<PAGE>
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
For the fiscal year ended December 31, 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 333-13413
READING ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2859312
(State of incorporation) (I.R.S. Employer
Identification No.)
30 SOUTH FIFTEENTH STREET
13TH FLOOR
PHILADELPHIA, PENNSYLVANIA 19102
(Address of principal (Zip Code)
executive offices)
REGISTRANT'S TELEPHONE NUMBER: 215-569-3344
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which
registered
COMMON STOCK, $.001 PAR VALUE PHILADELPHIA STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
(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 April 8, 1997, 7,449,364 shares of Common Stock were outstanding and
the aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $22,935,287.
Documents incorporated by reference:
Part III: Portions of proxy statement for 1997 Annual Meeting of Reading
Entertainment, Inc. shareholders.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Reading Entertainment, Inc., a Delaware corporation ("REI" and
collectively with its various subsidiaries and predecessors, the "Company" or
"Reading"), was recently formed in order to effect a reorganization of Reading
Company under a Delaware holding company. Initially organized in 1833, the
Company's predecessors have been doing business in the United States for almost
165 years.
Prior to the creation of the Consolidated Rail Corporation ("Conrail"), the
Company was principally in the transportation business, owning and operating the
Reading Railroad. Following the transfer of substantially all of its rolling
stock and active rail lines to Conrail in 1976, the Company pursued a number of
endeavors including the development of One Reading Center (a 600,000 square foot
office complex located in Philadelphia) and initiated the activities which led
to the development of the Pennsylvania Convention Center on land originally
utilized by the Company for railroad operating purposes. Since 1976, the Company
has reduced its railroad real estate holdings from approximately 700 parcels and
rights-of-way to 28.
In 1993, following the sale of its major railroad asset -- the Reading
Terminal Headhouse -- and a thorough review of the opportunities available to
it, the Company determined to refocus its essentially real estate based
activities on the "Beyond-the-Home" or real estate based segment of the
entertainment industry. Since that date, the Company
. in 1994, acquired and has since expanded a chain of multiplex cinemas
located in Puerto Rico ("Cine Vista"),
. in 1996, acquired the Angelika Film Center, an art and speciality
multiplex cinema and cafe facility located in the Soho district of New
York City, and began the rollout of that concept into other cities,
beginning with the development of a 29,000 square foot multiplex art
cinema and cafe as a part of the Bayou Place development in Houston,
Texas, and
. in 1996, constructed and opened its first multiplex cinema in
Australia, as the first step in the Company's plan to become one of
the principal cinema circuits and an established developer of
entertainment center complexes featuring multiplex cinema facilities
in that country.
In recognition of the significant amounts of capital required to compete in
the cinema exhibition business, and in furtherance of its plan to focus on and
the development of cinemas and cinema based entertainment centers, on October
15, 1996, the Company reorganized as REI (the "Reorganization"), and completed a
private placement of common and preferred stock which increased shareholders'
equity from approximately $69 million to approximately $156 million (the "Stock
Transactions").
Most of the Company's theater development projects are in the early stage
of development. At December 31, 1996, the Company had assets valued for balance
sheet purposes at approximately $181.8 million and no material long term
indebtedness. A significant portion of these assets, however, is represented by
cash (totaling approximately $48.7 million at December 31, 1996), land held for
development (cost basis $7.3 million at December 31, 1996), and equity
securities in two other companies (valued at approximately $72.8 million for
book purposes at December 31, 1996). These securities consist of 693,650 shares
of the Series B Preferred Stock (the "Stater Preferred Stock") of Stater Bros.
Holdings, Inc. ("Stater") which is principally in the business of owning and
operating retail grocery stores in Southern California, and 1,564,473 shares of
the common stock, representing approximately 26% of the voting power, of Citadel
Holding Corporation ("CHC" and collectively with its subsidiaries, "Citadel"),
which is principally in the business of owning commercial real estate and
providing real estate consulting services to Reading. The
2
<PAGE>
Company intends to use these assets to continue to build its Beyond-the-Home
entertainment business, and not to engage in the retail grocery business or in
the business of acquiring, selling, holding, trading or investing in securities.
Stater files annual reports with respect to its debt securities with the
Securities and Exchange Commission (the "SEC"). The Stater Preferred Stock
carries a dividend of 10.5% or approximately $7,283,000 per annum. For its
fiscal year ended September 30, 1996, Stater reported gross revenues of $1.7
billion, earnings before interest, depreciation and taxes, of $59 million, and
net income of $16 million.
Citadel is a publicly reporting and trading company, whose common stock is
traded on the American Stock Exchange. Citadel's net earnings from the
Company's date of acquisition of its Citadel interest on March 29, 1996 through
December 31, 1996, were $6,183,000, inclusive of 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 purposes of previously deferred proceeds
from the bulk sale of loans and real estate by a previously owned subsidiary of
CHC. The Company's share of such earnings was $1,526,000 which amount is
included in the Consolidated Statement of Operations for the year ended December
31, 1996 as "Equity in earnings of affiliate."
In addition to its principal activities in the Beyond-the-Home
entertainment business, the Company continues to be engaged in the business of
winding up its historic railroad related activities, including the sale or other
exploitation of its residual real estate interests, and in certain financial
activities such as equipment leasing through its affiliate, FA, Inc.
Shares of the common stock, par value $.001 per share (the "Common Stock"),
of REI are quoted on the Nasdaq National Market ("NNM") and trade on the
Philadelphia Stock Exchange under the symbols RDGE and RDG, respectively.
DESCRIPTION OF BUSINESS
- - - -----------------------
The Company is primarily engaged in the development of cinema based
entertainment centers and in the multiplex cinema exhibition business in Puerto
Rico under the Cine Vista marquee, in Australia under the Reading Cinemas
marquee, and with respect to exhibition of art and specialty in the United
States under the Angelika marquee. While exceptions may be made with respect to
certain well-situated cinemas with proven or projected draw as art and specialty
houses, it is the Company's intention to develop or acquire exclusively
multiplex venues. With respect to new construction, it is the Company's
intention to focus primarily upon a stadium seating format, and to feature
wall-to-wall screens and state-of-the-art projection and sound.
Cine Vista
- - - ----------
Acquired effective July 1, 1994, for a cash purchase price of $22.7 million
(inclusive of acquisition expenses in the amount of $323,000), Cine Vista
operated motion picture exhibition facilities in six leased locations in Puerto
Rico at the time of its acquisition. Since that date, Cine Vista has added eight
screens in a new complex at Plaza Palma Real in Humacao, and on March 26, 1997,
six screens in a new complex in the Mayaguez Shopping Center in Mayaguez. In
addition, an eight screen complex is under development to replace the current
six-screen facility at the Mayaguez Mall, also in Mayaguez. This expanded
facility is scheduled to open in mid 1998. The Company is currently negotiating
with respect to the construction of approximately 22 additional screens at two
locations in Puerto Rico and the expansion of one of its existing facilities.
However, no assurances can be given that such negotiations will result in
operating facilities.
All of Cine Vista's theaters are modern multi-screen facilities. Listed
below are Cine Vista's current locations and theater sites under development.
3
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
EXISTING THEATERS LOCATION SCREENS
----------------- -------- ---------
<S> <C> <C>
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*** Hormigueros** 6
Cayey Shopping Center Cayey 4
Plaza Palma Real Humacao 8
Mayaguez Shopping Center (1) Mayaguez 6
UNDER DEVELOPMENT
-----------------
Mayaguez Mall*** Hormigueros** 8
</TABLE>
(1) Opened March 26, 1997
* San Juan metropolitan area
** Mayaguez metropolitan area
*** Four of the six screens at the Mayaguez Mall will be closed in mid-
1997 in order to permit the construction of a new eight screen theater
at this location. Upon completion of the new facility in mid-1998, the
two existing screens will be closed.
Puerto Rico is a self-governing Commonwealth of the United States with a
population of approximately 3.8 million people. Puerto Rico exercises control
over internal affairs similar to states of the U.S.; 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, Puerto Rico has undergone significant retail
shopping center development. During this period, the number of multiplex
theaters has increased substantially. The Company's principal competitor,
Caribbean Cinemas, a privately-owned company, has opened three complexes
representing approximately 33 screens in the San Juan metropolitan area since
the beginning of 1996. All of these complexes were under development at the time
the Company purchased its interest in Cine Vista. These new screens have
adversely affected the Company's current operations, reducing in the near term
the Company's market share from approximately 42% to approximately 24% percent.
The Company believes that, while Cine Vista has an opportunity to expand its
operations through the development of new multiplex theaters and improvement of
its existing operations, the Puerto Rico market will be substantially built out
by the year 2000. It is unlikely that the Company will develop more than an
additional thirty to thirty-five screens in Puerto Rico over the next three
years (excluding the eight screens under development at the Mayaguez Mall).
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 Puerto Rico. 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.
4
<PAGE>
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 revenues include revenues from
theater rentals for meetings, conferences, special film exhibitions and vending
machine receipts or rentals.
Licensing/Pricing: Films are licensed under agreements with major film
-----------------
distributors and several local distributors specializing in films of special
interest to residents of Puerto Rico. Puerto Rico 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 Puerto Rico rules governing film licensing make such a
situation unlikely. In 1996, films licensed from Cine Vista's four largest film
suppliers accounted for approximately 65% of Cine Vista's box office revenues.
Competition: The Company believes there are approximately 32 first-run
-----------
movie theaters in daily operation with approximately 179 screens in Puerto Rico.
Based upon number of screens, box office revenues and number of theaters, Cine
Vista is the second largest exhibitor in Puerto Rico. The three largest
exhibitors are believed to account for over 99% of the box office revenues
recorded in 1996 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 cinemas is limited. Competitors of
Cine Vista are expected to continue to open theaters competitive with Cine
Vista's. Since the beginning of 1996, the Company's principal competitor has
opened three complexes in the San Juan metropolitan area adding 33 screens, all
of which are competitive with the Company's theaters, and which have attracted
business that would otherwise have gone to theaters owned by Cine Vista.
This competitor has at least one additional competitive theater under
development, which is expected to add 12 screens to the San Juan market.
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.
Employees: Cine Vista has approximately 175 employees in Puerto Rico,
---------
approximately 15 of whom are employed under the terms of a collective bargaining
agreement. The collective bargaining agreement expires in May 1997. The Company
believes its relations with its employees in Puerto Rico to be good.
Angelika Film Centers
- - - ---------------------
On August 27, 1996, the Company and Sutton Hill Associates ("Sutton Hill"),
a New York cinema exhibitor, acquired, for approximately $12,570,000 (inclusive
of $529,000 in acquisition costs), the Angelika Film Center (the "Angelika"), a
multiplex theater located in the Soho district of New York City and which the
Company believes to
5
<PAGE>
be the premier specialty theater 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.
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 of AFC.
AFC is managed by City Cinemas Corporation ("City Cinemas"), a cinema
management company owned by Sutton Hill, 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.
The Angelika reported 1996 revenue of $7.4 million. AFC has reached
agreement with its landlord to extend the remaining term of the Angelika lease
from approximately 12.5 years to approximately 29.5 years, and the landlord has
submitted such amended lease to its lender for its consent.
The Company is currently working to develop additional Angelika Film
Centers in major urban areas located throughout the United States. It is not
currently anticipated that City Cinemas would participate in centers located
outside of New York City. In accordance with the Company's business plan, on
February 27, 1997, the Company entered into an agreement for the construction
and lease of a 1,450-seat, eight-screen, 29,000 square foot art and specialty
cinema and cafe facility to be located in the Bayou Place entertainment center
in Houston, Texas. Bayou Place is being developed by The Cordish Company
pursuant to a ground lease and development agreement with the City of Houston.
The complex sits over a 3,000-car parking garage and is located in the middle of
the City's theater district. The lease is subject to approval by the City, the
execution and delivery by the city of a suitable agreement of attornment and
non-disturbance and the granting by the City of certain parking rights. Assuming
the prompt approval of the lease and the prompt execution and delivery of such
an agreement and grant of parking rights, it is anticipated that the Houston
Angelika could be opened in time for the 1997 year-end Holiday season. The
Company is currently in negotiation with owners and developers with respect to a
number of additional potential locations. No assurances can be given, however,
that any of the negotiations will result in operational theaters.
The Company believes that the exhibition of first run art and specialty
films is a niche business, in some ways distinct from the business of exhibiting
bigger budget wide release films. At the present time, the only national chain
specializing in art and specialty film is Landmark Cinemas, a subsidiary of
Metromedia Company which operates over 140 screens in over 50 locations,
principally in California and Washington. Many larger cities have smaller chains
which operate one to five locations. While major chains specializing in
conventional wide releases film product also may exhibit art and specialty
product from time to time, these chains have typically limited themselves to the
exhibition of such crossover art films as "Four Weddings and a Funeral," "The
English Patient," "Pulp Fiction," "The Piano" and "Shine." This may change as
more megaplex complexes with 16 or more screens are constructed, particularly if
the number of films released by the distributors of conventional wide release
film product decreases or if art and specialty film develops in popularity to
the point where it enjoys a wider release than is currently typically the case
with such films. Current levels of film production continue to provide megaplex
exhibitors with sufficient film products to make such exhibitors inconsistent
sources of screens for the distributors of art and specialty film. Art cinemas
complexes, which typically do not exhibit conventional wide release films, are
accordingly currently a more consistent source of screens to the distributors of
art and art specialty film.
Licensing/Pricing: Art and specialty films are available from many sources
-----------------
ranging from the divisions of the larger film distributors specializing in the
distribution of specialty films to individuals that have acquired domestic
6
<PAGE>
rights to one film. Generally, film payment terms are based upon an adjusted
gross receipts formula where the film distributors receive a specified
percentage (usually 90%) of the box office receipts over the "House Allowance,"
a negotiated allowance for theater expenses.
Competition: In most markets, art and specialty film is currently exhibited
-----------
at older independently owned one and two screen theater complexes. Few such
independent exhibitors operate cinemas in more than one metropolitan area. The
Company believes that there is currently a window of opportunity to construct,
in a number of under-serviced urban markets, a nationwide chain of
state-of-the-art multiplex cinemas specializing in art and specialty film. The
Company further believes that the distributors of such films may favor
distribution of art and speciality film to such a specialized chain as opposed
to distribution to conventional megaplex operators, since megaplex operators
will typically prefer to exhibit mainstream bigger budget film rather than art
product and, accordingly, may not be as consistent and as dependable a source of
screens as exhibitors who show only art and specialty film product. The Company
also believes that patrons of art and specialty film may prefer a cinema
experience that is different from that offered by a megaplex complex and that
the familiarity and goodwill associated with the Angelika name and the strength
of the Company's balance sheet may give the Company a competitive advantage over
other independent exhibitors of art and speciality films. However, the cinema
industry is currently in a state of significant change, as illustrated by the
significant number of multiplex and megaplex theaters which have been
constructed or announced in recent periods, and no assurances can be given that
the Company's plans can be successfully implemented.
Seasonality: The exhibition of art and specialty film, while still somewhat
-----------
seasonal in nature, is less so than the film exhibition business generally. Art
and specialty films tend to be released more evenly over the course of the year
and, if successful, to enjoy a longer run than wide release films. The
popularity of art and specialty film has increased significantly in recent
years, grossing domestically approximately $98,000,000, $112,000,000,
$244,000,000, $372,000,000, $355,000,000 in 1991 through 1995, respectively,
and over $500,000,000 in 1996 (based upon management estimates).
Employees: AFC has approximately 30 employees, three of whom are employed
---------
under the terms of collective bargaining agreement. The collective bargaining
agreement expires in October 1998. AFC believes its relations with its employees
to be good.
Reading Australia
- - - -----------------
The Company commenced activities in Australia in mid-1995, and currently
conducts business in Australia through its wholly-owned subsidiary, Reading
Australia Pty. Limited ("RAPL" and, collectively with its various subsidiaries.
"Reading Australia"). In November 1995, the Company and Craig Corporation
(together with its wholly-owned subsidiaries, "Craig") formed a limited
liability corporation, Reading International LLC ("Reading International"),
which was owned equally by the Company and Craig. Reading International owns
Reading Australia. REI acquired Craig's interest in Reading International in
October 1996 (see the "Stock Transactions"). Reading Australia has retained
several key executives resident in Australia, acquired or signed agreements to
acquire several parcels of real estate for development as entertainment centers
with multiplex cinemas and complementary uses and, on December 26, 1996, opened
its first multiplex cinema in Australia.
Reading Australia's initial business plan has been to focus on two types of
locations. The first type of locations are large freehold sites or long-term
leasehold properties located in metropolitan areas and which the Company
believes can be developed as entertainment centers ("Entertainment Centers")
providing patrons with not only a state-of-the-art multiplex cinema facility
(typically featuring a complex with 12 or more screens), but also with
convenient on-site parking and access to complementary amenities such as
restaurants. Entertainment Center projects are currently being developed by
wholly-owned subsidiaries of Reading Australia.
The second type of locations are smaller sites ("Country Cinemas"), located
in smaller metropolitan areas which cannot, in the view of the Company,
currently support larger multiplex complexes. It is expected that the Country
Cinemas will be developed by Australia Country Cinemas Pty. Limited ("ACC"), a
company which will be owned 75% by a subsidiary of Reading Australia and 25% by
a company owned by an Australian national, resident in Australia and from a
family long experienced in the cinema exhibition and supply business. These
Country
7
<PAGE>
Cinemas are a secondary focus for the Company, the principal focus being upon
the development and operation of entertainment centers, and it is uncertain as
to how many Country Cinemas locations will be developed.
The initial cinema opened by Reading Australia was a Country Cinema
consisting of six screens and 1,364 seats located on a long-term leasehold
property in Townsville, Queensland. In March 1997, the Company broke ground on
another cinema, a six-plex virtually identical to the Townsville theater,
located on a long-term leasehold in Mandurah, Western Australia.
In addition, Reading Australia has signed contracts to acquire the
following properties for development as Entertainment Centers:
<TABLE>
<CAPTION>
LAND APPROXIMATE ESTIMATED
SIZE IN APPROXIMATE CINEMA DEVELOPMENT SIZE IN
SQUARE PURCHASE SIZE IN SQUARE FOOTAGE OF
SITE FOOTAGE PRICE SQUARE FEET IMPROVEMENTS
---- ------- ----- ------------- ------------
<S> <C> <C> <C> <C>
Auburn, New South Wales 522,720 $8,500,000 60,000 210,000
Frankston, Victoria/1/ 227,750 N/A 64,000 94,000
Moonee Ponds, Victoria 129,949 $5,400,000 54,000 103,000
Newmarket, Queensland 172,160 $4,800,000 49,000 161,000
</TABLE>
/1/Under the applicable development agreement, Reading Australia is required to
make certain infrastructure improvements which are estimated to cost
approximately $6,000,000.
The Company has also signed a lease on a site mentioned below and is about
to sign a lease on the second site mentioned below. In both cases, the Company's
interest would be limited to that of the owner/operator of a multiples cinema as
follows:
<TABLE>
<CAPTION>
SITE CINEMA SIZE IN SQUARE FEET NUMBER OF SCREENS
---- -------------------------- -----------------
<S> <C> <C>
Liverpool, New South Wales 68,000 18 screens
Penrith, New South Wales 70,000 12 screens
</TABLE>
The Company has accumulated, as the consequence of three separate
acquisitions, a 50 acre site in Burwood, Victoria. The site was originally
acquired for development of a mega-plex cinema. However, such use is currently
being revaluated as a consequence of an adverse land use determination, which
negated certain permits which were in place at the time the land was acquired.
The Company, generally speaking, has encountered substantial opposition to
its attempt to develop freestanding cinema in entertainment complexes in
Australia. Currently, most cinemas in Australia are located within the central
business district (the "CBD") of the community which they serve. In the case of
multiplex developments, such complexes are typically found on second or third
floor locations in large privately-owned shopping centers. This course of
development has historically been a function of Australian land use planning
which is more protective of CBDs and of private shopping center development
than is typically the case in the United States and has, in the view of the
Company, resulted in facilities that are typically less convenient to the public
and less modern than the current generation of U.S. multiplexes and in higher
ticket prices than are typically found in the United States.
In the view of the Company, the principal competitive restraint on the
development of its business in Australia is the availability of sites. The
Company's principal competitors and certain major commercial landlords are
currently attempting to use this historical course of land use development to
prevent the construction of freestanding cinemas in entertainment complexes,
particularly where those complexes are located outside of an established CBD
or shopping center development. At the present time, competitors or shopping
centers' landlords are contesting the suitability, from a land use point of
view, of several of the above referenced locations. In the case of the Company's
8
<PAGE>
50-acre site at Burwood in Victoria, the relevant Minister (Minister for
Planning and Local Government) preempted local zoning authorities to prohibit
the Company's intended development of a 25-screen cinema complex, which would
have competed with complexes owned by the principal theater operators in
Australia and located in shopping centers owned by some of the principal
landlords in Australia.
The inability to development free standing cinemas as part of Entertainment
Centers would be adverse to the Company, since the principal exhibitors in
Australia have close historic relations with that country's principal shopping
center owners.
In light of the opposition encountered to date, no assurances can be given
that the Company will be able to accomplish its business objectives in
Australia. Furthermore, even if those objectives are eventually achieved, the
realization of these objectives will likely require a longer period of time and
a greater level of developmental costs than originally anticipated by the
Company. While the Company remains committed to its plans with respect to
Australia, no assurances can be given that the Company will be able to obtain
the governmental approvals needed to develop its Entertainment Center sites and
the Company does not anticipate that it will have any of its metropolitan
locations open before the forth quarter of 1998. Each of the agreements signed
by the Company to acquire or lease land is, in effect, subject to the receipt of
all permits required for the construction of a multiplex cinema.
As each of Frankston, Moonee Ponds and Newmarket are located in either CBD
or an entertainment zone, the Company anticipates that it will receive the
permits needed to proceed with such locations. The Company's transferor at
Auburn has been granted development consent for the construction of a 2,000
seat, eight screen complex although building approval is required before
construction can commence. However, a competitor has challenged the legality of
such permit and filed suit to overturn the permit. The Company intends to
vigorously defend this attempt by such competitor to delay or block this
project. Reading Properties Pty. Limited, a subsidiary of RAPL, has been joined
as a party in the relevant legal proceeding. As to Liverpool, the determination
of the City Council to deny a permit has been appealed to the Land and
Environment Court. Penrith is also located in an entertainment zone, and
applications for necessary permits have been filed.
As to the Burwood Property (a parcel of undeveloped land acquired by the
Company in 1995 for $7.3 million), the Company is currently reviewing its
options as to possible alternative uses of the site. At the present time, the
Company believes it unlikely, absent a change in governmental attitude in
Victoria as to the development of cinemas outside of established shopping
centers, that the property can be developed for cinema or other entertainment-
oriented purposes. However, the Company believes that the parcel has significant
value for alternative uses.
In addition to the locations referenced above, the Company has been in
negotiations for some period of time with AMP Investments Limited ("AMP")
concerning a ground lease and the construction of a twelve screen cinema on a
60,000 square foot pad at AMP's Mount Gravatt shopping center in Queensland.
Based upon the advice of counsel, the Company is of the view that an enforceable
lease currently exists between the Company and AMP with respect to that site.
However, AMP is currently taking the position that no such lease exists and has
stated an unwillingness to proceed. Without waiving its position that an
enforceable lease does presently exist, the Company is presently continuing
discussions with AMP, in an effort to overcome AMP's current unwillingness to
proceed. If these discussions do not resolve the issue, the Company intends to
litigate the matter.
Australia is a self-governing and fully independent member of the
Commonwealth of Nations. The constitution resembles that of the United States in
that it creates a federal form of government, under which the powers of the
central government are specified and all residual powers are left to the states.
The country is organized into five mainland states (New South Wales, Queensland,
South Australia, Victoria and Western Australia), one island state (Tasmania)
and two territories (Australian Capital Territory and the Northern Territory).
The ceremonial supreme executive is the British monarch, represented by the
governor-general and in each of the six states by a governor. These officials
are appointed by the British monarch, but appointments are nearly always
recommended by the Australian governments. True executive power rests with the
prime minister, the leader of the majority party in the House of
Representatives. The legislature is bicameral, with a Senate and a House of
Representatives, and the ministers are appointed by the prime minister from the
membership of the House and the
9
<PAGE>
Senate. The organization of the state government is similar to that of the
central government. Each state has an appointed governor, an elected premier and
a legislature.
Although Australia is the sixth largest country in the world in land mass,
it only has a population of approximately 19.2 million people. This population
is concentrated in a few coastal urban areas, with approximately 4 million in
the greater Sydney area, 3.4 million in the greater Melbourne area, 1.7 million
in the Brisbane area, 1.1 million in Adelaide and 1.4 million in Perth.
Australia is one of the richest countries in the world in terms of natural
resources per capita and one of the most economically developed countries in the
world, although vast areas of the interior, known as "the Outback," remain all
but uninhabited. The principal language is English, and the largest part of the
population traces its origin to Britain and Europe, although an increasing
portion of the population has immigrated from the Far East. Australian taste in
film has historically been similar to that of American audiences.
Internal trade is dominated by the two most populous states, New South
Wales (mainly Sydney) and Victoria (mainly Melbourne). Together these two states
account for a majority of all wholesale trade and approximately 75% of all
retail sales. At the present time, Australia's principal trading partners are
the United States and Japan.
Australia does not restrict the flow of currency into the country from the
U.S, or out of Australia to the United States. Also, subject to certain review
procedures, U.S. companies are typically permitted to operate businesses and to
own real estate.
Licensing/Pricing: Films are licensed under agreements with major film
-----------------
distributors and several local distributors who distribute specialized films.
Film exhibitors are provided with an opportunity to view films prior to
negotiating with the film distributor the commercial terms applicable to its
release. Films are licensed on a film-by-film, theater-by-theater basis. Reading
Australia licenses films from all film distributors as appropriate to each
location.
Generally, film payment terms provide for payment to film distributors
under a 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 50%-60% in the first play week to a low of 25% after 4-5
weeks. Under an adjusted gross receipts formula, the film distributor receives a
specified percentage, usually 80% or 90%, of the box office receipts over the
"House Allowance," a negotiated allowance for theater expenses. Normally, the
higher of the above two calculations is the amount paid to the distributor.
Competition: The film exhibition business in Australia is concentrated and,
-----------
to a certain extent, vertically integrated. The principal exhibitors in
Australia include Village Roadshow Limited ("Village") with approximately 136
screens, Greater Union and affiliates with approximately 278 screens and Hoyts
Cinemas ("Hoyts") with approximately 166 screens. Independents as a group
operate approximately 560 screens.
Greater Union is the owner of Birch Carroll & Coyle and a part owner of
Village. All new multiplex cinema projects announced by Village are being
jointly developed by Greater Union, Village, and Warner Bros. Hoyts has
announced plans to add approximately 140 new multiplex screens.
These companies have substantial capital resources. Village had a publicly
reported consolidated net worth of approximately $650 million at June 30, 1996.
The Greater Union organization does not separately publish financial reports,
but its parent, Amalgamated Holdings, had a publicly reported consolidated net
worth of approximately $210 million at June 30, 1996. Hoyts Cinemas recently
completed a public offering, increasing its net worth to approximately $170
million.
10
<PAGE>
The industry is somewhat vertically integrated in that Village also serves
as a distributor of film in Australia for Warner Bros. and
Disney/Touchstone/Buena Vista. Films produced or distributed by the majority of
the local international independent producers are also distributed by Roadshow
Film Distributors. Roadshow Film Distributors is owned equally by Village and
Greater Union. The practical impact of this vertical integration is mitigated to
some extent, however, by the Australian legal requirement that all films be made
reasonably available to all exhibitors.
Seasonality: Major films are generally released to coincide with the school
-----------
holiday trading periods, particularly the summer holidays. Accordingly, Reading
Australia would expect to record greater revenues and earnings during the first
half of the calendar year.
Employees: Reading Australia has seven executive and administrative
---------
employees and approximately 30 theater employees.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
- - - -----------------------------------------------------------
The following table indicates the relative amounts of revenues from
operations and identifiable assets of the Company by geographic area during the
three-year period ended December 31, 1996. The Company has no export revenues.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Puerto Rico............................... $ 15,523 $14,925 $ 8,060
Mainland United States (1)................ 3,256 273 697
Australia (2)............................. 0 0 0
Income (loss) from operations: (3)
Puerto Rico............................... $ 385 $ 1,225 $ 889
Mainland United States.................... 956 273 697
Less: Minority Interest................... (67) 0 0
Australia.................................. (2,817) (781) 0
Add: Minority Interest.................... 388 390 0
Corporate and Other (4)................... 7,159 1,482 (3,238)
Identifiable assets:(5)
Puerto Rico............................... $ 26,529 $26,979 $26,488
Mainland United States.................... 15,824 0 0
Australia................................. 12,948 4,760 0
Less: Minority Interest................... 0 (2,380) 0
Corporate and other........................ 126,453 47,926 46,228
Consolidated Assets (6)................... $181,754 $77,924 $72,716
</TABLE>
1. The Angelika revenues represent only the period from August 27, 1996
through December 31, 1996.
2. Reading Australia recorded no revenues other than interest and dividend
income, which income is included in Corporate and other.
3. Reflects earnings before interest expense, taxes and intercompany
interest and management fees.
4. Corporate and other income includes corporate General and Administrative
expense, Other Income, and Interest Income/Expense and excludes
intercompany interest and management fees.
11
<PAGE>
5. Reading Australia has cash, cash equivalents, and the Stater Preferred
Stock, which assets had an aggregate book value of $82,210,000 and
have been included in the value of Corporate and other Assets.
6. Consolidated assets for 1995 and 1996 include the assets of Reading
Australia.
The Reorganization and Stock Transactions
- - - -----------------------------------------
In October 1996, two transactions were approved by shareholders, the
Reorganization and the Stock Transactions. Both transactions were completed on
October 15, 1996. The Reorganization was effected pursuant to an Agreement and
Plan of Merger (the "Merger Agreement") among Reading Company, REI, which was a
newly formed, wholly-owned subsidiary of Reading Company, and Reading Merger Co.
("Merger Co.") which was a newly formed, wholly-owned subsidiary of REI. In the
Reorganization, Reading Company merged with Merger Co. and each outstanding
share of Reading Company's Common Stock and Class A Common Stock was converted
into the right to receive one share of REI's Common Stock. As a result of the
Reorganization, Reading Company became a wholly-owned subsidiary of REI and the
shareholders of Reading Company became shareholders of REI.
The Stock Transactions were carried out pursuant to an Exchange Agreement,
dated September 4, 1996 (the "Exchange Agreement") between REI, Citadel, Reading
Company and Craig. In the Stock Transactions, REI issued (i) 70,000 shares of
Series A Voting Cumulative Convertible Preferred Stock (the "Series A Preferred
Stock") to Citadel, and granted certain contractual rights to Citadel in return
for $7 million in cash and (ii) 550,000 shares of Series B Voting Cumulative
Convertible Preferred Stock (the "Series B Preferred Stock") and 2,476,190
shares of Common Stock to Craig in exchange for certain assets owned by Craig.
The assets acquired by REI from Craig consisted of the 693,650 shares of Stater
Preferred Stock, Craig's 50% membership interest in Reading International, of
which an indirect wholly owned subsidiary of REI was the sole other member, and
1,329,114 shares of Citadel's 3% Cumulative Voting Convertible Preferred Stock,
stated value $3.95 per share (the "Citadel Preferred Stock").
The contractual rights granted to Citadel in the Stock Transactions are set
forth in an Asset Put and Registration Rights Agreement pursuant to which
Citadel has the right (the "Asset Put Option"), exercisable at any time after
October 15, 1996 and until 30 days after REI files its Annual Report on Form
10-K for the year ending December 31, 1999, to require REI to acquire
substantially all of Citadel's assets, and assume related liabilities (such as
mortgages), for shares of REI Common Stock. In exchange for up to $20 million in
aggregate appraised value of Citadel assets on exercise of the Asset Put Option,
REI is obligated to deliver to Citadel a number of shares of REI Common Stock
determined by dividing the value of the Citadel assets by $11.75 if the notice
of exercise is received by October 31, 1997 and $12.25 if notice is received
thereafter. If the appraised value of the Citadel assets is in excess of $20
million, REI is obligated to pay for the excess of issuing Common Stock at the
then fair market value. REI is not obligated to acquire more than $30 million of
assets.
The Series A and Series B Preferred Stock (collectively, the "Convertible
Preferred Stock") have stated values of $7 million and $55 million,
respectively. Holders of each series of the Convertible Preferred Stock are
entitled to cast 9.64 votes per share, voting together with the holders of the
Common Stock and the other series of Convertible Preferred Stock, on any matters
presented to shareholders of REI. Each share of Series A Preferred Stock is
convertible into shares of Common Stock at a conversion price of $11.50, and
each share of Series B Preferred Stock is convertible into shares of Common
Stock at a conversion price of $12.25, each subject to adjustment on certain
events, at any time after April 15, 1998. The shares of Series A Preferred Stock
may also be converted after a change in control. REI has the right to require
conversion of the Series A Preferred Stock if the average market price of the
Common Stock over a 180-calendar day period exceeds $15.525. REI granted certain
registration rights to Citadel with respect to the shares of Common Stock
issuable on conversion of the Series A Preferred Stock and the Asset Put Option.
Citadel has the right during the 90 day period beginning October 15, 2001,
or in the event of a change of control of the Company, to require the Company to
repurchase the Series A Preferred Stock at its stated value plus accrued and
unpaid dividends plus, in the case of a change of control, a premium. In
addition, if REI fails to pay dividends on the Series A Preferred Stock for four
quarters, Citadel may (after April 15, 1998) require REI to repurchase the
Series A Preferred Stock. Also, REI has certain rights to redeem the Convertible
Preferred Stock at its option. Due to the redemption provisions, the Series A
Preferred Stock has not been included as a component of Shareholders' Equity in
the Consolidated Balance Sheet and is separately categorized as "Preferred
Stock."
12
<PAGE>
REI and Citadel also agreed that, immediately following REI's receipt of
the Citadel Preferred Stock from Craig, the Company would deliver the Citadel
Preferred Stock to Citadel in exchange for an equal number of shares of a new
series of Citadel preferred stock (the "Citadel Series B Preferred Stock"). The
Citadel Preferred Stock and the Citadel Series B Preferred Stock were
substantially identical, except that the Citadel Series B Preferred Stock
reduced the accrual rate on the redemption premium from 9% per annum to 3% per
annum subsequent to the closing of the Stock Transactions and also provided that
the Citadel Series B Preferred Stock could not be presented for conversion to
Citadel common stock for a period of one year beginning 15 days after Citadel
filed its 1996 Annual Report on Form 10-K with the SEC.
On December 18, 1996, REI elected to convert the Citadel Series B Preferred
Stock into Citadel common stock whereupon Citadel exercised its right to redeem
the Citadel Series B Preferred Stock. REI received gross proceeds of
approximately $6.2 million on such redemptions.
ITEM 2. PROPERTIES
REI Executive and Administrative Offices
- - - ----------------------------------------
REI leases approximately 6,600 square feet of office space in center city
Philadelphia. A subsidiary of the Company shares office space in New York City
with City Cinemas. This space approximates 2,600 square feet, and the cost is
apportioned between City Cinemas and REI.
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 which are
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.
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 Non-Entertainment Real Estate
- - - --------------------------------------------
When the Company's railroad assets were conveyed to Conrail, the Company
retained fee ownership of approximately 700 parcels and rights-of-way located
throughout Pennsylvania, Delaware, and New Jersey. 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.
Entertainment Properties
- - - ------------------------
The Company currently leases approximately 227,728 square feet of completed
theater space in the United States, Puerto Rico and Australia, as follows:
13
<PAGE>
<TABLE>
<CAPTION>
Approximate
Aggregate Range of Terms Average Remaining Term
Square Footage (including renewals) (including renewals)
-------------- -------------------- --------------------
<S> <C> <C> <C>
United States 23,050 12.5 12.5/1/
Puerto Rico 181,728 16-40 years 30
Australia 16,000 30 30
</TABLE>
/1/The Company has reached agreement with its landlord to extend the
remaining term of the Angelika lease to approximately 29.5 years, and the
landlord has submitted such amended lease to its lender for consent.
In addition, the Company has signed leases with respect to additional
to-be-built theater space of 29,000 square feet in the U.S., 36,000 square feet
in Puerto Rico, and 170,000 square feet in Australia (calculated exclusive of
the Mount Gravatt lease). These leases have average terms (including renewals)
of 36 years and average base rents of $464,000.
The Company currently has contracted to purchase 1,052,571 square feet of
land comprised of four sites for the construction of cinemas and entertainment
complexes in Australia.
For more detailed information about the Company's entertainment properties,
please see the discussion under Item 1. - Business - Description of Business,
above.
Cine Vista Properties
- - - ---------------------
All of Cine Vista's real properties are leased. The eight theaters are
leased pursuant to long-term leases with remaining terms and renewal options
ranging from 16 to 40 years. Cine Vista has executed an additional lease for an
expansion of an existing theater, which lease term commences with occupancy,
expected in mid-1998. The landlord of one of Cine Vista's theaters has the right
to terminate the lease relating to space presently housing two screens, subject
to six months' notice. All of the 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.
Angelika Film Centers Properties
- - - --------------------------------
The Angelika Film Center is located in a leased facility of approximately
23,000 square feet in the Soho district of New York City.
Reading Australia Properties
- - - ----------------------------
Reading Australia maintains leased offices in Melbourne and Sydney,
Australia pursuant to short term leases. The total leased space is approximately
2,300 square feet. In December 1995, Reading Australia acquired a 50 acre site
in a suburban area outside of Melbourne. Reading Australia had intended to build
a multiplex theater on this site but the Minister for Planning and Local
Government has intervened to negate certain permits which were in place at the
time the land was acquired. Reading Australia believes that the site has value
as an assemblage for other uses, even if its unable to develop the site as a
theater.
Reading Australia opened its first theater in December 1996 in leased
facilities in Townsville, Queensland under the Country Cinema concept and has
broken ground on a second facility now under construction in Mandurah, West
Australia.
Reading Australia is 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 deposits.
14
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Environmental
- - - -------------
Reading Company has been advised by the Environmental Protection Agency
("EPA") that it is a potentially responsible party ("PRP") 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 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
Company was 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.
In 1995, the federal district court judge who presided over Reading
Company's bankruptcy reorganization ruled that all liability asserted against
Reading Company relating to the site was discharged pursuant to the consummation
order issued in conjunction with Reading Company's bankruptcy on December 31,
1980. The judge's decision has been appealed and the appeal was heard in July
1996. The appellate court has not yet rendered its opinion.
Pursuant to a settlement of litigation, the City of Philadelphia, Conrail,
and the Southeastern Pennsylvania Transportation Agency have agreed to pay an
amount ranging from 52% to 55% of future costs Reading Company may incur in
cleaning environmental contamination on one of its properties, the Viaduct,
which Reading Company believes may be contaminated by PCBs. Reading Company has
advised the EPA of the potential contamination. Reading Company has not
determined the scope and extent of any such PCB contamination. However, Reading
Company has been advised by counsel that, given the lack of regulatory attention
to the Viaduct in the fourteen years which have elapsed since the EPA was
notified of the likelihood of contamination, it is unlikely that Reading Company
will be required to decontaminate the Viaduct or incur costs related thereto.
Certain Shareholder Litigation
- - - ------------------------------
In September 1996, the holder of 50 shares of Common Stock commenced a
purported class action on behalf of the Company's minority shareholders owning
Reading Company Class A Common Stock in the Philadelphia County Court of Common
Pleas relating to the Reorganization and Stock Transactions. The complaint in
the action (the "Complaint") named the Company, Craig, two former directors of
the Company and all of the current directors of the Company (other than Gregory
R. Brundage) as defendants. The Complaint alleged, among other things, that the
Independent Committee set up to review the transactions and the current and
former directors of the Company breached their fiduciary duty to the minority
shareholders in the review and negotiation of the Reorganization and Stock
Transactions and that none of the directors of the Company were independent and
that they all were controlled by James J. Cotter, Craig or those controlled by
them. The Complaint also alleged, in part, that the defendants failed to
disclose the full future earnings potential of the Company and that Craig would
benefit unjustly by having its credit rating upgraded and its balance sheet
bolstered and that the value of the minority shareholders' interest in the
Company was diluted by the transactions. The Complaint sought injunctive relief
to prevent the consummation of the Stock Transactions and recision of the Stock
Transactions if they were consummated and divestiture by the defendants of the
assets or shares of the Company that they obtained as a result of the Stock
Transactions, and unspecified damages and other relief.
In October, all of the defendants filed preliminary objections to the
Complaint and thereafter, by agreement of the parties and Order of the Court,
the Company was dismissed as a defendant without prejudice. Plaintiff dismissed
with prejudice his request for preliminary and permanent injunctive relief to
prevent the consummation of the Stock Transactions and his request to rescind
and set aside the Stock Transactions.
15
<PAGE>
In November, plaintiffs filed an amended complaint against all of the
Company's present directors, its two former directors and Craig. The amended
complaint does not name either the Company or Reading Company as a defendant.
The amended complaint essentially restates all of the allegations contained in
the Complaint and contends that the named defendant directors and Craig breached
their fiduciary duties to the alleged class. The amended complaint seeks
unspecified damages on behalf of the alleged class and attorneys' and experts'
fees.
Management believes that the allegations contained in the amended complaint
are without merit and intends to vigorously defend the directors in the matter.
The Company has Directors and Officers liability insurance and believes that the
claim is covered by such insurance.
The Company is not a party to any other pending legal proceedings or
environmental action which management believes could have a material adverse
effect on its financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's 1996 Annual Meeting of Shareholders held on October 15,
1996, shareholders (i) elected six directors (ii) approved a proposal to adopt
an Agreement and Plan of Merger, which Plan of Merger effected the
Reorganization and (iii) approved a proposal to approve an Exchange Agreement,
which Exchange Agreement effected the Stock Transactions. The results of the
votes were as follows:
(i) Election of Directors
For Withheld
--- --------
James J. Cotter 2,678,663 256,673
Gregory R. Brundage 2,677,165 258,171
Edward L. Kane 2,678,617 256,719
John W. Sullivan 2,678,665 256,671
Albert J. Tahmoush 2,678,665 256,671
S. Craig Tompkins 2,678,503 256,833
For Against Abstain
--- ------- -------
(ii) Approval of Plan of Merger 2,676,560 258,573 203
(iii) Approval of Exchange Agreement 2,676,508 258,621 207
EXECUTIVES OFFICERS OF THE REGISTRANT
NAME AGE POSITION
---- --- --------
James J. Cotter 59 Chairman of the Board of Directors
S. Craig Tompkins 46 Vice Chairman and Director
Robert F. Smerling 62 President
John Rochester 53 Chief Executive Officer, Australian
Cinemas Operations and Reading
Australia Pty Ltd.
James A. Wunderle 45 Executive Vice President, Chief
Financial Officer and Treasurer
16
<PAGE>
Charles S. Groshon 43 Vice President
Eileen M. Mahady 31 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 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 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 Theatres, a wholly-owned subsidiary of
Decurion.
Mr. Smerling has been President of Reading Entertainment since January
1997. Mr. Smerling has served as 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 Australia. 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. Tompkins has been Vice Chairman since January 1997. Mr. Tompkins has
been a Director of the Company since March 1994 and was President of the Company
from March 1994 through December 1996. Mr. Tompkins is also President and
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 the past 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. Since July
1995, Mr. Tompkins has been the Vice Chairman of Citadel, and currently serves
as that company's Secretary/Treasurer and Principal Accounting Officer.
Mr. Rochester has been Chief Executive Officer of Reading Australia 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. Wunderle has been Chief Financial Officer since January 1987 and
Executive Vice President, Treasurer, and Chief Financial Officer since December
1988. He has been Treasurer since March 1986.
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.
In addition, the Company has contractual arrangements with certain other
individuals and/or certain affiliated companies which make available to the
Company consulting services from the following individuals:
John Foley: Mr. Foley has been a full time employee of City Cinemas since
January 1997, and in this capacity provides booking and site identification
advice to the Company. Prior to joining City Cinemas, Mr. Foley was the
President of Distribution for Miramax, where he, among other things, developed
and implemented the distribution plan for "The English Patient," the winner of
nine Academy Awards and one of the most profitable art films
17
<PAGE>
of all time. Prior to joining Miramax in 1994, Mr.Foley was the President of
Distribution for MGM/UA from 1989 through 1993.
Steve Wesson: Mr.Wesson has been the President and Chief Executive Officer
of CHC since August 1994. Prior to his employment by Citadel in 1993, Mr. Wesson
was the Chief Executive Officer of Burton Properties Trust Inc., the U.S. real
estate subsidiary of The Burton Group PLC, from 1989. Reading owns 26% of the
outstanding Common Stock of CHC, and receives real estate consulting services
from Citadel pursuant to an agreement with that company.
18
<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 Reading Company
Class A Common Stock from January 1, 1995 through October 15, 1996, and the REI
Common Stock from October 16, 1996 through December 31, 1996, as reported on the
NNM. The Reading Company Class A Common Stock was also traded on the
Philadelphia Exchange from September 9, 1996 through October 15, 1996 and the
REI Common Stock has been traded on such exchange since October 15, 1996.
Reading Company's Common Stock traded infrequently on the over-the-counter "pink
sheet" market. Historical bid/asked data is insufficient to provide high and low
price information on Reading Company's Common Stock during 1995 and 1996.
<TABLE>
<CAPTION>
1996
QUARTER 1ST 2ND 3RD 4TH
- - - ------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
HIGH 11 11 11 1/8 10 3/8
LOW 9 10 10 9
<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
</TABLE>
On April 8, 1997, the high, low and closing prices for REI Common Stock on
the NNM were $11.63, $11.38 and $11.38, respectively. On April 8, 1997, there
were approximately 1,000 shareholders of record of REI Common Stock, which
amount does not include individual participants in security position listings.
Neither REI nor Reading Company have paid any dividends on their Common
Stock. The Board of Directors does not intend to authorize payment of dividends
on the Common Stock in the foreseeable future. Holders of the Convertible
Preferred Stock are 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 Common Stock) are paid to the holders of the Common Stock.
On October 15, 1996, REI issued the Convertible Preferred Stock to Craig
and Citadel. See Item 1. - Business - The Reorganization and Stock Transactions.
The Convertible Preferred Stock was offered and sold pursuant to the exemption
from registration provided by Section 4(2) of the Securities Act of 1933 as a
non-public offering to a limited number of persons.
19
<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, 1996/(1)/ 1995/(2)/ 1994/(2)/ 1993 1992
- - - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 22,944 $17,632 $10,911 $ 3,306 $ 4,421
Income (loss) applicable to common
shareholders before cumulative effect of
accounting change 6,092 2,351 (1,652) (520) (3,424)
Cumulative effect of accounting change 0 0 0 132 0
- - - -------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common
shareholders $ 6,092 $ 2,351 ($1,652) ($388) ($3,424)
===================================================================================================================
Per share information:
Income (loss) applicable to common
shareholders before cumulative effect of
accounting change $ 1.11 $ 0.47 ($0.33) ($0.11) ($0.69)
Cumulative effect of accounting change 0 0 0 0.03 0
- - - -------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common
shareholders $ 1.11 $ 0.47 ($0.33) ($0.08) ($0.69)
===================================================================================================================
<CAPTION>
- - - -------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 1995 1994 1993 1992
- - - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $181,754 $75,544 $72,716 $70,121 $71,509
Redeemable preferred stock $ 7,000 $ 0 $ 0 $ 0 $ 0
Shareholders' equity $155,954 $68,712 $66,086 $68,026 $68,416
===================================================================================================================
</TABLE>
/(1)/ Includes results of Citadel from March 30, 1996, the acquisition of the
Angelika from August 28, 1996 and the Stock Transactions from October 16,
1996.
/(2)/ Results of operations of Cine Vista have been included since its
acquisition effective July 1, 1994.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company has elected to focus its theater development and related real
estate development activities in three principal areas: (i) the management and
development of motion picture theaters in Australia; (ii) the domestic
management and development and acquisition of specialty motion pictures theaters
which feature foreign and limited release art films similar to the Angelika; and
(iii) the management and development of motion picture theaters in Puerto Rico.
To provide the Company with equity to execute its theater acquisition and
development plans, the Company completed a private placement in late 1996 (which
included the Reorganization and Stock Transactions as described below).
THE REORGANIZATION AND STOCK TRANSACTIONS
The Reorganization was effected in order to consolidate the Company's
operations under a holding company incorporated under the laws of the State of
Delaware. The Company believes that such a structure will facilitate the
financing of the Company, without subjecting such capital to the contingent
liabilities of the Company's historical railroad business, and permit the
Company to avail itself of a more established body of corporate law than that of
Pennsylvania (the state in which Reading Company is incorporated).
The Stock Transactions permitted the Company to acquire assets which, in
the opinion of management, could be converted into cash or utilized as
collateral to raise cash funds necessary to finance the Company's theater and
real estate development activities.
Pursuant to the Stock Transactions, The Company received $7,000,000 of cash
from Citadel. In return the Company issued to Citadel, $7,000,000 in stated
value (70,000 shares) of the Company's Series A Preferred Stock and granted
Citadel certain contractual rights including the Asset Put Option. The Asset Put
Option grants Citadel the right to require the Company to acquire substantially
all of Citadel's assets and assume related liabilities in return for the
issuance of Common Stock at any time through a date 30 days after the Company
files its 1999 Annual Report on Form 10-K. The number of shares to be issued
will be determined by dividing the appraised value of the Citadel assets or $20
million, whichever amount is lower, by $11.75 if Citadel exercises the Asset Put
Option by October 31, 1997 and $12.25 thereafter. If the appraised value of
Citadel assets is in excess of $20 million, the Company will issue Common Stock
at fair market value for such excess up to a total of $30 million in Citadel
assets. In addition, the Company agreed to exchange the Citadel Preferred Stock,
which the Company acquired from Craig in the Stock Transactions, for Citadel's
Series B Preferred Stock containing terms modified in certain respects from the
terms of the Citadel Preferred Stock. The Company received from Craig the Stater
Preferred Stock with a stated value of $69,365,000, the Citadel Preferred Stock
with a stated value of $5,250,000 and Craig's 50% interest in Reading
International. In return, REI issued to Craig, 2,476,190 shares of Common Stock
and 550,000 shares ($55,000,000 stated value) of Series B Voting Cumulative
Preferred Stock (the "Series B Preferred Stock").
Certain Financial Reporting Considerations
- - - ------------------------------------------
The Reorganization and Stock Transactions have been accounted for as a
reorganization of related entities requiring that the Company reflect the assets
received at the lower of the value which they were recorded on the books of the
affiliates, Craig or Citadel, or market. The assets received were therefore
recorded as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 7,000,000
Citadel Preferred Stock (1) 5,250,000 *
Stater Bros. Preferred Stock 67,978,000 *
50% Ownership interest in Reading International 13,194,000
------------
Gross Book Value of Assets Received $ 93,422,000
============
</TABLE>
21
<PAGE>
* Plus accrued and unpaid dividends
(1) The Citadel Preferred Stock was redeemed by Citadel in December 1996.
The Stock Transactions are intended to qualify as an exchange under Section
351(a) (a "351 Exchange") of the Internal Revenue Code of 1986, as amended (the
"Code"). In a 351 Exchange, the party acquiring the assets (in the Stock
Transactions, REI) retains the contributing parties' tax basis in the acquired
assets, with no taxable gain recognized as a result of the exchange. The parties
contributing assets (in the Stock Transactions, Craig and Citadel) obtain a
basis in the assets received in the exchange equal to the basis in the assets
which are contributed in the exchange (the Series A and Series B Preferred
Stock). With the exception of the Stater Preferred Stock, the book value of the
assets received in the Stock Transactions approximated the tax basis in the
assets received. Craig's adjusted tax basis (for federal tax purposes) in the
Stater Preferred Stock was approximately $5 million.
The estimated tax liabilities associated with the assets received in the
Stock Transactions were $22,042,000 in deferred federal income taxes primarily
relating to the Stater Preferred Stock. At the time of the closing of the Stock
Transactions, the Company had a gross deferred federal tax asset of $55,968,000
and a tax asset valuation allowance (the "TAVA") in the same amount. Upon
receipt of the Stater Preferred Stock, the Company determined that it was more-
likely-than-not that a portion of the deferred tax asset which had previously
been fully reserved, would be realized and the Company reduced the TAVA by
$20,782,000 which amount reflects the amount of federal tax loss carryforwards
("NOLs") which were expected to be utilized net of $1,260,000 in alternative
minimum tax ("AMT").
A portion of the reversal of the tax asset valuation allowance, $3,957,000,
was included in "Income tax benefit" in the Company's Consolidated Statement of
Operations and was subsequently reclassified from "Retained Earnings" to "Other
Capital". The balance, $18,085,000, was credited directly to "Other Capital" in
the Company's Consolidated Statement of Shareholders' Equity. The amount which
was included in income was equal to the NOLs which remained available to the
Company and which existed as of the date of the Company's 1981 quasi-
reorganization. At the time of the Company's quasi-reorganization, the Company
also realized a loss relating to the conveyance of certain assets to Conrail and
charged such loss directly to "Other Capital." The benefits of NOLs relating to
such charge cannot be reflected in the Company's Consolidated Statement of
Operations. As of January 1, 1997, the Company has no NOLs which existed at the
time of the Company's quasi-reorganization and therefore, any future reductions
in the Company's tax valuation allowance will be reflected as income in the
Company's Consolidated Statement of Operations.
The Company issued Common Stock and the Convertible Preferred Stock in
exchange for assets received in the Stock Transactions. The Convertible
Preferred Stock was reflected on the Consolidated Balance Sheet of the Company
at December 31, 1996 at its stated value ($100 per share), which value
management believes approximates market. The Series A Preferred Stock has not
been included as a component of Shareholders' Equity since it includes
provisions which permit a majority of the holders to request redemption at
stated value plus accrued and unpaid dividends for a 60 day period beginning
October 15, 2001 and also provides for redemption at the option of the majority
of the holders, if the Company fails to pay four quarterly dividends or in event
of a change in control.
In addition to issuing to Citadel the Series A Preferred Stock, the Company
also granted the Asset Put Option, which under certain circumstances permits
Citadel to exchange substantially all of its assets for Common Stock. The
Company did not allocate any value to the Asset Put Option due in part to the
subjective nature of the assumptions utilized in option pricing models and the
fact that stock option valuation models are intended to value transferable
options and the Asset Put Option is not transferable. Had a value been
separately ascribed to the Asset Put Option, the value of such option would have
been deducted from the value of the Series A Preferred Stock and included as
"Other Capital" in the Company's Consolidated Statement of Shareholders' Equity.
In addition to the 6.5% dividend payable on the $62 million of Convertible
Preferred Stock, the Company has elected to include as a component of "Preferred
Stock Dividends" in its calculation of earnings per common share, a provision
which will total approximately $68,000 in 1997 for the amortization of the value
of the Asset Put Option (based upon a valuation utilizing the Black & Scholes
option valuation model).
22
<PAGE>
Management believes that the tax gain (related to the Stater Preferred
Stock) recognized by the Company was offset by the Company's NOL carryforwards
(See Note 6 to the Consolidated Financial Statements contained elsewhere
herein). However, the amount of NOLs 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 IRS would agree with the Company as to the amount of NOL
available to offset such gains. Use of the NOLs is subject to certain
limitations, including those resulting from certain changes in the ownership of
the Company. While the transfer restrictions which are applicable to the
Company's equity securities are intended to minimize the risk of such ownership
changes, ownership changes unknown to the Company may have occurred despite or
in violation of such restrictions. In addition, the Code and related case law
limit the ability to use NOLs to offset certain "built-in" gains on contributed
its property. Although the Company does not believe that such limitations on the
use of its NOLs would apply to the disposition of the Stater Preferred Stock,
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 was to make use of the NOLs and the Company could not show
otherwise, such use may not be available. In such case, the financial position
of the Company could be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Reading Australia's business plan provides for the development of Country
Cinemas and Entertainment Centers (See Item I, Business). The Country Cinemas
are smaller and more likely to be located in leased premises while the
Entertainment Cinemas are generally free-standing sites, many of which will
include related retail developments which may be developed or sold as the
Company's theaters are developed. It is intended that the Entertainment Centers
be constructed on land owned by the Company and, accordingly, such centers are
capital intensive at this stage of development. Reading Australia has signed
three purchase agreements and a development agreement to acquire sites which
will require the payment of approximately $19,300,000. If all of these projects
are developed, Reading Australia estimates the total development cost of these
four entertainment centers will aggregate in excess of $100,000,000, over the
next two to three years.
To provide Reading Australia with funding needed to complete its theater
development plans without requiring REI to guarantee the indebtedness of Reading
Australia and as a means of minimizing the Company's exposure to fluctuations in
the value of the Australian dollar and to demonstrate the Company's commitment
to the Australian market, the Company contributed its Stater Preferred Stock to
Reading Australia. The Company anticipates that Reading Australia will pledge
the Stater Preferred Stock as collateral for Australian dollar borrowings and
Reading Australia has had preliminary discussions in furtherance thereof. In
addition, the Company has been advised that Stater is considering exercising its
right to repurchase the Stater Preferred Stock and that such repurchase may
occur as early as prior to the end of Stater's fiscal year, September 30, 1997.
If such repurchase were to occur, the repurchase would be at stated value,
$69,365,000. However, there can be no assurance that such repurchase can or will
be effected. The Company's contribution of the Stater Preferred Stock to Reading
Australia resulted in a taxable gain (for federal tax purposes) of approximately
$62,977,000 and resulted in an AMT liability of $1,260,000.
Cine Vista opened a new six-plex on March 26, 1997 and will close four of
six screens at another location in April 1997 in order to initiate construction
of a new eight-plex at the same location, which construction is anticipated to
be completed in mid-1998. The Company anticipates that it will invest
approximately $8.4 million in 1997 and 1998 in furtherance of these two
projects. Cine Vista is also negotiating provisions of an agreement to expand
one facility and to open new theaters at two new sites which, collectively could
result in the addition of up to 30 new screens. The timing of the additions is
not predictable nor is the Company assured of concluding these proposed
developments. The capital cost of these new additions is estimated to total
approximately $15 million. Cine Vista may use funds available under its Line of
Credit (See Note 10 to the Consolidated Financial Statements contained elsewhere
herein) to fund its theater development activities.
The Company recently announced the signing of a lease for the first new
theater based upon the Angelika concept to be located in Houston, Texas. The
Company is actively seeking sites to develop Angelika type theaters throughout
the United States and will consider acquiring leasehold or ownership interests
in conjunction with such developments. The cash cost of such developments can
range from approximately $1.5 million for a turnkey leased facility to over $7
million for an owned site.
23
<PAGE>
If the Company is successful in its efforts to develop all of the projects
which it is presently considering, its capital requirements over the next three
years will exceed its existing cash balances, the value of the Stater Preferred
Stock (or the proceeds thereof) and existing borrowing arrangements. However,
the Company believes that additional funding could be realized through, among
other things, bank borrowings, sale and lease back transactions and the
issuance/sale of additional equity either of REI, Reading Australia or at the
project level.
The following summarizes the major sources and uses of cash funds in each
of the three years ended December 31, 1996, 1995 and 1994:
1996:
- - - -----
"Unrestricted cash and cash equivalents increased $4,491,000 in 1996 from
$44,189,000 in 1995 to $48,680,000 at December 31, 1996. Working capital
increased $62,000 from $42,666,000 at December 31, 1995 to $42,728,000 at
December 31, 1996.
While not necessarily indicative of its results of operations determined
under generally accepted accounting principles, Cine Vista's and the Angelika's
(net of minority interest of $67,000) operating cash flow (income before
depreciation and amortization) of $2,520,000 contributed to the Company's liquid
funds in 1996. Other principal sources of liquid funds in 1996 were $4,165,000
in "Interest and dividend" income, $4,327,000 in "Other income," $11,686,000 in
proceeds from the Stock Transactions (net of $1,505,000 of paid and accrued
expenses and inclusive of the proceeds from the redemption of the Citadel Series
B Preferred Stock), and Craig contributions of $12,888,000 to Reading
International which benefited the Company upon the Company's acquisition of 100%
ownership in Reading International. Additionally, principal sources of liquid
funds included a net increase of $4,544,000 in "Accounts payable and accrued
expenses."
In addition to operating expenses, other uses of liquid funds in 1996
included, the purchase of the Angelika for $9,217,000 (total purchase price of
$12,570,000 net of a credit of $1,285,000 for a judgement secured by a portion
of the stock of the seller of the Angelika (the "Angelika Judgement") and the
minority partner contribution of $2,068,000), the purchase of the Citadel Common
Stock (see Note 3 to the Consolidated Financial Statements contained elsewhere
herein) for $3,325,000, purchases, primarily by Reading Australia, of
$11,075,000 in property and equipment and a net increase in "Amounts receivable"
of $2,406,000.
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.
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 and $2,341,000 in "Other income" proceeds from litigation.
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 of its share of
certain capital contributions to the entity, which amount was reimbursed by
Craig in February 1996, a $1,040,000 contribution to Reading International (the
Company's share), $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 and $1,285,000 for the purchase of
the Angelika Judgement.
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.
24
<PAGE>
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
$2,134,000 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. Other sources of liquid funds
included 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 $565,000 in "Amounts receivable," and a net decrease
of $458,000 in other liabilities.
Prior to the Company's 1981 quasi-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.
RESULTS OF OPERATIONS
Due to the nature of the Company's development and acquisition activities
and the timing associated with the results of such activities, the effect of
litigation awards and settlements, the third quarter acquisition of the Angelika
and the fourth quarter 1996 closing of the Stock Transactions, historical
revenues and earnings have varied significantly and are not indicative of future
operating results.
Revenue
- - - -------
Theater Revenue is comprised of Admissions, Concessions and Advertising and
other revenues and totaled the amounts set forth below in each of the three
years ended December 31, 1996 inclusive of minority interest where applicable:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C>
$18,236,000 $14,925,000 $8,080,000
</TABLE>
Theater Revenue includes revenues from Cine Vista since its acquisition on
July 1, 1994 and the results of the Angelika subsequent to the Angelika's
acquisition on August 28, 1996. Cine Vista's Theater Revenue increased
approximately 4% between 1995 and 1996 as a result of the addition of a new
eight screen theater which commenced operations in late 1995. Cine Vista's
Theater Revenues on a same theater basis decreased approximately $686,000 (4.6%)
between 1995 and 1996 primarily as a result of the opening by a competitor of
three new multiplex theaters in the San Juan metropolitan market.
Theater Revenues in 1996 included $2,713,000 in revenue (inclusive of
minority interest) from the Angelika for the period beginning August 28, 1996
(the date that the Company's interest in the Angelika was acquired) through the
end of 1996. Revenues from admissions at the Angelika increased approximately
32% from the admission revenues recorded by the Angelika in the same period of
the prior year (such revenues which were recorded prior to the Company's
acquisition of the Angelika are therefore not included the Company's
consolidated financial results). The Company opened its first theater in
Australia, a six-plex located in Townsville, Queensland, at the end of December.
Revenues from the new theater were not material in 1996 and have not been
included in the consolidated financial results of the Company in 1996.
25
<PAGE>
In 1997, the Company will receive the benefit of a full year of Angelika
Theater Revenues (which totaled $7,549,000 in 1996) and the results of the
Company's theater in Townsville, Australia. Cine Vista opened a new six-plex in
March 1997 and in mid-1997 will close four of six screens at another location to
initiate construction of a new eight-plex at the location which construction is
anticipated to be completed in mid-1998. Accordingly, Cine Vista anticipates a
net increase of two screens in 1997 and the addition of six more screens in mid-
1998. However, the increased competition in the San Juan metropolitan market is
expected to decrease theater revenues in 1997, relative to 1996 levels, if
overall box office revenues on the island remain equal to the prior year.
Real Estate revenues include rental income and the net proceed of sales of
the Company's real estate. Real estate revenues increased from $272,000 in 1995
to $543,000 in 1996. Real estate revenues totaled $697,000 in 1994. Rental
income in 1995 and 1994 was approximately equal, however in 1996 it included
$289,000 from rentals on the leased equipment (See Note 4 to the Consolidated
Financial Statements included elsewhere herein). Gains on sale of property
totaled ($43,000, $0 and $308,000, in each of the three years ended December 31,
1996, 1995 and 1994, respectively. Real estate revenues in 1994 included
$179,000 from the collection, by a real estate joint venture, of certain
insurance proceeds. The Company has 28 parcels and rights-of-way remaining, many
of which are of limited marketability. Future real estate revenues may increase
as larger properties are sold. However, management believes that most of the
properties held for sale will be liquidated within the next three years.
Interest and dividend revenues were as follows in each of the three years
ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C>
$4,165,000 $2,435,000 $2,134,000
</TABLE>
The increase in interest income between 1994 and 1995 resulted from higher
interest yields on invested funds. Interest and dividend income increased
$1,730,000 in 1996 largely as a result of the Company's acquisition of the
Stater Preferred Stock on October 15, 1996 in the Stock Transactions. The Stater
Preferred Stock has a dividend yield of 10.5% and contributed approximately
$1,377,000 since its acquisition. The increase in interest and dividend income
associated with the Stater Preferred Stock was offset somewhat by lower average
investable fund levels (due in part to the purchase of the Angelika) during the
period prior to the closing of the Stock Transactions.
Expenses
- - - --------
"Theater costs," "Theater concession costs" and "Depreciation and
amortization" reflect the direct theater costs of Cine Vista and the Angelika's
operations. These costs inclusive of minority interest increased $3,440,000 from
$12,793,000 in 1995 to $16,233,000 in 1996 due primarily to increased costs
associated with higher revenues, the operating expenses associated with the
addition of a new Cine Vista eight-screen theater in late 1995 and the inclusion
of $2,300,000 of theater costs associated with the Angelika's operations
subsequent to acquisition. During the fourth quarter of 1996, the minimum wage
for Puerto Rico was increased by approximately 15%. Since most of Cine Vista's
theater employees are paid minimum wage, the increase will have a negative
effect on its operating results in future periods.
26
<PAGE>
"General and administrative" expenses for the years listed below include
the following components:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cine Vista $1,050 $ 922 $ 427
Angelika/(1)/ 137 0 0
Australia/(1)/ 2,057 390 0
Other, general 3,087 3,278 4,126
----- ----- -----
Total $6,331 $4,590 $4,553
====== ====== ======
</TABLE>
/(1)/Net of minority interest for applicable periods.
Cine Vista "General and administrative" expense increased in 1995 from 1994
due mainly to the fact that 1994 only included such expenses from the Company's
acquisition of Cine Vista on July 1, 1994.
The "Australia" component increased $1,666,000 in 1996 as compared to 1995
due to an increase in professional fees associated with the development of
various theater sites, some of which were ultimately not selected by the
Company, as well as a full year of salary expense associated with the employees
located in Australia.
The "Other general" component of "G&A" decreased $849,000 from 1994 to
1995 largely as a result of the inclusion in 1994 of $795,000 related to a
provision for uncollectible loans.
The investment in and operating results of Reading International were
reported under the equity method through 1995. On October 15, 1996, the Company
acquired, among other things, ownership of all of Reading International and
consolidated the results of Reading International with the results of the
Company in 1996. (See Note 3 to the Consolidated Financial Statements contained
elsewhere herein). "Equity loss from investment in Australian joint venture"
appearing in the 1995 Consolidated Statement of Operations 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 8 to the Consolidated Financial Statements
contained elsewhere herein). Reading Australia's first theater opened at the end
of 1996, however related operations have not been included in the Consolidated
Statement of Operations for 1996 as they are not material. Reading Australia
anticipates continuing losses during the next several years until additional new
theaters are developed and operations increased.
A "Provision for environmental matters" of $1,306,000 was recorded in 1994
and relates primarily to the Douglassville disposal site (See Note 10 to the
Consolidated Financial Statements contained elsewhere herein).
Equity in Earnings of Affiliate
- - - -------------------------------
The $1,526,000 in "Equity in earnings of affiliate" reflects earnings from
the Company's investment in Citadel. Citadel's 1996 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 (See Note 4 to the Consolidated Financial Statements
included elsewhere herein).
Other Income
- - - ------------
"Other income" totaled $4,327,000, $2,341,000 and $79,000 in the three
years ended December 31, 1996, 1995 and 1994, respectively, and is primarily
comprised of litigation settlements and awards. The principal components of
"Other income" in 1996 included a $2,360,000 settlement of the Company's claim
against Conrail, the City of Philadelphia, the Southeastern Pennsylvania
Transportation Authority and several other parties for reimbursement of costs
incurred by the Company associated with cleanup of PCB continuation to certain
properties
27
<PAGE>
formerly owned by the Company (See Note 10 to the Consolidated Financial
Statements contained elsewhere herein), a $941,000 gain from the redemption of
the Citadel Series B Preferred Stock, which resulted from the requirement that
the Citadel Series B Preferred Stock be recorded at the value reflected on
Craig's books at the time of the Stock Transactions, and $1,119,000 received net
of expenses in settlement of a claim against a third party for failure to pay
certain fees.
"Other income" in 1995 included $1,146,000 received in settlement of a
condemnation claim, a $425,000 settlement of certain litigation relating to a
lease of a property developed by the Company, $319,000 received in settlement of
two matters related to the Company's former railroad operations, and $233,000
relating to the expiration of the time period for redemption of unclaimed
reorganization debt obligations.
Minority Interest
- - - -----------------
Minority interest of $321,000 in 1996 included Craig's $388,000 share of
Reading International's loss for the period prior to the Company's acquiring
100% ownership in the Stock Transactions, offset by $67,000 of the minority
share of the Angelika income.
Income Tax Provision
- - - --------------------
The income tax benefit in 1996 included the $3,957,000 benefit associated
with the reversal of the tax asset valuation allowance, described above, offset
by AMT of $2,195,000, an accrual for foreign withholding taxes of $446,000 which
will be paid if certain intercompany loans are repaid and state taxes of $80,000
(See Note 6 to the Consolidated Financial Statements contained elsewhere
herein). "Income Tax" expense in 1995 was composed primarily of AMT expense.
Net Income (Loss)
- - - -----------------
As a result of the above, "Net income" increased from $2,351,000 in 1995 to
$7,003,000 in 1996. In 1994 the Company recorded a loss of $1,652,000.
Net Income (Loss) Applicable to Common Shareholders
- - - ---------------------------------------------------
In 1996, "Net income applicable to common stockholders" has been reduced by
the 6.5% per annum dividend on the $62,000,000 of Convertible Preferred Stock
for the period subsequent to the closing on the Stock Transactions, and
amortization of the Asset Put Option (See "Financial Reporting Considerations,"
above).
EFFECTS ON INFLATION
The Company does not believe that inflation has a material effect upon its
existing operations.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments" in 1996. SFAS 107 requires the disclosure of the fair
value of certain financial instruments for which it is practicable to estimate
that value and requires the disclosure of significant assumptions used in such
estimates.
The Company also adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in 1996. SFAS
No. 121 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.
28
<PAGE>
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation"
in 1996. SFAS No. 123 establishes a fair value method of accounting for stock-
based employee compensation plans. As permitted by SFAS No. 123, the Company has
elected to continue to account for stock based compensation according to the
provisions of APB No. 25, "Accounting for Stock Issued to Employees."
FORWARD-LOOKING STATEMENTS
From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing, including those contained
herein. Such forward-looking statements may be included in, without limitation,
reports to stockholders, press releases, oral statements made with the approval
of an authorized executive officer of the Company and filings with the
Securities and Exchange Commission. The words or phrases "anticipates,"
"expects," "will continue," "estimates," "projects," or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The results contemplated by the Company's forward-looking statements are
subject to certain risks, trends, and uncertainties that could cause actual
results to vary materially from anticipated results, including without
limitation, delays in obtaining leases and permits for new multiplex locations,
construction risks and delays, the lack of strong film product, the impact of
competition, market and other risks associated with the Company's investment
activities and other factors described herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to pages
F-1 through F-26.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
29
<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 1997 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 respects to its 1997 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 1997 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 1997 Annual Meeting of
Shareholders.
30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
<S> <C>
(a)(1) Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and
December 31, 1995 F-1 - F-2
Consolidated Statements of Operations for the years ended F-3
December 31, 1996, December 31, 1995 and
December 31, 1994.
Consolidated Statements of Cash Flows for the years ended F-4 - F-5
December 31, 1996, December 31, 1995 and
December 31, 1994.
Consolidated Statements of Shareholders' Equity for the years F-6 - F-7
ended December 31, 1996, December 31, 1995 and
December 31, 1994.
Notes to Consolidated Financial Statements. F-8 - F-25
Report of Independent Auditors - Ernst & Young LLP. F-26
</TABLE>
All 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
2.1 Agreement and Plan of Merger Among Reading Company, Reading
Entertainment, Inc., and Reading Merger Co. (Incorporated by
reference to Exhibit A to the Proxy Statement/Prospectus
included in Reading Entertainment, Inc.'s Registration
Statement on Form S-4, File No. 333-13413.)
3(i) Certificate of Incorporation of Reading Entertainment, Inc.
as amended. (Incorporated by reference to Exhibit B to the
Proxy Statement/Prospectus included in Reading
Entertainment, Inc.'s Registration Statement on Form S-4,
File No. 333-13413.)
3(ii) Bylaws of Reading Entertainment, Inc. (Incorporated by
reference to Exhibit C to the Proxy Statement/Prospectus
included in Reading Entertainment, Inc.'s Registration
Statement on Form S-4, File No. 333-13413.)
4.1 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. (Incorporated by reference to
Exhibit G to the Proxy Statement/Prospectus included in
Reading Entertainment, Inc.'s Registration Statement on Form
S-4, File No. 333-13413.)
31
<PAGE>
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.)
10.5 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.)
10.6 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.)
10.7 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.)
10.8 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.)
10.9 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.)
10.10 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.)
10.11 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.)
10.12 Amended and Restated Capital Funding Agreement by and
between Reading Investment Company, Inc., Craig Corporation,
Craig Management, Inc., and Reading International
32
<PAGE>
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.)
10.13 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.)
10.14 Exchange Agreement among Reading Company, Reading
Entertainment, Inc., Craig Corporation, Craig Management,
Inc., Citadel Holding Corporation, and Citadel Acquisition
Corp., Inc. (Incorporated by reference to Exhibit F to the
Proxy Statement/Prospectus included in Reading
Entertainment, Inc.'s Registration Statement on Form S-4,
File No. 333-13413.)
10.15 Asset Put and Registration Rights Agreement dated October
15, 1996 by and among Reading Entertainment, Inc., Citadel
Holding Corporation, and Citadel Acquisition Corp., Inc.
10.16 Certificate of Designation of the Series B 3% Cumulative
Voting Convertible Preferred Stock of Citadel Holding
Corporation.
10.17 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).
10.18 Option Agreement, dated September 3, 1993, among Stater
Bros. Holdings Inc., Craig Corporation, and Craig Management
Inc. (Incorporated by reference to Exhibit 10.24 to Craig
Corporation's Annual Report on Form 10-K for the year ended
September 30, 1993.)
10.19 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 Report on Form 8-K dated August
27, 1996.)
10.20 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 Report on Form 8-K dated
August 27, 1996.)
10.21 $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 Report on Form 8-K dated
August 27, 1996.)
10.22 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 Report on Form 8-K
dated August 27, 1996.)
10.23 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. (Incorporated by
reference to Exhibit 10.31 to Reading Entertainment, Inc.'s
Registration Statement on Form S-4, File No. 333-13413.)
33
<PAGE>
10.24 Limited Liability Company Agreement between Angelika
Cinemas, Inc. and Sutton Hill Associates dated August 27,
1996. (Incorporated by reference to Exhibit 10.32 to Reading
Entertainment, Inc.'s Registration Statement on Form S-4,
File No. 333-13413
10.25 Management Agreement dated as of August 27, 1996 between
Angelika Film Centers, LLC and City Cinemas Corporation.
(Incorporated by reference to Exhibit 10.33 to Reading
Entertainment, Inc.'s Registration Statement on Form S-4,
File No. 333-13413.)
10.26 Restated Certificate of Incorporation of Stater Bros.
Holdings Inc. (Incorporated by reference to Exhibit 3.1 to
Stater Bros. Holdings Inc. Registration Statement on Form S-
4, File No. 33-77296.)
10.27 Purchase Agreement between Equipment Leasing Associates
1995-VI Limited Partnership and FA, Inc. effective December
20, 1996.
10.28 Master Lease Agreement between FA, Inc. and Equipment
Leasing Associates 1995-VI Limited Partnership dated
December 20, 1996.
10.29 Nonrecourse Promissory Note between FA, Inc. and Equipment
Leasing Associates 1995-VI Limited Partnership effective
December 20, 1996.
10.30 Lease Rental Purchase Agreement between FA, Inc. and Ralion
Financial Services, Inc. dated December 31, 1996.
21(i) List of Subsidiaries of Reading Entertainment, Inc.
23.1 Consent of Independent Auditors - Ernst & Young LLP
27 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed current reports on Form 8-K on October 30, 1996.
(c) See item 14(a)(3) above.
(d)(1) Not applicable.
(d)(2) Not applicable.
(d)(3) Not applicable.
34
<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 ENTERTAINMENT, INC.
By: /s/ Robert F. Smerling
------------------------------
Robert F. Smerling, 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 4/14/97
- - - --------------------------------
James J. Cotter Chairman and Director
/s/ S. Craig Tompkins 4/14/97
- - - --------------------------------
S. Craig Tompkins Vice Chairman and Director
/s/ James A. Wunderle 4/14/97
- - - --------------------------------
James A. Wunderle Executive Vice President,
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
/s/ Eileen M. Mahady 4/14/97
- - - --------------------------------
Eileen M. Mahady Controller
/s/ Gregory R. Brundage 4/14/97
- - - --------------------------------
Gregory R. Brundage Director
/s/ Edward L. Kane 4/14/97
- - - --------------------------------
Edward L. Kane Director
/s/ John W. Sullivan 4/14/97
- - - --------------------------------
John W. Sullivan Director
/s/ Albert J. Tahmoush 4/14/97
- - - --------------------------------
Albert J. Tahmoush Director
<PAGE>
Exhibit Index
-------------
Exhibit
No.
--
10.15 Asset Put and Registration Rights Agreement dated October 15, 1996 by and
among Reading Entertainment, Inc., Citadel Holding Corporation, and
Citadel Acquisition Corp., Inc.
10.16 Certificate of Designation of the Series B 3% Cumulative Voting
Convertible Preferred Stock of Citadel Holding Corporation.
10.27 Purchase Agreement between Equipment Leasing Associates 1995-VI Limited
Partnership and FA, Inc. effective December 20, 1996.
10.28 Master Lease Agreement between FA, Inc. and Equipment Leasing Associates
1995-VI Limited Partnership dated December 20, 1996.
10.29 Nonrecourse Promissory Note between FA, Inc. and Equipment Leasing
Associates 1995-VI Limited Partnership dated December 20, 1996.
10.30 Lease Rental Purchase Agreement between FA, Inc. and Ralion Financial
Services, Inc. dated December 31, 1996.
21(i) List of Subsidiaries of Reading Entertainment, Inc.
23.1 Consent of Independent Auditors - Ernst & Young LLP
27 Financial Data Schedule
<PAGE>
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
- - - -----------------------------------------------------------------------------------------------------
1996 1995
- - - -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $48,460 $44,189
Amounts receivable, less allowance of $70 in 1996 and $291 in 1995 3,117 711
Due from affiliate 0 1,040
Restricted cash 3,683 360
Inventories 151 112
Prepayments and other current assets 814 498
- - - -----------------------------------------------------------------------------------------------------
Total current assets 56,445 46,910
- - - -----------------------------------------------------------------------------------------------------
Investment in Stater Preferred Stock 67,978 0
Investment in Citadel Common Stock 4,850 0
Net investment in leased equipment 2,125 0
Restricted cash 517 362
Property and equipment:
Land 7,332 0
Buildings 743 733
Capitalized premises lease 538 538
Leasehold improvements 5,774 5,095
Equipment 5,990 3,787
Construction-in-progress and property development costs 2,562 236
------ ------
22,939 10,389
Less: Accumulated depreciation 1,809 1,176
------ ------
21,130 9,213
Other assets, less valuation allowance of $42 2,480 3,521
Intangible assets:
Beneficial leases - net of accumulated amortization of $2,284
in 1996 and $1,370 in 1995 14,624 15,538
Cost in excess of assets acquired - net of accumulated
amortization of $197 in 1996 11,605 0
- - - -----------------------------------------------------------------------------------------------------
125,309 28,634
- - - -----------------------------------------------------------------------------------------------------
$181,754 $75,544
=====================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-1
<PAGE>
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
- - - -----------------------------------------------------------------------------------------------
1996 1995
- - - -----------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $5,183 $2,279
Accrued taxes 3,156 442
Accrued property costs and other 1,240 308
Film rent payable 1,102 299
Note payable 1,500 0
Property purchase commitment 230 0
Due to affiliate 183 0
Other liabilities 1,122 916
- - - ------------------------------------------------------------------------------------------------
Total current liabilities 13,716 4,244
- - - ------------------------------------------------------------------------------------------------
Capitalized lease, less current portion 516 521
Note payable 500 0
Other liabilities 1,972 2,067
- - - ------------------------------------------------------------------------------------------------
Total long term liabilities 2,988 2,588
- - - ------------------------------------------------------------------------------------------------
Minority interests 2,096 0
Reading Entertainment Redeemable Series A Preferred Stock, par value 7,000 0
$.001 per share, stated value $7,000; Authorized, issued and outstanding
- 70,000 shares
Shareholders' Equity
Reading Entertainment Series B Preferred Stock, par value $.001 per share,
stated value $55,000; Authorized, issued and outstanding - 550,000 shares 1 0
Reading Entertainment preferred stock, par value $.001 per share:
Authorized - 9,380,000 shares; None issued 0 0
Reading Entertainment common stock, par value $.001 per share:
Authorized - 25,000,000 shares; Issued and outstanding in 1996 --
7,449,364 shares 7 0
Reading Company preferred stock, par value $1.00 per share:
Authorized in 1995 -- 5,000,000 shares; None issued 0 0
Reading Company common stock, par value $.01 per share:
Authorized -- 10,000,000 shares; Issued and outstanding in 1995 --
11,530 shares 0 1
Reading Company Class A common stock, par value $.01 per share:
Authorized -- 15,000,000 shares; Issued and outstanding 1995 --
5,145,161 shares 0 51
Reading Company Class A common stock in treasury, at cost:
1995 -- 183,397 shares 0 (2,622)
Other capital 138,594 56,257
Retained earnings 17,238 15,035
Foreign currency translation adjustment 114 (10)
- - - ------------------------------------------------------------------------------------------------
Total shareholders' equity 155,954 68,712
- - - ------------------------------------------------------------------------------------------------
$181,754 $75,544
================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-2
<PAGE>
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31,
- - - -----------------------------------------------------------------------------------
1996 1995 1994
- - - -----------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Theater:
Admissions $12,986 $10,356 $ 5,633
Concessions 4,486 3,883 2,141
Advertising and other 764 686 306
Real estate 543 272 697
Interest and dividends 4,165 2,435 2,134
- - - -----------------------------------------------------------------------------------
22,944 17,632 10,911
- - - -----------------------------------------------------------------------------------
EXPENSES:
Theater costs 13,631 10,784 5,742
Theater concession costs 821 640 360
Depreciation and amortization 1,793 1,369 681
General and administrative 7,106 4,200 4,553
Provision for environmental matters 0 0 1,306
Equity loss from investment in Australian
theater developments 0 390 0
- - - -----------------------------------------------------------------------------------
23,351 17,383 12,642
- - - -----------------------------------------------------------------------------------
(Loss) income from operations (407) 249 (1,731)
Equity in earnings of affiliate 1,526 0 0
Other income, net 4,327 2,341 79
- - - -----------------------------------------------------------------------------------
Income (loss) before income taxes (benefit) and
minority interests 5,446 2,590 (1,652)
Minority interests (321) 0 0
- - - -----------------------------------------------------------------------------------
Income (loss) before income taxes (benefit) 5,767 2,590 (1,652)
Income taxes (benefit) (1,236) 239 0
- - - -----------------------------------------------------------------------------------
Net income (loss) 7,003 2,351 (1,652)
Less: Preferred stock dividends and amortization
of asset put option (911) 0 0
- - - -----------------------------------------------------------------------------------
Net income (loss) applicable to common
shareholders $6,092 $2,351 ($1,652)
===================================================================================
Per share information:
- - - -----------------------------------------------------------------------------------
Net income (loss) applicable to common
shareholders after preferred stock dividends
and amortization of asset put option $1.11 $0.47 ($0.33)
===================================================================================
Weighted average common shares outstanding 5,494,145 4,973,369 4,973,548
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
- - - ------------------------------------------------------------------------------------------------------
1996 1995 1994
- - - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $7,003 $2,351 ($1,652)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Condemnation award 0 (1,146) 0
Depreciation 644 453 226
Amortization 1,149 916 455
Deferred rent expense 245 165 82
Deferred income tax expense (benefit) (3,957) 132 0
Equity in earnings of affiliate (1,526) 0 0
Equity loss from Australian joint venture 0 390 0
Minority interest in net loss of Australian joint venture (388) 0 0
Minority interest in net income of the Angelika 67 0 0
Preferred stock redemption premium (941) 0 0
Gain on sale of real estate (43) 0 (308)
Gain on real estate joint venture investments 0 0 (179)
Discharge of reorganization obligations 0 (223) 0
Provision for environmental matters 0 0 1,306
Changes in operating assets and liabilities:
(Increase) decrease in amounts receivable (2,406) 135 (565)
(Increase) decrease in inventories (17) (26) 24
(Increase) decrease in prepaids and other current assets (177) 95 (119)
Decrease in notes receivable due from officer of subsidiary 0 0 1,000
Increase (decrease) in accounts payable and accrued expenses 4,544 (119) 829
Increase (decrease) in film rent payable 769 (60) (65)
Decrease in other liabilities (134) (392) (458)
Other, net (403) (49) 329
- - - ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,429 2,622 905
- - - ------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
- - - -------------------------------------------------------------------------------------------------------
1996 1995 1994
- - - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net cash provided by operating activities $ 4,429 $ 2,622 $ 905
- - - -------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of the Angelika (12,570) 0 0
Reimbursement proceeds for the Angelika judgement 1,293 0 0
Purchase of property and equipment (11,075) (1,828) (66)
Proceeds from redemption of Citadel preferred stock investment 6,191 0 0
Purchase of Citadel common stock (3,325) 0 0
(Increase) decrease in restricted cash (1,478) 208 83
(Decrease) increase in due from affiliate 1,040 (1,040) 0
Investment in leased equipment (See Note 4) (75) 0 0
Net proceeds from sales of real estate 91 0 570
Investment in Australian joint venture 0 (1,040) 0
Purchase of the Angelika judgement (See Note 3) 0 (1,285) 0
Purchase of Cine Vista 0 0 (22,720)
Net proceeds from condemnation award 0 1,146 0
Net proceeds from real estate joint venture investments 0 185 138
Purchases of available-for-sale securities 0 (510) (12,261)
Sales and maturities of available-for-sale securities 0 36,319 42,589
- - - -------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (19,908) 32,155 8,333
- - - -------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from minority partner of Australian joint venture 12,888 0 0
Cash acquired as a result of consolidation of Australian joint venture 95 0 0
Proceeds from issuance of Series A redeemable preferred stock 7,000 0 0
Proceeds from minority partner for purchase of the Angelika 2,068 0 0
Distributions to minority partner of the Angelika (38) 0 0
Payments of Stock Transactions issuance costs (1,056) 0 0
Payment of preferred stock dividends (910) 0 0
Payments of debt financing costs (256) 0 0
Purchase of treasury stock (1) (1) (2)
- - - -------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 19,790 (1) (2)
- - - -------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 180 0 0
- - - -------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 4,491 34,776 9,236
Cash and cash equivalents at beginning of year 44,491 9,413 177
- - - -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 48,680 $44,189 $9,413
=======================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, 1994
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
--------------------Reading Company------------------ ------------Reading Entertainment---------
Common Stock Class A Common Stock Treasury Stock Common Stock Series B Preferred Stock
-------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 14,149 $ 1 5,142,542 $ 51 (183,116) ($2,619) 0 $ 0 $ 0 $ 0
Net loss
Adjustment to beginning
balance for change in
accounting method net of
income taxes of $19
Change in unrealized gains
and losses net of income
taxes of $19
Reading Company common stock
converted to Reading Company
Class A common stock (1,858) 1,858
Reading Company treasury
stock purchased (134) (2)
--------------------------------------------------------------------------------------------------
Balance at December 31, 1994 12,291 1 5,144,400 51 (183,250) (2,621) 0 0 0 0
Net income
Change in unrealized gains
and losses
Realization of tax benefit
resulting from pre-quasi-
reorganization
Foreign currency translation
adjustment resulting from
equity method of accounting
in Reading International
Reading Company common stock
converted to Reading Company
Class A common stock (761) 761
Reading Company treasury stock
purchased (147) (1)
--------------------------------------------------------------------------------------------------
Balance at December 31, 1995 11,530 1 5,145,161 51 (183,397) (2,622) 0 0 0 0
--------------------------------------------------------------------------------------------------
<CAPTION>
Foreign
Unrealized Currency
Gains and Other Retained Translation
(Losses) Capital Earnings Adjustment
---------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $ 0 $55,057 $15,536 $ 0
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)
Reading Company common stock
converted to Reading Company
Class A common stock
Reading Company treasury
stock purchased
-------------------------------------------------------
Balance at December 31, 1994 (286) 55,057 13,884 0
Net income 2,351
Change in unrealized gains
and losses 286
Realization of tax benefit
resulting from pre-quasi-
reorganization 1,200 (1,200)
Foreign currency translation
adjustment resulting from
equity method of accounting
in Reading International (10)
Reading Company common stock
converted to Reading Company
Class A common stock
Reading Company treasury stock
purchased
-------------------------------------------------------
Balance at December 31, 1995 0 56,257 15,035 (10)
-------------------------------------------------------
</TABLE>
F-6
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity (continued)
Years ended December 31, 1996, 1995, 1994
(in thousands, except shares)
<TABLE>
<CAPTION>
-----------------------Reading Company-----------------------
Common Stock Class A Common Stock Treasury Stock
----------------- -------------------- ---------------------
Shares Amount Shares Amount Shares Amount
- - - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 11,530 $1 5,145,161 $51 (183,397) ($2,622)
Net income
Realization of tax benefit resulting
from pre-quasi-reorganization
operating loss carryforwards
Foreign currency translation
adjustment resulting from equity
method of accounting in Reading
International
Reading Company common stock
converted to Reading Company Class A
common stock (2,853) 2,853
Reading Company treasury stock
purchased (120) (1)
Reading Company Common and Class A
common stock converted to Reading
Entertainment common stock (8,677) (1) (5,148,014) (51)
Reading Company Class A common
stock in treasury retired 183,517 2,623
Issuance of Reading Entertainment common
stock and Series B Preferred to Craig in
accordance with terms of Stock Transactions
Issuance costs of Stock Transactions
Reading Entertainment Series A and B
preferred dividends declared
--------------------------------------------------------------------------------------
Balance at December 31, 1996 0 $0 0 $0 0 $0
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Foreign
-----------Reading Entertainment------------- Unrealized Currency
Common Stock Series B Preferred Stock Gains and Other Retained Translation
------------------------------------------
Shares Amount Shares Amount (Losses) Capital Earnings Adjustment
- - - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 0 $0 0 $0 $0 $56,257 $15,035 ($10)
Net income 7,003
Realization of tax benefit resulting
from pre-quasi-reorganization
operating loss carryforwards 22,042 (3,957)
Foreign currency translation
adjustment resulting from equity
method of accounting in Reading
International
Reading Company common stock 124
converted to Reading Company Class A
common stock
Reading Company treasury stock
purchased
Reading Company Common and Class A
common stock converted to Reading
Entertainment common stock 4,973,174 5 45
Reading Common Class A common
stock in treasury retired (2,622)
Issuance of Reading Entertainment common
stock and Series B Preferred to Craig in
accordance with terms of Stock Transactions 2,476,190 2 550,000 1 64,377
Issuance costs of Stock Transactions (1,505)
Reading Entertainment Series A and B
preferred dividends declared (843)/(1)/
--------------------------------------------------------------------------------------
Balance at December 31, 1996 7,449,364 $7 550,000 $1 $0 $138,594 $17,238 $114
====================================================================================================================================
</TABLE>
(1) Represents dividends per share of $1.36 for Reading Entertainment Series A
redeemable preferred stock and dividends per share of $1.36 for Reading
Entertainment Series B preferred stock.
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
In October 1996, Reading Company merged with a wholly owned subsidiary of
Reading Entertainment, Inc., a newly formed Delaware corporation ("REI" or
"Reading Entertainment" and collectively, with its subsidiaries and
predecessors, "Reading" or the "Company"). As a result of the merger,
shareholders of Reading Company became entitled to receive one share of REI
Common Stock in exchange for each share of Reading Company Common Stock or Class
A Common Stock (the "Reorganization") (See Note 2).
The Company has operated motion picture exhibition theaters in leased
locations in the Commonwealth of Puerto Rico under the name Cine Vista since
1994. In August 1996, the Company acquired an 83.3% interest in the Angelika
Film Center (the "Angelika"), a multiplex theater located in New York City (See
Note 3). In November 1995, the Company and Craig Corporation (together with its
wholly owned subsidiaries, "Craig") formed Reading International Cinemas LLC
("Reading International"), a limited liability company owned equally by the
Company and Craig until October 15, 1996, which has initiated theater
development activities in Australia through Reading Australia Pty. Limited
(together with its subsidiaries "Reading Australia"). On October 15, 1996,
Reading Entertainment acquired ownership of 100% of Reading International (See
Note 2). The Company is also a participant in two real estate joint ventures
and holds certain property for sale located primarily in Philadelphia,
Pennsylvania and has acquired certain leased equipment as an investment.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION: The consolidated financial statements of Reading
Entertainment and Subsidiaries include the accounts of REI and its majority-
owned subsidiaries including the results of the Angelika subsequent to August
27, 1996, the effective date of the Angelika acquisition. Significant
intercompany transactions and accounts have been eliminated.
INCOME TAXES: 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. Through the year ended December 31,
1996, 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.
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
CASH EQUIVALENTS: The Company considers all highly liquid investments with
original 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.
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, the Angelika's and Reading Australia's operations and are stated at the
lower of cost (first-in, first-out method) or net realizable value.
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 useful
F-8
<PAGE>
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 7-15 years
Furniture and Fixtures 7 years
Leasehold Improvements 20 years
CONSTRUCTION IN PROGRESS AND PROPERTY DEVELOPMENT COSTS: Construction-in-
progress and property development costs are comprised of all direct costs
associated with the development of potential theater locations (whether for
purchase or lease). Amounts are carried at cost unless management decides that a
particular theater location will not be pursued to completion. If such a
judgement is made, previously capitalized costs which are no longer of value are
expensed.
PROPERTY HELD FOR SALE: Property held for sale 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.
INTANGIBLE ASSETS: Intangible assets are comprised of beneficial theater
leases used in Cine Vista's operations and cost in excess of net assets acquired
in the acquisition of the Angelika.
The amount of the purchase price of the Angelika assets in excess of the
appraised value of the assets acquired is being amortized on a straight-line
basis over a period of 20 years. The fair value of the assets was determined by
an independent appraiser.
The amount of the Cine Vista 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 Cine
Vista's leases at the time of the Company's acquisition of Cine Vista and
allocating such amount as a component of the purchase price of Cine Vista. 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 Australia's operations (see Note 3) 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. 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 (Reading Entertainment
Common Stock for the period subsequent to Reorganization and Reading Company
Class A Common and Common Stock for periods prior to the Reorganization) is
calculated by dividing net income (loss) available to common shareholders by
the weighted average shares outstanding during the period and the dilutive
effect, if any, of common stock equivalents that are outstanding. Net income
available to common stock shareholders reflects the reduction for dividends
declared on the Company's preferred stock and for amortization of an estimate of
an asset put option had one been recorded (See Note 2).
RECLASSIFICATION: Certain amounts in previously issued financial statements
have been reclassified to conform with the current presentation.
ACCOUNTING CHANGES: The Company adopted SFAS No. 107, "Disclosure about
Fair Value of Financial Instruments" in 1996. SFAS No. 107 requires the
disclosure of the fair value of certain financial instruments for which it is
practicable to estimate that value and requires the disclosure of significant
assumptions used in such estimates.
The Company also adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in 1996. SFAS
No. 121 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.
F-9
<PAGE>
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
The Company adopted SFAS No. 123, "Accounting for Stock-based
Compensation." in 1996. SFAS No. 123 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.
NOTE 2- REORGANIZATION AND STOCK TRANSACTIONS
In October 1996, two transactions were approved by the Company's
shareholders, the Reorganization and the exchange by REI of capital stock for
certain assets of Citadel Holding Corporation (together with its wholly owned
subsidiaries, "Citadel") and Craig (the "Stock Transactions"). Both transactions
were completed on October 15, 1996. The Reorganization was effected pursuant to
an Agreement and Plan of Merger (the "Merger Agreement") among Reading Company,
REI, which was a newly formed, wholly-owned subsidiary of Reading Company, and
Reading Merger Co. ("Merger Co.") which was a newly formed, wholly-owned
subsidiary of REI. In the Reorganization, Reading Company merged with Merger Co.
and each outstanding share of Reading Company's Common Stock and Class A Common
Stock was converted into the right to receive one share of REI's Common Stock
(the "Common Stock"). As a result of the Reorganization, Reading Company became
a wholly-owned subsidiary of REI and the Shareholders of Reading Company became
shareholders of REI.
The Stock Transactions were carried out pursuant to an Exchange Agreement,
dated September 4, 1996 (the "Exchange Agreement"). In the Stock Transactions,
REI issued (i) 70,000 shares of Series A Voting Cumulative Convertible
Redeemable Preferred Stock, (the "Series A Preferred Stock"), to Citadel, and
granted certain contractual rights to Citadel, in return for $7 million in cash
and (ii) 550,000 shares of Series B Voting Cumulative Convertible Preferred
Stock, (the "Series B Preferred Stock"), and 2,476,190 shares of Common Stock to
Craig in exchange for certain assets owned by Craig. The assets acquired by REI
from Craig consist of 693,650 shares of Stater Bros. Holdings, Inc.'s ("Stater")
Series B Preferred Stock (the "Stater Preferred Stock"), Craig's 50% membership
interest in Reading International, of which an indirect wholly owned subsidiary
of REI was the sole other member, and 1,329,114 shares of Citadel's 3%
Cumulative Voting Convertible Preferred Stock, stated value $3.95 per share (the
"Citadel Preferred Stock").
The contractual rights granted to Citadel in the Stock Transactions are set
forth in an Asset Put and Registration Rights Agreement pursuant to which
Citadel has the right (the "Asset Put Option"), exercisable at any time after
October 15, 1996 and until 30 days after REI files its Annual Report on Form
10-K for the year ending December 31, 1999, to require REI to acquire
substantially all of Citadel's assets, and assume related liabilities (such as
mortgages), for shares of Common Stock. In exchange for up to $20 million in
aggregate appraised value of Citadel assets on exercise of the Asset Put Option,
REI is obliged to deliver to Citadel a number of shares of Common Stock
determined by dividing the appraised value of the Citadel assets by $11.75 if
the notice of exercise is received by October 31, 1997 and $12.25 if notice is
received thereafter. If the value of the Citadel assets is in excess of $20
million, REI is obliged to pay for the excess by issuing common stock at the
then-fair market value up to a maximum of $30 million of assets. Also, in
conjunction with the Stock Transactions, REI agreed to reimburse Citadel for its
out-of-pocket costs with respect to the transaction, up to a maximum of
$280,000.
The Series A and Series B Preferred Stock (collectively the "Convertible
Preferred Stock") have stated values of $7 million and $55 million,
respectively. Citadel has the right during the 90-day period beginning October
15, 2001, or in the event of a change of control of REI, to require the Company
to repurchase the Series A Preferred Stock at its stated value plus accrued and
unpaid dividends or, in the case of a change in control, a premium. Due to the
redemption provisions, the Series A Preferred Stock has not been included as a
component of Shareholders' Equity in the Consolidated Balance Sheets and will be
separately categorized as "Preferred Stock," until such time that the redemption
provision is exercised or expires. For financial reporting purposes, the Company
did not allocate any value to the Asset Put Option, due to the Company's belief
that the value is immaterial and that the methods of valuing
F-10
<PAGE>
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
options include numerous subjective assumptions and are not intended to value
non-transferable options such as the Asset Put Option.
REI and Citadel also agreed that immediately following REI's receipt of the
Citadel Preferred Stock from Craig, the Company would deliver the Citadel
Preferred Stock to Citadel in exchange for an equal number of shares of a new
series of Citadel Preferred Stock (the "Citadel Series B Preferred Stock"). The
Citadel Preferred Stock and the Citadel Series B Preferred Stock were
substantially identical, except that the Citadel Series B Preferred Stock
reduced the accrual rate on the redemption premium from 9% per annum to 3% per
annum subsequent to the closing of the Stock Transactions and also provided that
the Citadel Series B Preferred Stock could not be presented for conversion to
Citadel common stock for a period of one year beginning 15 days after Citadel
filed its 1996 Annual Report on Form 10-K with the Securities and Exchange
Commission.
On December 18, 1996, Reading Entertainment elected to convert the Citadel
Series B Preferred Stock into Citadel common stock whereupon Citadel exercised
its right to redeem the Citadel Series B Preferred Stock. Under the terms of
the Citadel Series B Preferred Stock, the Company received all accrued and
unpaid dividends and a redemption premium of $941,000, which premium was
included in "Other income" in the fourth quarter Consolidated Statement of
Operations in 1996.
NOTE 3-THEATER ACQUISITION AND DEVELOPMENT ACTIVITIES
On August 27, 1996, the Company and Sutton Hill Associates ("Sutton Hill"),
acquired from Angelika Film Centers, Inc. ("AFCI") the assets comprising the
Angelika, a multiplex theater located in New York City. The purchase price of
the Angelika was approximately $12,570,000 (subject to certain adjustments),
inclusive of acquisition costs of approximately $529,000. The Company and Sutton
Hill 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 collateralized promissory note issued to
AFCI in the amount of $2,000,000 and credit in full satisfaction of a judgement
encumbering certain of the stock of AFCI, with interest on such judgement at a
rate of 9% per annum. The Company had acquired the judgement from a bank for
$1,285,000 in November 1995. The short-term portion ($1,500,000) and the
long-term portion ($500,000) of the promissory note and an escrow established in
relation to this future obligation have been classified a "Note payable" and
"Restricted cash," respectively, in the Consolidated Balance Sheet as of
December 31, 1996.
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 borrowing by the
Company. In addition, Sutton Hill has agreed that the Company will be entitled
to receive up to 100% of the proceeds of borrowing by AFC, up to the amount of
the Company's initial capital contribution to AFC.
AFC is managed by City Cinemas, a New York motion picture exhibitor and an
affiliate of Sutton Hill, 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'a annual revenues.
F-11
<PAGE>
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
The Company's 83.3% interest in the Angelika was accounted for using the
purchase method and the Angelika's operating results since the acquisition on
August 27, 1996 have been consolidated with the operating results of the
Company. Sutton Hill's initial capital investment and share of the Angelika's
net earnings for the period subsequent to the acquisition of the Angelika have
been recorded as "Minority interest" in the Consolidated Balance Sheet as of
December 31, 1996.
The pro forma consolidated operating results set forth below assume that
the acquisition of the Angelika was completed at the beginning of 1995 and
include the impact of certain adjustments, including amortization of
intangibles, depreciation and reduction and reductions in "Interest and
dividend" income resulting from payment of the purchase price.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenues $27,443 $24,530
========== ==========
Net income $6,861 $1,944
========== ==========
Per Share:
Net income $1.25 $.39
========== ==========
</TABLE>
Reading International Cinemas LLC
---------------------------------
In November 1995, the Company and Craig formed Reading International to
develop and operate multiplex cinemas in Australia under the operating name
Reading Cinemas. On October 15, 1996, as a part of the Stock Transactions,
Reading acquired Craig's 50% interest in Reading International. Since formation,
Reading Australia has acquired a 50 acre site near Melbourne, signed three
purchase agreements, a development agreement and entered into three leases of
properties to be developed as theaters. Reading Australia's first theater
commenced operations in late 1996. Reading International was equally owned by
the Company and Craig prior to conclusion of the Stock Transactions on October
15, 1996 (See Note 2), and wholly-owned by the Company subsequent thereto.
In 1996, the Company consolidated the financial results of Reading
International and reflected Craig's 50% share of the losses prior to the Stock
Transactions as "Minority Interest" (which amount totaled $388,000) in the
Company's Consolidated Financial Statements.
The pro forma consolidated operating results set forth below assume that
the Company owned 100% of Reading International since formation, in November
1995, and include the impact of certain adjustments, including reductions in net
income and "Interest and dividend" income resulting from the operations of and
funding requirements associated with 100% ownership of Reading International.
F-12
<PAGE>
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
------- -------
<S> <C> <C>
Revenues $22,943 $17,632
======= =======
Net income $6,614 $1,961
======= =======
Per Share:
Net income $1.20 $.39
======= =======
</TABLE>
NOTE 4 - INVESTMENTS
Citadel Holding Corporation
---------------------------
In March 1996, the Company purchased from Craig 1,564,473 shares of the
common stock of Citadel (the "Citadel Common Stock") 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. On the day prior to
the acquisition of the Citadel Common Stock, the closing price of the Citadel
Common Stock on the American Stock Exchange was $2.25 per share. Upon
acquisition of the Citadel Common Stock, the Company paid Craig with a five year
unsecured, interest-bearing promissory note (the "Citadel Note"), which note was
retired on July 29, 1996. Interest of approximately $85,000 was paid to Craig on
the Citadel Note. The Company also acquired from Craig (for $50,000) a one-year
option to acquire, at fair market value, the Citadel Preferred Stock, which
option was canceled in conjunction with the Stock Transactions (See Note 2). The
Company accounts for its investment in the Citadel Common Stock by the equity
method.
Citadel's net earnings from the Company's date of acquisition, March 29,
1996 through December 31, 1996, were $6,183,000, inclusive of 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 purposes of previously
deferred proceeds from the bulk sale of loans and real estate by a previously
owned subsidiary of Citadel. The Company's share of such earnings for the same
period was $1,526,000, which amount is included in the Consolidated Statement
of Operations for the year ended December 31, 1996 as "Equity in earnings of
affiliate." Citadel's assets and liabilities totaled $30,292,000 and
$12,568,000, respectively, as of December 31, 1996. Management believes that the
December 31, 1996 carrying amount of the Citadel Common Stock investment
approximates its fair value.
The pro forma consolidated operating results set forth below assume that
the acquisition of the Company's Common Stock interest in Citadel was completed
at the beginning of 1995 and include the impact of certain adjustments,
including an increase in interest expense resulting from the Citadel Note.
F-13
<PAGE>
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATE)
<TABLE>
Year Ended December 31,
----------------------
1996 1995
------- -------
<S> <C> <C>
Revenues $22,943 $17,632
======= =======
Net income $6,992 $2,406
======= =======
Per Share:
Net income $1.27 $.48
======= =======
</TABLE>
State Preferred Stock
---------------------
The 693,650 shares of Stater Preferred Stock acquired by the Company in the
Stock Transactions have a liquidation preference, stated value and redemption
value of $69,365,000 and a cumulative dividend preference of 10.5% through
September 2002, increasing to 12% per annum in October 2002 and thereafter
increasing 100 basis points per year to a maximum of 15%. The Stater Preferred
Stock is redeemable by Stater without premium at anytime. In addition, the
Company can require Stater to redeem the Stater Preferred Stock at stated value
plus accrued and unpaid dividends beginning in 2009.
Stater is a leading supermarket chain in Southern California, operating 110
supermarkets in the Inland Empire Region of Southern California. All of the
common stock of Stater is owned by La Cadena Investments, a general partnership
whose partners include three members of Stater's senior management. There is no
public market for the Stater Preferred Stock, although the Company does have
certain registration rights relating to such shares. The Stater Preferred Stock
has been recorded on the Consolidated Balance Sheet as "Investment in Stater
Preferrred Stock" and valued at $67,978,000 (98% of stated value) which amount
is consistent with a valuation of the Stater Preferred Stock prepared by an
independent investment banker.
Net Investment in Leased Equipment
----------------------------------
During 1996, a wholly-owned subsidiary of the Company purchased computer
controlled manufacturing equipment for $40,934,000 which equipment was leased to
manufacturing companies (the "User Leases"). Concurrent with the purchase of the
equipment, the Company leased the equipment back to the seller, subject to the
User Leases, for a period of five years (the "Wrap Lease"). The Company's
investment in the equipment was funded through a cash payment of $1,944,000 and
the issuance of a nonrecourse promissory note (the "Promissory Note") in the
amount of $38,990,000. Payments due under the Wrap Lease were subsequently sold
to a third party in return for a $32,000 payment and assumption by the purchaser
of all obligations under the Promissory Note. The Company has retained all
rights and interest in the equipment subject to the User Leases and the Wrap
Lease. Therefore, the Company has rights to the residual value of the equipment
upon conclusion of the Wrap Lease (which term exceeds the term of the User
Leases). The residual interest has been reflected at its net cost, $2,125,000,
in the Consolidated Balance Sheet at December 31, 1996 as "Net investment in
leased equipment."
F-14
<PAGE>
READING ENTERTAINMENT, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
NOTES 5-STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," (APB 25) and related
Interpretations in accounting for its employee stock options because, the
alternative fair value accounting provided for under SFAS No. 123, "Accounting
for Stock-Based Compensation," requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, if the
exercise price of the Company's employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The Company had 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 an exercise price of $12.50
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 expire ten years from
the date of grant and may contain certain other terms and conditions as
determined by the Committee. All options granted under the 1992 Plan have an
exercise price of $14.00 per share.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be determined
as if the Company has accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of that Statement.
No options have been granted subsequent to such date and therefore no pro
forma information has been included.
F-15
<PAGE>
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(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:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------- -------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------------------------- -------------------------- ------------------------
<S> <C> <C> <C>
1982 Plans:
- - - ----------
Outstanding at beginning of year 17,000 $14.57 17,000 $14.57 17,000 $14.57
Expired (12,000) 15.44
-------------------------- -------------------------- ------------------------
Outstanding at end of period 5,000 12.50 17,000 14.57 17,000 14.57
-------------------------- -------------------------- ------------------------
1992 Plan:
- - - ---------
Outstanding at beginning of year 342,732 14.00 357,732 14.00 357,732 14.00
Canceled (15,000) 14.00
-------------------------- -------------------------- ------------------------
Outstanding at the end of year 342,732 14.00 357,732 14.00 357,732 14.00
-------------------------- -------------------------- ------------------------
Total
- - - -----
Outstanding at Year End 347,732 $13.98 359,732 $14.03 374,732 $14.03
========================== ========================== ========================
Exercisable at Year End 337,357 $13.98 341,982 $14.03 347,107 $14.03
========================== ========================== ========================
</TABLE>
The weighted-average remaining contractual life of all options outstanding
at December 31, 1996 was 5.2 years.
NOTE 6 - INCOME TAXES
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 $1,667,000 or $.30 per share for the
twelve months ended December 31, 1996.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Income (loss) consists of the following
components:
United States $10,497 $3,916 ($1,359)
Foreign (4,730) (1,326) (293)
-------- -------- --------
Total $5,767 $2,590 ($1,652)
======== ======== ========
</TABLE>
F-16
<PAGE>
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
Significant components of the provisions for income taxes attributable to
operations are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1996 1995 1994
------ ------- ------
<S> <C> <C> <C>
Income taxes (benefit):
Current:
United States $2,195 $ 1,419 $ 0
Foreign 446 20 0
State and local 80 0 0
------- ------- -------
Total 2,721 1,439 0
Increase (decrease) in
valuation allowance (3,957) (1,200) 0
------- ------- -------
Total income taxes (benefit) ($1,236) $ 239 $ 0
======= ======= =======
</TABLE>
Reconciliation of income taxes at United States statutory rates to income taxes
as reported are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
Tax provision (benefit) at U.S. statutory rates $1,961 $ 881 ($ 562)
Foreign and U.S. losses not currently benefited 234 538 562
Foreign witholding taxes 446 20 0
State income taxes 80 0 0
Reduction of Valuation Allowance due to
Pre-Quasi-Reorganization losses (3,957) (1,200) 0
--------- -------- ---------
Total income taxes (benefit) ($1,236) $ 239 $ 0
========= ======== =========
</TABLE>
The Stock Transactions (see Note 2) are intended to qualify as an exchange
under Section 351(a) (a "351 Exchange") of the Internal Revenue Code of 1986, as
amended (the "Code"). In a 351 Exchange, the party acquiring the assets retains
the contributing parties' tax basis in the acquired assets, with no taxable gain
recognized as a result of the exchange. The parties contributing assets obtain a
tax basis in the assets received in the exchange equal to the basis in the
assets which are contributed in the exchange. With the exception of the Stater
Preferred Stock, the book value of the assets received in the Stock Transactions
approximated the tax basis in the assets received. Craig's adjusted tax basis
(for federal tax purposes) in the Stater Preferred Stock was approximately $5
million and, accordingly, upon the Company's contribution of the Stater
Preferred Stock to Reading Australia, a taxable gain (for federal tax purposes)
of approximately $62,977,000 was recorded by the Company.
The estimated tax liabilities associated with the assets received in the
Stock Transactions were $22,042,000 in deferred federal income taxes primarily
relating to the Stater Preferred Stock. At the time of the closing on the Stock
Transactions, the Company had a gross deferred federal tax asset of $55,968,000
and a valuation allowance in
F-17
<PAGE>
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
the same amount. Upon receipt of the Stater Preferred Stock, the Company
determined that it was more-likely-than-not that a portion of the deferred tax
asset which had previously been fully reserved, would be realized and the
Company reduced the valuation allowance by $20,782,000, which amount reflects
the value of the Company's federal tax loss carryforwards which were expected to
be utilized by the Company, net of $1,260,000 in federal alternative minimum tax
("AMT").
A portion of the reversal of the tax asset valuation allowance, $3,957,000,
was included in "Income tax benefit" in the Company's Consolidated Statement of
Operations and was subsequently reclassified from "Retained Earnings" to "Other
Capital." The balance, $18,085,000, was credited directly to "Other Capital" in
the Company's Consolidated Statement of Shareholders' Equity.
The sale of the Wrap Lease payments described in Note 4 resulted in a
taxable gain of approximately $39 million. This gain was not recognized for
financial reporting purposes.
Carryforwards and temporary differences which give rise to the deferred
tax asset at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net operating loss carryforwards $ 16,156 $ 56,055
Alternative minimum taxes 2,928 733
Wrap Lease rental sale 13,171 0
Reserves and other, net 1,134 1,398
---------- ----------
Gross deferred asset 33,389 58,186
Valuation allowance (33,389) (58,186)
---------- ----------
Net deferred asset $ 0 $ 0
========== ==========
</TABLE>
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 at December 31, 1996.
The Company's federal tax net operating loss carryforwards expire as
follows:
<TABLE>
<CAPTION>
Year Amount
--------------- ---------------
<S> <C>
1997.......... $ 13
1998.......... 2,096
2000.......... 26,915
2002.......... 7,382
2003.......... 589
2007.......... 1,443
2008.......... 1,155
2009.......... 32
---------------
$39,625
===============
</TABLE>
In addition to the federal net operating loss carryforwards, the Company
has AMT credits of $2,928,000 which can be carried forward indefinitely. Also,
the Company has foreign net operating loss carryforwards of
F-18
<PAGE>
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
$6,863,000 which expire between 2000 and 2001 unless utilized prior thereto. In
1996, the Company had $14,178,000 of federal net operating loss carryforwards
that expired unused.
The Company is required to pay AMT for 1996 and 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 of $2,195,000 and $87,000 in 1996 and 1995,
respectively, and recorded no AMT expense in 1994.
The Company paid $139,000, $1,000 and $3,000 in income taxes in 1996, 1995
and 1994, respectively.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Environmental
- - - -------------
Reading Company has been advised by the Environmental Protection Agency
("EPA") that it is a potentially responsible party ("PRP") 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 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
Company has 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.
In 1995, the federal district court judge who presided over Reading
Company's bankruptcy reorganization ruled that all liability asserted against
Reading Company relating to the site was discharged pursuant to the
consummation order issued in conjunction with the bankruptcy on December 31,
1980. The judge's decision has been appealed and the appeal was heard in July
1996. The appellate court has not yet rendered a decision on this matter.
Based upon counsel's evaluation of possible outcomes on this matter, it is
believed that the range of possible outcomes of this matter is from $0, if the
appeal is upheld, to $3,000,000 if the appeal is not upheld. The Company accrued
a $1,200,000 provision for this matter in 1994, all of which continues to be
available to reduce the effect of an adverse ruling.
Pursuant to a settlement of litigation, the City of Philadelphia, Conrail,
and the Southeastern Pennsylvania Transportation Authority have agreed to pay an
amount ranging from 52% to 55% of future costs that the Company may incur in
cleaning environmental contamination on one of its other properties, the
Viaduct, which the Company believes may be contaminated by polychlorinated
biphenyls ("PCBs"). Reading Company has advised the EPA 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 fourteen years which have
elapsed since the 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.
Certain Shareholder Litigation
- - - ------------------------------
In September 1996, the holder of 50 shares of the Company's Common Stock
commenced a purported class action on behalf of the Company's minority
shareholders owning Reading Company Class A Common Stock in the Philadelphia
County Court of Common Pleas relating to the Reorganization and Stock
Transactions (See Note 2).
F-19
<PAGE>
READING ENTERTAINMEMT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,1996
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
The complaint in the action (the "Complaint") named the Company, Craig, two
former directors of the Company and all of the current directors of the Company
(other than Gregory R. Brundage) as defendants. The Complaint alleged, among
other things, that the Independent Committee set up to review the transactions
and the current and former directors of the Company breached their fiduciary
duty to the minority shareholders in the review and negotiation of the
Reorganization and Stock Transactions and that none of the directors of the
Company were independent and that they all were controlled by James J. Cotter,
Craig or those controlled by them. The Complaint also alleged, in part, that the
defendants failed to disclose the full future earnings potential of the Company
and that Craig would benefit unjustly by having its credit rating upgraded and
its balance sheet bolstered and that the value of the minority sharehholders'
interest in the Company was diluted by the transactions. The Complaint sought
injunctive relief to prevent the consummation of the Stock Transactions and
recision of the Stock Transactions if they were consummated and divestiture by
the defendants of the assets or shares of the Company that they obtained as a
result of the Stock Transactions, and unspecified damages and other relief.
In October, all of the defendants filed preliminary objections to the
Complaint and thereafter, by agreement of the parties and Order of the Court,
the Company was dismissed as a defendant without prejudice. Plaintiff dismissed
with prejudice his request for preliminary and permanent injunctive relief to
prevent the consummation of the Stock Transactions and his request to rescind
and set aside the Stock Transactions.
In November, plaintiffs filed an amended complaint against all of the
Company's present directors, its two former directors and Craig. The amended
complaint does not name the Company as a defendant. The amended complaint
essentially restates all of the allegations contained in the Complaint and
contends that the named defendant directors and Craig breached their fiduciary
duties to the alleged class. The amended complaint seeks unspecified damages on
behalf of the alleged class and attorneys' and experts' fees.
Management believes that the allegations contained in the amended complaint
are without merit and intends to vigorously defend the directors in the matter.
The Company had Directors and Officers liability insurance and believes that the
claim is covered by such insurance.
The Company is not a party to any other pending legal proceedings or
environmental action which management believes could have a material adverse
effect on its financial position.
NOTE 8-LEASE AGREEMENTS AND PURCHASE COMMITMENTS
Cine Vista, the Angelika and Reading Australia determine 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
$2,675,000, $2,139,000 and $1,097,000 in 1996, 1995 and 1994, respectively. In
1996, 1995 and 1994, contingent rental expense under the Cine Vista operating
leases totaled $220,000, $197,000, and $111,000, respectively.
Cine Vista and the Angelika conduct their operations in leased premises. In
addition, Reading Australia's first theater is located in a leased facility. The
Company's theater leases have remaining terms inclusive of options of 12 to 36
years. Certain Cine Vista theater leases and the Reading Australia theater lease
provide for contingent rentals based upon a specified percentage of theater
revenues with a guaranteed minimum. 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, warehouse space and equipment under
noncancelable operating leases. With the exception of one capital lease, all
leases are accounted for as operation leases.
F-20
<PAGE>
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(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 Cine Vista capital lease consist of the
following at December 31, 1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASES
----- ------
<S> <C> <C>
1997 $ 95 $ 2,327
1998 95 2,371
1999 95 2,350
2000 95 2,314
2001 95 2,339
Thereafter 1,164 36,206
---------- ----------
Total net minimum lease payments 1,639 $47,907
==========
Less amount representing interest 1,118
----------
Present value of net minimum lease
payments under capital lease $ 521
==========
</TABLE>
At December 31, 1996 the Company had three lease agreements for theater
facilities (exclusive of the currently contested Mount Gravtt Lease) with a
total of 20 screens which were then under construction or for which construction
was anticipated to commence in 1997. The aggregate anticipated contribution for
construction costs for such facilities was approximately $7,200,000 at December
31, 1996. The aggregate minimum annual rental for such leases is approximately
$550,000, which rentals commence upon the opening of the theaters. One such
theater, a six-plex in Mayaguez (a Cine Vista theater), commenced operations on
March 26, 1997.
The Company has entered into purchase agreements and lease agreements which
are subject to satisfaction of certain contingencies, which contingencies
were not satisfied as of March 1997. In conjunction with the lease and
purchase agreements, the Company had escrowed or made deposits totaling
$1,616,000 at December 31, 1996, which amount has been classified as "Restricted
cash" on the Company's Consolidated Balance Sheet.
NOTE 9--RELATED PARTY TRANSACTIONS
In 1995, 1996 and 1997, the Company's Board of Directors voted to waive the
transfer restrictions imposed by the provisions of the Company's capital 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 capital 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 federal tax loss carryforwards by
precluding a change in control which could limit the value of the carryforwards.
These transfer restrictions were subsequently extended to January 1, 2003 after
shareholder approval at the Company's 1996 Annual Meeting of Stockholders held
on October 15, 1996 (See Note 2). 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 federal tax loss carryforwards.
F-21
<PAGE>
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
The Company acquired the Angelika on August 27, 1996 (See Note 3). The
theater is owned jointly by the Company and Sutton Hill, a partnership
affiliated with City Cinemas, a Manhattan-based theater operator and owned in
equal parts by Mr. James J. Cotter, the Company's Chairman, and Mr. Michael
Forman. City Cinemas (also owned indirectly in equal parts by Messrs. Cotter and
Forman) operates the theater pursuant to the Management Agreement. Mr. Cotter is
a principal shareholder of Craig. A company controlled by Mr. Forman and his
family beneficially own 12.4% of Craig's currently outstanding common stock.
Robert F. Smerling, President of the Company, also serves as President of City
Cinemas.
The Stock Transactions (See Note 2) involved the issuance of Common Stock
and Series B Preferred Stock to Craig (which as a result of the Stock
Transactions and certain open market purchases holds securities representing
approximately 78% of the Company's voting securities), in return for certain
assets owned by Craig. The Company is a subsidiary of Craig. At the time that
the negotiations which led to the Stock Transactions were initiated, Craig
owned 51% of the Company's voting securities and the Chairman and President of
the Company (both of whom are also directors of Craig and the Company) served in
the same positions at Craig. The Company's Board of Directors therefore
established an Independent Committee of the Board of Directors comprised of
directors with no affiliation with Craig or Citadel (other than the Company's
ownership in Citadel) to negotiate the terms of the proposed transaction with
Craig and Citadel, to review the fairness of any consideration to be received or
paid by the Company and the other terms of any such transaction and to make a
recommendation to the Board of Directors concerning such transaction.
The Company utilizes the services of certain Citadel employees, including
the President and Chief Executive Officer of Citadel, for real estate advisory
services. The Company pays Citadel for such services at a rate which is believed
to approximate the fair market value of such services.
An officer of Reading Australia is a joint venture partner of Reading
Australia in certain theaters to be developed by Reading Australia. Pursuant to
the agreement between the officer and Reading Australia, the officer will
purchase a 25% interest in the theater which was opened by Reading Australia in
December 1996. Amounts to be paid by the joint venture partner for the 25%
interest will be funded by loans from Reading Australia.
NOTE 10--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, 1996 and 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 borrowing and capital expenditures. Borrowings
under the Credit Agreement accrue interest at LIBOR (the London Interbank
Offered Rate) plus 2.25%,
F-22
<PAGE>
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
or the base rate plus 1/2 of 1%, at Cine Vista's election. Cine Vista failed to
maintain compliance with certain of the financial covenants contained in the
Credit Agreement during 1996. The Company is currently working with the lender
to revise certain of the financial covenants to ensure the continuing
availability of the Line of Credit. The lender has waived compliance with the
covenants for the periods involved. 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%.
NOTE 11--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for 1996 and 1995 is summarized below:
<TABLE>
<CAPTION>
First Second Third Fourth
1996: Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $4,670 $4,559 $5,446 $8,269
Net (loss) income applicable to
common shareholders ($ 273) $1,313 $1,372 $3,680
========= ========= ========= =========
Per share information:
Net (loss) income applicable to
common shareholders ($ .05) $ .26 $ .28 $ .52
========= ========= ========= =========
<CAPTION>
First Second Third Fourth
1995: Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $3,791 $4,089 $5,830 $3,922
Net (loss) income applicable to
common shareholders ($ 79) $ 401 $2,065 ($ 36)
========= ========= ========= =========
Per share information:
Net (loss) income applicable to
common shareholders ($ .02) $ .08 $ .42 ($ .01)
========= ========= ========= =========
</TABLE>
The second quarter includes $1,433,000 of equity earnings from the Citadel
Common Stock investment. These equity earnings included the Company's 26.1%
share of 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
purpose of previously deferred proceeds from the bulk sale of loans by a
previously owned subsidiary of Citadel (See Note 4). The third quarter includes
$1,119,000 received net of expenses in full settlement of a claim relating to a
prior year purchase offer. Fourth quarter revenues include $2,360,000 recorded
as income related to a settlement of a claim for property cleanup amounts
previously expensed by the Company (See Note 7). The fourth quarter also
includes a $941,000 preferred stock redemption premium (See Note 2) and a
deferred tax benefit of $3,957,280 related to the reduction in the deferred tax
asset valuation allowance (See Note 6). The first, second and third quarters
include equity losses from Reading International of $254,000, $52,000 and
$68,000 respectively. Reading International's fourth quarter loss (which was
consolidated with the Company's operations subsequent to the Stock Transactions)
totaled $1,468,000.
F-23
<PAGE>
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
1995:
- - - -----
The second quarter results include $425,000 received in settlement of
certain litigation between the Company and ARAMARK. The third quarter results
include revenues of $1,146,000 in settlement of a condemnation claim 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 and a $102,000 equity loss from Reading International.
NOTE 12--CAPITALIZATION
Reading Entertainment Common Stock
- - - ----------------------------------
REI Common Stock (par value $.001) is traded on the Nasdaq National Market
under the symbol RDGE and the Philadelphia Stock Exchange under the symbol RDG.
The Articles of Incorporation include restrictions on the transfer of Common
Stock which are intended to reduce the risk that an "ownership change" within
the meaning of Section 382(g) of the Internal Revenue Code of 1986, as amended,
will occur, which change could reduce the amount of federal tax net loss
carryforwards available to offset taxable income. The restrictions provide that
any attempted sale, transfer, assignment or other disposition of any shares of
Common Stock to any person or group who, prior to the transfer owns (within the
meaning of the Code and such regulations) shares of Common Stock or any other
securities of REI which are considered "stock" for proposes of Section 382,
having a fair market value equal to or greater than 4.75% of the value of all
outstanding shares of REI "stock" shall be void ab initio, unless the Board of
Directors of the Company shall have given its prior written approval. The
transfer restrictions will continue until January 1, 2003 (unless earlier
terminated by the Company's Board of Directors).
Reading Entertainment Series A and Series B Cumulative Convertible Preferred
- - - ----------------------------------------------------------------------------
Stock
- - - -----
Holders of the Convertible Preferred Stock are entitled to receive
quarterly cumulative dividends at the annual rate of $6.50 per share. In the
event of a liquidation of the Company, the holders of the Convertible Preferred
Stock will be entitled to receive the stated value of $100 per share plus
accrued and unpaid dividends before any payment is made to the holders of the
Common Stock. The Series B Preferred Stock ranks junior to the Series A
Preferred Stock in rights to dividend distributions and distributions in
liquidation.
Holders of the Convertible Preferred Stock are entitled to cast 9.64 votes
per share. In the event that dividends are not paid on either series of the
Convertible Preferred Stock for six consecutive quarters, the holders of such
series of the Convertible Preferred Stock will be entitled to elect one
director.
Each share of Series A Preferred Stock is convertible into shares of Common
Stock at a conversion price of $11.50 per share and each share of Series B
Preferred Stock is convertible into shares of Common Stock at a price of $12.25
per share, at any time after April 15, 1998. The shares of Series A Preferred
Stock are convertible prior to April 15, 1998 in the event that a change in
control of the Company occurs. The Company also has the right to require
conversion of the Series A Preferred Stock in the event that the average market
price of the Common Stock over a 180 day period exceeds 135% of the conversion
price of the Series A Preferred Stock. The Series B Preferred Stock has no
mandatory conversion provisions. Citadel has certain registration rights with
respect to the shares of the Common Stock to be received upon the conversion of
the Series A Preferred Stock or the exercise of the Assets Put Option.
F-24
<PAGE>
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
The Company may, at its option, redeem the Series A Preferred Stock at any
time after October 15, 2001, in whole or in part, at a redemption price equal to
a percentage of the stated value (initially 108%, declining 2% per annum until
the percentage equals 100%) plus accrued and unpaid dividends to the date of
redemption. The holders of a majority of the Series A Preferred Stock have the
right to require REI to repurchase the Series A Preferred Stock at the stated
value plus accrued and unpaid dividends for a 90 day period beginning October
15, 2001. In addition, the holders of the Series A Preferred Stock may require
the Company to repurchase the shares at the stated value plus accrued and unpaid
dividends in the event that the Company fails to pay dividends on the Series A
Preferred Stock in any four quarterly periods (after April 15, 1998). In the
event of a change in control of the Company, the holders of a majority of the
Series A Preferred Stock may require redemption at a premium. The Series A
Preferred Stock has not been included as Shareholders' Equity in the Company's
Consolidated Balance Sheet due to the mandatory redemption provisions.
F-25
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Reading Entertainment, Inc.
We have audited the consolidated balance sheets of Reading Entertainment, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. 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 Reading Entertainment, Inc. and subsidiaries at December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 19, 1997
F-26
<PAGE>
EXHIBIT 10.15
-------------
ASSET PUT AND
REGISTRATION RIGHTS AGREEMENT
This Asset Put and Registration Rights Agreement (this "Agreement") is
---------
entered into as of this 15th day of October, 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 Septemer 4, 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,
12
<PAGE>
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.
13
<PAGE>
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
14
<PAGE>
(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.
15
<PAGE>
(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.
16
<PAGE>
(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: /s/ S. Craig Tompkins
------------------------------------
Name: S. Craig Tompkins
----------------------------------
Its: President
-----------------------------------
CITADEL ACQUISITION CORP., INC.
By: /s/ Steve Wesson
------------------------------------
Name: Steve Wesson
----------------------------------
Its: President
-----------------------------------
CITADEL HOLDING CORPORATION
By: /s/ Steve Wesson
------------------------------------
Name: Steve Wesson
----------------------------------
Its: President
-----------------------------------
Acknowledged and agreed, as to the matters set forth in Section 1.1(e)(iv) and
Article Four:
CRAIG CORPORATION
By: /s/ S. Craig Tompkins
-------------------------
Name: S. Craig Tompkins
-----------------------
Its: President
------------------------
17
<PAGE>
EXHIBIT 10.16
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 August 23, 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
October 8, 1996.
CITADEL HOLDING CORPORATION
By: /s/ Steve Wesson
----------------------------------------
Name: Steve Wesson
Title: President and Chief Executive Officer
10
<PAGE>
Exhibit 10.27
PURCHASE AGREEMENT
------------------
Equipment Leasing Associates 1995-VI Limited Partnership ("Seller")
hereby agrees to sell certain equipment to FA, Inc. ("Buyer") on the terms and
conditions set forth below in this Purchase Agreement and the parties further
agree that this Purchase Agreement shall establish binding commitments and
unconditional promises of the parties hereto with respect to the subject matter
hereof.
1. Purchase and Sale of Equipment. The equipment being purchased is
------------------------------
more particularly described on Schedule A hereto ("Equipment"). Buyer
acknowledges that the Equipment is presently being leased to the various parties
set forth on the pages attached to Schedule A, and is being conveyed subject to
such leases. Buyer also acknowledges that the Equipment is also subject to
certain encumbrances which are also listed on Schedule A (the "Senior Liens").
2. Purchase Price. The purchase price of the Equipment is set forth
--------------
on Schedule B and shall be paid in the manner specified in Schedule B.
3. Transfer of Title. The parties agree that the sale shall be
-----------------
consummated and the transfer of title to said Equipment shall be deemed to have
occurred on December 20, 1996 when:
(a) the Seller and Buyer have executed this Purchase Agreement;
(b) Seller has delivered of a Bill of Sale by Seller to Buyer which is
accepted by Buyer; and
(c) Buyer has paid the consideration set forth on Exhibit B to Seller in
the amounts and in the manner specified on Schedule B.
4. Purchase Money Security Interest. Notwithstanding the foregoing,
--------------------------------
Seller shall retain a purchase money security interest in the Equipment for any
unpaid portion of the purchase price. Upon Buyer's failure to make payment in
full upon the dates specified on Schedule B, Seller shall have the right, upon
notice to Buyer, to take possession of the Equipment, to sell the Equipment, and
exercise any and all rights with respect to the Equipment and the lease(s) of a
secured party under the Uniform Commercial Code of Virginia if payment is not
make in full upon the dates specified on Schedule B.
5. Leaseback. Seller and Buyer hereby agree that in conjunction
---------
with the sale of the Equipment, Seller agrees to lease from Buyer and Buyer
agrees to lease to Seller all of the Equipment for a term of sixty (60) months
from December 20, 1996 with payments paid annually in arrears based on a present
value of $38,989,635.00. Said annual payments in arrears will be computed using
a ten percent (10%) debt rate. The proforma Master Lease Agreement ("Wrap
Lease") to be used by the parties is attached hereto for reference. As
consideration for the Leaseback, Seller, as Lessee, agrees to pay to Buyer, as
Lessor, an amount of 5.0% of any and all remarketing proceeds received by Lessee
with respect to the period from January 1, 1998 through December 31, 1998, for
transactions wherein the original user lease has expired and a new user lease
has commenced.
1
<PAGE>
6. Further Documents. Seller and Buyer agree to execute such
-----------------
further documents and instrument as are necessary, appropriate, and reasonable
to more fully and fairly detail this Purchase Agreement and related agreements
and understandings between the parties.
IN WITNESS WHEREOF, the parties have executed this Purchase Agreement
effective as of December 20, 1996.
SELLER:
EQUIPMENT LEASING ASSOCIATES
1995-VI LIMITED PARTNERSHIP
By: Management Associates Limited
Partnership VIII, General Partner
By: Managing Partners Corporation,
General Partner
By: /s/ Donald Butler
-------------------------------------
Title: Executive Vice President
-----------------------------------
BUYER:
FA, INC.
By: /s/ S. Craig Tompkins
-------------------------------------
Title: President
-----------------------------------
2
<PAGE>
PURCHASE AGREEMENT
------------------
SCHEDULE A
----------
User Lessee: See attached schedule(s) (12 pages)
(The Equipment Schedules, submitted as exhibits to the Purchase Agreement
are omitted for purposes of this filing as it is written in French and
would require translation. A copy is available at the Company's office.)
Equipment: See attached schedule(s) (12 pages)
(The Equipment Schedules, submitted as exhibits to the Purchase Agreement
are omitted for purposes of this filing as it is written in French and
would require translation. A copy is available at the Company's office.)
Equipment Locations: To be further identified.
3
<PAGE>
PURCHASE AGREEMENT
------------------
SCHEDULE B
----------
1. Purchase Price: $40,934,000.00
--------------
2. Method of Payment:
-----------------
a. Equity:
------
(i) Cash payment in the amount of $75,000.00 upon execution hereof.
(ii) Cash payment in the amount of $1,869,365.00 on or before January
31, 1997.
b. Debt:
----
Delivery of a nonrecourse Promissory Note payable to the order of
Seller in the amount of $38,989,635.00.
3. Effective Date: December 20, 1996.
--------------
4
<PAGE>
Exhibit 10.28
MASTER LEASE AGREEMENT
----------------------
MASTER LEASE AGREEMENT, dated as of December 20, 1996, ("Lease"), between
FA, Inc. ("Lessor"), and Equipment Leasing Associates 1995-VI Limited
Partnership ("Lessee").
Lessor agrees to lease the equipment and accessories thereto listed on
Schedule A attached hereto (the "Equipment") to Lessee, and Lessee hereby agrees
to lease the Equipment from Lessor, on the terms and subject to the conditions
specified herein. (If and to the extent that there are more than one Schedule A
and related Schedule B attached hereto, each Schedule A and related Schedule B
shall incorporate this Master Lease Agreement and shall be deemed a separate and
distinct lease of the Equipment covered thereby.) The definition of terms in the
Purchase and Sale Agreement of even date herewith between the Lessor, as
"Buyer," and the Lessee, as "Seller" (the "Purchase Agreement"), regarding the
applicable Equipment shall apply herein.
1. TERM. The term of this Lease shall commence and end on the dates
----
specified in Schedule B attached hereto.
2. RENT. Lessee hereby agrees to pay Lessor fixed rent in the amounts
----
and on the dates specified in Schedule B ("Fixed Rents"). Any and all payments
of rent not paid when due as specified on Schedule B shall bear interest after
the due date thereof at the rate of 10% per annum. Such interest shall accrue
for every day such rent payment is overdue.
3. ACCEPTANCE OF EQUIPMENT BY LESSEE. Lessee hereby agrees that its
---------------------------------
execution of this Lease shall, without further act, irrevocably constitute
acceptance by Lessee of the Equipment for all purposes of the Lease in an "as
is" condition.
4. MOVEMENT OF EQUIPMENT. In no event shall any Equipment be moved from
---------------------
its present country without the written consent of Lessor.
5. RETURN OF EQUIPMENT. Unless a unit of Equipment has been previously
-------------------
disposed of in accordance with Section 11(a) or (c), or in accordance with any
other written agreement between Lessor and Lessee, Lessee will, at its own cost
and expense, deliver possession of each unit of Equipment to Lessor upon the
termination hereof, in the condition required for it to be maintained by Lessee
pursuant to Section 8(b), at the location of the Equipment on that date, free
and clear of any liens, charges, security interests, encumbrances or rights of
any person, other than the rights of Lessor or any User Lessee or any lien,
charge, security interest or encumbrance incurred by or on behalf of Lessor.
6. WARRANTIES AND SERVICE POLICIES. Unless Lessee shall have been
-------------------------------
declared in default pursuant to Section 16, Lessor hereby covenants and agrees
that Lessor will assign or otherwise make available to Lessee such rights as
Lessor may have under any warranty or service policy with respect to the
Equipment made by the manufacturer of the Equipment (the
1
<PAGE>
"Manufacturer"), any subcontractors of the Manufacturer, or any vendors to the
extent that the same may be assigned or otherwise made available to Lessee.
7. GENERAL TAX INDEMNITY. Lessee will pay, and will defend, indemnity
---------------------
and hold Lessor harmless on an after-tax basis from, any and all Taxes (as
defined below) and related audit and contest expenses on or relating to (a) any
of the Equipment, (b) the Lease, (c) purchase acceptance, ownership, lease,
possession, use operation, transportation, return or other disposition of any of
the Equipment, and (d) rentals or earnings relating to any of the Equipment or
the Lease. "Taxes" means present and future taxes or other governmental charges
that are not based on the net income of Lessor, whether they are assessed to or
payable by Lessee or Lessor, including, without limitation (i) sales, use,
excise, licensing, registration, titling, franchise, business and occupation,
gross receipts, stamp and personal property taxes, (ii) levies, imposts, duties,
assessments, charges and withholdings, (iii) penalties, fines, and additions to
tax and (iv) interest on any of the foregoing. Unless Lessor elects otherwise,
Lessor will prepare and file all reports and returns relating to any Taxes and
will pay all Taxes to the appropriate taxing authority. Lessee will reimburse
Lessor for all such payments promptly on request. On or after any applicable
assessment/levy/lien date for any personal property Taxes relating to any
Equipment, Lessee agrees that upon Lessor's request Lessee shall pay to Lessor
the personal property Taxes which Lessor reasonably anticipates will be due,
assessed, levied or otherwise imposed on any Equipment during its Lease Term. If
Lessor elects in writing, Lessee will itself prepare and file all such reports
and returns, pay all such Taxes directly to the taxing authority, and send
Lessor evidence thereof. Lessee's obligations under this section shall survive
the expiration, cancellation or termination of the Lease.
8. POSSESSION; USE AND MAINTENANCE; COMPLIANCE WITH LAWS; INSURANCE.
----------------------------------------------------------------
(a) Possession. So long as no Event of Default shall have occurred
----------
and be continuing, Lessee and any User Lessee shall be entitled, as against
Lessor or its assignee, to the possession and use of the Equipment in accordance
with and during the term of this Lease; as long as any User Lessee is not in
default under the User Lease, the User Lessee shall be entitled to continued
possession and use of the Equipment.
(b) Use and Maintenance.
-------------------
(i) Lessee shall cause the Equipment to be used only in the
manner for which it was designed and intended and so as to subject it only to
ordinary wear and tear. Lessee shall not modify any unit of Equipment without
the prior written approval of Lessor, except as provided in (ii) and (iii) below
or as may be authorized by any sublease or User Lease as permitted under Section
14 hereof. Notwithstanding the preceding, Lessee may add, delete or substitute
features or options on any unit of the Equipment provided none thereof decrease
the value of the Equipment, in any way damage or injure the Equipment, interfere
with the normal or satisfactory operation or maintenance of the Equipment or
create a safety hazard, and, provided further, that at or following the
expiration of the term hereof, Lessee shall, at its expense, remove such
additions or alterations promptly on demand of Lessor, and, forthwith upon such
removal, restore the Equipment to its original condition, less ordinary wear and
tear. In the event that at the expiration of the term of the Lease for any item
of Equipment, such item has been upgraded by additions, and/or replacements such
that the item's value has been
2
<PAGE>
increased over that which it would be absent such upgrades, then Lessee, in lieu
of removing such upgrades, may leave same attached to the subject item and
Lessor and Lessee agree to permit the item and such upgrades to be remarketed as
a single unit, with any proceeds from such remarketing being distributed to
Lessor and Lessee based upon the respective then fair market values (as defined
in Section 23(h) hereof).
(ii) Lessee may acquire and install, at Lessee's expense, such
additional features or options (including memory) as may be available from time-
to-time. Such additional features or options shall be removed by Lessee before
the Equipment is returned to Lessor and Lessee shall repair all damages to the
Equipment resulting from such installation and removal; provided, however, that
Lessee shall not be required to remove additional features or options if Lessee
complies with the procedures set forth in (i) above.
(iii) Lessee shall, at Lessor's expense, make any modifications
and acquire any additional features requested in writing by Lessor.
(iv) Lessee shall cause all units of Equipment under lease to
User Lessees to be maintained in good operating condition and repair, and will
cause all necessary adjustments and repairs to be made to the Equipment. Lessee
is hereby authorized to provide directions with respect to such maintenance,
adjustments and repairs, and such maintenance shall be subject to the reasonable
safety and security regulations of Lessee and any User Lessee.
Charges for maintenance, installation and dismantling of
the Equipment shall be borne by Lessee, and Lessee agrees promptly to reimburse
Lessor for any amount thereof paid by Lessor. All Equipment shall be installed
and operated as specified in the Manufacturer's installation manual and in
places meeting at all times the standards established by Lessee for location and
operation of similar equipment owned or leased by it. All units not leased to
User Lessees shall be properly maintained to prevent deterioration or other
damage.
(v) Notwithstanding anything contained herein to the contrary,
any improvements or additions that are made by Lessee shall be owned by Lessee
provided that such improvements and additions shall be readily removable without
causing material damage to the Equipment and any damage so caused is repaired or
Lessee complies with the procedures set forth in (i) above; but ordinary
maintenance and repairs performed by Lessee will not constitute an improvement
or addition to the Equipment within the meaning hereof.
(c) Governing Laws. Rules and Regulations. Lessee agrees to comply
-------------------------------------
with all governmental laws, regulations, requirements and rules with respect to
the use, maintenance and operation of each unit of Equipment.
(d) Insurance. Lessee at its sole expense shall at all times keep
---------
each item of Equipment insured against all risks of loss or damage from every
cause whatsoever for an amount not less than the full replacement value of such
item of Equipment. Lessee at its sole expense shall at all times carry public
liability and property damage insurance in amounts reasonably satisfactory to
Lessor protecting Lessee and Lessor from liabilities for injuries to persons and
damage to property of others relating in any way to the Equipment. All insurers
shall be reasonably satisfactory to Lessor. Lessee
3
<PAGE>
shall deliver to Lessor satisfactory evidence of such coverage. Proceeds of any
insurance covering damage or loss of the Equipment shall be payable to Lessor as
loss payee and shall, at Lessor's option, be applied toward (a) the replacement,
restoration or repair of the Equipment, or (b) payment of the obligations of
Lessee under the Lease. If the User Lessee's insurance permits the User Lessee
to replace the equipment with the insurance proceeds, then Lessor shall be
obligated to allow the replacement or repair of the equipment with such
insurance proceeds. Proceeds of any public liability or property insurance
shall be payable first to Lessor as additional insured to the extent of its
liability, then to Lessee. If an event of default occurs and is continuing, or
if Lessee fails to make timely payments due under Section 2 hereof, then Lessee
automatically appoints Lessor as Lessee's attorney-in-fact with full power and
authority in the place of Lessee and in the name of Lessee or Lessor to make
claim for, receive payment of, and sign and endorse all documents, checks or
drafts for loss or damage under any such policy. Each insurance policy will
require that the insurer give Lessor at least 30 days prior written notice of
any cancellation of such policy and will require that Lessor's interests remain
insured regardless of any act, error, omission, neglect or misrepresentation of
Lessee. The insurance maintained by Lessee shall be primary without any right
of contribution from insurance which may be maintained by Lessor.
Lessor agrees that Lessee's obligations under this paragraph (d) of Section 8
shall be deemed satisfied with respect to any unit of Equipment subject to a
User Lease or sublease permitted under Section 14 hereof which provides for the
User Lessee or sublessee or any other party thereunder to insure the Equipment
in a manner and in such amounts as comply with Lessee's responsibilities set
forth in this subparagraph and if Lessee provides Lessor with an assignment of
said insurance reasonably satisfactory to Lessor.
(e) Inspection. Lessee will permit any authorized representative of
----------
Lessor to inspect the Equipment and reasonably to examine, copy or make extracts
from, any and all books, records and documents in the possession of Lessee
relating to the Equipment and performance of this Lease, all at such reasonable
times and as often as may reasonably be requested.
9. REPRESENTATIONS AND WARRANTIES.
------------------------------
(a) Lessee's Representations. Lessee represents and warrants to, and
------------------------
covenants with, Lessor, as follows:
(i) Organization and Existence. Lessee is, at the time of
--------------------------
executing and delivering this Lease, and will be, on the Commencement Date and
throughout the term of this Lease, a limited partnership duly and validly
organized and existing in good standing under the laws of the State of Delaware
and duly qualified to own its properties and carry on its business in each
jurisdiction where the failure to be so qualified would be materially adverse to
Lessee or its business, or Lessor.
(ii) Power and Authority. Lessee has the power and authority to
-------------------
execute and deliver this Lease and will at the time of execution and delivery
hereof have the power and authority to execute and deliver or accept, as the
case may be, any and all other agreements, instruments and documents executed
and delivered or accepted in connection herewith or therewith and to pay and
perform, when due, its obligations hereunder and thereunder.
4
<PAGE>
(iii) Authorization. The execution and delivery or acceptance,
-------------
as the case may be, of this Lease and the other documents contemplated hereby by
Lessee have been duly authorized by all necessary action of Lessee and do not,
and at the time of their execution and delivery or acceptance will not, violate
or conflict with, or, with or without the giving of notice, the passage of time
or both, constitute a default under, any provision of Lessee's instruments of
organization, any law, or any order, writ, injunction, decree, rule or
regulation of any court, administrative agency or any other governmental
authority or any agreement or other document or instrument to which Lessee is,
or will then be, a party, or by which Lessee or the Equipment is, or may then
be, bound.
(iv) Enforceability. This Lease and the other documents
--------------
contemplated hereby constitute, or when executed and delivered will constitute,
the valid and binding obligations of Lessee, enforceable against it in
accordance with their respective terms, subject, however, to laws of general
application affecting creditors' rights.
(b) Lessor's Representations and Warranties. Lessor represents and
---------------------------------------
warrants to, and agrees with, Lessee as follows:
(i) Organization and Existence. Lessor is, at the time of
--------------------------
executing and delivering this Lease, and will be, on the Commencement Date and
throughout the term of this Lease, a corporation duly and validly organized and
existing under the laws of the state of Delaware and duly qualified to own its
properties and carry on its business in each jurisdiction where the failure to
be so qualified would be materially adverse to Lessor or its business, or
Lessee.
(ii) Power and Authority. Lessor has the power and authority to
-------------------
execute and deliver this Lease and will, at the time of execution and delivery
thereof have the power and authority to execute and deliver or accept, as the
case may be, the other documents contemplated hereby and to pay and perform,
when due, its obligations hereunder and thereunder.
(iii) Authorization. The execution and delivery or acceptance,
-------------
as the case may be, of this Lease and the other documents contemplated hereby by
Lessor, and the payment and performance by Lessor, when due, of its obligations
hereunder and thereunder, have been duly authorized by all necessary action of
Lessor and do not, and at the time of their execution and delivery or
acceptance, as the case may be, will not, violate or conflict with, or, with or
without the giving of notice, the passage of time or both, constitute a default
under, any provision of Lessor's instruments of organization, any order, writ,
injunction, decree, rule or regulation of any court, administrative agency or
any other governmental authority or any agreement or other document or
instrument to which Lessor is a party, or by which Lessor is, or may be, bound.
(iv) Enforceability. This Lease and the other documents
--------------
contemplated hereby constitute, or when executed and delivered will constitute,
the valid and binding obligations of Lessor, enforceable against it in
accordance with their respective terms, subject, however, to laws of general
application affecting creditors' rights.
5
<PAGE>
10. OWNERSHIP; FILING.
-----------------
(a) Retention of Title. Lessor or its transferee shall and hereby
------------------
does retain full legal title to the Equipment notwithstanding the delivery of
possession to, and use by, Lessee.
(b) Duty to Mark Equipment. Lessee agrees to mark the Equipment with
----------------------
all information as may from time to time be required by Lessor in order to
protect the title of Lessor to the Equipment and Lessor's rights under this
Lease, and Lessee will replace promptly any such-markings which may be removed,
defaced or destroyed. The failure to mark or identify any equipment shall not
serve to diminish or prejudice Lessor's full legal title and ownership of the
Equipment.
(c) Filing. Lessee will cooperate with Lessor for the purpose of
------
protecting Lessor's title to the Equipment and the sums due under this Lease,
including executing and filing appropriate financing statements.
(d) Encumbrance: Disposition. Lessee shall not encumber and shall
------------------------
not by contract permit sublessees to encumber, nor shall Lessee dispose of, the
Equipment other than as expressly permitted by this Lease; and Lessee agrees to
cause the Equipment to remain free and clear of any such encumbrance.
Furthermore, Lessee agrees that it shall claim no depreciation deduction for
income tax purposes for the Equipment. In no event shall Lessee take any
position on its tax return or any other document relating thereto that is
inconsistent with Lessor's ownership of the Equipment.
11. DAMAGE TO EQUIPMENT; REQUISITION; EARLY TERMINATION.
---------------------------------------------------
(a) Casualty Occurrence. In the event any unit of Equipment is
-------------------
damaged, destroyed, lost, stolen, or title thereto shall be requisitioned or
taken by any governmental authority under power of eminent domain or otherwise,
such fact shall promptly be reported by Lessee to Lessor. Lessee shall determine
in the event of damage, whether such unit of Equipment can be repaired. In the
event Lessee determines that such unit of Equipment can be repaired, Lessee
shall cause such unit of Equipment to be repaired, at Lessee's expense, as soon
as reasonably practicable. Lessee shall be entitled to reimbursement from and to
the extent of any insurance proceeds paid with respect to a unit of Equipment
repaired by Lessee. In the event Lessee determines that the unit of Equipment
cannot be repaired or in the event of such destruction, loss, theft, requisition
or taking of title, such unit of Equipment shall be deemed to have suffered a
"Casualty Occurrence" and, as soon as reasonably practicable after the date of
such Casualty Occurrence, Lessee shall either (at Lessee's option) (x) pay to
Lessor a purchase price equal to such Equipment's fair market value (as defined
in Section 23(h) hereof plus a lease termination fee equal to the present value
(using a discount rate equal to the discount rate set forth on Schedule B (the
"Discount Rate")) of the remaining Fixed Rent applicable to the subject
Equipment less the fair market value of Lessee's remaining leasehold interest
hereunder with respect to such Equipment, or (y) replace such item with any item
or items of like kind equipment, in accordance with the terms set forth in
Section 23(g) hereof. The repair or replacement of the Equipment as hereinabove
provided shall not result in any abatement or reduction in, or in any other way
affect, the rent to be paid with respect to such Equipment, it being expressly
agreed that the Fixed Rent payable with respect thereto shall continue in the
same amounts and be payable at the same times as prescribed on Schedule B hereto
as if such repair or replacement did not occur. In the event Lessee elects (in
lieu of replacing) to purchase any unit of Equipment, as described above, the
Fixed Rent
6
<PAGE>
payable pursuant to Schedule B shall (as of the next rental payment) be reduced
to an amount which bears the same relationship to the rental payable before such
reduction as the value of Equipment leased after the Casualty Occurrence bears
to the value of Equipment leased prior to the Casualty Occurrence.
(b) Risk of Loss. Lessee shall, during the entire term of this
------------
Lease, bear the risk of loss to the Equipment and, except as provided in
paragraph (a) of Section 11, shall not be released from its obligations
hereunder in the event of any Casualty Occurrence to any unit of Equipment.
(c) Option. So long as no Event of Default (as defined herein) shall
------
have occurred and be continuing, if, when and to the extent (x) a User Lessee
exercises its option to purchase any unit of Equipment pursuant to an option
contained in a User Lease, or (y) with respect to an item of Equipment not
currently on lease to a User Lessee, Lessee determines that it is uneconomical
to continue to hold such items of Equipment on lease, Lessee shall have the
right to purchase the subject Equipment (the "Off-Lease Item") at a purchase
price equal to its then fair market value (as herein defined and determined) and
Lessee shall pay to Lessor a lease termination fee equal to the present value
(discounted at the Discount Rate) of the remaining Fixed Rent applicable to the
subject Equipment less the fair market value of Lessee's remaining leasehold
interest hereunder. Lessor shall convey the Off-Lease Item to Lessee free and
clear of any liens, claims or encumbrances created by, through or under Lessor,
other than any underlying lien and the User Lease, if any, then in effect.
Thereupon, this Lease shall terminate with respect to the Off-Lease Item. In
lieu of the foregoing purchase and sale, Lessee shall have the right instead to
substitute and replace such Item with other equipment which is substantially
similar within the parameters set forth in Section 23(g) hereof (the
"Replacement Item"). Effective upon such replacement, all incidents of Lessee's
interest as Lessee hereunder in the Off-Lease Item ipso facto shall cease and
terminate automatically and the Replacement Item shall become Equipment leased
hereunder instead of the Off-Lease Item. In addition, effective upon such
replacement, all of Lessor's right, title and interest in and to the Off-Lease
Item shall be automatically assigned and shall pass to Lessee and Lessor shall
have no further interest therein. The substitution for a unit of Equipment shall
not result in any abatement or reduction in, or in any other way affect, the
rent to be paid with respect to such Equipment, it being expressly agreed that
the rent payable with respect thereto shall continue in the same amounts and be
payable at the same times as prescribed on Schedule B hereto as if such
substitution did not occur. In the event Lessee elects to purchase any unit of
Equipment which was the subject of the option, in lieu of replacing such unit of
Equipment, the rent payable pursuant to Schedule B shall (as of the next rental
payment) be reduced to an amount which bears the same relationship to the rental
payable before such reduction as the value of the Equipment leased after the
exercise of the option bears to the value of Equipment leased prior to the
exercise of the option. For purposes of the preceding sentence "value" shall be
determined by reference to original cost of the Equipment to Lessor.
12. GENERAL INDEMNITY. Lessee assumes all risk and liability for, and
-----------------
shall defend, indemnity and keep Lessor harmless on an after-tax basis from, any
and all liabilities, obligations, losses, damages, penalties, claims actions,
suits, costs and expenses, including reasonable attorney fees and expenses, of
whatsoever kind and nature imposed on, incurred by or asserted against Lessor,
in any way relating to or arising out of the manufacture, purchase, acceptance,
rejection, ownership, possession, use, selection, delivery, lease, operation,
condition, sale, return or other disposition of the Equipment or any part
thereof (including, without limitation, any claim for latent or other defects,
7
<PAGE>
whether or not discoverable by Lessee or any other person, any claim for
negligence, tort or strict liability, any claim under any environmental
protection or hazardous waste law and any claim for patent, trademark or
copyright infringement). Lessee will not indemnity Lessor under this section for
loss or liability caused directly and solely by the gross negligence or willful
misconduct of Lessor. Lessee shall not be required to indemnify Lessor or
Lessor's successors and assigns for loss or liability in respect of any unit of
Equipment arising from acts or events that occur after possession of such unit
of Equipment has been delivered to Lessor in accordance with Section 5. In this
section, "Lessor" also includes any director, officer, employee, agent,
successor or assign of Lessor. Lessee's obligations under this section shall
survive the expiration, cancellation or termination of the Lease.
13. ASSIGNMENT.
----------
(a) By Lessor. Lessee agrees that Lessor may transfer or assign all
---------
or any part of Lessor's right, title and interest in, under or to the Equipment
and this Lease and any or all sums due or to become due pursuant to any of the
above, to any third party (the "Assignee") for any reason. Lessee agrees that
upon receipt of written notice from Lessor of such assignment, Lessee shall
perform all of its obligations hereunder for the benefit of Assignee and, if so
directed, shall pay all sums due or to become due hereunder directly to the
Assignee or to any other party designated by the Assignee. Lessee hereby
covenants, represents and warrants as follows and agrees that the Assignee shall
be entitled to rely on and shall be considered a third-party beneficiary of the
following covenants, representations and warranties:
(i) Lessee's obligations to Assignee hereunder are absolute and
unconditional and are not subject to any abatement, reduction, recoupment,
defense, offset or counterclaim available to Lessee for any reason whatsoever
including operation of law, defect in the Equipment, failure of Lessor to
perform any of its obligations hereunder or for any other cause or reason
whatsoever, whether similar or dissimilar to the foregoing;
(ii) Lessee will not look to Assignee to perform any of Lessor's
obligations hereunder;
(iii) Lessee will not amend or modify this Lease without the
prior written consent of the Assignee; and
(iv) Lessee will send a copy to Assignee of each notice which
Lessee sends to Lessor.
(b) By Lessee. Lessee shall not, directly or indirectly, (a) mortgage,
---------
assign, sell, transfer, or otherwise dispose of the lease or any interest
therein or the equipment or any part thereof, or (b) sublease, rent, lend or
transfer possession or use of the equipment or any part thereof to any party
(except User Lessees as set forth in paragraph 14 below) or (c) create, incur,
grant, assume or allow to exist any lien on the lease, any schedule, the
equipment or part thereof.
14. SUBLEASE BY LESSEE. Subject to the terms and conditions of this
------------------
Section 14, Lessee may sublease any or all of the Equipment without the consent
of Lessor or its Assignees if:
8
<PAGE>
(a) the terms and conditions of such User Lease are generally as
favorable to Lessee as the terms and conditions in Lessee's leases or subleases
then being offered to others leasing similar equipment; and
(b) the sublease is in the ordinary course of Lessee's business;
(c) the sublease of any Equipment is not beyond the term of this
Lease without the consent of the Lessor, which consent shall not be unreasonably
withheld.
Lessee, shall be responsible for any and all remarketing fees incurred in
connection with the sublease of the Equipment, and Lessor, as between Lessor and
Lessee, shall be responsible for any and all other reasonable costs and expenses
incurred in connection therewith.
15. ASSIGNMENT OF SUBLEASES AND OTHER RESPONSIBILITIES. Lessor hereby
--------------------------------------------------
assigns, transfers and conveys to Lessee, effective upon the Commencement Date
hereof, all of Lessor's rights, title and interest in, under and to the initial
User Lease(s) and the Remarketing Agreement. In consideration therefor, Lessee,
for the benefit of Lessor (but not for the benefit of any other party,
including, but not limited to, the User Lessee), hereby agrees to assume and
discharge each and every one of the obligations of Lessor thereunder and hereby
relieves Lessor of and releases Lessor from every obligation thereunder. Lessee
further agrees (i) that it will pay and apply all rentals and other sums
otherwise to be retained by Lessee under User Lease(s) to pay amounts due on the
Underlying Debt, (ii) that it will not commingle such rents and other sums under
any such User Lease(s) with its other assets so long as any such Underlying Debt
applicable to such User Lease(s) remains outstanding, and (iii) that, subject to
the rights of any Underlying Lender with respect to any Underlying Debt, it will
pursue in a commercially reasonable manner its remedies against any User Lessee
arising from any default or violation of any User Lease(s). Lessor agrees that
so long as Lessee fulfills its covenants and obligations in this paragraph,
Lessee shall have not further obligations or personal liability to discharge any
Underlying Debt in favor of any Underlying Lender or to make any payment on
account thereof.
16. EVENTS OF DEFAULT. The following events shall constitute Events of
-----------------
Default:
(a) Lessee shall fail to make any payment of rent when the same shall
become due and such failure shall continue unremedied for a period of 15 days
(fifteen) after written notice to Lessee; or
(b) Lessee shall fail to provide or maintain insurance as required by
paragraph above and such failure shall continue unremedied for a period of 5
(five) days after written notice to Lessee;
(c) Lessee shall fail to perform or observe any other covenant,
condition or agreement to be performed or observed by it hereunder, and such
failure shall continue unremedied for a period of thirty (30) days after written
notice thereof by Lessor, unless, if such default cannot reasonably be cured
within said thirty (30) days, Lessee shall have promptly commenced action to
cure such default during said period and shall diligently pursue said action; or
9
<PAGE>
(d) Any representation or warranty made by Lessee herein, or in any
agreement, document, or certificate furnished Lessor in connection herewith or
pursuant hereto or pursuant to which this Lease is executed, shall prove to be
incorrect at any time in any material respect and shall continue unremedied (if
such representation or warranty is capable of being remedied) for a period of
thirty (30) days after written notice thereof by Lessor; or
(e) Lessee shall admit in writing its inability to pay its debts or
shall have made a general assignment for the benefit of creditors; or shall have
permitted the entry of an order for relief in bankruptcy; or shall take any
action towards its dissolution or liquidation; or shall have filed a voluntary
petition in bankruptcy or for reorganization or to effect a plan or other
arrangement with creditors; or shall have filed an answer to a creditor's
petition or other petition filed against it (admitting the material allegations
thereof) for an order for relief in bankruptcy or for a reorganization; or shall
have applied for or permitted the appointment of a receiver or trustee or
custodian for any of its property or assets and such receiver, trustee or
custodian so appointed shall not have been discharged within sixty (60) days
after the date of his appointment; or if an order shall be entered, and shall
not be dismissed or stayed within sixty (60) days from its entry, approving any
petition for a reorganization of Lessee.
17. REMEDIES. Upon the occurrence of any Event of Default and, at any
--------
time after notice and grace period duly given to Lessee as provided herein to
cure said Event of Default, so long as the same shall be continuing, Lessor may,
at Lessor's option, declare this Lease to be in default by written notice to
such effect delivered to Lessee and, at any time thereafter, Lessor may exercise
one or more of the following remedies, as Lessor in Lessor's sole discretion
shall elect:
(a) Proceed by appropriate court action, either at law or in equity,
to enforce performance by Lessee of the applicable covenants of this Lease or to
recover damages for the breach thereof;
(b) Declare the entire amount of rent for the remainder of the term
to be immediately due and payable without notice or demand to Lessee, whereupon
Lessee shall pay such amount to Lessor discounted to present value at the
Discount Rate;
(c) Subject to the rights of any Underlying Lender and of any User
Lessee not in default under a User Lease, cause Lessee, at its expense, promptly
to return the Equipment to the possession of Lessor at the location where the
Equipment is in last use and in the condition required upon the return thereof
pursuant to Section 5, or Lessor, at Lessor's option, may enter upon the
premises where the Equipment is located and take immediate possession of the
same and render it unusable or remove it by summary proceedings or otherwise;
(d) Subject to the rights of any Underlying Lender and of any User
Lessee not in default under a User Lease, sell the Equipment at public or
private sale as Lessor may determine, free and clear of any rights of Lessee,
and hold Lessee liable for any deficiency resulting from an excess of the sum of
all unpaid rent (if any) due and payable for periods up to and including the
rental period during which such sale occurs, plus any accelerated rent
(discounted as provided in (b)above), plus Lessor's costs and expenses incurred
in connection with such repossession and sale, over the gross proceeds of such
sale;
10
<PAGE>
(e) Subject to the rights of any Underlying Lender and of any User
Lessee not in default under an User Lease, Lessor may use, operate, lease, or
hold the Equipment as Lessor in Lessor's sole discretion may decide. In
addition, Lessee shall be liable for any and all costs and expenses (to the
extent not provided for hereinabove), including reasonable attorney's fees,
disbursements and any costs and expenses in placing the Equipment in the
condition required by the terms hereof, including Section 5, incurred by reason
of the occurrence of any Event of Default or the exercise of Lessor's remedies
with respect thereto;
(f) Except as otherwise provided above, no remedy referred to in this
Section 17 is intended to be exclusive, but each shall be cumulative and in
addition to any other remedy referred to above or otherwise available to Lessor
at law or in equity, including, but not limited to, the right to terminate this
Lease. No express or implied waiver by Lessor of any Event of Default hereunder
shall in any way be, or be construed to be, a waiver of any future or subsequent
Event of Default.
(g) If an Event of Default hereunder shall occur which affects and
relates to some but not all of the Equipment leased hereunder, then Lessor's
foregoing remedies may be exercised only with respect to that item or those
items of Equipment to which the Event of Default relates.
18. LESSOR'S RIGHT TO PERFORM FOR LESSEE. If Lessee fails to make any
------------------------------------
payment required to be made by it hereunder or fails to perform or comply with
any of its agreements contained herein, Lessor may, upon ten (10) days' prior
written notice to Lessee, make such payment and the amount of the reasonable
expenses of Lessor incurred in connection with such payment or the performance
of or compliance with such agreement, as the case may be, together with interest
at the rate of ten percent (10%), shall be payable by Lessee upon demand.
19. NOTICES. All notices required or permitted to be delivered to any
-------
party shall be in writing, and shall be deemed to be given when delivered, or
when deposited in the United States mails, certified or registered and postage
prepaid, with return receipt requested, as follows:
(a) If to Lessor:
FA, Inc.
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
(b) If to Lessee: Equipment Leasing Associates
1995-VI Limited Partnership
11130 Sunrise Valley Drive, Suite 206
Reston, Virginia 22091
or to such other address as may be designated in writing from time to time by
one party to the other.
20. NO SET-OFF FOR LESSEE. This Lease is a net lease, and Lessee's
---------------------
obligation to pay all rent payable hereunder shall be absolute and
unconditional, and all such rent shall be paid (and not recovered back for any
reason) notwithstanding any circumstances, including without limitation (i) any
11
<PAGE>
set-off, counterclaim, recoupment, defense or other right which Lessee may have
against Lessor, the Manufacturer or anyone else for any reason whatsoever, (ii)
except as provided in paragraphs (a) and (c) of Section 11, any defect in the
Equipment, condition, title, design, operation or fitness for use of, or any
damage to or loss or destruction of, the Equipment or an interruption or
cessation in the use or possession thereof by Lessee for any reason whatsoever,
or (iii) any insolvency, bankruptcy, reorganization or similar proceedings by or
against Lessee. Anything contained in this Lease or any other agreement to the
contrary notwithstanding, any obligation of Lessor shall be separate and
independent from and shall not affect Lessee's obligation to make payment
hereunder.
21. NO WARRANTIES BY LESSOR. LESSOR SUPPLIES THE EQUIPMENT AS IS AND NOT
-----------------------
BEING THE MANUFACTURER OF THE EQUIPMENT, THE MANUFACTURER'S AGENT OR THE
SELLER'S AGENT, MAKES NO WARRANTY OR REPRESENTATION, EITHER EXPRESS OR IMPLIED,
AS TO THE EQUIPMENT'S MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, DESIGN,
CONDITION, QUALITY, CAPACITY, MATERIAL OR WORKMANSHIP OR AS TO PATENT
INFRINGEMENT OR THE LIKE, it being agreed that all such risks, as between Lessor
and Lessee, are to be borne by Lessee. Lessee agrees to look solely to the
Manufacturer or to suppliers of the Equipment for any and all warranty claims
and any and all warranties made by the Manufacturer or the supplier of Lessor
are hereby assigned to Lessee for the term of this Lease. Lessee agrees that
Lessor shall not be responsible for the delivery, installation, maintenance,
operation or service of the Equipment or for delay or inadequacy of any or all
of the foregoing. Lessor shall not be responsible for any direct or
consequential loss or damage resulting from the installation, operation or use
of the Equipment or otherwise.
22. SECURITY INTEREST.
-----------------
(a) To secure payment of the rent and its other obligations
hereunder, Lessee hereby grants Lessor a security interest in all of Lessee's
contract rights (and the proceeds thereof) under the following collateral (the
"Collateral"):
(i) Any and all User Leases, including any renewal or extension
thereof;
(ii) All rental or other payments due or to become due from User
Lessees under the User Leases, including late charges, damages, insurance
payments, or otherwise;
(iii) Lessee's rights, if any, to the Equipment as now or later
described in the schedules in accordance with the provisions of this Lease;
(iv) Any and all collateral or security given for the
performance of the obligations under any or all of the User Leases; and
(v) Any and all proceeds from the User Leases, together with
all of the rights and remedies of the Lessee under the User Leases.
(b) Lessee agrees to take whatever steps are reasonably requested by
Lessor to further evidence and perfect the Lessor's security interest granted
herein, including, but not limited to,
12
<PAGE>
executing and delivering a Collateral Lease Assignment to and for the benefit of
Lessor contemporaneous with Lessee's execution and delivery hereof.
23. MISCELLANEOUS.
-------------
(a) Consent. Unless otherwise expressly provided, wherever consent
-------
or approval of either party is required herein, such consent or approval shall
not be unreasonably withheld.
(b) Counterparts. This Lease may be executed in several
------------
counterparts, each of which so executed shall be deemed to be an original, and
in each case such counterparts shall constitute but one and the same instrument.
(c) Severability. Any provision of this Lease which is prohibited or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. To the extent permitted by applicable law, Lessor and Lessee
hereby waive any provision of law which renders any provision hereof prohibited
or unenforceable in any respect.
(d) Modification of Lease. No term or provision of this Lease may be
---------------------
changed, waived, discharged, or terminated orally, but only by an instrument in
writing signed by the party against whom the enforcement of the change, waiver,
discharge or termination is sought.
(e) Captions. The captions in this Lease are for convenience of
--------
reference only and shall not define or limit any of the terms or provisions
herein.
(f) Governing Law. This Lease shall in all respects be governed by
-------------
and construed in accordance with the laws of the Commonwealth of Virginia
including all matters of construction, validity and performance.
(g) Substitution of Equipment. Whenever Lessee elects to substitute
-------------------------
equipment ("Substituted Equipment") as provided in Section 11(a) and (c) hereof,
Lessee shall replace such item with any item or items of like kind equipment
reasonably satisfactory to Lessor; provided, however, that (i) Lessee transfers
to Lessor (by bill of sale or other documents necessary to effect such transfer)
such Substituted Equipment, free and clear of all security interest, liens,
leases, claims, charges and encumbrances, except as expressly permitted below,
(ii) at the time of such replacement, the Substituted Equipment shall have an
aggregate fair market value equal to or greater than the aggregate fair market
value of the replaced Equipment (the "Replaced Equipment") immediately prior to
the damage or destruction requiring its replacement; and (iii) the Substituted
Equipment has the same cost recovery period under Section 168(c) of the Code as
the Replaced Equipment and the substitution will be effectuated in accordance
with, and qualify as, a "like kind exchange" pursuant to, and as defined in,
Code Section 1031. Any item or items of Substituted Equipment may be subject to
security interests, liens, or encumbrances, provided that the indebtedness
relating to such security interest, liens or encumbrances, when added to all
other indebtedness then outstanding on the Equipment (other than indebtedness on
the Replaced Equipment), will not be in excess of the aggregate unpaid balance
of the unpaid balance (principal and interest) outstanding on the Nonrecourse
Note, and will be satisfied and
13
<PAGE>
discharged in full by the payment of rent to be earned during the noncancellable
terms of User Leases for the Equipment. For purposes hereof, a cancellation
provision in a User Lease will not cause the otherwise non-cancelable terms
thereof to be deemed cancelable provided that such cancellation provision
requires that a termination or similar payment be made which will discharge and
satisfy in full such outstanding indebtedness. Lessee shall give Lessor at least
ten (10) days prior notice of any such substitution, which notice shall include
(i) a description and appraisal (by an appraiser reasonably acceptable to
Lessor) of the fair market value of the item or items of Replaced Equipment and
proposed Substituted Equipment, (ii) copies of any and all leases, security
agreements and other documents relating to security interest, liens, leases or
encumbrances imposed or to be imposed, as permitted hereunder, on the item or
items of proposed Substituted Equipment and (iii) a statement of the amounts
secured by security interests, liens and encumbrances on the item or items to be
replaced and on the proposed Substituted Equipment. The parties agree that,
effective upon the substitution of Equipment in accordance with the provisions
hereof, all incidents of Lessee's interest as Lessee hereunder in the Replaced
Equipment ipso facto shall cease and terminate automatically and the Substituted
Equipment shall become Equipment leased hereunder instead of the Replaced
Equipment. In addition, effective upon such substitution, all of Lessor's right,
title and interest in and to the Replaced Equipment shall be automatically
assigned and shall pass to Lessee and Lessor shall have no further interest
therein. Lessee and Lessor agree to execute and deliver such documents as are
necessary to transfer title to and ownership of the Substituted Equipment to
Lessor and title to and ownership of the replaced Equipment to Lessee.
(h) Fair Market Value. For purposes hereof, the term "fair market
-----------------
value" shall mean the purchase price or rental, as the case may be, that would
be obtained in an arm's-length transaction between an informed and willing buyer
or lessee under no compulsion to buy or lease and an informed and willing seller
or lessor under no compulsion to sell or lease, as determined in the good faith
exercise of the judgment of Lessor and Lessee at the applicable time. In the
event the parties are unable to agree upon a fair market value of the Equipment,
such value shall be determined in accordance with the foregoing definition by an
independent appraiser to be mutually agreed upon by the parties or, failing such
agreement, by a panel of three appraisers, one selected by Lessor, one selected
by Lessee and a third selected by the first two, the cost of which will be
deemed a remarketing expense payable out of the Equipment proceeds.
(i) Legal Costs and Attorneys' Fees. Each of the parties hereto
-------------------------------
agree that it shall pay directly any and all legal costs which it has incurred
on its own behalf in the preparation of this Lease and other agreements
pertaining to this Lease and any related transactions. In the event it becomes
necessary for either party hereto to hire counsel to review or enforce any
remedies arising out of any breach of this Lease, or if it becomes necessary for
either party hereto to file suit to enforce this Agreement, or any provision
contained herein, the party prevailing in such suit shall be entitled to
recover, in addition to all other remedies or damages, as provided herein,
reasonable attorneys' fees and costs incurred in such suit.
(j) Other Documents: Expenses. Lessee agrees to sign and deliver to
-------------------------
Lessor any additional documents reasonably deemed desirable by Lessor to effect
the terms of the Master Lease or this Schedule including, without limitation,
Uniform Commercial Code financing statements which Lessor is authorized to file
with the appropriate filing officers. Lessee hereby irrevocably appoints Lessor
as Lessee's attorney-in-fact with full power and authority in the place of
Lessee and in the name
14
<PAGE>
of Lessee to prepare, sign, amend, file or record any Uniform Commercial Code
financing statements or other documents deemed desirable by Lessor to perfect,
establish or give notice of Lessor's interests in the Equipment or any
collateral as to which Lessee has granted Lessor a security interest. The
signing or filing of Uniform Commercial Code financing statements and other
recordings are undertaken as a precaution only since the parties intend this
Schedule to be a lease transaction. Lessee shall pay upon Lessor's written
request any actual out-of-pocket costs and expenses reasonably paid or incurred
by Lessor in connection with the above terms of this section or the funding and
closing of this Schedule.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Lease as of
the date first above written.
LESSOR: FA, INC.
By: /s/ S. Craig Tompkins
------------------------------------------
Name: S. Craig Tompkins
------------------------------------------
Title: President
------------------------------------------
LESSEE: EQUIPMENT LEASING ASSOCIATES
1995-VI LIMITED PARTNERSHIP
By: Management Associates Limited
Partnership VIII, General Partner
By: Managing Partners Corporation,
General Partner
By: /s/ Donald Butler
------------------------------------------
Name: Donald Butler
------------------------------------------
Title: Executive Vice President
------------------------------------------
16
<PAGE>
MASTER LEASE AGREEMENT
SCHEDULE A
See attached Equipment Schedules (12 pages).
17
<PAGE>
EQUIPMENT SCHEDULES
(The Equipment Schedules, submitted as exhibits to Exhibit A, Master Lease
Agreement are omitted for purposes of this filing as it is written in French and
would require translation. A copy is available at the Company's office.)
18
<PAGE>
FA, Inc./Equipment Leasing Associates 1995-VI Limited Partnership
-----------------------------------------------------------------
MASTER LEASE AGREEMENT
----------------------
SCHEDULE B
----------
I. RENT: The Fixed Rent specified under Section 2 of the Master Lease Agreement
----
shall be payable as follows:
<TABLE>
<CAPTION>
Amount Due Date
------ --------
<S> <C>
$288,989.14 December 31, 1996
$10,403,619.55 December 31, 1997
$10,403,619.55 December 31, 1998
$10,403,619.55 December 31, 1999
$10,403,619.55 December 31, 2000
$10,114,629.54 December 31, 2001
</TABLE>
II. TERM: The term of this Lease shall commence on December 20, 1996 and
----
continue through December 20, 2001.
III. DISCOUNT RATE: Ten Percent (10%) per annum.
-------------
IV. SUPPLEMENTAL RENT: Lessor shall also be entitled to five per cent (5%) of
-----------------
any and all remarketing proceeds from the Equipment with respect to the period
from January 1, 1998 through December 31, 1998 for transactions wherein the
original User Lease has expired and a new User Lease has commenced.
19
<PAGE>
Exhibit 10.29
NONRECOURSE PROMISSORY NOTE
$38,989,635.00 Date: As of December 20, 1996
FOR VALUE RECEIVED, the undersigned, FA, INC. ("Payor"), with an address at
103 Springer Building, 3411 Silverside Road, Wilmington, Delaware 19810,
promises to pay to the order of EQUIPMENT LEASING ASSOCIATES 1995-VI LIMITED
PARTNERSHIP ("Payee"), a limited partnership organized and existing under the
laws of the State of Delaware, in accordance with the terms and provisions set
forth below, the principal sum of Thirty Eight Million Nine Hundred Eighty Nine
Thousand Six Hundred Thirty Five Dollars ($38,989,635.00), together with
interest on the outstanding principal from the effective date hereof at the rate
of Ten percent (10%) per annum.
--- -----
I. UNDERLYING TRANSACTIONS. Payor has as of this date purchased certain
-----------------------
equipment described on Schedule A hereto (the "Equipment") from Payee, a portion
of the purchase price for which is represented by the execution and delivery of
this Nonrecourse Promissory Note (this "Promissory Note").
II. SECURITY. To secure payment of the amounts of principal and interest
--------
due hereunder, the Payor has executed a Security Agreement with Payee granting a
subordinate security interest in the Equipment to Payee.
III. NONRECOURSE OBLIGATION. This Promissory Note is a negotiable,
----------------------
nonrecourse obligation of the Payor, and the Payee shall, in the event of a
default hereunder, be entitled to look solely to the Equipment and other
"Collateral" (as defined in and solely in accordance with the terms of the
Security Agreement of even date herewith) for satisfaction and payment of the
amounts due hereunder. Further, Payor shall have no personal liability
whatsoever for: (i) payment of any indebtedness now or hereafter owing under or
in connection with this Promissory Note and any other agreement relating
thereto, (ii) any amounts owing under in connection with the Security Agreement
of even date herewith, (iii) performance of any duty or obligation created or
arising under, pursuant to or in connection with the Promissory Note, Security
Agreement, and/or any other agreement relating thereto.
IV. MANNER OF PAYMENT. The amounts of principal and interest due
-----------------
hereunder shall be payable annually, in arrears, on a proportionate basis,
compounded monthly and on the basis of a 360-day year of twelve 30-day months in
United States currency remitted in accordance with the Schedule of Payments
attached hereto as Schedule A.
V. APPLICATION OF PAYMENTS. All payments under this Promissory Note shall
-----------------------
be applied in satisfaction of the amount of interest accrued hereunder which is
due and outstanding at the time of such payment. Only after all such interest
has been paid shall the remainder, if any, be applied to reduce the then
outstanding principal balance hereunder.
VI. PLACE OF PAYMENT. All payments of this Promissory Note shall be made
----------------
at such place in the United States as Payee may from time to time designate by
notice pursuant to Article XI hereof.
-1-
<PAGE>
VII. PREPAYMENT. The amounts due under this Promissory Note may not be
----------
voluntarily prepaid without the written consent of Payee and must be mandatorily
prepaid to the extent of any rents or other amounts received by Payor or its
assigns under that certain Master Lease Agreement between Payor, as "Lessor,"
and Payee, as "Lessee," to the extent the same relate to the Equipment.
VIII. DELINQUENT PAYMENTS. All amounts delinquent hereunder, whether of
-------------------
principal or accrued interest, shall bear interest after the due date thereof at
the rate of 10% per annum, computed on the basis of a 360-day year of twelve 30-
--- -----
day months. Such interest shall accrue for every day such payment is overdue.
IX. DEFAULT. Payor shall be deemed to be in default under this Promissory
-------
Note upon the failure of Payor to pay any installment of interest or principal
due hereunder in accordance with the terms and conditions hereof within fifteen
(15) days after written notice of Payor's failure to pay any installment of
interest or principal due hereunder.
X. REMEDIES. If Payor shall be in default under this Promissory Note,
--------
Payee shall have available to it all remedies available at law or in equity
including the right to accelerate the payments due hereunder.
XI. NOTICES. Any notice required or permitted to be given by Payor or
-------
Payee pursuant to the terms of this Promissory Note shall be deemed given only
if in writing when actually received by addressee or when mailed by certified or
registered mail, return receipt requested, or foreign equivalent, addressed as
follows:
If to Payor: FA, Inc.
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
If to Payee: Equipment Leasing Associates
1995-VI Limited Partnership
11130 Sunrise Valley Drive, Suite 206
Reston, Virginia 22091
The person and place to which notices are to be mailed to either party may be
changed from time to time by such party by written notice to the other party.
XII. SEVERABILITY. Except for section III, the invalidity or
------------
unenforceability of any provision of this Promissory Note shall not affect the
validity or Enforceability of any other provision hereof.
XIII. ASSIGNABILITY; SUCCESSORS AND ASSIGNS. This Promissory Note shall
-------------------------------------
be binding upon Payor and shall inure to the benefit of Payee and its
successors and assigns in the same manner and to the same extent and with like
effect as if such successors and assigns were named in and made parties to this
Promissory Note.
XIV. ARTICLE HEADINGS. Article headings used herein are solely for
----------------
convenience of the parties hereto and shall not affect the interpretation or
construction of this Promissory Note.
-2-
<PAGE>
XV. APPLICABLE LAW. This Promissory Note shall be governed and construed
--------------
for all purposes under and in accordance with the laws of the Commonwealth of
Virginia applicable to contracts made and to be performed in such jurisdiction,
without giving effect to the principles thereof with respect to the conflict of
laws.
XVI. NON-WAIVER. No term or condition of this Promissory Note can be
----------
waived except by the written consent of the Payee. Forbearance or indulgence by
Payee in any regard whatsoever shall not constitute a waiver of the provisions
of said terms or conditions, nor of any remedies otherwise available to Payee
under this Promissory Note or at law or in equity.
XVII. AMENDMENTS. This instrument shall not be amended, altered or
----------
changed without the express written consent of both parties.
XVIII. CERTAIN PAYMENTS. Any payment by, or for the account of, Payor to
----------------
the holder of any First or Second Senior Lien (as said terms are defined in that
certain Purchase and Sale Agreement of even date herewith between Payor, as
Buyer, and Payee, as Seller) which is credited against principal of, or interest
on, such Senior Lien, shall, as between Payor and Payee, be deemed to be a
payment under this Promissory Note.
IN WITNESS WHEREOF, the Payor has executed this instrument as of the date
and year first above written.
PAYOR: FA, Inc.
By: /s/ S. Craig Tompkins
-------------------------------
Title: President
------------------------------
-3-
<PAGE>
Fa, Inc./Equipment Leasing Associates 1995-VI Limited Partnership
-----------------------------------------------------------------
NONRECOURSE PROMISSORY NOTE
---------------------------
SCHEDULE A
<TABLE>
<CAPTION>
SCHEDULE OF PAYMENTS:
Amount* Due Date
------- --------
<S> <C>
$288,989.14 December 31, 1996
$10,403,619.55 December 31, 1997
$10,403,619.55 December 31, 1998
$10,403,619.55 December 31, 1999
$10,403,619.55 December 31, 2000
$10,114,629.54 December 31, 2001
</TABLE>
*Includes interest at 10% per annum.
Equipment Schedule: See attached.
(The Equipment Schedules, submitted as exhibits to the Nonrecourse
Promissory Note are omitted for purposes of this filing as it is written in
French and would require translation. A copy is available at the Company's
office.)
-4-
<PAGE>
Exhibit 10.30
LEASE RENTAL PURCHASE AGREEMENT
-------------------------------
This Purchase Agreement, dated as of the 31st day of December, 1996, by and
between FA, INC., having an office and place of business at 103 Springer
Building, 3411 Silverside Road, Wilmington, Delaware 19810, as seller (the
"Seller"), and Ralion Financial Services, Inc., having an office and place of
business at 54 Sasco Hill Road, Fairfield, Connecticut 06430, as buyer (the
"Buyer").
WITNESSETH:
----------
WHEREAS, Seller is the owner of certain equipment described on Schedule A
annexed hereto (the "Equipment"), which is presently being leased by Seller to
Equipment Leasing Associates 1995-VI Limited Partnership the ("Lessee") pursuant
to the lease described on Schedule A (the "Lease"); and
WHEREAS, the Equipment and the Lessee's obligation to pay rent is
encumbered by lien(s) (singly or collectively, as the case may be, the "Senior
Lien"), in favor of the lender or lenders described on Schedule A with respect
to the Equipment described therein (singly or collectively, as the case may be,
the "Lender") including any purchase money lien to secure indebtedness incurred
by Seller in connection with the Seller's acquisition of the Equipment; and
WHEREAS, Seller desires to sell and Buyer desires to purchase all of
Seller's right to receive Rent (as defined hereinbelow), certain Rent-Related
Payments (as defined hereinbelow), and a certain 5% payment of remarketing
proceeds payable from Lessee under the Lease as more fully identified in
Schedule A and described in Section 1.1 below, on the terms set forth below;
WHEREAS, Seller only intends to sell and Buyer only intends to purchase
Seller's right to receive Rent and certain Rent-Related Payments under the Lease
and not Seller's interest in the Equipment;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements hereinafter set forth, the parties agree as follows:
1. Sale of Assigned Rent.
---------------------
1.1 Definition of Rent. As used in this Purchase Agreement, the term
------------------
"Rent" shall mean and be limited to the periodic rental payments to be paid by
Lessee under the Lease, and any late charges associated therewith under the
Lease.
1.2 Definition of Rent-Related Payments. As used in this Purchase
-----------------------------------
Agreement, the term "Rent-Related Payments" shall mean and be limited to the
following payments that may be payable under the Lease, subject to the
limitations set forth hereinbelow: insurance payments, termination payments,
loss payments, including the right, if any, of the lessor under the Lease to
receive from Lessee any amounts from the proceeds of Subleases of the Equipment.
The foregoing payments shall constitute Rent-Related Payments: (a) only to the
extent that such payments are on account of or in lieu of Rent, and (b) shall be
limited to such amounts as may be necessary to compensate the owner of the Rent
for its damages, if any, arising from
-1-
<PAGE>
any cessation of payment of Rent, provided, however that such damages shall be
limited to the present value of such owner's interest in the due and unpaid Rent
after discounting the value of the due and unpaid Rent to present value.
1.3 Definition of Assigned Rent: As used in this Purchase Agreement,
---------------------------
the term "Assigned Rent" shall mean and be limited to Seller's right, if any, to
receive Rent and Rent-Related Payments under the Lease, which right is to be
sold and assigned by Seller and purchased by Buyer pursuant to this Purchase
Agreement.
1.4 Conveyance. Subject to the terms and conditions hereof, Seller
----------
hereby sells and assigns to Buyer, and Buyer hereby purchases from Seller, the
Assigned Rent. Buyer acknowledges that the right to receive the Assigned Rent,
and the Lease, are each encumbered by and subordinate to the rights of the
Lender under the Senior Lien, and the rights of any Users under the User Leases.
Seller further sells and assigns it interest in the 5% of remarketing proceeds
to be paid to Seller by Lessee under the Master Lease Agreement. Notwithstanding
anything herein to the contrary, Buyer does not assume, nor shall Lessee or any
third party have the right to seek performance by Buyer of, any of Seller's
obligations under the Lease, other than Seller's covenant of quiet enjoyment
with respect to the Equipment.
1.5 Price. The purchase price to be paid by Buyer to Seller for the
-----
Assigned Rent is the amount specified on Schedule A as the "full purchase price"
therefor. Payment of the full purchase price is being made as follows: (a) by
payment to Seller concurrently with the execution and delivery hereof, of the
total amount specified in Schedule A as the "cash portion" (if any) by check
payable to Seller; and (b) by Buyer's assumption, for the benefit of Seller, of
all of Seller's outstanding obligations with respect to the "Applicable
Indebtedness" as described in Schedule A. Buyer's assumption of the Applicable
Indebtedness is further described in Section 5 of this Agreement.
1.6 Closing Date. The closing date (the "Closing Date") hereof, upon
------------
which the transaction described herein shall become effective, shall be December
31, 1996.
2. Representations, Warranties and Covenants of Seller. Seller
---------------------------------------------------
represents, warrants and covenants to Buyer as follows:
2.1 Good Standing; Binding Obligation. Seller is a corporation duly
---------------------------------
and validly organized and existing in good standing under the laws of the State
of Delaware. Seller has full power and authority to enter into this Agreement.
Seller had full power and authority to enter into the Lease and the transactions
evidencing the Applicable Indebtedness at the time they were entered into.
Seller has, and at all relevant times had, full power and authority to execute
and deliver all other instruments and documents executed and delivered in
connection with or relating to the transactions contemplated hereby and thereby,
and to consummate the transactions contemplated hereby and thereby. This
Agreement and the consummation of the transactions contemplated hereby,
including the transactions creating or evidencing the Applicable Indebtedness
and the Lease (collectively the "Underlying Agreements"), have been duly
authorized by all necessary action of Seller, and each such agreement
(including, without limitation, the Lease) has been duly executed and delivered
by, and constitutes the legal, valid and binding obligations of, Seller, and to
the best of Seller's knowledge, the other parties thereto, enforceable in
accordance with their respective terms, except as enforceability may be limited
by applicable bankruptcy, reorganization, insolvency, moratorium or similar laws
relating to or affecting creditors' rights generally. There is no action, suit
or proceeding pending against Seller and no law or any order,
-2-
<PAGE>
writ, injunction, decree, rule or regulation of any court, administrative agency
or other governmental authority which brings into question the validity of, or
might in any way impair, the execution, delivery or performance by Seller of
this Agreement or any of the Underlying Agreements. All approvals of and
consents from governmental authorities and third parties required for the
execution, delivery or performance by Seller of this Agreement and the
Underlying Agreements have been (or will be) obtained and copies thereof have
been (or will be) delivered to Buyer.
2.2 Inconsistent Agreements. The execution, delivery and performance by
-----------------------
Seller of this Agreement and the transactions contemplated hereby, including
under any of the Underlying Agreements, do not contravene, violate or conflict
with any provisions of any law or any order, writ, injunction, decree, rule or
regulation of any court, administrative agency or any other governmental
authority applicable to Seller, and do not conflict with and are not
inconsistent with, and will not result (with or without the giving of notice or
passage of time or both) in a breach of, or constitute a default or require any
consent not heretofore requested or obtained under, the terms of any of the
Underlying Agreements, any credit agreement, lease, guarantee, document,
agreement or instrument to which Seller is a party, by which Seller or its
property is or may be bound, or to which Seller or its property may be subject
and will not result in the creation of any lien, charge or encumbrance on the
Assigned Rent, the Lease, or the Equipment or on any User Lease thereof, or be
in violation of or beyond the authority conferred by Seller's agreement or
certificate of limited partnership or any of Seller's other enabling or
governing instruments.
2.3 Right to Receive Rent. On the date hereof, Seller shall, and hereby
---------------------
does, transfer to Buyer the right to receive all Assigned Rent free and clear of
all leases, liens, claims, charges, equities and encumbrances of any kind or
nature whatsoever, except for the Applicable Indebtedness or as otherwise
described herein or in Schedule A; neither the Lease nor the Applicable
Indebtedness shall impair the consummation of the transactions contemplated
hereby or impose obligations on the Buyer, other than those expressly agreed to
in Sections 3.3 and 3.4 hereof.
2.4 Documentation. Seller will furnished to Buyer a true, correct and
-------------
complete copy of each and every material document delivered to or by Seller in
connection with the purchase of the Equipment by Seller and the right to receive
Assigned Rent by Seller and the leasing of the Equipment pursuant to the Lease,
and all material documents creating or relating to any lien, claim, charge,
equity, encumbrance or transfer of title of any kind or nature concerning the
Assigned Rent, the Lease, or the Equipment. Nothing has come to Seller's
attention which would lead Seller to believe that (i) the Equipment is not in
good working order, condition and appearance, or the Lease is not in full force
and effect, or (ii) the sale of the Assigned Rent by Seller to Buyer hereunder,
violates or infringes the rights of any party.
2.5 No Representations or Warranties by Seller. Buyer acknowledges
-------------------------------------------
and agrees that Seller has not made, does not make and specifically negates and
disclaims any representations, warranties, promises, covenants, agreements or
guaranties of any kind or character whatsoever, whether express or implied, oral
or written, past, present or future, of, as to, concerning or with respect to:
(a) the value, nature, quality or condition of the Assigned Rents and the
advisability of Buyer purchasing the Assigned Rents;
(b) the profitability of purchasing the Assigned Rents;
(c) Buyer affirms that it has not relied on Seller's skill or judgment to
decide whether and under what conditions to purchase the Assigned Rents and
further affirms that Seller has made no warranty that the purchase is
appropriate or that the purchase will be economically viable;
(d) the value, use, or quality of the Assigned Rents;
-3-
<PAGE>
Buyer further acknowledges:
(e) no person acting on behalf of Seller is authorized to make, and by
execution of this Agreement Buyer acknowledges that no person has made, any
representation, agreement, statement, warranty, guaranty or promise regarding
the purchase to be made by Buyer or any transaction contemplated herein; and no
such representation, warranty, agreement, guaranty, statement or promise if any,
made by any person acting on behalf of Seller shall be valid or binding upon
Seller unless expressly set forth herein;
(f) it has been given the opportunity to inspect all aspects of Assigned
Rents, including without limitation, all financial aspects of Assigned Rents and
is relying solely on its own investigation of Assigned Rents and not on any
information provided or to be provided by Seller.
The provisions of this section 2.5 shall survive the closing or any
termination of this Agreement.
2.6 Warranty Disclaimer. EXCEPT AS SET FORTH HEREIN SELLER MAKES NO
-------------------
REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER.
Seller shall in no event be liable to Buyer for any direct, indirect, special or
consequential damages caused, directly or indirectly, by the Equipment or any
inadequacy thereof for any purpose, or any deficiency or defect therein, by the
use or maintenance thereof, or any repairs, servicing or adjustments thereto or
by the failure of Lessee to make any payments of Assigned Rent for any reason,
including the lack of creditworthiness of the Lessee or the User Lessees, or for
any other reason. The provisions of this section 2.6 shall survive the closing
or any termination of this Agreement.
3. Representations, Warranties and Covenants of Buyer. Buyer hereby
--------------------------------------------------
represents, warrants and covenants to Seller as follows:
3.1 Binding Obligation. Buyer is duly organized and validly existing as a
------------------
corporation in good standing under the laws of the state of its incorporation.
Buyer has full power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby. This Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary action of Buyer and this Agreement constitutes the legal, valid
and binding obligations of Buyer, enforceable in accordance with its terms,
except as enforceability may be limited by applicable bankruptcy,
reorganization, insolvency, moratorium, or similar laws relating to or affecting
creditors' rights generally. There is no action, suit or proceeding pending
against Buyer before or by any court, administrative agency or other
governmental authority which brings in question the validity of, or might in any
way impair, the execution, delivery or performance by Buyer of its obligations
hereunder. No approval of, or consent from, any governmental authority or other
third party is required for the execution, delivery or performance by Buyer of
this Agreement.
3.2 Inconsistent Agreements. The execution, delivery and performance by
-----------------------
Buyer of this Agreement and the transactions contemplated hereby do not
contravene any law or any order, writ, injunction, decree, rule or regulation of
any court, administrative agency or any other governmental agency, applicable to
Buyer, and do not conflict with and are not inconsistent with, and will not
result (with or without the giving of notice or passage of time or both) in a
breach of or constitute a default or require any consent under, the terms of any
credit agreement, indenture, mortgage,
-4-
<PAGE>
agreement, deed of trust, security agreement, lease, guarantee or other
instrument to which Buyer is a party or by which Buyer or its property is or may
be bound, and will not be in violation of, or beyond the authority conferred by,
Buyer's certificate of incorporation or other enabling or governing instruments
of Buyer.
3.3 Quiet Enjoyment. So long as a User or Lessee shall not be in default
---------------
under any of the provisions of a User Lease or Lease, as the case may be, Buyer
shall take no action to interfere with such User's or Lessee's quiet and
peaceful possession of the Equipment pursuant to such User Lease or Lease.
3.4 Priority of Liens. Buyer agrees, at the request of Seller, to execute
-----------------
and deliver such documents, instruments and agreements as may be required to
evidence, perfect and maintain the priority of the security interests
represented by the Senior Lien including, without limitation, any subordination
or security agreement in favor of Lender and any financing statements in form
acceptable for recording in any appropriate jurisdiction.
3.5 Further Sales of the Right to Receive Rent. No sale, assignment,
------------------------------------------
transfer, encumbrance or hypothecation of the right to receive any Assigned Rent
shall relieve Buyer of any of its obligations to Seller hereunder or otherwise.
4. Deliveries at Closing.
---------------------
4.1 Deliveries by Buyer. If required by the Lender, Buyer shall deliver
-------------------
to Seller a document, acceptable in form and substance to the Lender, by which
Buyer shall assume Seller's obligations with respect to the Applicable
Indebtedness.
5. Specific Covenants.
------------------
(a) Of Buyer. Regardless of whether Buyer receives payment of Assigned
--------
Rent, Buyer agrees (i) to pay or to cause or be paid on behalf of, as the case
may be, the Lender, all principal of, all interest on, and all other sums due to
the Lender on account of the Applicable Indebtedness, as and in the manner
provided in the Underlying Agreements with respect to all Equipment, when due,
(ii) to pay and perform when due, all of Seller's other obligations under the
Underlying Agreements with respect to the Applicable Indebtedness, and (iii) not
to modify or amend (or cause to be modified or amended) any of such Underlying
Agreements without the prior written consent of Seller. Buyer's covenant and
agreement as set forth in this paragraph 5(a) shall be a nonrecourse obligation
and Buyer shall have no personal liability in connection therewith. However, if
Buyer fails to comply with its covenant and agreement as set forth in this
paragraph 5(a), then Buyer's right to receive and retain payment of the Assigned
Rent shall immediately cease and terminate and such right shall revert to Seller
in its entirety. In that event, Buyer shall thereafter forward any payment of
Assigned Rent received by Buyer to Seller immediately upon receipt by Buyer, and
Buyer shall be personally liable for its failure to do so.
(b) Of Seller. If Seller shall receive any payment from a Lessee or User
---------
which includes Assigned Rent, Seller will hold the same in trust for Buyer and
will, immediately and without demand, deliver same to Buyer, or, if so provided
in the Underlying Agreements, pay or cause such amounts to be paid to Lender in
respect of the Applicable Indebtedness secured thereby. Seller shall, upon
written request of Buyer, cause notice of the sale of the Assigned Rent hereby
to Buyer and the assumption of Seller's obligations with respect to the
Applicable Indebtedness to be served upon Lessee and any Lender, and to direct
all payments of Assigned Rent hereafter to be made by Lessee to Buyer or as
otherwise directed by Buyer or provided
-5-
<PAGE>
in the Lease with respect thereto.
6. Assignment. Notwithstanding anything herein to the contrary, Buyer
----------
shall not, without the prior written consent of Seller, transfer or assign any
or all of its rights under this Agreement, the Lease or any Underlying
Agreements or User Lease to any third party.
7. Miscellaneous.
-------------
7.1 Assigns. Subject to the terms and conditions of Section 6 hereof,
-------
this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns.
7.2 Survival. The agreements, representations, warranties and
--------
covenants made herein shall survive the execution and delivery of this Agreement
and the consummation of the transactions described herein.
7.3 Captions. The captions appearing in this Agreement and in any
--------
other documents relating to this transaction are inserted only as a matter of
convenience and in no way define, limit or describe the scope or intent of such
sections or articles nor in any way affect this Agreement or any other documents
relating to this transaction.
7.4 Modifications. This Agreement may not be altered, modified or
-------------
amended except by a writing signed by the party against whom such alteration,
modification or amendment is sought.
7.5 Further Assurances. The parties hereto agree to execute and
------------------
deliver, or cause to be executed and delivered, such further instruments or
documents and take such other action as may be required to effectively carry out
the transactions contemplated herein, provided the same do not impose any
additional liabilities or obligations upon Buyer or Seller.
7.6 Entire Agreement. This Agreement embodies the entire agreement
-----------------
between the parties relative to the subject matter hereof, and there are no oral
or written agreements between the parties, nor any representations made by
either party relative to the subject matter hereof, which are not expressly set
forth herein.
7.7 Jury Waiver. SELLER AND BUYER DO HEREBY KNOWINGLY, VOLUNTARILY
------------
AND INTENTIONALLY WAIVE THEIR RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION BASED HEREON, OR ARISING OUT OF, OR UNDER OR IN CONNECTION WITH THIS
AGREEMENT, THE DOCUMENTS DELIVERED BY Buyer AT CLOSING OR SELLER AT CLOSING, OR
ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR
WRITTEN) OR ANY ACTIONS OF EITHER PARTY ARISING OUT OF OR RELATED IN ANY MANNER
WITH THIS AGREEMENT OR THE PROPERTY (INCLUDING WITHOUT LIMITATION, ANY ACTION TO
RESCIND OR CANCEL THIS AGREEMENT AND ANY CLAIMS OR DEFENSES ASSERTING THAT THIS
AGREEMENT WAS FRAUDULENTLY INDUCED OR IS OTHERWISE VOID OR VOIDABLE). THIS
WAIVER IS A MATERIAL INDUCEMENT FOR SELLER TO ENTER INTO AND ACCEPT THIS
AGREEMENT AND THE DOCUMENTS DELIVERED BY BUYER AT CLOSING AND SHALL SURVIVE THE
CLOSING OR TERMINATION OF THIS AGREEMENT.
7.8 Notices. Any notice, request or other communication to either
-------
-6-
<PAGE>
party by the other hereunder shall be deemed given on the earlier of the date
the same is (i) actually received, or (ii) five (5) days after mailing by
certified or registered mail, return receipt requested, postage prepaid and
addressed to the party for which it is intended at the address set forth at the
head of this Agreement. The place to which notices are to be given to either
party may be changed from time to time by either party by like notice to the
other.
7.9 Choice of Law. This Agreement shall be governed by and
-------------
interested under the laws of the Commonwealth of Virginia without giving effect
to the principles of conflicts of laws .
7.10 Severability. The invalidity or unenforceability of any
------------
provision of this Agreement shall not affect the validity or enforceability of
any other provision.
7.11 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute on and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered on the date first above written.
SELLER: FA, INC.
By: /s/ S. Craig Tompkins
-------------------------------
Name: S. Craig Tompkins
-------------------------------
Title: President
-------------------------------
BUYER: Ralion Financial Services, Inc.
By: /s/ John M. Costello
-------------------------------
Name: John M. Costello
-------------------------------
Title: President
-------------------------------
-7-
<PAGE>
SCHEDULE A
----------
1. LEASE:
(a) That certain Master Lease Agreement dated as of December 20, 1996 between
Lessee and Seller. (See Exhibit 10.29 of Reading Entertainment, Inc.'s
December 31, 1996 10-K.)
2. USER(S) (IF OTHER THAN LESSEE): See attached Schedule.
3. USER LEASE(S) (IF OTHER THAN LEASE): See attached Schedule.
4. EQUIPMENT DESCRIPTION & LOCATION: See attached Schedule.
5. LENDER:
(a) See attached Schedule for lenders with respect to User Leases.
(b) ISO-trade with respect to certain remarketing proceeds from the
Equipment.
(c) Lessee, pursuant to that certain Nonrecourse Promissory Note (and
related Security Agreement) dated as of December 20, 1996 issued by
Seller to Lessee and payable out of the fixed rentals under the Lease.
6. APPLICABLE INDEBTEDNESS:
That certain indebtedness in favor of the Lessee referenced in 5 (c). above,
secured by the Lease referenced in 1 above and the Equipment.
7. FULL PURCHASE PRICE: See Schedule B.
(The Schedules for Items 2., 3., 4., and 5.(a) submitted as exhibits to
this Lease Rental Purchase Agreement are omitted for purposes of this
filing as they are written in French and would require translation. A
copy is available at the Company's office.)
-8-
<PAGE>
SCHEDULE B
----------
<TABLE>
<CAPTION>
<S> <C>
FULL PURCHASE PRICE: $38,840,950.29
1. Cash payment on or before
December 31, 1996
in the amount of: $32,000.00
2. Assumption of the Applicable
Indebtedness in the outstanding
amount of: $38,808,950.29
</TABLE>
-9-
<PAGE>
EXHIBIT 21(i)
READING ENTERTAINMENT, INC.
---------------------------
As of March 17, 1997
<TABLE>
<CAPTION>
JURISDICTION OF
CONSOLIDATED SUBSIDIARIES INCORPORATION
<S> <C>
1. Angelika Cinemas, Inc. New York, USA
2. Angelika Film Centers LLC Delaware, USA
3. Australia Cinema Management New South Wales, Australia
Pty Limited
4. Cine Vista Holdings, Inc. Delaware, USA
5. Entertainment Holdings, Inc. Delaware, USA
6. FA, Inc. Delaware, USA
7. The Port Reading Railroad Company New Jersey, USA
8. Puerto Rico Holdings, Inc. Delaware, USA
9. Railroad Investments, Inc. Delaware, USA
10. Reading Australia Pty Limited New South Wales, Australia
11. Reading Capital Corporation Delaware, USA
12. Reading Center Development Corp. Pennsylvania, USA
13. Reading Cinemas, Inc. Delaware, USA
14. Reading Cinemas of Puerto Rico, Puerto Rico, USA
Inc.
15. Reading Cinemas U.K., Inc. Delaware, USA
16. Reading Company Pennsylvania, USA
17. Reading Country Cinemas Pty Ltd. New South Wales, Australia
18. Reading Holdings, Inc. Delaware, USA
19. Reading International Cinemas LLC Delaware, USA
20. Reading Investment Company Delaware, USA
21. Reading Merger Co. Pennsylvania, USA
22. Reading Properties Pty Limited Victoria, Australia
23. Reading Real Estate Company Pennsylvania, USA
24. Reading Resources, Inc. Delaware, USA
25. Reading Transportation Company Pennsylvania, USA
26. Trenton-Princeton Traction Company New Jersey, USA
27. Washington and Franklin Railway Pennsylvania and
Company Maryland, USA
28. Western Gaming, Inc. Delaware, USA
29. Wilmington & Northern Railroad Pennsylvania and
Delaware, USA
</TABLE>
<PAGE>
UNCONSOLIDATED MINORITY INTERESTS
<TABLE>
<CAPTION>
<S> <C>
1. Allentown Terminal Railroad Pennsylvania, USA
Company
2. Baltimore and Cumberland Valley Pennsylvania, USA
Railroad Extension Company
3. Pennsylvania-Reading Seashore New Jersey, USA
Lines
4. Philadelphia Belt Line Railroad Pennsylvania, USA
Company (The)
5. Trailer Train Company
PARTNERSHIPS
1. Parametric Garage Associates
2. Rutherford Industrial Center Partners, G.P.
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 2-83039 and No. 33-57222) pertaining to the stock option plans
of Reading Entertainment, Inc. of our report dated March 19, 1997, with
respect to the consolidated financial statements of Reading Entertainment,
Inc. included in the Annual Report (Form 10-K) for the year ended December 31,
1996.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 15, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 48,680
<SECURITIES> 0
<RECEIVABLES> 3,117
<ALLOWANCES> 70
<INVENTORY> 151
<CURRENT-ASSETS> 56,445
<PP&E> 22,939
<DEPRECIATION> 1,809
<TOTAL-ASSETS> 181,754
<CURRENT-LIABILITIES> 13,716
<BONDS> 516
7,000
1<F1>
<COMMON> 7
<OTHER-SE> 155,946
<TOTAL-LIABILITY-AND-EQUITY> 181,754
<SALES> 4,486
<TOTAL-REVENUES> 22,944
<CGS> 821
<TOTAL-COSTS> 16,245
<OTHER-EXPENSES> 7,106
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,767
<INCOME-TAX> (1,236)
<INCOME-CONTINUING> 7,003
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,003
<EPS-PRIMARY> $1.11
<EPS-DILUTED> $1.11
<FN>
<F1>REPRESENTS PAR VALUE OF READING ENTERTAINMENT SERIES B PREFERRED STOCK
</FN>
</TABLE>
