
Co. et al., plaintiffs seek unspecified damages. The principal allegations of
the complaint are that milk prices of the defendants operating in the Los
Angeles County area are higher than milk prices for the same products in the San
Francisco Bay area and that the prices for such products in Los Angeles County
are higher than the prices charged in Riverside and San Bernardino counties.
Because the Company does not conduct business in the San Francisco Bay area and
its prices for milk are
F-20
<PAGE>
generally consistent throughout all of its supermarkets in the Los Angeles
County area and Riverside and San Bernardino counties, the Company believes the
F-21
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - LITIGATION MATTERS (CONTD.)
claim is without merit with respect to the Company and the Company intends to
vigorously defend such litigation. The Company believes that the ultimate
outcome of this litigation will not have a material adverse effect on the
Company's results of operations or its consolidated financial condition.
NOTE 12 - RECAPITALIZATION TRANSACTION
Since January 1988, the equity of the Company has been beneficially owned
equally by Craig Corporation and by La Cadena Investments ("La Cadena"), a
California general partnership consisting of three senior officers of the
Company including Mr. Brown, Chairman of the Board, President and Chief
Executive Officer of the Company. Pursuant to the Recapitalization Transaction
entered into as of September 3, 1993, as amended, among the Company, La Cadena
and Craig (and an affiliate of Craig), simultaneously with the closing of the
offering of $165 million of 11% Senior Notes, (the "Notes") on March 8, 1994, La
Cadena acquired effective voting control of the Company, and the Company made
certain cash payments and distributions to Craig or into escrow for the benefit
of Craig, totaling approximately $41.8 million in the aggregate, including the
purchase of an option to purchase Craig's equity interest in the Company. In
addition, the Company redeemed its 9.8% Senior Notes due 2001 and repaid certain
other outstanding indebtedness. Such transactions with the Company, La Cadena
and Craig and repayment of debt are collectively referred to as the
"Recapitalization" or the "Recapitalization Transaction".
The following paragraphs describe the Recapitalization, all of which were
completed on or before March 8, 1994 (the "Recapitalization Closing"), except
for those transactions described below as occurring after such time.
RECLASSIFICATION OF COMMON STOCK
The Company amended its Certificate of Incorporation to provide for two
classes of common stock designated "Common Stock" and "Class A Common Stock",
and two series of preferred stock designated "Series A Preferred Stock" and
"Series B Preferred Stock". The existing shares of outstanding common stock
were classified as Common Stock, and at the Recapitalization Closing, holders of
such stock were afforded the right to exchange all such shares into a like
number of shares of Class A Common Stock. At the Recapitalization Closing,
La Cadena exchanged its shares of Common Stock for shares of Class A Common
Stock and Craig retained its shares of Common Stock (subject to the Company's
right to convert such shares of Common Stock into shares of Series B Preferred
Stock, and subject to the Company's option to acquire such shares of Common
Stock or, subsequent to such conversion, Series B Preferred Stock, as described
below).
F-22
<PAGE>
Following the Recapitalization Closing, the rights of holders of the Common
Stock and Class A Common Stock are identical except with respect to voting. For
a period of five years following the Recapitalization Closing, each share of
Class A Common Stock is entitled to 1.1 votes and each share of Common Stock is
entitled to one vote, giving La Cadena approximately 52% and Craig approximately
48% of the total voting power of the Company. Holders of the Common Stock are
entitled to elect one director of the Company during such five-year period. At
the end of the five-year period, each share of Common Stock and each share of
Class A Common Stock will be entitled to one vote.
F-23
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DIVIDEND ON COMMON STOCK
The Board of Directors of the Company declared a dividend of $400 per share
of Common Stock, payable to holders of record at the close of business on the
day following the Recapitalization Closing. As a result of the amendment of the
Company's Certificate of Incorporation and the exchange by La Cadena of its
shares of Common Stock into Class A Common Stock, the aggregate amount of the
dividends paid on the Common Stock was $20.0 million, and the entire dividend
amount was paid to Craig.
RIGHT TO CONVERT COMMON STOCK INTO SERIES B PREFERRED STOCK
Pursuant to the Option Agreement dated as of September 3, 1993, between the
Company and Craig, as amended (the "Option Agreement"), the Company has the
right, at its option, for a period of two years from the Recapitalization
Closing (March 8, 1994), to convert the Common Stock into 693,650 shares of
Series B Preferred Stock. Holders of the Series B Preferred Stock will have the
right to elect one director of the Company. In addition, as long as all the
shares of Series B Preferred Stock are beneficially owned by Craig, the holder
of the Series B Preferred Stock will have the right to vote as a single class
with holders of all other voting stock of the Company, and the voting power of
the Series B Preferred Stock will equal 20% of the total voting power of such
combined class. In the event dividends on the Series B Preferred Stock in
respect of any two or more quarterly dividend periods shall be and remain
unpaid, so long as the majority of the shares of Series B Preferred Stock are
beneficially owned by Craig, the holders of the Series B Preferred Stock will
have the right to elect a majority of the Company's directors. In the event
Craig ceases to be the beneficial owner of a majority of the Series B Preferred
Stock, the right of the holders of the Series B Preferred Stock to elect one
director will be suspended, and if dividends on the Series B Preferred Stock in
respect of any two or more quarterly dividend periods shall be and remain
unpaid, the holders of the Series B Preferred Stock will have the right to elect
only two directors of the Company. In addition, the Option Agreement prohibits
the Company and its Subsidiaries from issuing or selling any shares of their
capital stock to any person or entity, unless and until the Common Stock is
converted into Series B Preferred Stock.
Dividends on the Series B Preferred Stock, if issued, will commence to accrue
on the second anniversary of the Recapitalization Closing (the "Accrual Date"),
at the rate of 10.5% per annum for the first 78 months following the Accrual
Date. Commencing with the 79th month following the Accrual Date, the dividend
rate will increase to 12% per annum, and will further increase each twelfth
month thereafter by 100 basis points per year, to a maximum rate of 15% per
annum.
OPTION TO ACQUIRE COMMON STOCK OR SERIES B PREFERRED STOCK
F-24
<PAGE>
Pursuant to the Option Agreement, the Company has the option to purchase all,
but not less than all, shares of the Common Stock held by Craig immediately
after the Recapitalization Closing for a purchase price, in cash, of $60.0
million plus an adjustment factor equal to 8.833% per annum from the time of the
Recapitalization Closing, compounded annually. The option may be exercised with
respect to such Common Stock at any time prior to the second anniversary of the
Recapitalization Closing. At such time, if the Company has not exercised its
right to convert such Common Stock into Series B Preferred Stock, the option
will expire. If the Company shall have exercised its right to convert such
Common Stock into Series B Preferred Stock, the option will remain in effect
until the twelfth anniversary of the Recapitalization Closing and will entitle
the Company to purchase all, but not less than all, such shares of the Series B
Preferred Stock. With respect to the Series B Preferred Stock, the exercise
price of the option will be $69.4 million to be paid to Craig. Of the $14.7
million option price, $2.7 million was paid to Craig at the Recapitalization
Closing. Payment of the
F-25
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OPTION TO ACQUIRE COMMON STOCK OR SERIES B PREFERRED STOCK (CONTD.)
remaining $12.0 million (the "Deferred Portion") was deposited into an escrow
account for the benefit of Craig, and was paid to Craig on August 23, 1994.
Pursuant to the Option Agreement, holders of Series B Preferred Stock are
entitled to certain registration rights. In addition, holders of Series B
Preferred Stock have the right to require the redemption of all, but not less
than all, the Series B Preferred Stock owned by such holder in the event of
certain changes of control of the Company or in the event Jack H. Brown shall
cease to be the Chief Executive Officer of the Company, other than by reason of
death, disability or retirement in accordance with the Company's normal
retirement policies.
The Option Agreement also prohibits the Company and its subsidiaries from
issuing or selling any shares of their capital stock to any person or entity,
unless and until the Common Stock is converted into Series B Preferred Stock.
CONSULTING AGREEMENT AND COVENANT NOT TO COMPETE
Pursuant to the Consulting Agreement dated as of September 3, 1993 (the
"Consulting Agreement"), effective and commencing as of the Recapitalization
Closing, Craig will render consulting services to the Company for a five-year
period. In consideration for such consulting services, the Company will pay
Craig $1.5 million per year, payable quarterly during the term of the Consulting
Agreement. The Company will have the right to terminate its obligations under
the Consulting Agreement in the event it exercises its option to purchase the
Common Stock or Series B Preferred Stock owned by Craig. Additionally, at the
Recapitalization Closing, and in accordance with the terms of the Consulting
Agreement, Craig has agreed not to engage in any business that competes with the
Company in any of the five counties in which the Company operates until the end
of the five-year period of the Consulting Agreement. The Company paid Craig
$5.0 million at the Recapitalization Closing which is amortized to earnings over
the five-year term of the covenant not to compete included in the Consulting
Agreement.
REDEMPTION OF SERIES A PREFERRED STOCK AND PAYMENT OF INTEREST ON STOCKHOLDER
NOTES
Pursuant to the Option Agreement, at the Recapitalization Closing, the
Company purchased from Craig 72,000 shares of the Company's Series A Preferred
Stock, currently held by Craig, for a total purchase price of $1.8 million plus
accrued and unpaid dividends and paid approximately $79,000 to Craig as payment
of all unpaid interest owing to Craig on a stockholder note. In addition, the
Company purchased from La Cadena 72,000 shares of the Company's Series A
Preferred Stock, currently held by La Cadena, for a total purchase price of $1.8
million, plus accrued and unpaid dividends and paid approximately $79,000 to La
Cadena
F-26
<PAGE>
as payment of all unpaid interest owing to La Cadena on a stockholder note. In
September 1993 and September 1992, the Company issued 40,000 shares and 32,000
shares, respectively, of the Company's Series A Preferred Stock to each of Craig
and La Cadena in payment of all principal owing on such shareholder notes.
TRANSFER OF CRAIG COMMON STOCK
Pursuant to the Second Amended and Restated Stock Agreement dated as of
January 12, 1994, (the "Craig Stock Agreement"), among the Company, Craig, La
Cadena and James J. Cotter, in consideration for a standstill agreement by
Craig, the Company agreed to transfer to Craig 311,404 shares of Craig's common
stock owned by the Company at such time following the Recapitalization Closing
as the Company determined it was legally entitled to do so under applicable law
governing distributions to shareholders. Such agreement resulted in a pre-
tax
F-27
<PAGE>
EXHIBIT K
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---
EXCHANGE ACT OF 1934
For the quarterly period ended June 23, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--
EXCHANGE ACT OF 1934
For the transition from __ to__
Commission file number 001-13222
---------
STATER BROS. HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware
--------
(State or other jurisdiction of incorporation or
organization)
33-0350671
----------
(I.R.S. Employer Identification No.)
21700 Barton Road
Colton, California 92324
------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (909) 783-5000
--------------
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report.)
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 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- --
As of July 17, 1996, there were issued and outstanding
50,000 shares of the registrant's Class A Common Stock
- -------------------------------------------------------------------------------
1
<PAGE>
STATER BROS. HOLDINGS INC.
JUNE 23, 1996
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION (Unaudited) Page
- ------ --------------------------------- ----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) as of September 24, 1995
and June 23, 1996 3
Consolidated Statements of Income (Unaudited) for the 39 weeks ended
June 25, 1995 and June 23, 1996 5
Consolidated Statements of Income (Unaudited) for the 13 weeks ended
June 25, 1995 and June 23, 1996 6
Consolidated Statements of Cash Flows (Unaudited) for the 39 weeks
ended June 25, 1995 and June 23, 1996 7
Notes to Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and analysis of Financial
Condition and Results of Operations 10
<CAPTION>
Part II OTHER INFORMATION
- ------- -----------------
<S> <C> <C>
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 19
</TABLE>
2
<PAGE>
PART I-FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
- ------
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
ASSETS
Sept. 24, June 23,
1995 1996
--------- --------
<S> <C> <C>
Current Assets
Cash and cash equivalents........................ $ 26,308 $ 49,859
Receivables...................................... 15,877 18,461
Inventories...................................... 107,146 108,788
Prepaid expenses................................. 3,591 4,172
Deferred income taxes............................ 2,792 2,792
Properties held for sale......................... 2,933 2,795
--------- ---------
Total current assets................................ 158,647 186,867
Investment in unconsolidated affiliate.............. 9,250 8,315
Property and equipment
Land............................................. 20,653 16,023
Buildings and improvements....................... 96,653 86,989
Store fixtures and equipment..................... 68,338 75,571
Property subject to capital leases............... 14,368 14,368
-------- --------
200,012 192,951
Less accumulated depreciation and amortization... 81,385 85,092
-------- --------
118,627 107,859
Deferred income taxes............................... 4,975 4,973
Deferred debt issuance cost, net.................... 6,423 5,538
Lease guarantee escrow.............................. 5,584 6,471
Other assets........................................ 10,576 8,523
-------- --------
Total assets........................................ $314,082 $328,546
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Sept. 24, June 23,
1995 1996
--------- --------
<S> <C> <C>
Current Liabilities
Accounts payable................................... $ 67,604 $ 62,655
Accrued payroll and related expenses............... 22,289 23,467
Other accrued liabilities.......................... 22,653 29,698
Current portion of capital lease obligations....... 1,087 1,087
-------- --------
Total current liabilities............................. 113,633 116,907
Long-term debt........................................ 165,000 165,000
Capital lease obligations, less current portion....... 8,099 7,293
Long-term portion of self-insurance reserves.......... 13,031 13,031
Other long-term liabilities........................... 741 2,569
Series B Preferred Stock.............................. - 69,365
Stockholders' equity
Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares - 50,000 in 1995,
0 in 1996....................................... 1 -
Class A Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares - 50,000........... 1 1
Additional paid-in capital......................... 12,715 12,715
Retained earnings.................................. 15,511 (43,685)
Less option to acquire stock....................... (14,650) (14,650)
-------- --------
Total stockholders' equity............................ 13,578 (45,619)
-------- --------
Total liabilities and stockholders' equity............ $314,082 $328,546
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
39 Weeks Ended
--------------
June 25, June 23,
1995 1996
-------- --------
<S> <C> <C>
Sales.............................................. $1,177,288 $1,244,312
Cost of goods sold................................. 914,424 959,246
--------- ---------
Gross profit....................................... 262,864 285,066
Operating expenses
Selling, general and administrative expenses.... 229,170 239,252
Depreciation and amortization................... 8,622 9,220
Consulting fees................................. 1,122 1,125
--------- ---------
Total operating expenses........................... 238,914 249,597
--------- ---------
Operating profit................................... 23,950 35,469
Interest income.................................... 608 1,309
Interest expense................................... (15,227) (14,943)
Equity in earnings (loss) from unconsolidated
affiliate......................................... (562) (935)
Other income - net................................. 89 (187)
--------- ---------
Income before income taxes......................... 8,858 20,713
Income taxes....................................... 3,543 8,390
--------- ---------
Net Income......................................... $ 5,315 $ 12,323
--------- ---------
Less preferred dividends........................ - 2,155
--------- ---------
Earnings available to common shareholders.......... $ 5.315 $ 10.168
--------- ---------
Earnings per common share:......................... $ 53.15 $ 126.75
--------- ---------
Average common shares outstanding.................. 100.000 80.220
------- ------
Shares outstanding at end of period................ 100.000 50.000
------- ------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended
--------------
June 25, June 23,
1995 1996
-------- --------
<S> <C> <C>
Sales.................................................... $396,072 $429,349
Cost of goods sold....................................... 306,088 330,092
-------- --------
Gross profit............................................. 89,984 99,257
Operating expenses
Selling, general and administrative expenses........... 78,024 83,636
Depreciation and amortization.......................... 2,946 3,058
Consulting fees........................................ 374 375
-------- --------
Total operating expenses................................. 81,344 87,069
-------- --------
Operating profit......................................... 8,640 12,188
Interest income.......................................... 288 602
Interest expense......................................... (5,006) (5,019)
Equity in earnings (loss) from unconsolidated affiliate.. (298) (387)
Other income - net....................................... (19) (11)
-------- --------
Income before income taxes............................... 3,605 7,373
Income taxes............................................. 1,443 2,988
-------- --------
Net income............................................... $ 2,162 $ 4,385
-------- --------
Less preferred dividends............................... - 1,816
-------- --------
Earnings available to common shareholders................ $ 2,162 $ 2,569
-------- --------
Earnings per common share................................ $ 21.62 $ 51.38
-------- --------
Average common shares outstanding........................ 100,000 50,000
-------- --------
Shares outstanding at end of period...................... 100,000 50,000
-------- --------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
39 Weeks Ended
--------------
June 25, June 23,
1995 1996
------- -------
<S> <C> <C>
Operating activities:
Net income.................................................................. $ 5,315 $12,323
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................................ 8,622 9,220
Provision for deferred income taxes...................................... 670 2
(Gain) loss on disposals of assets....................................... (89) 187
Net undistributed loss in investment in unconsolidated affiliate......... 562 935
Changes in operating assets and liabilities:
(Increase) decrease in receivables...................................... (333) (2,584)
(Increase) decrease in inventories...................................... (2,654) (1,642)
(Increase) decrease in prepaid expenses................................. (588) (581)
(Increase) decrease in other assets..................................... (1,324) 1,167
Increase (decrease) in accounts payable................................. 876 (4,949)
Increase (decrease) in accrued liabilities and long-term
portion of self-insurance reserves..................................... (380) 7,463
------- -------
Net cash provided by operating activities................................... 10,677 21,541
------- -------
Investing activities:
Purchase of property and equipment.......................................... (9,734) (13,658)
Proceeds from sale of property and equipment and properties
held for sale.............................................................. 482 18,629
------- -------
Net cash (used in) provided by investing activities......................... (9,252) 4,971
------- -------
Financing activities:
Proceeds from notes payable borrowings...................................... 100 -
Preferred stock dividends................................................... - (2,155)
Redemption of common stock.................................................. - (69,365)
Issuance of preferred stock................................................. - 69,365
Principal payments on long-term debt and capital lease obligations.......... (868) (806)
------- -------
Net cash (used by) financing activities..................................... (768) (2,961)
------- -------
Net increase (decrease) in cash and cash equivalents........................ 657 23,551
Cash and cash equivalents at beginning of period............................ 21,289 26,308
------- -------
Cash and cash equivalents at end of period.................................. $21,946 $49,859
------- -------
Supplementary information:
Interest paid............................................................... $10,216 $ 9,938
Income taxes paid........................................................... $ 2,810 $ 7,175
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
7
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 23, 1996
Note 1 - Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of Stater Bros. Holdings Inc. (the
"Company") and its subsidiaries as of June 25, 1995 and June 23, 1996 and the
results of its operations and cash flows for the thirty-nine weeks ended June
25, 1995 and June 23, 1996. These consolidated financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Company's latest annual report filed on Form 10-K. The operating
results for the thirty-nine weeks ended June 23, 1996 are not necessarily
indicative of the results of operations for a full year.
Note 2 - Income Taxes
The provision for income taxes for the thirty-nine weeks ended June 25,
1995 and June 23, 1996 consists of the following:
39 Weeks Ended
--------------
June 25, 1995 June 23, 1996
------------- -------------
(In thousands)
Federal Income Taxes $ 3,034 $ 7,198
State Income Taxes 509 1,192
-------- --------
$ 3,543 $ 8,390
======== ========
Note 3 - Conversion of Common Stock into Series B Preferred Stock
In March 1994, the Company acquired, for $14.7 million, an option to
purchase all, but not less than all, shares of the Common Stock held by Craig
for a cash purchase price of $60.0 million plus an adjustment factor equal to
8.833% per annum from March 8, 1994 to March 8, 1996, compounded annually and
$69,365,000 thereafter, provided the Common Stock of the Company held by Craig
is converted into shares of Series B Preferred Stock of the Company.
The Option Agreement also include an option available to the Company to
convert the Company's 50,000 shares of Common Stock held by Craig Corporation
into 693,650 shares of 10.5% Series B Preferred Stock on or before March 8,
1996.
Effective March 8, 1996, the Company exercised its option and converted the
Company's 50,000 shares of Common Stock held by Craig Corporation into 693,650
shares of the Company's Series B Preferred Stock. The Series B Preferred Stock
is redeemable by the Company in whole but not in part for $69.4 million plus
accrued and unpaid dividends. The holders of the Series B Preferred Stock can,
beginnning in the year 2009, cause the Company to redeem such Preferred Stock.
Dividends on the Preferred Stock will be paid quarterly in arrears at the
rate of 10.5% per annum through September 2002, and beginning in October 2002,
will increase to 12% per annum and will increase by 100 basis points per year
thereafter to a maximum rate of 15% per annum.
8
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 23, 1996
Note 4 - Consulting Agreement and Covenant Not To Compete
Pursuant to the Consulting Agreement dated as of September 3, 1993 (the
"Consulting Agreement"), effective and commencing March 8, 1994, Craig will
render consulting services to the Company for a five-year period. In
consideration for such consulting services, the Company will pay Craig $1.5
million per year, payable quarterly during the term of the Consulting Agreement.
The Company will have the right to terminate its obligations under the
Consulting Agreement in the event it exercises its option to purchase the Common
Stock or Series B Preferred Stock owned by Craig. Additionally, in accordance
with the terms of the Consulting Agreement, Craig has agreed not to engage in
any business that competes with the Company in any of the five counties in which
the Company operates until the end of the five-year period of the Consulting
Agreement. The Company paid Craig $5.0 million March 8, 1994 which is amortized
to earnings over the five-year term of the covenant not to compete included in
the Consulting Agreement.
Note 5 - Unconsolidated Affiliate
The Company owns 49.6% of Santee Dairies, Inc. ("Santee"), an operator of a
fluid mike processing plant located in Los Angeles, California. The Company
purchases a substantial portion of the fluid mike products offered for sale in
its supermarkets from Santee. The Company does not provide any guarantees
regarding the Santee operations. Accordingly, the Company accounts for its
investment in Santee using the equity method of accounting.
Note 6 - Reclassifications
Certain amounts in the prior periods have been reclassified to conform to
the current period financial statement presentation.
<PAGE>
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART I - FINANCIAL INFORMATION (contd.)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------
OF OPERATIONS
OWNERSHIP OF THE COMPANY
Effective March 8, 1996, La Cadena Investments ("La Cadena") became the
sole Common Shareholder of the Company and holds all of the shares of
Class A Common Stock which are entitled to 1.1 votes per share. La
Cadena Investments is a California General Partnership whose partners
include Jack H. Brown, Chairman of the Board, President and Chief
Executive Officer of the Company and other members of senior management
of the Company. Jack H. Brown has a majority interest in La Cadena and
is the managing general partner with the power to vote the shares of the
Company held by La Cadena.
RECAPITALIZATION TRANSACTION
In March 1994, the Company completed a Recapitalization Transaction (the
"Recapitalization") which transferred effective voting control of the
Company to La Cadena, reclassified the Company's outstanding equity,
provided for certain cash payments and distributions to Craig
Corporation ("Craig"), previously a shareholder of the Company, and
provided the Company with an option to acquire Craig's remaining equity
in Stater Bros. Holdings Inc. The Recapitalization was funded through an
offering of $165.0 million of 11% Senior Notes due 2001 which are listed
and trade on the American Stock Exchange.
Effective March 8, 1996, pursuant to options available to the Company
included in a certain Option Agreement entered into in March 1994, as
part of the Recapitalization between the Company and Craig Corporation,
the Company exercised its right to convert all of the Common Stock held
by Craig Corporation into 693,650 shares of 10.5% Series B Preferred
Stock. The redemption value of the Series B Preferred Stock is $100 per
share for an aggregate value of $69,365,000. Dividends on the Series B
Preferred Stock will be paid quarterly in arrears.
RESULTS OF OPERATIONS
The following table sets forth certain income statement components
expressed as a percent of sales for the thirteen and thirty-nine weeks
ended June 23, 1996 and June 25, 1995.
Thirteen Weeks Thirty-Nine Weeks
-------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
Sales 100.00% 100.00% 100.00% 100.00%
Gross profit 23.12 22.72 22.91 22.33
Selling, general and
administrative expense 19.48 19.70 19.23 19.47
Depreciation and amortization .71 .74 .74 .73
Consulting fees .09 .10 .09 .10
Other (income)(net) (.05) .01 (.01) (.01)
Interest expense 1.17 1.26 1.20 1.29
Earnings before income taxes 1.72% .91% 1.66% .75%
10
<PAGE>
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (contd.)
Total sales for the thirteen weeks ended June 23, 1996 increased 8.4% and
amounted to $429.3 million compared to $396.1 million for the like period in
1995. Total sales for the thirty-nine weeks year to date ended June 23, 1996
increased 5.7% and amounted to $1,244.3 million compared to $1,177.3 million for
the same period in 1995. Like store sales increased 8.5% for the quarter and
increased 6.1% for the year to date period. The Company operated 110
supermarkets at June 23, 1996 and at June 25, 1995.
Gross profits for the thirteen weeks ended June 23, 1996, amounted to $99.3
million or 23.12% of sales compared to $90.0 million or 22.72% of sales in the
same period of the prior year. During the quarter ended June 23, 1996, the
Company continued to introduce higher gross margin products into its
supermarkets, such as prepackaged gourmet vegetables and fresh cut flowers. For
the thirty-nine week year to date period, gross profits increased to $285.1
million or 22.91% of sales compared to $262.9 million of 22.33% of sales in the
prior year. The increase in gross profits for the year to date period, is due
to increased efficiencies in the Company's warehousing and transportation
departments and the introduction of higher gross margin products, such as
prepackaged gourmet vegetables and fresh cut flowers, a decrease in competitive
activity in the current year when compared to the prior year and slight
improvements in the Southern California economy.
Operating expenses include selling, general and administrative expenses,
depreciation and amortization expenses and consulting fees. For the thirteen
weeks ended June 23, 1996, selling, general and administrative expenses amounted
to $83.6 million or 19.48% of sales compared to $78.0 million or 19.70% of sales
for the like period of the prior year. For the year to date period, selling,
general and administrative expenses amounted to $239.3 million or 19.23% of
sales compared to $229.2 million or 19.47% of sales for the like period of the
prior year. Selling, general and administrative expenses for the thirteen and
thirty-nine weeks ended June 23, 1996 reflect reductions in expenses for
employer contributions to collective bargaining benefits trust of $3.8 million.
Such collective bargaining health care benefits trust was over-funded and
employer monthly contributions to the trust were suspended for the months of
December 1995 and January 1996.
Depreciation and amortization expenses amounted to $3.1 million and $9.2 million
for the third quarter and year to date periods ended June 23, 1996,
respectively, and included amortization of a prepaid five-year covenant not to
compete between the Company and Craig which became effective as of March 8,
1994. Depreciation and amortization expense amounted to $2.9 million and $8.6
million for the quarter and year to date periods of the prior year.
In conjunction with the March 1994 Recapitalization Transaction, the Company
entered into a five-year consulting and covenant not to compete agreement (the
"Consulting Agreement") with Craig Corporation. The Consulting Agreement
provided for a prepayment of $5.0 million, which is amortized to expense over
the five-year term of the covenant not to compete. The Consulting Agreement
also provides for annual consulting payments of
11
<PAGE>
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (contd.)
$1.5 million, paid quarterly in arrears. The requirement to make annual
consulting payments may, at the election of the Company, be terminated if the
Company acquires Craig's remaining equity in the Company prior to the expiration
date of the Consulting Agreement. Accordingly, amortization of the prepaid
covenant not to compete amounted to $250,000 and $750,000, respectively, for the
thirteen and thirty-nine weeks ended June 23, 1996 and June 25, 1995 and is
included in depreciation and amortization expense. Additionally, annual
consulting fees paid or accrued to the benefit of Craig amounted to $375,000 and
$374,000, for the thirteen weeks and $1,125,000 and $1,122,000, for the thirty-
nine weeks ended June 23, 1996 and June 25, 1995, respectively.
Operating profits for the third quarter of 1996 amounted to $12.2 million or
2.84% of sales, compared to $8.6 million or 2.18% of sales in the third quarter
of 1995. Operating profits for the thirty-nine weeks year to date ended June
23, 1996, amounted to $35.5 million or 2.85% of sales, compared to $24.0 million
or 2.03% of sales for the like period in 1995.
Interest expense amounted to $5.0 million for the third quarters of 1996 and
1995. For the year to date periods of 1996 and 1995, interest expense amounted
to $14.9 million and $15.2 million, respectively. Interest expense in the third
quarter and year to date periods of 1996, includes amortization of $295,000 and
$885,000, respectively, from fees and expenses incurred to acquire debt,
compared to $270,000 and $943,000 for the same period in 1995.
Income before income taxes amounted to $7.3 million and $3.6 million for the
third quarters of 1996 and 1995, respectively, and amounted to $20.7 million and
$8.9 million for the year to date periods of 1996 and 1995, respectively.
Net income for the third quarters of 1996 and 1995 amounted to $4.4 million or
1.02% of sales and $2.2 million or .55% of sales, respectively, and for the year
to date periods for 1996 and 1995, amounted to $12.3 million or .99% of sales
and $5.3 million or .45% of sales, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has funded its daily cash flow requirements through
funds generated from operations and through borrowings from short-term revolving
credit facilities.
Working capital amounted to $70.0 million at June 23, 1996 and $45.0 million at
September 24, 1995 and the Company's current ratios were 1.60:1, and 1.40:1,
respectively. Fluctuations in working capital and current ratios are not
unusual in the industry.
Net cash provided by operating activities for the thirty-nine weeks ended June
23, 1996 amounted to $21.5 million. Fluctuations in operating assets and
liabilities are not unusual in the supermarket industry. Net cash provided by
operating activities amounted to $10.7 million in the 1995 year to date period.
12
<PAGE>
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (contd.)
The increase in accrued current liabilities in 1996 when compared to 1995 is due
primarily to an increase in unremitted sales taxes of approximately $5.7
million, which were subsequently paid on their due dates.
Net cash provided by investing activities for the thirty-nine weeks ended June
23, 1996, amounted to $4.9 million compared to net cash used in investing
activities of $9.3 million in the like period of fiscal 1995. The difference in
net cash used in investing activities between the comparable periods in 1996 and
1995 is due to the Company's capital expenditures during such periods, net of
proceeds from asset dispositions. Capital expenditures for the thirty-nine week
year to date periods amounted to $13.7 million in 1996 and $9.7 million in 1995.
On January 31, 1996, the Company completed a sale and leaseback transaction
involving five of its supermarkets with an unrelated third party. Gross proceeds
from the transaction were approximately $18.5 million. As part of the sale and
leaseback transaction, the Company entered into leases for the five supermarkets
with initial terms of 20 years. No gain or loss was recognized in conjunction
with the sale of the five supermarkets. Proceeds from the sale and leaseback
transaction will be used to fund an accelerated capital expenditure program,
including the construction of new supermarkets and the remodeling of existing
supermarkets.
Capital expenditures through June 23, 1996 have been financed primarily from
cash provided by operating activities and proceeds from the sale and leaseback
transaction and consist primarily of costs incurred to build a replacement
supermarket, which opened in February 1996, to fund supermarket remodels, and to
fund technology improvements and merchandising enhancements in most of the
Company's supermarkets.
Net cash used by financing activities for the thirty-nine weeks ended June 23,
1996 amounted to $3.0 million compared to $.8 million in the 1995 year to date
period. The increase in net cash used by financing activities in 1996, when
compared to 1995, was due primarily to the accretion of preferred dividends
which commenced on March 8, 1996.
Management believes that operating cash flow, funds available to the Company
from its revolving credit facility and funds derived from leases will be
sufficient to meet the Company's currently identified operating needs and
scheduled capital expenditures. However, there can be no assurance that cash
provided through future lease financing will be available to the Company.
The Bank Facilities
Stater Bros. Markets, the Company's operating subsidiary, and Bank of America
National Trust and Savings Association (the "Bank") entered into a Credit
Agreement in March 1994, as amended and effective June 1, 1996, whereby the
Bank provides Stater Bros. Markets with a revolving operating line of credit
(the "Operating Facility") with a maximum availability of $15.0 million which
was available at June 23, 1996 and a revolving letter of credit facility (the
"LC Facility") with a maximum availability of $25.0 million (collectively, the
"Bank Facilities").
13
<PAGE>
STATER BROS. HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (contd.)
The Bank Facilities (contd.)
As of June 23, 1996 approximately $10.2 million of the LC Facility was available
to the Company. The Bank Credit Agreement expires on June 1, 1998.
The Company is subject to certain covenants associated with its 11% Senior Notes
due 2001 and covenants included in the Credit Agreement between a bank and
Stater Bros. Markets, a wholly owned subsidiary of the Company. As of June 23,
1996, the Company was in compliance with all such covenants. However, there can
be no assurance that the Company will be able to achieve the expected operating
results or implement the capital expenditure strategy upon which future
compliance with such covenants is based.
The Preferred Stock Conversion
In March 1994, the Company acquired, for $14.7 million, an option to purchase
all, but not less than all, shares of the Common Stock held by Craig for a cash
purchase price of $60.0 million plus an adjustment factor equal to 8.833% per
annum from March 8, 1994 to March 8, 1996, compounded annually and $69,365,000
thereafter, provided the Common Stock held by Craig is converted into shares of
Series B Preferred Stock of the Company.
The Option Agreement also included an option available to the Company to convert
the Company's 50,000 shares of Common Stock held by Craig Corporation into
693,650 shares of 10.5% Series B Preferred Stock on or before March 8, 1996.
Effective March 8, 1996, the Company exercised its option to convert the
Company's 50,000 shares of Common Stock held by Craig Corporation into 693,650
shares of the Company's Series B Preferred Stock. The Series B Preferred Stock
is redeemable by the Company in whole but not in part for $69.4 million plus
accrued and unpaid dividends. The holders of the Series B Preferred Stock can,
beginning in the year 2009, cause the Company to redeem such Preferred Stock.
Dividends on the Preferred Stock will be paid quarterly in arrears at the rate
of 10.5% per annum through September 2002, and beginning in October 2002, will
increase to 12% per annum and will increase by 100 basis points per year
thereafter to a maximum rate of 15% per annum.
Labor Relations
The Company and other major supermarket employers in Southern California
negotiated a four-year contract, beginning October 1995, with the United Food
and Commercial Workers Union. The Company's collective bargaining agreement with
the International Brotherhood of Teamsters was renewed for four years in
September 1994. Management believes it has good relations with its employees.
14
<PAGE>
STATER BROS. HOLDINGS INC.
JUNE 23, 1996
PART II- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
- -------
Various legal actions and claims are pending against the Company in the
ordinary course of business. In the opinion of management and its
general legal counsel, the ultimate resolution of such pending routine
legal actions and claims will not have a material adverse effect on the
Company's consolidated financial position.
For a description of legal proceedings, please refer to the footnote
entitled "Legal Proceedings" contained in the Notes to Consolidated
Financial Statements section of the Company's Annual Report on Form 10-K
for the fiscal year ended September 24, 1995.
Item 2. CHANGES IN SECURITIES
- -------
Effective March 8, 1996, pursuant to options available to the Company
included in a certain Option Agreement entered into as part of the
Recapitalization and between the Company and Craig Corporation, the
Company exercised its right to convert the 50,000 shares of the
Company's Series B Preferred Stock.
The Series B Preferred Stock is redeemable by the Company in whole but
not in part for $69.4 million plus accrued and unpaid dividends. The
holders of the Series B Preferred Stock can, beginning in the year 2009,
cause the Company to redeem such Preferred Stock. Holders of the Series
B Preferred Stock will have the right to elect one director of the
Company. In addition, as long as all the shares of Series B Preferred
Stock are beneficially owned by Craig, the holder of the Series B
Preferred Stock will have the right to vote as a single class with
holders of all other voting stock of the Company, and the voting power
of the Series B Preferred Stock will equal 20% of the total voting power
of such combined class. In the event dividends on the Series B Preferred
Stock in respect of any two or more quarterly dividend periods shall be
and remain unpaid, so long as the majority of the shares of Series B
Preferred Stock are beneficially owned by Craig, the holders of the
Series B Preferred Stock will have the right to elect a majority of the
Company's directors. In the event Craig ceases to be the beneficial
owner of a majority of the Series B Preferred Stock, the right of the
holders of the Series B Preferred Stock to elect one director will be
suspended, and if dividends on the Series B Preferred Stock in respect
of any two or more quarterly dividend periods shall be and remain
unpaid, the holders of the Series B Preferred Stock will have the right
to elect only two directors of the Company.
Dividends on the Series B Preferred Stock commenced to accrue on March
8, 1996, at the rate of 10.5% per annum for the first 78 months.
Commencing with the 79th month, the dividend rate will increase to 12%
per annum, and will further increase each twelfth month thereafter by
100 basis points per year, to a maximum rate of 15% per annum.
15
<PAGE>
STATER BROS. HOLDINGS INC.
JUNE 23, 1996
Item 2. CHANGES IN SECURITIES (contd.)
- -------
In the event of any liquidation of the Company, the holders of the
Series B Preferred Stock will be entitled to receive $100 per share
before any distribution is made to holders of Junior Stock.
Item 3. DEFAULTS UPON SENIOR SECURITIES
- -------
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------
None
Item 5. OTHER INFORMATION
- -------
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
- -------
(a) Exhibits
Exhibits are as follows:
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 (1) Certificate of Incorporation of
the Company.
3.2 (1) By-Laws of the Company.
4.1 (1) Indenture between the Company and
IBJ Schroder Bank & Trust
Company, as Trustee, for
$165,000,000 11% Senior Notes due
2001, dated as of March 8, 1994
(the "Indenture").
4.2 (1) Global Notes of the Company
issued pursuant to the Indenture.
4.3 (1) Registration Rights Agreement
among the Company and Paine
Webber Incorporated dated
March 8, 1994.
10.1 (1) Reclassification Agreement dated
September 3, 1993, by and among
the Company, Craig and La Cadena.
10.2 (1) Amendment to Reclassification
Agreement, dated January 12,
1994, by and among the Company,
Craig and La Cadena.
10.3 (1) Agreement of Stockholders dated
May 10, 1989, by and among the
Company, Craig and La Cadena.
16
<PAGE>
STATER BROS. HOLDINGS INC.
JUNE 23, 1996
Item 6.Exhibits and Reports on Form 8-K (contd.)
- -------
(a) Exhibits (contd.)
EXHIBIT NO. DESCRIPTION
----------- -----------
10.4 (1) Amendment to Agreement of Stockholders dated
September 3, 1993, by and among the Company,
Craig, Craig Management, Inc. ("CMI") and La
Cadena.
10.5 (1) Option Agreement dated September 3, 1993, by and
between the Company and Craig.
10.6 (1) Amendment to Option Agreement dated January 12,
1994, by and between the Company and Craig.
10.7 (1) Consulting Agreement dated September 3, 1993, by
and between the Company, Craig and CMI.
10.8 (1) Letter Agreement regarding Consulting Agreement,
dated March 8, 1994, by and between the Company,
Craig and CMI.
10.9 (1) Second Amended and Restated Stock Agreement dated
January 12, 1994, by and among the Company,
Craig, CMI, La Cadena and James J. Cotter.
10.10 (1) Security Agreement dated March 8, 1994, by and
between the Company and Craig.
10.12 (1) Credit Agreement dated March 8, 1994, by and
between Stater Bros. Markets and Bank of America
Trust and Savings Association.
10.12(a) (2) Amendment dated June 23, 1995 to the Credit
Agreement dated March 8, 1994, by and between
Stater Bros. Markets and Bank of America Trust
and Savings Association.
10.13 (1) Continuing Guaranty dated March 8, 1994, of
Stater Bros. Development, Inc. in favor of Bank
of America Trust and Savings Association.
10.15 (1) Subordination Agreement dated March 8, 1994, by
and among the Company, Stater Bros. Markets and
Bank of America Trust and Savings Association.
10.16 (1) Amended and Restated Sublease Agreement dated
June 1, 1983, between Wren Leasing Corp., as
Lessor, and Stater Bros. Markets, as Lessee.
10.17 (1) Preferred Stock Agreement dated March 22, 1983,
between Stater Bros. Markets and Petrolane
Incorporated.
17
<PAGE>
STATER BROS. HOLDINGS INC.
JUNE 23,1996
Item 6. Exhibits and Reports on Form 8-K (contd.)
- -------
(a) Exhibits (contd.)
EXHIBIT NO. DESCRIPTION
----------- -----------
10.18 (1) Escrow Agreement dated September 19,
1985, by and among Stater Bros. Markets,
Petrolane Incorporated and First
Interstate Bank of California.
11 Calculation of Earnings per common
share.
27 Financial Data Schedule
----------------------------------------------------------------
(1) Previously filed with the Securities and Exchange Commission
as an exhibit to Registration Statement S-4 No. 33-77296
dated July 21, 1994.
(2) Previously filed with the Securities and Exchange Commission
as an Exhibit to the Registrant's Quarterly Report on Form
10-Q dated June 25, 1995 and filed on August 8, 1995.
Copies of Exhibits listed herein can be obtained by writing and
requesting such Exhibits from: Corporate Secretary, P.O. Box
150, Colton, California 92324.
(b) Reports on Form 8-K
None
18
<PAGE>
STATER BROS. HOLDINGS INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: August 5, 1996 /s/ Jack H. Brown
-----------------------------
Jack H. Brown
Chairman of the Board, President,
and Chief Executive Officer
Date: August 5, 1996 /s/ Dennis N. Beal
---------------------------------
Dennis N. Beal
Vice President, Finance and
Chief Financial Officer
(Chief Accounting Officer)
<PAGE>
Exhibit 11
STATER BROS. HOLDINGS INC.
Calculation of Earnings Per Common Share
(Unaudited)
(In thousands, except number of shares and per share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
-------------- --------------
June 25, June 23, June 25, June 23,
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 2,162 $ 4,385 $ 5,315 $12,323
Less preferred dividends - 1,816 - 2,155
------- ------- ------- -------
Net income available to common shareholders $ 2,162 $ 2,569 $ 5,315 $10,168
------- ------- ------- -------
Earnings per common share $21.62 $51.38 $53.15 $126.75
------- ------- ------- -------
Average common shares outstanding 100,000 50,000 100,000 80,220
------- ------- ------- -------
Common shares outstanding at end of period 100,000 50,000 100,000 50,000
------- ------- ------- -------
</TABLE>
20
<PAGE>
Exhibit L
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______ to ______
Commission File No. 1-8625
-----------------
CITADEL HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-3885184
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
550 SOUTH HOPE STREET, SUITE 1825 90071
LOS ANGELES, CA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICERS)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (213) 239-0540
Securities Registered pursuant to Section 12(b) of the Act:
Title of each class Names of exchanges on which each class registered
- --------------------------------------------------------------------------------
Common Stock, $0.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether 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 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K of any amendments to
this Form 10-K. Yes No X
--- ---
The aggregate market value of voting stock held by non-affiliates of the
Registrant was $10,266,000 as of April 11, 1996.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of April 11, 1996, there
were 6,003,924 shares of Common Stock, par value $.01 per share, and 1,329,114
shares of Serial Preferred Stock, par value $.01 per share outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
<PAGE>
CITADEL HOLDING CORPORATION
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1995
INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I.
Item 1. Business 1
Item 2. Properties 3
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II.
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters 8
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") 12
Item 8. Financial Statements and Supplementary Data F-1
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure II-1
PART III.
Item 10. Directors and Executive Officers of the Registrant II-2
Item 11. Executive Compensation II-3
Item 12. Security Ownership of Certain Beneficial Owners and Management II-6
Item 13. Certain Relationships and Related Transactions II-8
PART IV.
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
Signatures II-9
</TABLE>
-i-
<PAGE>
PART I
ITEM 1: BUSINESS
GENERAL
Citadel Holding Corporation, a Delaware corporation ("Citadel" and
collectively with its wholly owned subsidiaries, the "Company"), has been
engaged primarily in the ownership and management of commercial and residential
property since August 1994. At December 31, 1995, Citadel's balance sheet
assets amounted to approximately $39.8 million and consisted primarily of two
office buildings, two apartment buildings and $16 million in cash. Management
is currently evaluating the assets and opportunities available to the Company
with a view to possibly acquiring or developing a new line of business. While
no assurance can be given, such line of business may include the participation
with the Company's affiliates in land based entertainment businesses such as
motion picture exhibition.
In 1983, Citadel was organized to serve as the holding company for Fidelity
Federal Bank, a Federal Savings Bank, "Fidelity"). On August 4, 1994, Citadel
and Fidelity completed a recapitalization and restructuring transaction (the
"Restructuring"), which resulted in the reduction of Citadel's interest in
Fidelity from 100% to approximately 16%, the acquisition by the Company, at bulk
sale prices from Fidelity, of four Real Estate Owned properties (the "REO
Assets"), the sale by Citadel to Fidelity of its Gateway Investments ("Gateway")
subsidiary for approximately $1 million, the transfer to Citadel of Fidelity's
interest in certain outstanding litigation (the "D&O Litigation"), and the
receipt by way of dividend from Fidelity of options to acquire at book value two
office buildings used by Fidelity in its operations.
In connection with the Restructuring, Citadel agreed to indemnify Fidelity
with respect to certain losses that might be incurred by Fidelity in the event
of breach by Fidelity of certain representations made by Fidelity to purchasers
in the bulk sale portion of the Restructuring (the "Bulk Sale Indemnity").
Citadel's liability under this indemnity was capped at $4 million, and pertains
only to those representations and warranties addressing certain environmental
and structural issues. The period for making claims under these representations
and warranties has now lapsed, with claims of approximately $3.9 million having
been asserted against Fidelity. However, Fidelity has asserted that these
remaining claims are subject to a cure threshold which would reduce the maximum
claim to $2.8 million. Furthermore, Fidelity has informed the purchaser that,
based upon its review to date, it believes the remaining claims to be without
merit. Citadel is advised that the purchaser disputes Fidelity's position. As
there continues to be a significant number of material issues to be resolved,
included on the Company's balance sheet at December 31, 1995 and 1994 is $4
million recorded as "Deferred proceeds from bulk sales agreements."
Also in connection with the Restructuring, Citadel and Fidelity entered
into a tax disaffiliation agreement (the "Tax Disaffiliation Agreement"). In
general, under the Tax Disaffiliation Agreement, Fidelity is responsible for (1)
all adjustments to the tax liability of Fidelity and its subsidiaries for period
before the Closing to operations of Fidelity, (ii) any tax liability of Fidelity
and its subsidiaries for the taxable year that begins before and ends after the
closing in respect to that part of the taxable year through the end of the date
of the Closing, and (iii) any tax liability of Fidelity and its subsidiaries for
periods after the Closing. For this purpose, Gateway is deemed to be a
subsidiary of Fidelity at all relevant times and any liability for taxes for
such period ending on or before the Closing is measured by Citadel's actual
liability for taxes for such period, after applying tax benefits otherwise
available to Citadel attributable to such period. In general, Citadel will be
responsible for all tax liabilities of Citadel and its subsidiaries (other than
Fidelity and its subsidiaries) for all periods prior to disaffiliation. Citadel
will be entitled to any refunds of taxes relating to its liabilities.
1
<PAGE>
During fiscal 1995, substantially all of the Company's remaining interest
in Fidelity was sold. In January 1996, The company received notice from the
Office of Thrift supervision that it had been deregistered as a savings and loan
holding company.
MANAGEMENT
Steve Wesson is the President and Chief Executive Officer of the Company.
From 1989 until he joined the Company in 1993, Mr. Wesson served as CEO of
Burton Property Trust Inc., the U.S. real estate subsidiary of The Burton Group
PLC. In this position he was responsible for the restructuring and eventual
disposal of the Company's assets in the U.S.
S. Craig Tompkins became the Secretary/Treasurer of Citadel in September,
1994. Mr. Tompkins is also the President and a director of Craig Corporation
("Craig") and its 49.3% affiliate, Reading Company. Prior to joining Craig and
Reading in March, 1993, Mr. Tompkins was a partner in the law firm of Gibson,
Dunn & Crutcher.
The Company has two additional employees, and shares space and has
contracted for certain administrative services with Craig.
2
<PAGE>
ITEM 2: PROPERTIES
REAL ESTATE INTERESTS
The table below provides an overview of the Citadel Purchase Assets owned
by the Company at December 31, 1995.
<TABLE>
<CAPTION>
UNITS/SQUARE % LEASED MAJOR TENANTS REMAINING
ADDRESS TYPE FEET AT 12/31/95 * LEASE TERMS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ARBOLEDA Office/ 178,000 99 American Express (58%) February 1999
1661 Camelback Rd. Restaurant Others 1-5 Yrs.
Phoenix, Arizona
BRAND BUILDING Office 89,000 100 Fidelity (65%) May 2005
600 No. Brand Blvd.
Glendale, CA Public Storage (35%) April 96
VESELICH Apartment 216 93 None 6-12 months
3939 Veselich Ave. 176,000
Los Angeles, Calif.
PARTHENIA Apartment 27 89 None 6-12 months
21028 Parthenia 26,000
Canoga Park, Calif.
CLAREMONT Land 26 Acres -- -- --
- -------------------------------------------------------------------------------------------------------------
</TABLE>
*% of rentable space leased
ARBOLEDA, PHOENIX
- -----------------
This property is substantially leased at December 31, 1995, to American
Express Company, which occupies 58% (100,098 sq. ft.) of the property. In March
1996, American Express entered into a two-year renewal of its lease to February
1999.
VESELICH, LOS ANGELES
- ---------------------
While the occupancy rate of this property in the last twelve months has
ranged from 90% to 95%, the property has historically experienced considerable
turnover of tenants. This has resulted in high overhead and reduced cash flows.
Management has addressed this issue by carrying out deferred maintenance,
increasing marketing expenditures and improving diligence on prospective
tenants. During the fourth quarter of 1995, the Company decided to seek offers
for the sale of the property and on March 26, 1996 entered into a Purchase and
Sale Agreement to sell the property for approximately $9.3 million. Pursuant to
the terms of the Agreement, the closing date, subject to certain conditions
precedent is scheduled to occur on or before May 29, 1996. However, the Company
can make no assurance that the sale will be closed.
3
<PAGE>
BRAND, GLENDALE
- ---------------
As part of the Restructuring, Citadel acquired, by way of dividend, the
Building Options, which were subsequently assigned to Citadel Realty, Inc., its
wholly owned subsidiary. The office buildings subject to the Building Options
included the Glendale Building which is used by Fidelity in its operations.
With regard to the purchase of the Glendale Building, Fidelity extended a five
year loan, amortizing over twenty years, at an adjustable rate of interest tied
to the 30-day LIBOR rate plus 4.5% per annum, adjustable monthly. The Company
paid Fidelity points of 1% plus normal closing costs. The loan is subject to
prepayment penalties in year one of 4%, decreasing 1% in each subsequent year.
The interest rate on this loan is currently 9.843%.
The purchase of the Glendale Building closed on May 18, 1995. The Company
funded the $7.12 million exercise price to purchase the Glendale Building
through a borrowing from Fidelity of $5.34 million with the balance of the funds
coming from internal sources.
The Glendale Building was until recently the headquarters building of
Fidelity. Effective at the closing, Citadel and Fidelity entered into a 10-
year, full service gross lease for four of the six floors of the Glendale
Building. The rental rate for the first five years of the lease term is $26,000
per month (including parking) for the ground floor and approximately $75,000 per
month (including parking) for the fourth, fifth and sixth floors. The lease
provides for annual rental increases at a rate equal to the lower of the
increase in the Consumer Price Index or 3%. After the first five years of the
lease term, the rental rate for the ground floor will be adjusted to the higher
of the then current market rate or $1.50 per square foot increased by the annual
rental rate increase applied during the first five years of the lease as
described in the preceding sentence. Fidelity has the option to extend the lease
of the ground floor for two consecutive five year terms at a market rental rate
and will have the option to purchase the Glendale Building at the market value
at the expiration of the lease term, provided that the Company then owns the
building. Fidelity finalized the move of its headquarters in March 1996, and is
currently attempting to sublease all or a portion of their leased premises
except the ground floor which serves as Fidelity's principal branch.
Public Storage occupies 31,946 square feet (two floors) on a lease that
expires in April 1996 with a total rental of $53,900 per month ($1.75/sq. ft.).
The Company is actively marketing this space and has had discussions with other
potential tenants for these premises. No definitive agreements have been reached
at this time and the Company can make no assurance that attractive terms will be
reached with an alternative tenant.
WESTERN, HARBOR CITY
- --------------------
On January 6, 1995, the Company sold the Western property for a net price
of $5.9 million and a gain of approximately $981,000. In addition, a mortgage
note payable of $3.7 million was assumed and subsequently paid in full by the
purchaser. During the last several months prior to its sale, this property has
consistently operated at 99% occupancy with low tenant turnover.
CLAREMONT
- ---------
The Company foreclosed on a loan previously made by Fidelity and received in
the Restructuring on August 14, 1995. The property is currently carried on the
books at $400,000. The Company is currently marketing this property for sale
but, due to certain conditions attached to the entitlements which require action
of the adjacent owners, the Company can make no assurance that the property can
be sold in the near term.
4
<PAGE>
FINANCING OF REAL ESTATE INTERESTS
The Company's acquisition of the REO Properties was 100% leveraged: $13.9
million was obtained in the form of conventional mortgage loans by Fidelity
against the Arboleda, Veselich and Western Avenue Properties, while the balance
was obtained through drawdowns ($6.2 million) on an $8.2 million line of credit
from Craig (the "Craig Line of Credit").
With respect to each of the Western Avenue Property and the Veselich
Property (two apartment complexes), Fidelity extended a 10-year loan, amortizing
over 30 years, at an adjustable rate of interest tied to the one-year Treasury
rate plus approximately 3.70% per annum, with an initial interest rate of 7.25%.
The mortgage on the Western Avenue Property was assigned to the Buyer at the
time of its sale in January 1995. The rate on the Veselich Property loan is
currently 8.75%. The loan secured by the Arboleda Property (an office building)
is guaranteed by Citadel, has a seven-year term, amortizing over 25 years, with
an adjustable rate of interest tied to a six-month LIBOR rate plus 4.5% per
annum, with an initial rate of 9.25% per annum. The interest rate on this loan
is currently 9.937%. Fidelity did not provide financing with respect to the
Parthenia Property (an apartment complex).
The remainder of the purchase price of the REO Properties was drawn on the
Craig Line of Credit. At the time of the Restructuring, Craig held approximately
9% of the outstanding stock of Citadel. James J. Cotter is Chairman of each of
Citadel and Craig. S. Craig Tompkins is a director of Citadel and the President
and a director of Craig.
The Craig Line of Credit was initially committed in the amount of $8.2
million, of which $6.2 million was immediately drawn down. On November 10, 1994,
the Company retired $5.25 million of the Craig Line of Credit by issuance to
Craig of 1,329,114 shares of 3% Cumulative Voting Convertible Preferred Stock
(the "Preferred Stock"). The rights, privileges and preferences of the Preferred
Stock are described below under Item 5, under the caption - "Dividends on 3%
Voting Cumulative Convertible Preferred Stock." In May of 1995, the remaining
balance of $950,000 on the Craig line of credit was paid in full and the line of
credit was canceled.
In May, 1995, Citadel obtained a loan of $765,000 from American Savings on
the Parthenia property. The loan provides for a term of 30 years, amortizing
over 30 years, at a fixed rate of interest of 2.950 over the 11th District Cost
of Funds. The rate on this loan is currently 7.983%.
ITEM 3: LEGAL PROCEEDINGS
ROVEN LITIGATION
Citadel, Hecco Ventures I and James J. Cotter are defendants in a civil
action filed in 1990 by Alfred Roven in the United Sates District Court for the
Central District of California. The complaint alleged fraud by Citadel in a
proxy solicitation relating to Citadel's 1987 Annual Meeting of Stockholders
and breach of fiduciary duty. The complaint also sought compensatory and
punitive damages in an amount alleged to exceed $40 million. The complaint
grew out of and was originally asserted as a counter claim in an action brought
by Citadel against Roven to recover alleged short swing profits. In October
1995, Citadel, Hecco Ventures I and James J. Cotter were granted summary
judgment on all causes of action asserted in the 1990 complaint in federal
court. Roven has appealed that judgment.
In 1995, Roven filed a complaint in the California Superior Court
against Citadel, Hecco Ventures I and James J. Cotter and, in addition, S. Craig
Tompkins and certain other persons, including Citadel's outside
5
<PAGE>
counsel and certain former directors of Citadel (which directors are currently
directors of Craig and Reading), alleging malicious prosecution in connection
with the short swing profits litigation. Citadel believes that it has
meritorious defenses to these claims, and has not reserved any amounts with
respect thereto. Defense of the action has been accepted by Citadel's insurers.
However, no assurance can be given that additional costs of defense will not be
material to Citadel's future operating results considering Citadel's limited
revenue and operating profits.
FIDELITY EMPLOYEE CLAIMS
Citadel is advised that, following the Restructuring of Fidelity, Fidelity
significantly reduced staffing as part of its efforts to reduce costs. Certain
terminated employees have threatened, and in one case, as detailed below, filed
claims asserting that Citadel is in some manner liable for what is asserted to
be wrongful termination of these individuals by Fidelity. In light of the fact
that, among other things, these employees were never employees of Citadel and
were terminated only after Citadel's interest in Fidelity had been reduced to a
16%, in essentially, non-voting interest in Fidelity. Citadel believes that
it has no liability to these individuals. Defense of this action has been
accepted by Citadel's insurer's, although Citadel expects to incur some
additional costs of defense.
RESTRUCTURING LITIGATION
In July 1995, Citadel was named as a defendant in a lawsuit alleging
violations of federal securities laws in connection with the offering of common
stock of Citadel's then wholly owned subsidiary, Fidelity, as part of the
Restructuring (the "Harbor Finance Litigation"). The suit was filed by Harbor
Finance Partners in an alleged class action complaint in the United States
District Court - Central District of California, and named as defendants
Citadel, Fidelity, Richard M. Greenwood (Fidelity's chief executive officer and
Citadel's former chief executive officer), J.P. Morgan Securities, Inc. and
Deloitte & Touche LLP. That suit alleged false and misleading information was
provided by the defendants in connection with Fidelity's stock offering in the
Restructuring and the defendants knew and failed to disclose negative
information concerning Fidelity. Fidelity and Citadel filed a Motion to Dismiss,
which was granted with leave to amend on January 25, 1996. Plaintiff has now
retained new counsel and filed a new complaint alleging essentially the same
claims, but adding state securities law causes of action, and not naming J.P.
Morgan Securities or Deloitte & Touche. On March 15, 1996, Fidelity and Citadel
filed a Motion to Dismiss the new complaint. Defense of the action has been
accepted by Fidelity under the terms of the Stockholders Agreement entered into
between Citadel and Fidelity as part of the Restructuring, and Citadel, to date,
has not retained separate counsel with respect to this litigation and is not
incurring outside costs of defense. Since the filing of the initial complaint in
the Harbor Finance Litigation, Fidelity has completed a second recapitalization
transaction, in which it raised gross proceeds of approximately $146 million,
through the sale of common and preferred stock. Citadel has been named in only
two of the four alleged claims for relief and only in its capacity as an alleged
controlling entity of Fidelity.
Both the initial complaint and the new complaint filed by Harbor Finance
Partners make certain assertions previously made in a wrongful termination and
defamation action brought by William Strocco against Fidelity and Citadel,
which was filed in Los Angeles County Superior Court on March 9, 1995. The
plaintiff in that case is the former manager of Fidelity's REO Department who
alleges that his employment was terminated in violation of public policy and was
a result of breaches of his implied employment contract and the implied covenant
of good faith and fair dealing. The plaintiff alleges his termination was
related to the fact that he objected to various aspects of the Restructuring,
including the selling of REO properties in bulk sales, as not in the interests
of Fidelity, and he asserts that the same was not fully disclosed to potential
investors and the Office of Thrift Supervision. Strocco also seeks damages for
defamation and interference with contractual relationship. Citadel has been
named in only one of the five causes of action brought by Strocco, and is made a
party defendant only on the basis that Citadel allegedly conspired with and
induced Fidelity to breach its employment agreement with Strocco.
6
<PAGE>
Both the Harbor Finance and Strocco complaints seek damages in an
unspecified amount. Citadel believes these claims against it are without merit
and is vigorously contesting them.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1995.
7
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is listed and quoted on the American Stock
Exchange ("AMEX"). The following table sets forth the high and low closing bid
prices of the common stock of the Company as reported by AMEX for each of the
following quarters:
<TABLE>
<CAPTION>
HIGH LOW
(IN DOLLARS)
<S> <C> <C>
1995:
Fourth Quarter 2 1/2 2
Third Quarter 2 3/8 2
Second Quarter 2 7/16 2
First Quarter 3 1/8 2 1/16
1994:
Fourth Quarter 4 3/16 2 1/16
Third Quarter 6 3/8 3 1/2
Second Quarter 8 3 7/8
First Quarter 12 1/4 4 1/4
</TABLE>
HOLDERS OF RECORD
The number of holders of record of the Company's common stock at April 10,
1996 was 250.
DIVIDENDS ON COMMON STOCK
While Citadel has never declared a dividend on its Common Stock and has no
current plan to declare a dividend, it is Citadel's policy to review this matter
on an ongoing basis.
DIVIDENDS ON 3% VOTING CUMULATIVE CONVERTIBLE PREFERRED STOCK
On November 10, 1994, the Company issued 1,329,114 shares of 3% Cumulative
Voting Convertible Preferred Stock ("Preferred Stock") at a stated value of
$3.95 per share, or $5,250,000, to Craig. The Preferred Stock carries a
liquidation preference equal to its stated value and bears a cumulative
(noncompounded) annual dividend equal to 3% of the stated value. Each share of
the Preferred Stock entitles the holder to one vote on all matters submitted to
a vote of the Company's stockholders. The Preferred Stock is convertible at the
option of the holder into Common Stock.
Set forth below is a description of certain terms of the issuance of the
Preferred Shares. Such description is summary in nature and is qualified in its
entirety by reference to the Certificate of Designation and the related stock
purchase agreement with Craig, which was filed as an exhibit to the Company's
Report on 8-K filed on November 14, 1994.
Holders of the Preferred Shares have the right to convert such shares into
Common Stock at any time at a conversion ratio based upon the market price of
Common Stock, subject to certain limitations. In addition, the Preferred Shares
are subject to automatic conversion into Common Stock under certain circum-
stances if Citadel undertakes a rights offering of Common Stock to its stock-
holders. Citadel has the option to redeem the Preferred Shares at any time after
November 10, 1997 at a premium. Holders of Preferred Shares have the right to
require Citadel to purchase their shares at a premium under certain
circumstances, including a "Change in Control." A Change in Control is defined
as the occurrence of either of the following events: (i) any person, entity or
"group" (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") and the rules thereunder) other than Craig, and
its successors and affiliates, acquires beneficial ownership of over 35% of the
outstanding voting securities of Citadel; or (ii) the directors of Citadel as of
October 10, 1994 (the "Current Directors"), and any future directors
("Continuing Directors") of Citadel who have been elected or nominated by a
majority of the Current Directors or the Continuing Directors, cease to
constitute a majority of the Board of Directors. The Preferred Shares vote
jointly (not as a separate class) with the Common Stock on most matters,
including the election of directors.
During 1995, the Board of Directors declared and paid dividends to Craig
for the period from the date of the Preferred Stock issuance in November 1994
through June 30, 1995. As of December 31, 1995, undeclared cumulative dividends
amounted to $78,750. Such amounts were declared and paid during March 1996.
8
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth certain historical financial data regarding
the Company. This information is derived in part from, and should be read in
conjunction with, the consolidated financial statements of the Company.
<TABLE>
<CAPTION>
At or for the Year ended December 31,
--------------------------------------------------------------------
(in thousands, except per share information) 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income from real estate operations $ 6,112 $ 2,115
Gain on property sales 1,541
Net interest income after provision for
estimate loan losses $ 36,101 $ 79,601 $ 92,264
Gains (losses) on sale of loans, net 194 1,117 2,118
Gains (losses) on sale of mortgage-back
securities 1,342 8,993
Gains (losses) on sales of investment
securities (54) 1
Other income (expense) (35,870) (6,602) (5,616)
Administrative charge from Fidelity 916
Loss of Fidelity 41 171,964
Operating expense 6,214 4,060 105,341 77,911 79,446
Earnings (loss) before income taxes 1,398 (174,825) (103,628) (3,795) (18,314)
Income tax expense (benefit) (36,467) (5,841) 15,651
Net earnings (loss) $ 1,398 ($174,825) ($67,161) $2,046 $2,663
====================================================================================================================
Earnings (loss) per common and common
equivalent share $0.16 ($26.45) ($11.56) $0.62 $0.81
Average common and common equivalent
shares (1) (2) (3) 8,616,613 6,610,280 5,809,570 3,297,812 3,297,812
Balance Sheet Data:
Total assets $39,815 $39,912 $4,389,519 $4,698,326 $5,126,525
Cash and investments 16,291 4,805 238,220 177,599 289,150
Total loans, net 3,713,383 3,991,781 4,550,848
Deposits 3,368,643 3,457,918 3,884,707
Borrowings 16,186 14,846 734,230 908,400 871,150
Subordinated notes 60,000 60,000 60,000
Stockholders equity 17,720 17,838 187,403 223,186 221,140
Cash dividend declared on Preferred
Stock 101 -- -- -- --
Other Data:
Real estate loans funded $422,355 $435,690 $509,625
Average interest rate on new loans 6.75% 7.77% 9.07%
Loans sold $137,870 $204,435 $282,728
Nonperforming assets to total assets 5.37% 4.99% 2.43%
Number of deposit accounts 241,093 233,037 238,187
Interest rate margin at end of period (3) 2.19% 2.68% 3.20%
Interest rate margin for the period (3) 2.28% 2.67% 2.54%
Retail branch offices (4) 42 43 43
</TABLE>
9
<PAGE>
(1) Net of treasury shares, where applicable.
(2) 1993 data includes 3,297,812 shares issued in March 1993 in connection with
a stocks right offering, which produced net proceeds to the Company of $31.4
million.
(3) Excluding the writedowns of core deposit intangibles of $5.2 million,
interest rate margins at and for the year ended December 31, 1993, would
have been 2.32% and 2.39%.
(4) All retail branches were located in Southern California.
(5) 1995 data includes the effect of shares assumed to be issued on the
conversion of the outstanding 3% Cumulative Voting Convertible Preferred
Stock amounting to 2,430,223.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Prior to the Restructuring in August 1994, Citadel was a financial services
holding company engaged in the savings bank business through its previously
wholly owned subsidiary, Fidelity Federal Bank ("Fidelity"). It conducted
virtually no operations at the holding company level. In the Restructuring,
Citadel's interest in Fidelity was reduced from 100% to 16.2% and Citadel
transferred the stock of its other subsidiary, Gateway, to Fidelity leaving
Citadel with no historical operating business. As a result, effective January
1, 1994 Citadel ceased including the results of Fidelity on a consolidated basis
in its financial statements and began accounting for its investment in Fidelity
on the cost basis. Since the Restructuring, Citadel has been engaged primarily
in the ownership and management of commercial and residential real property.
Therefore, no meaningful comparisons can be made between Citadel's results of
operations for the years ended December 31, 1995 (twelve months of real estate
operations), December 31, 1994 (5 months of real estate operations) and December
31, 1993 (12 months as a financial services holding company).
In addition to the reduction of Citadel's interest in Fidelity, several
other significant events occurred in the Restructuring, including (1) the
acquisition by the Company from Fidelity of four real properties for a purchase
price of approximately $19.8 million (Fidelity's book value) of which $13.9
million was financed by Fidelity on a secured basis and the balance was financed
by Craig Corporation ("Craig"), a significant stockholder of the Company, under
a short-term line of credit; (2) the receipt by way of dividend from Fidelity of
options to acquire at book value ($9.3 million) two office buildings used by
Fidelity in its operations (the "Building Option"); (3) the transfer to the
Company of Citadel's interest in certain outstanding litigation, and (4)
Citadel's agreement to indemnify Fidelity, up to a limit of $4 million, with
respect to certain environmental and structural representations and warranties
made by Fidelity to certain third party buyers in connection with bulk sales by
Fidelity made as part of the Restructuring ("Bulk Sale Indemnity").
The Company reported net income for the year ended December 31, 1995 of
$1,398,000 or $0.16 per share, including a gain of approximately $1,541,000 from
the sale of the Sherman Oaks Building and a residential property in Harbor City,
California. The Company reported a net loss of $174.8 million or $26.45 per
share in Fiscal 1994 comprised of (i) a $112.1 million loss from the operations
of its former subsidiary, Fidelity, through the date of the Restructuring, (ii)
writedowns of $59.9 million on the Company's investment in Fidelity at and
following the Restructuring, (iii) a $900,000 administrative charge paid to
Fidelity prior to the Restructuring and (iv) a $1.9 million loss from its
ongoing operations.
During the first quarter of Fiscal 1995, the Company exercised its option
to purchase the Building Options and on March 23, 1995 purchased and immediately
sold the Sherman Oaks Building for a gain of approximately $7.12 million.
Concurrent, with the purchase, the Company entered into a ten year, full service
gross lease with Fidelity for four of the six floors of the Glendale Building
providing for a base rent, subject to annual escalations, of approximately
$1,220,000 annually. At December 31, 1995 rental properties consisted of one
apartment building and two commercial buildings as compared to three apartment
buildings and one commercial building at December 31, 1994. Properties held for
sale at December 31, 1995 was comprised of one apartment building with a book
value of $7,542,000 and an undeveloped parcel of land with a book value of
$400,000.
During the second quarter of fiscal 1995, the Company sold substantially
all of its investment in Fidelity, which resulted in the Company receiving net
cash proceeds of approximately $11,938,000 and the return of 666,000 shares of
the Company's common stock. The Fiscal 1995 net earnings includes a loss of
approximately $41,000 from the sale of such Fidelity shares calculated by
comparing the net cash proceeds combined with the amount ascribed to the common
stock received ($2.125 per share), to the carrying value of such Fidelity stock
included in the balance sheet as Investment in Fidelity held for sale at
December 31, 1994. The Company has reflected the return of the Company's common
stock as treasury stock in the amount of $1,415,000.
The sale of the real properties and the sale of the Fidelity stock
contributed to the significant increase in cash and cash equivalents during
December 31, 1995. The increase in cash and cash equivalents was offset,
11
<PAGE>
in part, by the purchase of the Glendale Building for approximately $7.12
million which was funded with $1.78 million of cash and a mortgage of
approximately $5.34 million. Cash and cash equivalents amounted to $4,805,000 at
December 31, 1994 as compared to $16,291,000 at December 31, 1995. Accordingly,
interest income increased significantly during the third and fourth quarter of
Fiscal 1995. The Company's net operating results for Fiscal 1995 include
interest income amounting to $710,000 as compared to $45,000 in Fiscal 1994.
Rental income amounted to $5,402,000 in fiscal 1995 as compared to
$2,070,000 for fiscal 1994. Rental income may vary significantly depending upon
the properties owned by the Company during the periods being reported. As
described above, the Company did not engage in the ownership and management of
commercial and residential properties until the Restructuring in August 1994.
Accordingly, Fiscal 1994 reflects rental income for only five months as compared
to twelve months in Fiscal 1995. In addition, Fiscal 1995 includes rental income
from the Company's May acquisition of the Glendale Building, somewhat offset, by
a reduction in rental income resulting from the sale of the Harbor City
residential property in the first quarter of 1995.
During Fiscal 1995, the Company made a decision to sell the Veselich
residential property and, accordingly, has included this property with a
carrying value of $7,542,000 at December 31, 1995 in Properties held for sale.
On March 26, 1996, the Company entered into a Purchase and Sale Agreement to
sell the Veselich property, whereby the Buyer agreed to purchase said property
for approximately $9.3 million. The Company received a $0.5 million deposit
which is refundable only under certain conditions. Pursuant to the terms of the
Purchase and Sale Agreement, the closing date, subject to certain conditions
precedent, is scheduled to occur on or before May 29, 1996. As of December 31,
1995, this property was encumbered by a mortgage in the amount of approximately
$5,731,000.
Interest expense amounted to $1,327,000 in Fiscal 1995 and $649,000 in
Fiscal 1994. As described above, at the date of the Restructuring, the Company
purchased the properties from Fidelity with an acquisition price of $19.8
million with mortgage financing from Fidelity and a short-term line of credit
amounting to $6.2 million from Craig. Fiscal 1994 interest expense reflects
interest for the five month period on the indebtedness incurred at the
Restructuring and includes $266,000 paid to Craig under the terms of the Craig
line of credit.
On November 10, 1994, the Company issued 1,329,114 shares of 3%
Cumulative Voting Convertible Preferred Stock ("Preferred Stock") at a stated
value of $3.95 per share. The sales price of the 1,329,114 shares sold was
$5,250,000 which was paid through the conversion of a portion of the $6.2
million indebtedness to Craig, resulting in a reduction in interest costs. Upon
the sale of the Fidelity shares in April 1995, the Company paid in full the
remaining $950,000 loan from Craig. Included in interest expense for Fiscal
1995 is approximately $59,000 related to the loan from Craig. The reduction in
interest costs associated with the pay-off and conversion of the Craig loan to
Preferred shares and the assignment of the mortgage indebtedness as part of the
sale of the Harbor City property was offset, in part, by $5.34 million of
mortgage financing obtained to purchase the Glendale Building in Fiscal 1995.
General and administrative expenses from real estate operations amounted
to $1,807,000 in Fiscal 1995 as compared to $1,785,000 in Fiscal 1994.
Fiscal 1994 general and administrative expenses represented only five
months of operations and included approximately $1.1 million related to a
contested proxy, solicitation, litigation defense and settlement cost. Such
legal costs included the costs of defending a lawsuit filed in the Court of
Chancery of the State of Delaware by a stockholder. Dillon Investors L.P., in
November 1994, naming as defendants the Company, its directors and Craig. On
April 13, 1995, the Company, Craig and Dillon Investors and its affiliates (the
"Dillon Parties") entered into settlement agreements to resolve this litigation.
Under the settlement agreements, the Dillon Parties purchased from Citadel
1,295,000 shares of Class B common stock of Fidelity owned by the Company in
exchange for which the Company received from Dillon Parties $2.22 million and
666,000 shares of the Company's common stock, and all existing litigation among
the Company, Craig and the Dillon Parties was terminated, with mutual releases
executed and delivered. The Dillon Parties also agreed for a period of one year
following the closing, not to purchase or acquire any other beneficial interests
in any of the Company's securities, and not to engage in any solicitations of
consents or proxies.
The settlement terms also included an agreement by Craig with the Dillon
Parties not to exercise, prior to February 4, 1996, its right to tender any
shares of the Preferred Stock for conversion into the Company's
12
<PAGE>
common stock without the prior written consent of the holders of a majority of
the outstanding shares of the Company's common stock. In exchange for such
concession from Craig, the Company agreed to grant Craig a two year warrant to
acquire the 666,000 shares of the Company's common stock acquired from the
Dillon Parties at a price of $3.00 per share, and agreed to reimburse Craig for
certain legal costs associated with the litigation amounting to approximately
$62,000.
Fiscal 1995 general and administrative expenses amounted to $384,000 for
the three months ended December 31, 1995 as compared to $659,000, $339,000, and
$425,000 for the third, second and first quarter ended September 30, June 30,
and March 31, 1995. During Fiscal 1995, the Company incurred additional legal
fees pertaining to outstanding litigation (see Part II, Item 1-Legal
Proceedings) and paid bonuses and directors fees for past services aggregating
approximately $302,500, which were authorized by the Board to the Chairman,
Vice-Chairman and President. Such employee related costs were offset by a
payment of approximately $120,000 by affiliates of Craig to the Company for real
estate consulting services provided by employees to such affiliates.
13
<PAGE>
BUSINESS PLAN, CAPITAL RESOURCES AND LIQUIDITY OF THE COMPANY
- -------------------------------------------------------------
Cash and cash equivalents increased by approximately $11,486,000 from
$4,805,000 at December 31, 1994 to $16,291,000 at December 31, 1995. Net cash
provided by investing activities for the year ended December 31, 1995 amounted
to $11,165,000 including cash proceeds from the sale of its Fidelity stock and
proceeds from the sale of properties amounting to $11,938,000 and $8,837,000,
respectively. Fiscal 1995 proceeds from long-term mortgage financings amounted
to approximately $6,104,000. During Fiscal 1995, $9,610,000 of such proceeds
were used purchase and improve real properties and repay long-term and short-
term principal borrowings of $4,764,000.
The Company expects that its sources of funds in the near term will include
cash on hand ($16,291,000 at December 31, 1995), cash flow from the operations
of its real estate properties and proceeds from the sale of its properties.
In the short-term, uses of funds are expected to include (i) funding of the
repair of the earthquake damage to the parking structure of the Glendale
Building, (ii) operating expenses, (iii) any amounts that may become due under
the $4 million Bulk Sale Indemnity, (iv) debt service pursuant to the property
mortgages and (v) dividends declared, if any under the Preferred Stock. Annual
cumulative dividends accrue at $157,500 per year. The Company has declared and
paid dividends amounting to $101,500 on the Preferred Stock for the period from
its issuance in November 1994 through June 30, 1995. At December 31, 1995,
cumulative dividends not declared or paid amounted to $78,750. Such dividends
were declared and paid in March 1996.
Management is currently evaluating the assets and opportunities available
to the Company with a view to developing a new business plan. Among the
alternatives under consideration are the continuation and expansion of its real
estate operations, the movement into a new line of business, and the merger or
sale of the entire Company. Such alternatives may include the participation
with the Company's major beneficial shareholder, Craig and/or its affiliates in
land based entertainment businesses such as motion picture exhibition.
On March 29, 1996, the Company was notified by its major shareholder, Craig
that it had sold its common stock interest in the Company, representing
approximately 26% of the outstanding shares of the Company, to its 49.3% owned
affiliate, Reading Company ("Reading"). In addition, Craig sold to Reading an
option to purchase its 1,329,114 shares of Preferred Stock and its warrant to
purchase 666,000 shares of the Company's common stock. Such Preferred Stock
combined with the Common Stock currently held by Reading represent approximately
40% of the outstanding voting equity securities of the Company.
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX PAGE
- ----- ----
<S> <C>
Report of Independent Auditors.................... F-2
Consolidated Balance Sheets
Years Ended December 31, 1995 and 1994.......... F-3
Consolidated Statements of Operations
Years Ended December 31, 1995, 1994 and 1993.... F-4
Consolidated Statements of Stockholders' Equity
Three Years Ended December 31, 1995............. F-5
Consolidated Statements of Cash Flows
Years Ended December 31, 1995, 1994 and 1993.... F-6
Notes to Consolidated Financial Statements........ F-8
Financial Statement Schedule - III - Real Estate
and Accumulated Depreciation.................... S-1
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Citadel Holding Corporation
We have audited the consolidated balance sheets of Citadel Holding Corporation
and subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. Our audits also included the
financial statements schedule listed in the Index at Item 8. These financial
statements and the financial statement schedule are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Citadel Holding Corporation and
subsidiaries as of December 31, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 27, 1996
F-2
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(NOTE 1)
<TABLE>
<CAPTION>
December 31,
1995 1994
-------- --------
(In thousands of dollars)
<S> <C> <C>
ASSETS
- ------
Cash and cash equivalents $ 16,291 $ 4,805
Investment in Fidelity Federal Bank-held for sale 11 13,405
Properties held for sale 7,942 --
Rental properties, less accumulated depreciation 14,251 19,858
Other receivables 437 1,219
Other assets 883 625
-------- --------
Total assets $ 39,815 $ 39,912
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
Security deposits payable $ 253 $ 227
Accrued legal fees 313 1,239
Accounts payable and accrued liabilities 1,343 1,762
Deferred proceeds from bulk sales agreement 4,000 4,000
Short-term line of credit with affiliate -- 950
Mortgage notes payable 16,186 13,896
-------- --------
Total liabilities 22,095 22,074
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Serial preferred stock, par value $.01,
5,000,000 shares authorized, 3% Cumulative
Voting Convertible, ($3.95 per share or
$5,250,000 stated value) 1,329,114 shares
issued and outstanding 13 13
Common stock, par value $.01, 20,000,000
shares authorized, 6,669,924 shares issued
and outstanding at December 31, 1995
and 1994 67 67
Additional paid-in capital 65,197 65,298
Retained (deficit) (46,142) (47,540)
Cost of treasury shares, 666,000 shares (1,415) --
-------- --------
Total stockholders' equity 17,720 17,838
-------- --------
Total liabilities and stockholders' equity $ 39,815 $ 39,912
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(NOTE 1)
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
------ --------- ---------
(In thousands of dollars,
except per share amounts)
<S> <C> <C> <C>
Real Estate Operations:
Rental income $5,402 $ 2,070 $ --
Interest income 710 45 --
------ --------- ---------
6,112 2,115 --
Real estate operating expenses 2,660 1,350 --
Depreciation and amortization 420 276 --
Interest expense 1,327 649 --
General and administrative expenses 1,807 1,785 --
------ --------- ---------
Total expenses 6,214 4,060 --
Gain on sale of properties 1,541 -- --
------ --------- ---------
Earnings (loss) from Real Estate Operations 1,439 (1,945) --
------ --------- ---------
Loss From Financial Services Operations
(Note 13) -- -- (103,628)
Administrative Charge from Fidelity
Federal Bank -- (916) --
Loss of and Write-down of Investment in
Fidelity Federal Bank (41) (171,964) --
------ --------- ---------
Earnings (loss) before taxes 1,398 (174,825) (103,628)
Income tax expense (benefit) -- -- (36,467)
------ --------- ---------
Net earnings (loss) $1,398 $(174,825) $ (67,161)
====== ========= =========
Net earnings (loss) per common and
common equivalent share $ 0.16 $ (26.45) $ (11.56)
====== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1995
(IN THOUSANDS OF DOLLARS) (NOTE 1)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------- --------------- Treasury Stock-
Shares Par Shares Par Paid-In Retained Stock, holders'
Value Value Capital Earnings At Cost Equity
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
January 1, 1993 3,298 $ 33 $28,707 $ 194,446 $ 223,186
Net (loss) (67,161) (67,161)
Proceeds of rights
offering 3,298 33 31,345 31,378
----- ---- ----- ---- ------- --------- ------- ---------
Balances at
Dec. 31, 1993 6,596 66 60,052 127,285 187,403
Issuance of common stock 74 1 285 286
Issuance of preferred
stock, net of
issuance costs of $275 1,329 $ 13 4,961 4,974
Net (loss) (174,825) (174,825)
----- ---- ----- ---- ------- --------- ------- ---------
Balances at
Dec. 31, 1994 1,329 13 6,670 67 65,298 (47,540) -- 17,838
Asset exchange for
666,000 shares of
common stock $(1,415) (1,415)
Net earnings 1,398 1,398
Preferred stock
dividends (101) (101)
----- ---- ----- ---- ------- --------- ------- ---------
Balances at
Dec. 31, 1995 1,329 $ 13 6,670 $ 67 $65,197 $ (46,142) $(1,415) $ 17,720
===== ==== ===== ==== ======= ========= ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)(NOTE 1)
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ 1,398 $(174,825) $ (67,161)
Adjustments to reconcile net earnings (loss) to
net cash provided (used) by operating activities:
Deconsolidation of Fidelity -- 111,988 --
Writedown of investment in Fidelity 41 59,892 --
Deferred proceeds from Bulk Sales Agreement -- 4,000 --
Depreciation and amortization 420 276 23,092
Gain on sale of rental property (1,541) -- --
Amortization of deferred loan costs 58 (1,163)
Provision for estimated losses -- -- 95,300
Gains on sales of loans and securities -- -- (1,482)
Capitalized loan origination costs -- -- (2,187)
Purchases of investment securities -- -- (669,228)
Proceeds/maturities of investment securities -- -- 585,773
Purchases of mortgage-backed securities -- -- (446,809)
Proceeds from sales of mortgage-backed securities -- -- 514,981
Principal repayments of mortgage-backed securities -- -- 58,865
Writedown of investment securities -- -- 2,074
Originations of loans held for sale -- -- (162,868)
Proceeds from sale of loans held for sale -- -- 138,399
FHLB stock dividend -- -- (1,640)
Deferred income tax expense -- -- 14,491
Decrease (increase) in other receivables 382 (1,219) 4,080
Decrease (increase) in other assets (216) (625) (49,414)
Increase in security deposits payable 26 227 --
Increase (decrease) in accrued liabilities (1,345) 3,001 (21,381)
------- --------- ---------
Net cash provided by (used in) operating activities (777) 2,715 13,722
INVESTING ACTIVITIES
Proceeds from sale of Fidelity stock 11,938 -- --
Proceeds from sale of properties 8,837 -- --
Purchase of and additions to real estate (9,610) (20,055) --
Purchase of investment securities -- -- (200,055)
Maturities of investment securities -- -- 226,617
Proceeds from sale of investment securities -- -- 26,908
Principal repayments of mortgage-backed securities
held for investment -- -- 9,565
Proceeds from sale of mortgage backed securities
held for investment -- -- 7,114
Purchase of loans -- -- (3,951)
Loans receivable, net decrease -- -- 149,909
Proceeds from sale of real estate -- -- 41,608
Premises and equipment (additions), net -- -- (6,946)
Other, net -- -- 3,275
------- --------- ---------
Net cash provided by (used in) investing activities 11,165 (20,055) 254,044
</TABLE>
F-6
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS OF DOLLARS) (NOTE 1)
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
------- --------- ---------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from long-term mortgage borrowings 6,104 13,930 --
Repayments of long-term borrowings (3,814) (34) (162,000)
Short-term borrowings from affiliates -- 6,200 --
Repayment of borrowings from affiliates (950) - --
Dividends paid (101) -- --
Short-term borrowings increase -- -- 242,830
Capitalized financing costs (141) (246) --
Costs of preferred stock issuance -- (275) --
Proceeds from issuance of common stock -- 286 --
Proceeds from stock rights offering, net -- -- 31,378
Demand deposits and passbook savings decrease, net -- -- (111,601)
Certificate accounts, net increase -- -- 22,326
Proceeds from FHLB advances -- -- 250,000
Repayment of FHLB advances -- -- (505,000)
------- --------- ---------
Net cash provided by (used in) financing activities 1,098 19,861 (232,067)
Less cash and cash equivalents of Fidelity at
beginning of period -- (143,677) --
------- --------- ---------
Net increase (decrease) in cash and cash equivalents 11,486 (141,156) 35,699
Cash and cash equivalents at beginning of year 4,805 145,961 110,262
------- --------- ---------
Cash and cash equivalents at end of year $16,291 $ 4,805 $ 145,961
======= ========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest on mortgages and line of credit 1,292 548 --
Interest on deposits, advances and other borrowings -- -- 180,861
Income taxes -- -- (679)
Noncash transactions:
Conversion of line of credit to preferred stock,
net of loan costs -- 4,974 --
Common stock received in exchange for Fidelity stock 1,415 -- --
Additions to real estate owned (other assets)
through foreclosure 400 -- 193,461
Loans originated to finance sale of real estate
acquired through foreclosure -- -- 51,607
Transfers from investment portfolio to held for
sale portfolio:
Loans receivable -- -- 325,222
Investment securities -- -- 14,264
Mortgage-backed securities -- -- 214,310
</TABLE>
See notes to accompanying consolidated financial statements.
F-7
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLE OF CONSOLIDATION
- -------------------------------------------------------------
The consolidated financial statements include the accounts of Citadel Holding
Corporation ("Citadel") and its wholly owned subsidiaries (collectively the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
On August 4, 1994 (the "Closing"), Citadel completed a restructuring (together
with other transactions below, the "Restructuring") in which, among other
things, Citadel's ownership interest in its previously wholly owned subsidiary,
Fidelity Federal Bank ("Fidelity"), was reduced to approximately 16%. The
reduction was a result of Fidelity issuing and selling to investors in a public
offering shares of Class A and Class C common stock. As of August 4, 1994,
Citadel's shares of Fidelity were reclassified into 4,202,243 shares of Class B
common stock of Fidelity. During April 1995, Citadel sold substantially all of
the Class B common stock of Fidelity received in the Restructuring.
As a result of the Restructuring, effective January 1, 1994, Citadel no longer
consolidates Fidelity in its financial statements; rather it accounts for its
investment in Fidelity on the cost basis. Accordingly, information for the year
ended December 31, 1994 presents the Company's results of operations for the
five months subsequent to the Restructuring separate from the results of
operations of Fidelity, which have been included in the statement of operations
as "Loss of and writedown of investment in Fidelity" (see note 4). For the
period prior to the closing of the Restructuring, administrative expenses have
been recorded consistent with the previous allocations made to Citadel by
Fidelity. Note 13 relates to the Company as the holding company of Fidelity
prior to the Restructuring.
In addition to the reduction of Citadel's interest in Fidelity, several other
significant events occurred in the Restructuring, including:
a. Citadel sold to Fidelity all of the stock of Gateway Investment
Services, Inc., previously a wholly owned subsidiary of Citadel.
b. A newly formed subsidiary of Citadel, Citadel Realty, Inc. ("CRI")
purchased four real properties from Fidelity for a purchase price of $19.8
million (Fidelity's book value) of which $13.9 million was financed by Fidelity
on a secured basis, and the balance was financed by Craig Corporation
("Craig"), a significant stockholder of Citadel, under a short-term line of
credit.
c. Citadel received from Fidelity by way of a dividend (i) a one-year
transferable option (subsequently contributed to CRI) to acquire two office
building in Sherman Oaks and Glendale, California (the "Office Buildings") used
in the operations of Fidelity for an aggregate exercise price of $9.3 million,
portions of which buildings to be leased back to Fidelity upon purchase by the
F-8
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLE OF CONSOLIDATION, (CONT'D)
- -----------------------------------------------------------------------
Company (Note 3), and (ii) Fidelity's interest in a lawsuit filed against the
former carrier of Fidelity's directors' and officers insurance policies,
involving certain coverage and indemnity issues (the "D & O Litigation"), which
resulted in Citadel collecting approximately $2.5 million.
d. Citadel and Fidelity entered into a Stockholders' Agreement, under which
Citadel is obligated to reimburse Fidelity for certain losses that may be
incurred by Fidelity as a result of certain environmental and other
representations made by Fidelity in connection with the bulk sale of loans and
other assets to certain third parties in connection with the Restructuring.
Subject to a $4 million limit, the Stockholders' Agreement requires Citadel to
reimburse Fidelity for certain losses incurred by Fidelity, in either
repurchasing assets sold in connection with the bulk sale in the event of
breached representations, or curing such breaches.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Cash and cash equivalents
- -------------------------
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Included in cash and cash
equivalents at December 31, 1995 is approximately $15,780,000 which is being
held in institutional money market mutual funds.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization is generally provided using the straight-line
method over the estimated useful lives of the assets which range from 27 to 39
years. Leasehold improvements are amortized over the lives of respected leases
or the useful lives of the improvements, whichever is shorter.
Deferred Financing Costs
- ------------------------
Costs incurred in connection with obtaining financing are amortized over the
terms of the respective loans on a straight line basis.
Investments in Common Stock
- ---------------------------
The Company's investment in common stock of Fidelity is classified as "available
for sale" under the provisions of Statement of Financial Accounting Standards
F-9
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONT'D)
- -------------------------------------------------------------
("SFAS") No. 115 and is reported at fair value. Under SFAS No. 115, fluctuations
in fair value are included in a separate component of stockholders' equity. If
there is decline in fair value judged to be other than temporary, the amount of
writedown is included in net income (loss).
Earnings (Loss) per Share Data
- ------------------------------
Earnings per share is based on 8,616,613, 6,610,280, and 5,809,570, the weighted
average number of shares of common stock and common stock equivalents
outstanding during the years ended December 31, 1995, 1994 and 1993,
respectively. The 3% Cumulative Voting Convertible Preferred Stock and the
outstanding Warrants and stock options are common stock equivalents. For 1995,
the calculation of the weighted average shares of common stock outstanding
included the effect of shares assumed to be issued on conversion of the
outstanding 3% Cumulative Voting Convertible Preferred Stock and the outstanding
Warrants and stock options. The number of Shares assumed converted as of the
beginning of the period being reported amounted to 2,430,223 and was calculated
in accordance with the terms described in Note 9 as of December 31, 1995. The
Preferred Stock is not included in the 1994 calculation as its effect was anti-
dilutive.
NOTE 3 - RENTAL PROPERTIES AND PROPERTIES HELD FOR SALE
- -------------------------------------------------------
The Company's rental properties at December 31, 1995 and 1994 consist of the
following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(in thousands)
<S> <C> <C>
Land $ 4,699 $ 5,538
Building and improvements 9,855 14,517
------- -------
Total 14,554 20,055
Less accumulated depreciation (303) (197)
------- -------
Rental properties, net $14,251 $19,858
======= =======
</TABLE>
At December 31, 1995 rental properties consisted of one apartment building and
two commercial buildings as compared to three apartment buildings and one
commercial building at December 31, 1994. Properties held for sale at December
31, 1995 was comprised of one apartment building and an undeveloped parcel of
land amounting to $7,542,000 and $400,000, respectively.
During 1995, the Company sold an apartment building for approximately $5.9
million, net of expenses. The sale resulted in a gain of approximately $981,000.
As a result of the sale, approximately $3,693,000 of a mortgage note payable was
assumed and subsequently paid off by the purchaser.
On February 2, 1995, the Company exercised the Building Options described in
Note 1 to purchase the two office buildings from Fidelity. On March 23, 1995,
the Company purchased and immediately sold the Sherman Oaks Building for a gain
of approximately $560,000. On May 18, 1995, the Company purchased the Glendale
Building at an exercise price of $7.12 million. In connection with the Glendale
F-10
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 3 - RENTAL PROPERTIES AND PROPERTIES HELD FOR SALE, (CONT'D)
- -----------------------------------------------------------------
obtained a $5.34 million five year mortgage from Fidelity, which amortizes on a
twenty year basis with interest payable monthly at the 30 day LIBOR rate plus
4.5%. The Company paid Fidelity 1% of the loan amount plus normal closing costs;
such loan is subject to prepayment penalties in year one of 4%, decreasing 1%
each subsequent year.
The Company and Fidelity have entered into a ten year, full service gross lease
for four of the six floors of the Glendale Building. The rental rate for the
first five years of the lease term is $26,000 per month (including parking) for
the ground floor and approximately $75,000 per month (including parking), for
the fourth through sixth floors. The lease provides for annual rental increases
at a rate equal to the lower of the increase in the Consumer Price Index or 3%.
After five years, the lease provides that the rental rate for the ground floor
will be adjusted to the higher of the then current market rate or $1.50 per
square foot increased by the annual rental rate increase applied during the
first five years of the lease as described in the preceding sentence. Fidelity
has the option to extend the lease of the ground floor for two consecutive five
year terms at a market rental rate and has the option to purchase the Glendale
Building, if still owned by the Company, at a market value at the expiration of
the lease. During February 1996, Fidelity discontinued use of floors four
through six and has notified the Company that it is attempting to sublease such
space. In addition, during April 1996, the lease related to the two remaining
floors in the Glendale Building expires. The Company is actively seeking a new
lessee.
On March 26, 1996, the Company entered into a Purchase and Sale Agreement to
sell an apartment rental property, whereby the Buyer agreed to purchase said
property for approximately $9.3 million, of which $0.5 million has been
deposited in escrow. As of December 31, 1995, this property was encumbered by a
mortgage in the amount of approximately $5,731,000. Pursuant to the term of the
Purchase and Sale Agreement, the closing date, subject to certain conditions
precedent, is scheduled to occur on or before May 29, 1996. Such property, with
a carrying value of approximately $7,542,000, has been included in the balance
sheet as "Property held for sale" at December 31, 1995.
NOTE 4 - INVESTMENT IN FIDELITY
- -------------------------------
At December 31, 1994, the Company's investment in Fidelity consisted of
4,202,243 shares of Class B Common Stock the fair value which was estimated by
management to be $3.19 per share, or a total carrying value of approximately
$13,405,000. During fiscal 1995 the Company's investment in Fidelity was reduced
by (1) the sale of 1,295,000 shares of Class B Common Stock of Fidelity in
consideration for a cash
F-11
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 4 - INVESTMENT IN FIDELITY (CONT'D)
----------------------------------------
payment of $2,220,000 and the return of 666,000 shares of the Company's
common stock as part of the settlement of litigation with Dillon Investors
(Note 11), and 2) the sale of 2,900,000 shares for approximately
$9,718,000, net of commissions. At December 31, 1995 the Company holds
for sale 1,810 shares of Fidelity stock, which shares reflect a one for
four reverse stock split completed by Fidelity on February 14, 1996.
The loss of and writedown of investment in Fidelity for the year ended
December 31, 1994 consisted of the following:
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C>
Loss from operations of Fidelity through August 4, 1994 $112,072
Writedown of investment in Fidelity as of the date of
the Restructuring 52,811
Writedown representing other than temporary decline in
value from August 5, 1994 to December 31, 1994 7,081
--------
$171,964
========
</TABLE>
Included in the writedown of investment in Fidelity as of the date of
Restructuring is the effect of the proceeds received from the D&O
Litigation, the writedown of uncollectible loans, and the deferral of the
$4 million of proceeds received from the Bulk Sale Asset Agreement relating
to a sale of Fidelity loans (see Note 1). The loss from operations of
Fidelity through August 4, 1994 was partially offset by an income tax
benefit of $16,524,000.
NOTE 5 - OTHER ASSETS
---------------------
Other assets are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1995 1994
----- -----
(in thousands)
<S> <C> <C>
Deferred financing costs $ 271 $ 256
Accumulated amortization (43) (79)
----- -----
Deferred financing costs, net 228 177
Impounds 291 --
Deposits 99 87
Prepaid expenses 195 329
Other 70 32
----- -----
$ 883 $ 625
===== =====
</TABLE>
F-12
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 6 - DEFERRED PROCEEDS FROM BULK SALES AGREEMENT
----------------------------------------------------
Under the Stockholders' Agreement (see Note 1), Citadel agreed to reimburse
Fidelity for certain losses incurred by Fidelity in either curing breached
representations or repurchasing assets sold under a bulk sales agreement,
subject to a $4 million aggregate limit, in the event Fidelity is
determined to have breached certain representations made in connection with
certain Bulk Sales which were part of the Restructuring. To date claims
totaling $3.9 million have been asserted. Citadel has been informed that
Fidelity is contesting these claims and has asserted that these claims are,
in any event, subject to a cure threshold which reduces the maximum claim
to $2.8 million. A significant number of material issues remain unresolved
with regards to the Company's ultimate exposure with respect to the
indemnity clause negotiated with Fidelity. Accordingly, included on the
balance sheet at December 31, 1995 and 1994 is $4 million recorded as
"Deferred proceeds from bulk sales agreement".
NOTE 7 - MORTGAGE NOTES PAYABLE
-------------------------------
Mortgage notes payable at December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
December 31,
1995 1994
-------- --------
(in thousands)
<S> <C> <C>
Notes payable to Fidelity - principal and
interest paid monthly at rates equal to
LIBOR plus 4.5% and 1-year Treasury rate
plus 3.7%, maturing through 2004 $15,424 $13,896
Note payable to American Savings Bank -
principal and interest paid monthly at a
rate equal to the 11th District cost of
funds plus 2.95%, maturing June 1, 2025 762 --
------- --------
$16,186 $13,896
======= ========
</TABLE>
As of December 31, 1995, the LIBOR interest rate was 5.843%, the 1-year
Treasury rate was 5.5% and the 11th District Cost of Funds was 5.116%.
Aggregate future principal payments as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, (in thousands)
------------ --------------
<S> <C>
1996 $ 118
1997 167
1998 205
1999 227
2000 5,004
Thereafter 10,465
------
$16,186
======
</TABLE>
F-13
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 8 - SHORT-TERM LINE OF CREDIT
----------------------------------
In connection with the Restructuring the Company borrowed $6,200,000 under
a Line of Credit from its shareholder affiliate, Craig Corporation. In
November 1994, the amount was reduced to $950,000 through the issuance of
1,329,114 shares of 3% Cumulative Voting Convertible Preferred Stock with a
stated value of $5,250,000, and in May 1995 such $950,000 was repaid and
the line of credit agreement canceled. Included in interest expense for
the years ended December 31, 1995 and 1994 is approximately $59,000 and
$266,000 representing interest and amortization of loan fees paid pursuant
to the terms of the line of credit agreement.
NOTE 9 - 3% CUMULATIVE VOTING CONVERTIBLE PREFERRED STOCK
---------------------------------------------------------
On November 10, 1994, the Company issued 1,329,114 shares of 3% Cumulative
Voting Convertible Preferred Stock ("Preferred Stock") at a stated value of
$3.95 per share. The sales price of the 1,329,114 shares sold was
$5,250,000 which was paid through the conversion of existing indebtedness
to Craig (Note 8). The Preferred Stock carries a liquidation preference
equal to its stated value and bears a cumulative (noncompounded) annual
dividend equal to 3% of the stated value. Each share of the Preferred
Stock shall entitle the holder to one vote on all matters submitted to a
vote of the Company's stockholders.
The Preferred Stock is convertible at the option of the holder into common
stock. The conversion ratio is one share of Preferred Stock for a fraction
of a share of common; the numerator which is $3.95 per share plus any
unpaid dividends, and the denominator which is the average of the closing
prices per share of the Company's common stock, as defined ("Market
Price"). If the Market Price exceeds $5.00 per share the conversion ratio
will be calculated using $5.00 and if the Market Price is below $3.00, the
Company can redeem the Preferred Stock tendered for conversion based upon
the following redemption provisions. The Company does not have the right
to call for the redemption of the Preferred Stock prior to November 1997.
Thereafter, the Company has the right, at its sole option, to redeem at the
sum of (1) $3.95 per share, (2) any unpaid dividends, and (3) a premium at
the redemption date equal to an accrual on the Stated Value ranging from 9%
per annum during the period from November 1994 to November 1998 and
thereafter reducing over time from the period November 1998 to November
2006 at the rate of 1% per year. If the redemption date is after November
2006 there is no premium. Assuming a Market Price of $2.25, the closing
price of the Company's common stock on March 28, 1995, the Preferred Stock
would convert into 2,333,333 shares of the Company's common stock.
Included as a reduction of paid in capital for the year ended December 31,
1995 is $101,500, representing dividends declared and paid to Craig for the
period from the date of the Preferred Stock issuance in November 1995
through June 30, 1995. As of December 31, 1995, undeclared cumulative
dividends amounted to $78,750. Such amounts were declared and paid during
March 1996.
F-14
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 10 - FUTURE MINIMUM RENT
-----------------------------
The Company has operating leases with tenants at its commercial properties
that expire at various dates through 2005 and are subject to scheduled
fixed increases or adjustments based on the Consumer Price Index. Future
minimum rent under operating leases, excluding tenant reimbursements of
certain costs, is summarized as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, (in thousands)
------------ --------------
<S> <C>
1996 $ 3,549
1997 3,507
1998 3,526
1999 1,768
2000 1,322
Thereafter 5,347
-------
$19,019
</TABLE>
Leases related to the Company's residential properties have been excluded
from the above schedule as they are generally six months or less in length.
Commencing in August 1995, the Company began renting corporate office space
from its stockholder affiliate, Craig, on a month to month basis. In
addition, the Company engaged Craig to provide certain administrative
services. Included in general and administrative expenses is $45,000 paid
to Craig for such rent and services. In addition, the Company provided real
estate consulting services to affiliates of Craig during the year ended
December 31, 1995 for which the Company was paid approximately $120,000.
Such amounts are included in the statement of operations as a reduction of
general and administrative expenses.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
---------------------------------------
There are several legal actions and claims against the Company. Based on
advice of legal counsel management believes that the ultimate liability, if
any, which may result from any of these lawsuits will not materially effect
the financial position or results of operations of the Company.
In November 1994, a stockholder, Dillon Investors L.P. filed a lawsuit in
the Court of Chancery of the State of Delaware naming as defendants the
Company, its directors and Craig. On April 13, 1995, the Company, Craig
and Dillon Investors and its affiliates (the "Dillon Parties") entered into
settlement agreements to resolve this litigation. Under the settlement
agreements, the Dillon Parties purchased from Citadel 1,295,000 shares of
Class B common stock of
F-15
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 11 - COMMITMENTS AND CONTINGENCIES, (CONT'D)
-------------------------------------------------
Fidelity owned by the Company in exchange for which the Company received
from the Dillon Parties $2.22 million and 666,000 shares of the Company's
common stock and all existing litigation among the Company, Craig and the
Dillon Parties was terminated, with mutual releases executed and delivered.
For financial statement purposes the Company reflected the return of the
Company's common stock as treasury stock in the amount of $1,415,000, or
$2.125 per share. The Dillon Parties also agreed for a period of one year
following the closing, not to purchase or acquire any other beneficial
interests in any of the Company's securities, and not to engage in any
solicitations of consents or proxies.
The settlement terms also included an agreement by Craig with the Dillon
Parties not to exercise, prior to February 4, 1996, its right to tender any
shares of the Preferred Stock for conversion into the Company's common
stock without the prior consent of the holders of a majority of the
outstanding shares of the Company's common stock. In exchange for such
concession from Craig Corporation, the Company agreed to grant Craig
Corporation a two year warrant to acquire the 666,000 shares of the
Company's common stock acquired from the Dillon Parties at a price of $3.00
per share, and the Company agreed to reimburse Craig Corporation for
certain expenses associated with the litigation which amounted to $62,000.
NOTE 12 - STOCK OPTIONS
-----------------------
Pursuant to an employment agreement, the Company granted to the President,
Mr. Wesson, stock options to purchase 33,000 shares of common stock at a
price of $2.69 per share. As of December 31, 1995, 22,000 shares were
exercisable. The remaining 11,000 shares vest on August 4, 1996.
NOTE 13 - ACCOUNTING POLICIES AND FOOTNOTE DISCLOSURES PRIOR TO THE
-------------------------------------------------------------------
RESTRUCTURING
-------------
The consolidated financial statements include the accounts of Citadel
Holding Corporation ("Citadel") and subsidiaries, which prior to August 4,
1994 included Fidelity Federal Bank and Gateway Investment Services Inc.
("Gateway"). As a result of the Restructuring described in Note 1,
effective January 1, 1994, Citadel no longer consolidates its previously
wholly-owned subsidiaries, Fidelity and Gateway in its financial
statements. Accordingly, only the financial statement information for the
year ended December 31, 1993 includes the operating results and cash flows
of Fidelity and Gateway on a consolidated basis.
F-16
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 13 - ACCOUNTING POLICIES AND FOOTNOTE DISCLOSURES PRIOR TO THE
-------------------------------------------------------------------
RESTRUCTURING (CONT'D)
----------------------
The following details the components of the Loss from Financial Services
Operations included in the Statement of Operations for the year ended
December 31, 1993:
Loss from Financial Services Operations:
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C>
Interest income $289,592
Interest expense 188,391
---------
Net interest income 101,201
Provision for estimated loan losses 65,100
---------
Net interest income after
provision for estimated loan losses 36,101
Noninterest income (expense):
Loan and other fees 5,389
Gain (loss) on sale of loans, net 194
Fee income from investment products 4,313
Fee income on deposits and other income 3,271
Provision for estimated real estate losses (30,200)
Real estate operations on specific properties (18,643)
Gains on sales of mortgage-backed securities
and investment securities, net 1,288
Operating expenses (105,341)
----------
Total noninterest expense (139,729)
----------
Loss from financial services operations $ (103,628)
==========
</TABLE>
The following summarizes the significant accounting policies and footnote
disclosures with respect to the year ended December 31, 1993.
Principles of Consolidation - The consolidated financial statements include
the accounts of Citadel Holding Corporation and subsidiaries. Citadel is
the holding company of Fidelity Federal Bank, a Federal Savings Bank and
Gateway Investment Services, Inc. Unless otherwise indicated, references
in this footnote to the "Company" include Citadel, Fidelity, Gateway, and
all subsidiaries of Fidelity and Citadel. All significant inter-company
transactions and balances have been eliminated.
Cash and cash equivalents - For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks and federal
funds sold.
Investment Securities and Mortgage backed securities - U.S. Government and
agency obligations, commercial paper, mortgage backed securities and other
corporate debt securities identified as held for investment are recorded at
cost, with any
F-17
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 13 - ACCOUNTING POLICIES AND FOOTNOTE DISCLOSURES PRIOR TO THE
-------------------------------------------------------------------
RESTRUCTURING (CONT'D)
----------------------
discount or premium recognized over the life of the related security by
using a methodology which approximates the interest method. Fidelity's
portfolio of mortgage-backed securities consists of pools of mortgage loans
exchanged for mortgage-backed securities and those purchased. Securities
held for investment are those securities which the Company has the intent
and ability to hold to maturity, and are carried on an amortised cost
basis. Securities to be held for indefinite periods of time, including
securities that management intends to use as part of its asset/liability
strategy, or that may be sold in response to changes in interest rates,
changes in prepayment risk, the need to increase regulatory capital or
other similar factors, are classified as held for sale and are carried at
the lower of cost or market value. Any gains or losses incurred on sales
of securities are calculated based upon the specific identification method.
Any investment securities held for trading are carried at market value.
Proceeds from sales of securities held for investment during 1993 were
$26.9 million, with a resulting gain of $1,946,000. Proceeds from sales of
mortgage-backed securities held for trading during 1993 totaled $51.3
million and the gross gains of $54,000 realized from those sales are
reported in the statement of operations as a component of gains/losses on
sales of mortgage-backed securities, net. During the year ended December
31, 1993, the Company had gross gains of $1.5 million and gross losses of
$1,000 on the sale of mortgage-backed securities held for investment.
Loans - Interest on loans is credited to income as earned and is accrued
only if deemed collectible. Accrued interest is fully reserved on loans
over 90 days contractually delinquent and on other loans which have
developed inherent problems prior to being 90 days delinquent. Discounts
and premiums on loans are included with loans receivable and are credited
or charged to operations over the estimated life of the related loans using
the interest method. The Bank charges fees for originating loans. Loan
origination fees, net of direct costs of originating the loan are
recognized as an adjustment of the loan yield over the life of the loan by
the interest method, which results in a constant rate of return. When a
loan is sold, net loan, origination fees and direct costs are recognized in
operations. Other loan fees and charges representing service costs for the
prepayment of loans, for delinquent payments or for miscellaneous loan
services are recognized when collected. Loan commitment fees received are
deferred to the extent they exceed direct underwriting costs.
Loans held for sale by Fidelity are carried at the lower of cost or market.
Fidelity has sold loans which have generated gains on sale, a stream of
loan servicing revenue and cash for lending or liquidity. Sales of loans
are dependent upon various factors, including interest rate movements,
investor
F-18
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 13 - ACCOUNTING POLICIES AND FOOTNOTE DISCLOSURES PRIOR TO THE
-------------------------------------------------------------------
RESTRUCTURING (CONT'D)
----------------------
demand for loan products, deposit flows, the availability and
attractiveness of other sources of funds, loan demand by borrowers and
liquidity and capital requirements. Due to the volatility and
unpredictability of these factors, the volume of Fidelity's sales of loans
has fluctuated. All loans sold during 1993 were from the held for sale
portfolio.
Owned Real Estate - Real estate held for sale acquired in settlement of
loans generally results when property collateralizing a loan is foreclosed
upon or otherwise acquired by Fidelity in satisfaction of the loan. Real
estate acquired through foreclosure is recorded at the lower of fair value
or the recorded investment in the loan satisfied at the date of
foreclosure. Fair value is based on the amount that the Company could
reasonably expect to receive for the asset in a current sale between a
willing buyer and a willing seller, that is, other than a forced or
liquidation sale. Inherent in the computation of estimated fair value are
assumptions about the length of time the Company may have to hold the
property before disposition. The holding costs through the expected date
of sale and estimated disposition costs are included in the valuations.
Real estate held for investment or development is carried at the lower of
cost or fair value. Adjustments to the carrying value of the assets are
made through valuation allowances and charge-offs, through a charge to
operations. Net cash receipts on real estate owned or on those loans
designated as in-substance foreclosures and net cash payments are recorded
in real estate operations on specific properties.
The results of real estate operations for the year ended December 31, 1993
amounted to a loss of approximately $48,843,000 including income from real
estate acquired for investment or development amounting to $110,000, loss
from real estate acquired through foreclosure amounting to $18,753,000 and
a provision for estimated losses of $30,200,000.
Loans meeting certain criteria are accounted for as "in-substance
foreclosures". These substantially foreclosed assets are recorded at the
lower of the loans carrying amount or at the estimated fair value of the
collateral at the date the loan was determined to be in-substance
foreclosed. These assets are reported as real estate owned in addition to
formally foreclosed real estate.
Allowances for Estimated Losses on Loans and Real Estate - The Company has
established valuation allowances for estimated losses on specific loans and
real estate ("specific reserves") and for the inherent risk in the loan and
real estate portfolios which has yet to be specifically identified
("general valuation allowances" or "GVA"). The internal asset review
department reviews the quality and recoverability of the Company's assets
on a quarterly basis in order to establish adequate specific reserves and
general valuation allowances. Fidelity
F-19
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 13 - ACCOUNTING POLICIES AND FOOTNOTE DISCLOSURES PRIOR TO THE
-------------------------------------------------------------------
RESTRUCTURING (CONT'D)
----------------------
utilizes the delinquency migration and classification methods in
determining the adequacy of its GVA. The delinquency migration method
attempts to capture the potential future losses as of a particular date
associated with a given portfolio of loans, based upon Fidelity's own
historical migration experience over a given period of time. Under the
classification method, a reserve factor is applied to each aggregate
classification level by asset collateral type in an effort to estimate the
loss content in the portfolio. Fidelity calculates a range of loss by
applying both methodologies and then applies judgement and knowledge of
particular credits, economic trends, industry experience and other relevant
factors to estimate the GVA amount. Additions to the allowances, in the
form of provisions, are reflected in current operations. Charge-offs to
the allowance are made when the loss is determined to be significant and
permanent.
Depreciation and Amortization - Depreciation and amortization are computed
principally on the straight line method over the lives of the respective
leases or the useful lives of the improvements, whichever is shorter.
Intangible assets -The cost of core deposits purchased from various
financial institutions is amortized over the average life of the deposits
acquired, generally five to ten years. The amortization and writedown of
core deposit intangibles, resulting from purchases of deposits and goodwill
acquired in the acquisitions of other financial institutions for the year
ended December 31, 1993 amounted to approximately $18,458,000 including
$5,192,000 from the writedown of core deposit intangible assets (which
writedown is included in interest expense) based upon a branch
profitability and analysis and a $8,776,000 writedown of goodwill (which
writedown is included in operating expenses) based upon an analysis of the
recoverability of goodwill indicating an impairment of value.
Financial Instruments - In the normal course of business, the Company
enters into off-balance sheet instruments to enhance yields and to alter
its exposure to interest rate risk. The financial instruments include
interest rate swaps and swap option agreements and puts and calls. The
differences to be paid or received on swaps are included in interest
expense as payments are made or received. The swap options are held as
trading positions during the option period and are carried at market value
and gains and losses are reflected in operations.
NOTE 14 - TAXES ON INCOME
-------------------------
As of December 31, 1995, the Company has for income tax purposes net
operating loss carryforwards and capital loss carryforwards of
approximately $2.1 million and $10 million, respectively. These
carryforwards will expire in the years 1999 through 2004 and are subject to
certain limitations.
F-20
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 14 - TAXES ON INCOME, (CONT'D)
-----------------------------------
Since, in view of the Company's recent history of operating losses,
realization of such tax benefits may be unlikely, a full valuation reserve
has been provided.
The tax sharing agreement between Citadel and Fidelity was terminated prior
to the Restructuring. In connection with such termination, Citadel and
Fidelity agreed that certain amounts, estimated to be approximately $3.2
million, that would have otherwise become payable by Citadel to Fidelity
under the terms of such agreement as a result of losses recognized by
Fidelity during the second quarter of 1994, would not be payable.
At the time of the Restructuring, Citadel and Fidelity entered into a tax
disaffiliation agreement (the "Tax Disaffiliation Agreement"). In general
under the tax disaffiliation Agreement, Fidelity is responsible for (a) all
adjustments to the tax liability of Fidelity and its subsidiaries for the
periods before the Restructuring relating to operations of Fidelity, (b)
any tax liability of Fidelity and its subsidiaries for the taxable year
that begins before and ends after the Restructuring in respect to that part
of the taxable year through the date of the Restructuring, and (c) any tax
liability of Fidelity and its subsidiaries for periods after the
Restructuring. For this purpose any liability for taxes for periods on or
before the Restructuring is measured by Fidelity's actual liability for
taxes after applying tax benefits attributable to periods prior to the
closing otherwise available to Fidelity. With certain exceptions Fidelity
is entitled to any refunds relating to those liabilities.
In general Citadel is responsible for all tax liabilities of Citadel and
its subsidiaries (other than Fidelity and its subsidiaries) for all
periods.
Deferred income taxes reflect the net tax effect of "temporary differences"
between the financial statement carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes. During 1995 the Company finalized and filed its tax return for
the year ended December 31, 1994. Based upon these filings the Company has
made certain adjustments to the deferred tax assets previously estimated
for the year ended December 31, 1994. Allocations of tax loss
carryforwards have been adjusted to reflect At December 31, 1995 and 1994,
the components of the deferred tax liabilities and assets are as follows:
F-21
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 14 - TAXES ON INCOME (CONT'D)
----------------------------------
<TABLE>
<CAPTION>
December 31,
1995 1994
--------- ---------
(in thousands)
<S> <C> <C>
FEDERAL
Deferred tax liabilities:
Other $ -- $ 20
------- --------
Total deferred tax liabilities -- 20
------- --------
Deferred tax assets:
Acquired and option properties 3,100 3,664
Investment in Fidelity -- 4,000
Capital losses from sale of Fidelity 3,430 --
Bulksale indemnification 1,400 1,400
Net operating loss carryforward 938 525
Other 385 385
------- --------
Gross deferred tax assets 9,253 5,974
------- --------
Valuation allowance $(9,253) (5,954)
------- --------
Deferred tax assets, net of allowance -- 20
------- --------
Net Deferred tax liability $ -- $ --
======= ========
STATE
Deferred tax liabilities:
Other $ -- $ 5
------- --------
Gross deferred tax liabilities -- 5
------- --------
Deferred tax assets:
Acquired and option properties 850 1,003
Investment in Fidelity -- 1,000
Capital losses from sale of Fidelity 930 --
Bulk sale indemnification 372 372
Net operating loss carryforward 120 94
------- --------
Gross deferred tax assets 2,272 2,469
Valuation reserve (2,272) (2,464)
------- --------
Deferred tax assets, net of allowance 0 5
Net deferred tax liability $ -- $ 0
======= ========
</TABLE>
F-22
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS & EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
FIRST
BECAME
NAME AGE CURRENT OCCUPATION DIRECTOR
- ---------------------------- --- ------------------------------ --------
<S> <C> <C> <C>
James J. Cotter(1)(3) 57 Chairman of the Board of 1986
Citadel, Chairman of the
Board of Craig Corporation, and
Chairman of the Board of Reading
Company
William D. Gould(1) 57 Attorney and Member, Troy & 1995
Gould Professional Corporation;
Director of Craig Corporation
S. Craig Tompkins(3) 45 Secretary/Treasurer and Principal 1993
Accounting Officer of Citadel, Vice
Chairman of the Board of Citadel,
President and Director of Craig
Corporation, President and Director
of Reading Company, and Director of
G&L Realty Corp.
Ronald I. Simon(2)(3) 57 Private Investor/Financial 1995
Consultant; Chairman of Sonat
Corporation
Alfred Villasenor, Jr(1)(2). 66 President of Unisure Insurance 1987
Services, Inc.
Steve Wesson 38 President and Chief Executive
Officer
</TABLE>
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Member of the Executive Committee.
Set forth below is certain information concerning the principal occupation and
business experience of each of the individuals named above during the past five
years.
Mr. Cotter was first elected to the Board in 1986, and resigned in 1988. He
was re-elected to the Board in June 1991, named Acting Chairman of the Board of
Directors of Citadel and Fidelity Federal Bank, a Federal Savings Bank
("Fidelity") in October 1991, and named Chairman of the Board of Citadel on
June 5, 1992. Mr. Cotter has been Chairman of the Board of Craig Corporation
("Craig Corporation") (retail, grocery, motion picture exhibition and real
estate) since 1988 and a Director of that company since 1985. He is also the
Executive Vice President and a Director of The Decurion Corporation (motion
picture exhibition). Mr. Cotter began his association with The Decurion
Corporation in 1969. Mr. Cotter has been the Chief Executive Officer and a
Director of Townhouse Cinemas Corporation (motion picture exhibition) since
1987. Mr. Cotter is the General Partner of James J. Cotter, Ltd., a general
partner in Hecco Ventures I, a California General Partnership and a general
partner in Hecco Ventures II, a California General Partnership (Hecco I and
Hecco II are involved in investment activities), and has been a Director of
Stater Bros., Inc. (retail grocery) since 1987. Mr. Cotter has served as a
Director of Reading Company (motion picture exhibition and real estate) since
1990 and as the Chairman of the Board of that company since 1991.
Mr. Gould is Chairman of the Compensation Committee. Mr. Gould has been a
member of the law practice of Troy & Gould Professional Corporation specializing
in corporate law since July 1986. Mr. Gould
II-2
<PAGE>
has been a Director of Craig Corporation for more than the past five years and
is currently Chairman of the Compensation Committee of Craig Corporation.
Mr. Simon has been a director of the Company since June 1995 and is Chairman
of the Audit Committee. Mr. Simon is a financial consultant and private
investor. He is currently Chairman of Sonat Corporation, a manufacturer of
interactive voice response equipment and was a Director of Reading Company from
1990 to June 1995. Formerly, Mr. Simon was the Managing Director of the Henley
Group, Inc. and a Director of Craig Corporation from 1987-1990.
Mr. Tompkins was a partner of Gibson Dunn & Crutcher until March 1993 when he
resigned to become President of each of Craig and Reading. Mr. Tompkins has
served as a Director of each of Craig and Reading since February 1993. Mr.
Tompkins was elected to the Board of Directors of G&L Realty Corp., a New York
Stock Exchange listed real estate investment trust, in December of 1993, and was
elected Vice Chairman of the Board of Citadel in July of 1994. Mr. Tompkins also
serves as the Secretary/Treasurer and Principal Accounting Officer for Citadel.
Mr. Villasenor is the President and the owner of Unisure Insurance Services,
Incorporated, a corporation which has specialized in life, business life and
group health insurance for over 30 years. Mr. Villasenor served on the Board of
Directors of ELAR, a reinsurance company from 1990 to 1991. Mr. Villasenor
served as a Director of Fidelity from 1987 until the Restructuring and as a
Director of Gateway Investments, Inc. (a wholly owned subsidiary of Fidelity)
from June 22, 1993 until February 24, 1995.
Mr. Wesson served as CEO of Burton Property Trust Inc., the U.S. real estate
subsidiary of the Burton Group PLC until he joined the Company as a consultant
in 1993. Mr. Wesson became the President and Chief Executive Officer of the
Company at the date of the Restructuring in August 1994.
There are no family relationships between the officers of the Company. All
officers are elected annually by the Board of Directors.
Directors who are not officers or employees of the Company receive for
services as a director, an annual retainer of $15,000 plus $1,500 if serving as
a Committee Chairman and $800 for each meeting attended in person (or $300 in
the case of telephonic meetings). During 1995, the Board of Directors authorized
a payment of $192,500 to Mr. Cotter, the Chairman of the Board, in recognition
of his past service to the Company with respect to the Restructuring.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The Summary Compensation Table sets forth the compensation earned for the
years ended December 31, 1995, 1994 and 1993 by each of the most highly
compensated executive officers of the company whose compensation exceeded
$100,000 in all capacities in which they served.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION/
ANNUAL COMPENSATION AWARDS
--------------------------------------------- -----------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- ------------------------------ ------- -------- ------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Steve Wesson
President and Chief 1995 $175,000 $100,000 --(1) 33,000
Executive Officer 1994(2) $ 70,564 $25,000 --(1) $5,564
</TABLE>
II-3
<PAGE>
(1) Excludes perquisites less than $50,000, or 10% of salary plus bonus, if
less.
(2) Includes compensation received as President and Chief Executive Officer of
Citadel from August 5, 1994 to December 31, 1994.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following summarizes options granted in 1995(1).
<TABLE>
<CAPTION>
POTENTIALLY REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
------------------------------------------------------- ----------------------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE
OPTIONS/SARS EMPLOYEES IN OR EXPIRATION
NAME GRANTED FISCAL YEAR BASE PRICE DATE 5% 10%
- ----------------------------- ------------ ------------ ---------- ---------- -------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Steve Wesson 33,000 100% $2.69 2004 $55,925 $141,144
</TABLE>
(1) Although not granted until August 31, 1995, such options were provided for
in Mr. Wesson's employment agreement with Citadel, effective August 4, 1994.
AGGREGATED OPTION/SAR IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTION/SARS
SHARES ACQUIRED VALUE AT FY-END (#) AT FY-END (#)
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------------------- --------------- ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Steve Wesson N/A N/A 22,000/11,000 0(1)
</TABLE>
(1) None of the options held by Mr. Wesson are in-the-money.
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL AGREEMENTS
Citadel and Steve Wesson entered into an Executive Employment Agreement,
effective as of August 4, 1994 (the "Employment Agreement"). The term of the
Employment Agreement is two years and is automatically renewed for subsequent
one year terms unless either party gives notice of non-renewal. Mr. Wesson is
paid an annual salary of $175,000 and a minimum annual bonus of $50,000.
Pursuant to the Employment Agreement, Mr. Wesson was granted options in 1995 to
purchase 33,000 shares of Common Stock of Citadel.
On June 27, 1990 the Board authorized Citadel to enter into indemnity
agreements with its then current as well as future directors and officers. Since
that time, Citadel's officers and directors have entered such agreements. Under
these agreements, Citadel agrees to indemnify its officers and directors against
all expenses, liabilities and losses incurred in connection with any threatened,
pending or completed action, suit or proceeding, whether civil or criminal,
administrative or investigative, to which any such officer or director is a
party or is threatened to be made a party, in any manner, based upon, arising
from, relating to or by reason of the fact that he is, was, shall be or shall
have been an officer or director, employee, agent or fiduciary of Citadel. Each
of the current Citadel directors have entered into indemnity agreements with
Citadel. Similar agreements also exist between Citadel's subsidiaries and the
officers and directors of such subsidiaries.
II-4
<PAGE>
COMPENSATION COMMITTEE
From August 4, 1994 to August 31, 1995, Citadel dissolved the Compensation
Committee and the entire Board of Directors took responsibility for the
compensation decisions. On August 31, 1995, the Compensation Committee was
reinstituted to include Directors Cotter, Gould and Villasenor. It is currently
Citadel's policy that directors whose compensation is at issue are not involved
in the discussion of, or voting on, such compensation.
Mr. Wesson and Mr. Tompkins are the executive officers of Citadel. In
accordance with Citadel's policy on executive officer compensation, Mr. Wesson
and Mr. Tompkins are not involved in the discussion of, or voting on, their
respective compensation. Mr. Tompkins receives no compensation for his services
as an executive officer, but received director's fees. For the year ended
December 31, 1995, such fee aggregated $95,700, including a bonus of $60,000 for
services rendered to Citadel with respect to the Restructuring.
Mr. Tompkins is President and a Director of Craig Corporation and Reading
Corporation. Mr. Cotter is the Chairman of the Board of Craig Corporation and
Reading. Mr. Cotter is a member of the Reading Executive Committee, which serves
as the compensation committee for that company. Mr. Gould is a Director of Craig
and is Chairman of the Craig Compensation Committee.
II-5
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth the shares of Common Stock, Preferred Stock and
Voting Stock beneficially owned as of April 8, 1996 by (i) each director and
nominee, (ii) all directors and executive officers as a group, and (iii) each
person known to Citadel to be the beneficial owner of more than 5% of either the
Common Stock or the Preferred Stock. Except as noted, the indicated beneficial
owner of the shares has sole voting power and sole investment power.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL
BENEFICIAL OWNER OWNERSHIP PERCENT OF CLASS
- ------------------------- ---------------------- -------------------
<S> <C> <C>
James J. Cotter(1)(4) 4,424,371 shares of 49.9% of Common
Common Stock and Stock and 100% of
1,329,114 shares of Preferred Stock
Preferred Stock
Steve Wesson(4) 22,000 shares of *
Common Stock(2)
Alfred Villasenor, Jr.(4) 900 shares of *
Common Stock
S. Craig Tompkins(4) -- --
Ronald I. Simon(4)
William D. Gould(4)
Craig Corporation(1)(4) 4,424,371 shares of 49.9% of Common
Common Stock and Stock and 100% of
1,329,114 shares of Preferred Stock
Preferred Stock
Reading Corporation (1) 1,564,473 shares of 26% of Common Stock
30 South Fifteenth Street Common Stock and 21.3% of Voting
Ste. 1300 Stock
Philadelphia, PA 19102-4813
Lawndale Capital Management,
Inc., 396,600 shares of 6.6% of Common Stock
Andrew E. Shapiro, Common Stock(3) and 5.4% of Voting
Diamond A Partners, L.P., and Stock(3)
Diamond A Investors, L.P.
One Sansome Street, Suite 3900
San Francisco, California
94104(3)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ----------------------------- ------------------------ --------------------
<S> <C> <C>
John Winfield(5) 342,200 shares of 5.7% of the Common
2121 Avenue of the Stars, Common Stock Stock and 4.7%
Suite 2020 of Voting Stock(3)
Los Angeles, CA 90067
All directors and executive 4,447,271 shares of 50% of Common Stock
officers as a Group Common Stock and and 100% Preferred
(5 persons)(1) 1,329,114 shares of Stock
Preferred Stock
</TABLE>
(1) Mr. Cotter is the Chairman of Craig and Reading, and a principal stockholder
of Craig. Craig, in turn, owns approximately 49.3% of the Common Stock of
Reading. Collectively, Mr. Cotter and Craig own approximately 50.8% of the
Common Stock of Reading. Craig owns directly 1,329,114 shares of Preferred
Stock representing 18.1% of the currently outstanding voting securities of
Citadel and a warrant (the "Warrant") to purchase 666,000 shares of Common
Stock at $3.00 per share. Reading owns directly 1,564,473 shares of Common
Stock and has an option (the "Option"), not currently exercisable, to
acquire from Craig the Preferred Stock and the Warrant. These securities
have been listed as beneficially owned by Mr. Cotter and Craig due to the
inter-relationships between Mr. Cotter, Craig and Reading. The Preferred
Stock and the Common Stock underlying the Option have not been listed as
beneficially owned by Reading, as the Option is not currently exercisable.
The Common Shares underlying the Warrant (representing 666,000 shares) have
been listed as beneficially owned by Mr. Cotter and Craig even though the
exercise price is currently materially in excess of the current market value
of such Common Stock. Subject to certain limitations discussed elsewhere in
the Report on Form 10-K, the Preferred Stock is convertible by the holder
into Common Stock. The disclosures set forth with respect to Mr. Cotter and
Craig with respect to their respective beneficial ownership of Common Stock
for purposes of this Item have assumed conversion of the Preferred Stock
into 2,193,898 shares of Common Stock and exercise in full of the Warrants.
However, this conversion feature is subject to certain limitations,
including a formula exercise price which varies with the market price of
Common Stock and the right of the Company to redeem the Preferred Stock to
the extent that the conversion feature is exercised and the exercise price
would otherwise be less than $3.00 per share. Mr. Cotter disclaims
beneficial ownership of all Citadel securities owned by Craig and/or
Reading.
(2) Pursuant to the terms of an employment agreement, Citadel granted Mr.
Wesson options to purchase 33,000 shares of Common Stock. The option has
vested with respect to 22,000 shares, and will vest as to 11,000 shares on
August 4, 1996.
(3) Based on ownership assuming no conversion of the Preferred Stock or exercise
of the warrants.
(4) 550 S. Hope St., Ste. 1825, Los Angeles, California 90071
(5) Based upon a 13-D, Mr. Winfield has sole voting and investment power with
respect to 155,000 shares and shares voting and investment power for an
additional 155,000 shares with Intergroup Corporation, and also shares
investment power for an additional 32,200 shares with family members.
* Represents less than one percent of the outstanding shares of Citadel Common
Stock.
II-7
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Issuance of Stock to Craig Corporation
In October and November 1994, Citadel issued 74,300 shares of Common Stock
and 1,329,114 shares of 3% Cumulative Voting Convertible Preferred Stock to
Craig. James J. Cotter, Chairman of the Board of Citadel, was, at the time of
such issuances, and currently is, the Chairman of the Board and a major
stockholder of Craig. S. Craig Tompkins, Secretary/Treasurer and Principal
Accounting Officer of Citadel, was, at the time of such issuances, and currently
is, the President and a Director of Craig.
Settlement with Dillon and issuance of warrant to Craig Corporation
On April 3, 1995, Citadel, Craig and Roderick K. Dillon and certain of his
affiliates ("Dillon") entered into agreements to settle outstanding litigation
between such parties. At the time of such settlement, Dillon was the beneficial
owner of over 5% of the outstanding Common Stock of Citadel. In connection with
the settlement, Citadel issued to Craig a two-year warrant to purchase at $3.00
per share 666,000 shares of Common Stock of Citadel that had been to Citadel by
Dillon in connection with such settlement.
Transactions with Craig Corporation and Reading Company
Commencing in August 1995, Citadel began renting corporate office space
from Craig on a month to month basis and engaged Craig to provide certain
administrative services. During fiscal 1995, $45,000 was paid to Craig for such
rent and services. In addition, Citadel provided real estate consulting services
to Craig's affiliate, Reading, during fiscal 1995, for which Citadel was paid
$120,000.
II-8
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DESCRIPTION PG. NO
----------- ------
<S> <C>
Independent Auditor's Report...................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994...... F-3
Consolidated Statements of operations for Each of the Three
Years in the Period Ended December 31, 1995...................... F-4
Consolidated Statements of Stockholders' Equity for Each of the
Three Years in the Period Ended December 31, 1995................ F-5
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1995...................... F-6
Notes to Consolidated Financial Statements........................ F-8
</TABLE>
(a)(2) FINANCIAL STATEMENT SCHEDULE
Financial Statement Schedule III -- Real Estate
and Accumulated Depreciation............................... II-1
(b) REPORTS ON FORM 8-K
(i) The Company filed a Report on Form 8-K on April 4, 1995,
reporting on Item 5, "Other Information."
(ii) The Company filed a Report on Form 8-K on April 25, 1995,
reporting on Item 5, "Financial Statements"
(c) EXHIBITS
II-9
<PAGE>
EXHIBIT
NO. DESCRIPTION
- --- -----------
3.1 Certificate of Amendment of Restated Certificate of Incorporation of
Citadel Holding Corporation, (filed as Exhibit 3.1 to the Company's
Report on Form 10-K for the year-end December 31, 1994, and incorporated
herein by reference).
3.2 Restated By-laws of Citadel Holding Corporation (filed as Exhibit 3.2 to
the company's Form 10-K for the year ended December 31, 1988, and
incorporated herein by reference)
3.3 Amendment to By-laws of Citadel Holding Corporation (filed herewith).
3.4 Amendment to By-laws of Citadel Holding Corporation (filed herewith).
4.1 Certificate of Designation of the 3% Cumulative Voting Convertible
Preferred Stock of Citadel Holding Corporation (filed as Exhibit 3 to the
Company's Report on Form 8-K, filed on November 14, 1994, and
incorporated herein by reference)
10.1 Form of Investor Purchase Agreement between Fidelity Federal Bank and the
investors (filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994, and incorporated herein by
reference)
10.2 Settlement Agreement between Fidelity Federal Bank, Citadel Holding
Corporation and certain lenders, dated as of June 3, 1994 (the "Letter
Agreement")(filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994, and incorporated herein by
reference)
10.3 Amendment No. 1 to the Letter Agreement, dated as of June 30, 1994 (filed
as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994, and incorporated herein by reference)
10.4 Amendment No. 2 to Letter Agreement, dated as of July 28, 1994 (filed as
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994, and incorporated herein by reference)
10.5 Amendment No. 3 to Letter Agreement, dated as of August 3, 1994 (filed as
Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994, and incorporated herein by reference)
10.6 Mutual Release, dated as of August 4, 1994, between Fidelity Federal
Bank, Citadel Holding Corporation and certain lenders (filed as Exhibit
10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994, and incorporated herein by reference)
10.7 Mutual Release between Fidelity Federal Bank, Citadel Holding
Corporation, and the Chase Manhattan Bank, N.A., dated June 17, 1994
(filed as Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1994, and incorporated herein by reference)
10.8 Loan and REO Purchase Agreement (Primary), dated as of July 13, 1994,
between Fidelity Federal Bank and Colony Capital, Inc. (filed as Exhibit
10.8 to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994, and incorporated herein by reference)
10.9 Deposit Escrow Agreement, dated as of July 13, 1994, among Colony
Capital, Inc., Fidelity Federal Bank, and Morgan Guaranty Trust Company
of New York (filed as Exhibit 10.9 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994, and incorporated herein by
reference)
10.10 Real Estate Purchase Agreement, dated as of August 3, 1994, between
Fidelity Federal Bank and Citadel Realty, Inc. (filed as Exhibit 10.10 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1994, and incorporated herein by reference)
II-10
<PAGE>
EXHIBIT M
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 1996
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
CITADEL HOLDING CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 95-3885184
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
550 South Hope Street
Suite 1825 Los Angeles CA 90071
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 239-0540
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [x] No ______
-------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of August 13, 1996, there
were 6,003,924 shares of Common Stock, $0.01 par value per share, and 1,329,114
shares of Serial Preferred Stock, $0.01 par value per share outstanding.
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
INDEX
-----
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART 1. Financial Information
- ------
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996 (Unaudited)
and December 31, 1995.............................................. 3
Consolidated Statements of Operations for the Three Months
Ended June 30, 1996 and 1995 (Unaudited)........................... 4
Consolidated Statements of Cash Flows for Three Months Ended
June 30, 1996 and 1995 (Unaudited)................................. 5
Notes to Consolidated Financial Statements........................... 6
Item 2. Management's Discussion and Analysis of the Consolidated
Statements of Operations..................................... 12
PART 2. Other Information
- -------
Item 1. Legal Proceedings............................................ 18
Item 2. Changes in Securities........................................ 19
Item 3. Defaults Upon Senior Securities.............................. 19
Item 4. Submission of Matters to a Vote of Security Holders.......... 19
Item 5. Other Information............................................ 19
Item 6. Exhibits and Reports on Form 8-K............................. 20
Signatures................................................................ 21
</TABLE>
2
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------------------------
(In thousands of dollars)
<S> <C> <C>
ASSETS
- ----------------------------------------------
Assets
Cash and cash equivalents $ 19,168 $ 16,291
Properties held for sale 400 7,942
Rental properties, net 14,508 14,251
Other receivables 414 437
Other assets 898 894
-------- --------
Total assets $ 35,388 $ 39,815
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------
Liabilities:
Security deposits payable $ 164 $ 253
Accrued legal fees 202 313
Accounts payable and accrued liabilities 1,263 1,343
Deferred proceeds from bulk sales agreement -- 4,000
Mortgage notes payable 10,372 16,186
-------- --------
Total liabilities 12,001 22,095
Commitments and contingencies
Stockholders' Equity
Serial preferred stock, par value $.01,
5,000,000 shares authorized, 3% Cumulative
Voting Convertible, ($3.95 per share or
$5,250,000 stated value) 1,329,114 shares
issued and outstanding 13 13
Common stock, par value $.01, 20,000,000
shares authorized, 6,669,924 shares
issued and outstanding 67 67
Additional paid-in capital 65,080 65,197
Retained (deficit) (40,358) (46,142)
Cost of treasury shares, 666,000 shares (1,415) (1,415)
-------- --------
Total stockholders' equity 23,387 17,720
-------- --------
Total liabilities and stockholders' equity $ 35,388 $ 39,815
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
------------------ ----------------
(In thousands of dollars, except per share amounts)
<S> <C> <C> <C> <C>
Real Estate Operations:
Rental income $ 1,353 $ 1,264 $ 2,883 $ 2,301
Interest income 219 168 429 244
-------- -------- -------- --------
1,572 1,432 3,312 2,545
-------- ------ -------- --------
Real estate operating expenses 754 617 1,514 1,162
Depreciation and amortization 99 83 221 183
Interest expense 396 323 794 561
General and administrative expenses 255 339 472 764
-------- ------ -------- --------
Total expenses 1,504 1,362 3,001 2,670
-------- ------ -------- --------
Gain on sale of rental property 1,473 -- 1,473 1,541
-------- ------ -------- --------
Earnings from Real Estate Operations 1,541 70 1,784 1,416
Gain (loss) related to Investment in
Fidelity Federal Bank 4,000 (39) 4,000 (39)
-------- ------ -------- --------
Earnings before income taxes 5,541 31 5,784 1,377
Provision for income taxes -- -- -- --
-------- ------ -------- --------
Net earnings $ 5,541 $ 31 $ 5,784 $ 1,377
======== ====== ======== ========
Earnings per common and
common equivalent share $ 0.67 $ 0.00 $ 0.70 $ 0.16
======== ====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
------------------------
(In thousands of dollars)
<S> <C> <C>
Operating Activities
Net Earnings $ 5,784 $ 1,377
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain from Investment in Fidelity (4,000) --
Depreciation and amortization 221 183
Gain on sale of rental property (1,473) (1,541)
Amortization of deferred loan costs 99 33
Changes in operating assets and liabilities:
(Increase) decrease in other receivables 23 (39)
(Increase) decrease in other assets (103) 278
(Decrease) increase in security deposits (89) 17
(Decrease) increase in accrued liabilities (191) (1,396)
------- -------
Net cash provided by (used in) operating activities 271 (1,088)
Investing Activities
Proceeds from sale of Fidelity investment -- 11,938
Proceeds from sale of rental properties 8,941 8,778
Purchase of and additions to rental properties (418) (9,449)
------- -------
Net cash provided by (used in) investing activities 8,523 11,267
Financing Activities
Repayments of long-term borrowings (5,814) (4,698)
Capitalized financing costs -- (143)
Dividends paid on Preferred Stock (117) --
Long-term mortgage borrowings -- 6,104
------- -------
Net cash provided by (used in) financing activities (5,931) 1,263
Increase (decrease) in cash and cash equivalents 2,863 11,442
Cash and cash equivalents at beginning of period 16,291 4,805
------- -------
Cash and cash equivalents at end of period $19,154 $16,247
======= =======
</TABLE>
Supplemental Disclosures:
Interest paid during the six months ended June 30, 1996 and 1995 was
approximately $297,000 and $485,000, respectively.
See accompanying notes to consolidated financial statements.
5
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
Note 1 - Summary of Significant Accounting Policies
- ---------------------------------------------------
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of Citadel Holding
Corporation ("Citadel") and its wholly owned subsidiaries (collectively the
"Company"). In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments of a recurring nature
considered necessary for a fair presentation of its financial position as of
June 30, 1996 and December 31, 1995, and the results of operations and its cash
flows for the three months ended June 30, 1996 and 1995. The results of
operations for the three month period ended June 30, 1996 are not necessarily
indicative of the results of operations to be expected for the entire year.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, therefore, do not include
all information and footnotes required to be in conformity with generally
accepted accounting principles. The financial information provided herein,
including the information under the heading, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," is written with the
presumption that the users of the interim financial statements have read, or
have access to, the most recent Annual Report on Form 10-K which contains the
latest audited financial statements and notes thereto, together with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations as of December 31, 1995 and for the year then ended.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Included in cash and cash
equivalents at June 30, 1996 is approximately $18.2 million which is being held
in institutional money market mutual funds.
Earnings Per Share
- ------------------
Earnings per common and common equivalent share is based on 8,251,921 and
8,362,921 shares, the weighted average number of shares of common stock and
common stock equivalents outstanding during the three months ended June 30, 1996
and 1995, and 8,251,921 and 8,640,421 shares during the six months ended June
30, 1996 and 1995, respectively. The 3% Cumulative Voting Convertible Preferred
Stock, the outstanding Warrants and stock options are common stock equivalents.
The calculation of the weighted average shares of common stock outstanding
included the effect of shares assumed to be issued on the conversion of the
Preferred Stock as of the beginning of the periods being reported. The number
of shares assumed converted as of the January 1, 1996 and 1995 amounted to
2,247,997 and was calculated as of June 30, 1996 in accordance with the
Preferred Stock conversion terms described in Note 4.
6
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 2 - RENTAL PROPERTIES AND PROPERTIES HELD FOR SALE
- -------------------------------------------------------
The Company's rental properties at June 30, 1996 and December 31, 1995 consist
of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------------- -------------
(in thousands)
<S> <C> <C>
Land $ 4,699 $ 4,699
Building and improvements 10,259 9,855
------- -------
Total $14,958 $14,554
Less accumulated depreciation (450) (303)
------- -------
Rental properties, net $14,508 $14,251
------- -------
</TABLE>
At June 30, 1996 and December 31, 1995, rental properties consisted of one
apartment building and two office buildings. Properties held for sale
consisted of an undeveloped parcel of land amounting to $400,000 at June 30,
1996. In August 1996, such undeveloped property was sold for a purchase price,
net of expenses, approximating book value.
In May 1996, the Company sold an apartment rental property held for sale at
December 31, 1995 for approximately $8.94 million, net of expenses. The sale
resulted in a gain of approximately $1.473 million. Concurrently, with the
sale, the Company paid off the related mortgage note payable amounting to
approximately $5.7 million.
During the six months ended June 30, 1995, the Company sold an apartment
building and an office building which resulted in a gain of approximately
$1,541,000.
NOTE 3 - TAXES ON INCOME
- ------------------------
For the three months and six months ended June 30, 1996 and 1995, no provision
for income taxes was required due to the realization for financial statement
purposes of deferred tax assets previously reserved.
NOTE 4 - DEFERRED PROCEEDS FROM BULK SALES AGREEMENT
- ----------------------------------------------------
Under a Stockholders' Agreement, Citadel agreed to reimburse its previously
owned subsidiary, Fidelity Federal Bank ("Fidelity"), for certain losses
incurred by Fidelity in either curing breached representations or repurchasing
assets sold under a bulk sales agreement, subject to a $4 million aggregate
limit, in the event Fidelity were to be determined to have breached certain
representations made in connection with certain bulk sales of loans and
properties in 1994. As
7
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 4 - DEFERRED PROCEEDS FROM BULK SALES AGREEMENT, CONT'D.
- -------------------------------------------------------------
a significant number of material issues were unresolved with regards to the
Company's ultimate exposure with respect to the indemnity clause negotiated with
Fidelity, the Company included on the balance sheet, $4 million recorded as
"deferred proceeds from bulk sales agreement". As Fidelity has reached
settlement with the purchaser regarding such bulk sales claims and has agreed to
release the Company from the indemnity given to Fidelity, the Company has
reflected in the Statements of Operations for the three months ended June 30,
1996 a non-recurring gain related to its previous investment in Fidelity, which
resulted from the reversal of the $4 million deferral.
NOTE 5 - 3% CUMULATIVE VOTING CONVERTIBLE PREFERRED STOCK
- ---------------------------------------------------------
On November 10, 1994, the Company issued 1,329,114 shares of 3% Cumulative
Voting Convertible Preferred Stock ("Preferred Stock") at a stated value of
$3.95 per share or $5,250,000 to Craig Corporation, a stockholder affiliate. The
Preferred Stock carries a liquidation preference equal to its stated value and
bears a cumulative (noncompounded) annual dividend equal to 3% of the stated
value. Each share of the Preferred Stock entitles the holder to vote on all
matters submitted to a vote of the Company's stockholders on the basis of one
vote per share. The Preferred stock is convertible at the option of the holder
into common stock. The conversion ratio is one share of Preferred Stock for a
fraction of a share of common stock; the numerator of which is $3.95 per share
plus any unpaid dividends, and the denominator of which is the 60 business day
average of the closing price per share of the Company's common stock, as defined
("Market Price"). If the Market Price exceeds $5.00 per share the conversion
ratio will be calculated using a denominator of $5.00 per share and if the
Market Price is below $3.00, the Company can redeem the Preferred Stock tendered
for conversion. Except in the case of a tender at a conversion price of less
than $3.00 per share, the Company does not have the right to call for the
redemption of the Preferred Stock prior to November 1997. Thereafter, the
Company has the right, at its sole option, to redeem for an amount equal to the
sum of (1) stated value ($3.95 per share), (2) any unpaid dividends, and (3) a
premium to Stated Value equal to 9% per annum during the period from November
1994 to November 1998 and thereafter reducing at the rate of 1% per year. The
same formula pricing is also applicable to any redemption in connection with a
tender for conversion. If the redemption date is after November 2006 there is no
premium. The Market Price calculated in accordance with the terms of the
Preferred Stock provisions approximated $2.39 at June 30, 1996, which price,
would result in the Preferred Stock converting into approximately 2,247,997
shares of the Company's common stock.
Recorded as a reduction of paid in capital for the six months ended is $118,125,
representing cumulative dividends declared through March 31, 1996. As of June
30, 1996, undeclared cumulative dividends amounted to $39,375. Such amounts were
declared and paid subsequent to June 30, 1996.
8
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 6 - SUBSEQUENT EVENT
- -------------------------
On August 12, 1996, the Company, with the approval of the Board of Directors,
upon recommendation of a special committee of the independent directors of the
Board of Directors, entered into a letter of intent (the "Letter of Intent")
with its shareholder affiliates, Craig Corporation ("Craig") and Reading Company
("Reading"). Craig owns all the Company's outstanding shares of its 3%
Cumulative Voting Convertible Preferred Stock, stated value $3.95 per share,
(the "Preferred Stock") and a warrant to purchase 666,000 shares of the
Company's Common Stock at $3.00 per share. Reading, which is 52.5% owned by
Craig, owns 1,564,473 shares, or 26.1%, of the Company's Common Stock. The
Letter of Intent contemplates two transactions including (i) the formation of a
new Delaware holding company by Reading under the name of Reading Entertainment,
Inc. ("Reading Entertainment") and (ii) the contribution by Craig and Citadel to
Reading Entertainment of assets valued for purposes of the transaction at $88
million in exchange for equity securities of Reading Entertainment.
More specifically, the Letter of Intent contemplates that the Company will
contribute cash in the amount of $7 million to Reading Entertainment in exchange
for 70,000 shares of Reading Entertainment's Series A Voting Cumulative
Convertible Preferred Stock and an option to transfer all or substantially all
of its assets to Reading Entertainment for Reading Entertainment Common Stock
(the "Asset Put Option"). Craig will contribute assets, valued for purposes of
this transaction at $81 million, in exchange for 2,476,190 shares of Reading
Entertainment Common Stock and 550,000 shares of Reading Entertainment Series B
Voting Cumulative Convertible Preferred Stock. The assets to be transferred by
Craig consist of 693,650 shares of the Series B Preferred Stock of Stater Bros.
Holdings Inc., Craig's 50% membership interest in Reading International Cinemas
LLC, and 1,329,114 shares of the Company's Preferred Stock. Upon consummation
of the transactions, Craig and the Company will hold in the aggregate in excess
of 80% of the voting power of Reading Entertainment with Craig's holdings
representing approximately 77.4% of the voting power of Reading Entertainment
and the Company's holdings representing approximately 5% of such voting power.
Also upon completion of the transaction, Reading Entertainment will hold Company
securities representing approximately 39.5% of the outstanding voting power of
the Company's outstanding voting securities.
The Series A Preferred Stock to be issued to the Company will (i) bear a
cumulative dividend of 6.5%, payable quarterly and (ii) be convertible at any
time after 18 months from issuance (or earlier upon a change of control of
Reading Entertainment) into shares of Reading Entertainment Common Stock at a
conversion price of $11.50 per share.
The Asset Put Option is exercisable at any time after the closing of the
transaction through a date 30 days after Reading Entertainment's Form 10-K is
filed with respect to its year ended December 31, 1999, and entitles Citadel to
exchange all or substantially all of its assets, as defined, together with any
debt encumbering such assets, for shares of Reading Entertainment Common Stock
(the "Asset Put"). Through October 1997, the common stock to be issued with
9
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 6 - SUBSEQUENT EVENT, CONT'D.
- ----------------------------------
respect to the Asset Put will be exchanged at $11.75 per share and thereafter,
at 12.25 per share. However, if the average trading price of Reading
Entertainment Common Stock exceeds 130% of the then applicable exchange price
for more than 60 days, then the exchange price will thereafter be the fair
market of the Reading Entertainment Common Stock from time to time, unless the
Company exercises its Assets Put within 120 days of receipt of notice from
Reading Entertainment of the occurrence of such average trading price over such
60 day period.
The Company will have certain demand and piggy-back registration rights with
respect to Reading Entertainment Common Stock issuable on conversion of the
Series A Voting Cumulative Convertible Preferred Stock or on exercise of the
Asset Put. If Reading Entertainment fails to pay dividends on the Series A
Preferred Stock for four consecutive quarters after 18 months from issuance, the
Company will have the option to require Reading Entertainment to repurchase such
shares at their aggregate liquidation value plus accumulated dividends. The
Company and Reading Entertainment will each have a right to require redemption
of the Series A Preferred Stock in the event of a change of control of Reading
Entertainment and after five years from the date of issuance. Reading has
agreed to reimburse the Company for its out of pocket costs with respect to the
proposed transaction, up to a maximum of $280,000.
The Letter of Intent also provides that with respect to the Company's Preferred
Stock that except in the event of a change of control of the Company, if such
Preferred Stock is not tendered by Reading Entertainment for conversion to
common stock prior to the 15th day following the filing of the Company's Form
10-K for fiscal 1996, the right to convert will be suspended for a one year
period. In addition, the current redemption premium accrual rate will be
reduced to 3% from the date of the closing of the transactions forward.
The Letter of Intent is non-binding on each of the companies and consummation of
the proposed transaction is subject to certain conditions, including execution
of definitive agreements, approval of the Reading stockholders, delivery of
written fairness opinions from the companies' respective financial advisors and
certain other standard and customary conditions. No stockholder approval is
required with respect to the Company or Craig. However, in the event the
Company determines to exercise the Asset Put Option, approval of the Company's
stockholders may be required at such time, if the assets transferred were
determined to constitute substantially all the Company's assets. Craig, which
owns 52.5% of Reading's capital stock, has agreed to vote its shares in favor of
the transactions and, accordingly, the vote of no other Reading shareholder is
required for approval of the transactions.
Reading is currently involved in conventional multiplex cinema exhibition in
Puerto Rico through its Cine Vista Cinemas chain, is scheduled to close in the
immediate future the acquisition of the Angelika Film Center in New York (a
specialty art multiplex cinema and cafe complex), and is working with Craig,
10
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 6 - SUBSEQUENT EVENT, CONT'D.
- ----------------------------------
through Reading International Cinemas LLC, to develop, a new chain of multiplex
cinemas in Australia. Reading intends to expand the Angelika Film Center
concept to other cities, and is currently reviewing a number of potential
locations suitable for such complexes.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Citadel Holding Corporation, a Delaware corporation ("Citadel" and
collectively with its wholly owned subsidiaries, the "Company") has been engaged
primarily in the ownership and management of commercial and residential property
since August 1994. During this time period, the Company has considered
acquisitions outside of the ownership and management of commercial and
residential properties, and as a consequence of the real estate advisory and
consulting services provided on a fee basis to Reading, has gained substantial
familiarity with the cinema exhibition industry.
In May 1996, the Company's shareholder affiliates, Reading Company
("Reading") and Craig Corporation ("Craig") authorized their respective
managements to work together to develop one or more proposals for the
consolidation of the assets of these two companies, and potentially of Citadel,
into a single business unit to provide Reading with the capital funding
necessary to pursue its Beyond-the-Home entertainment business plan. In June
1996, the Company authorized its management to cooperate with such efforts and
formed a special committee of the Board composed of outside directors
unaffiliated with Craig and/or Reading to participate in the negotiation and
review of any such potential transaction (the "Independent Committee"). The
Independent Committee was authorized to retain, and did in fact retain, legal
counsel and investment banking advisors to assist it in this process.
On August 12, 1996, the Company, with the approval of the Board of Directors,
entered into a letter of intent (the "Letter of Intent") with Reading and Craig.
The Letter of Intent contemplates two transactions including (i) the formation
of a new Delaware holding company by Reading under the name of Reading
Entertainment, Inc. ("Reading Entertainment") and (ii) the contribution be Craig
and Citadel to Reading Entertainment of assets, valued for purposes of the
transaction at $88 million, in exchange for equity securities of Reading
Entertainment (the "Stock Transaction"). See Footnote 6 of the Notes to
Consolidated Financial Statements for more detailed information concerning the
provisions contemplated by the Letter of Intent. Reference is also made to the
Letter of Intent which is included as Exhibit 10.50 hereto.
If consummated, the transactions will provide the Company an opportunity to
make an initial investment in the Beyond-the-Home entertainment industry, and
the ability, thereafter, to review the implementation by Reading Entertainment
of its business plan and, if it approves of the progress made by Reading
Entertainment, to make a further investment in this industry through the
exercise of its Asset Put Option to exchange all or substantially all of its
assets for Reading Entertainment Common Stock. The Company has the right to
require Reading Entertainment to redeem the securities issued to it in the Stock
Transaction after five years or sooner if Reading Entertainment fails to pay
dividends on such securities for four quarters. Since this transaction does not
constitute a current sale of all or substantially all of the assets of the
Company, no shareholder approval is required or sought. However, exercise of
the Asset Put Option may require shareholder approval.
Craig owns all the Company's outstanding shares of its 3% Cumulative Voting
Convertible Preferred Stock, stated value $3.95 per share, (the "preferred
12
<PAGE>
Stock") and a warrant to acquire 666,000 shares of the Company's Common Stock at
$3.00 per share. Reading, which is 52.5% owned by Craig, owns 1,564,473 shares,
or 26.1%, of the Company's Common Stock. Together, these holdings represent
approximately 39.5% of the voting power of the Company's outstanding equity
securities.
Reading is currently involved in conventional multiplex cinema exhibition in
Puerto Rico through its Cine Vista Cinemas chain, is scheduled to close in the
immediate future the acquisition of the Angelika Film Center in New York (a
specialty art multiplex cinema and cafe complex), and is working with Craig,
through Reading International Cinemas LLC, to develop, a new chain of multiplex
cinemas in Australia. Reading intends to expand the Angelika Film Center
concept to other cities, and is currently reviewing a number of potential
locations suitable for such complexes.
The Letter of Intent contemplates that the Company will contribute cash in
the amount of $7 million to Reading Entertainment in exchange for 70,000 shares
of Reading Entertainment Series A Voting Cumulative Convertible Preferred Stock
and the Asset Put Option. Craig will contribute assets, valued for purposes of
this transaction at $81 million, in exchange for 2,476,190 shares of Reading
Entertainment Common Stock and 550,000 shares of Reading Entertainment Series B
Voting Cumulative Convertible Preferred Stock. The assets to be transferred by
Craig consist of 693,650 shares of the Series B Preferred Stock of Stater Bros.
Holdings Inc., Craig's 50% membership interest in Reading International Cinemas
LLC, and 1,329,114 shares of the Company's Preferred Stock. Upon consummation
of the transaction, Craig and the Company will hold in the aggregate in excess
of 80% of the voting power of Reading Entertainment with Craig's holdings
representing approximately 77.4% of the voting power of Reading Entertainment
and the Company's holdings representing approximately 5% of such voting power.
The Asset Put Option is exercisable at any time after the closing of the
transaction through a date 30 days after Reading Entertainment's Form 10-K is
filed with respect to its year ended December 31, 1999, and gives the Company
the right to exchange all or substantially all of its assets, as defined,
together with any debt encumbering such assets, for shares of Reading
Entertainment Common Stock (the "Asset Put"). Through October 1997, the common
stock to be issued with respect to the Asset Put will be exchanged at $11.75 per
share and thereafter, at $12.25 per share. However, if the average trading
price of Reading Entertainment Common Stock exceeds 130% of the then applicable
exchange price for more than 60 days, then the exchange price will thereafter be
the fair market of the Reading Entertainment Common Stock from time to time,
unless the Company exercises its Asset Put within 120 days of receipt of notice
from Reading Entertainment of the occurrence of such average trading price over
such 60 day period.
The Letter of Intent also provides that with respect to the Company's
Preferred Stock that except in the event of a change of control of the Company,
if such Preferred Stock is not tendered by Reading Entertainment for conversion
to common stock prior to the 15th day following the filing of the Company's Form
10-K for fiscal 1996, the rights to convert will be suspended for a one year
period. In addition, the current redemption premium accrual rate will be
reduced to 3% from the date of the closing of the transactions forward.
13
<PAGE>
RESULTS OF OPERATIONS
The following is a comparison of the results of operations for the three
months ended June 30, 1996 ("1996 Quarter") with the three months ended June
30, 1995 ("1995 Quarter") and a comparison of the results of operations for the
six months ended June 30, 1996 (the "1996 Six Months") with the six months ended
June 30, 1995 (the "1995 Six Months"). Due to the nature of the Company's
business activities, revenues and earnings have varied significantly reflecting
the operating results of its managed real estate and asset sales during those
periods.
The Company's net earnings for the 1996 Quarter were $5,541,000 or $0.67 per
common and common equivalent share, as compared to $31,000 or $0.00 per common
and common equivalent share for the 1995 Quarter. The net earnings for the 1996
Six Months was $5,784,000 or $0.70 per common and common equivalent share, as
compared to $1,377,000 or $0.16 per common and common equivalent share for the
1995 Six Months. Included in net earnings for the 1996 Quarter and 1996 Six
Months is (1) approximately $1,473,000 from the sale of an apartment building
and (2) non-recurring income amounting to $4,000,000 resulting from the
recognition for financial statement purposes of previously deferred proceeds
from the bulk sale of loans and properties by Citadel's previously owned
subsidiary, Fidelity Federal Bank ("Fidelity"). At the time of the bulk sale in
1994 by Fidelity, Citadel agreed to indemnify Fidelity, up to $4,000,000, with
respect to certain losses that might be incurred by Fidelity in the event of a
breach by Fidelity of certain environmental and structural representations made
by Fidelity to the purchaser of such loans and properties. Fidelity has reached
settlement with the purchaser regarding such bulk sale claims and has agreed to
release Citadel from the indemnity given to Fidelity. Included in the earnings
for the 1995 Six Months is approximately $1,541,000 from the sale of two
rental properties.
Rental income amounted to $1,353,000 for the 1996 Quarter as compared to
$1,264,000 for the 1995 and rental income amounted to $2,883,000 for the 1996
Six Months as compared to $2,301,000 for the 1995 Six Months. The increase in
the 1996 periods from the 1995 periods reflects the change in composition of the
Company's rental properties between the periods. As of June 30, 1996 rental
properties consisted of one apartment building and two commercial buildings as
compared to two apartment buildings and two commercial properties (one of which
was purchased in May 1995) as of June 30, 1995.
Real estate operating costs amounted to $754,000 in the 1996 Quarter as
compared to $617,000 in the 1995 Quarter. The increase in real estate operating
expenses to $1,514,000 in the 1996 Six Months as compared to $1,162,000 in the
1995 Six Months is principally due to the costs associated with operating an
office building located in Glandale, California, which was purchased in May
1995, as well as, an increase in deferred maintainance costs incurred at the
apartment building sold in May 1996.
Interest expense was $396,000 in the 1996 Quarter as compared to $323,000 in
the 1995 Quarter and amounted to $794,000 for the 1996 Six Months as compared to
$561,000 for the 1995 Six Months. The increase in interest expense is a result
of additional mortgage loans obtained during the periods reported and an
increase in overall interest rates. The Company obtained two mortgages
aggregating
14
<PAGE>
approximately $6.1 million since the 1995 Quarter. In May 1996, the Company upon
sale of a rental property for approximately $8.941 million, net of expenses,
repaid an outstanding mortgage on said property amounting to approximately $5.7
million.
General and administrative expenses decreased to $255,000 in the 1996 Quarter
as compared to $339,000 three months ended March 31, 1995. General and
administrative expenses amounted to $472,000 in the 1996 Six Months as compared
to $764,000 in the 1995 Six Months. Such 1996 Six Month decrease is attributable
to (1) a reduction in outside professional and legal costs and (2) a decrease in
directors fees related to a payment for past services authorized by the Board to
a director in the 1995 Six Months. In addition, the 1996 Six Months includes
approximately $85,000 in fee income for consulting services provided by
employees of the Company to Reading.
REAL ESTATE INTERESTS
- ---------------------
The table below provides an overview of the properties which constituted all
of the real properties owned by the Company at June 30, 1996.
<TABLE>
<CAPTION>
Units/ % Major Remaining
Address Type Sq. Feet Leased Tenants Lease Term
- ------------------ ---------- -------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
ARBOLEDA Office/ 178,000 99 American
1661 Camelback Rd. Restaurant Express Feb. 1999
Phoenix, Arizona Others 1-5 Yrs.
BRAND Office 89,000 65 Fidelity May 2005
600 N. Brand
Glendale, CA
PARTHENIA Apartment 27 89 None 6-12 months
21028 Parthenia 26,000
Canoga Park, CA
CLAREMONT Land 26 Acres -- -- --
</TABLE>
Arboleda, Phoenix
-----------------
At June 30, 1996, this property is substantially leased. American Express
Company, which occupies 58% (100,098 sq. ft.) of the property, has leased their
portion of the property through February 1999.
Brand, Glendale
---------------
The Glendale Building was at the time of aquisition, the headquarters
building of Fidelity Federal Bank, FSB (Fidelity). Citadel and Fidelity have
entered into a 10 year, full service gross lease for four of the six floors of
the Glendale Building. The rental rate for the first five years of the lease
term is $26,000 per month (including parking) for the ground floor and
15
<PAGE>
approximately $75,000 per month (including parking) for the fourth, fifth and
sixth floors. The lease provides for annual rental increases at a rate equal to
the lower of the increase in the Consumer Price Index or 3%. After the first
five years of the lease term, the rental rate for the ground floor will be
adjusted to the higher of the then current market rate or the prevailing rental
rate in the fifth year of the lease and the rental rate for the upper floors
will be adjusted to the higher of the then current market rate or $1.50 per
square feet increased by the annual rental rate increase applied during the
first five years of the lease as described in the preceding sentence. Fidelity
has the option to extend the lease of the ground floor for two consecutive five
year terms at a market rental rate and has the option to purchase the Glendale
Building at the market value at the expiration of the lease term, provided that
the Company then owns the building. Fidelity has subsequently relocated its
headquarters and is working with the Company to rent the entire building, other
than the ground floor which houses Fidelity's principal branch office, to a
single user.
Until April 1996, Public Storage occupied 30,879 square feet (two floors)
with a total rental of $53,900 per month ($1.75/sq. ft.). The Company is
actively seeking potential tenants, for these premises and the upper floor space
currently leased by Fidelity. While the Company has entered into lease
negotiations with a potential user for the entire building, exclusive of the
ground floor, no agreement has yet been entered into and the Company
can make no assurance that definitive agreements will be reached.
Claremont
---------
This property was sold in August 1996 at a price approximating book value.
FINANCING OF REAL ESTATE INTERESTS
The Company's acquisition of the Arboleda and Veselich properties (the
Veselich property was sold in May 1996) was 100% leveraged: $10.2 million was
obtained in the form of conventional mortgage loans from Fidelity against the
Arboleda and Veselich properties, while the balance was obtained through
drawdowns ($3.5 million) on an $8.2 million line of credit (the "Craig Line of
Credit") from Craig Corporation ("Craig").
The loan secured by the Arboleda property has a seven year term, amortizing
over 25 years, with an adjustable rate of interest tied to the six month LIBOR
rate plus 4.5% per annum, with an initial rate of 9.25% per annum. The rate on
this loan is currently 10%. With respect to the Veselich property, Fidelity
extended a ten year loan, amortizing over thirty years, at an adjustable rate of
interest tied to the one year Treasury rate plus approximately 3.7% per annum,
with an initial rate of 7.25%. Such loan was repaid upon the sale of the
property in May 1996.
The remainder of the purchase price of the Arboleda and Veselich properties
was drawn on the Craig Line of Credit. The Craig Line was initially committed
in the amount of $8.2 million, of which $6.2 million was immediately drawn down
to purchase the Arboleda and Veselich properties and an additional property that
16
<PAGE>
has since been sold. On November 10, 1994, the Company retired $5.25 million
of the Craig Line of Credit by issuance to Craig of 1,329,114 shares of the
Company's 3% Cumulative Voting Convertible Preferred Stock. The remaining
$950,000 of the Craig Line of Credit was retired in May 1995 and, accordingly,
the Company has no further funds available under the Craig Line of Credit.
With regard to the purchase of the Glendale Building, Fidelity extended a 5
year loan, amortizing over twenty years, at an adjustable rate of interest tied
to LIBOR plus 4.5% per annum, adjustable monthly, in the amount of $5.34
million. The Company paid Fidelity points of 1% plus normal closing costs. The
current interest rate is 10%.
On May 1, 1995, the Company obtained a loan of $765,000 on the Parthenia
property. The loan has a term of 30 years, with an adjustable rate of interest
at 2.95% over the 11th District cost of funds, currently amounting to 7.759%.
BUSINESS PLAN, CAPITAL RESOURCES AND LIQUIDITY
Cash and cash equivalents increased by approximately $2,863,000 from
$16,291,000 at December 31, 1995 to $19,154,000 at June 30, 1996. During the six
months ended June 30, 1996 the Company utilized cash proceeds of approximately
$118,000 to pay dividends on the outstanding Preferred Stock and $418,000 to
fund repairs at the Glendale Building. Net cash provided by investing activities
during the six months ended included approximately $8.941 million from the sale
of a rental property, of which approximately $5.7 million was used in repaying
the long-term mortgage on said property.
The Company expects that its sources of funds in the near term will include
cash on hand ($19.154 million at June 30, 1996), cash flow from the operations
of its real estate properties, consulting fees and proceeds from the sale of its
properties net of the mortgage loan repayments.
In the short term, uses of funds are expected to include (i) funding of the
repair of the earthquake damage to the parking structure of the Glendale
Building as well as possible leasehold improvements to be incurred in releasing
the Glendale Building, (ii) operating expenses, (iii) debt service under the
property mortgages, (iv) dividends declared, if any, under the Preferred Stock
and (v) funding of the anticipated $7 million capital investment in Reading
Entertainment. Management believes that the Company's sources of funds will be
sufficient to meet its cash flow requirements for the foreseeable future.
17
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1 - LEGAL PROCEEDINGS
- --------------------------
Roven Litigation
- ----------------
The Company, Hecco Ventures I and James J. Cotter are defendants in a civil
action filed in 1990 by Alfred Roven in the United States District Court for the
Central District of California. The complaint alleged fraud by the Company in a
proxy solicitation relating to the Company's 1987 annual meeting of stockholders
and breach of fiduciary duty. The complaint sought compensatory and punitive
damages in an amount alleged to exceed $40 million. The complaint grew out of
and was originally asserted as a counter claim in an action brought by the
Company against Roven to recover alleged short swing profits under Section 16(b)
of the Securities Exchange Act of 1934 (the "Section 16 Action"). The Company
believes it has meritorious defenses to these claims and has not reserved any
amounts with respect thereto. In October 1995, the Company, Hecco Ventures I and
James J. Cotter were granted summary judgement on all causes of action asserted
in the 1990 complaint in federal court. Roven has appealed that judgement.
In 1995, Roven filed a complaint in the California Superior Court against the
Company, Hecco Ventures I and James J. Cotter and, in addition, S. Craig
Tompkins and certain other persons, including the Company's outside counsel and
certain former directors of the Company (which directors are currently directors
of Craig and or Reading), alleging malicious prosecution in connection with the
Section 16 Action. The Company believes that it has meritorious defenses to
these claims, and has not reserved any amounts with respect thereto. Defense of
the action has been accepted by the Company's insurers. In August 1996, the Los
Angeles County Superior Court ordered summary judgement in favor of the Company
and all other defendants.
Fidelity Employee Claims
- ------------------------
Citadel is advised that, following the reduction of Citadel's interest in
Fidelity from a 100% ownership interest to an approximately 16% non-voting
equity interest, Fidelity significantly reduced staffing as part of its efforts
to reduce costs. Certain terminated employees have threatened, and in one case
filed, claims asserting that Citadel is in some manner liable for what is
asserted to be wrongful termination of these individuals by Fidelity. In light
of the fact that, among other things, these employees were never employees of
Citadel and were terminated only after Citadel's interest in Fidelity had been
reduced to an essentially non-voting 16% interest, the Company believes it has
no liability to these individuals.
One former Fidelity employee, William Strocco brought in a wrongful
termination and defamation action against Fidelity and Citadel, which was filed
in Los Angeles County Superior Court on March 9, 1995. The plaintiff in that
case is the former manager of Fidelity's REO Department who alleged that his
employment was terminated in violation of public policy and was a result of
breaches of his implied employment contract and the implied covenant of good
faith and fair
18
<PAGE>
dealing. The plaintiff alleged his termination was related to the fact that he
objected to various aspects of Fidelity's restructuring, including the selling
of REO properties in bulk sales, as not in the interests of Fidelity, and that
he asserted that the same was not fully disclosed to potential investors and to
the Office of Thrift Supervision. Strocco also sought damages for alleged
defamation and interference with contractual relationship. Citadel was named in
only one of five causes of action brought by Strocco, and was made a party
defendant only on the basis that Citadel allegedly conspired with and induced
Fidelity to breach its employment agreement with Strocco. In July 1996, the
Superior Court ordered summary judgement in favor of Citadel.
Securities Litigation
- ---------------------
In July 1995, Citadel was named as a defendant in a lawsuit alleging
violations of federal securities laws in connection with the offering of common
stock of Citadel's then wholly owned subsidiary, Fidelity, in 1994 as part of
the previously reported restructuring (the "Harbor Finance Litigation"). The
suit was filed by Harbor Finance Partners in an alleged class action complaint
in the United States District Court - Central District of California on July 28,
1995 and named as defendants Citadel, Fidelity, Richard M. Greenwood (Fidelity's
chief executive officer and Citadel's former chief executive officer), J.P.
Morgan Securities, Inc. and Deloitte & Touche LLP. The complaint, which has been
amended on three occasions in response to motions to dismiss brought by Fidelity
and Citadel, and which, as amended, has deleted as defendants, J.P. Morgan
Securities, Inc. and Deloitte & Touche LLP alleged that false and misleading
information was provided by the defendants in connection with Fidelity's stock
offering and the defendants knew and failed to disclose negative information
concerning Fidelity. Fidelity and Citadel filed a Motion to Dismiss, which was
granted with leave to amend on January 25, 1996. Plaintiff has now retained new
counsel and filed a new complaint alleging essentially the same claims, but
adding state securities law causes of action, and not naming J.P. Morgan
Securities or Deloitte & Touche LLP. On March 15, 1996 Fidelity and Citadel
filed a Motion to Dismiss the new complaint. Defense of the action has been
accepted by Fidelity under the terms of the Stockholders Agreement entered into
between Citadel and Fidelity as part of the restructuring of Citadel's interest
in Fidelity, and Citadel, to date, has not retained separate counsel with
respect to this litigation and is not incurring outside costs of defense. In
August 1996, the Federal District Court for the Central District of California
dismissed with prejudice all federal claims in the case against Citadel,
Fidelity and Greenwood and dismissed all state claims without prejudice to the
ability of the plaintiff to file such claims in a new state court action.
ITEM 2 - CHANGES IN SECURITIES
- ------------------------------
Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Not applicable.
ITEM 5 - OTHER INFORMATION
- --------------------------
Not applicable.
19
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
A. Exhibits
10.50 Letter of Intent dated August 12, 1996 by and between Reading
Company, Citadel Holding Corporation, Craig Corporation, Reading
Entertainment, Inc., Craig Management, Inc., and Citadel
Acquisition Corp., Inc.
27. Financial Data Schedule.
B. Reports on Form 8-K
None.
20
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITADEL HOLDING CORPORATION
---------------------------
By: /s/ Steve Wesson
-------------------------
President and Chief
Executive Officer
August 19, 1996
/s/ S. Craig Tompkins
-------------------------
Principal Accounting Officer
August 19, 1996
21
<PAGE>
EXHIBIT N
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Angelika Film Centers, Inc., New York City, New York
We have audited the accompanying balance sheet of Angelika Film Centers,
Inc. as of December 31, 1995 and the related statements of income, retained
earnings (accumulated deficit), and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Angelika Film Centers,
Inc. as of December 31, 1995, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
As discussed in Note 4 to the financial statements, the Company is involved
in litigation matters which could, if not successfully defended, result in a
declaration of bankruptcy. The Company and legal counsel cannot predict the
outcome of these matters. The financial statements include a provision for an
estimated cost that might result from the outcome of the landlord
indemnification matter. The Company cannot predict the outcome or range of
potential loss, if any, that might result from the other litigation matters.
No provision for any liability that may result from these other matters has
been made in the financial statements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial
statements, as of December 31, 1995, the Company had a working capital
deficiency. As discussed in Note 9, the Company has entered into negotiations
to sell its theater, which represents its only revenue producing asset.
Although the Company believes that it will recover the carrying value of such
asset, the ultimate proceeds from such sale cannot presently be determined.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include
adjustments that might result from the outcome of this uncertainty.
Miller and Company
July 1, 1996
N-1
<PAGE>
ANGELIKA FILM CENTERS, INC.
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
<TABLE>
<S> <C>
Current Assets
Cash............................................................. $ 114,698
Receivables...................................................... 32,129
Inventory........................................................ 11,419
Prepaid expenses................................................. 104,432
----------
Total Current Assets........................................... 262,678
Property and equipment, at cost, less accumulated depreciation of
$1,433,370 (Note 1)............................................... 2,987,119
Other Assets
Advances to affiliate (Note 2)................................... 259,376
Security deposits................................................ 16,080
Trademark........................................................ 6,189
----------
$3,531,442
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable................................................. $ 539,598
Film rental payable.............................................. 637,793
Accrued expenses and taxes....................................... 555,951
Deferred compensation (Note 5)................................... 76,301
Deferred revenues from prepaid tickets (Note 1).................. 36,954
Due to shareholders (Note 4)..................................... 1,142,417
----------
Total Current Liabilities...................................... 2,989,014
Deferred rent and rent tax (Note 5)................................ 529,370
Commitments (Note 5)
Shareholders' Equity
Common stock--no par value, authorized 200 shares; 113 shares
issued and outstanding.......................................... 500,000
Accumulated deficit.............................................. (486,942)
----------
13,058
----------
$3,531,442
==========
</TABLE>
See accompanying notes and auditors' report
N-2
<PAGE>
ANGELIKA FILM CENTERS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Revenues:
Theater admissions.............................................. $ 6,207,237
Cafe and concession............................................. 1,163,574
Rental and miscellaneous........................................ 72,415
-----------
7,443,226
-----------
Expenses:
Theater costs, including depreciation of $244,742............... 4,538,363
Cafe and concession costs....................................... 977,368
Selling, general and administrative............................. 908,697
Litigation costs................................................ 444,863
-----------
6,869,291
-----------
Income from operations............................................ 573,935
Interest expense.................................................. 84,095
-----------
Net income before income taxes.................................... 489,840
Less: New York City income tax.................................... 55,438
-----------
Net income........................................................ 434,402
-----------
Retained earnings--beginning of year as previously reported....... 3,930,961
Prior period adjustments:
Unrecorded expenses in prior years (Note 6)..................... (840,751)
Prior years dividends paid (Note 7)............................. (2,568,903)
-----------
Retained earnings--beginning of year as restated.................. 521,307
-----------
955,709
Less: Dividends paid (1,442,651)
-----------
Accumulated deficit--end of year.................................. $ (486,942)
===========
</TABLE>
See accompanying notes and auditors' report
N-3
<PAGE>
ANGELIKA FILM CENTERS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income....................................................... $ 434,402
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................... 244,742
Amortization................................................... 9,736
Changes in operating assets and liabilities:
(Increase) in receivables.................................... (23,553)
Decrease in inventory........................................ 11,646
(Increase) in prepaid expenses............................... (2,344)
Increase in accounts payable................................. 303,153
Increase in film rental payable.............................. 36,010
Increase in accrued expenses and taxes....................... 211,336
Increase in deferred compensation............................ 76,301
Deferred revenues received from prepaid tickets.............. 21,712
Increase in security deposits................................ (5,000)
Increase in deferred rent and rent tax....................... 45,970
-----------
Net Cash Provided by Operating Activities........................ 1,364,111
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayment of employee loans.................................... 5,300
Purchase of property and equipment............................. (40,501)
Decrease in advance to affiliate............................... 27,768
Investment in trademark........................................ (6,189)
-----------
Net Cash Used In Investing Activities............................ (13,622)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments of bank loan payable...................... (170,330)
Advances from shareholders..................................... 593,100
Repayments to shareholders..................................... (327,961)
Dividends paid................................................. (1,442,651)
-----------
Net Cash Used in Financing Activities............................ (1,347,842)
-----------
Net Increase in Cash............................................. 2,647
Cash, Beginning of Year.......................................... 112,051
-----------
Cash, End of Year................................................ $ 114,698
===========
</TABLE>
See accompanying notes and auditors' report
N-4
<PAGE>
ANGELIKA FILM CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
a. Company:
The Company was formed and commenced operations in New York City, New
York in 1989 as a motion picture exhibition theater. The theater derives
revenues from six motion picture screens, concession stand sales, cafe food
and beverages, and theater rentals.
b. Income Recognition:
Income from the theater box office, concession stand and cafe is
recognized daily. Prepaid ticket revenues are recognized when tickets are
used and theater rental revenues are recognized as the rental event occurs.
c. Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
d. Inventories:
Inventories are comprised of food and confection goods and are stated at
the lower of cost (first-in, first-out method) or net realizable value.
e. Property and Equipment:
Depreciation is provided for by the straight line and declining balance
methods over the estimated useful lives of the assets. Routine repairs and
maintenance are charged to operations as incurred and major repairs are
capitalized.
<TABLE>
<CAPTION>
DEPRECIATION
LIVES
------------
<S> <C> <C>
Theater and improvements............................ 10 - 39 yrs. $3,726,241
Equipment and furniture............................. 3 - 7 yrs. 694,248
----------
4,420,489
Less: Accumulated depreciation.................... 1,433,370
----------
$2,987,119
==========
</TABLE>
f. Income Taxes:
The provision for income taxes is computed using current New York City
tax rates including an alternative tax computation. For federal and state
income tax purposes, the Company, with the consent of its stockholders, has
elected to be treated as an "S" corporation. The stockholders will be
liable for individual income taxes on their respective shares of the
Company's taxable income. New York State and New York City have granted
permission to file a combined franchise and income tax return with an
affiliated corporation (Angelika Films, Inc.). The Company has made all
required tax payments.
g. Advertising:
Advertising costs are charged to operations when incurred. The amount
charged to expense for the year ended December 31, 1995 is $398,197.
See auditors' report
N-5
<PAGE>
ANGELIKA FILM CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. ADVANCES TO AFFILIATE
The Company has made advances to and on behalf of Naima Saleh (a relative of
the shareholders) which are in dispute and counterclaimed for a much larger
sum. See Litigation Note 4a.
3. GOING CONCERN
The Company's financial statements have been prepared on the basis of a
going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
a working capital deficiency of $2,726,336 at December 31, 1995 and a net
worth of $13,058. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.
4. LITIGATION
a. Naima Saleh, mother of Joseph Saleh, a shareholder and former officer of
the Company, commenced an action in the Supreme Court of the State of New York
seeking $6.5 million in connection with loans allegedly made by her to the
Company, and for the enforcement of a security interest in the Company's
assets allegedly given to her in March 1990. The Company has interposed
various affirmative defenses and counterclaims against Naima Saleh based upon
the books and records of the Company. Management has directed counsel to
vigorously contest the action and discovery is proceeding. In February 1996
the Supreme Court dismissed that portion of the Amended Complaint which sought
enforcement of the security interest on the grounds that the alleged security
interest was never authorized by the Company. At this time counsel for the
Company is not in a position to assess the likelihood of an unfavorable
outcome or the scope thereof.
b. The Company has indemnified the Theater's landlord against any loss it
may sustain resulting from an action commenced by 31-32 Gourmet Corp., another
tenant in the building in which the theater is located. 31-32 Gourmet claims
that the theater's cafe restaurant operation violates a restrictive covenant
contained in its lease. The action went to trial and the complaint was
dismissed; however, 31-32 Gourmet prosecuted an appeal resulting in a reversal
of the trial court's dismissal of the complaint and a new trial ordered. The
Company is pursuing settlement negotiations before the commencement of a new
trial and estimates that a settlement can be reached for the approximate sum
of $160,000 which has been accrued.
c. In October 1995 Joseph Saleh, a shareholder and the former president of
the Company, commenced an action seeking recovery of $1,760,000 allegedly owed
to him by the Company as repayment of loans. The Company's records reflect a
loan payable for approximately $730,000 less than is claimed by Mr. Saleh, but
the Company and other defendants have filed counterclaims against Mr. Saleh in
the aggregate amount of $4,000,000 claiming that Mr. Saleh, on a net basis, is
indebted to the Company. The counterclaims arise out of actions by Mr. Saleh
while he was the president and chief operating officer of the Company which
resulted in waste and mismanagement of the assets of the Company, and the
breach by Mr. Saleh of his fiduciary obligations to the Company which resulted
in damages. The outcome of this action and counterclaims cannot be predicted
at this time.
d. In January 1996, the Company commenced an action against Mr. Joseph Saleh
and others seeking injunctive relief in connection with an attempted physical
takeover of the theater premises. Mr. Saleh has counterclaimed that he is the
beneficial owner of all issued and outstanding shares of the Company. He
claims that at the time the other shareholders were given their shares, it was
with the understanding and agreement that Mr. Saleh would receive the return
of all shares in the event he was no longer the chief operating officer of the
Company. Discovery has not yet commenced in the action and as a result counsel
is unable to evaluate the likelihood of an unfavorable outcome.
See auditors' report
N-6
<PAGE>
ANGELIKA FILM CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS
a. Leased premises--theater:
The Company leases its theater under an operating lease expiring December
31, 2008. The basic rent is subject to certain guaranteed increases plus
adjustments for taxes, utilities and maintenance charges. A straight-line
rent expense of $467,740 under this lease has been charged to operations.
The minimum lease commitment as of December 31, 1995 under this long-term
lease is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1996........................................................... $ 424,603
1997........................................................... 424,603
1998........................................................... 451,144
1999........................................................... 488,294
2000........................................................... 488,294
Thereafter..................................................... 4,303,090
----------
$6,580,028
==========
</TABLE>
a. Leased premises--office and storage:
The Company obligated itself on December 15, 1995 to rent office space
commencing February 1, 1996 and ending on July 31, 1996 for a monthly
expense of $2,400. On January 2, 1996 the Company prepaid $1,500 for
records storage space for calendar year 1996.
b. Deferred compensation
On October 23, 1995 the Company entered into employment contracts with
three shareholders providing for an annual wage of $150,000 each. Due to
the cash flow needs of the Company, a portion of the payment of these
salaries has been deferred.
6. CORRECTION OF PRIOR YEARS EARNINGS
The beginning retained earnings has been adjusted for $840,751 of expenses
which should have been reflected in prior periods.
7. CORRECTION OF PRIOR YEARS ADVANCES TO AFFILIATE
The beginning retained earnings has been adjusted by $2,568,903 to correct
dividend distributions to shareholders in prior years erroneously recorded as
advances to an affiliated company.
8. INTEREST AND TAXES PAID
The Company made interest payments of $55,560 ($46,884 to an affiliate) and
tax payments of $47,744 ($47,119 to an affiliate) for the year ended December
31, 1995.
9. SUBSEQUENT EVENT
On July 1, 1996 the Company entered into a contract to sell its theater for
$12,500,000 subject to certain price reduction adjustments and the approval of
the purchaser's board of directors.
See auditors' report
N-7
<PAGE>
ANGELIKA FILM CENTERS, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Current Assets
Cash................................................. $ 288,667 $ 13,500
Receivables.......................................... 21,186 3,541
Inventory............................................ 11,419 11,400
Advances to officers................................. 61,886 37,240
Prepaid expenses..................................... 46,897 35,492
Due from affiliated company.......................... 137,000 -0-
---------- ----------
Total Current Assets............................... 567,055 101,173
Property and equipment, at cost, less accumulated
depreciation of $1,520,065 and and $1,310,999 (Note
1).................................................... 2,900,424 3,109,490
Other Assets
Advances to affiliate (Note 2)....................... 259,376 258,644
Security deposits.................................... 16,080 11,080
Trademark............................................ 6,189 -0-
---------- ----------
$3,749,124 $3,480,387
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable, accrued expenses and taxes......... $1,718,161 $1,352,696
Bank loan payable.................................... -0- 68,132
Deferred compensation (Note 4)....................... 103,767 -0-
Deferred revenues (Note 1)........................... 49,867 29,375
Due to shareholders (Note 3)......................... 1,062,827 1,088,487
---------- ----------
Total Current Liabilities.......................... 2,934,622 2,538,690
Deferred rent and rent tax (Note 4).................... 552,234 506,385
Commitments (Note 4)
Shareholders' Equity
Common Stock--no par value, authorized 200 shares;
113 shares issued and outstanding................... 500,000 500,000
Accumulated deficit.................................. (237,732) (64,688)
---------- ----------
262,268 435,312
---------- ----------
$3,749,124 $3,480,387
========== ==========
</TABLE>
See accompanying notes
N-8
<PAGE>
ANGELIKA FILM CENTERS, INC.
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS(ACCUMULATED DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Theater admissions.............................. $ 2,816,354 $ 2,976,154
Cafe and concession............................. 532,282 560,671
Rental and miscellaneous........................ 13,756 29,534
------------ ------------
3,362,392 3,566,359
------------ ------------
Expenses:
Theater costs, including depreciation of $86,695
and $122,371................................... 1,926,281 2,152,588
Cafe and concession costs....................... 448,917 419,313
Selling, general and administrative............. 473,576 522,164
Litigation costs................................ 199,753 99,690
------------ ------------
3,048,527 3,193,755
------------ ------------
Income from operations............................ 313,865 372,604
Interest expense.................................. 42,211 32,818
------------ ------------
Net income before income taxes.................... 271,654 339,786
Less: New York City income tax.................... 22,444 37,394
------------ ------------
Net income........................................ 249,210 302,392
------------ ------------
Retained earnings (accumulated deficit) beginning
of period as previously reported................. (486,942) 3,930,961
Prior period adjustments:
Unrecorded expenses in prior years (Note 5)..... -0- (840,751)
Prior years dividends paid (Note 6)............. -0- (2,568,903)
------------ ------------
Retained earnings--beginning of period as
restated......................................... (486,942) 521,307
------------ ------------
(237,732) 823,699
Less: Dividends paid.............................. -0- 888,387
------------ ------------
Accumulated deficit--end of period................ $ (237,732) $ (64,688)
============ ============
</TABLE>
See accompanying notes
N-9
<PAGE>
ANGELIKA FILM CENTERS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
-------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income......................................... $ 249,210 $ 302,392
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation..................................... 86,695 122,371
Amortization..................................... -0- 3,314
Changes in operating assets and liabilities:
Decrease in receivables........................ 10,943 5,035
Decrease in inventory.......................... -0- 11,665
Decrease in prepaid expenses................... 57,535 66,596
(Decrease) Increase in accounts payable,
accrued expenses and taxes.................... (15,181) 169,853
Increase in deferred compensation.............. 27,466 -0-
Increase deferred revenues..................... 12,913 14,133
Increase in deferred rent and rent tax......... 22,864 22,985
----------- ------------
Net Cash Provided by Operating Activities.......... 452,445 718,344
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayment of employee loans...................... -0- 5,300
Decrease in advance to affiliate................. -0- 28,500
Purchase of property and equipment............... -0- (40,501)
Advances to shareholders......................... (141,476) (37,240)
Decrease in intangible assets.................... -0- 6,422
Advances to affiliated company................... (137,000) -0-
----------- ------------
Net Cash Used in Investing Activities.............. (278,476) (37,519)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments of bank loan payable........ -0- (102,198)
Advances from shareholders....................... -0- 211,209
Dividends paid................................... -0- (888,387)
----------- ------------
Net Cash Used in Financing Activities.............. -0- (779,376)
----------- ------------
Net Increase (Decrease) in Cash.................... 173,969 (98,551)
Cash, beginning of period.......................... 114,698 112,051
----------- ------------
Cash, end of period................................ $ 288,667 $ 13,500
=========== ============
</TABLE>
See accompanying notes
N-10
<PAGE>
ANGELIKA FILM CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with generally
accepted accounting principles for interim information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments of a recurring nature considered
necessary for a fair presentation of the results for the interim periods
presented have been included. Operating results for the six months ended
June 30, 1996 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996.
a. Company:
The Company was formed and commenced operations in New York City, New
York in 1989 as a motion picture exhibition theater. The theater derives
revenues from six motion picture screens, concession stand sales, cafe food
and beverages, and theater rentals.
b. Income Recognition:
Income from the theater box office, concession stand and cafe is
recognized daily. Prepaid ticket revenues are recognized when tickets are
used and theater rental revenues are recognized as the rental event occurs.
c. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
d. Inventories:
Inventories are comprised of food and confection goods and are stated at
the lower of cost (first-in, first-out method) or net realizable value.
e. Property and equipment:
Depreciation is provided for by the straight line and declining balance
methods over the estimated useful lives of the assets. Routine repairs and
maintenance are charged to operations as incurred and major repairs are
capitalized.
<TABLE>
<CAPTION>
DEPRECIATION
LIVES JUNE 30,
------------ ---------------------
1996 1995
---------- ----------
<S> <C> <C> <C>
Theater and improvements................ 10 - 39 yrs. $3,726,241 $3,726,241
Equipment and furniture................. 3 - 7 yrs. 694,248 694,248
---------- ----------
4,420,489 4,420,489
Less: Accumulated depreciation.......... 1,520,065 1,310,999
---------- ----------
$2,900,424 $3,109,490
========== ==========
</TABLE>
N-11
<PAGE>
ANGELIKA FILM CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
f. Income taxes:
The provision for income taxes is computed using current New York City
tax rates including an alternative tax computation. For federal and state
income tax purposes, the Company, with the consent of its stockholders, has
elected to be treated as an "S" corporation. The stockholders will be
liable for individual income taxes on their respective shares of the
Company's taxable income. New York State and New York City have granted
permission to file a combined franchise and income tax return with an
affiliated corporation (Angelika Films, Inc.). The Company has made all
required tax payments.
g. Advertising:
Advertising costs are charged to operations when incurred. The amounts
charged to expense for the six months ended June 30, 1996 and 1995 are
$147,708 and $209,293 respectively.
2. ADVANCES TO AFFILIATE
The Company has made advances to and on behalf of Naima Saleh (a relative of
the shareholders) which are in dispute and counterclaimed for a much larger
sum. See Litigation Note 3a.
3. LITIGATION
a. Naima Saleh, mother of Joseph Saleh, a shareholder and former officer of
the Company, commenced an action in the Supreme Court of the State of New York
seeking $6.5 million in connection with loans allegedly made by her to the
Company, and for the enforcement of a security interest in the Company's
assets allegedly given to her in March, 1990. The Company has interposed
various affirmative defenses and counterclaims against Naima Saleh based upon
the books and records of the Company. Management has directed counsel to
vigorously contest the action and discovery is proceeding. In February, 1996
the Supreme Court dismissed that portion of the Amended Complaint which sought
enforcement of the security interest on the grounds that the alleged security
interest was never authorized by the Company. At this time counsel for the
Company is not in a position to assess the likelihood of an unfavorable
outcome or the scope thereof.
b. The Company has indemnified the theater's landlord against any loss it
may sustain resulting from an action commenced by 31-32 Gourmet Corp., another
tenant in the building in which the theater is located. 31-32 Gourmet Corp.
claims that the theater's cafe restaurant operation violates a restrictive
covenant contained in its lease. The action went to trial and the complaint
was dismissed; however, 31-32 Gourmet prosecuted an appeal resulting in a
reversal of the trial court's dismissal of the complaint and a new trial
ordered. The Company is pursuing settlement negotiations before the
commencement of a new trial and estimates that a settlement can be reached for
the approximate sum of $160,000 which has been accrued.
c. In October, 1995 Joseph Saleh, a shareholder and the former president of
the Company, commenced an action seeking recovery of $1,760,000 allegedly owed
to him by the Company as repayment of loans. The Company's records reflect a
loan payable for approximately $730,000 less than is claimed by Mr. Saleh, but
the Company and other defendants have filed counterclaims against Mr. Saleh in
the aggregate amount of $4,000,000 claiming that Mr. Saleh, on a net basis, is
indebted to the Company. The counterclaims arise out of actions by Mr. Saleh
while he was the president and chief operating officer of the Company which
resulted in waste and mismanagement of the assets of the Company, and the
breach by Mr. Saleh of his fiduciary obligations to the Company which resulted
in damages. The outcome of this action and counterclaims cannot be predicted
at this time.
d. In January, 1996, the Company commenced an action against Mr. Joseph
Saleh and others seeking injunctive relief in connection with an attempted
physical takeover of the theater premises. Mr. Saleh has
N-12
<PAGE>
ANGELIKA FILM CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
counterclaimed that he is the beneficial owner of all issued and outstanding
shares of the Company. He claims that at the time the other shareholders were
given their shares, it was with the understanding and agreement that Mr. Saleh
would receive the return of all shares in the event he was no longer the chief
operating officer of the Company. Discovery has not yet commenced in the
action and as a result counsel is unable to evaluate the likelihood of an
unfavorable outcome.
4. COMMITMENTS
a. Leased premises--theater:
The Company leases its theater under an operating lease expiring December
31, 2008. The basic rent is subject to certain guaranteed increases plus
adjustments for taxes, utilities and maintenance charges. A straight-line
rent expense of $233,870 under this lease has been charged to operations.
The minimum lease commitment as of December 31, 1995 under this long-term
lease is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1996........................................................... $ 424,603
1997........................................................... 424,603
1998........................................................... 451,144
1999........................................................... 488,294
2000........................................................... 488,294
Thereafter..................................................... 4,303,090
----------
$6,580,028
==========
</TABLE>
Leased premises--office and storage:
The Company obligated itself on December 15, 1995 to rent office space
commencing February 1, 1996 and ending on July 31, 1996 for a monthly
expense of $2,400. On January 2, 1996 the Company prepaid $1,500 for
records storage space for calendar year 1996.
b. Deferred compensation
On October 23, 1995 the Company entered into employment contracts with
three shareholders providing for an annual wage of $150,000 each. Due to
the cash flow needs of the Company, a portion of the payment of these
salaries has been deferred.
c. Sale of assets
On July 1, 1996 the Company entered into a contract to sell its theater
for $12,500,000 subject to certain price reduction adjustments and the
approval of the purchaser's board of directors.
5. CORRECTION OF PRIOR YEARS EARNINGS
The beginning retained earnings at December 31, 1994 has been adjusted for
$840,751 of expenses which should have been reflected in prior periods.
6. CORRECTION OF PRIOR YEARS ADVANCES TO AFFILIATE
The beginning retained earnings at December 31, 1994 has been adjusted by
$2,568,903 to correct dividend distributions to shareholders in prior years
erroneously recorded as advances to an affiliated company.
N-13
<PAGE>
ANGELIKA FILM CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
7. INTEREST AND TAXES PAID
The Company made interest and tax payments as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------
1996 1995
------ ------
<S> <C> <C>
Interest..................................................... 30,648 30,273
Taxes........................................................ 22,444 37,394
</TABLE>
N-14
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Reading Entertainment is incorporated in Delaware. Under the General
Corporation Law of the State of Delaware, a Delaware corporation has the
power, under specified circumstances, to indemnify its directors, officers,
employees, and agents in connection with actions, suits, or proceedings
brought against them by a third party or in the right of the corporation, by
reason of the fact that they were or are such directors, officers, employees,
or agents, against expenses incurred in any action, suit, or proceeding. The
Certificate of Incorporation of Reading Entertainment provides for
indemnification of directors and officers to the fullest extent permitted by
the General Corporation Law of the State of Delaware. Reference is made to the
Certificate of Incorporation of Reading Entertainment filed as an Exhibit
hereto.
The General Corporation Law of the State of Delaware provides that a
certificate of incorporation may contain a provision eliminating or limiting
the personal liability of a director to the corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director provided that
such provision shall not eliminate or limit the liability of a director (i)
for any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
(relating to liability for unauthorized acquisitions or redemptions of, or
dividends on, capital stock) of the General Corporation Law of the State of
Delaware, or (iv) for any transaction from which the director derived an
improper personal benefit. The Certificate of Incorporation of Reading
Entertainment contains such a provision.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger (incorporated by reference to Exhibit A
to the Proxy Statement/Prospectus included in this Registration
Statement)
3(i) Certificate of Incorporation of Reading Entertainment, as amended
(incorporated by reference to Exhibit B to the Proxy
Statement/Prospectus included in this Registration Statement)
3(ii) By-laws of Reading Entertainment (incorporated by reference to
Exhibit C to the Proxy Statement/Prospectus included in this
Registration Statement)
4.1 Certificate of Designation of Reading Entertainment (incorporated by
reference to Exhibit G to the Proxy Statement/Prospectus included in
this Registration Statement)
4.2 Restated Certificate of Incorporation of Stater (incorporated by
reference to Exhibit 3.1 to Stater's Registration Statement on Form
S-4, File No. 33-77296)
4.3 Certificate of Designation of Citadel (included in and incorporated
by reference to Exhibit F to the Proxy Statement/Prospectus included
in this Registration Statement)
5.1 Opinion of Duane, Morris & Heckscher
8.1 Tax opinion of Duane, Morris & Heckscher
10.1 Reading Company 1982 Non-Qualified Stock Option Plan, as Amended.
(Incorporated by reference to Exhibit 4(b) to Reading Company's
Registration Statement No. 2-83039, as amended.)
10.2 Reading Company 1982 Incentive Stock Option Plan, as Amended.
(Incorporated by reference to Exhibit 4(a) to Reading Company's
Registration Statement No. 2-83039, as amended.)
10.3 Reading Company 1992 Non-Qualified Stock Option Plan. (Incorporated
by reference to Exhibit 4(B) to Reading Company's Registration
Statement No. 33-57222, as amended.)
10.4 Executive Sharing Agreement by and between Reading Cinemas, Inc. and
City Cinemas Corp. dated as of November 1, 1993. (Incorporated by
reference to Exhibit 10.1 to Reading Company's Annual Report on Form
10-K for the year ended December 31, 1993.)
</TABLE>
II-1
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<TABLE>
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10.5 Lease Agreement between Plaza Las Americas, Inc. and Wometco de Puerto
Rico, Inc. dated as of August 24, 1979, as amended. (Incorporated by
reference to Exhibit 10.5 to Reading Company's Annual Report on Form
10-K for the year ended December 31, 1994.)
10.6 Lease Agreement between TJAC (Hatillo), S.E. and Theater Acquisitions
of Puerto Rico, Inc. dated as of May 11, 1992. (Incorporated by
reference to Exhibit 10.6 to Reading Company's Annual Report on Form
10-K for the year ended December 31, 1994.)
10.7 Agreement of Lease between Cinema Centro, S.E. and Theater
Acquisitions of Puerto Rico, Inc. dated as of May 16, 1994.
(Incorporated by reference to Exhibit 10.7 to Reading Company's Annual
Report on Form 10-K for the year ended December 31, 1994.)
10.8 Memorandum of Understanding by and between Reading Company and Robert
Kory dated May 19, 1994. (Incorporated by reference to Exhibit 10.8 to
Reading Company's Annual Report on Form 10-K for the year ended
December 31, 1994.)
10.9 Lease Agreement between Palma Real Associates, S.E. and Theater
Acquisitions of Puerto Rico, Inc. dated as of July 13, 1994.
(Incorporated by reference to Exhibit 10.9 to Reading Company's Annual
Report on Form 10-K for the year ended December 31, 1995.)
10.10 The First Amendment dated May 10, 1995 between Palma Real Associates,
S.E. and Reading Cinemas of Puerto Rico, Inc. (successor by merger to
Theater Acquisitions of Puerto Rico, Inc.) to the Lease Agreement
between Palma Real Associates, S.E. and Theater Acquisitions of Puerto
Rico, Inc. dated as of July 13, 1994. (Incorporated by reference to
Exhibit 10.10 to Reading Company's Annual Report on Form 10-K for the
year ended December 31, 1995.)
10.11 Credit Agreement by and between Reading Cinemas of Puerto Rico, Inc.,
and Citibank, N.A., as administrative agent for the Lenders thereunder
dated as of December 20, 1995. (Incorporated by reference to Exhibit
10.11 to Reading Company's Annual Report on Form 10-K for the year
ended December 31, 1995.)
10.12 The First Amendment dated February 7, 1996 to the Credit Agreement by
and between Reading Cinemas of Puerto Rico, Inc., and Citibank, N.A.,
as administrative agent for the Lenders thereunder dated as of
December 20, 1995. (Incorporated by reference to Exhibit 10.12 to
Reading Company's Annual Report on Form 10-K for the year ended
December 31, 1995.)
10.13 Limited Liability Company Agreement of Reading International Cinemas
LLC dated November 9, 1995. (Incorporated by reference to Exhibit
10.13 to Reading Company's Annual Report on Form 10-K for the year
ended December 31, 1995.)
10.14 RC Revocable Trust Agreement between Reading Investment Company, Inc.
and Craig Corporation and Craig Management, Inc. as trustee, dated
November 9, 1995. (Incorporated by reference to Exhibit 10.14 to
Reading Company's Annual Report on Form 10-K for the year ended
December 31, 1995.)
10.15 Lease Agreement between Mayaguez Shopping Center, S.E. and Reading
Cinemas of Puerto Rico, Inc. dated as of August 10, 1995.
(Incorporated by reference to Exhibit 10.15 to Reading Company's
Annual Report on Form 10-K for the year ended December 31, 1995.)
10.16 Contract of Sale of Real Estate between Brick & Pipe Industries LTD
and Burgundy Two Pty LTD dated October 10, 1995. (Incorporated by
reference to Exhibit 10.16 to Reading Company's Annual Report on Form
10-K for the year ended December 31, 1995.)
10.17 Contract of Sale of Real Estate between Royal Society for the
Prevention of Cruelty to Animals (Victoria) Incorporated and Burgundy
Two Pty LTD dated November 9, 1995. (Incorporated by reference to
Exhibit 10.17 to Reading Company's Annual Report on Form 10-K for the
year ended December 31, 1995.)
10.18 Stock Purchase and Sale Agreement dated as of March 30, 1996 by and
between Reading Holdings, Inc. and Craig Corporation. (Incorporated by
reference to Exhibit 10.18 to Reading Company's Annual Report on Form
10-K for the year ended December 31, 1995.)
</TABLE>
II-2
<PAGE>
10.19 Amended and Restated Capital Funding Agreement by and between Reading
Investment Company, Inc., Craig Corporation, Craig Management Inc.,
and Reading International Cinemas LLC. (Incorporated by reference to
Exhibit 10.19 to Reading Company's Annual Report on Form 10-K for the
year ended December 31, 1995.)
10.20 Service Deed between Australia Cinema Management Pty Limited and John
Rochester dated May 7, 1996. (Incorporated by reference to Exhibit
10.20 to Reading Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1996.)
10.21 Letter of intent, dated August 12, 1996, among Reading Company,
Citadel Holding Corporation, and Craig Corporation. (Incorporated by
reference to Exhibit 10.21 to Reading Company's Quarterly Report on
Form 10-Q for the period ended June 30, 1996.)
10.22 Exchange Agreement among Reading Company, Reading Entertainment Inc.,
Craig Corporation, Craig Management Inc., Citadel Holding Corporation,
and Citadel Acquisition Corp., Inc., including form of Asset Put and
Registration Rights Agreement (incorporated by reference to Exhibit F
to the Proxy Statement Prospectus included in this Registration
Statement)
10.23 Preferred Stock Purchase Agreement dated November 10, 1994, between
Citadel Holding Corporation and Craig Corporation (incorporated by
reference to Exhibit 2 to Citadel Holding Corporation's Report on Form
8-K dated November 14, 1994)
10.24 Option Agreement, dated September 3, 1993, among Stater Bros. Holdings
Inc., Craig Corporation, and Craig Management Inc. (Incorporated by
reference to Exhibit 10.5 to Stater Bros. Holdings Inc.'s Registration
Statement File No. 33-77296)
10.25 Purchase Agreement dated July 8, 1994 by and among Theater
Acquisitions, L.P., Theater Acquisitions of Puerto Rico, Inc., and
Reading Company. (Incorporated by reference to Exhibit 2(a) to Reading
Company's Quarterly Report on Form 10-Q for the period ended June 30,
1994.)
10.26 Letter Agreement dated August 9, 1994 by and among Theater
Acquisitions, L.P., Theater Acquisitions of Puerto Rico, Inc., and
Reading Company. (Incorporated by reference to Exhibit 2(b) to Reading
Company's Quarterly Report on Form 10-Q for the period ended June 30,
1994.)
10.27 The Sale Agreement dated as of July 1, 1996, by and among Reading
Investment Company, Inc., as Purchaser, AFCI, as Seller, and Houston
Cinema, Inc., with all Exhibits and Schedules omitted. (Incorporated
by reference to Exhibit 2(a) to Reading Company's Current Report on
Form 8-K dated August 27, 1996.)
10.28 Amendment to the Sale Agreement made and entered into as of July 27,
1996 by and among Reading Investment Company, Inc., AFCI and Houston
Cinema, Inc. (Incorporated by reference to Exhibit 2(b) to Reading
Company's Current Report on Form 8-K dated August 27, 1996.)
10.29 $2,000,000.00 Non-Negotiable Secured Promissory Note dated as of
August 27, 1996 (the "Holdback Note") by AFC, as Maker, to AFCI, as
Payee. (Incorporated by reference to Exhibit 2(c) to Reading Company's
Current Report on Form 8-K dated August 27, 1996.)
10.30 Pledge Agreement dated August 27, 1996 by and among AFCI, as Secured
Party, and AFC, as Debtor, concerning the cash security for the
Holdback Note. (Incorporated by reference to Exhibit 2(d) to Reading
Company's Current Report on Form 8-K dated August 27, 1996.)
10.31 The Agreement of Lease between Cable Building Associates and Houston
Cinema, Inc. dated March 4, 1988 together with Amendment of Lease
dated December 26, 1989.
10.32 Limited Liability Company Agreement between Angelika Cinemas, Inc. and
Sutton Hill Associates dated August 27, 1996.
10.33 Management Agreement dated as of August 27, 1996 between Angelika Film
Centers, LLC and City Cinemas Corporation.
21.1 List of Subsidiaries of Reading Entertainment
23.1 Consents of Duane, Morris & Heckscher (included in Exhibits 5.1 and
8.1)
23.2 Consent of Ernst & Young LLP (regarding Reading Company)
23.3 Consent of Ernst & Young LLP (regarding Stater Bros. Holdings Inc.)
23.4 Consent of Deloitte & Touche LLP
II-3
<PAGE>
<TABLE>
<C> <S>
23.5 Consent of Miller & Company
23.6 Consent of Berwind Financial Group, L.P.
24.1 Powers of Attorney (included on signature page)
28.1 Form of proxy card
</TABLE>
(b) The following financial statement schedules are included in the
Registration Statement:
<TABLE>
<CAPTION>
READING COMPANY
---------------
<C> <S>
Schedule II --Valuation and Qualifying Accounts (included in Exhibit
H to the Proxy Statement/Prospectus included in this
Registration Statement).
<CAPTION>
CITADEL HOLDING CORPORATION
---------------------------
<C> <S>
Schedule III --Real Estate and Accumulated Depreciation (included in
Exhibit L to the Proxy Statement/Prospectus included in
this Registration Statement).
</TABLE>
All other financial statements and schedules for which provision is made in
the applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding paragraph, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the Registration Statement when it became effective.
II-4
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF PHILADELPHIA, STATE OF
PENNSYLVANIA ON OCTOBER 2, 1996.
Reading Entertainment, Inc.
/s/ S. Craig Tompkins
By: _________________________________
S. CRAIG TOMPKINS, PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
KNOW ALL MEN BY THESE PRESENTS THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS JAMES J. COTTER, S. CRAIG TOMPKINS, AND JAMES
A. WUNDERLE, AND EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT,
WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, TO ACT, WITHOUT THE OTHER,
FOR HIM AND IN HIS NAME, PLACE, AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN
ANY OR ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THE
REGISTRATION STATEMENT ON FORM S-4 OF READING ENTERTAINMENT, INC. RELATING TO
THE OFFERING OF SHARES OF ITS COMMON STOCK, AND TO FILE THE SAME, WITH ALL
EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE
SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT AND
AGENTS FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING
REQUISITE AND NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS FULL TO ALL
INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND
CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS, OR ANY OF THEM, THEIR
SUBSTITUTE OR SUBSTITUTES MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE
HEREOF.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ James J. Cotter Chairman of the October 2, 1996
- ------------------------------------- Board (Principal
JAMES J. COTTER Executive Officer)
and Director
/s/ S. Craig Tompkins President and October 2, 1996
- ------------------------------------- Director
S. CRAIG TOMPKINS
/s/ James A. Wunderle Executive Vice October 2, 1996
- ------------------------------------- President, Chief
JAMES A. WUNDERLE Financial Officer,
and Treasurer
(Principal
Financial Officer)
/s/ Eileen M. Mahady Controller October 2, 1996
- ------------------------------------- (Principal
EILEEN M. MAHADY Accounting Officer)
II-5
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Edward L. Kane Director October 2, 1996
- -------------------------------------
EDWARD L. KANE
/s/ John W. Sullivan Director October 2, 1996
- -------------------------------------
JOHN W. SULLIVAN
/s/ Albert J. Tahmoush Director October 2, 1996
- -------------------------------------
ALBERT J. TAHMOUSH
/s/ Gregory R. Brundage Director October 2, 1996
- -------------------------------------
GREGORY R. BRUNDAGE
II-6
<PAGE>
[LETTERHEAD OF DUANE, MORRIS & HECKSCHER APPEARS HERE]
Exhibit 5.1
October 2, 1996
Reading Entertainment, Inc.
One Penn Square West, Suite 1300
Philadelphia, PA 19102-4813
Dear Sirs:
You have requested our opinion in connection with the Registration
Statement on Form S-4 (the "Registration Statement") filed by Reading
Entertainment, Inc., a Delaware corporation (the "Company"), with the Securities
and Exchange Commission pursuant to the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations promulgated thereunder (the "Rules"). The
Registration Statement relates to 4,973,174 shares (the "Shares") of the
Company's Common Stock to be issued in connection with the proposed merger (the
"Merger") of Reading Merger Co., a Delaware corporation and wholly-owned
subsidiary of the Company, into Reading Company, a Pennsylvania corporation
("Reading"), pursuant an Agreement and Plan of Merger dated September 4, 1996
(the "Merger Agreement").
We have examined such records and documents and have made such examination
of law as we considered necessary to form a basis for the opinion set forth
herein. In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, and the
conformity with the originals of all documents submitted to us as copies
thereof. We have further assumed without investigation that each share of the
Common Stock and Class A Common Stock of Reading outstanding on the date of the
effectiveness of the Merger will be validly issued, fully paid, and non-
assessable.
Based on the above, we are of the opinion that the Shares, when issued in
accordance with the Merger Agreement and as contemplated by the Registration
Statement, will be validly issued, fully paid, and non-assessable.
The foregoing opinion is limited to the General Corporation Law of the
State of Delaware. We express no opinion on the effect of (i) any other laws or
the laws of any other state or
2
<PAGE>
Reading Entertainment, Inc.
October 2, 1996
Page 2
jurisdiction, including federal laws regulating securities and other federal
laws or regulations or the rules and regulations of stock exchanges or of any
other regulatory body, or (ii) any equitable considerations, as to which we have
no information.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Registration Statement. In so doing, we do not admit that we are
in the category of persons whose consent is required under Section 7 of the Act
or under the Rules.
Very truly yours,
/s/ DUANE, MORRIS & HECKSCHER
3
<PAGE>
[LETTERHEAD OF DUANE, MORRIS & HECKSCHER APPEARS HERE]
Exhibit 8.1
October 2, 1996
Reading Entertainment, Inc.
One Penn Square West, Suite 1300
Philadelphia, PA 19102-4813
Gentlemen:
You have requested our opinion concerning certain federal income tax
consequences relating to the proposed merger (the "Merger") of Reading Merger
Co., a wholly-owned subsidiary of Reading Entertainment, Inc. (the "Company"),
with Reading Company, pursuant to an Agreement and Plan of Merger dated
September 4, 1996. In rendering this opinion, we have relied upon
representations made to us by you and the facts set forth in the Company's
Registration Statement on Form S-4 relating to the Merger (the "Registration
Statement"), filed with the Securities and Exchange Commission (the
"Commission"), and the exhibits thereto.
Our opinion is based on the provisions of the Internal Revenue Code of
1986 as amended to the date of this letter, regulations under such Code,
judicial authority, and current administrative rulings and practice, all as of
the date of this letter. Future legislative, judicial, or administrative
changes or interpretations, which may or may not be retroactive, could affect
the opinion set forth herein.
Based on the foregoing, in our opinion, the discussion under the
heading "Reorganization Proposal -- Certain Federal Income Tax Consequences" and
in the first two paragraphs under the heading "Stock Proposal -- Tax and
Accounting Treatment" in the Proxy Statement and Prospectus contained in the
Registration Statement, although necessarily general in many respects,
accurately sets forth, in summary form, the matters discussed therein.
<PAGE>
Reading Entertainment, Inc.
October 2, 1996
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In so doing, we do not admit that we are in the category
of persons whose consent is required under Section 7 of the Securities Act of
1933, as amended, or the rules and regulations of the Commission thereunder.
Very truly yours,
/s/ DUANE, MORRIS & HECKSCHER
<PAGE>
Exhibit 10.31
STANDARD FORM OF STORE LEASE
The Real Estate Board of New York, Inc.
AGREEMENT OF LEASE, made as of this 4th day of March 1988, between CABLE
BUILDING ASSOCIATES, having an office at c/o H.D. Carlisle Construction Corp.,
58-47 Francis Lewis Boulevard, Bayside, New York 11364, party of the first part,
hereinafter referred to as Owner, and HOUSTON CINEMA, INC., a New York
corporation, having an office at c/o Angelika Films, 1974 Broadway, New York,
New York 10023, party of the second part, hereinafter referred to as Tenant.
WITNESSETH: Owner hereby leases to Tenant and Tenant hereby hires from Owner
certain premises located on the ground floor and basement levels, substantially
as shown by outlining on the floor plans annexed hereto and made a part hereof
as Exhibit "A" in the building known as 611 Broadway (the "Building" or
"building") in the Borough of Manhattan, City of New York, for the term set
forth in Article 40 of the Rider annexed hereto and made a part hereof, at an
annual rental rate as set forth on Schedule "A" annexed hereto and made a part
hereof (hereinafter referred to as "Fixed Rent") and additional charges
(hereinafter referred to as "Additional Charges") consisting of all other sums
of money as shall become due from and payable by Tenant to Owner hereunder which
Tenant agrees to pay in lawful money of the United States which shall be legal
tender in payment of all debts and dues, public and private, at the time of
payment, in monthly installments in advance on the first day of each month
during said term, at the office of Owner or such other place as Owner may
designate, without any set off or deduction whatsoever, except that Tenant shall
pay the first monthly installment(s) on the execution hereof.
The parties hereto, for themselves, their heirs, distributees, executors,
administrators, legal representatives, successors and assigns, hereby covenant
as follows:
Rent:
1. Tenant shall pay the rent as above and as hereinafter provided.
Occupancy:
2. Tenant shall use and occupy demised premises in accordance with Article
41 of the Rider annexed hereto and made a
<PAGE>
part hereof and for no other purpose. Tenant shall at all times conduct its
business in a high grade and reputable manner, shall not violate Article 37
hereof, and shall keep show windows and signs in a neat and clean condition.
Alterations:
3. Tenant shall make no changes in or to the demised premises of any
nature without Owner's prior written consent. Subject to the prior written
consent of Owner, and the revisions of this article, Tenant at Tenant's expense,
may make alterations, installations, additions or improvements which are non-
structural and which do not affect utility services or plumbing and electrical
lines, in or to the interior of the demised premises by using contractors or
mechanics first approved by Owner. Tenant shall, before making any alterations,
additions, installations or improvements, at its expense, obtain all permits,
approvals and certificates required by any governmental or quasi-governmental
bodies and upon completion certificates of final approval thereof and shall
deliver promptly duplicates of all such permits, approvals and certificates to
Owner and Tenant agrees to carry and will cause Tenant's contractors and sub-
contractors to carry such workman's compensation, general liability, personal
and property damage insurance as Owner may reasonable require. If any
mechanic's lien is filed against the demised premises, or the building of which
the same forms a part, for work claimed to have done for, or materials furnished
to Tenant, whether or not done pursuant to this article, the same shall be
discharged by Tenant within thirty (30) days after notice thereof at Tenant's
expense, by filing the bond required by law. All fixtures and all paneling,
partitions, railings and like installations, installed in the premises at any
time, either by Tenant or by Owner in Tenant's , shall, upon
installation, become the property of Owner and shall remain upon and be
surrendered with the demised premises. Notwithstanding the foregoing, Tenant
shall have the right to remove built-in movie theatre seats from the premises
prior to the date fixed as the termination of this lease. Should Tenant fail to
remove such seats as aforesaid, same shall become the property of Owner and
shall remain upon and be surrendered with the demised premises. Nothing in this
article shall be construed to give Owner title to or to prevent Tenant's removal
of trade fixtures, moveable office furniture and equipment, but upon removal of
any such from the premises or upon removal of other installations as may be
required by Owner, Tenant shall immediately and at his expense, repair and
restore the premises to the condition existing prior to installation and repair
any damage to the demised premises or the building due to such removal. All
property permitted or required to be removed by Tenant at the end of the term
remaining in the premises after
<PAGE>
Tenant's removal shall be deemed abandoned and may, at the election of Owner,
either be retained as Owner's property or may be removed from the premises by
Owner at Tenant's expense.
Repairs:
4. Owner shall maintain and repair the public portions of the building,
both exterior and interior (i being acknowledged that the public portions of the
building include the structure and facade of the building and the building
systems), except, however, that the foregoing obligation to maintain and repair
shall not apply in any respect to any public portions of the building, to the
extent same (a) constitute or relate to Tenant's Work (as hereinafter defined),
or (b) become subject to maintain or repair by reason of Tenant's acts or
omissions. Except tat if Owner allows Tenant to erect on the outside of the
building a sign or signs, or a hoist, lift or sidewalk elevator for the
exclusive use of Tenant, Tenant shall maintain such exterior installations in
good appearance and shall cause the same to be operated in a good and
workmanlike manner and shall make all repairs thereto necessary to keep same in
good order and condition at Tenant's own cost and expense, and shall cause the
same to be covered by the Insurance provided for hereafter in Article 8. Tenant
shall, throughout the term of this lease, take good care of the demised premises
and the fixtures and appurtenances therein, and the sidewalks adjacent thereto,
and at its sole cost and expense, make all non-structural repairs thereto at and
when needed to preserve them in good working order and condition, reasonable
wear and tear, obsolescence and damage from the elements, fire or other
casualty, excepted. If the demised premises be or become infested with vermin,
Tenant shall at Tenant's expense cause the same to be exterminated from time to
time to the satisfaction of Owner. Except as specifically provided in Article 9
or elsewhere in this lease, there shall be no allowance to the Tenant for the
diminution of rental value and no liability on the part of Owner by reason of
inconvenience, annoyance or injury to business arising from Owner, Tenant or
others making or failing to make any repairs, alterations, additions or
improvements in or to any portion of the building or the demised premises or in
and to the fixtures, appurtenances or equipment thereof. The provisions of this
article 4 with respect to the making of repairs shall not apply in the case of
fire or other casualty which are dealt with in article 9 hereof.
Window Cleaning:
5. Tenant will not clean nor require, permit, suffer or allow any window
in the demised premises to be cleaned from the outside in violation of Section
202 of the New York State Labor Law or any other applicable law or of the Rules
of the Board of
<PAGE>
Standards and Appeals, or of any other Board or body having or asserting
jurisdiction.
Requirements of Law, Fire Insurance:
6. Prior to the commencement of the lease term, if Tenant is then in
possession, and at all times thereafter, Tenant at Tenant's sole cost and
expense, shall promptly comply with all present and future laws, orders and
regulations of all state, federal, municipal and local governments, departments,
commissions and boards and any direction of any public officer pursuant to law,
and all orders, rules and regulations of the New York Board of Fire Underwriters
or the Insurance Services Office, or any similar body which shall impose any
violation, order or duty upon Owner or Tenant with respect to the demised
premises, and with respect to the portion of the sidewalk adjacent to the
premises. If the premises are on the street level, whether or not arising out of
Tenant's use or manner of use whereof, or with respect to the building if
arising out of Tenant's use or manner of use of the premises or the building
(including the use permitted under the lease). Except as provided in Article 29
hereof, nothing herein shall require Tenant to make structural repairs or
alterations unless Tenant has by its manner of use of the demised premises or
method of operation therein, violated any such laws, ordinances, orders, rules,
regulations or requirements with respect hereto. Tenant shall not do or permit
any act or thing to be done in or to the demised premises which is contrary to
law, or which will invalidate or be in conflict with public liability, fire or
other policies of insurance at any time carried by or for the benefit of Owner.
Tenant shall pay all costs, expenses, fines, penalties or damages which may be
imposed upon Owner by reason of Tenant's failure to comply with the provisions
of this article. If the fire insurance rate shall, at the beginning of the lease
or at any time thereafter, be higher than it otherwise would be, then Tenant
shall reimburse Owner, as additional rent hereunder for that portion of all fire
insurance premiums thereafter paid by Owner which shall have been charged
because of such failure by Tenant, to comply with the terms of this article. In
any action or proceeding wherein Owner and Tenant are parties, a schedule or
"make-up" of rate for the building or demised premises issued by a body making
fire insurance rates applicable to said premises shall be conclusive evidence of
the facts therein stated and of the several items and charges in the fire
insurance rate then applicable to said premises.
Subordination:
7. This lease is subject and subordinate to all ground or underlying
leases and to all mortgages which may now or hereafter
<PAGE>
affect such leases or the real property of which demised premises are a part and
to all renewals, modifications, consolidations, replacements and extensions of
any such underlying leases and mortgages. This clause shall be self-operative
and no further instrument of subordination shall be required by any ground or
underlying lease or by any mortgages, affecting any lease or the real property
of which the demised premises are a part. In confirmation of such subordination,
Tenant shall execute promptly any certificate that Owner may request.
Tenant's Liability Insurance Property Loss, Damage, Indemnity:
8. Owner or its agents shall not be liable for any damage to property of
Tenant or of others entrusted to employees of the building, for loss of or
damage to any property of Tenant by theft or otherwise, not for any injury or
damage to persons or property resulting from any cause of whatsoever nature,
unless caused by or due to the negligence of Owner, its agents, servants or
employees. Owner or its agents will not be liable for any such damage caused by
other Tenants or persons in, upon or about said building or caused by operations
in construction of any private, public or quasi-public work. Tenant agrees, at
Tenant's sole cost and expense, to maintain general public liability insurance
in standard form in favor of Owner and Tenant against claims for bodily injury
or death or property damage occurring in or upon the demised premises, effective
from the date Tenant enters into possession and during the term of this lease.
Such insurance shall be in an amount and with carriers acceptable to the Owner.
Such policy or policies shall be delivered to the Owner. On Tenant's default in
obtaining or delivering any such policy or policies or failure to pay the
charges therefore, Owner may secure or pay the charges for any such policy or
policies and charge the Tenant at additional rent therefor. Tenant shall
indemnify and have harmless Owner against and from all liabilities, obligations,
damages, penalties, claims, costs and expenses for which Owner shall not be
reimbursed by insurance, including reasonable attorneys fees, paid suffered or
incurred as a result of any breach by Tenant, Tenant's agents, contractors,
employees, invitees, or licensees, of any covenant on condition of this lease,
or the carelessness, negligence or improper conduct of the Tenant, Tenant's
agents, contractors, employees, invitees or licensees. Tenant's liability under
this lease extends to the acts and omissions of any subtenant, and any agent,
contractor, employee, invitee or licensee of any subtenant. In case any action
or proceeding is brought against Owner by reason of any such claim, Tenant, upon
written notice from Owner, will, at Tenant's expense, resist or defend such
action or proceeding by Counsel approved by Owner in writing, such approval not
to be unreasonably withheld.
<PAGE>
Destruction, Fire and Other Casualty:
9. (a) If the demised premises or any part thereof shall be damaged by fire
or other casualty, Tenant shall give immediate notice thereof to Owner and this
lease shall continue in full force and effect except as hereinafter set forth.
(b) If the demised premises are partially damaged or rendered partially unusable
by fire or other casualty, the damages thereto shall be repaired by and at the
expense of Owner and the rent, until such repair shall be substantially
completed, shall be apportioned from the day following the casualty according to
the part of the premises which is usable. (c) If the demised premises are
totally damaged or rendered wholly unusable by fire or other casualty, then the
rent shall be proportionately paid up to the time of the casualty and
thenceforth shall cease until the date when the premises shall have been
repaired and restored by Owner, subject to Owner's right to elect not to restore
the same as hereinafter provided. (d) If the demised premises are rendered
wholly unusable or if at least thirty-five (35%) percent of the building shall
be damaged and Owner shall decide to demolish it or to rebuild it, then, in any
of such events, Owner may elect to terminate this lease by written notice to
Tenant given within 90 days after such fire or casualty specifying a date for
the expiration of the lease, which date shall not be more than 60 days after the
giving of such notice, and upon the date specified in such notice the term of
this lease shall expire as fully and completely as if such date were the date
set forth above for the termination of this lease and Tenant shall forthwith
quit, surrender and vacate the premises without prejudice however, to Owner's
rights and remedies against Tenant under the lease provisions in effect prior to
such termination, and any rent owing shall be paid up to such date and any
payments of rent made by Tenant which were on account of any period subsequent
to such date shall be returned to Tenant. Notwithstanding the provisions of the
foregoing sentence, Owner shall not have the right to terminate this lease by
reason of damage to the building so long as the demised premises are not
materially damaged or rendered unusable to the extent of at least thirty-five
(35%) percent. Unless Owner shall serve a termination notice as provided for
herein, Owner shall make the repairs and restorations under the conditions of
(b) and (c) hereof, with all reasonable expedition subject to delays due to
adjustment of insurance claims, labor troubles and causes beyond Owner's
control. Should Owner fail to substantially repair and restore the demised
premises within ninety (90) days following its receipt of notice from Tenant as
to the occurrence and nature of such casualty, then Tenant may, within thirty
(30) days after the expiration of said ninety (9) day period, terminate this
lease by written notice to Owner. Notwithstanding the foregoing sentence, should
Owner, prior to commencing such repair and restoration, notify Tenant that such
<PAGE>
work will be substantially completed by a date designated in such notice which
will occur after the expiration of said ninety (90) day period (which designated
date, however, will occur no later than one hundred eighty (180) days following
Owner's receipt of the aforesaid notice from Tenant as to the occurrence and
nature of such casualty), Tenant shall notify Owner within twenty (20) days
following its receipt of such notice that it elects to either cancel this lease
as of the expiration of such ninety (90) day period or waive such right to
cancel hereunder. Any failure by Tenant to respond to Owner within said twenty
(20) day period shall be deemed to be an election by Tenant to waive such right
to cancel. In the event Tenant waives such right to cancel and Owner thereafter
fails to commence diligently the performance of such repair and restoration or
thereafter fails diligently to complete same, Tenant may, thirty (30) days
following delivery of notice to Owner and Owner's continued failure within said
thirty (30) day period to commence diligently or to proceed diligently and
continuously, complete such repair and restoration, and Owner shall remain
liable for the reasonable cost of such work, subject, however, to the further
provisions of this Article 9; the foregoing right of Tenant, however, shall be
extended for such period of time that Owner's failure to perform as aforesaid is
attributable to strikes, lockouts, labor difficulties, or any other cause beyond
Owner's control, it being agreed that Owner's lack of funds shall not be deemed
a cause "beyond Owner's control." Notwithstanding anything contained in this
Article 9, in the event that substantial repair and restoration of the demised
premises is delayed by reason of delays caused or occasioned by Tenant, Tenant
agrees that (a) the aforesaid ninety (90) day period (or if applicable, the
aforesaid one hundred eighty (180) day period or thirty (30) day period) shall
be extended for the period of such delay, (b) should Tenant be entitled to a
rental abatement for the duration of such delay, (c) Tenant shall not be
entitled to exercise the foregoing right to complete the repair and restoration
of the demised premises, for the duration of any such delay, and (d) Tenant
shall reimburse Owner for all additional costs incurred by Owner by reason of
any material interference by Tenant with such repair and restoration. After any
such casualty, Tenant shall cooperate with Owner's restoration by removing from
the premises or promptly as reasonably possible, all of Tenant's salvageable
inventory and movable equipment, furniture, and other property. Tenant's
liability for rent shall resume five (5) days after written notice from Owner
that the premises are substantially ready for Tenant's occupancy. (e) Nothing
contained hereinafter shall relieve Tenant from liability that may exist as a
result of damage from fire or other casualty. Notwithstanding the foregoing,
each party shall look first to any insurance in its favor before making any
claim against the other party for recovery for loss or damage resulting from
fire or other
<PAGE>
casualty, and to the extent that such insurance is in force and collectible and
to the extent permitted by law, Owner and Tenant each hereby releases and waives
all right of recovery against the other or any one claiming through or under
each of them by way of subrogation or otherwise. The foregoing release and
waiver shall be in force only if both releasors' insurance policies contain a
clause providing that such a release or waiver shall not invalidate the
insurance and also provided that such a policy can be obtained without
additional premiums. Tenant acknowledges that Owner will not carry insurance on
Tenant's furniture and/or furnishings or any fixtures or equipment,
improvements, or appurtenances removable by Tenant and agrees that Owner will
not be obligated to repair any damage thereto or replace the same. (f) Tenant
hereby waives the provisions of Section 227 of the Real Property Law and agrees
that the provisions of this article shall govern and control in lieu thereof.
Eminent Domain:
10. If the whole or any part of the demised premises shall be acquired or
condemned by Eminent Domain for any public or quasi public use or purpose, then
and in that event, the term of this lease shall cease and terminate from the
date of title vesting in such proceeding and Tenant shall have no claim for the
value of any unexpired term of said lease. Tenant shall, however, have the
right to seek compensation from the condemning authority for the value of
Tenant's alterations, installations, fixtures and furnishings affected by such
taking.
Assignment, Mortgage, Etc.:
11. Tenant, for itself, its heirs, distributees, executors,
administrators, legal representatives, successors and assigns expressly
covenants that it shall not assign, mortgage or encumber this agreement, not
underlet, or suffer to permit the demised premises or any part thereof to be
used by others, without the prior written consent of Owner in each instance. If
this lease be assigned, or if the demised premises or any part thereof be
underlet or occupied by anybody other than Tenant, Owner may, after default by
Tenant, collect rent from the assignee, under-tenant or occupant, and apply the
net amount collected to the rent herein reserved, but no such assignment,
underletting, occupancy or collection shall be deemed a waiver of the covenant,
or the acceptance of the assignee, under-tenant or occupant as tenant, or a
release of Tenant from the further performance by Tenant of covenants on the
part of Tenant herein contained. The consent by Owner to an assignment or
underletting shall not in any way be construed to relieve Tenant from obtaining
the express consent in writing of Owner to any further assignment or
underletting.
<PAGE>
Electric Current:
12. Tenant covenants and agrees that at all times its use of electric
current shall not exceed the capacity of existing feeders to the building or the
wiring installation and Tenant may not use any electrical equipment which, in
Owner's opinion, reasonably exercised, will overload such installations or
interfere with the use thereof by other tenants of the building. The change at
any time of the character of electric service shall in no way make Owner liable
or responsible to Tenant, for any loss, damages or expenses which Tenant may
sustain.
Access to Premises:
13. Owner or Owner's agents shall have the right (but shall not be
obligated) to access the demised premises in any emergency at any time, and, at
other reasonable times on reasonable prior notice to examine the same and to
make such repairs, replacements and improvements as Owner may deem necessary and
reasonably desirable to any portion of the building of which Owner may elect to
perform in the premises following Tenant's failure to make repairs or perform
any work which Tenant is obligated to perform under this lease, or for the
purpose of complying with laws, regulations and other directions of governmental
authorities. Tenant shall permit Owner to use and maintain and replace pipes
and conduits in and through the demised premises and to erect new pipes and
conduits therein, provided they are within the walls. Owner may, during the
progress of any work in the demised premises, take all necessary materials and
equipment into said premises without the same constituting an eviction nor shall
the Tenant be entitled to any abatement of rent while such work is in progress
nor to any damages by reason of loss or interruption of business or otherwise.
Throughout the term hereof Owner shall have the right to enter the demised
premises at reasonable hours on reasonable prior notice for the purpose of
showing the same to prospective purchasers of mortgages of the building, and
during the last six months of the term for the purpose of showing the same to
prospective tenants and may during said six months period, place upon the
premises the notice "To Let" and "For Sale" which notices Tenant shall permit to
remain thereon without molestation. If Tenant is not present to open and permit
an entry into the premises, Owner or Owner's agents may enter the same whenever
such entry may be necessary or permissible by master key or forcibly and
provided reasonable care is exercised to safeguard Tenant's property and such
entry shall not render Owner or its agents liable therefor, nor in any event
shall the obligations of Tenant hereunder be affected. If during the last month
of the term Tenant shall have removed all or substantially all of Tenant's
property therefrom, Owner may immediately enter,
<PAGE>
alter, renovate or redecorate the demised premises without limitation or
abatement of rent, or incurring liability to Tenant for any compensation and
such act shall nave on this lease or Tenant's obligations hereunder. Owner shall
have the right at any time, without the same constituting an eviction and
without incurring liability to Tenant therefor to change the arrangement and/or
location of public entrances, passageways, doors, doorways, corridors,
elevators, stairs, toilets, or other public parts of the building and to change
the name, number or designation by which the building may be known.
Vault, Vault Space, Area:
14. No Vaults, vault space or area, whether or not enclosed or covered,
not within the property line of the building is leased hereunder, anything
contained in or indicated on any sketch, blue print or plan, or anything
contained elsewhere in this lease to the contrary notwithstanding. Owner makes
no representation as to the location of the property line of the building All
vaults and vault space and all the such areas not within the property line of
the building, which Tenant may be permitted to use and/or occupy, is to be used
and/or occupied under a revocable license, and if any such license be revoked,
or if the amount of such space or area be diminished or required by any federal,
state or municipal authority or public utility, Owner shall not be subject to
any liability nor shall Tenant be entitled to any compensation or diminution or
abatement of rent, nor shall such revocation, diminution or requisition be
deemed constructive or actual eviction. Any tax, fee or charge of municipal
authorities for such vault or area shall be paid by Tenant.
Occupancy:
15. Tenant will not at any time use or occupy the demised premises in
violation of Articles 2 or 37 hereof, or of the certificate of occupancy issued
for the building of which the demised premises are a part. Tenant has inspected
the premises and accepts them as is, subject to the riders annexed hereto with
respect to Owner's work, if any. In any event, Owner makes no representation as
to the condition of the premises and Tenant agrees to accept the same subject to
violations whether or not of record.
Bankruptcy:
16. (a) Anything elsewhere in this lease to the contrary notwithstanding,
this lease may be cancelled by Landlord by the sending of a written notice to
Tenant within a reasonable time after the happening of any one or more of the
following events:
<PAGE>
(1) the commencement of a case in bankruptcy or under the laws of any state
naming Tenant as the debtor; or (2) the making by Tenant of an assignment or any
other arrangement for the benefit of creditors under any state statute. Neither
Tenant nor any person claiming through or under Tenant, or by reason of any
estate or order of court, shall thereafter be entitled to possession of the
premises demised but shall forthwith quit and surrender the premises. If this
lease shall be assigned in accordance with its terms, the provisions of this
Article 16 shall be applicable only to the party then owning Tenant's interest
in this lease.
(b) It is stipulated and agreed that in the event of the termination of
this lease pursuant to (a) hereof, Owner shall forthwith, notwithstanding any
other provisions of this lease to the contrary, be entitled to recover from
Tenant as and for liquidated damages an amount equal to the difference between
the rent reserved hereunder for the unexpired portion of the term demised and
the fair and reasonable rental value of the demised premises for the same
period. In the computation of such damages the difference between any
installment of rent becoming due hereunder after the date of termination and the
fair and reasonable rental value of the demised premises for the period for
which such installment was payable shall be discounted to the date of
termination at the rate of four percent (4%) per annum. If such premises or any
part t hereof be re-let by the Owner or for the unexpired term of said lease, or
any part thereof, before presentation of proof of such liquidated damages to any
court, commission or tribunal, the amount of rent reserved upon such reletting
shall be deemed to be the fair and reasonable rental value for the part or the
whole of the premises so re-let during the term of the re-letting. Nothing
herein contained shall limit or prejudge the right of the Owner to prove for and
obtain as liquidated damages by reason of such termination an amount equal to
the maximum allowed by any statute or rule of law in effect at the time when,
and governing the proceedings in which such damages are to be proved, whether or
not such amount be greater, equal to, or less than the amount of the difference
referred to above.
Default:
17. (1) If Tenant defaults in fulfilling any of the covenants of this
lease or if the demised premises become vacant or deserted, or if any execution
or attachment shall be issued against Tenant or any of Tenant's property
whereupon the demised premises shall be taken or occupied by someone other than
Tenant, or if this lease be rejected under Section 365 of Title II of the U.S.
Code (Bankruptcy Code), then upon Owner serving a written
<PAGE>
ten (10) days notice upon Tenant in the event of a default in the fulfillment of
any covenant for the payment of rent or additional rent and upon the expiration
of said ten (10) days without Tenant's having complied or remedied such default
or, as to any other default by Tenant under this Lease, upon Owner serving a
written thirty (30) days notice upon Tenant specifying the nature of said
default and upon the expiration of said thirty (30) days, if Tenant shall have
failed to comply with or remedy such default, or if the said default or omission
complained of shall be of a nature that the same cannot be completely cured or
remedied within said thirty (30) day period, and if Tenant shall not have
diligently commenced curing such default within such thirty (30) day period and
shall not thereafter with reasonable diligence and in good faith proceed to
remedy or cure such default, then Owner may serve a written ten (10) days notice
of cancellation of this lease upon Tenant, and upon the expiration of said ten
(10) days, this lease and the term thereunder shall end and expire fully and
completely as if the expiration of such ten (10) day period were the day herein
definitely fixed for the end and expiration of this lease and the term thereof
and Tenant shall then quit and surrender the demised premises to Owner but
Tenant shall remain liable as hereinafter provided.
(2) If the notice provided for in (1) hereof shall have been given,
and the term shall expire as aforesaid, then and in any of such events Owner may
without notice, re-enter the demised premises either by force or otherwise and
dispossess Tenant by summary proceedings or otherwise, and the legal
representative of Tenant or other occupant of demised premises and remove their
effects and hold the premises as if this lease had not been made and Tenant
hereby waives the service of notice of intention to re-enter or to institute
legal proceedings to that end.
Remedies of Owner and Waiver of Redemption:
18. In case of any such default, re-entry, expiration and/or dispossess by
summary proceedings or otherwise, (a) the rent, and additional rent, shall
become due thereupon and be paid up to the time of such re-entry, dispossess
and/or expiration. (b) Owner may re-let the premises or any part or parts
thereof, either in the name of Owner or otherwise, for a term or terms which may
at Owner's option be less than or exceed the period which would otherwise have
constituted the balance of the term of this lease and may grant concessions or
free rent or charge a higher rental than that in this lease and/or (c) Tenant or
the legal representatives of Tenant shall also pay Owner as liquidated damages
for the failure of Tenant to observe and perform said Tenant's covenants herein
contained any deficiency between the rent hereby reserved and/or covenanted to
be paid and the net amount, if any, of the rents collected on account of the
<PAGE>
subsequent lease or leases of the demised premises for each month of the period
which would otherwise have constituted the balance of the term of this lease.
The failure of Owner to re-let the premises or any part or parts thereof shall
not release or affect Tenant's liability for damages. In computing such
liquidated damages there shall be added to the said deficiency such reasonable
expenses as Owner may incur in connection with re-letting, such as legal
expenses, attorneys' fees, brokerage, advertising and for keeping the demised
premises in good order or for preparing the same for re-letting. Any such
liquidated damages shall be paid in monthly installments by Tenant on the rent
day specified in this lease. Owner, in putting the demised premises in good
order or preparing the same for re-rental may, at Owner'[s option, make such
alterations, repairs, replacements, and/or decorations in the demised premises
as Owner, in Owner's sole judgment, considers advisable and necessary for the
purpose of re-letting the demised premises, and the making of such alterations,
repairs, replacements, and/or decorations shall not operate or be construed to
release Tenant from liability. Owner shall in no event be liable in any way
whatsoever for failure to re-let the demised premises, or in the event that the
demised premises are re-let, for failure to collect the rent thereof under such
re-letting and in no event shall Tenant be entitled to receive any excess, if
any, of such net rent collected over the sums payable by Tenant to Owner
hereunder. In the event of a breach or threatened breach by Tenant or any of the
covenants or provisions hereof, Owner shall have the right of injunction and the
right to invoke any remedy allowed at law or in equity as if re-entry, summary
proceedings and other remedies were not herein provided for. Mention in this
lease of any particular remedy shall not preclude Owner from any other remedy in
law or in equity. Tenant hereby expressly waives any and all rights of
redemption granted by or under any present or future laws.
Fees and Expenses:
19. If Tenant shall default in the observance or performance of any term
or covenant on Tenant's part to be observed or performed under or by virtue of
any of the terms or provisions in any article of this lease and if Tenant shall
fail to cure such default within a reasonable period following notice by Owner
(it being agreed, however that such period shall in no event exceed thirty (30)
days unless such default be of a nature that same cannot be completely cured
within said thirty (30) days, in which event such period shall in no event
exceed the period of time that Tenant, proceeding with reasonable diligence and
good faith may require to cure same) then, unless otherwise provided elsewhere
in this lease Owner may immediately or at any time thereafter and without notice
perform the obligation of Tenant thereunder, and if Owner, in connection
therewith or in
<PAGE>
connection with any default by Tenant in the covenant to pay rent hereunder,
makes any expenditures or incurs any obligations for the payment of money,
including but not limited to attorney's fees, in instituting, prosecuting or
defending any actions or proceeding, such sums so paid or obligations incurred
with interest and costs shall be deemed to be additional rent hereunder and
shall be paid by Tenant to Owner within five (5) days of rendition of any bill
or statement to Tenant therefore, and if Tenant's lease term shall have expired
at the time of making of such expenditures or incurring of such obligations,
such sums shall be recoverable by Owner as damages. Notwithstanding the
provisions of this Article 15, Owner shall be authorized to perform any
obligation of Tenant hereunder without the delivery of notice as aforesaid in
any emergency situation or if the delay occasioned by such notice period might
subject Owner to civil penalties or fines or criminal liability or might
materially prejudice Owner.
No Representations By Owner:
20. Neither Owner nor Owner's agents have made any representations or
promises with respect to the physical condition of the building, the land upon
which it is erected or the demised premises, the rents, leases, expenses of
operation, or any other matter or thing affecting or related to the premises
except as herein expressly set forth and no rights, easements or licenses are
acquired by Tenant by implication or otherwise except as expressly set forth in
the provisions of this lease. Tenant has inspected the building and the demised
premises and is thoroughly acquainted with their condition, and agrees to take
the same as is and acknowledges that the taking of possession of the demised
premises by Tenant shall be conclusive evidence that the said premises and the
building of which the same form a part were in good and satisfactory condition
at the time such possession was so taken, except as to latent defects. All
understandings and agreements heretofore made between the parties hereto are
merged in this contract, which alone fully and completely expresses the
agreement between Owner and Tenant and any executory agreement hereafter made
shall be ineffective to change, modify, discharge or effect an abandonment of it
in whole or in part, unless such executory agreement is in writing and signed by
the party against whom enforcement of the change, modification, discharge or
abandonment is sought.
End of Term:
21. Upon the expiration or other termination of the term of this lease,
Tenant shall quit and surrender to Owner the demised premises, broom clean, in
good order and condition, ordinary wear excepted, and Tenant shall remove all
its property except as
<PAGE>
otherwise set forth in Article 3 hereof. Tenant's obligation to observe or
perform this covenant shall survive the expiration or other termination of this
lease. If the last day of the term of this lease or any renewal thereof falls on
Sunday, this lease shall expire at noon on the preceding Saturday unless it be a
legal holiday in which case it shall expire at noon on the preceding business
day.
Quiet Enjoyment:
22. Owner covenants and agrees with Tenant that upon Tenant paying the
rent and additional rent and observing and performing all the terms, covenants
and conditions, on Tenant's part to be observed and performed, Tenant may
peaceably and quietly enjoy the premises hereby demised, subject, nevertheless,
to the terms and conditions of this lease including, but not limited to Article
33 hereof and to the ground leases, underlying leases and mortgages hereinbefore
mentioned.
Failure To Give Possession:
23. If Owner is unable to give possession of the demised premises on the
date of the commencement of the term hereof, because of the holding-over or
retention of possession of any tenant, undertenant or occupants, or if the
premises are located in a building being constructed because such building has
not been sufficiently completed to make the premises ready for occupancy or
because of the fact that a certificate of occupancy has not been procured or for
any other reason, Owner shall not be subject to any liability for failure to
give possession on said date and the validity of the lease shall not be impaired
under such circumstances, nor shall the same be construed in any way to extend
the term of this lease, but the rent payable hereunder shall be abated (provided
Tenant is not responsible for the inability to obtain possession) until after
Owner shall have given Tenant written notice that the premises are substantially
ready for Tenant's occupancy. If permission is given to Tenant to enter into
the possession of the demised premises or to occupy premises other than the
demised premises prior to the date specified at the commencement of the term of
this lease, Tenant covenants and agrees that such occupancy shall be deemed to
be under all the terms, covenants, conditions and provisions of this lease,
except as to the covenant to pay rent. The provisions of this article are
intended to constitute an express provision to the contrary within the meaning
of Section 223-a of the New York Real Property Law.
No Waiver:
24. The failure of Owner to seek redress for violation of
<PAGE>
or to insist upon the strict performance of any covenant or condition of this
lease or of any of the Rules or Regulations set forth or hereafter adopted by
Owner, shall not prevent a subsequent act which would have originally
constituted a violation from having all the force and effect of an original
violation. The receipt by Owner of rent with knowledge of the breach of any
covenant of this lease shall not be deemed a waiver of such breach and no
provision of this lease shall be deemed to have been waived by Owner unless such
waiver be in writing signed by Owner. No payment by Tenant or receipt by Owner
of a lesser amount than the monthly rent herein stipulated shall be deemed to be
other than on account of the earliest stipulated rent, nor shall any endorsement
or statement of any check or any letter accompanying any check or payment as
rent be deemed an accord and satisfaction, and Owner may accept such check or
payment without prejudice to Owner's right to recover the balance of such rent
or pursue any other remedy in this lease provided. No act or thing done by Owner
or Owner's agents during the term hereby demised shall be deemed in acceptance
of a surrender of said premises and no agreement to accept such surrender shall
be valid unless in writing signed by Owner. No employee of Owner or Owner's
agent shall have any power to accept the keys of said premises prior to the
termination of the lease and the delivery of keys to any such agent or employee
shall not operate as a termination of the lease or a surrender of the premises.
Waiver of Trial by Jury:
25. It is mutually agreed by and between Owner and Tenant that the
respective parties herein shall and they hereby do waive trial by jury in any
action, proceeding or counterclaim brought by either of the parties hereto
against the other (except for personal injury or property damage) on any matters
whatsoever arising out of or in any way connected with this lease, the
relationship of Owner and Tenant. Tenant's use of or occupancy of said
premises, and any emergency statutory or any other statutory remedy. It is
further mutually agreed that in the event Owner commences any summary proceeding
for possession of the premises, Tenant will not interpose any counterclaim of
whatever nature or description in any such proceeding.
Inability to Perform:
26. This lease and the obligation of Tenant to pay rent hereunder and
perform all of the other covenants and agreements hereunder on part of Tenant to
be performed shall in no way be affected, impaired or excused because Owner is
unable to fulfill any of its obligations under this lease or to supply or is
delayed in supplying any service expressly or impliedly to be supplied or is
unable to make, or is delayed in making any
<PAGE>
repair, additions, alterations or decorations or is unable to supply or is
delayed in supplying any equipment or fixtures if Owner is prevented or delayed
from so doing by reason of strike or labor troubles, government preemption in
connection with a National Emergency or by reason of any rule, order or
regulation of any department or subdivision thereof of any government agency or
by reason of the conditions of supply and demand which have ben or are affected
by war or other emergency, or when, in the judgement of Owner, temporary
interruption of such services is necessary by reason of accident, mechanical
breakdown, or to make repairs, alterations or improvements.
Bills and Notices:
27. Except as otherwise in this lease provided, a bill, statement, notice
or communication which Owner may desire or be required to give to Tenant, shall
be deemed sufficiently given or rendered if, in writing, delivered to Tenant
personally or sent by registered or certified mail addressed to Tenant at the
building of which the demised premises form a part or such other address as
Tenant may specify by written notice to Owner, and the time of the rendition of
such bill or statement and of the giving of such notice or communication shall
be deemed to be the time when the same is delivered to Tenant or two (2)
business days after the mailing of same. Any notice by Tenant to Owner must be
served by registered or certified mail addressed to Owner at the address first
hereinabove given or at such other address as Owner shall designate by written
notice. Tenant shall be entitled to designate one 91) additional party to
receive a copy of each notice of default which may be delivered by Owner
pursuant to Article 17 hereof, it being agreed that Tenant shall designate such
party by written notice delivered pursuant to the provisions of this Article 27
setting forth the name and address of such additional party and its relationship
to Tenant.
Water Charges:
28. If Tenant requires, uses or consumes water for any purpose in addition
to ordinary lavatory purposes (of which fact Tenant constitutes Owner to be the
sole judge) Owner may install a water meter and thereby measures Tenant's water
consumption for all purposes. Tenant shall pay Owner for the cost of the meter
and the cost of the installation thereof and throughout the duration of Tenant's
occupancy Tenant shall keep said meter and installation equipment in good
working order and repair at Tenant's own cost and expense. Tenant agrees to pay
for water consumed, as shown on said meter as and when bills are rendered.
Tenant covenants and agrees to pay the sewer rent, charge or any other tax,
rent, levy or charge which now or hereafter is assess, imposed or a lien upon
the demised premises or the realty of
<PAGE>
which they are part pursuant to law, order or regulation made or issued in
connection with the use, consumption, maintenance or supply of water, water
system or sewage or sewage connection or system. The bill rendered by Owner
shall be payable by Tenant as additional rent. Independently of and in addition
to any of the remedies reserved to Owner hereinabove or elsewhere in this lease,
owner may sue for and collect any monies to be paid by Tenant or paid by Owner
for any of the reasons or purposes hereinabove set forth.
Sprinklers:
29. Anything elsewhere in this lease to the contrary notwithstanding, if
the New York Board of Fire Underwriters or the Insurance Services Office or any
bureau, department or official of the federal, state or city government require
or recommend the installation of a sprinkler system or that any changes,
modifications, alterations, or additional sprinkler heads or other equipment be
made or supplied in an existing sprinkler system by reason of Tenant's business,
or the location of partitions, trade fixtures, or other contents of the demised
premises, or for any other reason, or if any such sprinkler system
installations, changes, modifications, alterations, additional sprinkler heads
or other such equipment, become necessary to prevent the imposition of a penalty
or charge against the full allowance for a sprinkler system in the fire
insurance rate set by any said Exchange or by any fire insurance company, Tenant
shall, at Tenant's expense, promptly make such sprinkler system installations,
changes, modifications, alterations, and supply additional sprinkler heads or
other equipment as required whether the work involved shall be structural or
non-structural in nature. Tenant shall pay to Owner as additional rent the sum
of $250 on the first day of each month during the term of this lease, as
Tenant's portion of the contract price for sprinkler supervisory service.
Heat, Cleaning:
30. As long as Tenant is not in default under any of the covenants of this
lease Owner shall, if and insofar as existing facilities permit furnish heat to
the demised premises such days as Tenant is open for business, from 8:00 a.m. to
2:00 a.m., or such lesser time as Tenant may request, which heat shall be
furnished as follows: (a) as to the basement level, to the perimeter of such
space at a location chosen by Owner, and (b) as to the ground floor level, to
the currently existing radiator system at such space (it being agreed that
should Tenant alter, modify or replace such radiator system, Owner's obligation
shall be to furnish heat solely to the perimeter of such space at a location
chosen by Owner). Notwithstanding the foregoing, Owner
<PAGE>
shall not be required to furnish heat as aforesaid to the demised premises until
the date on which Owner is notified by Tenant that Tenant has commenced the
operation of its business at the demised premises (the "Heat Notification
Date"); however, Owner shall, between the date hereof and the Heat Notification
Date, use its best efforts to furnish heat as aforesaid to the ground floor
level of the demised premises on weekdays from 9:00 a.m. to 5:00 p.m. Tenant
shall at Tenant's expense, keep demised premises clean and in order, to the
satisfaction to Owner, and if demised premises are situated on the street floor,
Tenant shall, at Tenant's own expense, make all repairs and replacements to the
sidewalks and curbs adjacent thereto, and keep said sidewalks and curbs free
from snow, ice, dirt and rubbish. Tenant shall pay to Owner the cost of removal
of any of Tenant's refuse and rubbish from the building. Bills for the same
shall be rendered by Owner to Tenant at such times as Owner may elect and shall
be due and payable when rendered, and the amount of such bills shall be deemed
to be, and be paid as, additional rent. Tenant shall, however, have the option
of independently contracting for the removal of such rubbish and refuse in the
event that Tenant does not wish to have same done by employees of Owner. Under
such circumstances, however, the removal of such refuse and rubbish by others
shall be subject to such rules and regulations as, in the reasonable judgment of
Owner, are necessary for the proper operation of the building.
Security:
31. Tenant has deposited with Owner the sum of $75,000.00 as security for
the faithful performance and observance by Tenant of the terms, provisions and
conditions of this lease; it is agreed that in the event Tenant defaults in
respect of any of the terms, provisions and conditions of this lease, including,
but not limited to, the payment of rent and additional rent. Owner may use,
apply or retain the whole or any part of the security so deposited to the extent
required for the payment of any rent and additional rent or any other sum as to
which Tenant is in default or for any sum which Owner may expend or may be
required to expend by reason of Tenant's default in respect of any of the terms,
covenants and conditions of this lease, including but not limited to, any
damages or deficiency in the re-letting of the premises, whether such damages or
deficiency accrued before or after summary proceedings or other re-entry by
Owner. Such amount shall be held by Owner in a money-market account at a
federally insured depository institution and all interest earned thereon (less a
1% annual administrative charge to Owner) shall be paid to Tenant annually. In
the event that Tenant shall fully and faithfully comply with all of the terms,
provisions, covenants and conditions of this lease, the security shall be
returned to Tenant after the date fixed as the end of the Lease
<PAGE>
and after delivery of entire possession of the demised premises to Owner. In the
event of a sale of the land and building or leasing of the building, of which
the demised premises form a part, Owner shall have the right to transfer the
security to the vendee or lessee and Owner shall thereupon be released by Tenant
from all liability for the return of such security, and Tenant agrees to look to
the new Owner solely for the return of said security; and it is agreed that the
provisions hereof shall apply to every transfer or assignment made of the
security to a new Owner. Tenant further covenants that it will not assign or
encumber or attempt to assign or encumber the monies deposited herein as
security and that neither Owner nor its successors or assigns shall be bound by
any such assignment, encumbrance, attempted assignment or attempted encumbrance.
Captions:
32. The Captions are inserted only as a matter of convenience and for
reference and in no way define, limit or describe the scope of this lease nor
the intent of any provision thereof.
Definitions:
33. The term "Owner" as used in this lease means only the Owner, or the
mortgagee in possession for the time being of the land and building (or the
Owner of a lease of the building or of the land and building) of which the
demised premises form a part, so that in the event of any sale or sales of said
land and building or of said lease, or in the event of a lease of said building,
or of the land and building, the said Owner shall be and hereby is entirely
freed and relieved of all covenants and obligations of Owner hereunder, and it
shall be deemed and construed without further agreement between the parties or
their successors in interest, or between the parties and the purchaser, at any
such sale, or the said lessee of the building, or of the land and building, that
the purchaser or the lessee of the building has assumed and agreed to carry out
any and all covenants and obligations of Owner hereunder. The words "re-enter"
and "re-entry" as used in this lease are not restricted to their technical legal
meaning. The term "business days" as used in this lease shall exclude Saturdays
(except such portion thereof as is covered by specific hours in Article 30
hereof), Sundays and all days designated as holidays by the applicable building
service employees service contract or by the applicable Operating Engineer
contract with respect to HVAC service.
Adjacent Excavation -- Sharing:
34. If an excavation shall be made upon land adjacent to
<PAGE>
the demised premises, or shall be authorized to be made, Tenant shall afford to
the person contracted or authorized to cause such excavation, license to enter
upon the demised premises for the purpose of doing such work as said person
shall deem necessary to preserve the wall of the building of which demised
premises form a part from injury, damage and support the same by proper
foundations without claim for damages or indemnity against Owner, or diminution
or abatement of rent.
Rules and Regulations:
35. Tenant and Tenant's servants, employees, agents, visitors, and
licensees shall observe fully and comply strictly with the Rules and Regulations
and such other and further reasonable Rules and Regulations Owner or Owner's
agents may from time to time adopt. Notwithstanding any additional rules or
regulations shall be given in such manner as Owner may elect. In case Tenant
disputes the reasonableness of any additional Rule or Regulation hereafter made
or adopted by Owner or Owner's agents, the parties hereto agree to submit the
question of the reasonableness of such Rule or Regulation for decision by the
New York office of the American Arbitration Association. Such determination
shall be final and conclusive upon the parties hereto. The right to dispute the
reasonableness of any additional Rule or Regulation upon Tenant's part shall be
deemed waived unless same shall be asserted by service of a notice in writing
upon Owner within ten (10) days after the giving of notice thereof. Nothing in
the lease contained shall be construed to impose upon Owner an obligation to
enforce the Rules and Regulations or terms, covenants or conditions in any other
lease as against any other tenant. Owner shall not be liable to Tenant for
violation of the same by any other tenant, its servants, employees, agents,
visitors or licensees.
Glass:
36. Tenant shall replace, at its own expense, any and all plate and other
glass damaged or broken from any cause whatsoever in and about the demised
premises. Should Tenant fail to replace such glass within fifteen (15) days
following notice by owner to do so, Owner shall have the right, at the expense
of Tenant, to replace same.
Pornographic Uses Prohibited:
37. Tenant agrees that the value of the demised premises and the
reputation of the Owner will be seriously injured if the premises are used for
any other or pornographic purposes or any sort of compromise sex establishment.
Tenant agrees that Tenant will not permit any obscene or pornographic material
on the
<PAGE>
premises and shall not permit or conduct any obscene, nude, or semi-nude
performances on the premises, nor permit use of the premises for nude modeling,
rap sessions, or as a so-called rubber goods show or as a sex club of any sort,
or as a "massage parlor." Tenant agrees further that Tenant will not permit any
of these uses by any sublettor or assignee of the premises. This Article shall
directly bind any successors in interest to the Tenant. Tenant agrees that if
at any time Tenant violates any of the provisions of this Article, such
violation shall be deemed a breach of a substantial obligation of the terms of
this lease and objectionable conduct. Pornographic material defined for
purposes of this Article as any written or pictorial with prurient appeal or any
objects of instrument that are primarily concerned with lewd or prurient sexual
activity. Obscene material is defined here as it is in Penal law (S)235.00.
Estoppel Certificate:
38. Tenant, at any time, and from time to time with at least 10 days prior
notice by Owner, shall acknowledge and deliver to Owner, and/or any other
person, firm or corporation specified by Owner, a statement certifying that this
lease is unmodified and in full force and effect (or, if there have been
modifications, that the same are in full force and effect as modified and
stating the modifications and stating the dates which the rent and additional
rent have been paid, and stating whether or not there exists any defaults to
Owner under this lease, and, if so, specifying each such default and any other
statements reasonable.
Successors and Assigns:
39. The covenants, conditions and agreements contained in this lease shall
bind and inure to the benefit of Owner and Tenant and their respective heirs,
distributees, executors, administrators, successors and assigns as otherwise
provided in this lease, their assigns.
*requested by Owner. Owner, at any time and from time to time, upon at least 10
days prior notice by Tenant, shall execute, acknowledge and deliver to Tenant,
and/or to any other person, firm or corporation specified by Tenant, a statement
certifying to the matters described above in Article 38; however, Owner shall
not be required to deliver such statement more than twice during any 12-month
period during the term hereof.
IN WITNESS WHEREOF, Owner and Tenant have respectively signed and sealed
this lease as of the day and time first above written.
<PAGE>
CABLE BUILDING ASSOCIATES
-------------------------
HOUSTON CINEMA, INC.
/s/ Joseph Saleh
-------------------------
V.P.
<PAGE>
RIDER TO LEASE DATED MARCH 4, 1988 BETWEEN CABLE BUILDING ASSOCIATES, AS
OWNER, AND HOUSTON CINEMA, INC., AS TENANT.
40. TERM. (a) The term of this lease shall commence on March 15, 1988
----
(the "Commencement Date") and shall end on December 31, 2008 (the "Expiration
----------------- ----------
Date") or on such earlier date upon which the term of this lease shall expire or
- ----
be cancelled or terminated pursuant to any of the terms, conditions or covenants
of this lease or pursuant to law.
(b) If the Commencement Date or Expiration Date occurs on a day
other than the first day of a calendar month, the Fixed Rent for such partial
calendar month shall be prorated.
(c) Anything contained herein to the contrary notwithstanding,
provided that Tenant shall not be in default hereunder, beyond the expiration of
the applicable grace period, if any, Fixed Rent shall be abated as follows: (a)
for the period from the first day of the calendar month immediately following
the Approval Date (hereinafter defined) (the "Abatement Commencement Date") to
and including the date which is the nine-month anniversary (less one day) of the
Abatement Commencement Date, Fixed Rent shall be fully abated; and (b) for the
period from the nine-month anniversary of the Abatement Commencement Date to and
including the fifteen-month anniversary (less one day) of the Abatement
Commencement Date, Fixed Rent shall be abated in the amount of $6,000 per month.
As used in this Article 40, the term "Approval Date" shall mean the date upon
which the Buildings Department (hereinafter defined) (i) gives final approval(s)
allowing the construction by Tenant of the Initial Tenant Work (hereinafter
defined) in accordance with the Initial Plans (hereinafter defined), and (ii)
accepts an application for a "public assembly" permit for the demised premises
in accordance with the applicable provisions of Local Law 41, subject to
Tenant's completion of the Initial Tenant Work in accordance with the Initial
Plans.
41. USE AND OCCUPANCY. Supplementing the provisions of Article 2 of this
-----------------
lease:
(a) Tenant agrees that during the first two (2) years and four
and one-half (4-1/2) months of the term of this lease, it shall use, occupy,
operate and maintain the basement level of the demised premises throughout the
term of this lease as a first-class motion picture theatre only. Should Tenant
thereafter desire to use the basement level of the demised premises for any
other purpose, it shall first obtain the prior written consent of Owner. In its
request for such other use, Tenant shall inform Owner in writing as to the exact
nature and duration of such use. Owner agrees that it shall not
<PAGE>
unreasonably withhold its consent to such other use of the basement level.
Notwithstanding anything herein contained, under no circumstances shall Tenant
use the basement level or any part thereof for the sale or service of food or
beverages (except for food sold by Tenant or concessionaires for movie theatre
patrons only) or as a nightclub, discotheque or cabaret.
(b) Tenant agrees to use, occupy, operate and maintain the ground
floor level of the demised premises throughout the term of this lease as either
a first-class motion picture theatre and/or as a cafe restaurant. Should Tenant
desire to use the ground floor level of the demised premises for any other
purpose, it shall first obtain the prior written consent of Owner. In its
request for such other use, Tenant shall inform Owner in writing as to the exact
nature and duration of such use. Owner agrees that it shall not unreasonably
withhold its consent to such other use of the ground floor level.
(c) Tenant agrees to use, occupy and maintain the demised
premises throughout the term of this lease in a high grade and reputable manner
and in a manner which shall not detract from the character, appearance or
dignity of the Building. Tenant further agrees not to (i) engage in any
unethical method of business operation, (ii) use or permit to be used the
sidewalks or other space outside the demised premises for any display, sale or
similar undertaking or storage, unless in each instance Tenant as acquired all
necessary permits in connection with the foregoing and has complied with all
laws, rules and regulations pertaining thereto, or (iii) use or permit to be
used any loudspeaker, phonograph or other sound system or advertising device
which may be heard outside the demised premises. Tenant acknowledges that
Owner's damages resulting from any breach of the provisions of Articles 2 and 37
hereof or of this Article are difficult, if not impossible, to ascertain and by
law or the provisions of this lease, Owner shall be entitled to enjoin Tenant
from any violation of said provisions.
(d) Tenant shall not at any time use or occupy the demised
premises or the Building, or suffer or permit anyone to use or occupy the
demised premises, or do anything in the demised premises or the Building, or
suffer or permit anything to be done in, brought into or kept on the demised
premises, which (i) violates the certificate of occupancy for the demised
premises, if any, or for the Building; (ii) causes or is liable to cause injury
to the demised premises or the Building or any equipment, facilities or systems
therein; (iii) constitutes a violation of the laws and requirements of any
public authorities or the requirements of insurance bodies; (iv) impairs or
tends to impair the proper and economic maintenance, operation and repair of the
Building and/or its equipment, facilities or systems; (v)
<PAGE>
constitutes a nuisance, public or private; (vi) makes unobtainable from
reputable insurance companies authorized to do business in New York State any
fire insurance with extended coverage, or liability, elevator, boiler or other
insurance at standard rates (for buildings containing a motion picture theatre)
required to be furnished by Owner under the terms of any mortgages covering the
demised premises; or (vii) discharges objectionable fumes, vapors or odors into
the Building's flues or vents or otherwise in such manner as may offend other
tenants or occupants of the Building.
(e) If any governmental license or permit shall be required for
the proper and lawful conduct of Tenant's business in or adjacent to the demised
premises or any part thereof, including without limitation any "public assembly"
permit in accordance with the applicable provisions of Local Law 41, Tenant, at
its expense, shall duly procure and thereafter maintain such license or permit
and submit the same to Owner for inspection. Tenant shall at all times comply
with the terms and conditions of each such license or permit.
(f) Tenant shall not use the demised premises or any part thereof
for the exhibition of pornographic motion pictures; however, Tenant may exhibit
motion pictures at the demised premises which are similar to those motion
pictures then being shown at public theaters operated by such companies as
United Artists, the Walter Reade Organization, Lincoln Plaza, Cineplex and Film
Forum.
(g) Should Tenant use the ground floor level of the demised
premises as a cafe restaurant, it shall at its own cost and expense install and
maintain all necessary exhaust vent systems for cooking and other apparatus
utilized; in connection with the foregoing, Owner agrees that it shall designate
an area of the Building in which Tenant may reasonably extend its exhaust vent
system, it being agreed that any such extension shall be performed at Tenant's
sole cost and expense and otherwise in accordance with the provisions of this
lease and that Tenant shall be solely responsible for the repair and maintenance
of such system. It is the specific intention of the parties that the other
portions of the Building shall not in Owner's reasonable judgment be affected or
disturbed in any way by smoke, fumes or odors emanating from the demised
premises. Tenant shall at its own cost and expense install and maintain in the
demised premises such systems which may be required by the Fire Department of
the City of New York or any other applicable governmental authority and shall
comply with any applicable governmental rules, regulations and ordinances.
(h) Tenant's failure to maintain the installations
<PAGE>
required under subparagraph (g) above to the reasonable satisfaction of the
Owner or to remedy promptly and cure after notice from Owner any violation of
applicable governmental rules, regulations or ordinances with respect to smoke,
fumes or odors caused by Tenant's use of the demised premises shall constitute a
breach of a material and substantial obligation by Tenant under this lease and
Owner shall have the right either to perform at the expense of the Tenant any
work which it deems necessary in order to cure, reduce or eliminate such
disturbance (including, but not limited to, the extension of any exhaust vent
system to the roof or any other portion of the Building) or to avail itself of
any other rights or remedies provided for herein or at law in the event of a
default by Tenant hereunder.
(i) So long as Tenant serves or allows liquor or other alcoholic
beverages at the demised premises, Tenant shall at all times observe, perform
and comply with the New York State liquor and alcoholic beverage control laws
and the rules, regulations, orders and requirements of all federal, state and
municipal bodies having jurisdiction over the sale and use of liquor and
alcoholic beverages. Any breach or violation by Tenant of its obligations under
this subparagraph shall constitute a default under this lease and shall entitle
Owner, at its option, to exercise all rights and remedies provided for hereunder
in the event of Tenant's default. Owner makes no representations or warranties
whatsoever as to whether Tenant may legally serve or allow liquor or other
alcoholic beverages at the demised premises.
(j) Notwithstanding the provisions of subparagraph (b) hereof,
Tenant shall not use, or suffer or permit anyone to use, the demised premises or
any part thereof, for a cafeteria, self-service restaurant, luncheonette, coffee
shop, pizza parlor, salad bar, fast food restaurant or establishment selling
food or beverages for off-premises consumption. The foregoing shall not prohibit
Tenant from allowing the operation of a typical concession stand to sell food
and beverages to movie theatre patrons at the demised premises.
(k) Except as may otherwise be set forth herein, Tenant
acknowledges that Owner makes no representations or warranties whatsoever as to
the ability of Tenant to use the demised premises for any specific purpose.
Should Tenant desire a change in use of the ground floor level in accordance
with subparagraph (b) hereof, it shall be solely responsible for the performance
of all proposed alterations, installations, additions and improvements and for
obtaining all necessary permits or changes in the certificate of occupancy
affecting the Building; all of such proposed alterations, installations,
additions and inspections shall be performed by Tenant in strict accordance
<PAGE>
with Articles 3 and 49 hereof.
42. TAXES. A. The terms defined below shall for the purposes of this
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lease have the meanings herein specified:
(i) "Taxes": All real estate taxes, sewer rents, water frontage
charges (unless the demised premises are separately metered for water
consumption), and assessments, special or otherwise, levied, assessed or imposed
by the City of New York or any other taxing authority upon or with respect to
the building containing the demised premises and the land thereunder (the
"Land") and all taxes assessed or imposed with respect to the rentals payable
----
hereunder other than general income and gross receipts taxes (except that
general income and gross receipts taxes shall be included if covered by the
provisions of the following sentence). Taxes shall also include any taxes,
charges or assessments levied, assessed or imposed by any taxing authority in
addition to or in lieu of the present method of real estate taxation, provided
such substitute taxes, charges and assessments are computed as if the Building
were the sole property of the Owner subject to said substitute tax, charge or
assessment. Tenant hereby waives any right to institute or join in tax
certiorari proceedings or other similar proceedings contesting the amount or
validity of any Taxes.
(ii) "Base Tax Year" shall mean the fiscal tax year commencing
on July 1, 1989 and ending June 30, 1990.
(iii) "Base Taxes" shall mean the Taxes payable for the Base Tax
Year.
(iv) "Tax Year" shall mean each period of twelve (12) months,
commencing on the first day of July of each such period, in which occurs any
part of the term of this lease or such other period of twelve (12) months
occurring during the term of this lease as hereafter may be duly adopted as the
fiscal year for real estate tax purposes of the City of New York.
(v) "Tax Statement" shall mean an instrument or instruments
setting forth the amount payable by Tenant for a specified Tax year pursuant to
this Article.
(vi) "Tenant's Tax Percentage" shall mean six and eight-tenths
(6.8%) percent.
B. If Taxes payable for any Tax Year or any part thereof shall exceed
the Base Taxes, Tenant shall pay to Owner as Additional Charges an amount
(herein called the "Tax Payment) equal to Tenant's Tax Percentage of the amount
-----------
by which the Taxes for such Tax Year are greater than the Base Taxes, which
amount
<PAGE>
shall be payable as hereinafter provided.
C. The Tax Payment shall be payable by Tenant, in its entirety, as an
Additional Charge, within ten (10) days after Tenant shall have received a Tax
Statement from Owner. Notwithstanding the foregoing, Tenant shall be allowed to
make such payments to Owner in similar installments as Taxes are payable by
Owner provided, however, that (1) such payments shall in each instance be
delivered to Owner by the later to occur of (A) ten (10) days following receipt
by Tenant of the applicable bill from Owner; or (B) five (5) days prior to the
due date by which Owner or its agent must pay the affected installment to the
City of New York without the applicability of any grace period. Owner's failure
to render a Tax Statement with respect to any Tax Year shall not prejudice
Owner's right thereafter to render a Tax Statement with respect to any such Tax
Year nor shall the rendering of a Tax Statement prejudice Owner's right
thereafter to render a corrected Tax Statement for that Tax Year.
D. If the amount of Taxes payable during the Base Tax Year is reduced
by final determination of legal proceedings, settlement or otherwise, the
reduced amount of such Taxes shall determine the amount of the Tax Payment
pursuant to this Article. The Tax Payment theretofore paid or payable under this
Article shall be recomputed on the basis of such reduction, and the Tenant shall
pay to Owner as Additional Charges within ten (10) days after being billed
therefore, any deficiency between the amount of the Tax Payment theretofore
computed and the amount thereof due as a result of such recomputation.
E. In the event Taxes for any Tax Year or part thereof shall be
reduced after Tenant shall have paid Tenant's Tax Percentage of any increase
thereof in respect of such Tax year, Owner shall set forth in the first Tax
Statement thereafter submitted to Tenant the amount of such refund and the
amount of the legal fees and other expenses incurred in connection with the
collection of the refund; and, provided that Tenant is not then in default under
this lease, beyond the applicable grace period, if any, Tenant shall receive a
credit against the installment or installments of rent next falling due equal to
Tenant's Tax Percentage of the amount by which the refund exceeds said fees and
expenses, but in no event shall the credit exceed the amount of the Additional
Charges paid by Tenant with respect to Taxes for said Tax Year.
F. The expiration or termination of this lease during any Tax Year
for any part or all of which there is a Tax Payment due under this Article shall
not affect the rights or obligations of the parties hereto respecting such Tax
Payment and any Tax Statement relating to such Tax Payment may, on a pro rata
basis,
<PAGE>
be sent to Tenant subsequent to, and all such rights and obligations shall
survive, any such expiration or termination. Any payments due under such Tax
Statement shall be payable within ten (10) days after such statement is sent to
Tenant.
43. PORTER'S WAGE ESCALATION.
------------------------
(a) The terms defined below shall for the purposes of this Article
have the meanings herein specified:
(i) "R.A.B." shall mean the Realty Advisory Board On Labor
Relations, Incorporated, or its successor.
(ii) "Local 32B-32J" shall mean Local 32B-32J of the Building
Service Employees International Union, AFL-CIO, or its successor.
(iii) "Class A Office Buildings" shall mean office buildings in
the same class or category as the building under any agreement between R.A.B.
and Local 32B-32J, regardless of the designation given to such office buildings
in any such agreement.
(iv) "Labor Rates" shall mean a sum equal to the regular hourly
wage rate required to be paid to Others (hereinafter defined) employed in Class
A Office Buildings pursuant to an agreement between R.A.B. and Local 32B-32J
(exclusive of fringe benefits); provided, however, that if, as of January 1st of
any Operation Year, any such agreement shall require Others in Class A Office
Buildings to be regularly employed on days or during hours when overtime or
other premium pay rates are in effect pursuant to such agreement, then the term
"regular hourly wage rate", as used in this subsection shall mean the average
hourly wage rate for the hours in a calendar week during which Others are
required to be regularly employed; and provided, further, that if no such
agreement is in effect as of January 1st of any Operation Year with respect to
Others, then the term "regular hourly wage rate", as used in this subsection
shall mean the regular hourly wage rate actually paid to Others employed in the
Building by owner or by an independent contractor engaged by Owner.
(v) "Others" shall mean that classification of employees engaged
in the general maintenance and operation of Class A Office Buildings most nearly
comparable to the classification now applicable to "others" in the current
agreement between R.A.B. and Local 32B-32J.
(vi) "Base Labor Year" shall mean the calendar year commencing
January 1989.
<PAGE>
(vii) "Base Labor Rates" shall mean the Labor Rates in effect for
the Base Labor Year.
(viii) "Owner's Statement" shall mean an instrument or
instruments setting forth the amount of any additional rent payable by Tenant
for a specified Operation Year.
(ix) "Operation Year" shall mean each calendar year, subsequent
to the calendar year 1989, in which occurs any part of the term of this lease.
(b) If the Labor Rates in effect for any Operation Year (any part or
all of which falls within the term) shall be grater than the Base labor Rates,
then for such Operation Year and continuing thereafter until a new Owner's
Statement is rendered to Tenant with respect to Operating Payments (hereafter
defined), Tenant shall pay to Owner an amount equal to the sum of (a) six
thousand one hundred eighty (6,180) multiplied by one (1) times the number of
cents (inclusive of any fractions of a cent) of such increase; and (b) ten
thousand (10,000) multiplied by one-half (1/2) times the number of cents
(inclusive of any fractions of a cent) of such increase (collectively,
"Operating Payment").
-----------------
(c) Owner may furnish to Tenant, prior to the commencement of each
Operation Year, a written statement setting forth Owner's reasonable estimate of
the Operating Payment for the next Operation Year. Tenant shall pay to Owner on
the first day of each month during such Operation Year, an amount equal to one-
twelfth of Owner's estimate of the Operating Payment for such Operation Year.
If, however, Owner shall not furnish any such estimate for an Operation Year or,
if Owner shall furnish any such estimate for an Operation Year subsequent to the
commencement thereof, then (a) until the first day of the month following the
month in which such estimate is furnished to Tenant, Tenant shall pay to Owner
on the first day of each month an amount equal to the monthly sum payable by
Tenant to Owner under this Article in respect of the last month of the preceding
Operation Year; (b) after such estimate is furnished to Tenant, Owner shall give
notice to Tenant stating whether the installments of the Operating Payment
previously made for such Operation Year are greater or less than the
installments of the Operating Payment to be made for such Operation Year, in
accordance with such estimate, and (i) if there shall be a deficiency, Tenant
shall pay the amount thereof within 10 days after demand therefor, or (ii) if
there shall have been an overpayment, Owner shall refund to Tenant the amount
thereof; and (c) on the first day of the month following the month in which such
estimate is furnished to Tenant and monthly thereafter throughout the remainder
of such Operation Year, Tenant shall pay
<PAGE>
to Owner an amount equal to one-twelfth (1/12th) of the Operating Payment shown
on such estimate.
(d) Owner shall furnish to Tenant an Owner's Statement for each
Operation Year; such Owner's Statement shall be furnished by Owner no later than
the latter to occur of (A) the date which is 90 days following the expiration of
the affected Operation Year, or (B) the date which is 30 days following Owner's
receipt of written notice from Tenant requesting the Owner's Statement, which
notice may be sent by Tenant no earlier than the final day of the affected
Operation Year. (i) If Owner did not furnish to Tenant a statement of estimated
Operating Payment under the preceding subparagraph (c), then Tenant shall pay to
Owner, within 15 days of the furnishing of Owner's Statement, the Operating
Payment for the Operation Year. (ii) If Owner has furnished to Tenant a
statement of the estimated Operating Payment under the preceding subparagraph
(c), then if the Owner's Statement shall show that the sums paid by Tenant under
subparagraph (c) exceeded the Operating Payment to be paid by the amount of such
excess simultaneously with the rendition of such Owner's Statement; and if the
Owner's Statement for such Operation Year shall show that the sums so paid by
Tenant were less than the Operating Payment to be paid by Tenant for such
Operation Year, Tenant shall pay the amount of such deficiency within 15 days
after demand therefor.
44. FUEL ESCALATION. Tenant agrees to pay a sum equal to Six and Eight-
---------------
Tenths (6.8%) Percent per annum of the increased difference of the cost of fuel
oil (including sales or other taxes thereon) for as many gallons supplied to the
Building, of which the demised premises form a part, as compared to the cost of
sixty ($.60) cents per gallon. Payment to Owner shall be due and payable as and
when bills are rendered and shall be deemed additional rent and collectible as
such. Bills to be rendered for periods are at Owner's discretion. In the event
Owner, at its option, elects to change the fuel presently used for the Building
to any other type of fuel, then and in that event, the Tenant agrees to pay a
share equal to Six and Eight-Tenths (6.8%) Percent per annum of the increased
cost of such other fuel supplied to the Building for the term of the within
lease based upon the cost of sixty ($.60) cents per gallon. Payment to Owner
shall be due and payable as and when bills are rendered accompanied by evidence
that the fuel bills have been paid by Owner and shall be deemed additional rent
and collectible as such.
45. COMPLIANCE WITH LAWS. If any capital improvement is made to the
--------------------
Building or the Land thereunder during any calendar year during the term in
compliance with requirements of any Federal, state or local law or governmental
regulation (other
<PAGE>
than requirements currently in effect which have not been complied with by
Owner, which Owner agrees it shall comply with at its sole cost and expense),
then Tenant shall pay to Owner, immediately upon demand therefor, Tenant's Tax
Percentage of the reasonable annual amortization, with interest at the rate of
10% per annum, of the cost of such improvement in each calendar year during the
term during which such amortization occurs.
46. ATTORNMENT AND NOTICE TO OWNER. Supplementing the provisions of
------------------------------
Article 7 of this lease:
A. If at any time or times during the term of this lease, (i) the
Owner of the demised premises shall be the holder of a leasehold estate covering
premises of which the demised premises are a part, and if such leasehold estate
shall expire or terminate for any reason, or (ii) if the Building, Land or the
Owner's aforesaid leasehold estate shall be affected by a mortgage, then Tenant
shall, at the election and upon demand of any owner of the premises of which the
demised premises are a part, or of any mortgagee in possession thereof, attorn
to any such owner or mortgagee upon the terms and conditions set forth herein
for the remainder of the term of this lease. The foregoing provisions shall
inure to the benefit of any such owner or mortgagee and shall, in the even of
any such election and demand, be self-operative without the necessity of the
execution of any further instruments; but Tenant agrees upon the demand of any
such owner or mortgagee to execute, acknowledge and deliver any instrument or
instruments confirming such attornment. The foregoing provisions shall not be
construed to limit or preclude any other rights which such owner or mortgagee
may then have under law or otherwise.
B. In the event of an act or omission or alleged act or omission by
Owner which would give Tenant the right to terminate this lease or to abate the
payment of rent or to claim a partial or total eviction, Tenant shall not
exercise any such right unless (i) Tenant shall first have given written notice
of such act or omission to Owner and to the holder of any mortgage on the
Building (whose name and address shall previously have been furnished to Tenant)
and (ii) neither Owner nor any mortgagee shall have commenced to cure such act
or omission within a reasonable period of time following the giving of such
notice (which reasonable period shall in no event be less than the period to
which owner would be entitled under this lease or otherwise, after similar
notice, to effect such remedy).
C. Owner agrees that promptly after the execution of this lease, in
the event this lease shall be in full force and effect and without default by
Tenant, it shall request the holder of any current mortgage encumbering the
Building and the Land
<PAGE>
("Superior Mortgage") to enter into an agreement substantially to the effect
that so long as Tenant is in full compliance with the terms, covenants and
conditions of this lease, its possession of the demised premises shall not be
disturbed in the event of a foreclosure of such Superior Mortgage (such
agreement from a holder of a Superior Mortgage, or, if applicable, a lessor
under a Superior Lease (hereinafter defined) being hereinafter called a "Non-
Disturbance Agreement"). If Owner is unable in good faith to obtain such a Non-
Disturbance Agreement within fifteen (15) days from the date hereof, it shall
notify Tenant and Tenant shall, by notice delivered to Owner within twenty (20)
days thereafter, have the right to terminate this lease. Failure by Tenant to
notify Owner within said twenty (20)-day period shall be deemed an election by
Tenant to waive any further right to terminate this lease under this Section C.
D. Owner agrees that so long as this lease shall be in full force and
effect, the subordination of this lease as set forth in Article 7 hereof shall
be conditioned upon Owner's compliance with the following provisions: (i) should
Owner hereafter enter into any Superior Mortgage and Tenant is not then in
default hereunder beyond the applicable grace period, if any, same shall contain
a covenant on the part of the holder thereof (or such holder shall provide in a
separate document) substantially to the effect that so long as Tenant is in full
compliance with the terms, covenants and conditions of this lease, its
possession of the demised premises shall not be disturbed in the event of a
foreclosure under such Superior Mortgage; and (ii) should Owner hereafter enter
into any ground or underlying lease ("Superior Lease") and Tenant is not then in
default hereunder beyond the applicable grace period same shall contain a
covenant on the part of the lessor thereunder (or such lessor shall provide in a
separate document) substantially to the effect that so long as Tenant is in full
compliance with the terms, covenants and conditions of this lease, its
possession of the demised premises shall not be disturbed in the event of the
termination of such Superior Lease.
E. If required by the holder of a Superior Mortgage or the lessor
under a Superior Lease, Tenant shall promptly shall join in any Non-Disturbance
Agreement in such form as prepared by holder of such Superior Mortgage or
Superior Lease to indicate its concurrence with the provisions thereof and its
agreement, in the event of a foreclosure of such Superior Mortgage or the
termination of such Superior Lease, as the case may be, to attorn to such holder
or lessor, as the case may be, as Tenant's landlord hereunder and such other
terms and conditions reasonably requested by the holder of any such Superior
Lease or Superior Mortgage.
<PAGE>
F. Owner represents that there is no Superior Lease currently
affecting the demised premises.
47. ASSIGNMENT AND SUBLETTING.
-------------------------
A. Tenant shall not, whether voluntarily, involuntarily, or by
operation of law or otherwise (a) assign or otherwise transfer this lease or the
term and estate hereby granted, or advertise to do so referring to the name or
address of the Building, (b) sublet the demised premises or advertise to do so
referring to the name or address of the building, or allow the same to be used,
occupied or utilized by anyone other than Tenant, (c) mortgage, pledge, encumber
or otherwise hypothecate this lease or the demised premises or any part thereof
in any manner whatsoever or (d) permit the demised premises or any part thereof
to be occupied, or used for desk space, mailing privileges or otherwise, by any
person other than Tenant, without in each instance obtaining the prior written
consent of Owner.
B. (i) Tenant expressly covenants and agrees that a transfer of more
than fifty percent (50%) (at any one time or, in the aggregate from time to
time) of the shares of any class of the issued and outstanding stock of Tenant,
its successors or assigns or the issuance of additional shares of any class of
its stock to the extent of more than 50% of the number of shares of said class
of stock issued and outstanding at the time that it became the tenant hereunder
or the sale or transfer of more than 50% of the partnership, joint venture or
other unincorporated association interests of Tenant, its successors or assigns
shall constitute an assignment of this lease and, unless in each instance the
prior written consent of Owner has been obtained, shall constitute a default
under this lease and shall entitle Owner to exercise all rights and remedies
provided for herein in the case of default.
(ii) Notwithstanding the provisions of subsection (i) above,
Owner shall not unreasonably withhold its consent to the sale in a single
transaction of all of the issued and outstanding shares of stock of Tenant (or,
if applicable, the sale in a single transaction of all of the partnership, joint
venture of other unincorporated association interests of Tenant), provided that
(i) Tenant shall not then be in default after the expiration of the applicable
grace period, if any, in the performance of any obligations on its part to be
performed hereunder; (ii) the shareholders (or, if applicable, the holders of
unincorporated interests) of Tenant shall each have furnished Owner with notice
of their desire to sell such stock (or, if applicable, unincorporated
interests), which notice shall be accompanied by (A) conformed or photostatic
copies of all proposed transfer documents, the effective date of which shall be
<PAGE>
at least thirty (30) days after the giving of such notice; (B) a statement
setting forth in reasonable detail the identity of the proposed purchaser(s) of
such shares (or, if applicable, other unincorporated interests) and such proof
as Owner may reasonably require evidencing that said purchaser(s) are
experienced in the business being conducted at the demised premises as permitted
under the terms of this lease, are of sound financial condition considering the
responsibilities involved and are of good character; and (iii) the shareholders
(or, if applicable, holders of unincorporated interests) of Tenant shall
reimburse Owner on demand for any reasonable costs that may be incurred by Owner
in connection with said sale of shares (or, if applicable, unincorporated
interests), including, without limitation, the costs of making investigations as
to the acceptability of said proposed purchaser(s) and legal costs incurred in
connection with the granting of such requested consent.
(iii) Notwithstanding the provisions of subsection (i) hereof,
the shareholders (or, if applicable, holders of unincorporated interests) of
Tenant may without Owner's consent transfer their interests to any members(s) of
the immediate family of Joseph Saleh or to a trust for the sole benefit of
Joseph Saleh or to any entity at least 50% of which is owned and controlled by
Joseph Saleh and/or such immediate family member(s) or trust. The foregoing
right to transfer shall be subject to the following provisions: (A) Tenant shall
not then be in default after the expiration of the applicable grace period, if
any, in the performance of any obligations on its part to be performed
hereunder; and (B) Tenant shall have furnished to Owner conformed or photostatic
copies of all transfer documents within ten (10) days following execution
thereof. As used in this subparagraph (iii), the term "immediate family" shall
refer only to the spouse, sister, brother or children of Joseph Saleh.
C. If this lease be assigned, whether or not in violation of the
provisions of this lease, Owner may collect rent from the assignee. If the
demised premises are sublet or used or occupied by anybody other than Tenant,
whether or not in violation of this lease, Owner may, after default by Tenant,
and expiration of Tenant's time to cure such default, collect rent from the
subtenant or occupant. In either event, Owner may apply the net amount collected
to the Fixed Rent and Additional Charges herein reserved, but no such
assignment, subletting, occupancy or collection shall be deemed a waiver of any
of the provisions of Section A, or the acceptance of the assignee, subtenant or
occupant as tenant, or a release of Tenant from the performance by Tenant of
Tenant's obligations under this lease. The consent by Owner to a particular
assignment, mortgaging, subletting or use or occupancy by others shall not in
any way be considered a consent by Owner to any other or further assignment,
mortgaging
<PAGE>
or subletting or use or occupancy by others not expressly permitted by this
Article. References in this lease to use or occupancy by others (that is, anyone
other than Tenant) shall not be construed as limited to subtenants and those
claiming under or through subtenants but shall also include licensees and others
claiming under or through Tenant, immediately or remotely.
D. Any assignment or transfer, whether made with Owner's consent
pursuant to Section A or Section G or without Owner's consent pursuant to
Section B, shall be made only if, and shall not be effective until, the assignee
shall execute, acknowledge and deliver to Owner an agreement in form and
substance reasonably satisfactory to Owner whereby the assignee shall assume the
obligations of this lease on the part of Tenant to be performed or observed and
whereby the assignee shall agree that the provisions in Section A shall,
notwithstanding such assignment or transfer, continue to be binding upon it in
respect of all future assignments and transfers. The original named Tenant
covenants that, notwithstanding any assignment or transfer, whether or not in
violation of the provisions of this lease, and notwithstanding the acceptance of
Fixed Rent and/or Additional Charges by Owner from an assignee, transferee, or
any other party, the original named Tenant shall remain fully liable for the
payment of the Fixed Rent and Additional Charges and for the other obligations
of this lease on the part of Tenant to be performed or observed.
E. The joint and several liability of Tenant and any immediate or
remote successor in interest of Tenant and the due performance of the
obligations of this lease on Tenant's part to be performed or observed shall not
be discharged, released or impaired in any respect by any agreement or
stipulation made by Owner extending the time of, or modifying any of the
obligations of, this lease, or by any waiver or failure of Owner to enforce any
of the obligations of this lease.
F. The listing of any name other than that of Tenant, whether on the
doors of the demised premises or the Building directory, or otherwise, shall not
operate to vest any right or interest in this lease or in the demised premises,
nor shall it be deemed to be the consent of Owner to any assignment or transfer
of this lease or to any sublease of the demised premises or to the use or
occupancy thereof by others.
G. Notwithstanding the provisions of Section A of this Article 47,
Owner hereby agrees that it shall not unreasonably withhold or delay its consent
to an assignment of Tenant's entire interest under this lease (and Owner further
agrees that should such assignment constitute a conditional assignment pending
the full payment by the proposed assignee of the purchase price for
<PAGE>
Tenant's business, it shall not unreasonably withhold its consent to a
simultaneous interim subletting of the entire demised premises to such
assignee), subject, however, to the following terms and conditions:
(i) Tenant shall not then be in default, after the expiration of
the applicable grace period, if any, in the performance of any obligations on
its part to be performed hereunder;
(ii) Such assignment (and, if applicable, interim sublease)
shall be entered into at least one (1) year following the Commencement Date:
(iii) Such assignment (and if applicable, interim sublease)
shall be made in connection with the sale by Tenant of all or substantially all
of its assets at the demised premises to the assignee, which assets shall
include, without limitation, Tenant's good will and all of Tenant's business
inventory and trade fixtures;
(iv) Tenant shall have furnished Owner with notice of its desire
to assign this lease (and, if applicable, sublet the entire demised premises),
which notice shall be accompanied by (a) a conformed or photostatic copy of the
proposed assignment (and, if applicable, the interim sublease), the effective or
commencement date of which shall be at least thirty (30) days after the giving
of such notice, (b) a statement setting forth in reasonable detail the identity
of the proposed assignee and the principals thereof and such proof as Owner may
reasonably require evidencing that the proposed assignee or such principals
thereof (A) are experienced in the business being conducted at the demised
premises as permitted under the terms of this lease, (B) are of sound financial
condition considering the responsibilities involved; (C) are of good character;
and (D) if such assignee is a partnership, corporation or other entity, such
entity is validly formed, is qualified to transact business in the State of New
York and has duly authorized the signatories to sign all documents on its behalf
so as to bind the assignee; and (C) a statement setting forth in reasonable
detail the nature of the proposed assignee's business and its proposed use of
the demised premises:
(v) The proposed assignee (or subtenant) shall use the demised
premises only as permitted by the terms of this lease;
(vi) Upon the effective date of such assignment (and, if
applicable, upon the commencement date of such interim sublease), Tenant shall
deliver to Owner, as additional security
<PAGE>
hereunder, to be held by Owner in accordance with Article 31 hereof, a sum equal
to one (1) monthly installment of the then Fixed Annual Rent;
(vii) The form of the proposed assignment (and, if applicable,
the interim sublease) shall be in form reasonably satisfactory to Owner and
shall comply with the applicable provisions of this Article;
(viii) Tenant shall reimburse Owner on demand for any reasonable
costs that may be incurred by Owner in connection with said assignment (and, if
applicable, the interim sublease), including, without limitation, the costs of
making investigations as to the acceptability of the proposed assignee, and
legal costs incurred in connection with the granting of any requested consent;
(ix) The proposed assignee is not entitled, directly or
indirectly, to diplomatic or sovereign immunity and is subject to the service of
process in, and the jurisdiction of the courts of, New York State; and
(x) Tenant shall not have advertised the availability of the
demised premises referring to the name or address of the Building.
H. Owner hereby agrees that it shall not unreasonably withhold or
delay its consent to a subletting by Tenant of all or part of the ground-level
floor portion or the basement level portion of the demised premises, provided
and upon condition that:
(i) Tenant shall not then be in default after the expiration of
the applicable grace period, if any, in the performance of any obligations on
its part to be performed hereunder;
(ii) In Owner's reasonable judgment the proposed subtenant is
engaged in a business and the demised premises will be used in a manner which
(a) is in keeping with the then standards of the Building, (b) is limited to the
use permitted by the terms of this lease, and (c) will not violate any negative
covenant as to use contained in any other lease of space in the Building;
(iii) The proposed subtenant is a reputable person of good
character and with sufficient financial worth considering the responsibility
involved, and Owner has been furnished with reasonable proof thereof;
<PAGE>
(iv) The proposed sublessee is not entitled, directly or
indirectly, to diplomatic or sovereign immunity and is subject to the service of
process in, and the jurisdiction of the courts of, New York State;
(v) The form of the proposed sublease shall be in form
reasonably satisfactory to Owner and shall comply with the applicable provisions
of this Article;
(vi) There shall not at any one time be more than two (2)
subtenants of the entire demised premises;
(vii) Tenant shall reimburse Owner on demand for any reasonable
costs that may be incurred by Owner in connection with said sublease, including,
without limitation, the costs of making investigations as to the acceptability
of the proposed subtenant, and legal costs incurred in connection with the
granting of any requested consent; and
(viii) Tenant shall not have advertised the availability of the
demised premises referring to the name or address of the Building.
(ix) Tenant may during the term hereof, without obtaining
Owner's prior consent, permit part of the basement level space to be used by a
third party for the operation of a customary concession stand for the sale of
food and beverages to movie theatre patrons; for the purposes of subsection (vi)
of Section H hereof, such third party shall not constitute a "subtenant" of the
demised premises. The foregoing, however, is subject to the following terms and
conditions: (A) only one such concession stand shall be allowed at any one time
during the term hereof; and (B) Tenant shall deliver to Owner a full and
complete copy of the agreement between Tenant and such third party establishing
such use, in each case at least ten (10) days following the execution thereof.
I. In the event that (a) Owner consents to a proposed assignment or
sublease, and (b) Tenant fails to execute and deliver the assignment or sublease
to which Owner consented within 90 days after the giving of such consent, then,
Tenant shall again comply with all of the provisions and conditions of Sections
B, G or H, as the case may be, before assigning this lease (and, if applicable,
entering into a simultaneous interim sublease) or subletting all or any part of
the ground-level of the demised premises.
J. With respect to each and every sublease or subletting authorized
by Owner under the provisions of this lease, it is further agreed:
<PAGE>
(i) No subletting shall be for a term ending later than one day
prior to the expiration date of this lease.
(ii) No sublease shall be valid, and no subtenant shall take
possession of the demised premises until an executed counterpart of such
sublease has been delivered to Owner.
(iii) Each sublease shall provide that it is subject and
subordinate to this lease and to the matter to which this lease is or shall be
subordinate, and that in the event of termination, re-entry or dispossess by
Owner under this lease Owner may, at its option, take over all of the right,
title and interest of Tenant, as sublessor, under such sublease, and such
subtenant shall, at Owner's option, attorn to Owner pursuant to the then
executory provisions of such sublease, except that Owner shall not (a) be liable
for any previous act or omission of Tenant under such sublease, (b) be subject
to any offset not expressly provided in such sublease, which theretofore accrued
to such subtenant against Tenant, or (c) be bound by any previous modification
of such sublease or by any previous prepayment of more than one month's rent.
K. In no event shall Tenant be entitled to make, nor shall Tenant
make any claim, and Tenant hereby waives any damages by way of set-off,
counterclaim or defense, based upon any claim or assertion by Tenant that Owner
has unreasonably withheld or unreasonably delayed any consent or approval to a
proposed assignment or subletting as provided for above, but Tenant's sole
remedy shall be an action or proceeding to enforce any such provision, or for
specific performance, injunction or declaratory judgment.
L. If Tenant is a partnership (or is comprised of two (2) or more
persons, individually and/or as co-partners of a partnership) or if Tenant's
interest in this lease shall be assigned to a partnership (or to two (2) or more
persons, individually and/or as co-partners of a partnership) pursuant to this
Article (any such partnership and such persons are referred to in this section
as "Partnership Tenant"), the following provisions of this section shall apply
------------------
to such Partnership Tenant: (i) the liability of each of the general partners
comprising partnership Tenant shall be joint and several, and (ii) each of the
general partners comprising Partnership Tenant hereby consents in advance to,
and agrees to be bound by, any written instrument which may hereafter be
executed, changing, modifying or discharging this lease, in whole or in part, or
surrendering all or any part of the demised premises to Owner or renewing or
extending this lease and by any notices, demands, requests or other
communications which may hereafter be given, by Partnership Tenant or by any of
the parties comprising
<PAGE>
Partnership Tenant, and (iii) if Partnership Tenant shall admit new general
partners, all of such new general partners shall, by their admission to
Partnership Tenant, be deemed to have assumed performance of all of the terms,
covenants and conditions of this lease on Tenant's part to be observed and
performed.
M. Each subletting shall be subject to all of the covenants,
agreements, terms, provisions and conditions contained in this lease.
Notwithstanding any such subletting and/or acceptance of rent or additional rent
by Owner from any subtenant, Tenant shall and will remain fully liable for the
payment of the Fixed Rent and Additional Charges due and to become due hereunder
and for the performance of all the covenants, agreements, terms, provisions and
conditions contained in this lease on the part of Tenant to be performed and all
acts and omissions of any licensee or subtenant or anyone claiming under or
through any subtenant which shall be in violation of any of the obligations of
this lease, and any such violation shall be deemed to be a violation by Tenant.
Tenant further agrees that notwithstanding any such subletting, no other and
further subletting of the demised premises by Tenant or any person claiming
through or under Tenant shall or will be made except upon compliance with and
subject to the provisions of this Article.
N. Supplementing the foregoing provisions of this Article 47,
provided Tenant is not in default under the terms of this lease, beyond the
applicable grace period, if any, Owner agrees that Tenant shall have the right
to assign, pledge or hypothecate, this lease to a lending institution as
security for financing obtained by Tenant from such institution. A copy of such
assignment, pledge or hypothecation, shall be submitted forthwith to Owner.
O. Notwithstanding anything contained in this Article 47 to the
contrary, and except as provided in Paragraph 47 N., Tenant shall not enter into
any agreement to assign this Lease or sublet the basement space or any part
thereof until the substantial completion by Tenant of the Initial Tenant Work
(hereinafter defined).
48. INSURANCE. Supplementing the provisions of Articles 8 and 9 of this
---------
lease:
A. Tenant, at its expense, shall maintain at all times during the
term of this lease public liability insurance in respect of the demised premises
and the conduct or operation of business therein, with Owner and its managing
agent, if any, and Owner's lessor(s) and mortgagee(s) whose names and addresses
shall previously have been furnished to Tenant, as additional
<PAGE>
named insureds, with limits of not less than $5,000,000 combined single limit
bodily injury and property damage liability. Tenant shall deliver to Owner and
any additional named insured such fully paid-for policies or certificates of
insurance, in form reasonably satisfactory to Owner issued by the insurance
company or its authorized agent, at least 10 days before the commencement date.
Tenant shall procure and pay for renewals of such insurance from time to time
before the expiration thereof, and Tenant shall deliver to Owner and any
additional named insured such renewal policy or a certificate thereof at least
30 days before the expiration of any existing policy. All such policies shall be
issued by companies of recognized responsibility licensed to do business in New
York State, and all such policies shall contain a provision whereby the same
cannot be cancelled or modified unless Owner and any additional named insured
are given at least 20 days' prior written notice of such cancellation or
modification.
B. Owner may from time to time require that the amount of the
insurance to be maintained by Tenant under Section A be increased, so that the
amount thereof reasonably protects Owner's interest.
C. Tenant and Owner shall secure (if available) an appropriate clause
in, or an endorsement upon, each of their respective insurance policies covering
or applicable (in the case of Tenant) to the demised premises and the personal
property, fixtures and equipment located therein or thereon and the Building (in
the case of Owner), pursuant to which Owner and Tenant's respective insurance
companies waive subrogation or permit the insured, prior to any loss, to agree
with a third party to waive any claim it might have against said third party
without invalidating the coverage under said insurance policy. The waiver of
subrogation or permission for waiver of any claim obtained by Tenant shall
extend to Owner and its agents and employees and each mortgagee of Owner.
49. TENANT'S WORK AND ALTERATIONS. Supplementing the provisions of
-----------------------------
Article 3 of this lease:
A. Tenant shall make no changes or alterations in or to the demised
premises of any nature without Owner's prior written approval. Prior to
commencing any work in the demised premises, Tenant shall submit to Owner for
Owner's written approval complete drawings, plans and specifications (herein
collectively referred to as "Tenant's Plan") for the improvements and
-------------
installations to be made by Tenant (herein collectively referred to as "Tenant's
--------
Work"). Tenant's Plan shall be fully detailed and shall show complete
- ----
dimensions, shall not be in conflict with Owner's basic plans for the Building,
shall not
<PAGE>
require any changes in the structure of the Building and shall not be in
violation of any laws, orders, rules or regulations of any governmental
department or bureau having jurisdiction of the demised premises.
B. (i) Within twenty (20) days after submission to Owner or Tenant's
Plan, Owner shall either approve same or shall set forth in writing the
particulars in which Owner does not approve same, in which latter case Tenant
shall, within ten (10) days after Owner's notification, return to Owner
appropriate corrections thereto. Such corrections shall be subject to Owner's
approval. Tenant shall pay to Owner, promptly upon being billed and as
Additional Charges, any charges or expenses Owner may incur in reviewing
Tenant's Plan. Tenant agrees that any review or approval by Owner of Tenant's
Plan is solely for Owner's benefit, and without any representation or warranty
whatsoever to Tenant with respect to the adequacy, legality, correctness or
efficiency thereof or otherwise. Owner agrees that it shall not unreasonably
withhold or delay its consent to Tenant's Plan or any revisions thereof.
(ii) Notwithstanding the foregoing provisions of this Article 49,
following completion by Tenant of the Initial Tenant Work (hereinafter defined),
Owner's consent shall not be required hereunder for any subsequent Tenant's
Work, subject, however, to the following terms and conditions: (a) prior to
commencing any such work, Tenant shall submit to Owner the Tenant's Plan; (b) in
its performance of Tenant's Work, Tenant shall comply fully with applicable
provisions of Article 3 and this Article 49; and (c) such Tenant's Work shall
not affect the public portions or systems of the Building or otherwise affect
the structural integrity of the Building.
C. Following compliance by Tenant with its obligations under the
foregoing sections of this Article, Tenant shall timely commence Tenant's Work
in order to complete same within a reasonable period of time. Tenant's Work
shall be diligently pursued and shall be performed in a good and workmanlike
manner.
D. Tenant agrees that in the performance of Tenant's Work (i) that
Tenant shall comply with any reasonable work schedule, rules and regulations
proposed by Owner, its agents or employees, (ii) that the labor employed by
Tenant shall be harmonious and compatible with the labor employed by Owner in
the Building, it being agreed that if in Owner's judgment the labor is
incompatible Tenant shall forthwith upon Owner's demand withdraw such labor from
the demised premises, (iii) that Tenant shall procure and deliver to Owner
workmen's compensation, public liability, property damage and such other
insurance policies, in such amounts as shall be reasonably acceptable to Owner
in
<PAGE>
connection with Tenant's Work, and shall upon Owner's request cause Owner to be
named as an insured thereunder, (iv) that Tenant shall hold Owner harmless from
and against any and all claims arising from or in connection with any act or
omission of Tenant or its agents or employees, (v) that Tenant's Work shall be
performed in accordance with the approved Tenant's Plan and in compliance with
the laws, orders, rules and regulations of any governmental department or bureau
having jurisdiction of the demised premises, and (vi) that Tenant shall promptly
pay for Tenant's Work in full and shall not permit any lien to attach to the
demised premises or the Building.
E. (i) Upon Owner's approval of Tenant's Plans (if required
hereunder) and the selection by Tenant of all final bids in connection with
Tenant's Work, Tenant shall submit to Owner the full estimated cost for such
work certified by Tenant's architect. The determination of such full estimated
cost shall be subject to Owner's approval, not to be unreasonably withheld.
(ii) Upon a final determination being made of the estimated cost
of Tenant's Work, as provided in subsection (i) above, should such estimated
cost of Tenant's Work exceed the aggregate sum of One Hundred Seventy-Five
Thousand ($175,000) Dollars, Tenant shall, prior to Tenant's commencing any
work, deliver to Owner, to secure the prompt and proper completion of Tenant's
Work, a cash deposit or an irrevocable, unconditional, negotiable letter of
credit, issued by and drawn on a bank or trust company in a form reasonably
satisfactory to Owner, in an amount equal to the aggregate of (A) the aforesaid
final cost estimate and (B) ten (10%) per cent of such sum. Such letter of
credit shall be for one year and shall be renewed by Tenant each and every year
until Tenant's Work is completed and shall be delivered to Owner not less than
30 days prior to the expiration of the then current letter of credit. Failure to
deliver such new letter of credit on or before said date shall be a material
breach of this lease and Owner shall have the right, inter alia, to present the
----- ----
then current letter of credit for payment. Notwithstanding the foregoing, Tenant
shall have the right from time to time (but not more frequently than once each
30 days) to reduce the face amount of said letter of credit, subject in each
instance to the following provisions: Tenant may in each instance reduce the
then face amount of the letter of credit by an amount equal to the sum of
receipted invoices from contractor(s) delivered to Owner, which invoices shall
be accompanied by lien waivers to the extent of such requested reduction,
provided, however, that at no time shall the face amount of said letter of
credit be less than a sum equalling 110% of the remaining sum certified from
time to time by Tenant's architect to be necessary to complete such Tenant's
Work.
<PAGE>
(iii) Upon (A) the completion of Tenant's Work in accordance with
the terms of this Article and (B) the submission to Owner of proof evidencing
the payment in full for Tenant's Work, the letter of credit (or the balance of
the proceeds thereof, if Owner has drawn on said letter of credit) shall be
returned to Tenant.
(iv) Upon the Tenant's failure to properly perform, complete and
fully pay for Tenant's Work, as reasonably determined by Owner, Owner shall be
entitled to draw down on the letter of credit to the extent it deems necessary
in connection with Tenant's Work, the restoration and/or protection of the
demised premises or the Building and the payment or satisfaction of any costs,
damages or expenses in connection with the foregoing and/or Tenant's obligations
under this Article.
(v) Upon a final determination being made of the estimated cost
of Tenant's Work, as provided in subsection (i) above, should such estimated
cost of Tenant's Work exceed the aggregate sum of One Hundred Seventy-Five
Thousand ($175,000) Dollars, Tenant shall, prior to Tenant's commencing any
work, also deliver to Owner, as further security for the prompt and proper
completion of Tenant's Work, an absolute and unconditional guaranty of payment
and performance executed by Joseph Saleh, in form and substance reasonably
satisfactory in all respects to Owner, which document shall guarantee (A)
Tenant's performance of Tenant's Work free and clear of all liens, and (B) the
payment by Tenant of all sums which may be owing under subparagraph (e) of
Article 56 hereof. Upon (A) the completion of Tenant's Work in accordance with
the terms of this Article and (B) the submission to Owner of proof evidencing
the payment in full for Tenant's Work, the aforesaid guaranty shall be returned
to Tenant. In the even that his Lease is assigned to a corporation or
partnership in which Joseph Saleh is not a director, stockholder, officer or
partner, as the case may be, Owner agrees that the foregoing provisions of this
subsection (v) shall not apply to Tenant's Work (other than the Initial Tenant's
Work) to be performed by such assignee, it being agreed, however, that all other
terms and conditions of this Article 49 shall apply fully to such Tenant's Work
to be performed by such assignee, except that the dollar figure "$175,000" set
forth in subsection E(ii) of this Article 49 shall be reduced to "$50,000." The
parties hereto acknowledge and agree that the provisions of the immediately
preceding sentence shall not apply in any respect to an assignee of Tenant
pursuant to Section B(iii) of Article 47 hereof.
F. (i) Owner represents and warrants that under existing zoning rules
and regulations the demised premises permit the use thereof for motion picture
theatre(s), and that, subject to compliance with all other building codes, rules
and
<PAGE>
regulations ("Regulations"), the preliminary plans heretofore submitted by
Tenant to Owner entitled "Proposed Building-A Six Theatre Complex-Soho Theatre
Center" (Drawings A-1 to and including A-5) prepared by Michael Schimenti P.C.
and initialled by Tenant (collectively, the "Schimenti Plans") will not violate
existing zoning rules thereby (subject to compliance with Regulations)
permitting use of the demised premises for motion picture theatre(s). In the
event Tenant determines that the foregoing representation is not true in all
material respects, then either party may elect to terminate this Lease,
provided, however, such election is made in writing not later than thirty days
after submission by Tenant of the Initial Plans (hereinafter defined) to the
Buildings Department (hereinafter defined). Failure by either party to exercise
its right to cancel as provided for in this subparagraph F(i) shall constitute a
waiver of such party's right to terminate this Lease pursuant to this
subparagraph F(i).
(ii) Owner hereby approves the Schimenti Plans subject, however,
to Tenant's compliance with the provisions of Article 3 hereof and this Article
49. Tenant agrees that Owner's approval of such initialled preliminary plans is
without any representation or warranty whatsoever to Tenant with respect to the
adequacy, legality, correctness or efficiency thereof or otherwise.
G. Tenant agrees that in connection with the Tenant's Work to be
performed in order to prepare the demised premises for Tenant's occupancy
("Initial Tenant Work"), it shall, within ninety (90) days from the date of
execution and delivery (free of escrow) hereof, submit to Owner all of Tenant's
architectural drawings and such other plans or drawings as may be required to be
submitted to the New York City Department of Buildings (the "Buildings
Department") in order for Tenant to commence construction of the Initial Tenant
Work (collectively, the "Initial Plans"). Within ten (10) days following its
receipt of the proposed Initial Plans, Owner shall notify Tenant as to either
its approval of such plans or such changes thereto as Owner determines are
reasonably necessary; within ten (10) days following its receipt from Owner of
any reasonable proposed changes, provided such changes do not (i) substantially
increase the cost of the Initial Tenant Work, or (ii) reduce the proposed
aggregate searing capacity of the motion picture theatre(s) described in the
Initial Plans by more than fifty (50) seats, or (iii) reduce the number of
proposed motion picture theatre(s) at the demised premises, Tenant shall cause
its architect to make such changes to such plans and again submit same to Owner
for its approval. Within five (5) days following Owner's notifying Tenant as to
its approval of the Initial Plans, Tenant shall deliver the Initial Plans to the
Buildings Department for the
<PAGE>
latter party's approval. The parties hereto agree that they shall each cooperate
in connection with the prompt application to the Buildings Department for
approval of the Initial Plans, it being agreed that same shall be done at
Tenant's sole cost and expense. Should the Buildings Department thereafter
require changes to the Initial Plans, provided such changes do not (i)
substantially increase the cost of the Initial Tenant Work, or (ii) reduce the
proposed aggregate seating capacity of the motion picture theatre(s) described
in the Initial Plans by more than fifty (50) seats, or (iii) reduce the number
of proposed motion picture theatre(s) at the demised premises to four (4) or
fewer (provided that the Initial Plans shall have provided for at least five (5)
such theaters), Tenant shall promptly cause its architect to make such changes
and submit the revised Initial Plans to the Buidlings Department, subject to
Owner's consent, which shall not be unreasonably withheld or delayed. Should the
Buildings Department approve the Initial Plans as herein provided, Tenant shall
perform the Initial Tenant Work in full accordance with the provisions of this
lease, including without limitation, Article 3 and this Article 49.
Notwithstanding anything herein contained, should the Buildings Department fail
to approve the Initial Plans and accept the application for a public assembly
permit within 60 days from the date that the Initial Plans are initially
submitted, Tenant shall have the right to cancel this lease by notice delivered
to Owner within 15 days thereafter, in which event this lease shall terminate on
the date which is 30 days following the delivery of such notice as if such
termination date was the date originally set forth as the expiration date of
this lease and Owner shall return all unapplied security deposits and prepaid
rent, provided same have not been applied by Owner by reason of Tenants default
hereunder. Notwithstanding the foregoing sentence, should the failure by Tenant
to comply with the provisions of this Section (G) result in the failure by the
buildings Department to approve the Initial Plans within the aforesaid 60-day
period, Tenant shall not be entitled to terminate this lease as aforesaid.
H. Should Tenant, as part of the Initial Tenant Work, elect to
install an elevator at the demised premises, which installation is approved by
Owner in accordance with the provisions of this Article 49, Owner shall
reimburse Tenant for the cost of such elevator installation in an amount equal
to the lesser of (i) fifty (50%) percent of the cost of such installation, or
(ii) fifty thousand ($50,000) Dollars, which reimbursement shall be delivered
within fifteen (15) days following compliance by Tenant with each of the
following terms and conditions:
(a) Tenant shall have supplied to Owner evidence reasonably
satisfactory to Owner establishing (1) that the
<PAGE>
aforesaid elevator installation has been completed, (2) the cost thereof, (3)
that all sums due and owing to contractors, subcontractors and materialmen have
been paid (it being acknowledged by Owner that original receipted invoices from
such parties shall be deemed satisfactory evidence as to such payment), and (4)
that Tenant otherwise complied with the provisions of Article 3 hereof and this
Article 49 in connection with the performance and completion of such elevator
installation; and
(b) Tenant shall not then be in default under the terms of this
lease beyond the applicable grace period, if any.
I. All fixtures and equipment installed or used by Tenant in the
Premises (except for moveable fixtures and equipment and built-in movie theatre
seats) shall be fully paid for by Tenant in cash and shall not be subject to
conditional bills of sale, financing statement or other title retention
agreements.
50. REPAIRS. Supplementing the provisions of Article 4 of this lease:
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Owner shall maintain and repair the public portions of the Building,
both exterior and interior (excluding the exterior and interior of all windows,
plate glass, showcases, doors, door frames and bucks). Tenant, throughout the
term of this lease, shall take good care of the demised premises, the fixtures
and appurtenances therein (including, without limitation, the sprinkler system
and any other equipment installed y Tenant in accordance with the provisions of
Article 29 hereof, and all installations required for the furnishing to the
demised premises of the services enumerated in Article 51 hereof), and the store
front and entrance doors thereto and, at Tenant's sole cost and expense, shall
clean the sidewalks and curbs adjacent to the demised premises and make all non-
structural repairs thereto and to the demised premises (including the exterior
and interior of all windows, plate glass, showcases, doors, door frames and
bucks) as and when needed to preserve the same in good working order and
condition. Notwithstanding the foregoing, all damage or injury to the demised
premises or to any other part of the Building, or to its fixtures, equipment and
appurtenances, or to the sidewalks or curbs adjacent to the demised premises,
whether requiring structural or non-structural repairs, caused by or resulting
from (i) the moving of Tenant's fixtures, furniture and equipment or (ii) any
act, omission, neglect or improper conduct of, or alterations made by, Tenant,
Tenant's servants, employees, invitees or licensees, shall be repaired promptly,
either by Owner at Tenant's sole cost and expense, or, at Owner's option, by
Tenant at Tenant's sole cost and expense, to the satisfaction
<PAGE>
of Owner. All the aforesaid repairs shall be of a quality or class equal to the
original work or construction and shall be made in accordance with the
provisions of Articles 3 and 49 hereof. If Tenant, within 20 days following
written notice by Owner, fails to commence the performance of any repairs
required to be made by Tenant hereunder or if Tenant thereafter fails to
diligently prosecute the performance of such repairs to full completion, the
same may be made by owner, and the expenses thereby incurred by Owner shall be
collectible as Additional Charges. Tenant shall give Owner prompt notice f any
defective condition in any mechanical, electric, sanitary, plumbing, utility or
other service system (or any part thereof) located in, servicing or passing
through the demised premises and Owner shall thereafter repair such condition,
subject, however, to the further provisions of this lease. The water and wash
closets and other plumbing fixtures shall not be used for any purposes other
than those for which they were designed or constructed, and no sweepings,
rubbish, rags, acids or other substances shall be deposited therein.
51. SERVICES. A. Except as otherwise provided herein, Owner shall have
--------
no obligation to furnish to the demised premises cleaning services, electric
energy, water, air-conditioning, ventilation, gas or any other service or
utility. Tenant shall obtain air-conditioning, ventilation, gas and any other
services or utilities required by Tenant at Tenant's sole cost and expense and
in compliance with the applicable provisions of (i) all rules, regulations and
statutes promulgated by any governmental or quasi-governmental authority having
jurisdiction over the Building, (ii) all rules and regulations of Owner and any
public utility or other company furnishing such service or utility, and (iii)
this lease, including, without limitation, Article 3 hereof. Tenant shall
install, maintain, operate and repair the ventilating, air-conditioning, and
exhaust systems located or to be located in the demised premises at Tenant's
sole cost and expense, and shall obtain and keep in full force and effect during
the term of this lease a service contract, with a reputable contractor or
contractors, to maintain the ventilating, air-conditioning and exhaust systems
located or to be located in the demised premises. Tenant shall deliver to Owner
a duplicate copy of each such service contract within sixty (60) days of the
Commencement Date, and shall renew each such contract, and deliver a duplicate
copy of such renewal to Owner, no later than ten (10) days prior to the
expiration of the term of each contract. If Tenant shall fail to obtain or
maintain the service contracts required pursuant to this Section A, Owner may
obtain and maintain the same, and the cost thereof shall be collectible by Owner
as Additional Charges. Upon the expiration or earlier termination of the term of
this lease, Tenant shall surrender to Owner such ventilating, air-conditioning
and exhaust systems and
<PAGE>
all equipment and fixtures used in connection therewith in as good order and
condition as the same were in when installed, reasonable wear and tear excepted.
B. (i) Tenant, at Tenant's sole cost and expense, shall (a) keep the
demised premises in good order, (b) cause the demised premises and the store
front, the entrance door or doors and all glass surfaces (interior and exterior)
and any entrance areas (including service entrances) to be cleaned at regular
intervals (but not less frequently than weekly), (c) keep the sidewalk and curb
directly in front of the demised premises clean (and not at any time sweep any
refuse, rubbish or dirt into the gutters or streets), (d) cause Tenant's refuse
and rubbish to be kept completely out of view (except when the same is being
taken to the location of collection) and removed daily from the demised premises
and the Building, but in no event between the hours of 8:30 a.m. and 8:00 p.m.
on business days, and (e) cause any portions of the demised premises used for
storage, preparation, service or consumption of food or beverages to be
exterminated against infestation by vermin, roaches or rodents on a regular
basis. Tenant shall cause the removal of such refuse and rubbish and the
furnishing of cleaning and exterminating services to be performed in accordance
with all reasonable applicable rules and regulations of Owner, and shall not
permit any person to enter the demised premises or the Building for such
purposes, other than persons first approved by Owner.
(ii) If Tenant shall use any portion of the demised premises for
the sale of food or beverages, whether for consumption within or outside the
demised premises, Tenant shall cause all refuse and rubbish in the demised
premises to be stored in sealed, watertight, metal containers having rubber
wheels and bumpers so fashioned as to prevent damage to the demised premises and
the Building. Notwithstanding the foregoing, Tenant shall have the right to
cause all rubbish and refuse to be stored in plastic containers or bags so long
as same are at all times sealed and water tight so that no spillage whatsoever
occurs therefrom. In addition, Tenant shall not suffer or permit Tenant's
employees or any persons making deliveries to or from the demised premises or
removing refuse and rubbish therefrom, to leave any food, refuse and rubbish
containers or other matter standing upon the streets or sidewalks adjacent to
the Building (subject, however, to the provisions of clause (d) of the preceding
subparagraph (i) hereof). If Tenant shall fail to comply with the foregoing
provisions of this subparagraph, Owner, in addition to all other remedies
provided in this lease and at law, may remove any food, refuse and rubbish
containers and other matter so left standing, without any liability on the part
of Owner therefor, and the cost thereof shall be collectible as Additional
Charges. If the demised premises shall have an
<PAGE>
appurtenant service entrance, Tenant shall cause all deliveries to and from the
demised premises and refuse and rubbish removal to be made through such service
entrance.
C. Tenant shall arrange to obtain electric energy directly from the
public utility servicing the Building and understands and agrees that Owner
shall not be obligated to furnish the same to Tenant. Such electric energy may
be furnished to Tenant by means of the then existing Building electric systems
to the extent that, in Owner's opinion, the same are available, suitable and
safe for such purposes. All meters, submeters and all additional panel boards,
feeders, risers, wiring, and other conductors and equipment which may be
required to obtain electric energy shall be installed by Tenant (to the extent
the same are not already installed in the demised premises), at Tenant's sole
cost and expense, and the installation thereof shall be subject to Owner's
approval and performed in accordance with all other provisions of Articles 3 and
49 hereof. Tenant shall, simultaneously with each payment to the public utility
company of electrical charges for the demised premises, pay to Owner as
Additional Charges a sum equal to five (5%) percent of each electrical bill;
Tenant, shall, simultaneously with each payment to Owner of such Additional
Charges, include a copy of the corresponding electrical bill.
D. Within 90 days following receipt by Owner of Tenant's request,
which shall be made no later than nine (9) months from the date hereof, Owner
shall during the remainder of the term hereof supply water from the cooling
tower on the roof above the Building to the perimeter of the demised premises
for Tenant's air-conditioning system, which water shall be supplied during
Tenant's ordinary business hours. Tenant shall pay to Owner, as additional rent
hereunder, the sum of $25,000 per annum for its receipt of such water, which sum
shall be payable in equal monthly installments simultaneously with Tenant's
payments of fixed rent hereunder. In addition, Tenant shall pay to Owner as
additional rent all of Owner's costs for operation of the cooling tower beyond
Tenant's ordinary business hours (it being acknowledged that for the purposes
hereof, Tenant's "ordinary business hours" shall be on such days as Tenant is
open for business from 8:00 a.m. to 2:00 a.m.; should a dispute arise between
the parties as to the amount of such additional rent, Tenant shall nevertheless
be required to pay the amount billed, but same shall be resolved by a court of
competent jurisdiction; it being agreed that if such court shall find that Owner
overcharged Tenant, Owner shall refund to Tenant the amount of such overcharge,
together with interest thereon from the date of payment to the date of repayment
at the rate of 15% per annum. Tenant shall install all equipment required to
utilize such water, including but not limited to, air-conditioning units,
<PAGE>
ducts, lines, meters, pumps, connections and vents solely at its own cost and
expense, and shall maintain all such equipment in accordance with the provisions
of Article 3 and Article 49 hereof. Should Tenant fail to submit its request for
Owner to supply water as aforesaid within nine (9) months following the date
hereof, Tenant shall be deemed to have waived its right to receive such water
during the term of this lease.
E. Within 90 days after the execution and delivery (free of escrow)
of this Lease, Tenant shall have the right to elect that Owner refrain from
supplying heat to Tenant during the hours set forth elsewhere in this Lease. If
Tenant shall timely so elect, then (i) Owner shall have no further obligation to
supply heat to the Premises during the term hereof, (ii) the first sentence of
Article 30 and the provisions of Article 44, (Fuel Escalation) hereof shall be
---------------
of no further force or effect, and (iii) provided Tenant is not then in default
under this lease beyond the applicable cure period, if any, Owner shall, within
ten (10) days after receipt of notice from Tenant as to such election,
contribute the sum of $15,000 which Tenant shall apply to pay the hard costs of
construction of Tenant's Work.
52. INDEMNIFICATION. Tenant shall indemnify and hold harmless Owner and
---------------
Owner's mortgagee and its and their respective partners, directors, officers,
agents and employees from and against any and all claims arising from or in
connection with (a) the conduct or management of the demised premises or of any
business therein, or any work or thing whatsoever done, or any condition created
(other than by Owner) in or about the demised premises during the term of this
lease or during the period of time, if any, prior to the commencement date that
Tenant may have been given access to the demised premises; (b) any act, omission
or negligence of Tenant or any of its subtenants or licensees or its or their
partners, directors, officers, agents, employees or contractors; (c) any
accident, injury or damage whatever (except to the extent caused by Owner's
negligence) occurring in, at or upon the demised premises; and (d) any breach or
default by Tenant in the full and prompt payment and performance of Tenant's
obligations under this lease; together with all costs, expenses and liabilities
incurred in or in connection with each such claim or action or proceeding
brought thereon, including, without limitation, all attorneys' fees and
expenses. In case any action or proceeding be brought against Owner and/or its
mortgagee and/or its or their partners, directors, officers, agents and/or
employees by reason of any such claim, Tenant, upon notice from Owner or such
mortgagee, shall resist and defend such action or proceeding (by counsel
reasonably satisfactory to Owner or such mortgagee).
53. LATE CHARGE. In addition to any other remedies Owner
-----------
<PAGE>
may have under this lease, and without reducing or adversely affecting any of
Owner's rights and remedies hereunder, if any Fixed Rent, Additional Charges or
damages payable hereunder by Tenant to Owner are not paid within seven days
following the due date thereof, Tenant shall pay Owner as Additional Charges, o
or before the first day of the following month, 6 cents for each dollar so
overdue in order to defray Owner's administrative and other costs in connection
therewith.
54. BROKER. Tenant covenants, warrants and represents that no broker
------
except Spender, Gerard and Schermer, Inc. (the "Broker") was instrumental in
------
bringing about or consummating this lease and that Tenant had no conversations
or negotiations with any broker except the Broker concerning the leasing of the
demised premises. Owner covenants, warrants and represents that no broker except
the Broker was instrumental in bringing about or consummating this lease and
that Owner had no conversations or negotiations with any broker except the
Broker concerning the leasing of the demised premises to Tenant. Tenant agrees
to indemnify and hold harmless Owner against and from any claims for any
brokerage commissions and all costs, expenses and liabilities in connection
therewith, including, without limitation, attorneys' fees and expenses, arising
out of any conversations or negotiations had by Tenant with any broker other
than the Broker. Owner shall pay commissions owing to the Broker pursuant to
separate agreement.
55. SIGNS. (a) Tenant shall not install, affix or display any signs,
-----
canopies, flags, marquees, placards, posters, lights or other material
(collectively, "Signs") on the exterior of the Building or on the inner or outer
-----
faces of the windows or doors of the demised premises without Owner's prior
written consent, irrespective of whether the same be temporary or permanent.
Owner agrees that such prior written consent shall not be unreasonably withheld
and Owner shall notify Tenant as to its consent or rejection within twenty (20)
days after its receipt of Tenant's submission as to the location, design, color,
size, materials and content of each proposed Sign. If Owner gives such consent,
the Signs shall be installed subject to the following terms and conditions:
(i) The Signs shall be installed and be maintained by Tenant in
accordance with applicable law, in a good and safe manner and subject to such
reasonable restrictions as Owner may impose;
(ii) The Signs shall be reasonably satisfactory to Owner in terms
of location, design, color, size, materials and content;
<PAGE>
(iii) All fees payable in connection with the installation and
maintenance of the Signs and obtaining of required permits therefor shall be
paid by Tenant;
(iv) The signs shall at all times during the term of this lease
be kept in good repair by Tenant at Tenant's sole cost and expense; and
(v) Tenant shall indemnify and hold Owner harmless from any
damage, cost, claim, liability or expense (including, without limitation,
attorneys' fees) arising out of or in connection with Tenant's failure to comply
with the provisions of this paragraph.
(vi) Nothing herein contained is intended to restrict Tenant's
right, without Owner's consent, from time to time to change posters, displays,
lettering on marquees and make similar nonstructural changes to reflect changes
in films shown at the Premises.
(b) Subject to the provisions of the foregoing subsection 9a), Owner
shall, upon request by Tenant, reasonably cooperate with Tenant in its
application for the necessary permits or other required governmental approvals
in connection with the Signs. Any such cooperation by Owner shall be at Tenant's
sole cost and expense.
(c) In the event Owner deems it necessary to remove any Signs of
Tenant in order to make any repairs, alterations or improvements in, to, or
upon, the demised premises or the Building, Owner shall have the right to do so
upon not less than 20 days prior notice to Tenant (except that no such notice
shall be required in an emergency situation or if the delay occasioned by such
notice period might subject Owner to civil penalties or fines or criminal
liability or might materially prejudice Owner) provided the same be removed and
replaced at Owner's expense promptly upon completion of such repair, alteration
or improvement. Any work by owner hereunder shall be performed and completed
with due diligence.
(d) Should Owner hereafter erect any scaffolding at the Building by
reason of any work referred to in subsection (c) hereof, it shall not
unreasonably withhold its consent to Tenant's affixing temporary Signs on such
scaffolding until the replacement of the Signs originally removed. Any such
temporary Signs shall be affixed at the sole expense of Tenant.
56. MECHANIC'S LIENS. (a) Tenant shall have no power to do any act or
----------------
make any contract which may create or be the foundation for any lien upon the
reversion of Owner, the demised
<PAGE>
premises or the Building and improvements; it being agreed that should Tenant
cause any alterations, changes or labor to be performed or material to be
furnished therein or thereon, neither Owner nor the demised premises shall under
any circumstances be liable for the payment of expenses incurred or for the
value of any such work done or material furnished to the demised premises or any
part thereof; but all such alterations, changes, additions, improvements and
repairs and materials and labor shall be at Tenant's expense, and Tenant shall
be solely and wholly responsible to contractors, laborers and materialmen
furnishing labor and material to said premises and Building, or any part
thereof, for or on behalf of Tenant.
(b) Tenant shall not suffer or permit any mechanic's lien to be filed
against the fee ownership (or ground leasehold, if any) of the demised premises
nor against Tenant's leasehold interest in said premises, by reason of work,
labor, services or materials supplied or claimed to have been supplied to Tenant
or to any occupant of the demised premises claiming by, through or under Tenant.
If any such mechanic's lien shall at any time be filed against the demised
premises or the land, Building and improvements thereon, Tenant shall, at its
own cost and expense, cause the same to be cancelled and discharged of record by
surety bond or appropriate cash deposit or otherwise within thirty (30) days
after the date of notice to Tenant of filing of the same, and Tenant shall
indemnify and save harmless Owner from and against any and all costs, expenses,
claims, losses or damages resulting therefrom or by reason thereof.
(c) Tenant shall also defend on behalf of Owner and the fee at
Tenant's sole cost and expense, any action, suit or proceeding which may be
brought thereon or for the enforcement of such liens, and Tenant shall pay any
damages and satisfy and discharge any judgment entered thereon and save harmless
Owner and the fee owner from any claim or damages resulting therefrom.
(d) If Tenant shall fail to discharge such mechanic's lien within the
aforesaid period, then, in addition to any other right or remedy of Owner, Owner
may, but shall not be obligated to, discharge the same, either by paying the
amount claimed to be due or by procuring the discharge of such lien by deposit
in court or by bonding, and in such event Owner shall be entitled, if Owner so
elects, to compel the prosecution of any action for the foreclosure of such
mechanic's lien by the lienor and to pay the amount of the judgment, if any, in
favor of the lienor, with interest, costs and allowances.
(e) Any amount paid by Owner for any of the aforesaid charges and all
reasonable legal and other expenses of Owner, including reasonable counsel fees,
in defending any such action
<PAGE>
or in procuring the discharge of said lien, with all necessary disbursements in
connection therewith, with interest thereon at the rate of fifteen (15%) percent
per annum (but in no event to exceed the maximum legal rate of interest then
chargeable to Tenant), from the date of payment, shall be repaid within a period
of twenty (20) days after written demand therefor by Owner to Tenant, and the
same shall be deemed additional rent payable by Tenant hereunder and collectible
as such.
57. OWNER'S INITIAL WORK. A. Owner shall at its own expense perform the
--------------------
following work at the demised premises: (a) removal of the single cinder block
wall running north-to-south at the basement level; and (b) patch all ceiling
holes (collectively, "Owner's Initial Work"). Owner's Initial Work shall be
performed by Owner only once, it being understood that Owner's obligation to
perform the work is a single, non-recurring obligation.
B. If for any reason whatsoever Owner's Initial Work shall not have
been substantially completed on the date originally set forth herein as the
Commencement Date or Owner shall for any reason be unable to deliver possession
of the demised premises to Tenant on said date in accordance with the terms of
this lease, then notwithstanding anything to the contrary hereinabove contained,
the term of this lease shall commence on the date on which said work shall have
been substantially completed and Owner is able to so deliver possession, all
dates for increases in fixed rent shall be deferred for a like period, and the
lease expiration date hereinabove set forth shall be extended by a period of
time equal to the period between the date hereinabove set forth as the
commencement date of the lease term and the actual commencement date hereof as
determined pursuant to this Article. If such dates are so deferred, Owner and
Tenant will enter into a supplement to this lease confirming such new dates.
Tenant waives any right to rescind this lease under Section 223(a) of the Real
Property Law of the State of New York and further waives any damages which may
result from any delay in the substantial completion of the aforementioned work
or delivery of possession of the demised premises. If Tenant takes possession of
the premises prior to the date hereinabove set forth as the date of commencement
of the lease term, Tenant's obligation to pay Fixed Rent and Additional Charges
hereunder and to observe and perform all other conditions and agreements
hereunder shall commence on such earlier date of possession but the term of the
lease shall nevertheless expire on the date hereinabove set forth as the date of
expiration of the lease term. Notwithstanding the provisions of this Section B,
should Owner be unable to deliver possession of the demised premises, with
Owner's Initial Work substantially completed, on or before sixty (60) days
following the date
<PAGE>
originally set forth as the Commencement Date hereunder, Tenant shall have the
right, to be exercised by notice to Owner delivered within fifteen (15) days
following the expiration of such 60-day period, to cancel this lease, in which
event (i) the security deposit and the first month's Fixed Rent being delivered
simultaneously with the execution of this lease shall be returned promptly to
Tenant (ii) Owner shall reimburse Tenant for all architectural, engineering and
Environmental Solutions, Ltd. (ESL) expediter fees incurred in connection with
this lease or the Premises prior to the date of lease cancellation (but
reimbursement for architectural and engineering fees shall not exceed $35,000 in
the aggregate), (iii) this lease shall be deemed cancelled and of no further
force or effect, and (iv) neither party shall have any claim against the other
arising from the execution of this lease.
58. MISCELLANEOUS PROVISIONS. A. No agreement shall be effective to
------------------------
change, modify, waive, release, discharge, terminate or effect an abandonment of
this lease, in whole or in part, unless such agreement is in writing, refers
expressly to this lease and is signed by the party against whom enforcement of
the change, modification, waiver, release, discharge, termination or
effectuation of the abandonment is sought.
B. Except as otherwise expressly provided in this lease, the
obligations of this lease shall bind and benefit the successors and assigns of
the parties hereto with the same effect as if mentioned in each instance where a
party is named or referred to; provided, however, that (i) no violation of the
provisions of Article 46 shall operate to vest any rights in any successor or
assignee of Tenant.
C. If Owner or a successor in interest is an individual (which term
as used herein includes aggregates of individuals, such as joint ventures,
general or limited partnerships or associations), such individual shall be under
no personal liability with respect to any of the provisions of this lease, and
if such individual is in breach or default with respect to its obligations under
this lease, Tenant shall look solely to the equity of such individual in the
Land and Building of which the demised premises form a part for the satisfaction
of Tenant's remedies and in no even shall Tenant attempt to secure any personal
judgment against Owner or against any partner, principals (disclosed or
undisclosed), employee or agent of Owner by reason of such default by Owner.
D. The submission by Owner of the lease in draft form shall be deemed
submitted solely for Tenant's consideration and not for acceptance and
execution. Such submission shall have no binding force or effect and shall
confer no rights nor impose any
<PAGE>
obligations, including brokerage obligations, on either party unless and until
both Owner and Tenant shall have executed the lease and duplicate originals
thereof shall have been delivered to the respective parties.
E. If and to the extent that there is a conflict between the
provision contained in the printed portion of the Lease to which this Rider is
attached and the provisions contained in this Rider, then the provision
contained in this Rider shall govern and be controlling to the extent necessary
to resolve such conflict.
F. If any of the Fixed Rent or Additional Charges payable under the
terms and provisions of this lease shall be or become uncollectible, reduced or
required to be refunded because of any act or law enacted by a governmental
authority, Tenant shall enter into such agreement(s) and take such other steps
(without additional expense to Tenant) as Owner may request and as may be
legally permissible to permit Owner to collect the maximum rents which from time
to time during the continuance of such legal rent restriction may be legally
permissible (and not in excess of the amounts reserved therefor under this
lease). Upon the termination of such legal rent restriction, (a) the Fixed Rent
and/or Additional Charges shall become and thereafter be payable in accordance
with the amounts reserved herein for the periods following such termination, and
(b) Tenant shall pay to Owner promptly upon being billed, to the maximum extent
legally permissible, an amount equal to (i) the Fixed Rent and/or Additional
Charges which would have been paid pursuant to this lease but for such legal
rent restriction less (ii) the rents paid by Tenant during the period such legal
rent restriction was in effect.
G. Notwithstanding anything herein contained to the contrary,
wherever in this Lease there is a provision for Owner's consent or approval,
which consent or approval is not to be unreasonably withheld or delayed,
Tenant's sole remedy for Owner's either withholding and/or delaying such consent
or approval shall be to commence an action to enforce such provision, or for
specific performance, injunction or declaratory judgment and in no event shall
Tenant be entitled to make, nor shall Tenant make any claim and Tenant hereby
waives any claim for money damages, nor shall Tenant claim any money damages by
way of set-off, counterclaim or defense based upon any claim or assertion by
Tenant that Owner has unreasonably withheld or unreasonably delayed (or both)
any consent or approval.
<PAGE>
SCHEDULE "A"
------------
Fixed Rent
<TABLE>
<CAPTION>
Period Fixed Rent
------ ----------
<S> <C>
From March 15, 1988 (subject to the Three Hundred Fifty-Nine Thousand Two
abatement set forth in Section 40(c) Hundred Twenty ($359,220) Dollars per
hereof) to June 30, 1991, both dates annum, payable in equal monthly
inclusive installments of Twenty-Nine Thousand
Nine Hundred Thirty-Five ($29,935)
Dollars
From July 1, 1991 to July 31, 1993, three Hundred Sixty-Nine Thousand Two
both dates inclusive Hundred Twenty ($369,220) Dollars per
annum, payable in equal monthly
installments of Thirty Thousand Seven
Hundred Sixty-Eight and 33/100
($30,768.33) Dollars
From August 1, 1993 to July 31, 1998, Four Hundred Twenty-four Thousand Six
both dates inclusive Hundred Three ($424,603) Dollars per
annum, payable in equal monthly
installments of Thirty-Five Thousand
Three Hundred Eighty-Four ($35,384)
Dollars
From August 1, 1998 to July 31, 2003, Four Hundred Eighty-Eight Thousand
both dates inclusive Two Hundred Ninety-Four ($488,294)
Dollars per annum, payable in equal
monthly installments of Forty
Thousand Six Hundred Ninety-One and
16/100 ($40,691.16) Dollars
From August 1, 2003 to December 31, Five Hundred Sixty-One Thousand Five
2008, both dates inclusive Hundred Thirty-Eight ($561,538)
Dollars per annum, payable in equal
monthly installments of Forty-Six
Thousand Seven Hundred Ninety-four
and 83/100 ($46,794.83) Dollars
</TABLE>
<PAGE>
AMENDMENT OF LEASE
------------------
THIS AGREEMENT (the "Amendment") dated as of the 26th day of December, 1989
between CABLE BUILDING ASSOCIATES, a New York limited partnership having an
office at 611 Broadway, New York, New York ("Landlord") and HOUSTON CINEMA,
INC., a New York corporation having an office c/o Angelica Films, 1974 Broadway,
New York, New York ("Tenant").
W I T N E S S E T H
WHEREAS, by agreement of lease dated as of March 4, 1988, as amended by
letter agreement dated March 4, 1988 and letter agreement dated December 20,
1988 (collectively, the "Lease"), Landlord did demise and let to Tenant, and
Tenant did hire and take from Landlord, part of the ground floor and basement,
as more particularly described in the Lease (the "Demised Premises") in the
building known as 611 Broadway, New York, New York (the "Building"), for a term
expiring December 31, 2008; and
WHEREAS, the parties hereto desire to amend the Lease with respect to
those matters hereinafter set forth.
NOW THEREFORE, in consideration of the sum of Ten ($10.00) Dollars paid by
Tenant to Landlord and for other good and valuable consideration, the mutual
receipt and legal sufficiency of which is hereby acknowledged, the parties
hereto agree as follows. (For purposes of this Amendment, capitalized terms
should have the meanings ascribed to them in the Lease, unless otherwise defined
herein).
1. As of January 1, 1990 (the "Effective Date") and for the remainder of
the term of the Lease, there shall be added to and included in the Premises
originally demised under the Lease, without further act of the parties, the
portion of the Building substantially as shown cross-hatched on the floor plan
annexed hereto and made a part hereof as Exhibit A (hereinafter referred to as
---------
the "Additional Space"), upon and subject to all the covenants, agreements,
terms and conditions of the Lease, as supplemented and amended by this
Amendment. From and after the Effective Date, wherever the Lease refers to the
"Premises" or the "premises" or the "Demised Premises" or "demised premises"
such terms shall be deemed to include the Additional Space, unless otherwise
provided to the contrary herein.
2. The provisions of Article 57 of the Lease are not applicable to the
Additional Space.
3. Tenant shall accept the Additional Space "as is" on the Effective Date
and Landlord shall not be required to perform any
<PAGE>
work, install any fixtures or equipment or render any services whatsoever to
make the Building or the Additional Space ready or suitable for Tenant's use or
occupancy.
4. As of the Effective Date, the Fixed Rent payable pursuant to "Schedule
A" of the Lease shall be increased and the new Fixed Rent shall be as follows:
a. For the period from the Effective Date to June 30, 1991, both
dates inclusive, the Fixed Rent shall be three hundred seventy four thousand two
hundred twenty ($374,220) dollars per annum, payable in equal monthly
installments of thirty one thousand one hundred eighty-five ($31,185) dollars.
b. From July 1, 1991 to July 31, 1993 both dates inclusive, the Fixed
Rent shall be increased to three hundred eighty four thousand two hundred twenty
($384,220) dollars per annum, payable in equal monthly installments of thirty-
two thousand eighteen and 33/100 ($32,018.33) dollars.
c. From August 1, 1993 to July 31, 1998, both dates inclusive, the
Fixed Rent shall be increased to forty three hundred nine thousand six hundred
three ($439,603) dollars per annum, payable in equal monthly installments of
thirty six thousand six hundred thirty-three and 58/100 ($36,633.58) dollars.
d. From August 1, 1998 to July 31, 2003, both dates inclusive, the
Fixed Rent shall be increased to five hundred three thousand two hundred ninety-
four ($503,294) dollars per annum, payable in equal monthly installments of
forty one thousand nine hundred forty-one and 17/100 ($41,941.17) dollars.
e. From August 1, 2003 to December 31, 2008, both dates inclusive,
the Fixed Rent shall be increased to five hundred seventy six thousand five
hundred thirty-eight ($576,538) dollars per annum, payable in equal monthly
installments of forty eight thousand forty-four hundred and 83/100 ($48,044.83)
dollars.
5. Article 42 of the Lease is hereby amended as follows:
The term "tenant's tax percentage" as defined in subparagraph (vi)
thereof shall be deemed to be seven and one-tenths (7.1%) percent.
6. Article 43 of the Lease is hereby amended as follows:
The number six thousand one hundred eighty (6,180) contained in
paragraph (b) thereof shall be deleted and the
<PAGE>
number six thousand nine hundred twelve (6,912) shall be inserted in its place
and stead.
7. Article 44 of the Lease is hereby amended as follows:
a. The percentage of six and eight tenths (6.8%) percent contained in
this Article shall be deemed to be seven and one-tenths (7.1%) percent.
8. Tenant and Landlord covenant, warrant and represent that no broker
brought about this Amendment and that neither Tenant nor Landlord had
conversations or negotiations with any broker concerning this Amendment and the
terms hereof. Tenant and Landlord agree to indemnify and hold harmless, against
and from any claims for any brokerage commissions and all costs, expenses and
liabilities in connection therewith, including, without limitation, attorneys
fees and expenses, arising out of any conversations or negotiations had by
Tenant or Landlord with any broker.
9. It is understood and agreed that in addition to Fixed Rent and
Additional Charges payable under the Lease, (including, without limitation,
Additional Charges payable under Article 51D of the Lease), and this Amendment,
Tenant has been paying to Landlord a sum equal one thousand two hundred eighty
three and 33/100 ($1,283.33) dollars monthly as Additional Charges for Tenant's
use of Landlord's equipment to bring cooling water into Tenant's demised
premises. As of the Effective Date, Tenant agrees to and shall continue to
deliver to landlord one thousand two hundred eighty-three and 33/100 ($1,283.33)
dollars on the first day of the month each month until the Expiration Date of
the Lease.
10. It is specifically understood and agreed that this Amendment shall not
be construed as a release or waiver of any claims Landlord may have against
Tenant for Tenant's defaults under the Lease which either have occurred,
continue to occur or may occur in the future or any other claims Landlord may
have against Tenant whether presently the subject of pending litigation
proceedings or otherwise. In consideration for Landlord entering into this
Amendment, Tenant expressly agrees that this Amendment is not intended to nor
shall it prejudice Landlord's claims against Tenant.
11. Tenant shall be permitted, at Tenant's sole cost and expense, to
arrange with all applicable authorities to have all of the vaults, vault space
or areas located in and under the Building closed and removed form the tax rolls
(hereinafter the "Vault Removal Option"), provided (1) Tenant shall give
Landlord written notice of its intention to arrange to close the vaults no
<PAGE>
less than 365 days prior to the commencement by Tenant of any such actions
and/or arrangements to close the vaults along with a copy of Tenant's Plan for
Tenant's Work; (ii) Tenant shall not be permitted to exercise such notice until
January 1, 1991; (iii) Tenant shall be permitted to exercise the Vault Removal
Option only once during the term of the Lease; (iv) any alterations or
construction undertaken by Tenant or on behalf of Tenant to close such vaults
shall be done pursuant to Articles 3 and 49 of the Lease and (v) Landlord shall
approve Tenant's Plan. In the event Tenant has complied with the foregoing
requirements, Tenant's Fixed Rent shall be reduced by seven thousand ($7,000)
dollars per annum upon written notice to Tenant from Landlord within sixty (60)
days from the date Landlord receives satisfactory evidence, in Landlord's sole
discretion, that (i) all applicable and required approvals have been issued by
any federal, state or municipal authority and/or public utility, the Department
of Buildings and/or the Department of Highways, and/or other applicable agency
or authority with respect to the closing of the vault, vault space or areas; and
(ii) all of the vaults, vault space or areas in and/or under the Building have
been removed whatsoever. Tenant shall deliver, along with such evidence an
indemnity, in form satisfactory to Landlord, indemnifying Landlord for any and
all charges or costs that may accrue or be charged as a result of such vaults,
vault spaces or areas being improperly removed from the tax rolls or not being
removed from the tax rolls at all or for construction work improperly or
inadequately performed by or on behalf of Tenant.
12. Tenant shall not record this Amendment, the Lease, or any memorandum
thereof.
13. This Agreement shall not be binding upon Landlord until and unless it
is signed by Landlord.
14. Except as modified by this Amendment, the Lease and all the covenants,
agreements, terms, provisions and conditions thereof shall remain in full and
effect. The covenants, agreements, terms,provisions and conditions contained in
this Amendment shall bind and inure to the benefit of the parties hereto and
their respective successors, and except as otherwise provided in the Lease as
modified by this Amendment, their respective assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date and year first above written.
LANDLORD:
CABLE BUILDING ASSOCIATES
<PAGE>
By:
------------------------------
TENANT:
HOUSTON CINEMA, INC.
By:
------------------------------
<PAGE>
Exhibit 10.32
-------------
Limited Liability Company Agreement
-----------------------------------
This Limited Liability Company Agreement of Angelika Film Centers LLC is
made and entered into as of this 27th day of August, 1996 by and between the
Members.
For and in consideration of the mutual covenants, rights, and
obligations set forth herein, the benefits to be derived therefrom, than other
good and valuable consideration, the receipt and sufficiency of which each
Member acknowledges, the Members agree as follows:
ARTICLE I
DEFINITIONS, CONSTRUCTION
1.1 Definitions. When used herein, the following capitalized terms
-----------
shall have the meanings indicated:
"Act" means the Delaware Limited Liability Company Act and any
---
successor statute, as amended from time to time.
"Affiliate" means as to any Person, a director of such Person
---------
or any other Person who, directly or indirectly, through one or more
intermediaries, Controls or is Controlled by or under common Control
with that Person.
"Agreement" means this Limited Liability Company Agreement, as
---------
originally executed and as amended from time to time.
"Angelika, Inc." means Angelika Cinemas, Inc., a New York
-------------
corporation and an indirect wholly-owned subsidiary of Reading Company.
"Angelika Theatre" means that certain multiplex cinema and cafe
----------------
complex located at 18 W. Houston Street, New York, New York.
"Approval of the Members" means, except as specified in Section
-----------------------
III.3, the approval, vote or written consent of those Members holding
more than 50% of the Membership Interests.
"Capital Account" means the capital account established and
---------------
maintained for a Member pursuant to Article IV.
"Capital Contribution" means as to any Member the cumulative
--------------------
sum of money contributed by the Member to the capital of the Company, as
provided in Article IV.
Page 1
<PAGE>
"Certificate" or "Certificate of Formation" means the certificate of
----------- ------------------------
formation of the Company filed on July 16, 1996 in accordance with the Act and
as amended from time to time.
"City Cinemas" means City Cinemas Corporation, a New York corporation.
------------
"Code" means the Internal Revenue Code of 1986 and any successor
----
statute, as amended from time to time.
"Company" means Angelika Film Centers, LLC, a Delaware limited liability
-------
company.
"Company Minimum Gain" has the meaning ascribed to the term "Partnership
--------------------
Minimum Gain" in Treas. Reg. (S)1.704-2(d).
"Control," "Controls," or "Controlled" (and derivations thereof) means
-------- --------- ----------
as to a corporation the right to exercise, directly or indirectly, more than 50%
of the voting rights in the corporation, and as to any other Entity the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of the same.
"Depreciation" means depreciation and amortization of all of the assets
------------
of the Company (including, without limitation, depreciation of real and personal
property related thereto and the Lease).
"Dispose," "Disposing," or "Disposition" means a sale, assignment,
-------- ---------- -----------
transfer, exchange, mortgage, pledge, grant of a security interest, or other
disposition or encumbrance (including, without limitation, by operation of law),
or the acts thereof.
"Dissolution Event" means a Member's resignation, removal, withdrawal,
-----------------
bankruptcy or dissolution.
"Distributable Cash" means the amount of money on hand of the Company
------------------
and available for distribution to the Members, taking into account all accrued
debts, liabilities, and obligations of the Company and any amounts necessary or
advisable to reserve, designate, or set aside for actual or anticipated costs,
payments, liabilities, obligations, claims with respect to the Company's
business or reinvested in any lawful activity that may be undertaken by the
Company, as determined by a Majority in Interest of the Members.
"Entity" means any association, corporation, estate, limited liability
------
company, limited partnership, partnership, venture or other entity.
"Income" means any item of Company economic income not includable in
------
gross income for federal income tax purposes, and Company taxable income for
federal income
Page 2
<PAGE>
tax purposes, including Tax Items (items of income, gain, loss, deduction, or
credit of the Company) taken into account separately by the Members.
"Lease" means the Lease dated as of March 4, 1988, between Cable Building
-----
Associates, as lessor, and Houston Cinema, Inc., a New York corporation, as
lessee, regarding the premises located at 18 W. Houston Boulevard, New York, New
York, which Lease was subsequently assigned to Angelika Film Centers, Inc., and
then to the Company pursuant to the Assignment and Assumption of Lease dated as
of August 27, 1996, and as such lease may be amended, modified or supplemented
from time to time.
"Loss" means (i) any Company deduction specially allocable to a Member,
----
(ii) any Company expenditure that is neither deductible nor chargeable to
capital account under section 705(e)(2)(B) of the Code or Treasury Regulation
section 1.704-1(b)(2)(iv) and (d)(2), and (iii) the Company's net loss for
federal income tax purposes, excluding deductions described in clause (i) and
including Company Tax Items taken into account separately by the Members.
"Majority in Interest" has the meaning specified in Section III.2.
--------------------
"Management Agreement" means the Management Agreement dated as of the date
--------------------
hereof between the Company and City Cinemas, substantially in the form of
Exhibit A hereto.
"Member Nonrecourse Debt" has the meaning ascribed to the term "Partner
-----------------------
Nonrecourse Debt" in Treas. Reg. (S) 1.704-2(b)(4).
"Member Nonrecourse Deductions" means items of Company loss, deduction or
-----------------------------
Code section 705(a)(2)(B) expenditures which are attributable to Member
Nonrecourse Debt.
"Members" means the persons listed in Section III.1 of this Agreement and
-------
those persons subsequently admitted as Members pursuant to the terms of this
Agreement, so long as they have not ceased being Members pursuant to the terms
of this Agreement. A reference to a "Member" means any of the Members, and a
reference to a "Majority in Interest" of the Members means a Member or Members
owning a majority of the Membership Interest in the Company.
"Membership Interest" means a Member's interest in income of the Company,
-------------------
as determined under Section V.I., together with rights and obligations of such
Member under the provisions of this Agreement.
"Nonrecourse Liability" has the meaning set forth in Treas. Reg. (S)
---------------------
1.752-1(a)(2).
"Person" means any individual or Entity.
------
Page 3
<PAGE>
"Secretary of State" means the Secretary of State of the State of
------------------
Delaware.
"Super Majority in Interest" has the meaning specified in Section
--------------------------
III.3.
"Sutton Hill" means Sutton Hill Associates, a California general
-----------
partnership.
"Tax Items" has the meaning set forth under the definition of
---------
"Income".
I.2 Directly or Indirectly. Any provision of this Agreement which refers
----------------------
to an action which may be taken by any Person, or which a Person is prohibited
from taking, shall include any such action taken directly or indirectly by or on
behalf of such Person, including by or on behalf of any Affiliate or agent of
such Person.
I.3 Captions. All captions in this Agreement are inserted for reference
--------
only and are not to be considered in the construction or interpretation of any
provision hereof.
I.4 Interpretation. In the event any claim is made by any Person relating
--------------
to any conflict, omission or ambiguity in this Agreement, no presumption or
burden of proof or persuasion shall be implied by virtue of the fact that this
Agreement was prepared by or at the request of a particular Person or its
counsel.
I.5 References to this Agreement. References to numbered or lettered
----------------------------
articles, sections, and subsections refer to articles, sections, and subsections
of this Agreement unless otherwise expressly stated.
ARTICLE II
FORMATION
II.1 Formation. As of the effective date of this Agreement, the Company
---------
has been formed as a Delaware limited liability company under and pursuant to
the Act. The Company has executed and filed the Certificate with the Secretary
of State.
II.2 Name. The name of the Company shall be Angelika Film Centers LLC. The
----
business of the Company shall be conducted under that name or any other name or
names selected by the Members.
II.3 Principal Office. The principal office of the Company shall be
----------------
Angelika Film Centers, LLC, c/o City Cinemas Corporation, 950 Third Avenue, 26th
Floor, New York, New York 10022 or such other office as the Members may
designate from time to time. The Company also may have such other offices within
the United States as the Members may from time to time determine.
II.4 Agent. The Company shall at all times maintain a registered agent as
-----
required under
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the Act who shall be as stated in the Certificate or as otherwise may be
determined from time to time by the Members in the manner provided by law.
II.5 Business; Purpose; Powers. The business and purpose of the
-------------------------
Company is to develop, own and operate the Angelika Theatre and to conduct such
other business reasonably related thereto as the Company may engage from time to
time as permitted by the Act.
II.6 Term of the Company. The term of the Company shall commence on
-------------------
the date hereof and the Company shall continue in existence as long as the Lease
is in full force and effect, or such earlier time as specified in or pursuant to
this Agreement.
ARTICLE III
MEMBERS AND MEMBERSHIP INTERESTS
III.1 Members. Angelika, Inc. and Sutton Hill are hereby admitted as
-------
Members. Except as otherwise specifically provided in this Agreement, after the
date hereof, no Person may be admitted as an additional Member except with the
Approval of the Members.
III.2 Voting Rights; Approval Required. Except as otherwise
--------------------------------
specifically provided in this Agreement, the vote, consent, or approval of
Members holding in the aggregate more than fifty percent (50%) of the Membership
Interests (a "Majority in Interest") shall be required as to all matters as to
which the vote, consent or approval of the Members is required or permitted
under this Agreement. The vote, consent or approval of the Members, wherever
required or permitted hereunder, may be obtained in any manner permitted
hereunder or under the Act.
III.3 Super Majority Voting Rights.
----------------------------
Notwithstanding anything in this Agreement to the contrary, each
of the following will require the approval of Members holding 85% or more of the
Membership Interests (a "Super Majority in Interest") (i) any sale of all or
substantially all of the assets of the Company, (ii) any change in the business
and purpose of the Company as set forth in Section II.5 hereof (including,
without limitation, the entrance by the Company into a new line of business),
(iii) any amendment, modification or supplement to this Agreement which has an
adverse effect to any Member not holding a Majority in Interest, (iv)
acquisition of additional cinemas, (v) the issuance by the Company of a
guarantee of the indebtedness of any third party, and (vi) any transaction
involving the Company and an Affiliate of Angelika, Inc.
III.4 Meetings of Members.
-------------------
III.4.1 No annual or regular meetings of the Members shall be
required; if convened, however, meetings of the Members may be held at such
date, time, and place as the Members may fix from time to time.
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<PAGE>
III.4.2 A meeting of the Members may be called at any time by
any one or more Members representing fifteen percent (15%) or more of the
Membership Interests for the purpose of addressing any matter on which the vote,
consent or approval of the Members is required under this Agreement.
III.4.3 Notice of any meeting of the Members shall be sent or
otherwise given to the Members in accordance with this Agreement not less than
ten nor more than 60 days before the date of the meeting. The notice shall
specify the place, date, and hour of the meeting and the general nature of the
business to be transacted. Except as the Members may otherwise agree, no
business other than that described in the notice may be transacted at the
meeting.
III.4.4 Attendance, in person or by proxy, of a Member at a
meeting shall constitute a waiver of notice of that meeting, except when the
Member objects, at the beginning of the meeting, to the transaction of any
business because the meeting is not fully called or convened, and except that
attendance at a meeting is not a waiver of any right to object to the
consideration of matters not included in the notice of the meeting if that
objection is expressly made at the meeting. Neither the business to be
transacted nor the purpose of any meeting of Members need be specified in any
written waiver of notice. The Members may participate in any meeting of the
Members by means of conference telephone or similar means as long as both
Members can hear one another. A Member so participating shall be deemed to be
present in person at the meeting.
III.4.5 Any action that can be taken at a meeting of the Members
may be taken without a meeting if a consent in writing setting forth the action
so taken is signed and delivered to the Company by a Majority in Interest or
Super Majority in Interest of the Members, as the case may be. All such
consents shall be maintained in the books and records of the Company.
III.4.6 Any Member entitled to vote on any matter shall have the
right to do so either in person or by one or more agents authorized by a written
proxy signed by the Member and delivered to the other Member. The use of
proxies in all other respects shall be governed by the provisions of the
Delaware General Corporation Law pertaining to the use of proxies by corporate
stockholders.
III.5 Disposition of Interests.
------------------------
III.5.1 No Member shall Dispose of all or any part of its
Membership Interest without the approval each of the other Members, except as
provided below. Any attempted Disposition of a Membership Interest, or any part
thereof, other than in accordance with either Section III.6 or Section III.7
shall be, and hereby is declared, null and void ab initio.
III.5.2 No Member shall, directly or indirectly, sell, assign,
transfer or otherwise dispose of (collectively, a "transfer") its Membership
Interest or any part thereof, at any time, except for the transfers:
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<PAGE>
(i) to an Entity wholly-owned (directly or indirectly) by
one or more Members; or
(ii) to the parent of any Member; or
(iii) in the case of Sutton Hill, to James J. Cotter and/or
any of his lineal descendants, any trust for the benefit
of such person and any trustee thereof; or any Entity
controlled by any of the foregoing;
(iv) in the case of Sutton Hill, to Michael Forman, and/or
any of his lineal descendants, any trust for the benefit
of such person and any trustee thereof; or any Entity
controlled by any of the foregoing;
(v) in the case of a Member that is a natural person, to any
spouse or direct lineal descendants of such Member (an
"Heir"), or a trust, corporation or partnership for the
benefit of such member and/or one or more of such
Member's Heirs;
(vii) in the case of Sutton Hill, any Entity controlled by
James J. Cotter and/or Michael Forman;
(viii) in accordance with the terms and conditions of Sections
III.6 and III.7.
III.5.3 If in connection with a permitted Disposition of a
Membership Interest a Member purports to grant the Person to which the
Membership Interest is Disposed the right to be admitted as a member of the
Company, such Person shall have the right to be so admitted as a member if the
other Members receive a document (i) executed by both the Member effecting such
Disposition and the Person to which the Membership Interest is Disposed, (ii)
including the notice and payment address and facsimile number of the Person to
be admitted to the Company as a member and the written acceptance by such Person
of all the terms and provisions of this Agreement and an agreement by such
Person to perform and discharge timely all of the obligations and liabilities in
respect of the Membership Interest being acquired, (iii) setting forth the
respective percentage interests in Company allocations after the Disposition of
the Member effecting the Disposition and the Person to which the Membership
Interest is Disposed, which together shall total the percentage interest
in Company allocations of the Member effecting such Disposition prior thereto,
(iv) containing a representation and warranty by the Member effecting the
Disposition and the Person to which the Membership Interest is Disposed to the
effect that such Disposition was made in accordance with all laws and
regulations, including securities laws, applicable to such Member or Person, as
appropriate, and (v) setting forth the effective date of the Disposition.
III.6 Right of First Refusal
----------------------
No Member shall be entitled to transfer its Membership Interest, or any
part thereof, except
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<PAGE>
in a sale exclusively for cash in accordance with this Section III.6 or in a
transfer expressly permitted by this Agreement at any time; provided that no
Member shall transfer its Membership Interest in a sale for cash at any time
without first giving written notice to the Company and the other Members of its
intention to transfer such Membership Interest. Any such notice shall specify
the identity of the transferee and the amount of the cash purchase price
proposed to be paid for such Membership Interest, and shall include a copy of
the written offer of such transferee to purchase such Membership Interest, which
offer shall be in a form legally capable of acceptance and without
contingencies.
Any transfer of Membership Interest requiring the giving of written
notice under this Section III.6 shall be subject to a right of first refusal on
the part of the Company exercisable within thirty (30) days of receipt of such
written notice (the "Company Period"). During the Company Period, the Company,
subject to any restrictions imposed by law, shall have the right to elect to
purchase all or any part (subject to the condition set forth below) of the
Membership Interest (the "Subject Membership Interest") proposed to be sold by
the Member delivering such notice (the "Selling Member") for cash equal to the
cash purchase price, if any, proposed to be paid for such Membership Interest.
The Company shall exercise its election right by written notice delivered to the
Selling Member and the other Members within the Company Period. If the Company
does not elect to purchase all of the Subject Membership Interest, then such
right of first refusal shall pass to the other Members as follows:
Upon the expiration of the Company Period, each Member, other than the
Selling Member, shall have fifteen (15) days (the "Member Period") to elect in
writing to purchase all or any part of the Subject Membership Interest not
subject to purchase by the Company. In the event that the other Members elect
to purchase in the aggregate more Membership Interest than the Subject
Membership Interest available for sale, the Subject Membership Interest shall be
apportioned among the other Members in accordance with their percentage
interest in the Company. The other Members shall exercise their election right
by written notice delivered to the Selling Member and the Company within the
Member Period. If the Company and the other Members entitled to this right of
first refusal decline to purchase in the aggregate an amount equal to all of
the Subject Membership Interest, the Selling Member may thereafter transfer all,
but not less than all, the Subject Membership Interest in accordance with the
terms set forth in the written notice to the Company and the other Members.
If the Company elects to purchase all of the Subject Membership Interest
it shall tender payment for such interest within One Hundred Twenty Days
following the end of the Company Period to the Selling Member. If the Company
does not elect to purchase all of the Subject Membership Interest, but the
Company and/or the other Members elect to purchase all of the Subject Membership
Interest, they shall tender payment for such interest within One Hundred Twenty
Days following the end of the Member Period to the Selling Member. Failure to
tender the full payment for all the Subject Membership Interest shall terminate
the Company's and the other Members' rights to purchase and the Selling Member
may thereafter transfer all, but not less than all, of the Subject Membership
Interest in accordance with the terms set forth in the written notice to the
Company and the other Members.
Page 8
<PAGE>
No transfer of the Subject Membership Interest shall be made after the
end of One Hundred Eighty (180) days after the original notice given to the
Company and the Members under this Section III.6 or for a price that is lower
than the price specified in the notice referred to in this Section III.6, unless
the Membership Interest are first offered again to the Company and the other
Members in accordance with this Section III.6.
III.7 Tag Along Rights.
-----------------
In the event that Angelika, Inc. or any successors or assigns thereof, proposes
to transfer all, or any portion of its Membership Interest to a Person (other
than a transferee pursuant to Section III.5.2), then Angelika, Inc., shall
promptly give written notice (the "Tag Along Notice") to the Company and the
other Members of its intention to transfer such Membership Interest at least
forty-five (45) days prior to the closing of such transfer. Any such Tag Along
Notice shall specify in reasonable detail the proposed transfer, including the
identity of the transferee and the amount of the purchase price to be paid for
such Membership Interest or portion thereof, and shall include a copy of the
documentation evidencing such transaction and the date such proposed transfer is
expected to be consummated. It is understood by the parties hereto that
transfers of any interest in Angelika, Inc. by the shareholders thereof shall
constitute a transfer pursuant to this Section III.7.
Each Member shall have the right, exercisable upon written notice delivered to
Angelika, Inc., within twenty (20) days after receipt of such notice, to
participate in such sale on substantially the same terms and conditions set
forth in the Tag Along Notice, and to sell all of its Membership Interest for
the same consideration (adjusted to reflect such Member's percentage interest in
the Company) received by Angelika, Inc. It is understood by each of the Members
that, in the event the transferee in a transfer contemplated by this Section
III.7, will not agree to purchase such Member's interest on the terms and
conditions described above, Angelika, Inc. shall not be entitled to sell its
Membership Interest pursuant to this Section III.7.
The non-exercise of the rights of the Members hereunder to participate in one or
more transfers of the Membership Interest of Angelika, Inc., shall not adversely
affect their rights to participate in subsequent sales of the Membership
Interest of Angelika, Inc.
III.8 Amendment of Agreement to Reflect New Members. If a Person is to be
---------------------------------------------
admitted to the Company as a new member, the Person to be admitted as a new
member shall execute appropriate amendments to this Agreement to take into
account the Person's admission as a new member. In the case of any admission
pursuant to Section III.5.2, amendment shall provide, among things, that the
admission of the new member shall be deemed to occur immediately before any
withdrawal of the transferor Member.
III.9 No Resignation or Removal. Except as otherwise specifically
-------------------------
provided in this Agreement, a Member does not have the right or power to resign
or withdraw from the Company as a Member and shall be entitled to do so only
with the approval of the other Members.
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<PAGE>
III.10 No Liability to Third Parties. No Member shall have any personal
------------------------------
obligation for any liabilities of the Company, whether liabilities arise in
contract, tort or otherwise, except to the extent that any liabilities are
expressly assumed in a separate writing by the Member.
III.11 Indemnification by Members. To the fullest extent permitted by
--------------------------
law, each Member shall indemnify the Company, the other Members, and their
respective members, trustees, officers, directors, shareholders, employees,
associates, agents, and Affiliates, and hold them harmless from and against, any
and all losses, costs, liabilities, damages, and expenses (including, without
limitation, costs of suit and reasonable attorney's fees) (collectively referred
to herein as "Damages") they may incur on account of any material breach by the
Member of any provision of this Agreement.
III.12 Rights of Assignees. In the event the Company is required to
-------------------
recognize the validity of a Disposition notwithstanding the provisions of this
Article III to the contrary, the assignee of a Membership Interest who has not
been admitted to the Company in accordance with this Article III shall be
entitled only to allocations and distributions with respect to Membership
Interest as provided in this Agreement, but shall have no right to any
information or accounting of the affairs of the Company, or to inspect the books
or records of the Company, and shall not have any rights of a Member under the
Act or this Agreement.
ARTICLE IV
CAPITAL CONTRIBUTIONS AND CAPITAL ACCOUNTS
IV.1 Capital Contributions. Angelika, Inc. hereby agrees to make, on
---------------------
an as needed basis, an initial Capital Contribution of $10,340,683. Sutton Hill
hereby agrees to make, on an as needed basis, an initial Capital Contribution of
$2,068,137. The initial membership interests will be as follows: Angelika,
Inc., 83.34% and Sutton Hill, 16.66%. The Members agree to fund timely their
capital commitments on a pro-rata basis in accordance with the above
percentages.
IV.2 No Return of Capital Contribution; No Interest. Except as otherwise
----------------------------------------------
specifically provided in this Agreement, a Member shall not be entitled to
demand or receive the return of all or any portion of the Member's Capital
Contribution or to be paid interest in respect of either its Capital Account or
Capital Contribution. Under circumstances permitting or requiring a return of a
Member's Capital Contribution, the Member shall have no right to receive
property other than cash. No Member shall be required to contribute or to lend
any money or property to the Company to enable the Company to return any other
Member's Capital Contribution.
IV.3 Capital Accounts. A Capital Account shall be established and
----------------
maintained for each Member. Each Member's Capital Account (a) shall be
increased by (i) the amount of money contributed by or on behalf of that Member
to the Company, (ii) the fair market value of property contributed by or on
behalf of that Member to the Company (net of liabilities secured by contributed
property that the Company is considered to assume or take subject to under
section 752 of the Code), and (iii) allocations to that Member of Company Income
and gain (or items thereof), including
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income and gain exempt from tax and income and gain described in Treas. Reg. (S)
1.704-1(b)(2)(iv)(g), but excluding income and gain described in Treas. Reg. (S)
1.704-1(b)(4)(i), and (b) shall be decreased by (i) the amount of money
distributed to that Member by the Company, (ii) the fair market value of
property distributed to that Member by the Company (net of liabilities secured
by the distributed property that the Member is considered to assume or take
subject to under section 752 of the Code), (iii) allocations to that Member of
expenditures of the Company described in section 705(a)(2)(B) of the Code, and
(iv) allocations of Company loss and deduction (or items thereof), including
loss and deduction described in Treas. Reg. (S) 1.704-1(b)(2)(iv)(g), but
excluding items described in clause (b)(iii) of this sentence and loss or
deduction described in Treas. Reg. (S) 1.704-1(b)(4)(i) or 1.704-1(b)(4)(iii).
The Capital Accounts shall also be maintained and adjusted as permitted by the
provisions of Treas. Reg. (S) 1.704-1(b)(2)(iv)(f) and as required by the other
provisions of Treas. Reg. (S)(S) 1.704-1(b)(2)(iv) and 1.704-1(b)(4), including
adjustments to reflect the allocations to the Members of depreciation,
depletion, amortization, and gain or loss as computed for book purposes rather
than the allocation of the corresponding items as computed for tax purposes, as
required by Treas. Reg. (S) 1.704-1(b)(2)(iv)(g). On the transfer of all or part
of a Membership Interest, the Capital Account of the transferor that is
attributable to the transferred Membership Interest or part thereof shall carry
over to the transferee in accordance with the provisions of Treas. Reg. (S)
1.704-1(b)(2)(iv)(l).
IV.4 No Obligation to Restore Deficits. No Member shall have any
---------------------------------
Liability or obligation to the Company, the other Members or any creditor of the
Company to restore at any time any deficit balance in Member's Capital Account.
IV.5 Additional Capital Contributions.
--------------------------------
(a) Member Preemptive Rights: To the extent that additional
------------------------
capital is required, the Members will have a forty-five day
preemptive right (the "Rights Period") to provide such capital, with
the intention that each Member will have the opportunity to preserve
such Member's proportionate Membership Interest through the provision
of such further capital.
(b) Contribution Right: So long as it is a Member with a
------------------
Membership Interest representing at least 50% of the aggregate
Membership Interests, Angelika, Inc. will have the right, but not the
obligation, to provide capital to the Company to meet the obligations
of the Company. This right is subject to the preemptive rights of the
other Members, as set forth in subsection (a), immediately above.
However, such contributions may be made immediately, subject to
repayment (with interest at the rate of 30 Day LIBOR plus 2.25 basis
points) from the proceeds of any such exercise of preemptive rights
within forty-five (45) days of notice to the Members of such capital
contribution by Angelika, Inc. Such contributions will be treated as
contributions to capital by Angelika, Inc. effective on the date
funded, and Angelika, Inc.'s Membership Interest will be increased
proportionately by the
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amount of such contributions, except to the extent such
contributions, if any, are repaid from the proceeds of an exercise by
Members of preemptive rights during the Rights Period.
IV.6 Member Guarantees. No member will be required to issue any
-----------------
guarantee.
ARTICLE V
ALLOCATIONS AND DISTRIBUTIONS
V.1 Allocations of Income and Loss. Income and Loss for each year shall
------------------------------
be allocated as follows:
V.1.1 After giving effect to the special allocations set forth in
Section V.2, Income shall be allocated to the Members, 83.34% to Angelika, Inc.
and 16.66% to Sutton Hill.
V.1.2 After giving effect to the special allocations set forth in
Section V.2, Loss shall be allocated to the Members, 83.34% to Angelika, Inc.
and 16.66% to Sutton Hill.
V.2 Special Allocations.
-------------------
V.2.1 Notwithstanding the provisions of Section V.1, if there is a
net decrease in Company Minimum Gain during any taxable year, each Member shall
be specially allocated items of Company income and gain for year (and, if
necessary, in subsequent years) in an amount equal to the portion of Member's
share of the net decrease in Company Minimum Gain that is allocable to the
disposition of Company property subject to a Nonrecourse Liability, which share
of net decrease shall be determined in accordance with Treas. Reg. (S) 1.704-
2(g)(2). Allocations pursuant to this Section V.2.1 shall be made in proportion
to the amounts required to be allocated to each Member under this Section V.2.1.
The items to be so allocated shall be determined in accordance with Treas. Reg.
(S) 1.704-2(f). This Section V.2.1 is intended to comply with the minimum gain
chargeback requirement contained in Treas. Reg. (S) 1.704-2(f) and shall be
interpreted consistently therewith.
V.2.2 Notwithstanding the provisions of Section V.1, if there is a
net decrease in Minimum Gain attributable to a Nonrecourse Liability during any
taxable year, each Member who has a share of Company Minimum Gain attributable
to Nonrecourse Debt (which share shall be determined in accordance with Treas.
Reg. (S) 1.704-2(i)(5)) shall be specially allocated items of Company income and
gain for taxable year (and, if necessary, in subsequent years) in an amount
equal to that portion of Member's share of the net decrease in Company Minimum
Gain attributable to Nonrecourse Liability that is allocable to the disposition
of Company property subject to Nonrecourse Debt (which share of net decrease
shall be determined in accordance with Treas. Reg. (S) 1.704-2(i)(5)).
Allocations pursuant to this Section V.2.2 shall be made in proportion to the
amounts required to be allocated to each Member under this Section V.2.2. The
items to be so allocated shall be determined in accordance with Treas. Reg. (S)
1.704-2(i)(4). This Section V.2.2 is
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intended to comply with the minimum gain chargeback requirement contained in
Treas. Reg. (S) 1.704-2(i)(4) and shall be interpreted consistently therewith.
V.2.3 Notwithstanding the provisions of Section V.1, any nonrecourse
deductions (as defined in Treas. Reg. (S) 1.704-2(b)(1)), other than
depreciation and amortization deductions specially allocated pursuant to Section
V.2.8, for any taxable year or other period shall be specially allocated to the
Members in accordance with their respective percentage interests in Income and
Member Nonrecourse Deductions shall be allocated to the Member to whom the
Member Nonrecourse Debt is allocated.
V.2.4 Notwithstanding the provisions of Section V.1, those items of
Company loss, deduction, or expenditures under section 705(a)(2)(B) of the Code
which are attributable to Member Nonrecourse Debt for any taxable year or other
period shall be specially allocated to the Member who bears the economic risk of
loss with respect to the Member Nonrecourse Debt to which items are
attributable in accordance with Treas. Reg. (S) 1.704-2(i).
V.2.5 Notwithstanding the provisions of Section V.1, if a Member
unexpectedly receives any adjustments, allocations, or distributions described
in Treas. Reg. (S) 1.704-1(b)(2)(ii)(d)(4), (5) or (6), or any other event
creates a deficit balance in Member's Capital Account in excess of Member's
share of Minimum Gain, items of Company income and gain shall be specially
allocated to Member in an amount and manner sufficient to eliminate excess
deficit balance as quickly as possible. Any special allocations of items of
income and gain pursuant to this Section V.2.5 shall be taken into account in
computing subsequent allocations of income and gain pursuant to this Article V
so that the net amount of any item so allocated and the income, gain, and losses
allocated to each Member pursuant to this Section V.2.5 to the extent possible,
shall be equal to the net amount that would have been allocated to each Member
pursuant to the provisions of this Article V if unexpected adjustments,
allocations, or distributions had not occurred.
V.2.6 Notwithstanding any other provision in this Article V, in
accordance with section 704(C) of the Code, income, gain, loss, and deduction
with respect to any property contributed to the capital of the Company shall,
solely for tax purposes, be allocated among the Members so as to take account of
any variation between the adjusted basis of property to the Company for federal
income tax purposes and its fair market value on the date of contribution.
Allocations pursuant to this Section V.2.5 are solely for purposes of federal,
state, and local taxes; as , they shall not affect or in any way be taken into
account in computing a Member's Capital Account or share of Income, Loss, or
items of distribution pursuant to any provision of this Agreement.
V.2.7 In the event any Member has a deficit Capital Account at the
end of any Company taxable year which is in excess of the sum of (i) the amount,
if any, Member is obligated to restore and (ii) the amount Member is deemed to
be obligated to restore pursuant to the next to the last sentences of Treas.
Reg. (S)(S) 1.704-2(g)(1) and 1.704(2)(i)(5), each Member shall be specially
allocated items of Company income and gain in the amount of excess as quickly
as possible, provided that an allocation pursuant to this Section V.2.7 shall be
made if and only to the extent that
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Member would have a deficit Capital Account in excess of sum after all other
allocations provided for in this Article V have been tentatively made as if this
Section V.2.7 and Section V.2.5 hereof were not in this Agreement.
V.2.8 100% of the Company's Depreciation deductions shall be
allocated to Sutton Hill, up to an amount equal to its initial Capital
Contribution. Thereafter, 100% of the Company's Depreciation deductions shall be
allocated to Angelika, Inc. up to an amount equal to its initial Capital
Contribution. Thereafter, Depreciation deductions will be allocated 16.66% to
Sutton Hill and 83.34% to Angelika, Inc.
V.3 Allocation of Income and Loss in Respect of a Transferred Interest.
------------------------------------------------------------------
V.3.1 If a Member's Membership Interest is transferred, or is
adjusted by reason of additional Capital Contributions, the admission of a new
Member, or otherwise, during any taxable year, each item of income, gain, loss,
deduction, or credit of the Company for taxable year shall be assigned pro rata
to each day in the particular period of year to which item is attributable
(i.e., the day on or during which it is accrued or otherwise incurred) and the
amount of each item so assigned to any day shall be allocated to the Member
based upon its percentage interest in Company allocations at the close of day.
For the purpose of accounting convenience, except as provided below, the Company
may treat a transfer of, or an adjustment in, a Membership Interest which occurs
at any time during a semi-monthly period (commencing with the semi-monthly
period including the date hereof) as having been consummated on the first day of
semi-monthly period, regardless of when during semi-monthly period transfer or
adjustment actually occurs.
V.3.2 Notwithstanding any provision to the contrary in this
Agreement, gain or loss of the Company realized in connection with a Disposition
of any of the assets of the Company shall be allocated solely to the Members as
of the date Disposition occurs (or to any particular Member or Members as
required by Code section 704(c), if applicable to Disposition).
V.5 Distributions.
-------------
V.5.1 Subject to any restrictions under applicable law, the Company
shall periodically distribute Distributable Cash to the Members not less
frequently than quarterly, with the amount and timing of distributions to be
determined by the Members.
V.5.2 Except as otherwise provided in the case of the Company's
liquidation and termination, all distributions of Distributable Cash shall be
made 83.34% to Angelika, Inc. and 16.66% to Sutton Hill.
V.6 Form of Distributions. A Member has no right to demand or receive any
---------------------
distribution from the Company in any form other than cash. Likewise, except in
connection with the dissolution of the Company as provided herein, no Member
shall be compelled to accept from the Company a distribution of any asset in
kind.
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ARTICLE VI
MANAGEMENT AND OPERATION
VI.1 Management of Company by Members.
--------------------------------
The business, property, and affairs of the Company shall be managed
exclusively by the Members. The full, complete, and exclusive authority to
manage and control the business, affairs, and properties of the Company in
accordance with the terms of this Agreement, to make all decisions regarding the
same, and to perform any and all other acts or activities consistent therewith
which are customary or incidental to the management of the Company's business is
subject to the Approval of the Members.
VI.2 Administration.
--------------
VI.2.1 Officers and Employees. In order to provide for the orderly
----------------------
administration of the Company, the Members may designate from time to time an
administrative committee and/or may appoint officers to administer the business
and affairs of the Company, as set forth in a resolution executed by a Majority
in Interest of the Members. Initially, James J. Cotter, Robert Smerling and S.
Craig Tompkins will serve as Managing Directors of the Company, but will not
receive any separate compensation from the Company for their services in such
capacities. The execution of any document by two or more Managing Directors
will bind the Company in its affairs with all persons other than the Members and
their Affiliates. At the direction of the Members, the Company may also retain
employees to carry out the business of the Company.
VI.2.2 Management Agreement. Simultaneously with the execution of
--------------------
this Agreement, the Company is entering into the Management Agreement.
VI.3 Other Theatres.
--------------
Each of the Members hereby acknowledge and agree that Angelika, Inc. and/or one
or more of its Affiliates may develop, own, lease or operate, as applicable,
movie theatres located outside New York City including, without limitation,
theatres that exhibit specialty art films (collectively, "Reading Theatres").
Subject to the Executive Sharing Agreement dated as of November 1, 1993 by
and between Reading Company and City Cinemas, each of the Members acknowledge
and agree that Sutton Hill and/or its Affiliates has and may develop, own, lease
or operate, as applicable, other movie theatres located inside and outside of
New York City. It is further acknowledged and agreed that neither Sutton Hill,
Angelika, Inc. nor any of their respective Affiliates shall have any right to
contribute capital with respect to or acquire any ownership interest in,
participate in any profits generated by, or manage, other theatres that are
developed, owned, leased or operated by the other party. It is further
acknowledged and agreed by the Members that Angelika, Inc. may use the tradename
"Angelika" in connection with its development, ownership, lease or operation, as
applicable, of such Reading Theatres, subject to the documentation of a
reasonable royalty-free license agreement, approval of which will not be
unreasonably withheld or delayed; provided it is understood that, in no event
may Angelika, Inc. use the tradename "Angelika" in New York City without the
written approval of Sutton Hill.
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VI.4 Financing.
---------
Each of the Members acknowledge and agree that it is the Company's current
intention to seek third party financing (collectively "Indebtedness") secured by
the Angelika Theatre in an amount at least equal to the initial Capital
Contribution of Angelika, Inc. Each of the Members agree that the portion of
such financing proceeds equal to Angelika, Inc.'s initial Capital Contribution
shall be lent by the Company to Angelika, Inc., and the remainder of such
proceeds shall be lent by the Company to Sutton Hill, up to the amount of Sutton
Hill's initial Capital Contribution. These loans will be evidenced by promissory
notes reflecting the economics of the underlying loan to the Company. It is
further acknowledged and agreed that Angelika, Inc. may pledge its Membership
Interest in connection with borrowings by Angelika, Inc. and/or its Affiliates
and that such indebtedness may be in excess of the initial Capital Contribution
of Angelika Inc.
VI.5 Subordination.
-------------
In connection with any indebtedness of the Company or Angelika, Inc. described
in Section VI.4 above pursuant to which either the Angelika Theatre or Angelika
Inc.'s Membership Interest serves as security (collectively, "Indebtedness"),
Sutton Hill hereby agrees that it shall execute any reasonable agreement,
instrument or other document evidencing that Sutton Hill shall subordinate
solely the rights incident to its Membership Interest to the lenders extending
such Indebtedness to the extent the portion of such Indebtedness secured by such
Membership Interest does not exceed Angelika, Inc.'s initial Capital
Contribution; provided that Sutton Hill is provided commercially reasonable
notice and cure rights with respect to any such Indebtedness. To the fullest
extent permitted by law, Angelika, Inc. shall indemnify Sutton Hill and its
partners, officers, directors, employees, associates, agents and Affiliates
harmless from and against any Damages they may incur on account of any default
by the Company or Angelika, Inc., as the case may be, in connection with any
such Indebtedness.
ARTICLE VII
TAX MATTERS
VII.1 Tax Returns. The Company shall prepare or cause to be prepared
-----------
and filed all necessary federal, state, and local income tax returns for the
Company. The Company shall furnish to each Member copies of all returns that
are actually filed and shall keep them informed of any and all pending or
threatened tax proceedings regarding the Company.
VII.2 Tax Matters Partner. Angelika, Inc. shall be the "tax matters
-------------------
partner" of the Company pursuant to section 6231(a)(7) of the Code. Angelika,
Inc. shall take action as may be necessary to cause each other Member to become
a "notice partner" within the meaning of section 6231(a)(8) of the Code, and
shall inform each other Member of all significant matters that may come to its
attention in its capacity as "tax matters partner" and, shall forward to each
Member copies of all significant written communications it may receive in
capacity. Angelika, Inc. shall not take any
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action contemplated by sections 6222 through 6231 of the Code without the
consent of the Members.
VII.3 Tax Elections. The Company shall make the following elections on
-------------
the appropriate tax returns:
VII.3.1 to adopt the calendar year as the Company's fiscal year;
VII.3.2 to adopt an appropriate method of accounting and to keep
the Company's books and records on that method; and
VII.3.3 any other election Angelika, Inc. deems appropriate and in
the best interests of the Company and the Members. It is the intent of the
Members that the Company be treated as a partnership for United States federal
income tax purposes and, to the extent permitted by applicable law, for state
and local franchise and income tax purposes. Neither the Company nor any other
Member may make an election for the Company to be excluded from the application
of the provisions of subchapter K of chapter 1 of subtitle A of the Code or any
similar provisions of applicable state or local law, and no provision of this
Agreement shall be construed to sanction or approve an election.
VII.4 Withholding. With respect to any Member who is not a United States
-----------
person within the meaning of the Code, any tax required to be withheld under
section 1446 or other provisions of the Code, or under state law, shall, unless
already reflected by an appropriate charge to that Member's Capital Account, be
charged to that Member's Capital Account as if the amount of tax had been
distributed to Member. The amount so withheld shall be treated as a
distribution of Distributable Cash to Member for all purposes of this
Agreement.
ARTICLE VIII
INFORMATION
VIII.1 Information. In addition to the other rights specifically set forth
-----------
in this Agreement, each Member shall have access to all information to which a
Member is entitled to have access pursuant to the Act and other information
regarding the Company, as it may reasonably request from time to time.
ARTICLE IX
BOOKS, RECORDS, REPORTS, AND BANK ACCOUNTS
IX.1 Maintenance of Books. The books of account for the Company shall be
--------------------
maintained on an accrual basis in accordance with the terms of this Agreement,
except that Capital Accounts shall be maintained in accordance with Article IV.
The calendar year shall be the accounting year of the Company.
IX.2 Financial Information. The Company shall prepare, or shall cause to
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be prepared, as
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soon as practicable after the end of each fiscal year of the Company, and in any
event on or before the 90th day thereafter, a balance sheet, an income statement
and a statement of changes in Members' capital in the Company for, or as of the
end of, that year. In addition, the Company shall deliver to each Member within
90 days after each fiscal year a copy of the Company's federal income tax return
for that year and a Schedule K-1 setting forth Member's distributions and
allocations.
IX.3 Bank Accounts. The Company shall establish and maintain one or more
-------------
separate bank and investment accounts for the Company's funds in the Company's
name with financial institutions and firms as the Members may select and
designate signatories thereon. The Company's funds may not be commingled with
other funds of any other Person.
ARTICLE X
DISSOLUTION AND WINDING UP
X.1 Conditions of Dissolution. The Company shall be dissolved, its
-------------------------
assets shall be disposed of, and its affairs wound up on the first to occur of
the following:
(a) the vote, consent or approval of a Majority in Interest
of the Members at any time to dissolve the Company;
(b) the occurrence of a Dissolution Event, unless within
ninety (90) days after the occurrence, the remaining Members (other
than the Member as to which Dissolution Event occurred) consent to
continue the Company;
(c) the Disposition of all of the property and assets of the
Company;
(d) the entry of a decree of judicial dissolution under the
Act; or
(e) the expiration of the term of existence of the Company.
X.2 Liquidation and Termination.
---------------------------
X.2.1 Upon the dissolution of the Company as provided in Section
X.1, the Company shall continue solely for the purpose of winding up its affairs
in an orderly manner, liquidating its assets, and satisfying the claims of its
creditors. The Members shall act as liquidators or may appoint one or more other
Persons to act as liquidator. The liquidator shall oversee the winding up and
liquidation of the Company, take full account of the liabilities of the Company
and assets, either cause the Company's assets to be sold as promptly as is
consistent with obtaining fair market value therefor (or, with the consent of
the Members, distributed to the Liquidation Member) and, if sold, shall cause
the proceeds therefrom, to the extent sufficient therefor, to be applied and
distributed as provided in paragraph (c) below. Until final distribution, the
liquidator shall manage
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the Company's business and other property and assets with all of the power and
authority of the Members. The steps to be accomplished by the liquidator are as
follows:
(a) as promptly as possible after dissolution and again after
final liquidation, the liquidator shall cause a proper accounting to
be made of the Company's assets, liabilities, and operations through
the last day of the calendar month in which the dissolution shall
occur or the final liquidation shall be completed, as applicable;
(b) during the period commencing on the first day of
dissolution pursuant to Section X.1 hereof and ending on the date on
which all of the assets of the Company have been distributed to the
Members in accordance with this Section X.2, the Members shall
continue to share Income, Loss, and other items of Company income,
gain, loss or deduction in the manner provided in Article V, provided
that no distributions shall be made pursuant to Section V.4;
(c) the liquidator shall pay or discharge from Company funds
all of the debts, liabilities and obligations of the Company
(including, without limitation, but subject to the provisions of
applicable law, all expenses incurred in liquidation) or otherwise
make reasonably adequate provision therefor (including, without
limitation, the establishment of a cash escrow fund for contingent
liabilities in amount and for terms as the liquidator may reasonably
determine);
(d) all remaining assets of the Company shall be distributed to
the Members in accordance with the positive balances of their Capital
Accounts; and
(e) the liquidator may sell any or all Company property,
including to the Members for fair market value.
X.2.2 Any distributions in kind to the Members shall be made subject
to the liability of distributee for costs, expenses, and liabilities
theretofore incurred or for which the Company has committed prior to the date of
termination.
X.3 Cancellation of Filings. Upon completion of the distribution of
-----------------------
Company assets as provided herein, the Company is terminated, and the liquidator
shall take actions as may be necessary to terminate the Company.
ARTICLE XI
INDEMNIFICATION AND INSURANCE
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XI.1 Indemnification by Company
--------------------------
XI.1.1 The Company shall indemnify and defend each Member or
officer or employee of the Company who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding
(a "Proceeding") by reason of the fact that it is or was a Member, manager,
----------
officer, or other agent of the Company or that, being or having been a Member,
manager, officer or agent, it is or was serving at the request of the Company as
a manager, director, officer, employee, or other agent of another Person (all
Persons being referred to hereinafter as an "agent"), to the fullest extent
-----
permitted by applicable law in effect on the date hereof and to greater extent
as applicable law may hereafter from time to time permit; provided, however,
that no Person shall be entitled to indemnification hereunder for any act or
omission constituting gross negligence, willful misconduct or material breach of
this Agreement. Furthermore, the Company may, but shall not be obligated to,
indemnify any other Person who was or is a party or is threatened to be made a
party to, or otherwise becomes involved in, a Proceeding by reason of the fact
that person is or was an agent to the same extent as is provided for in the
preceding sentence with respect to a Member or agent.
XI.1.2 The indemnification provided by, or granted pursuant to, the
provisions of this Article XI shall not be deemed exclusive of any other rights
to which any Person seeking indemnification may be entitled under any agreement,
vote of Members, or otherwise, both as to action in Person's capacity as an
agent of the Company and as to action in another capacity while serving as an
agent. All rights to indemnification under this Article XI shall be deemed to
be provided by a contract between the Company and each Member and officer who
serves in capacity at any time while this Agreement and relevant provisions of
the Act and other applicable law, if any, are in effect. Any repeal or
modification hereof or thereof shall not affect any rights then existing.
ARTICLE XII
GENERAL PROVISIONS
XII.1 Notices All notices and other communications provided for or
-------
permitted to be given under this Agreement shall be in writing and shall be
given by depositing the notice in the United States mail, addressed to the
Person to be notified, postage paid, and registered or certified with return
receipt requested, or by notice being delivered in person or by facsimile
communication to party. Notices given or served pursuant hereto shall be
effective upon receipt by the Person to be notified. All notices to be sent to
a Member shall be sent to or made at, and all payments hereunder shall be made
at, the address given for that Member or other address as that Member may
specify by notice to the Company and the other Members.
XII.2 Entire Agreement; Waivers and Modifications.
-------------------------------------------
XII.2.1 The Certificate and this Agreement constitute the entire
agreement of the Members and their respective Affiliates relating to the Company
and supersedes any and all prior contracts, understandings, negotiations, and
agreements with respect to the Company and the subject
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matter hereof, whether oral or written.
XII.2.2 The Certificate and this Agreement may be amended or
modified from time to time only by a written instrument executed by the Members.
XII.2.3 In the event of an inconsistency or conflict between the
provisions of this Agreement and any resolution adopted by the Members,
resolution shall be deemed an amendment to this Agreement and a waiver by the
Members of the inconsistent or conflicting provision of this Agreement. Any
waiver or consent, express, implied or deemed to or of any breach or default by
any Person in the performance by that Person of its obligations with respect to
the Company or any action inconsistent with this Agreement is not a consent or
waiver to or of any other breach or default in the performance by that Person of
the same or any other obligations of that Person with respect to the Company or
any other action. Failure on the part of a Person to complain of any act of any
Person or to declare any Person in default with respect to the Company,
irrespective of how long that failure continues, does not constitute a waiver by
that Person of its rights with respect to that default until the applicable
statute of limitations period has run. Except with respect to the matters
described in the first sentence of this Section XII.2.3, all waivers and
consents hereunder shall be in writing and shall be delivered to the Company and
the Members in the manner set forth in Section XII.1. A Member may grant or
withhold any waiver or consent in its absolute sole discretion.
XII.3 Binding Effect; No Third-Party Beneficiaries. Subject to the
--------------------------------------------
restrictions on Dispositions set forth herein, this Agreement is binding on and
inures to the benefit of the Members and their respective successors and
assigns. Nothing in this Agreement shall provide any benefit to any third party
or entitle any third party to any claim, cause of action, remedy or right of any
king, it being the intent of the parties that this Agreement shall not be
construed as a third-party beneficiary contract.
XII.4 Governing Law. This Agreement is governed by and shall be construed
-------------
in accordance with the law of the State of Delaware, excluding any conflict-of-
laws rule or principle that might refer the governance or construction of this
agreement to the law of another jurisdiction. If any provision of this
Agreement or the application thereof to any Person or circumstance is held
invalid or unenforceable to any extent, the remainder of this Agreement and the
application of that provision to other Persons or circumstances is not affected
thereby, and that provision shall be enforced to the greater extent permitted by
law.
XII.5 Further Assurances. In connection with this Agreement and the
------------------
transactions contemplated hereby, each Member shall execute and deliver any
additional documents and instruments and perform any additional acts that may be
necessary or appropriate to effectuate and perform the provisions of this
Agreement and those transactions.
XII.6 Waiver of Certain Rights. Each Member irrevocably waives any right
------------------------
it might have to maintain any action for partition of the property of the
Company.
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XII.7 Multiple Counterparts; Facsimile Transmissions. This Agreement may
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be executed in multiple counterparts with the same effect as if the signing
parties had signed the same document. All counterparts shall be construed
together and constitute the same instrument. Delivery of an executed
counterpart of this Agreement by facsimile shall be equally as effective as
delivery of a manually executed counterpart of this Agreement. Upon the request
of any party, any party who shall have delivered an executed counterpart of this
Agreement by facsimile shall deliver a manually executed counterpart as well,
but the failure to so deliver a manually executed counterpart shall not affect
the validity, enforceability and binding effect of this Agreement.
XII.8 Submission to Jurisdiction. Each of the Members hereby consents to
--------------------------
the jurisdiction of any state or federal court located within the State of
Delaware, and, subject to the provisions of Section XII.8, irrevocably agrees
that all actions or proceedings relating to this Agreement shall be instituted
and heard by the courts of jurisdiction. Each Member hereby waives any
objection that it may have based on improper venue or forum non conveniens to
the conduct of any proceeding in any court and personal service of any and all
process upon it, and consents to any service of process made in the manner
provided herein for the giving of notices under this Agreement.
IN WITNESS WHEREOF, the parties hereto executed this Agreement effective as
of the date first above written.
MEMBERS:
-------
ANGELIKA CINEMAS, INC.
By: /s/ Charles S. Groshon
-------------------------------------
Name: Charles S. Groshon
Title: Vice President
SUTTON HILL ASSOCIATES, a California
General Partnership
By: /s/ Bradley J. Neel
-------------------------------------
Name: Bradley J. Neel
Its: Secretary
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<PAGE>
Exhibit 10.33
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (the "Agreement") is made and entered into as
of the 27th day of August, 1996, by and between ANGELIKA FILM CENTERS LLC, a
Delaware limited liability company ("Owner"), and CITY CINEMAS CORPORATION, a
New York corporation ("Manager").
RECITALS
A. Owner is the current owner or lessee under the lease dated as of
March 4, 1988 (as amended, modified or supplemented from time to time, the
"Lease") between Cable Building Associates, as lessor, and Houston Cinema Inc.,
as lessee, of the premises commonly known as the Angelika Theatre (the
"Theatre") located at 18 W. Houston, in the Borough of Manhattan, City of New
York, as such Lease was subsequently assigned to Angelika Film Centers, Inc.,
and then further assigned to the Company.
B. Manager is experienced in operating and managing motion picture
theatres and buying and booking films.
C. Owner desires to engage Manager to manage the Theatre and
Manager desires to manager the Theatre for (i) an annual Management Fee of One
Hundred Twenty-Five Thousand Dollars ($125,000), adjusted as described herein,
and (ii) a Bonus Fee equal to the positive difference, if any, between (a) the
lesser of (1) fifty percent (50%) the "Net Excess Amount," or (2) five percent
(5%) of "Gross Income," and (b) an amount equal to the Management Fee, all as
described in Section 5 below.
AGREEMENT
NOW, THEREFORE, in consideration of the above stated premises, the
mutual covenants and agreements contained herein and other valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Owner and Manager agree follows:
1. APPOINTMENT
-----------
Commencing August 27, 1996 (the "Commencement Date") and
continuing thereafter until December 31, 2003 (the"Initial Term"), Owner hereby
engages Manager to operate, manage and maintain the Theatre in accordance with
the terms and conditions set forth in this Agreement, and Manager hereby accepts
such engagement. After the Initial Term, this Agreement shall automatically
renew and continue in full force and effect for successive one (1) year periods
(the "Successive Terms") unless and until either party terminates this Agreement
by giving to the other party written notice of its desire to terminate the
Agreement, delivered no less than one hundred.
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eighty (180) days prior to the expiration of either the Initial Term, or any
Successive Term.
2. POWERS OF MANAGER.
------------------
2.1 Grant and Delegation. Owner hereby grants and delegates
---------------------
to Manager the following authority, powers and duties:
(a) Licensing. To arrange licensing for all motion
---------
picture films for the Theatre; provided it is understood that
administrative fees shall be the responsibility of Manager;
(b) Maintenance and Repair. To maintain or cause to
----------------------
be maintained the Theatre; to make or cause to be made and
supervise minor repairs; to purchase supplies required for the
operation and maintenance of the Theatre, and pay all bills
therefor, and to report to Owner any conditions in the Theatre
requiring the attention of Owner; provided that Manager shall not
make any expenditures for maintenance and repairs in excess of
$25,000.00, except for emergency repairs if, in the opinion of
Manager, such repairs are necessary to protect the Theatre or its
patrons or personnel;
(c) Employees. To hire theatre personnel, in such
---------
reasonable numbers as shall be required for the operation and
maintenance of the Theatre and to supervise, direct and discharge
all such theatre personnel; all such theatre personnel are to be
deemed the employees of Manager and not of Owner;
(d) Utilities and Service Contracts. To make
-------------------------------
arrangements for electricity, gas, fuel, water and telephone
service and any and all necessary contracts for landscaping,
security, elevator maintenance, window cleaning, trash and
rubbish hauling, pest control, HVAC and similar services;
(e) Taxes. To promptly send to Owner upon receipt,
-----
all notices of assessment or reassessment and tax bills affecting
the Theatre; provided that Manager will be responsible to pay
before delinquency any and all taxes and assessments (other than
income taxes) on behalf of Owner. In no event shall Manager have
any obligation for the payment of any income and/or estate or
other taxes of Owner;
(f) Licenses and Permits. To acquire and keep in
--------------------
force all licenses and permits required for the operation of the
Theatre as a motion picture theatre with concession and
merchandising facilities and operations and such uses incidental
or accessory thereto;
(g) Insurance. To obtain for the benefit of Owner,
---------
and for the Landlord
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under the Lease (if and to the extent required under the Lease), the following
insurance, and to cooperate with the insurance carriers under such policies to
make, administer and settle any claims thereunder:
1. Comprehensive general liability insurance (including bodily
injury and property damage) in an amount not less than a combined single
limit of Ten Million Dollars ($10,000,000), or such other amount as may be
agreed upon by Owner or Manager;
2. Property damage insurance covering the Theatre and all
improvements and property, providing "all risk" protection coverage; and
3. Such other insurance as may be required to be carried by
Owner under the terms of the Lease and otherwise as may be reasonably
agreed upon by Owner and Manager from time to time.
Manager shall also be named as an insured under any policy carried under this
subparagraph (g); at Manager's option, Manager may fulfill its obligations
hereunder by naming Owner (and, if and to the extent required under the Lease,
Landlord) as an additional insured(s) under any applicable blanket insurance
policy Manager may carry, and charge Owner its pro rata share of such coverage;
provided, however, that Owner may, at its election, require that such insurance
be obtained through one or more insurance companies, agencies or brokers
providing such insurance or service to Owner or any one or more of its
affiliates.
(h) Advertising. To advertise the films to be exhibited in the Theatre
------------
in such manner as is customary in the industry. Manager may combine such
advertisement of films to be exhibited in other theatres owned or operated by
Manager; provided, however, that only the prorated cost of such advertisement
properly allocable to the Theatre shall be charged as expenses of the Theatre;
provided, further, however, that Manager will consult with and follow the
directions of Owner with respect to the use of the "Angelika" name and will take
commercially reasonable measures to protect the goodwill associated therewith.
(i) Concessions. To purchase inventory and supplies;
------------
(j) Supervision. To supervise the general operation of the Theatre;
------------
and
(k) Payment of Operating Expenses. To incur and pay or cause to be
------------------------------
paid, out of Gross Income and any operating reserve which may be established,
all normal and proper operating expenses of the Theatre (except mortgage
payments, if any, which shall be paid directly by Owner) incurred or authorized
by Manager in the performance of the duties required to be
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performed by Manager under this Agreement. All such expenses
incurred by Manager, including, without limitation, (i) rental
under the Lease; (ii) the prorated cost of labor (including
without limitation the prorated cost of fringe benefits,
withholdings, payroll accounting and overhead in connection with
such labor) employed by Manager and of the equipment of Manager
used in connection with and while engaged on site in the
operation, maintenance and repair of the Theatre; and (iii) the
cost of the items and services described in subparts (a)-(i),
above, shall be charged as expenses of the Theatre.
Notwithstanding the foregoing, the following expenses incurred by
Manager under this Agreement shall not be paid out of Gross Income
or the operating reserve, they being deemed expenses not properly
allocable to the Theatre, but rather deemed expenses of Manager
for which Manager is compensated by the Management Fee: (i)
expenses for off-site office and administration, and (ii) direct
or indirect overhead expenses.
2.2 Reservation. All powers not expressly granted to Manager by this
-----------
Agreement are reserved by Owner.
3. DUTIES OF MANAGER.
-----------------
3.1 Management. Manager agrees to use reasonable efforts in the exercise
----------
of the powers conferred and assumed in Section 2.1 hereof and in the operation,
management and maintenance of the Theatre in accordance with this Agreement.
3.2 Accounting.
----------
(a) Manager shall maintain books of account based upon its ordinary
accounting practices at its offices in Los Angeles, California, with respect to
the Theatre. Said books of account shall be available to properly authorized
representatives and agents of Owner during all reasonable business hours upon
reasonable notice. Manager shall furnish Owner with a monthly profit and loss
statement in a form normally and customarily used by Manager, which form shall
show all receipts and estimated expenses of the Theatre for the preceding month,
and shall furnish Owner with weekly reports of "Gross Income" (as hereinafter
defined) after the close of each week. Manager shall retain all original
statements and invoices for the expenses of the Theatre for a period of at least
two (2) years and such statements shall be available to Owner during all
reasonable business hours upon reasonable notice.
(b) As soon as practicable, but in any event within forty-five (45)
days of the end of each calendar year, Manager shall prepare and furnish to
Owner a balance sheet, a statement of cash flows and a profit and loss statement
which shall show the Gross Income and actual expenses of the Theatre for the
immediately preceding calendar year, each based upon generally accepted
accounting principles consistently applied. Manager understands
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that Owner's affiliate, Reading Company, will use such information in the
preparation of its annual audited financial statements and agrees to cooperate
fully with Reading Company's independent public accountants in the preparation
of such audited financial statements. Similar information will be provided
quarterly by Manager within twenty-five (25) days after the end of each of the
first three calendar quarters of each calendar year.
3.3 Bank Account.
------------
(a) Manager shall cause a bank account or bank accounts (hereinafter
collectively referred to as the "Bank Accounts") to be opened and maintained
separate and apart from all other bank accounts of Manager for the sole purpose
of handling transactions under this Agreement. All receipts from the operation
of the Theatre shall be deposited in the Bank Account, and all payments of
costs, expenses and charges to be made by Manager under this Agreement
(including the remuneration to be paid Manager as hereinafter provided) shall be
paid out of the Bank Account. In the event the balance in the Bank Account is
insufficient to enable Manager to meet the obligations incurred or accrued
pursuant to the provisions of this Agreement as they mature, Owner, within five
(5) days following receipt of a request from Manager, shall furnish such
additional sums to Manager as Manager may reasonably require in order to enable
Manager to meet said obligations as they mature. Manager shall have the right,
but shall not be obligated, to advance on behalf of Owner, upon the failure of
Owner to timely provide such sums, the amounts which Manager requires for such
purposes. Manager is hereby authorized at any time, in the event of such
advances by it, to withdraw from the Bank Account, after five (5) days notice to
Owner, sufficient sums to repay itself with interest thereon at the fluctuating
rate equal to the discount rate announced from time to time by the Federal
Reserve Bank of San Francisco, plus 200 basis points, or the maximum amount
allowed by law, whichever is less (the "Agreement Rate"). The Bank Account will
be the property of the Owner. Any check of more than $50,000 (other than
regularly scheduled periodic payments such as rent) shall be subject to the
written authorization of Robert Smerling or, in his absence another designee
acceptable to Owner.
(b) All withdrawals from the Bank account shall be made by checks signed
by the authorized signatories of Manager, and Manager will furnish to Owner,
within thirty (30) days following the expiration of each month, a statement of
the receipts and expenses of the operation of the Theatre during such month.
(c) As often as reasonably practicable, but in no event less than promptly
following the end of each calendar month, Manager shall remit to Owner, from the
Bank Account, the excess of moneys which were on deposit therein at the
expiration of such theatre month, or other applicable period, after deducting
the amount required to make the payments herein provided to be paid by or to
Manager during such month and reasonable reserves for anticipated expenses.
3.4 Notices and Documents. Manager shall advise Owner promptly of the service
---------------------
upon
Page 5
<PAGE>
Manager of any summons, subpoena, or other like legal document, including any
notices, letters or other communications setting out or claiming an actual or
alleged potential liability of Owner or the Theatre (including all notices
from any landlord), and will reasonably cooperate with Owner in connection with
any legal or arbitration proceeding arising in connection with the Theatre, or
its operation. Manager shall also notify Owner promptly of (i) any notice of
violation or claimed violation of any Governmental requirement; (ii) any
material damage to the Theatre; and (iii) any actual or alledged personal injury
or property damage occurring to or formally claimed by any landlord, third party
or employee on or with respect to the Theatre.
4. TERMINATION
-----------
4.1. Default by Manager. In the event of a breach of the provisions of
------------------
this Agreement by Manager, Owner shall have the right to give to Manager thirty
(30) days' written notice to cure such breach, and in the event of the failure
of Manager to do so within such period, Owner shall have the right to thereafter
terminate this Agreement upon least thirty (30) days' written notice of such
election to terminate, such termination to be effective as of the end of the
first full month following the giving of such termination notice; provided that
if the breach is of such nature that it cannot be cured within such thirty (30)
day period, this Agreement shall not be terminable on account of such breach so
long as, within such thirty (30) day period, Manager shall have commenced to
cure such breach and shall thereafter dilligently prosecute the cure thereof.
4.2. Default by Owner. In the event of any failure by Owner to supply
----------------
and funds required under this Agreement, Manager shall have the right to
terminate this Agreement upon five (5) days' written notice to Owner, or such
longer time as such notice may state, unless Owner has, within such time period,
deposited such funds in the BankAccount or otherwise delivered to Manager good
and sufficient funds in the amount required. In the event of any other breach of
the provisions of this Agreement by Owner, Manager shall have the right to give
to Owner thirty (30) days written notice to cure such breach, and in the event
of the failure of Owner to do so within such period, Manager shall have the
right to thereafter terminate this Agreement upon an additional thirty (30) days
written notice of such election to terminate, such termination to be effective
as of the end of the first full month following the giving of such termination
notice; provided that if the breach is of such nature that it cannot be cured
within such thirty (30) day period, this Agreement shall not be terminable on
account of such breach so long as, within such thirty (30) day period, Owner
shall have commenced to cure such breach and shall thereafter diligently
prosecute the cure thereof.
4.3. Special Owner Termination Rights: Owner will have the right, but
--------------------------------
not the obligation to terminate this Agreement in the event of any of the
following:
(a) Bankruptcy: Immediately, with or without notice, in the
----------
event of any Event of Bankruptcy by Manager or any affiliate of Manager. "Event
of Bankruptcy" shall mean the filing of a voluntary or involuntary petition in
bankruptcy with respect to such party (unless in the case of an involuntary
petition, the same is dismissed within sixty (60) days); the adjudication of
such party as insolvent; the filing of a petition or answer with respect to such
party seeking any
Page 6
<PAGE>
reorganization, liquidation, or similar relief for itself under the present or
any future applicable law relating to relief for debtors (unless, in the case of
a petition filed against such party, the same is dismissed within sixty (60)
days); or the appointment of any trustee, receiver, conservator, or liquidated
with respect to all or any substantial part of such party's property (where
possession of such property is not restored to such party within in sixty (60)
days).
(b) Change of Control: Upon not less than five (5) days notice in
-----------------
the event that more than 50% of the capital stock or partnership interests of
Manager or Sutton Hill Associates are transferred to a person or persons
unaffiliated with James J. Cotter and/or Michael Forman. Manager agrees to give
written notice to Owner both of any such contemplated transfer and of the
completion of any such transfer.
(c) Sale of Interest: Upon not less than five (5) days notice in the
----------------
event that all or any portion of the equity interest in Owner currently held by
Sutton Hill Associates is sold to a person or persons unaffiliated with James J.
Cotter and/or Michael Forman. Manager agrees to give written notice to Owner
both of any such contemplated sale and of the completion of any such sale.
4.4 Effect of Termination on Booking. Notwithstanding the term provided
--------------------------------
for in Section 1 or the giving of any earlier notice of termination pursuant to
any of Sections 4.1 through 4.3 above, Manager shall during the entire term of
this Agreement continue to use its reasonable efforts to book films for
exhibition in the Theatre in accordance with reasonable industry standards, even
though such films may have exhibition dates after the termination of this
Agreement. Owner shall honor all booking commitments for the Theatre made prior
to the termination of this Agreement, notwithstanding that such bookings may be
for the period after the effective date of termination of this Agreement.
4.5 Delivery of Records; Final Accounting. Upon termination, Manager
-------------------------------------
shall (i) deliver to Owner all books, records and the like maintained solely in
connection with the operation and management of the Theatre; (ii) render a final
accounting to Owner within ninety (90) days after termination, reflecting the
balance of income and expenses of the Theatre, as of the date of termination;
and (iii) deliver to Owner the balance of the Bank Account.
4.6 Right of Termination on Other Remedies. The right to terminate
---------------------------------------
provided under this Section 4 shall be in addition to, and not in lieu of, any
other rights or remedies which the parties may have under this Agreement, at
law or in equity, including, without limitation, the right to receive specific
performance and/or to obtain damages.
5. COMPENSATION TO MANAGER.
-----------------------
5.1 Gross Income Defined. For the purposes of this Agreement, the term
--------------------
"Gross Income" shall mean: (i) all monies received for admission to the Theatre,
exclusive of admission taxes or other taxes required by law to be collected from
the patron at the time of the sale of the tickets at the
Page 7
<PAGE>
box office or other place where admissions are sold, and exclusive of all bona
fide refunds made to patrons; (ii) all monies received from sales of food,
beverages and merchandise at the Theatre, exclusive of sales tax required by law
to be paid in connection with such sales; (iii) the gross amount received (less
any applicable taxes) from the use of the Theatre in its entirety by a third
party for the exhibitions of films (i.e., a "four wall deal") or for theatrical
performances, lectures, concerts or the like where the party using the Theatre
is entitled to retain the receipts from admissions to such event and pays a flat
fee or percentage of receipts for such use; (iv) the receipts from any vending
or video machines located at the Theatre; (v) if applicable, parking receipts;
and (vi) all other monies received from the operation or use of the Theatre
(including without limitation, rebates, commissions and shrinkage and all
revenues obtained in connection with the advertising of the Theatre or motion
pictures exhibited therein). Admission prices and classifications shall be
determined by Manager, subject to the approval of Owner prior to any change,
which approval shall not be unreasonably withheld or delayed.
5.2 Net Income Defined. For the purposes of this Agreement, the term
------------------
"Net Income" shall be defined as the "Gross Income" less the sum of all ordinary
and necessary operating expenses of Theatre paid by Manager or Owner pursuant to
Section 2.1(k) ("Theatre Expenses"); provided it is understood, for purposes of
this Agreement, payments of principal and interest in respect of any
indebtedness of the Company and the Management Fee shall not be deemed Theatre
Expenses.
5.3 Net Excess Amount. For purposes of this Agreement, the term "Net
-----------------
Excess Amount" shall be defined as the positive difference, if any, between the
Net Income and the Net Income Base.
5.4 Net Income Base. For purposes of this Agreement, the term "Net
---------------
Income Base" shall be defined as an amount equal to $2 million; provided that on
the third, sixth and ninth anniversaries hereof and each such third anniversary
thereafter during the term of this Agreement, such amount shall be adjusted by
an amount (such amount referred to herein as the "Inflation Amount"), equal to
the cumulative inflation rate over each such three-year period; provided further
that the Inflation Amount shall in no event exceed 9%.
5.5 Management Fee/Bonus Fee. As compensation to Manager for the
------------------------
full and faithful performance of its duties under this Agreement, Owner shall
pay Manager the Management Fee and Bonus Fee described below.
(a) The Management Fee as to each "Management Year" (as defined
below) shall be the amount of One Hundred Twenty-Five Thousand Dollars
($125,000); provided that on the third, sixth and ninth anniversaries hereof and
each such third anniversary thereafter during the term of this Agreement, such
amount shall be adjusted by the Inflation Amount, provided further that the
Inflation Amount shall in no event exceed 9%. The Management Fee shall be
prorated for any Management Year comprised of less than twelve (12) calendar
months.
(b) The Bonus Fee as to each Management Year shall be an amount
equal to the positive difference, if any, between (A) the lesser of (i) five (5)
percent of Gross Income for such
Page 8
<PAGE>
Management Year as specified in Recital C above, or (ii) fifty percent (50%) of
the Net Excess Amount for such Management Year; and (B) an amount equal to the
Management Fee paid to Manager with respect to such Management Year. In the
event this Agreement is terminated on other than the end of a Management Year,
the Bonus Fee shall be payable to Manager for such incomplete Management Year,
if the Net Income for such partial Management Year is equal to, or greater than,
the product of the Net Income Base multiplied by a fraction, the denominator of
which is twelve (12), and the numerator of which is the number of calendar
months comprising such partial Management Year. With respect to the first
Management Year, the Bonus Fee shall be payable to Manager for such Management
Year if the Net Income for such Management Year is equal to, or greater than an
amount equal to the product of $2,000,000 multiplied by a fraction the numerator
of which is the number of calendar days remaining in the first Management Year
and the denominator of which is 365. As used herein, the term "Management Year"
shall mean, as to the first Management Year, the period commencing on the date
hereof and terminating December 31, 1996; thereafter, the term "Management Year"
shall mean the twelve month period commencing January 1, 1997, and terminating
December 31, 1997, and each twelve (12) calendar month period thereafter.
5.6 Payment of Management Fee and Bonus Fee. The Management Fee and
---------------------------------------
Bonus Fee shall be determined and payable as follows:
(a) Manager shall be entitled to withdraw from the Bank Account,
as its Management Fee for such month, an amount equal to one-twelfth (1/12) of
the annual Management Fee.
(b) Within ninety (90) calendar days after the end of each
Management Year, and within ninety (90) calendar days after the termination date
of this Agreement, Manager shall furnish to Owner a statement in writing showing
the total Gross Income and Net Income for the Theatre for such Management Year
(or, with respect to the final statement following the termination of this
Agreement, for such portion of such Management Year). Promptly thereafter,
Manager shall receive and be entitled to its Bonus Fee (if applicable).
6. ACKNOWLEDGMENT AND OBLIGATIONS OF OWNER.
---------------------------------------
6.1 Operations of Other Theatres by Manager. Owner specifically
---------------------------------------
acknowledges that Manager and its affiliates own and operate other theatres in
the same area in which the Theatre is located, which are in direct competition
with the Theatre, and nothing herein contained shall in any way affect the right
of Manager and its affiliates now or in the future to own, operate, or manage,
or book and buy for other theatres for their own account or for the account of
others or to expand or contract their operations.
6.2 Lease. Owner shall remain obligated to perform all of its
------
obligations as tenant under the Lease. Manager shall, however, perform certain
of those obligations on Owner's behalf as its agent, but only as provided for in
this Agreement, and Manager shall have no obligation to the
Page 9
<PAGE>
Landlord under the Lease.
6.3 Limitation on Damages. Owner acknowledges and agrees that in no
---------------------
event shall Manager be liable, under Sections 4.5 and 7 or at law or otherwise,
for punitive or consequential damages.
7. INDEMNIFICATION.
---------------
7.1 Indemnification by Manager. Manager shall defend, indemnify and
--------------------------
hold Owner harmless from and against any and all claims, demands, causes of
action, loss and liability to third parties (including all costs and reasonable
attorneys' fees) arising out of or resulting from (i) breach by Manager (or
Manager's agents, employees or subcontractors) of any of its duties or
obligations under this Agreement (except that Manager shall have no liability
for (a) failure to take any action under this Agreement that requires Owner's
prior approval or authorization, if Manager notified Owner that such action is
necessary and Owner has refused or failed to authorize Manager to take the same
or (b) any action taken in good faith by Manager under this Agreement (x) in
what it reasonably believed to be the best interests of Owner and consistent
with the approvals or authority given to it under or pursuant to this Agreement
or (y) with Owner's knowledge or consent); or (ii) actions taken by Manager
outside the scope of this Agreement. If under this Section 7.1, Manager
defends, indemnifies, or holds Owner harmless with respect to an item that is
covered by an insurance policy obtained in accordance with the provisions of
Subparagraph 2.1(g) hereof, then to the extent that amounts are actually paid
under such insurance policy in connection with such item, the liability of
Manager under this Section 7.1 in connection with such item shall be reduced.
7.2 Indemnification by Owner. Owner shall defend, indemnify and hold
------------------------
Manager harmless from and against any and all claims, demands, causes of action,
loss and liability to third parties (including all costs and reasonable
attorneys' fees) arising out of or resulting from (i) damage to property, or
injury to, or death of, persons (including the property and person of the
parties hereto, and their agents, subcontractors and employees) occasioned by or
in connection with the acts or omissions of Owner or Owner's agents, employees
or subcontractors (including the failure to timely authorize any action; under
this Agreement that requires Owner's prior approval or authorization if Manager
has not yet notified Owner that the same is necessary); (ii) contracts entered
into by Owner (including contracts entered into prior to the execution of this
Agreement); (iii) breach by Owner (or Owner's agents, employees or
subcontractors), of any of its duties or obligations under this Agreement; and
(iv) any act or action taken by Manager pursuant to this Agreement (including
without limitation the booking and buying of motion picture films and inventory
for the Theater) taken in good faith (x) in what Manager reasonably believed to
be consistent with the approvals or authority given to it under or pursuant to
this Agreement or (y) or with Owner's knowledge or consent. Notwithstanding
anything to the contrary contained herein, it is understood and agreed that
Owner shall advance to Manager all costs of litigation , (including without
limitation reasonable attorneys' fees) and pay any judgments and/or settlements
resulting from litigation in the event that Manager is made a defendant in any
litigation resulting from its activities under this Agreement except to the
extent it is ultimately determined that such liability is the proximate result
of a matter
Page 10
<PAGE>
with respect to which Manager is not entitled to indemnification hereunder;
provided that Manager undertakes to repay such advances, together with interest,
in the event it is ultimately determined that it was not entitled to
indemnification. Interest will be calculated at the Agreement Rate.
If, under this Section 7.2, Owner defends, indemnifies, or holds Manager
harmless with respect to an item that is covered by an insurance policy obtained
in accordance with the provisions of Subparagraph 2.1(g) hereof, then to the
extent that amounts are actually paid under such insurance policy in connection
with such item, the liability of Owner under this Section 7.2 in connection with
such item shall be reduced.
7.3 Procedure Relative to Indemnification.
-------------------------------------
(a) In the event that any party hereto shall claim that it is
entitled to be indemnified pursuant to the terms of this Section 7 (the
"Indemnified Claim"), it (the "Claiming Party") shall so notify the party
against which the Indemnified Claim is made (the "Indemnifying Party") in
writing of such Indemnified Claim within ninety (90) days after receipt of a
notice of such Indemnified Claim or notice of any claim of a third party that
may reasonably be expected to result in a claim by such party (the "Third Party
Claim") against the party to which such notice is given; provided, however, that
failure to give such notification shall not affect the indemnification provided
hereunder except to the extent the Indemnifying Party shall have been actually
prejudiced as a result of such failure. Such notice shall specify the nature of
the Indemnified Claim and the liability, loss, cost or expense incurred by or
imposed upon the Claiming Party on account hereof. If such liability, loss, cost
or expense is liquidated in amount, the notice shall so state and such amount
shall be deemed the amount of the claim of the Claiming Party. If the amount is
not liquidated, the notice shall so state and in such event an Indemnified Claim
shall be deemed asserted against the Indemnifying Party on behalf of the
Claiming Party, but no payment shall be made on account thereof until the amount
of such Indemnified Claim is liquidated and finally determined.
(b) The Indemnifying Party shall, upon receipt of such written
notice and at its expense, defend such Indemnified Claim in its own name or, if
necessary, in the name of the Claiming Party unless the Claiming Party
reasonably believes that its interests are adverse to those of the Indemnifying
Party in which event the Claiming Party may control its defense of the claim and
be reimbursed for its expenses, including reasonable attorneys' fees, as herein
provided. The Claiming Party will cooperate with and make available to the
Indemnifying Party such assistance and materials as may be reasonably requested
of it, and the Claiming Party shall have the right, at its expense (except as
provided above), to participate in the defense. The Indemnifying Party shall
have the right to settle and compromise any Third Party Claim only with the
consent of the Claiming Party unless the settlement does not involve any
confession or other acknowledgment of wrongdoing by the Claiming Party and
provides a complete release of all Third Party Claims against it, in which event
the Claiming Party's consent shall not be required. If the proceeding involves a
matter solely of concern to the Claiming Party in addition to the claim for
which indemnification under this Section 7 is being sought, such matter shall be
within the sole responsibility of the Claiming Party and its counsel.
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<PAGE>
(c) In the event the Indemnifying Party shall notify the Claiming
Party that it disputes any Indemnified Claim made by the Claiming Party and/or
it shall refuse to conduct a defense against any Third Party Claim, then the
Claiming Party shall have the right to conduct a defense against such Third
Party Claim and shall have the right to settle and compromise such Third Party
Claim without the consent of the Indemnifying Party. Once the amount of such
claim is liquidated and the claim is finally determined, the Claiming Party
shall be entitled to pursue each and every remedy available to it at law or in
equity to enforce the indemnification provisions of this Section 7 and, in the
event it is determined, or the Indemnifying Party agrees, that it is obligated
to indemnify the Claiming Party for such Third Party and Indemnified Claim, the
Indemnifying Party agrees to pay, in addition to all damages, costs, expenses,
and fees, including all reasonable attorneys' fees which may be incurred by the
Claiming Party in attempting to enforce indemnification under this Section 7,
whether the same shall be enforced by suit or otherwise, and interest thereon at
the Agreement Rate.
7.4 Effect of Insurance and Other Benefits. The determination of any
--------------------------------------
liability, claim, lien, encumbrance, charge, fine or penalty for which
indemnification may be claimed under this Section 7 shall be net of any benefit
derived and insurance proceeds received by the party bearing such liability,
claim, lien, encumbrance, charge, fine or penalty as a result thereof.
8. GENERAL PROVISIONS
------------------
8.1 Counterparts. This Agreement may be executed in counterparts ,
------------
each of which shall be deemed an original, but all or which, taken together,
shall constitute one and the same instrument.
8.2 Entire Agreement. This Agreement contains the entire agreement
----------------
between the parties respecting the subject matter of this Agreement and
supersedes all prior understanding and agreements, whether oral or in writing,
between the parties respecting the subject matter of this Agreement.
8.3 Legal Advice; Neutral Interpretation. Each party has received
-------------------------------------
independent legal advice from its attorneys with respect to the advisability
executing this Agreement and the meaning of the provisions hereof. The
provisions of this Agreement shall be construed as to their fair meaning, and
not for or against any party based upon any attribution to such party as the
source of the language in question.
8.4 Choice of Law. This Agreement shall be governed by the laws of
-------------
the State of New York, applicable to contracts entirely performed and made in
New York.
8.5 Severability. If any term, covenant, condition or provision of
------------
this Agreement, or the application thereof to any person or circumstance, shall
to any extent be held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, covenants, conditions or
provisions of this Agreement, or the application thereof to any person or
circumstance, shall remain in full force and effect and shall in no way be
affected, impaired or invalidated thereby.
Page 12
<PAGE>
8.6 Waiver of Covenants, Conditions or Remedies. The waiver by one
-------------------------------------------
party of the performance of any covenant or condition under this Agreement shall
not invalidate this Agreement nor shall it be considered a waiver by it of any
other covenant or condition under this Agreement. The waiver by either or both
parties of the time for performing any act under this Agreement shall not
constitute a waiver of the time for performing any other act or an identical act
required to be performed at a later time. The exercise of any remedy provided
in this Agreement shall not be a waiver of any consistent remedy provided by
law, and the provision in this Agreement for any remedy shall not exclude other
consistent remedies unless they are expressly excluded.
8.7 Exhibits. All exhibits to which reference is made in this
--------
Agreement are deemed incorporated in this Agreement.
8.8 Amendment. This Agreement may be amended only by the written
---------
agreement of owner and manager. All amendments, changes, revisions and
discharges of this Agreement, in whole or in part, and from time to time, shall
be binding upon the parties despite any lack of legal consideration, so long as
the same shall be in writing and executed by the parties hereto.
8.9 Relationship of Parties. The parties agree that their
-----------------------
relationship is that of owner and manager, and that nothing contained herein
shall constitute either party as employee or legal representative of the other
for any purpose whatsoever, nor shall this Agreement be deemed to create any
form of business organization, joint venture or partnership between the parties
hereto or as giving Manager any type of property interest in the Theatre, nor is
either party granted any right or authority to assume or create any obligation
or responsibility on behalf of the other party, except as otherwise provided
herein, nor shall either party be in any way liable to third parties for any
debt of the other.
8.10 No Third Party Benefit. This Agreement is intended to benefit
----------------------
only the parties hereto and no other person or entity has or shall acquire any
rights hereunder.
8.11 Time of the Essence. Time shall be of the essence as to all
-------------------
dates and times of performance contained herein.
8.12 Further Acts. Each party agrees to perform any further acts and
------------
to execute, acknowledge and deliver any documents which may be reasonably
necessary to carry out the provisions of this Agreement.
8.13 Successors and Assigns. This Agreement shall be binding upon
----------------------
and shall inure to the benefit of the successors and assigns of the parties to
this Agreement; provided, however, that in the event of assignment to any person
other than a wholly owned subsidiary, parent or sister company, or pursuant to a
sale of all or substantially all of the assets of the assigning party to a
single buyer, any such assignment shall give rise to a right of termination by
the non-assigning party which right may be exercised at any time within ninety
(90) days of the effectuation of such assignment.
Page 13
<PAGE>
8.14 Manner of Giving Notice. All notices and demands which either
-----------------------
party is required or desires to give to the other shall be given in writing by
personal delivery or by express courier services or by certified mail, return
receipt requested, to the address set forth below for the respective party,
provided that if any party gives notice of a change of name or address, notices
to that party shall thereafter be given as demanded in that notice. All notices
and demands given by personal delivery or by express courier service shall be
effective on the date of delivery; all notices and demands given by mail as set
forth above shall be effective on the fourth business day after mailing.
To Owner: With copies to:
- --------- ---------------
Angelika Film Centers, LLC Reading Company
c/o Reading Company c/o Craig Corporation
The Graham Building 550 South Hope Street, Suite 1825
One Penn Square West Los Angeles, CA 90071
30 S. l5th St., Ste.l300 Attn: S. Craig Tompkins
Philadelphia, CA 19102-4813
Attn: James A. Wunderle
To Manager: With copies to:
- ----------- ---------------
City Cinemas Corporation City Cinemas Corporation
950 Third Avenue, 26/th/ Floor 120 North Robertson Boulevard
New York, New York 10022 Third Floor
Attn: Robert F. Smerling Los Angeles, CA 90048
Attn: Ira S. Levin, Esq.
Page 14
<PAGE>
IN WITNESS WHEREOF, the parties have caused this instrument to be
executed as of the day and year first above written.
OWNER:
Angelika Film Centers, LLC,
a Delaware limited liability company
By: /s/ S. Craig Tompkins
---------------------------------
Name: S. Craig Tompkins
Title: Managing Director
MANAGER:
CITY CINEMAS CORPORATION,
a New York corporation
By: /s/ Bradley J. Neel
---------------------------------
Name: Bradley J. Neel
Title: Secretary
Page 15
<PAGE>
EXHIBIT 21.1
READING ENTERTAINMENT, INC.
---------------------------
CONSOLIDATED SUBSIDIARIES
1. Angelika Cinemas, Inc.
2. Angelika Film Centers LLC
3. Australia Cinema Management Pty Limited
4. Burgundy Two Pty Limited
5. Cine Vista Holdings, Inc.
6. FA, Inc.
7. The Port Reading Railroad Company
8. Puerto Rico Holdings, Inc.
9. Reading Australia Pty Limited
10. Reading Capital Corporation
11. Reading Center Development Corporation
12. Reading Cinemas, Inc.
13. Reading Cinemas of Puerto Rico, Inc.
14. Reading Cinemas U.K., Inc.
15. Reading Company
16. Reading Holdings, Inc.
17. Reading International Cinemas LLC
18. Reading Investment Company
20. Reading Real Estate Company (formerly Eastern Real Estate Co.)
21. Reading Resources, Inc.
22. Reading Transportation Company
23. RORC, Inc.
24. Trenton-Princeton Traction Company
25. Washington and Franklin Railway Company
26. Western Gaming, Inc.
27. Wilmington & Northern Railroad (The)
UNCONSOLIDATED MINORITY INTERESTS
1. Allentown Terminal Railroad Company
2. Baltimore and Cumberland Valley Railroad Extension Company
3. Pennsylvania-Reading Seashore Lines
4. Philadelphia Belt Line Railroad Company (The)
5. Trailer Train Company
PARTNERSHIPS
1. Parametric Garage Associates
2. Rutherford Industrial Center Partners, G.P.
Note: above represents subsidiaries of Reading Entertainment, Inc.
following consummation of the Reorganization and Stock Transactions.
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Independent Auditors"
and to the use of our report dated February 16, 1996, included in the Proxy
Statement of Reading Company that is made a part of the Registration Statement
(Form S-4 No. 333-00000) and Prospectus of Reading Entertainment, Inc. for the
registration of 4,973,174 shares of its common stock.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
October 3, 1996
<PAGE>
Exhibit 23.3
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Independent Auditors"
and to the use of our report dated November 17, 1995, with respect to the
consolidated financial statements of Stater Bros. Holdings, Inc. included in
its Annual Report (Form 10-K) for the period ended September 24, 1995, included
in the Proxy Statement of Reading Company that is made a part of the
Registration Statement (Form S-4 No. 333-00000) and Prospectus of Reading
Entertainment, Inc. for the registration of 4,973,174 shares of its common
stock.
/s/ Ernst & Young LLP
Riverside, California
October 1, 1996
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement of Reading Entertainment,
Inc. on Form S-4 of our report dated March 27, 1996 appearing in the Annual
Report on Form 10-K of Citadel Holding Corporation for the year ended December
31, 1995, and to the reference to us under the caption "Independent Auditors" in
the Prospectus, which is part of this Registration Statement.
/s/ Deloitte & Touche LLP
Los Angeles, California
September 28, 1996
<PAGE>
Exhibit 23.5
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 2-83039 and No. 33-37222) pertaining to the stock option plans of
Reading Company of our report dated July 1, 1996, with respect to the financial
statements of Angelika Film Centers, Inc. included in Reading Entertainment,
Inc.'s, Registration Statement S-4 filed with the Securities and Exchange
Commission on or about October 3, 1996.
/s/ Miller and Company Certified Public Accountants, P.C.
Miller and Company
Certified Public Accountants, P.C.
New York, New York
October 3, 1996
<PAGE>
Exhibit 23.6
CONSENT OF BERWIND FINANCIAL GROUP, L.P.
We hereby consent to the use in the Registration Statement on Form S-4 of
Reading Entertainment, Inc., and the Proxy Statement/Prospectus included
therein, of our opinion, dated August 23, 1996, and to the references to us in
such Proxy Statement/Prospectus.
/s/ Berwind Financial Group, L.P.
Philadelphia, Pennsylvania
October 2, 1996
<PAGE>
EXHIBIT 28.1
PROXY READING COMPANY PROXY
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD OCTOBER 15, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints James J. Cotter and S. Craig
Tompkins, and each or any of them, proxies of the undersigned, with full power
of substitution, to vote all of the shares of Reading Company (the "Company")
which the undersigned may be entitled to vote at the Annual Meeting of
Shareholders of the Company to be held 10:00 a.m., prevailing time, on October
15, 1996, at The Union League of Philadelphia, 140 South Broad Street,
Philadelphia, Pennsylvania for the following purposes and any adjournment
thereof, as follows:
1. ELECTION OF DIRECTORS
FOR all nominees WITHHOLD AUTHORITY
listed below TO vote for all
(except as marked nominees below. [_]
to the contrary
below). [_]
INSTRUCTION: To withhold authority to vote for any individual nominee, strike
a line through the nominee's name in the following list: James J. Cotter,
Edward L. Kane, John W. Sullivan, Albert J. Tahmoush, Gregory R. Brundage, and
S. Craig Tompkins.
2. PROPOSAL TO APPROVE THE MERGER AGREEMENT AMONG THE COMPANY, READING
ENTERTAINMENT, INC., AND READING MERGER CO. AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
[_] FOR [_] AGAINST [_] ABSTAIN
(please see reverse side)
<PAGE>
LOGO
(continued from reverse side)
3. PROPOSAL TO APPROVE THE EXCHANGE AGREEMENT AMONG THE COMPANY, READING
ENTERTAINMENT, INC., CRAIG CORPORATION, CRAIG MANAGEMENT INC., CITADEL
HOLDING CORPORATION, AND CITADEL ACQUISITION CORP., INC. AND THE
TRANSACTIONS CONTEMPLATED THEREBY.
[_] FOR [_] AGAINST [_] ABSTAIN
4. In their discretion the proxies are authorized to vote upon such other
business as may properly come before the meeting and any adjournment
thereof.
THIS PROXY WILL BE VOTED AS SPECIFIED. IF A CHOICE IS NOT SPECIFIED, THIS
PROXY WILL BE VOTED FOR THE NOMINEES FOR DIRECTOR AND FOR EACH OF THE ABOVE
PROPOSALS.
Dated: _______________________, 1996
____________________________________
(Please sign name(s) exactly as
registered)
__________ (If there are co-owners,
both should sign)
___________________ Telephone number
THIS PROXY SHOULD BE DATED, SIGNED BY THE SHAREHOLDER EXACTLY AS SUCH
SHAREHOLDER'S NAME APPEARS ON SUCH SHAREHOLDER'S STOCK CERTIFICATE AND RETURNED
PROMPTLY TO THE COMPANY, C/O WILMINGTON TRUST COMPANY, P.O. BOX 2111,
WILMINGTON, DELAWARE 19885-9472, IN THE ENCLOSED ENVELOPE. PERSONS SIGNING IN A
FIDUCIARY CAPACITY SHOULD SO INDICATE.
