<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ............... to ...............
Commission file number 1-14504
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, Suite 1300
Philadelphia, Pennsylvania 19102-4813
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 215-569-3344
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
There were 7,449,364 shares of Common Stock outstanding as of August 13,
1997.
<PAGE>
INDEX
READING ENTERTAINMENT, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PART I. - FINANCIAL INFORMATION PAGE
- ------------------------------- ----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- June 30, 1997
(Unaudited) and December 31, 1996............................................................... 3-4
Condensed Consolidated Statements of Operations -- Three Months and Six Months
Ended June 30, 1997 and 1996 (Unaudited)........................................................ 5
Condensed Consolidated Statements of Cash Flows -- Six Months
Ended June 30, 1997 and 1996 (Unaudited)........................................................ 6
Notes to Condensed Consolidated Financial Statements (Unaudited)................................... 7-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 11-16
PART II. - OTHER INFORMATION
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K................................................................... 17
Signatures.................................................................................................. 18
</TABLE>
2
<PAGE>
PART I - Financial Information
Item 1. Financial Statements
Reading Entertainment, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
(Unaudited)
June 30, December 31,
1997 1996*
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $38,977 $48,680
Amounts receivable 1,144 3,050
Dividends receivable 3,855 67
Restricted cash 2,586 3,683
Inventories 156 151
Prepayments and other current assets 990 814
Investment in Stater Preferred Stock 67,978 0
- -----------------------------------------------------------------------------------------------------------
Total current assets 115,686 56,445
- -----------------------------------------------------------------------------------------------------------
Investment in Stater Preferred Stock 0 67,978
Investment in Citadel Common Stock 4,740 4,850
Net investment in leased equipment 2,125 2,125
Property and equipment - net 22,284 21,130
Other assets 3,139 2,997
Intangible assets:
Beneficial leases - net of accumulated amortization of $2,741
in 1997 and $2,284 in 1996 14,167 14,624
Cost in excess of assets acquired - net of accumulated
amortization of $492 in 1997 and $197 in 1996 11,316 11,605
- -----------------------------------------------------------------------------------------------------------
57,771 125,309
- -----------------------------------------------------------------------------------------------------------
$173,457 $181,754
===========================================================================================================
</TABLE>
* The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
(Unaudited)
June 30, December 31,
1997 1996*
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $1,760 $5,183
Accrued taxes 1,030 3,156
Accrued property costs and other 907 1,240
Film rent payable 1,454 1,102
Note payable 500 1,500
Due to affiliate 27 183
Other liabilities 1,117 1,352
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 6,795 13,716
- -----------------------------------------------------------------------------------------------------------
Capitalized lease, less current portion 513 516
Note payable 0 500
Other liabilities 2,457 1,972
- -----------------------------------------------------------------------------------------------------------
Total long term liabilities 2,970 2,988
- -----------------------------------------------------------------------------------------------------------
Minority interests 2,113 2,096
Reading Entertainment Redeemable Series A Preferred Stock, par value $.001 per 7,000 7,000
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 1
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 -- 7,449,364 shares 7 7
Other capital 138,637 138,594
Retained earnings 17,203 17,238
Foreign currency translation adjustment (1,269) 114
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 154,579 155,954
- -----------------------------------------------------------------------------------------------------------
$173,457 $181,754
===========================================================================================================
</TABLE>
* The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
- --------------------------------------------------------------------------------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Theater:
Admissions $4,807 $2,781 $9,059 $5,557
Concessions 1,542 1,043 2,852 2,064
Advertising and other 223 174 433 388
Real estate 63 70 100 144
Interest and dividends 2,429 789 4,864 1,374
- --------------------------------------------------------------------------------------------
9,064 4,857 17,308 9,527
- --------------------------------------------------------------------------------------------
EXPENSES:
Theater costs 4,769 3,141 9,145 6,112
Theater concession costs 328 179 626 347
Depreciation and amortization 616 386 1,233 772
General and administrative 2,655 1,319 4,273 2,999
- --------------------------------------------------------------------------------------------
8,368 5,025 15,277 10,230
- --------------------------------------------------------------------------------------------
Income (loss) from operations 696 (168) 2,031 (703)
Equity in earnings of affiliate 70 1,433 136 1,433
Other income, net 9 9 238 24
- --------------------------------------------------------------------------------------------
Income before income taxes and
minority interests 775 1,274 2,405 754
Minority interests 58 (52) 104 (307)
- --------------------------------------------------------------------------------------------
Income before income taxes 717 1,326 2,301 1,061
Income taxes 162 13 321 22
- --------------------------------------------------------------------------------------------
Net income 555 1,313 1,980 1,039
Less: Preferred stock dividends and amortization
of asset put option (1,077) 0 (2,153) 0
- --------------------------------------------------------------------------------------------
Net (loss) income applicable to common
shareholders ($522) $1,313 ($173) $1,039
============================================================================================
Per share information:
- --------------------------------------------------------------------------------------------
Net (loss) income applicable to common
shareholders after preferred stock dividends
and amortization of asset put option ($0.07) $0.26 ($0.02) $0.21
============================================================================================
Weighted average common shares outstanding 7,449,364 4,973,222 7,449,364 4,973,241
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
- ------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $1,980 $1,039
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Depreciation 462 298
Amortization 771 74
Deferred rent expense 484 82
Equity in earnings of affiliate (136) (1,433)
Minority interests 104 (307)
Gain on sales of real estate (26) 0
Changes in operating assets and liabilities:
Decrease (increase) in amounts receivable 1,906 (78)
Increase in dividends receivable (3,788) 0
(Increase) decrease in inventories (5) 24
Increase in prepayments and other current assets (176) (129)
Decrease in accounts payable and accrued expenses (5,464) (363)
Increase in film rent payable 352 484
(Decrease) increase in other liabilities (3) 180
Other, net (151) 56
- ------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (3,690) 327
- ------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment (2,244) (3,779)
Purchase of Citadel stock option 0 (50)
Angelika acquisition organization costs 0 (231)
Decrease (increase) in restricted cash 1,596 (442)
Decrease in due to affiliate (156) 0
Net proceeds from sales of real estate 30 0
Decrease in due from affiliate 0 944
- ------------------------------------------------------------------------------------------
Net cash used in investing activities (774) (3,558)
- ------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payment of preferred stock dividends (2,153) 0
Decrease in note payable (1,500) 0
Payments of Stock Transactions issuance costs (366) 0
Distributions to minority partner of the Angelika (181) 0
Proceeds from partner of Australian joint venture 0 12,888
Payments of debt issuance costs 0 (254)
Cash acquired as a result of consolidation of Australian joint venture 0 95
- ------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (4,200) 12,729
- ------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (1,039) (94)
- ------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (9,703) 9,404
Cash and cash equivalents at beginning of year 48,680 44,189
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $38,977 $53,593
==========================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Condensed Financial Statements (unaudited)
June 30, 1997
(amounts in tables in thousands)
NOTE 1 -- BASIS OF PRESENTATION
Reading Entertainment, Inc. ("REI" or "Reading Entertainment" and
collectively, with its subsidiaries and predecessors, "Reading" or the
"Company") operates motion picture exhibition theaters in Puerto Rico, Australia
and New York, New York and is developing multiplex cinemas in Puerto Rico,
cinema based entertainment centers and multiplex cinemas in Australia and
multiplex art and speciality cinemas in the United States.
The financial statements have been prepared in accordance with generally
accepted accounting principles for interim information. Accordingly, they do
not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments of a recurring nature considered necessary for a
fair presentation of the results for the interim periods presented have been
included. Operating results for the six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
Certain amounts in previously issued financial statements have been
reclassified to conform with the current period presentation.
NOTE 2 -- ACQUISITION AND INVESTMENT ACTIVITIES
In March 1996, the Company acquired 1,564,473 shares of common stock of
Citadel Holding Corporation (together with its wholly owned subsidiaries
"Citadel") from Craig Corporation (together with its wholly owned subsidiaries
"Craig") representing an interest of approximately 26.1%. On April 11, 1997
Citadel issued 666,000 common shares to Craig Corporation at $3.00 per share,
thereby reducing the Company's ownership to approximately 23.5%. The Company
accounts for its investment in the Citadel Common Stock by the equity method.
Citadel's net earnings for the six months ended June 30, 1997 were $659,000 and
the Company's share of such earnings was $136,000, which amount is included in
the Condensed Consolidated Statement of Operations for the six months ended June
30, 1997 as "Equity in earnings of affiliate." Citadel's assets and liabilities
totaled $29,133,000 and $10,750,000, respectively, as of June 30, 1997.
Management believes that the June 30, 1997 carrying amount of the Citadel common
stock investment approximates its fair value.
The Company acquired an 83.3% interest in the Angelika Film Center LLC
("AFC") in August 1996, which company owns the Angelika Film Center, an art and
specialty multiplex cinema located in the Soho area of New York City (the
"Angelika"). AFC acquired the Angelika in part, by issuing a promissory note to
the sellers of such assets in the amount of $2,000,000. The note is fully
collateralized by escrowed funds classified as "Restricted cash." Principal of
$1,500,000 was paid in full in April 1997. The $500,000 remaining portion of
this note bears interest at 9% per annum and is due in February 1998.
In April 1997, Reading Australia Pty Limited (together with its
subsidiaries "Reading Australia") entered into an agreement with an officer of a
subsidiary whereby the officer may borrow up to approximately $800,000 from
Reading Australia to invest in certain country cinema developments. In
accordance with the agreement (which agreement was effective as of January 2,
1997), the officer has borrowed approximately $400,000 from Reading Australia
and utilized the proceeds of the borrowing to acquire a 25% ownership interest
(computed after consideration of certain management fees payable to Reading
Australia) in Reading Australia's theater in Townsville, Queensland.
7
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Condensed Financial Statements (unaudited)
June 30, 1997
(amounts in tables in thousands)
In October 1996, the Company acquired the 50% interest in Reading Australia
which was previously held by Craig, providing the Company with ownership of 100%
of Reading Australia.
Minority interest in 1997 reflects the 16.67% interest of Sutton Hill
Associates in the Angelika and 25% of the results of the theater operations in
Townsville, Queensland. In 1996, minority interest reflects the 50% interest of
Craig in Reading Australia.
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1997 1996
---------- -----------
<S> <C> <C>
Land $ 6,988 $ 7,332
Buildings 743 743
Capitalized premises lease 538 538
Leasehold improvements 7,537 5,774
Equipment 6,612 5,990
Construction-in-progress and property development costs 2,128 2,562
---------- -----------
24,546 22,939
Less: Accumulated depreciation (2,262) (1,809)
---------- -----------
$22,284 $21,130
========== ===========
</TABLE>
NOTE 4 -- INCOME TAXES
The Company is required to pay federal alternative minimum tax ("AMT").
AMT is calculated separately from the regular federal income tax and is based on
a flat rate applied to a broader tax base. Amounts payable thereunder cannot be
totally eliminated through the application of net operating loss carryforwards.
The Company recorded AMT expense of $0 and $22,000 in the six months ended June
30, 1997 and 1996, respectively. The Company recorded $100,000 in state and
local income tax expense in the six months ended June 30, 1997 related to
earnings from the Angelika and $222,000 in foreign withholding taxes which will
be paid if certain intercompany loans are repaid.
8
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Condensed Financial Statements (unaudited)
June 30, 1997
(amounts in tables in thousands)
NOTE 5 -- COMMITMENTS
At June 30, 1997 the Company had lease agreements for three theater
facilities with a total of 22 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 $12,400,000 at June 30, 1997. The aggregate minimum annual rental
commitment for such leases is approximately $550,000, which rentals commence
upon the opening of the theaters.
The Company has entered into purchase agreements and other lease agreements
which are subject to satisfaction of certain contingencies, which contingencies
were not satisfied as of August 13, 1997. In conjunction with lease and
purchase agreements, the Company escrowed and/or made deposits totaling
$2,625,000 at June 30, 1997, which amount has been classified as "Restricted
cash" in the Company's Condensed Consolidated Balance Sheet.
NOTE 6 -- 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 and fund certain new theater development expenditures. At June 30,
1997 and December 31, 1996, no amounts were outstanding under this agreement.
The provisions of the Credit Agreement require Cine Vista to maintain a
minimum level of net worth and other financial ratios, restrict the payment of
dividends, and limit additional borrowing and capital expenditures. Cine Vista
failed to maintain compliance with certain of the financial covenants contained
in the Credit Agreement during 1996 and the six months ended June 30, 1997. The
Company is currently working with the lender to revise certain of the Credit
Agreement's financial coverage to ensure its continuing availability. The
lender has waived compliance with the covenants during 1996 and the Company has
requested a waiver for the covenant violations during the six months ended June
30, 1997.
NOTE 7 -- COMMON STOCK TRANSFER RESTRICTIONS
REI common stock (par value $.001) ("Common Stock") is traded on the Nasdaq
National Market under the symbol RDGE and the Philadelphia Stock Exchange under
the symbol RDG. The Company's 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).
9
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Condensed Financial Statements (unaudited)
June 30, 1997
(amounts in tables in thousands)
In January 1997, the Company's Board of Directors voted to waive these
transfer restrictions to the extent necessary to permit Craig to acquire
additional shares of the Company's Common Stock. Prior to granting the waiver
of the restrictions, the Board of Directors had determined that acquisition of
the shares by Craig would not affect the continuing availability of the
Company's federal tax loss carryforwards.
NOTE 8 -- IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share," which is required to be adopted on December 31,
1997. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of Statement
128 on the calculation of the Company's primary and fully diluted earnings per
share is not expected to be material.
NOTE 9 -- LEGAL PROCEEDINGS
In 1995, the federal district judge who presided over Reading Company's (a
subsidiary of REI) bankruptcy reorganization ruled that all liability asserted
against Reading Company as a potentially responsible party for the Douglassville
Disposal Site under Federal Superfund legislation had been discharged pursuant
to the consummation order issued in conjunction with the bankruptcy on December
31, 1980. The judge's decision had been appealed and on June 17, 1997, the
United States Court of Appeals for the Third Circuit ("Appeals Court") upheld
the judge's ruling. The plaintiffs have submitted a request for a rehearing of
the matter to the Appeals Court.
NOTE 10 -- SUBSEQUENT EVENTS
In July 1997, the Company was advised by Stater Bros. Holdings, Inc.
("Stater") that Stater intends to exercise its option to acquire the Stater
Series B Preferred Stock (the "Stater Preferred Stock") owned by Reading
Australia. The exercise price to be paid at the closing is $69,365,000, plus
accumulated dividends. As of June 30, 1997, dividends had accumulated in the
amount of approximately $3.9 million, and continue to accumulate at the rate of
approximately $20,000 per day through the closing. The Company anticipates that
closing on the purchase will occur within the next 45 days. A book gain of
$1,387,000 will be recorded by the Company in the third quarter of 1997 related
to this transaction as the Stater Preferred Stock investment was recorded on the
Company's Consolidated Balance Sheet at $67,978,000 (98% of stated value). The
pro forma effect on "Interest and dividend" revenues and "Net income applicable
to common shareholders" from the sale of the Stater Preferred Stock would have
been to reduce such income by $1,848,000 (or $.25 per share) and $741,000 (or
$.39 per share) for the six months ended June 30, 1997 and the twelve months
ended December 31, 1996, respectively, exclusive of the non-recurring $1,387,000
gain associated with the writeup to stated value. Accordingly, pro forma net
loss applicable to common shareholders for the six months ended June 30, 1997
and pro forma net income applicable to common shareholders for the twelve months
ended December 31, 1996 would have been $2,021,000 ($.27 per share) and
$5,351,000 ($.72 per share), respectively. Had the sale of the Stater Preferred
Stock been recorded on the Company's Consolidated Balance sheet as of June 30,
1997, "Cash and cash equivalents" would have totaled $112,197,000 and the
Company would have no "Investment in Stater Preferred Stock."
On July 30, 1997, Reading Australia acquired an existing four-screen
theater located in Bundaberg, Victoria for approximately $1,600,000. The
Company commenced operations at the theater in the third quarter.
10
<PAGE>
Item 2. 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 multiplex cinemas and related entertainment centers in Australia;
(ii) the domestic management, development and acquisition of specialty motion
pictures theaters which feature foreign and limited release art films similar to
the Angelika Film Center in the Soho District of New York City (the "Angelika");
and (iii) the management and development of multiplex cinemas in Puerto Rico.
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 acquisition of the Angelika in the third
quarter of 1996 and a recapitalization of the Company (the "Stock Transactions")
in the fourth quarter of 1996, historical revenues and earnings have varied
significantly and management believes that such results are not necessarily
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
months and the six months ended June 30, 1997 and 1996, inclusive of minority
interest in the current year period:
<TABLE>
<CAPTION>
Period Ended June 30, 1997 1996
--------------------- ---- ----
<S> <C> <C>
Six Months $12,344,000 $8,009,000
Three Months $ 6,572,000 $3,998,000
</TABLE>
Cine Vista's Theater Revenues decreased approximately 10% between the
current and prior year six-month periods primarily as a result of the opening by
a competitor of three new multiplex theaters in the San Juan metropolitan
market. Cine Vista's theater revenues increased approximately 3% in the current
three month period due to the opening of a new six-plex in March 1997. In May
1997, Cine Vista closed four of six screens at another location to initiate
construction of a new eight-plex at that location, which construction is
anticipated to be completed in mid-1998. Accordingly, Cine Vista will have a net
increase of two screens in 1997 and anticipates the addition of six more screens
in mid-1998. However, increased competition in the San Juan metropolitan market
is expected to decrease theater revenues in subsequent quarters in 1997,
relative to 1996 levels, if overall box office revenues on the island remain
equal to the prior year.
Theater Revenue for the six months ended June 30, 1997 includes revenues of
$3,569,000 from the Angelika, inclusive of minority interest. (The Company
acquired the Angelika on August 28, 1996.) Theater revenues at the Angelika
increased approximately 6% from the theater revenues recorded by the Angelika in
the same six-month period of the prior year and decreased 10% in the three
months ended June 30, 1997 (revenues recorded prior to the Company's acquisition
of the Angelika are not included in the Company's condensed consolidated
financial results).
The Company opened its first theater in Australia, a six-plex located in
Townsville, Queensland, at the end of December 1996. Revenues from the new
theater totaled $800,000 and $1,602,000 in the three and six months ended June
30, 1997, respectively. In July 1997, the Company purchased an operating four-
screen theater in Bundaberg, Victoria for approximately $1,600,000. The
operating results of this theater will be included in the Condensed Consolidated
Statement of Operations from the settlement date forward. In addition, a six-
plex currently under construction by Reading Australia will commence operations
in late 1997.
11
<PAGE>
In the first quarter of 1997, the Company entered into a lease for the
first new theater based upon the Angelika concept to be located in Houston,
Texas and anticipates opening this eight-screen facility in late 1997.
Real Estate revenues include rental income and the net proceeds of sales of
the Company's real estate. The Company has approximately 25 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 six months
ended June 30, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
Period ending June 30, 1997 1996
--------------------- ---- ----
<S> <C> <C>
Six Months $4,864,000 $1,374,000
Three Months $2,429,000 $ 789,000
</TABLE>
The increase in interest and dividend income of $3,490,000 between the
current and prior year six-month period was largely 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%. For
the same reason, there was also an increase in interest and dividend income of
$1,640,000 from the prior year quarter to the current year quarter.
Expenses
- --------
"Theater costs," "Theater concession costs" and "Depreciation and
amortization" reflect the direct theater costs of Cine Vista, the Angelika and
Reading Australia's theater operations. These costs, inclusive of minority
interest, increased $3,773,000 from $7,231,000 in the prior year six-month
period to $11,004,000 in the current year six-month period due primarily to the
inclusion of $2,634,000 of theater costs associated with the Angelika's
operations subsequent to the Company's August 1996 acquisition and $1,474,000 in
costs associated with the new six-plex theater which opened in Australia in
December 1996 (which costs include approximately $100,000 of start-up costs
associated with the initialization of activities at the theater). An increase
of $2,007,000 in such theater costs from the prior year quarter to the current
year quarter resulted from the inclusion of $1,181,000 and $690,000 (inclusive
of minority interests) from the Angelika and Townsville operations,
respectively.
12
<PAGE>
"General and administrative" expenses for the three and six months ended
June 30, 1997 and 1996 listed below include the following components:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Cine Vista $ 161,000 $ 282,000 $ 385,000 $ 576,000
Angelika/(1)/ 104,000 0 209,000 0
Australia/(2)/ 1,202,000 201,000 1,531,000 456,000
Other, general 1,155,000 635,000 2,082,000 1,511,00
------------------- ---------------- ---------------- ----------------
Company share 2,622,000 1,118,000 4,207,000 2,543,000
------------------- ---------------- ---------------- ----------------
Minority Interests 33,000 201,000 66,000 456,000
------------------- ---------------- ---------------- ----------------
Gross Amount Included in
Condensed Consolidated
Statement of Operations $2,655,000 $1,319,000 $4,273,000 $2,999,000
=================== ================ ================ ================
</TABLE>
/(1)/Net of minority interest of Sutton Hill in the three months and six
months ended June 30, 1997.
/(2)/Net of minority interest of Craig in the three and six months ended
June 30, 1996, respectively and inclusive of a 25% minority interest
in the Company's Townsville, Australia theater.
The decrease in Cine Vista's "General and administrative" expenses from the
prior year periods to the current year periods is largely due to the inclusion
of $100,000 of salary expense in the prior year which has been included in
"Other, general-General and administrative" expenses in 1997 and a decrease in
certain professional fees.
In the current three-month period, Australia's "General and administrative"
expenses include $555,000 of previously capitalized property development costs
which were expensed due to management's determination in the second quarter that
development of the related theater locations would not be pursued to completion.
"General and administrative" expenses in the "Other, general" category
increased from the prior year periods due to an increase in professional fees
and other expenses associated with theater acquisition activities and an
increase in salaries and bonus expense resulting in part, from the inclusion of
certain salary expense (which was included in Cine Vista's "General and
administrative" expenses in the prior year.)
Equity in Earnings of Affiliate
- -------------------------------
"Equity in earnings of affiliate" which reflect earnings from the Company's
investment in Citadel acquired in late March 1996, decreased $1,297,000 from
$1,433,000 in the six months ended June 30, 1996 to $136,000 in the six months
ended June 30, 1997. The prior year period's equity earnings included 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. For the same reason, there was a decrease of $1,362,000
in these earnings from the prior year quarter to the current year quarter.
13
<PAGE>
Other Income
- ------------
"Other income" totaled $238,000 and $24,000 in the six months ended June
30, 1997 and 1996, respectively, and is comprised in the current year period
primarily of amounts received from a third party as reimbursement of certain
acquisition related expenditures which were expensed by the Company in prior
periods. "Other income" remained consistent from the prior year quarter to the
current year quarter.
Minority Interests
- ------------------
"Minority interests" for the three and six months ended June 30, 1997
includes $57,000 and $111,000, respectively, which reflects Sutton Hill's
minority share of the Angelika income for such periods, and $1,000 and $7,000
which reflects the minority share of the Townsville income and loss operations
for such periods, respectively (See Note 2). The "Minority interest" of $52,000
and $307,000 for three and six months ended June 30, 1996 reflects Craig's share
of Reading International's loss for those periods.
Income Tax Provision
- --------------------
Income tax expense in the current year six-month period includes an accrual
for foreign withholding taxes of $222,000 which will be paid if certain
intercompany loans are repaid and state and local taxes of $100,000. Income tax
expense in the prior year six-month period reflects $22,000 of AMT expense.
Income tax expense in the current quarter includes an accrual for foreign
withholding taxes of $112,000 and state and local taxes of $50,000. Income tax
expense in the prior year quarter reflects $13,000 of AMT expense.
Net Income (Loss)
- -----------------
As a result of the above, the Company recorded "Net income" of $1,980,000
and $1,039,000 for the six months ended June 30, 1997 and 1996, respectively,
and "Net income" of $555,000 and $1,313,000 for the three months ended June 30,
1997 and 1996, respectively.
Net Income (Loss) Applicable to Common Shareholders
- ---------------------------------------------------
In the three and six months ended June 30, 1997, "Net income applicable to
common stockholders" has been reduced by the 6.5% per annum dividend on the
$62,000,000 stated value of Convertible Preferred Series A and B Stock and
amortization of an asset put option issued to Citadel.
Liquidity and Capital Resources
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. In July 1997, the Company was advised by Stater Bros.
Holdings, Inc. that Stater intends to exercise its option to acquire the Stater
Preferred Stock, from Reading Australia. The exercise price to be paid at the
closing is $69,365,000, plus accumulated dividends. As of June 30, 1997,
accumulated dividends totaled approximately $3.9 million, and continue to
accumulate at the rate of approximately $20,000 per day through the closing.
The Company anticipates that closing on the purchase will occur within the next
45 days.
As the sale of the Stater Preferred Stock will increase the Company's cash
and cash equivalents to more than $100 million, it is anticipated that the
proceeds of the sale will be deployed into the Company's motion picture
exhibition and entertainment center development business over the next 24
months.
14
<PAGE>
If the Company is successful in its efforts to develop all of the projects
which it is presently considering in Australia, Puerto Rico and the domestic
market, 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-leaseback transactions and the issuance/sale of additional
equity either of REI, Reading Australia or at the project level. The Company
does not currently have property purchase or development commitments which
exceed its liquid funds.
During the six months ending June 30, 1997, the U.S. dollar strengthened
materially relative to the Australian dollar. Accordingly, the value of Reading
Australia's "Cash and cash equivalents" which funds are denominated in
Australian dollars, decreased approximately $1,000,000 when converted to U.S.
dollars in the Company's consolidated financial statements. Reading Australia
had "Restricted cash" and "Cash and cash equivalents" denominated in Australian
dollars which amounted to $(US)12,236,000 at June 30, 1997. Such devaluation
did not effect the Company's development plans or its ability to execute such
plans since Reading Australia's anticipated development expenditures are in
excess of Australian dollar denominated liquid assets held by Reading Australia.
Therefore Reading Australia has not sustained any loss in purchasing power. To
the extent that Reading Australia's intended Australian investments exceed
Australian dollar denominated assets, and are instead invested in U.S. dollar
investments by Reading Australia or REI, the company has benefitted from the
devaluation by increasing its purchasing power in Australian dollars.
The following summarizes the major sources and uses of cash funds in the
six months ended June 30, 1997 and 1996, respectively:
1997:
- ----
"Unrestricted cash and cash equivalents" decreased $9,703,000 from
$48,680,000 at December 31, 1996 to $38,977,000 at June 30, 1997. Working
capital increased $66,162,000 from $42,729,000 at December 31, 1996 to
$108,891,000 at June 30, 1997 largely as a result of the reclassification of the
Stater Preferred Stock investment from non-current assets to current assets at
June 30, 1997.
While not necessarily indicative of its results of operations determined
under generally accepted accounting principles, Cine Vista's, the Angelika's and
Reading Australia's earnings after consideration of direct theater general and
administrative expenses and before interest, depreciation and amortization
(theater "EBITDA") (inclusive of minority interest of $104,000) of $1,705,000
contributed to the Company's liquid funds for the six months ended June 30,
1997. Other principal sources of liquid funds in the current year six month
period were $1,009,000 in "Interest and dividend" income, a net decrease in
"Amounts receivable" of $1,906,000, and a net decrease in restricted cash of
$1,596,000.
In addition to operating expenses, other uses of liquid funds in the six
months ended June 30, 1997 included $2,244,000 of property and equipment
purchases, a net decrease in "Accounts payable and accrued expenses," of
$5,464,000, a net increase in "Dividends receivable" of $3,788,000, payment of
preferred stock dividends of $2,153,000, and a net decrease in "Notes payable"
of $1,500,000.
1996:
- ----
"Unrestricted cash and cash equivalents" increased $9,355,000 from
$44,189,000 at December 31, 1995 to $53,593,000 at June 30, 1996. Working
capital increased $4,883,000 from $42,666,000 at December 31, 1995 to
$47,549,000 at June 30, 1996.
Craig contributions of $12,888,000 to Reading International, which
benefitted the Company upon the acquisition of 100% ownership in Reading
International, contributed to the Company's liquid funds in the six months ended
June 30, 1996 as did Cine Vista's EBITDA of $974,000. Other principal sources
of liquid funds in the six
15
<PAGE>
months ended June 30, 1996 were a decrease in "Due from affiliate" of $944,000
and $1,374,000 in "Interest and dividend" income.
In addition to operating expenses, principal uses of liquid funds in the
prior year six-month period included $3,779,000 for the purchase of property,
plant and equipment related primarily to property acquisitions and developments
by Reading Australia.
Prior to Reading Company's 1981 quasi-reorganization, Reading Company had
extensive railroad and related operations. Such operations may have contributed
to environmental contamination of properties now owned by Reading Company,
previously sold by Reading Company, or to which Reading 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.
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.
Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share," which is required to be adopted on December 31,
1997. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of Statement
128 on the calculation of the Company's primary and fully diluted earnings per
share is not expected to be material.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On June 17, 1997, the United States Court of Appeals for the Third
Circuit (the "Appeals Court"), upheld the 1995 decision of a federal
district judge in the matter of Reading Company, Debtor v. United
---------------------------------
States of America and Consolidated Rail Corporation. The lower court
---------------------------------------------------
had ruled that Reading Company's ("Reading") bankruptcy reorganization
had discharged Reading from liability asserted against Reading as a
potentially responsible party for the Douglassville Disposal Site
(located in Berks County, Pennsylvania) on December 31, 1980. The
plaintiffs submitted a request for a rehearing of the mater to the
Appeals Court, which request was denied on August 12, 1997.
On April 24, 1997, a shareholder owning 50 shares of Reading
Entertainment, Inc. ("REI") common stock commenced a purported
derivative action (the "Action") on behalf of the Company entitled
Walter Alphin v. James J. Cotter, et. al, in the Philadelphia County
-----------------------------------------
Court of Common Pleas. The complaint in the Action named Craig
Corporation ("Craig"), former directors of Reading Company, Gerald P.
Laheney and Ralph B. Perry III and all of the current directors of REI
as defendants. The Action alleges that the defendants breached their
fiduciary duty to Reading Company by failing to utilize certain tax
assets of Reading Company over the years and such failure resulted in
the defendants causing Reading Company to use certain of the tax assets
for the ultimate benefit of Criag. No monetary claims have been
asserted against the Company in the Action and the plaintiff seeks
unspecified monetary damages from the defendants. Management is
reviewing the Action and believes that the suit has no merit and that
it will not have a material adverse effect upon the Company. The
Company has directors and officers liability insurance and believes
that the claims set forth in the Action are covered by such insurance,
if the Company is ultimately deemed to have any monetary responsibility
through its indemnification of REI's directors.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Non-Qualified Stock Option Agreement dated April 18, 1997 by and
between Reading Entertainment, Inc. and James J. Cotter.
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the reporting period.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
READING ENTERTAINMENT, INC. REGISTRANT
Date: August 14, 1997 By: /s/ James A. Wunderle
------------------------------- ------------------------------
James A. Wunderle
Executive Vice President
and Treasurer
(Duly Authorized Officer and
Principal Financial Officer)
Date: August 14, 1997 By: /s/ Eileen M. Mahady
------------------------------- ------------------------------
Eileen M. Mahady
Controller
(Principal Accounting Officer)
18
<PAGE>
Exhibit 10.1
READING ENTERTAINMENT, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
AGREEMENT, dated April 18, 1997 (the "Grant Date"), between Reading
Entertainment, Inc., a Delaware corporation (the "Company"), with an address at
One Penn Square West, Suite 1300, Philadelphia, Pennsylvania 19102, and James J.
Cotter (the "Consultant"), with an address c/o Pacific Theatres, 120 North
Robertson Boulevard, Third Floor, Los Angeles, California 90048.
WHEREAS, the Board of Directors of the Company has, on the Grant Date,
granted to the Consultant an option to purchase shares of the common stock, par
value $.001 per share, of the Company (the "Common Stock"), as hereinafter set
forth, and authorized the execution and delivery of this Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
1. The Consultant is hereby granted the options (the "Options") to
purchase from the Company, subject to the terms and conditions set forth in this
Agreement, all or any part of 460,000 shares of Common Stock (the "Option
Shares") at a purchase price of $12.80 per share. All of the Options shall be
treated as non-qualified stock options.
2. The Options shall become exercisable as follows, subject to prior
expiration or termination of the Options:
(a) Basic Options. Options to purchase 110,000 Option Shares (the
-------------
"Basic Options") shall become exercisable in four equal installments of
27,500 Option Shares each, the first such installment to become exercisable
on the first anniversary of the Grant Date and the remaining installments
to become exercisable on each subsequent anniversary thereof until all
Basic Options have become exercisable.
(b) Convertible Preferred Options. Options to purchase 260,000 Option
-----------------------------
Shares (the "Convertible Preferred Options") shall become exercisable in
four equal installments of 65,000 Option Shares each, the first such
installment to become exercisable on the first anniversary of the Grant
Date and the remaining installments to become exercisable on each
subsequent anniversary thereof until all Convertible Preferred Options have
become exercisable; provided, that (i) no Convertible Preferred Options
shall be exercisable prior to the date that shares of the Company's Series
A Voting Cumulative Convertible Preferred Stock and Series B Voting
Cumulative Convertible Preferred Stock (collectively, the "Convertible
Preferred Stock") are converted (by election of the holders thereof or
otherwise) into Common Stock, and (ii) if fewer than 620,000 shares of
Convertible Preferred Stock have at any time been converted into Common
Stock, the number of Option Shares for which Convertible Preferred Options
shall be exercisable (inclusive of any Convertible Preferred
<PAGE>
Exhibit 10.1
Options which have previously been exercised) in each installment shall be
reduced as of such date to equal (to the nearest whole number) one-fourth
of the total number of Option Shares subject to Convertible Preferred
Options (inclusive of those exercised) without regard to this Section
2(b)(ii) multiplied by a fraction, the numerator of which is the aggregate
number of shares of Convertible Preferred Stock which have been converted
into Common Stock as of such date and the denominator of which is 620,000,
provided further, however, (iii) that if on any date any shares of
Convertible Preferred Stock are redeemed or repurchased by the Company, the
number of Option Shares for which Convertible Preferred Options shall be
exercisable (inclusive of any Convertible Preferred Options which have
previously been exercised) in each installment shall be permanently reduced
to equal (to the nearest whole number) one-fourth of the total number of
Option Shares subject to Convertible Preferred Options (inclusive of those
exercised) without regard to this Section 2(b)(iii) or Section 2(b)(ii)
multiplied by a fraction, the numerator of which is 620,000 minus the
aggregate number of shares of Convertible Preferred Stock which have been
redeemed or repurchased to such date and the denominator of which is
620,000 and any Convertible Preferred Options which are excluded from
becoming exercisable as a result of this Section 2(b)(iii) shall be
immediately and without further action deemed canceled.
(c) Asset Put Options. Options to purchase 90,000 Option Shares (the
-----------------
"Asset Put Options") shall become exercisable in four equal installments of
22,500 Option Shares each, the first such installment to become exercisable
on the first anniversary of the Grant Date and the remaining installments
to become exercisable on each subsequent anniversary thereof until all
Asset Put Options have become exercisable; provided, that (i) no Asset Put
Options shall be exercisable prior to the date on which shares of Common
Stock have been issued to Citadel Holding Corporation, a Delaware
corporation ("Citadel"), pursuant to the Asset Put (as defined in the
Asset Put and Registration Rights Agreement, dated as of October 15, 1996
(the "Asset Put Agreement") , among the Company, Citadel, and Citadel's
subsidiary Citadel Acquisition Corp., Inc. ("CAC")), or to any successor in
interest to Citadel, and (ii) if fewer than 1,700,000 shares of Common
Stock are issued pursuant to the Asset Put, the number of Option Shares for
which Asset Put Options become exercisable in each installment shall be
reduced to equal (to the nearest whole number) one-fourth of the total
number of Option Shares subject to Asset Put Options (inclusive of those
exercised) without regard to this Section 2(c)(ii) multiplied by a
fraction, the numerator of which is the number of shares of Common Stock
issued pursuant to the Asset Put and the denominator of which is 1,700,000
(the number 1,700,000 in each being subject to adjustment in proportion to
any adjustments made pursuant to Section 8 in the number of Option Shares),
and any Asset Put Options which are excluded from becoming exercisable as a
result of this Section 2(c)(ii) shall be immediately and without further
action deemed canceled.
3. All Options shall terminate and thereafter no longer be exercisable
(subject to Section 7) on April 18, 2007 (the "Expiration Date").
2
<PAGE>
Exhibit 10.1
4. Option Shares purchased pursuant to this Agreement shall be paid for
in full at the time of purchase. Payment may be made in cash, shares of Common
Stock, Options, or such other consideration as may be approved by the
Compensation Committee of the Board of Directors of the Company (the
"Committee"), or a combination thereof, provided that such consideration shall
be such that the Option Shares shall be fully paid and nonassessable, and
provided further that no shares of Common Stock or Options may be so delivered
if, as a result thereof, the Consultant or other person exercising Options would
incur liability under Section 16(b) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). If payment is made in whole or part by tender of
(a) shares of Common Stock, such shares shall be valued at the Fair Market Value
thereof (as defined below), (b) Options, the Options tendered as payment must be
exercisable at the date of such tender, shall be deemed to have been exercised
for purposes of Section 2, and shall be valued at an amount equal to the excess
of the Fair Market Value of the Option Shares issuable on exercise of such
Options over the aggregate exercise price of such Options, or (c) consideration
other than cash, shares of Common Stock, or Options, such consideration shall
have such value as determined by the Committee (whose determination shall be
final). Upon receipt of written notice of exercise of Options in the form
attached hereto as Exhibit A together with payment and delivery of any other
required documentation, the Company shall, without stock transfer tax to the
Consultant or any other person entitled to exercise such Options, deliver to the
person exercising such Options a certificate or certificates for the Option
Shares so purchased. It shall be a condition to the performance of the
Company's obligation to issue or transfer Common Stock upon exercise of Options
that the Consultant or other person exercising such Options pay, or make
provision satisfactory to the Company for the payment of, any taxes (other than
stock transfer taxes) which the Company is obligated to collect with respect to
the issue or transfer of Common Stock upon exercise, including any Federal,
state, or local withholding taxes. The "Fair Market Value" of a share of Common
Stock on any date shall mean the closing price of the Common Stock on the
trading day prior to such date, as reported in the Wall Street Journal or, if
not so reported, as otherwise reported by the National Association of Securities
Dealers Automated Quotation (Nasdaq) System or, if not so reported, as
determined by the Committee (whose determination shall be final).
5. No person shall have any rights as a stockholder with respect to any
Option Shares until the date a stock certificate is issued to such person for
such Option Shares. Except as otherwise expressly provided herein, no
adjustment shall be made for dividends or other rights for which the record date
is prior to the date such stock certificate is issued.
6. Options may be transferred only (a) by will or the laws of descent and
distribution or (b) by the Consultant during his lifetime to any immediate
family member (as defined in Rule 16a-1(e) under the Exchange Act) of the
Consultant, any trust for the benefit of any one or more of the Consultant and
his immediate family members, or any partnership, corporation, limited liability
company, or other entity owned or controlled by any one or more of the
Consultant and his immediate family members, and are exercisable, during the
lifetime of the Consultant, only by the Consultant or the Consultant's personal
representative or guardian or a transferee permitted pursuant to this Section 6.
Subject to the foregoing, Options may be transferred whether or not exercisable
3
<PAGE>
Exhibit 10.1
at the time of transfer. The Consultant or his representative shall give the
Company notice of any transfer, specifying the name and address of the
transferee and the number and class of Options transferred.
7.(a) This option shall terminate 30 days (but not later than the
Expiration Date) after the date of the termination for cause, or 120 days (but
not later than the Expiration Date) after the date of the termination for any
reason, other than for cause, death, or Retirement (as hereinafter defined), of
the association of the Consultant with the Company.
(b) Upon the termination of the Consultant's association with the Company
due to Retirement, the Consultant or any transferee under Section 6 may, during
the Retirement Period (as hereinafter defined), exercise any or all of the
Options which were exercisable under this Agreement immediately prior to such
termination. "Retirement" means the termination of association due to
retirement with the consent of the Committee or as a result of the Consultant
becoming permanently disabled; and "Retirement Period" shall mean the period
from the date of Retirement to the later of (i) the date determined by the
Committee at the time of Retirement and (ii) three years from the date of
Retirement, provided that in no case shall the Retirement Period extend to a
date after the Expiration Date. The Committee shall have the sole discretion
whether or not to consent to a Retirement, which determination shall be final.
(c) Upon the termination of the Consultant's association with the Company
due to death, (i) all vesting provisions of Section 2 which would be satisfied
solely by the passage of time and the continuation of the Consultant's
association with the Company shall be accelerated and deemed satisfied and (ii)
the person or persons to whom the Consultant's rights hereunder are transferred
by will or the laws of descent and distribution, or any transferee under Section
6, may, at any time on or prior to the Expiration Date, exercise any or all of
the Options which (after giving effect to such acceleration) were exercisable as
of the date of the Consultant's death or which subsequently become exercisable
as a result of the conversion of Convertible Preferred Stock into Common Stock
or the exercise of the Asset Put Option.
(d) Upon the death of the Consultant during a period following termination
of such association in which Options are exercisable under Section 7(a) or 7(b),
(i) if such death resulted from a disability which occasioned Retirement, all
vesting provisions of Section 2 which would be satisfied solely by the passage
of time and the continuation of the Consultant's association with the Company
shall be accelerated and deemed satisfied and (ii) in any case, the person or
persons to whom the Consultant's rights hereunder are transferred by will or the
laws of descent and distribution, or any transferee under Section 6, shall have
the right, during the period ending on the later of the end of the period
provided in Section 7(a) or (b), as the case may be, for exercise of Options and
the period ending 18 months after the date of the Consultant's death, to
exercise any or all of the Options which (after giving effect to such
acceleration, if applicable) were exercisable as of the date of the Consultant's
death or which subsequently become exercisable as a result of the
4
<PAGE>
Exhibit 10.1
conversion of Convertible Preferred Stock into Common Stock or the exercise of
the Asset Put Option.
(e) If the Consultant is granted an approved leave of absence, the
Committee may, if it determines that to do so would be in the best interests of
the Company, provide for continuation of the Options during such leave of
absence, such continuation to be on such terms and conditions as the Committee
determines to be appropriate, provided that (except as provided in Section 7(d))
in no event shall Options be exercisable after the Expiration Date.
(f) For all purposes of this Agreement, the Consultant shall be considered
associated with the Company, and his association with the Company shall be
deemed to continue, so long as he is an officer, director, or employee of, or
consultant to, or otherwise associated with (other than solely as a
stockholder), the Company or any subsidiary or parent of the Company, and the
Options shall not be affected by any change of type of any such association as
long as the Consultant continues to be associated in any such manner with the
Company or any parent or subsidiary of the Company.
(g) Nothing in this Agreement shall confer on the Consultant any right to
continue to be associated with the Company or any parent or subsidiary of the
Company or interfere in any way with the right of the Company or any parent or
subsidiary of the Company to terminate the association with it of the Consultant
at any time.
8. The number of Option Shares (including the number subject to each
class of Options and each installment thereof), and the exercise price per
share, shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common
Stock, or any other increase or decrease in the number of issued shares of
Common Stock effected without receipt of consideration by the Company; provided,
however, that conversion of any convertible securities of the Company shall not
be deemed to have been "effected without receipt of consideration." Such
adjustment shall be made as determined by the Committee, whose determination
shall be final. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number of Option Shares or the exercise price of the
Options.
9. If the Company is merged or consolidated with another corporation, or
the property or stock of the Company is acquired by another corporation, or on
the reorganization or liquidation of the Company, the Board of Directors of the
Company, or the Board of Directors of any corporation assuming the obligations
of the Company hereunder, shall either make appropriate provisions for the
protection of the Options by the substitution on an equitable basis of
appropriate stock of the Company, or appropriate stock of the merged,
consolidated, or otherwise reorganized corporation.
5
<PAGE>
Exhibit 10.1
10.(a)(i) If the Company shall receive a written request (specifying that
it is being made pursuant to this Section 10(a)) from holders of Options or
Option Shares representing a majority of the Registrable Securities (as defined
below) that the Company file a registration statement under the Securities Act
of 1933, as amended (the "Securities Act"), covering the registration of at
least 50% of the Registrable Securities, the Company shall, within ten business
days of the receipt thereof, give written notice of such request to all holders
of Registrable Securities ("Eligible Holders") and shall file as soon as
practicable, and in any event within 60 days of the receipt of such request, a
registration statement under the Securities Act covering all Registrable
Securities which the Eligible Holders request to be registered within 30 days of
the mailing of such notice to all Eligible Holders. The term "Registrable
Securities" shall mean Option Shares which have not previously been sold and are
not then eligible for immediate sale (not limited by volume limitations) by the
holders thereof pursuant to an effective registration statement under the
Securities Act or pursuant to paragraph (k) of Rule 144 under the Securities
Act.
(ii) Notwithstanding the foregoing, (A) the Company shall not be obligated
to effect a registration pursuant to this Section 10(a) (I) unless Form S-3 is
then available for such registration or (II) during the period starting with the
date 60 days prior to the Company'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
the Company, provided that the Company is actively employing in good faith all
reasonable efforts to cause such registration statement to become effective and
that the Company's estimate of the date of filing such registration statement is
made in good faith; (B) if the Company shall furnish to the Eligible Holders
initiating the registration request hereunder (the "Initiating Eligible
Holders") a certificate signed by the President of the Company stating that in
the good faith judgment of the Board of Directors it would be materially
detrimental to the Company or its stockholders for a registration statement to
be filed in the near future, then the Company's obligation to file a
registration statement shall be deferred for a period not to exceed six months;
provided, however, that the Company may furnish such a certificate to Initiating
Eligible Holders only once in any one-year time period; and (C) if the managing
underwriter of an underwritten offering to be made pursuant to this Section
10(a) advises the Initiating Eligible Holders in writing that marketing factors
require a limitation of the number of shares to be underwritten, then the
Initiating Eligible Holders shall so advise all Eligible Holders whose
Registrable Securities would otherwise be underwritten pursuant hereto, and the
number of shares of Registrable Securities that may be included in the
underwriting shall be allocated among all Eligible Holders thereof in proportion
to the amount of Registrable Securities owned by each Eligible Holder.
(iii) The Company shall be obligated to effect only one registration
pursuant to this Section 10(a).
(b)(i) If at any time the Company determines to register (including for
this purpose a registration effected by the Company for securityholders other
than the Eligible Holders) any shares of Common Stock under the Securities Act
in connection with the public offering of such securities
6
<PAGE>
Exhibit 10.1
solely for cash on a Form and under circumstances that would also permit the
registration of the Registrable Securities (other than Forms S-4 and S-8), the
Company shall promptly give each Eligible Holder written notice of such
determination. Upon the written request of each Eligible Holder given within 20
days after mailing of any such notice by the Company, the Company shall, subject
to the provisions of this Section 10(b), cause to be registered under the
Securities Act all of the Registrable Securities that each such Eligible Holder
has requested be registered; provided however, that the Company 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.
(ii) In connection with any offering involving an underwriting of shares
being issued by the Company, the Company shall not be required under this
Section 10(b) to include any of the Eligible Holders' securities in such
underwriting unless they accept the terms of the underwriting as agreed upon
between the Company 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 the Company. If the total amount of securities,
including Registrable Securities, requested by the Eligible Holders and other
securityholders having registration rights to be included in such offering
exceeds the amount of securities to be sold other than by the Company (or the
securityholders initiating the registration) that the underwriters reasonably
believe compatible with the success of the offering, then the Company 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. In such event, the securities requested
to be included which are excluded shall be apportioned pro rata among the
Eligible Holders and, to the extent permitted by the contractual rights of other
selling securityholders, all other prospective selling securityholders according
to the total amount of securities requested to be included therein owned by each
such Eligible Holder and other selling securityholder or in such other
proportions as shall mutually be agreed to by such Eligible Holders and such
other selling securityholders. To the extent required by the rights of other
selling securityholders, including the rights of Citadel and CAC under the Asset
Put Agreement, the Registrable Securities shall be excluded prior to any
exclusion of securities held by such other securityholders.
(c) The Company shall not be required to include in any registration any
Registrable Securities unless the holder thereof shall have furnished to the
Company such information regarding itself, the Registrable Securities held by
it, and the intended method of disposition of such securities as shall be
required to effect the registration of the Registrable Securities.
(d) All expenses other than underwriting discounts and commission incurred
in connection with any registration, filing, or qualification pursuant to this
Section 10, including, without limitation, all registration, filing, and
qualification fees, printers' and accounting fees, fees and disbursements of
counsel for the Company, and the reasonable fees and disbursements of a single
counsel for and selected by the Eligible Holders and any other selling
securityholders, shall be borne by the Company; provided, however, that the
Company shall not be required to pay for any expenses of any registration
proceeding begun pursuant to Section 10(a) if the registration request
7
<PAGE>
Exhibit 10.1
is subsequently withdrawn at the request of the Eligible Holders of a majority
of the Registrable Securities to be registered (in which case all participating
Eligible Holders shall bear such expenses in proportion to the respective
numbers of Registrable Securities they requested to be included in such
registration, or as they may otherwise agree), unless, at the time of such
withdrawal, the Eligible Holders have learned of a material adverse change in
the condition, business or prospects of the Company from that known to the
Eligible Holders at the time of their request, in which case the Eligible
Holders shall not be required to pay any such expenses and shall retain all
rights pursuant to Section 10(a).
(e) The provisions of this Section 10 may be amended or waived in any
respect with the consent of holders of Options and Option Shares representing a
majority of the Registrable Securities, and any such amendment or waiver shall
be binding on all then and future holders of Options or Option Shares.
11. The Company shall at all times reserve and keep available out of its
authorized Common Stock the full number of shares of Common Stock of the
Corporation issuable upon exercise of Options.
12. If at any time the Board of Directors shall determine, in its
discretion, that the listing, registration, or qualification of any of the
Option Shares upon any securities exchange or under any state or federal law, or
the consent or approval of any governmental regulatory body, is necessary or
desirable as a condition of, or in connection with, the issue or purchase of
Option Shares, the Options may not be exercised in whole or in part unless such
listing, registration, qualification, consent, or approval shall have been
effected or obtained free of any conditions not acceptable to the Board of
Directors. Any notice of exercise of Options which would be effective except
for this Section 12 shall be deemed effective immediately upon satisfaction of
all such conditions (even if such notice could not otherwise then have been
given).
The Company shall not be obligated to sell or issue any Option Shares in
any manner in contravention of the Securities Act, the Exchange Act, or any
state securities law. The Board of Directors may, at any time, require as a
condition to the exercise of Options that the Option Shares be acquired for
investment purposes only and that the certificate therefor contain a legend
restricting transfer.
13. All notices hereunder shall be in writing, and (a) if to the Company,
shall be delivered personally to the Secretary of the Company or mailed to its
principal office, addressed to the attention of the Secretary, (b) if to the
Consultant, shall be delivered personally or via courier or mailed via certified
mail, postage prepaid, return receipt requested to the Consultant at the address
first set forth above, or (c) if to any subsequent holder of Options or Option
Shares, to the address specified for such holder in the notice provided for in
Section 6 or on the stock records of the Company. Such addresses may be changed
at any time by notice from one party to the other.
8
<PAGE>
Exhibit 10.1
14. All decisions or interpretations made by the Committee with regard to
any question arising hereunder shall be binding and conclusive on the Company
and the Consultant.
15. This Agreement shall bind and inure to the benefit of the parties
hereto and the successors and assigns of the Company and, to the extent provided
in Section 6, the executors, administrators, legatees, heirs, guardians, legal
representatives, successors, and assigns of the Consultant.
16. This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Pennsylvania, without giving effect to rules
governing the conflict of laws.
17. Notwithstanding anything to the contrary herein, the effectiveness of
this Agreement and the Options granted hereby is subject to the approval of this
Agreement by the stockholders of the Company, and no Options may be exercised
unless and until such approval is obtained.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
READING ENTERTAINMENT, INC.
By: /s/ James A. Wunderle
-------------------------------------
Name: James A. Wunderle
Title: Executive Vice President
/s/ James J. Cotter
------------------------------------
James J. Cotter
9
<PAGE>
Exhibit 10.1
EXHIBIT A
EXERCISE NOTICE
The undersigned, pursuant to the Option Agreement, dated April 18, 1997
(the "Option Agreement;" terms used and not defined herein have the meanings as
defined in the Option Agreement), between Reading Entertainment, Inc., a
Delaware corporation (the "Company"), and James J. Cotter (the "Consultant"),
hereby elects to exercise Options to purchase ______________________ Option
Shares (comprised of _______ Option Shares underlying Basic Options, _____
Option Shares underlying Convertible Preferred Options, and _____ Option Shares
underlying Asset Put Options) and herewith makes payment in full therefor by
delivery of
(i) $_____________ in cash,
(ii) _______ shares of Common Stock having a Fair Market Value of
$________,
(iii) Options (comprised of _______ Basic Options, _____ Convertible
Preferred Options, and _____ Asset Put Options), other than those exercised
hereby, to purchase ________ Option Shares, which Options have a value as
determined in accordance with the Option Agreement of $_________; and
(iv) other property described on the attachment hereto, if any, which
property has been approved by the Committee and valued by the Committee at
$______.
1. If the sale of the Option Shares and the resale thereof has not, prior
to the date hereof, been registered pursuant to a registration statement filed
and declared effective under the Securities Act, the undersigned hereby agrees,
represents, and warrants that:
(a) I am acquiring the Option Shares for my own account (and not for
the account of others) for investment and not with a view to the
distribution or resale thereof;
(b) By virtue of my position, I have access to the same kind of
information which would be available in a registration statement filed
under the Securities Act;
(c) I am a sophisticated investor;
(d) I understand that I may not sell or otherwise dispose of such
shares in the absence of either a registration statement under the
Securities Act or an exemption from the registration provisions of the
Securities Act; and
(e) The certificates representing such shares may contain a legend to
the effect of 1(d) above.
10
<PAGE>
Exhibit 10.1
2. If the sale of the Option Shares and the resale thereof has been
registered under the Securities Act, the undersigned hereby represents and
warrants that I have received the applicable prospectus and all reports
incorporated therein by reference.
Very truly yours,
--------------------------------------
(type name under signature line)
Dated: ____________________
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 38,977
<SECURITIES> 0
<RECEIVABLES> 4,999
<ALLOWANCES> 0
<INVENTORY> 156
<CURRENT-ASSETS> 115,686
<PP&E> 24,546
<DEPRECIATION> 2,262
<TOTAL-ASSETS> 173,457
<CURRENT-LIABILITIES> 6,795
<BONDS> 513
7,000
1<F1>
<COMMON> 7
<OTHER-SE> 154,571
<TOTAL-LIABILITY-AND-EQUITY> 173,457
<SALES> 2,852
<TOTAL-REVENUES> 17,308
<CGS> 626
<TOTAL-COSTS> 11,004
<OTHER-EXPENSES> 4,273
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,301
<INCOME-TAX> 321
<INCOME-CONTINUING> 1,980
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,980
<EPS-PRIMARY> ($0.02)
<EPS-DILUTED> ($0.02)
<FN>
<F1>Represents par value of Reading Entertainment Series B preferred stock
</FN>
</TABLE>
