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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, 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 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
Suite 1300
Philadelphia, Pennsylvania 19102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 215-569-3344
Securities registered pursuant to Section 12(b) of the Act:
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:
Common Stock, $.001 Par Value
Title of class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of March 26, 1998, 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 $27,204,733.38.
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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
formed in 1996 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 approximately 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 25.
In 1993, following the sale of its last major railroad real estate asset --
the Reading Terminal Headhouse -- and a thorough review of the opportunities
available to it, the Company determined to refocus its activities on the
"Beyond-the-Home" or real estate based segment of the entertainment industry.
Since that date, the Company has acquired and expanded a chain of multiplex
cinemas in Puerto Rico ("CineVista") featuring conventional film product; begun
through the acquisition of two existing multiplex cinemas and the construction
of a third multiplex cinema, the development of a chain of cinemas in the United
States featuring principally art, specialty and sophisticated or upper-end
conventional film product (the "Domestic Cinemas"); and begun through the
acquisition of one existing multiplex cinema and the construction of two new
multiplex cinemas, the development of a chain of cinemas in Australia featuring
conventional film product ("Reading Cinemas"). In addition, the Company has
entered into various agreements which are expected to add a material number of
new screens to each of its Puerto Rico, Domestic and Australian operations in
future periods.
In Australia, the Company is also in the real estate development business,
focusing upon the development of entertainment centers, typically consisting of
a multiplex cinema, complementary restaurant and retail uses, and convenient
parking, all located on land owned or controlled by the Company.
In recognition of the significant amounts of capital required to compete in
the cinema exhibition and real estate development businesses, and in furtherance
of its plan to focus on 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").
The Company, where feasible, prefers to own the land on which it constructs
its cinemas. In the United States and Puerto Rico, a variety of factors
(including land acquisition costs and competition from well established and well
financed developers) have caused the Company to focus on leasehold sites.
However, an ownership oriented approach is being pursued in urban centers in
Australia. This will necessarily mean that many of the Company's projects will
be much more capital intensive, have longer lead times and entail greater
development risks than would the development of cinemas in leased facilities in
established malls. To date, the Company has acquired, or has contracts giving it
the right to acquire, four potential entertainment center sites, consisting of
over one million square feet of land area. The Company has also acquired a 50%
joint venture interest in an existing 150,000 square foot shopping center in the
Melbourne area of Victoria, which it intends studying as a candidate for
redevelopment as an entertainment center. Accordingly, the Company's business
plan involves a material amount of development risk. Due principally to the
scope and extent of its development activities in Australia, the Company views
itself as being involved in essentially two lines of business, the development
and operation of cinemas in Puerto Rico, the United States and Australia and the
development and operation of entertainment centers in Australia.
Most of these entertainment center projects are in the early stage of
development. While one of the entertainment center projects involves the
redirection of an existing and cash flowing shopping center, none of these
entertainment projects have reached the construction phase. Three of the
Company's existing entertainment center projects, representing approximately
880,000 square feet of land area, have completed or substantially completed the
zoning and entitlement process. The zoning on the fourth is currently subject to
litigation. No approvals have yet been sought with respect to the redevelopment
site. It is not anticipated that construction of any entertainment center
projects will commence in Australia until the later half of 1998. Further, the
Company continues to encounter significant opposition to its projects from
established Australian cinemas operators and shopping center landlords.
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In addition to its principal activities, the Company continues to wind up
its historic railroad related activities, including the sale or other
exploitation of its residual real estate interests, and through a subsidiary,
FA, Inc., to lease equipment to third parties. The Company also owns a 50 acre
property assemblage located in the greater Melbourne area. Originally acquired
in 1996 as a potential entertainment site, the property is currently held for
non-cinema development. The Company is reviewing its alternatives with respect
to the site.
At December 31, 1997, the Company had assets valued for balance sheet
purposes at approximately $178 million and no long term indebtedness. A
significant portion of these assets is represented by cash and cash equivalents
(totaling approximately $93 million at December 31, 1997), Property and
equipment with a net book value of $40,312,000 million at December 31, 1997),
and 1,564,473 shares of the common stock, representing approximately 23.5% of
the voting power, of Citadel Holding Corporation ("CHC" and collectively with
its subsidiaries, "Citadel"). The Company intends to use its assets to continue
to build its Beyond-the-Home entertainment business, and not to engage in the
business of acquiring, selling, holding, trading or investing in securities.
Citadel is principally in the business of owning and operating commercial
and agricultural real estate and providing real estate consulting services to
Reading. Citadel also owns 70,000 shares representing all of the outstanding
shares of the Company's Series A Voting Cumulative Convertible Redeemable
Preferred Stock (the "Series A Preferred Stock") and holds certain option rights
to exchange all or substantially all of its assets for the Company's common
stock. Citadel is a publicly reporting and trading company, whose common stock
is traded on the American Stock Exchange. Citadel's net earnings during 1997
were $1,575,000. The Company's share of such earnings was $298,000 which amount
is included in the Consolidated Statement of Operations for the year ended
December 31, 1997 as "Equity in earnings of affiliate."
Shares of REI's common stock, par value $.001 per share (the "Common
Stock"), 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
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The Company is primarily engaged in the real estate development business in
Australia (focusing on the development in Australia of cinema based
entertainment centers) and in the multiplex cinema exhibition business (focusing
on the market for multiplex complexes featuring principally commercial film in
Puerto Rico and Australia, and featuring principally art, specialty and more
sophisticated upper-end film product in the United States). While exceptions may
be made from time to time with respect to certain well-situated cinemas with
proven or projected draw as art and specialty houses, it is the Company's
general intention to develop or acquire state-of-the art multiplex venues. With
respect to new construction, it is the Company's intention to concentrate
primarily upon a stadium seating format, and to feature wall-to-wall screens
with state-of-the-art projection and sound. The Company's entertainment centers
will typically be centered around a multiplex cinema, and feature complimentary
retail and restaurant facilities and convenient on-site parking.
Puerto Rico (CineVista)
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Acquired effective July 1, 1994, for a cash purchase price of $22.7 million
(inclusive of acquisition expenses in the amount of $323,000), CineVista at the
date of its acquisition by the Company operated motion picture exhibition
facilities consisting of 36 screens in six leased locations in Puerto Rico.
Since that date, CineVista has added fourteen screens in two new complexes. In
addition, an eight screen complex is under development to replace an out-of-date
six screen facility (currently expected to open in June 1998). The Company has
entered into a lease to develop and operate twelve screens in a regional
shopping center (currently anticipated to open in 1999) and is negotiating the
expansion, from an original ten to eighteen screens, of a complex located in the
largest shopping center in Puerto Rico. The Company is also negotiating with
respect to additional multiplex sites on the island. No assurances can be given
that such negotiations will result in operating facilities.
In Puerto Rico, the Company has determined to concentrate on multiplex
cinemas located on leasehold properties, and the exhibition of conventional film
product. Generally speaking, the Company's current and future developments
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are being constructed either in existing regional malls with proven foot traffic
and self contained parking or in new centers being developed by experienced and
well financed developers. All of CineVista's theaters are modern multi-screen
facilities.
The Company's CineVista chain is managed by the Company, principally
through management and administrative staff located in San Juan, Puerto Rico.
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 U.S. House of
Representatives has passed and there is before the Senate a bill which, if
passed by the Senate and signed by the President, would permit Puerto Rico to
vote to i) continue its status as a commonwealth, ii) convert to statehood or
iii) elect independence. The Company cannot now determine what effect, if any,
any vote which would change the status of Puerto Rico might have upon its
investment in CineVista. 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 CineVista. These new screens have
adversely affected the Company's current operations, reducing in the near term
the Company's market share from approximately 42% in 1995 to approximately 26%
percent in 1997. The Company believes that, while CineVista 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 20 to 30 screens in Puerto Rico over the next
three years (excluding the 30 screens currently under development).
CineVista 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
CineVista. Film distributors may supplementally advertise certain feature films
with the costs generally paid by distributors.
Concession sales account for approximately 25% of total revenues.
Concession products primarily include popcorn, candy and soda. CineVista has
implemented training programs and incentive programs and experiments with
product mix changes with the objective of increasing the amount and frequency of
concession purchases by theater patrons.
Screen advertising revenues contribute approximately 4% of total revenues.
CineVista has agreements with a major soft-drink bottler and an independent
advertising production company to show advertisements on theater screens prior
to feature film showings. Other sources of revenue include revenues from theater
rentals for meetings, conferences, special film exhibitions and vending machine
receipts or rentals.
Licensing/Pricing: Films are licensed under agreements with major film
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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 anti-
competitive practices. Films are licensed on a film-by-film, theater-by-theater
basis. Generally, film payment terms provide for payment to film distributors
under various formulas which provide for payments based upon a percentage of
gross box office receipts.
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CineVista licenses film from substantially all of the major United States
studios and is not dependent upon any one film distributor for all of its
product. 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 CineVista's
business. CineVista believes that the popularity of the Puerto Rico exhibition
market and Puerto Rico rules governing film licensing make such a situation
unlikely. In 1997, films licensed from CineVista's four largest film suppliers
accounted for approximately 65% of CineVista's box office revenues.
Competition: The Company believes there are approximately 29 first-run
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movie theaters in daily operation with approximately 179 screens in Puerto Rico.
Based upon number of screens, box office revenues and number of theaters,
CineVista is the second largest exhibitor in Puerto Rico, with the two largest
exhibitors accounting for over 99% of the box office revenues recorded in 1997,
measured 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
CineVista are expected to continue to open theaters competitive with those of
CineVista. 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 CineVista. This
competitor has at least 2 additional competitive theaters and an expansion of an
existing theater under development, which are expected to add 30 screens to the
San Juan market.
In Puerto Rico, the Company's strategy has been to build generally higher
quality cinemas, with larger seats, more leg room and better sound than those
constructed by its principal competitor, and to seek out and build in either
well established retail centers with adequate parking on-site or in connection
with the development of new retail centers being developed by experienced and
well financed developers. All of the screens currently under construction are
stadium design and the Company currently intends to make this stadium design
structure a consistent element of its cinemas. The Company's principal
competitor has historically constructed conventional auditoriums, with fewer
amenities.
Seasonality: Most major films are released to coincide with the summer
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months, when schools are closed or the winter holiday seasons. Accordingly,
CineVista has historically recorded greater revenues and earnings during the
second half of the calendar year.
Employees: CineVista has approximately 200 employees in Puerto Rico,
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approximately 15 of whom are employed under the terms of a collective bargaining
agreement. The collective bargaining agreement expires in May 2000. The Company
believes its relations with its employees in Puerto Rico to be good.
Domestic Cinemas (Angelika Film Centers)
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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 "NY Angelika"),
a multiplex theater located in the Soho district of New York City. The Company
and Sutton Hill formed a limited liability company, Angelika Film Centers LLC
("AFC"), to hold their interest in the NY Angelika. The theater is held under a
long term lease, with a remaining term of approximately 28 years.
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
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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.
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, in
February 1997, the Company entered into an agreement for the construction and
lease of and in December 1997 opened a 1,480-seat, eight screen, 31,700 square
foot art and specialty cinema and cafe facility at the Bayou Place entertainment
center in Houston, Texas. The complex sits over a 3,500-car parking garage and
is located in the middle of the City's theater district. In December 1997, the
Company acquired from United Artists an existing 1,066 seat, five screen, 18,100
square foot facility located in Minneapolis, at which the Company intends to
exhibit a combination of conventional and art and specialty film under the
Reading Cinemas name. The Company has signed a lease with respect to the
development of an additional 12 screen Reading Cinemas complex, has leases under
negotiation with respect to an additional 25 screens in three new Angelika
complexes, has projects representing an additional 10 screens in two additional
complexes under various letters of intent, and is currently in discussions with
owners and developers with respect to a number of additional potential
locations. No assurances can be given, however, that any of these negotiations
will result in operational theaters.
AFC is managed by City Cinemas Corp. ("City Cinemas"), a cinema management
company owned by Sutton Hill, pursuant to the terms of a management agreement
(the "New York Management Agreement"). The New York Management Agreement
provides for City Cinemas to manage the NY Angelika for a minimum annual fee of
$125,000 plus an incentive fee equal to 50% of annual cash flow (as defined in
the NY Management Agreement) over prespecified levels, provided, however, that
the maximum annual fee (minimum fee plus incentive fee) may not exceed 5% of the
NY Angelika's annual revenues. In addition, the Company has out-sourced certain
theater level management services with respect to the remainder of its Domestic
Cinemas by entering into a second management agreement with City Cinemas. Under
the terms of the second agreement, City Cinemas has agreed to provide cinema
management, human resources and accounting services for the Company's remaining
Domestic Cinemas for a fee equal to 2.5% of the gross revenues generated by such
theaters. This arrangement has allowed the Company to defer the cost of
identifying and retaining full-time employees to perform such functions until
such time as it has acquired a critical mass of screens domestically.
While major chains specializing in conventional wide release 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
"The English Patient," "Pulp Fiction," "Emma," "Shine" and "Chasing Amy". This
may change as more megaplex complexes with sixteen 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
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ranging from the divisions of the larger film distributors specializing in the
distribution of specialty films to individuals that have acquired domestic
rights to one film. Generally, film payment terms are based upon an agreed upon
percentage of box office receipts.
Competition: In most markets, art and specialty film is currently exhibited
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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 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 Theatres which operates
approximately 140 screens in approximately 50 locations, principally in
California and Washington. Many larger cities have smaller
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chains which operate one to five locations. In addition, General Cinemas has
announced a joint venture with the Sundance Institute to develop cinemas
specializing in the exhibition of independent film. No specific projects have,
however, been announced by this joint venture.
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 and in more
sophisticated higher end film product. The Company further believes that the
distributors of such films may favor distribution of art and specialty 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
specialty films.
The Company also believes that it may be better positioned than its
principal competitors in the market for art and specialty films due to its
financial condition and strategic presence in the Manhattan market. 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. Due to the relatively small
scale of the Company's current Domestic operations and the geographical
dispersion of its US cinemas, the Company may have difficulty securing certain
film product due to competitive pressures of larger domestic cinema chains or
more regionally concentrated exhibitors, and faces competition for sites from
much larger and better known competitors.
Seasonality: The exhibition of art and specialty film, while still somewhat
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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 $112,000,000, $244,000,000,
$372,000,000, $355,000,000, $500,000,000, and $525,000,000 in 1992 through 1997,
respectively (based upon management estimates).
Employees: City Cinemas employs approximately fifty employees pursuant to
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management agreements with the Company in the operations of the Company's
Domestic Cinemas, three of whom are employed under the terms of a collective
bargaining agreement which expires in October 1998. The Company has
approximately fifteen executive and administrative staff which, while located in
the Unites States, provide service with respect to all of the Company's
operations.
Reading Australia
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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"). Reading Australia is currently engaged in the development
and operation of multiplex cinemas featuring conventional film product and the
development of entertainment centers. Presently, Reading Australia operates 16
screens at two leased and one owned location. Reading Australia has signed
agreements to lease, leases or management agreements for an additional forty-
three screens in four locations, three of which presently have all necessary
land use approvals, and is currently in discussions with respect to a number of
additional potential sites.
Reading Australia is also currently engaged in the development of
entertainment centers which will typically consist of a multiplex cinema,
complementary restaurant and retail facilities, and convenient parking, all on
land owned or controlled by Reading Australia. At the present time, Reading
Australia owns two locations (representing over 300,000 square foot of
developable land), and has contractual rights to acquire two other locations
(representing over 750,000 square foot of developable land) for entertainment
center purposes. None of these properties currently produce any cash flow.
Reading Australia also owns a 50% joint venture interest in an existing and cash
flowing
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150,000 square foot shopping center located on leased land in the Melbourne area
of Victoria, which it is currently studying as a possible candidate for
redevelopment as an entertainment center.
The five potential entertainment center sites described above (calculated
inclusive of the one existing shopping center) include the potential for the
development of in the range of an additional 55 screens. Land use permits have
been granted or approved with respect to the two owned entertainment center
sites, one of which grant is currently being challenged by the owner of a
competing shopping center, and the two entertainment center sites under
contract. No applications have yet been made with respect to the shopping center
site, where cinema use should be "as of right" under existing Australian land
use policies. However, historically, the Company's attempts to get necessary
land use approvals have been strenuously opposed by competing cinema operators
and shopping center landlords, and no assurances can be given that needed land
use approvals will be obtained, or if obtained, that they will be upheld on
appeal.
Summarized below are the entertainment center projects currently under
development by Reading Australia:
<TABLE>
<CAPTION>
Estimated
Approximate Development
Land Size Approximate Cinema Size Size in Square
in Square Purchase in Square Footage of
Site Footage Price Feet Improvements
---- ------- ----- ---- ------------
<S> <C> <C> <C> <C>
Auburn, NSW 522,720 $6,800,000 60,000 210,000
Frankston, Victoria 227,750 N/A(1) 64,000 94,000
Moonee Ponds, Victoria(2) 129,949 $4,200,000 54,000 103,000
Newmarket, Queensland(3) 172,160 $4,500,000 49,000 161,000
Whitehorse, Victoria (3)&(4) 171,365 $1,600,000 60,000 230,000
</TABLE>
In addition to the above, the Company has accumulated, as the consequence
of three separate acquisitions, a 50 acre site in Burwood, Victoria. This site
was originally acquired for approximately $7.3 million for development of a
mega-plex cinema. However, such use is currently prohibited as a consequence of
an adverse land use determination, which negated certain permits for the
constructions of cinemas on the site. These permits were in place at the time
the land was acquired. Due to the size of the accumulation and its location at
the demographic center of the greater Melbourne metropolitan area, the Company
believed that the accumulation has value over and above its original purchase
price and is currently reviewing its options as to potential development
alternatives for the site.
One of the currently operating cinemas, located in Townsville, Queensland,
is owned by Australia Country Cinemas Pty. Limited ("ACC"), a company owned 75%
by a subsidiary of Reading Australia and 25% by a company owned by an Australian
national familiar with the market for cinemas in country towns. ACC has a
limited right of first refusal to develop cinema sites identified by Reading
Australia or such individual in country towns.
At the present time the Company's activities in Australia are principally
in the nature of speculative real estate development. While, in each case, the
Company is its own anchor tenant, the success of the real estate aspects
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(1) Under the applicable development agreement, Reading Australia is required
to make certain infrastructure improvements which are estimated to cost
approximately $4,000,000 in consideration of a grant to the underlying
land.
(2) Property acquired in March 1998
(3) Property acquired prior to December 31, 1997.
(4) The Company holds a 50% interest in this shopping center. Purchase price
does not include $1,400,000 loan to the Company's joint venture partner in
this development. The center currently consists of approximately 150,000
square feet of net leasable area which amount is not included in the
capitalized Estimated Developments Size column, above.
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of the Company's business will depend upon a number of variables and are subject
to a number of risk, some of which are outside of the Company's control. These
variables and risks include, without limitation:
o construction risks, such as weather, unknown and unknowable site
conditions, and the availability and cost of materials and labor;
o leasing risk with respect to ancillary space being constructed in
connection with the entertainment centers -- in certain cases such
ancillary space constitutes a substantial portion of the net leasable
area of a particular entertainment center and there is not presently
any established Australian market for entertainment center space;
o political risk, such as the possible change in mid-stream of existing
zoning or development laws to accommodate competitive interests (such
as occurred at Burwood); and
o financing risks, such as the risk of investing U.S. dollars in
Australia during times of currency exchange rate instability, and the
difficulties of acquiring construction finance while the great
majority of a company's projects are developmental in nature.
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
all of the governmental approvals needed to develop its entertainment center
sites or that such sites will attract its ancillary tenancies required for a
profitable project. The Company does not anticipate that it will have any of its
entertainment center locations open before late 1999, at the earliest.
Reading Australia's cinemas are managed by employees of the Company.
However, at the present time, Reading Australia does make use of an independent
booking firm for the booking of film product. This will likely continue until
the Company has sufficient screens operating in Australia to justify the cost of
a full time film buyer.
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 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.
8
<PAGE>
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 are based upon various formulas
which provide for payments based upon a specified percentage of box office
receipts.
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 156
screens, Greater Union and affiliates with approximately 308 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 A$830 million at June 30, 1997.
The Greater Union organization does not separately publish financial reports,
but its parent, Amalgamented Holdings, had a publicly reported consolidated net
worth of approximately A$288 million at June 30, 1997. Hoyts Cinemas had a net
worth of approximately A$237 million at March 1997.
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.
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 the historical course of land use development in
Australia to prevent the construction of freestanding cinemas in new
entertainment oriented complexes, particularly where those complexes are located
outside of an established Central Business District or shopping center
development. Competitors or shopping center landlords typically contest the
suitability of the Company's projects, resulting in appeals to applicable land
tribunals and delays in development. In the case of the Company's 50-acre site
at Burwood, the 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 retail landlords in Australia.
9
<PAGE>
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 15 full time executive and administrative
----------
employees and approximately 80 theater employees. The Company believes its
relations with its employees to be good
Financial Information Relating to Industry Segments and Foreign and Domestic
- ----------------------------------------------------------------------------
Operations
- ----------
See Note 14 to the Consolidated Financial Statements contained elsewhere
herein.
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
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 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 obligated to deliver to Citadel a
number of shares of REI Common Stock determined by dividing the value of the
Citadel assets by $12.25. If the appraised value of the Citadel assets is in
excess of $20 million, REI is obligated to pay for the excess by 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.
10
<PAGE>
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."
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
shared equally by 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.
Domestic 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 11 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.
11
<PAGE>
Reading Australia Properties
- ----------------------------
Reading Australia maintains leased offices in Melbourne and Sydney,
Australia. The total leased space is approximately 9,500 square feet, of which
3,500 square feet is occupied pursuant to a short term lease and 6,200 square
feet, of which are occupied under a lease with a minimum term of four years with
renewal options. 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 it is unable to develop the site as a
theater.
Entertainment Properties
- ------------------------
The Company currently leases approximately 262,175 square feet of completed
theater space in the mainland United States, Puerto Rico and Australia, as
follows:
<TABLE>
<CAPTION>
Aggregate Approximate Range of
Square Footage Terms (including renewals)
-------------- --------------------------
<S> <C> <C>
United States 72,650 10-40
Puerto Rico 135,490 15-40 years
Australia 54,035 29-40
</TABLE>
In addition, the Company has signed leases or agreements to lease with
respect to additional to-be-built theater space of 46,000 square feet in the
U.S., 50,000 square feet in Puerto Rico, and approximately 130,000 square feet
in Australia. These leases have average terms (including renewals) of forty to
fifty years including renewal options and average base rents totalling $760,000.
Reading Australia has also entered into an agreement to lease a site on which it
intends to build a 48,000 square foot cinema. The lease provides for a one-time
payment of approximately $850,000 for its two hundred year term.
The Company currently owns 300,000 square feet of land comprised of two
sites and has contracted to purchase or otherwise acquire over 750,000 square
feet of land comprised of two sites for the construction of cinemas and
entertainment complexes in Australia.
Reading Australia also owns a 50% joint venture interest in a shopping
center located on leased land in the Melbourne area of Victoria, and is
currently studying the redevelopment of such facility as an entertainment
center.
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. In 1995, the federal district court judge who
presided over Reading Company's bankruptcy reorganization ruled that all
liability asserted against Reading Company had been discharged in bankruptcy.
This decision was upheld on appeal, and the time to file further appeals has now
lapsed.
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. (See Note 9 to the
Consolidated Financial Statements contained elsewhere herein.) 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
12
<PAGE>
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 1996, 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 1996, 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. On December 9,
1997, the Court certified the case as a Class Action and approved the plaintiff
as Class Representative.
On April 24, 1997, plaintiff filed a purported derivative action against
the same defendants. This action included claims substantially similar to those
asserted in the class action and also alleged waste of tax benefits relating to
the Company's historic railroad operating losses. The Company moved to dismiss
this case for failure by the plaintiff to comply with the mandated procedures
for bringing such an action. On January 23, 1998, the Court dismissed the
derivative action. The Company intends to pursue recovery of counsel fees
expended in the defense of the case. The dismissal of the derivative action does
not affect the class action case, nor does it preclude reassertion to the claims
contained in the derivative action.
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.
Redevelopment Authority of the City of Philadelphia v. Reading
--------------------------------------------------------------
On December 12, 1997, the Redevelopment Authority filed an action in the
Philadelphia Court of Common Pleas which relates to the 1993 sale of the
Headhouse property by Reading to the Authority. Plaintiff has alleged discovery
of various contaminants -- asbestos, PCB's lead paint -- and alleges past and
future clean-up costs in excess of $1,000,000. The action is based upon theories
of contract and state environmental law. The Company has denied liability and
intends to vigorously defend. It is the Company's opinion that the Authority's
claim is meritless in that the Company adequately disclosed the condition of the
property and expressly limited its representations made in connection with the
sale.
Other Claims
------------
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.
Not Applicable
13
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
James J. Cotter 59 Chairman of the Board of Directors
S. Craig Tompkins 47 Vice Chairman and Director
Robert F. Smerling 63 President and Director
John Rochester 54 Chief Executive Officer, Australian Cinemas
Operations and Reading Australia Pty Ltd.
James A. Wunderle 45 Executive Vice President, Chief Financial Officer and
Treasurer
John Foley 47 Vice President, Marketing
Charles S. Groshon 44 Vice President, Finance
Ellen M. Cotter 32 Vice President, Business Affairs
</TABLE>
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 is the Chairman and a director of Citadel
Agricultural Inc., a wholly owned subsidiary of Citadel ("CAI"); the Chairman
and a member of the Management Committee of each of the agricultural
partnerships which constitute the principal assets of CAI (the "Agricultural
Partnerships"); and the Chairman and a member of the Management Committee of Big
4 Farming LLC, a consolidated subsidiary of Citadel. 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,
and is the Managing Director of Visalia, LLC, which holds a 20% interest in each
of the Agricultural Partnerships. 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 CineVista 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.
Tompkins is also President and a Director of CAI, a member of the Management
Committee of each of the Agricultural Partnerships and Big 4 Farming LLC, and
serves for administrative convenience
14
<PAGE>
as an Assistant Secretary of Visalia, LLC and Big 4 Ranch, Inc. (a partner
with CAI and Visalia, LLC, in each of the Agricultural Partnerships).
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.
Mr. Foley has been an officer of the Company since May 1998. Mr. Foley
also has been an officer of City Cinemas since January 1997. Prior to joining
City Cinemas and the Company, 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 of all time. Prior to joining Miramax in
1994, Mr. Foley was the President of Distribution for MGM/UA from 1989 through
1993.
Ms. Cotter has been the Vice President, Business Affairs of the Company
since March 1998. Prior thereto, Ms. Cotter held the same position with Craig
from August 1996. Prior thereto, she was an attorney specializing in corporate
law with White & Case, a New York law firm. Ms. Cotter is the daughter of Mr.
James J. Cotter.
The Company receives consulting services from the following individuals; a
full-time employee of an affiliated company, Citadel:
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 23.5% of the
outstanding Common Stock of CHC, and receives real estate consulting services
from Citadel pursuant to an agreement with that company.
15
<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, 1996 through October 15, 1996, and the REI
Common Stock from October 16, 1996 through December 31, 1997, 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 1996.
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------
Quarter 1st 2nd 3rd 4th
- ------- --- --- --- ---
<S> <C> <C> <C> <C>
High 10 7/8 11 3/4 12 1/2 14 1/2
Low 9 3/4 10 7/8 11 1/8 12 5/16
1996
----------------------------------------------------------------
Quarter 1st 2nd 3rd 4th
- ------- --- --- --- ---
High 11 11 11 1/8 10 3/8
Low 9 10 10 9
</TABLE>
On March 24, 1998, the high, low and closing prices for REI Common Stock on
the NNM were, $13.375, $13.0625, $13.125, respectively. On March 16, 1998, 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.
16
<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, 1997(1) 1996(2) 1995 1994(3) 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $36,288 $22,944 $17,632 $10,911 $3,306
Income (loss) applicable to common
shareholders before cumulative effect of
accounting change (1,354) 6,092 2,351 (1,652) (520)
Cumulative effect of accounting change 0 0 0 0 132
- -----------------------------------------------------------------------------------------------------------------------
Net (loss) income applicable to common
shareholders ($1,354) $6,092 $2,351 ($1,652) ($388)
=======================================================================================================================
Earnings per share information:
Basic earnings per share before cmuulative effect of
accounting change ($0.18) $1.11 $0.47 ($0.33) ($0.11)
Cumulative effect of accounting change 0 0 0 0 0.03
- -----------------------------------------------------------------------------------------------------------------------
Basic earnings per share ($0.18) $1.11 $0.47 ($0.33) ($0.08)
=======================================================================================================================
Diluted earnings per share before cumulative effect
at accounting change ($0.18) $1.02 $0.47 ($0.33) ($0.11)
Cumulative effect at accounting change 0 0 0 0 0.03
- -----------------------------------------------------------------------------------------------------------------------
Diluted earning per share ($0.18) $1.02 $0.47 ($0.33) ($0.08)
=======================================================================================================================
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $178,012 $181,754 $75,544 $72,716 $70,121
Redeemable preferred stock $7,000 $7,000 0 0 0
Shareholders' equity $150,485 $155,954 $68,712 $66,086 $68,026
=======================================================================================================================
</TABLE>
(1) Includes the results of five new theaters which were opened or acquired
during the year.
(2) Includes results of Citadel from March 30, 1996, the acquisition of the
NY Angelika from August 28, 1996, and the Stock Transactions from
October 16, 1996.
(3) Results of operations of CineVista have been included since its acquisition
effective July 1, 1994.
17
<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 two principal areas, the development and
operation of state of the art multiplex cinemas in Puerto Rico, the United
States and Australia, and the development and operation in Australia of
entertainment centers typically consisting of a multiplex cinema, complementary
restaurant and retail uses, and self contained parking.
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 Film Center
(the "NY Angelika") in the third quarter of 1996, a recapitalization of the
Company (the "Stock Transactions") in the fourth quarter of 1996, and the
results of operations of five new cinemas opened during 1997, historical
revenues and earnings have varied significantly. The Company's entertainment
center developments are in the early stage of development and generally will not
produce income or cash flow for at least eighteen to twenty four months from the
time that all development approvals have been secured. Management believes that
historical financial results are not necessarily indicative of future operating
results.
Revenue
- -------
Theater Revenue is comprised of Admissions, Concessions and Advertising and
other revenues from the Company's cinema operations and totaled the amounts set
forth below in each of the three years ended December 31, 1996 inclusive of
minority interests where applicable:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C>
$26,984,000 $18,236,000 $14,925,000
</TABLE>
CineVista's Theater Revenues decreased from $15,523,000 in 1996 to
$15,186,000 in 1997 due primarily to the competitive effect of two new multiplex
cinemas in the San Juan metropolitan market (which cinemas opened in July 1996
and January 1997), the closing of four screens at one existing location in 1997
in order to begin construction of an eight screen cinema at the same location,
offset somewhat by Theater Revenues realized from a new six screen cinema, which
commenced operations in March 1997. CineVista's Theater Revenues 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 offset somewhat by
the effect of competitive theater openings in the San Juan metropolitan market.
Theater Revenues in 1997 include revenues of $7,978,000 from the Company's
Domestic Cinemas (the NY Angelika, a new eight screen, 31,700 square foot cinema
and cafe complex in Houston, Texas (the "Houston Angelika") and a five screen
cinema located in Minneapolis, Minnesota (the "St. Anthony")). In 1996 the
Company's only Domestic Cinema contributed $2,713,000 in Theater Revenues
(inclusive of minority interest) from August 28 through year end. Box office and
concession revenues at this cinema in 1997 increased approximately 3.3% from the
amount recorded for the full year of 1996 by such cinema (inclusive of results
prior to the Company's acquisition of the theater). The Company commenced
operation of the Houston Angelika and the St. Anthony in December 1997. Theater
revenues from these additional cinemas were not material in 1997.
The Company opened its first cinema in Australia, a six screen cinema
located in Townsville, Queensland (the "Townsville Cinema"), at the end of
December 1996 and purchased an operating four screen cinema located in
Bundaberg, Victoria (the "Bundaberg Cinema") for approximately $1,600,000 in the
third quarter of 1997. A third six screen cinema located in Mandurah, Western
Australia (the "Mandurah Cinema") opened in November 1997. Theater Revenues from
the three cinemas totaled $3,820,000 in 1997. Reading Australia recorded no
Theater Revenues in 1996 or 1995.
In 1998, the Company will receive the benefit of a full year of operation
of the five cinemas (representing 29 screens) opened during 1997.
18
<PAGE>
Real Estate revenues include rental income and the net proceeds of sales of
the Company's domestic real estate. Reading Australia did not have any revenues
relating to its real estate activities. Real estate revenues were $180,000,
$543,000 and $272,000 in 1997, 1996 and 1995, respectively. Rental income in
1996 included $289,000 from rentals on leased equipment. The Company does
not anticipate recognizing additional income from the leasing transaction until
the residual value of the leased equipment is realized in 2002. (See Note 5 to
the Consolidated Financial Statements included elsewhere herein.) Gains on sale
of property totaled $15,000, $43,000 and $0 in each of the three years ended
December 31, 1997, 1996 and 1995, respectively. The Company has approximately 25
parcels and rights-of-way remaining from its historic railroad operations, many
of which are of limited marketability. Future domestic 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 two years.
The Company acquired the Stater Bros. Holdings Series B Preferred Stock
(the "Stater Preferred Stock") in the Stock Transactions and contributed the
Stater Preferred Stock to Reading Australia in late 1996. During the third
quarter of 1997 Stater Bros. Holdings ("Stater") exercised an option to purchase
the Stater Preferred Stock held by Reading Australia. Pursuant to the option
exercise, Stater paid Reading Australia $73,915,000, an amount equal to the
stated value of the Stater Preferred Stock plus accrued dividends. In addition
to recording income of $4,490,000 from the accrued dividends, the Company
recorded a gain of $1,387,000 reflecting the difference between the stated value
of the Stater Preferred Stock ($69,365,000) and the carrying value thereof of
$67,978,000 (98% of stated value). The Stater Preferred Stock had a dividend
yield of 10.5%. The income related to the repurchase of the Stater Preferred
Stock from Reading Australia has been recorded as "Earnings from Stater
Preferred Stock" in the Company's Consolidated Statement of Operations.
Interest and dividend revenues (exclusive of those from the Stater
Preferred Stock) were as follows in each of the three years ended December 31,
1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C>
$3,247,000 $2,788,000 $2,435,000
</TABLE>
Interest and dividend income increased $459,000 in 1997 as a result of
higher average balances of investable funds in the fourth quarter from the
proceeds of the Stater Preferred Stock redemption. The increase in interest and
dividend income between 1995 and 1996 was due primarily to higher levels of
investable funds after the Stock Transactions.
Expenses
- --------
"Theater costs," "Theater concession costs" and "Depreciation and
amortization" (collectively "Theater Operating Expenses") reflect the direct
theater expenses associated with the Company's cinema operations. Theater
Operating Expenses, inclusive of minority interest, increased $7,908,000 from
$16,235,000 in 1996, to $24,143,000 in 1997 due primarily to the operating
expenses associated with a full year of operations of one of the Company's
Domestic Cinemas and the commencement of operations of the Australia theaters
which amounts totaled $9,653,000 in 1997 and $2,148,000 in 1996.
CineVista Theater Operating Expenses increased approximately $402,000 to
$14,490,00 in 1997 primarily as a result of the additional expenses of operating
a new location (subsequent to March 1997). CineVista Operating expenses
increased approximately $200,000 between 1995 and 1996 due primarily to the
higher level of theater revenues recorded in 1996.
19
<PAGE>
"General and administrative" expenses, without consideration of
intercompany management fees, were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CineVista $ 767 $1,050 $922
Domestic Cinemas(1) 645 165 0
Australia(2) 3,714 2,804 390
Other 4,611 3,087 3,278
----- ----- -----
Total $9,737 $7,106 $4,590
</TABLE>
CineVista's "General Administrative" expenses decreased approximately
$283,000 in 1997 to $767,000 from $1,050,000 in 1996 due primarily to certain
reclassification of salary expenses ($200,000) and a reduction in professional
fees of $70,000.
"General and Administrative" expenses associated with the Domestic Cinemas
include $370,000 in 1997 and $43,000 in 1996 of management fees to City Cinemas
with respect to the management of the Domestic Cinemas. (See Note 3 to the
Consolidated Financial Statements contained elsewhere herein.)
Reading Australia's "General and Administrative" expenses increased from
$2,804,000 in 1996 to $3,714,000 in 1997. The principal components of this
increase include an increase in Property Development costs of $650,000 ($650,000
recorded in 1996 and $1,300,000 in 1997) which were written off due to project
abandonments or reconfiguration, third party theater management fees of $185,000
and increased office, salary and related overhead expenses resulting from an
expansion of Reading Australia's theater operations and entertainment center
development activities.
The investment in and operating results of Reading International Cinemas
LLP ("Reading International"), the parent of Reading Australia, were reported
under the equity method through 1995. The Company acquired ownership of 100% of
Reading International and consolidated the results of Reading International with
the results of the Company in 1996. (See Note 4 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. Reading Australia
anticipates continuing losses during the next several years until additional new
theaters and entertainment centers are developed and operations increased.
Other "General and Administrative" expense increased from $3,087,000 in
1996 to $4,611,000 in 1997, and includes the Company's non-capitalized expenses
associated with its US cinema development activities. The increase in 1997
includes bonus expense of $475,000 for a bonus paid to the Company's Chairman of
the Board of Directors and a $110,000 investment banking fee paid to the
Company's former Corporate Secretary, increased salary expense and salary
related expenses of approximately $370,000 due to an expansion of cinema
development and operating personnel and increased professional fees of
approximately $200,000 relating primarily to domestic cinema development
activities.
Equity in Earnings of Affiliates
In 1997 and 1996 "Equity in earnings of affiliate" were $298,000 and
$1,526,000 respectively and include the results of the Company's common stock
interest in Citadel Holding Corporation ("Citadel"). In 1997
- ----------
(1) Includes the NY Angelika, the St. Anthony and the Houston Angelika
(2) Does not include Craig's 50% share of Reading International's General and
Administrative expenses in 1995.
20
<PAGE>
Citadel's net income totaled $1,575,000 and the Company realized "Equity in
earnings of affiliates of $298,000. In 1996, 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 5 to the Consolidated Financial Statements
included elsewhere herein.)
Other Income
"Other income" totaled $1,531,000, $4,327,000 and $2,341,000 in the three
years ended December 31, 1997, 1996 and 1995, respectively, and is primarily
comprised of litigation settlements and awards. In 1997 "Other income" includes
$615,000 which REI received from Stater in return for REI's agreement not to
provide consulting services for, nor own a controlling interest in, a business
which competes with Stater (the retail sale of groceries in the "Inland Empire"
region of Southern California) for a period of one year, $260,000 from a third
party as reimbursement of certain acquisition related expenditures which were
expensed by the Company in prior periods, $490,000 of income realized upon
settlement of certain litigation relating to a discontinued subsidiary's
operations, and a $220,000 gain from currency transactions. (See "Currency
Transactions", below).
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
contamination in certain properties formerly owned by the Company (See Note 9 to
the Consolidated Financial Statement contained elsewhere herein), a $941,000
gain from the redemption of the Company's Citadel Series B Preferred Stock, 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 in income of $196,000 in 1997 includes a provision for
$238,000 for the 16.67% minority interest in one of the Company's Domestic
Cinema's income less $42,000 representing 25% of the loss related to the joint
venture partner's interest in on of the Company's Australian theaters. Minority
interest in the loss 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, offset by $67,000 of the minority share of the above referenced
Domestic Cinema.
Income Tax Provision
Income Tax expense in 1997 totaled $1,067,000 consisting of $146,000 of
Federal Alternative Minimum Tax ("AMT"), an accrual for foreign withholding
taxes of $698,000 which will be paid if certain intercompany loans are repaid
and state taxes of $223,000. (See Note 8 to the Consolidated Financial
Statements contained elsewhere herein.) The income tax benefit in 1996 included
the $3,957,000 benefit associated with a reversal of the tax asset valuation
allowance, described below, offset by AMT of $2,195,000, an accrual for foreign
withholding taxes of $446,000 and state taxes of $80,000. "Income Tax" expense
in 1995 was composed primarily of AMT expense.
Net Income
As a result of the above "Net income" totaled $2,955,000, $7,003,000 and
$2,351,000 in 1997, 1996 and 1995, respectively.
21
<PAGE>
Net (Loss) Income Applicable to Common Shareholders
- ---------------------------------------------------
"Net (loss) income applicable to common stockholders" has been reduced by
the 6.5% per annum dividend on the $62,000,000 of Convertible Preferred Stock
outstanding since October 15, 1996 and amortization of the asset put option
since October 15, 1996 (the period subsequent to the closing on the Stock
Transactions). (See "The Stock Transactions", below.)
Currency Transactions
- ---------------------
During the fourth quarter of 1997, the Company entered into several foreign
currency swaps and a currency forward position with a major bank. The agreements
provided for the Company to receive $12,363,800 US dollars ("USD") in return for
the delivery of $18,659,300 Australian dollars ("AUD") in January 1998. The
value of the contracts at December 31, 1997 was established by computing the
difference between the contractual exchange rates of the swap and forward
positions (AUD/USD) and the exchange rates in effect at December 31, 1997 and an
unrealized gain of $220,000 was recorded in 1997 from these transactions which
gain has been included in "Other income".
During the first quarter of 1998, the currency positions and extensions
thereof matured and the Company incurred a loss. The loss, which will be
recognized in the first quarter of 1998 totals approximately $700,000.
Liquidity and Capital Resources
- -------------------------------
The Company, where feasible, prefers to own the land on which it constructs
its cinemas. In the United States and Puerto Rico, a variety of factors
(including land acquisition costs and competition from well established and well
financed developers) has caused the Company to focus on leasehold sites.
However, an ownership oriented approach is being pursued in Australia with
respect to the Company's entertainment center projects (See Item 1, Business).
These projects will be more capital intensive, have longer lead times and entail
greater development risks than the leasing of facilities in established malls.
The entertainment centers will generally consist of a multiplex cinema with
complementary retail and restaurant use and convenient parking all constructed
on land owned or controlled by the Company. Accordingly, such centers are
capital intensive at this stage of development. Reading Australia has acquired
three sites (inclusive of a joint venture shopping center site), which the
Company may develop as entertainment centers, and has agreements relating to two
other possible entertainment center sites. Reading Australia also has a fifty
acre property assemblage in the Melbourne area. The Company is considering
development options for this site. However, if capital were required to fund the
company's entertainment center or other projects, this site could be sold to
fund such projects. If all of these potential entertainment center projects are
developed, Reading Australia estimates the total development cost of these
projects will exceed $100 million over the next two to three years.
The Company anticipates that it will invest approximately $6.2 million
during 1998 in furtherance of its expansion of an existing theater scheduled to
be completed in 1998. CineVista has also signed a lease agreement for a new
twelve screen cinema, and has a letter of intent relating to an expansion of an
existing location. CineVista's share of the estimated costs of these two
projects is approximately $15 million and will be expended in 1998 and 1999.
CineVista may use funds available under its Line of Credit (See Note 11 to the
Consolidated Financial Statements contained elsewhere herein) to fund a portion
of its theater development costs.
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. In addition, the Company may
from time-to-time develop theaters which specialize in conventional commercial
film product if the Company views the markets as attractive. The Company has
entered into a lease for a site on which the Company plans to build a twelve
screen commercial cinema in New Jersey. The theater is presently under
development and scheduled to open in late 1998. In addition, the Company has
entered into letters of intent relating to the development of Angelika type
cinemas with a total of 35 screens in five locations. The Company's share of the
development costs of these projects are estimated to total approximately $30
million. However, with the exception of the one theater under construction, it
cannot be assured any of these projects will be completed as leases have not yet
been executed. The cash cost of the Company's domestic cinema projects can range
from approximately $1.5 million for a turnkey leased facility to over $10
million for an owned site.
22
<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 liquid funds and anticipated cash flow. However,
the Company believes that additional funding can 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 Company presently has liquid funds in excess of its capital
commitments.
The following summarizes the major sources and uses of cash funds in each
of the three years ended December 31, 1997, 1996 and 1995:
1997:
- -----
"Unrestricted cash and cash equivalents increased $44,190,000 in 1997 from
$48,680,000 in 1996 to $92,870,000 at December 31, 1997. Working capital
increased $43,790,000 from $43,336,000 at December 31, 1996 to $87,126,000 at
December 31, 1997.
The principal source of liquid funds in 1997 was the $73,915,000 in
proceeds from the redemption of the Stater Preferred Stock investment. While not
necessarily indicative of results of operations determined under generally
accepted accounting principles, CineVista's, the Domestic Cinemas' and Reading
Australia's (net of minority interest of $196,000) operating cash flow (income
before depreciation and amortization and corporate charges) totaled $7,672,000
in 1997. Other sources of liquid funds in 1997 include $2,360,000 in payment of
a 1996 litigation settlement, $3,247,000 in "Interest and dividend" income and
cash of $875,000 from "Other income".
In addition to the payment of operating expenses the principal use of cash
funds included the payment of $4,030,000 of dividends on the Company's
Convertible Preferred Stock, and purchases of property and equipment of
$20,116,000 ($11,743,000 which relates to Reading Australia, $4,079,000 relating
to CineVista and $4,294,000 relating to the Domestic Cinemas), and the
investment of $3,871,000 by Reading Australia in a joint venture and a loan to
the joint venture partner with respect to property on which Reading Australia
intends to develop a multiplex cinema. (See Note 4 to the Consolidated
Financial Statements contained elsewhere herein.)
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 $670,000 from $42,666,000 at December 31, 1995 to $43,336,000 at
December 31, 1996.
While not necessarily indicative of its results of operations determined
under generally accepted accounting principles, CineVista's and the NY
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 benefitted 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 NY Angelika for $9,217,000 (total purchase price
of $12,570,000, net of a credit of $1,285,000 for a judgment secured by a
portion of the stock of the seller of the NY Angelika (the "Angelika Judgment")
and the minority partner contribution of $2,068,000), the purchase of the
Citadel common stock (see Note 5 to the Consolidated
23
<PAGE>
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.
CineVista'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 CineVista's new eight screen multiplex theater which
commenced operations during December 1995 and $1,285,000 for the purchase of the
Angelika Judgment.
The Stock Transactions
The Stock Transactions permitted the Company to acquire assets which 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 and
consolidate Craig and the Company's interest in Reading International in order
to reduce the complexity of the Company's corporate structure. With the
exception of Reading International, the non-cash assets received in the Stock
Transactions, the Stater Preferred Stock and the preferred stock of Citadel (the
"Citadel Preferred Stock") were converted into cash in 1996 and 1997.
In 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 Voting Cumulative Preferred Stock (the
"Series A Preferred Stock") and granted Citadel certain contractual rights
including the asset put option (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 $12.25. If the appraised value of the 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. 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").
The Stock Transactions were 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.
The Stock Transactions were 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.
24
<PAGE>
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 in 1996 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 in
1996. 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. The Company has no NOLs
which existed at the time of the Company's quasi-reorganization and therefore,
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 the 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 the Series A Preferred Stock, the Company also
granted the Asset Put Option to Citadel, 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 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 totaled
approximately $68,000 in 1996 and $279,000 in 1997 for the amortization of the
value of the Asset Put Option (based upon a valuation utilizing the Black &
Scholes option valuation model).
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 7 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
property. Although the Company does not believe that such limitations on the use
of its NOLs would apply to the disposition of the assets recovered by the
Company in the Stock Transaction, 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
25
<PAGE>
otherwise, such use may not be available. In such case, the financial position
of the Company could be materially adversely affected.
The Company has determined that it will not need to modify or replace
significant portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and beyond. The Company also
does not believe that the failure of any third party suppliers or other parties
to remediate year 2000 issues could have a material impact upon the Company's
operations.
Effects on Inflation
The Company does not believe that inflation has a material effect upon its
existing operations.
Recent Accounting Pronouncements
In 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128
requires net income per share to be presented under two calculations, basic
income per share and diluted income per share
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related information." SFAS No. 130 established standards
for reporting comprehensive income and its components in the financial
statements. SFAS No. 131 requires publicly held companies to report financial
and other information about key revenue-producing segments of the entity and is
utilized by the chief operation decision-maker. The Company is evaluating its
implementation approach for SFAS Nos. 130 and 131, both of which will be adopted
in 1998.
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-31.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
26
<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 1998 Annual Meeting of Shareholders and, to the
extent that it relates to executive officers, appears in Part I hereof.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the
Company's proxy statement with respect to its 1998 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 1998 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 1998 Annual Meeting of
Shareholders.
27
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
<C> <S> <C>
(a)(1) Financial Statements PAGE
Consolidated Balance Sheets as of December 31, 1997 and F-1 -- F-2
December 31, 1996.
Consolidated Statements of Operations for the years ended F-3
December 31, 1997, December 31, 1996 and
December 31, 1995.
Consolidated Statements of Cash Flows for the years ended F-4 -- F-5
December 31, 1997, December 31, 1996 and
December 31, 1995.
Consolidated Statements of Shareholders' Equity for the years F-6 -- F-7
ended December 31, 1997, December 31, 1996 and
December 31, 1995.
Notes to Consolidated Financial Statements. F-8 -- F-30
Report of Independent Auditors -- Ernst & Young LLP. F - 31
</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) By-laws 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.)
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.)
28
<PAGE>
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 Nonqualified Stock Option Plan.
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 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.)
10.6 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.)
10.7 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.)
10.8 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.)
10.9* 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 quarter ended June 30, 1996.)
10.10 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.)
10.11 Asset Put and Registration Rights Agreement dated October 15,
1996 by and among Reading Entertainment, Inc., Citadel Holding
Corporation, and Citadel Acquisition Corp., Inc. (Incorporated by
reference to Exhibit 10.15 to Reading Entertainment, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1996.)
10.12 Certificate of Designation of the Series B 3% Cumulative Voting
Convertible Preferred Stock of Citadel Holding Corporation.
(Incorporated by reference to Exhibit 10.16 to Reading
Entertainment, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1996.)
10.13 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.)
10.14 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.)
29
<PAGE>
10.15 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.)
10.16 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.)
10.17 $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.)
10.18 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.)
10.19 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.)
10.20 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.)
10.21 Restated Certificate of Incorporation of Stater Bros. Holdings
Inc. (Incorporated by reference to Exhibit 4.2 to Reading
Entertainment, Inc.'s Registration Statement on Form S-4, File
No. 333-13413.)
10.22 Purchase Agreement between Equipment Leasing Associates 1995-VI
Limited Partnership and FA, Inc. effective December 20, 1996.
(Incorporated by reference to Exhibit 10.27 to Reading
Entertainment, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1996.)
10.23 Master Lease Agreement between FA, Inc. and Equipment Leasing
Associates 1995-VI Limited Partnership dated December 20, 1996.
(Incorporated by reference to Exhibit 10.28 to Reading
Entertainment, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1996.)
10.24 Nonrecourse Promissory Note between FA, Inc. and Equipment
Leasing Associates 1995-VI Limited Partnership effective December
20, 1996. (Incorporated by reference to Exhibit 10.29 to Reading
Entertainment, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1996.)
10.25 Lease Rental Purchase Agreement between FA, Inc. and Ralion
Financial Services, Inc. dated December 31, 1996. (Incorporated
by reference to Exhibit 10.30 to Reading Entertainment, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1996.)
10.26*Non-Qualified Stock Option Agreement dated April 18, 1997 by and
between Reading Entertainment, Inc. and James J. Cotter.
(Incorporated by reference to Exhibit 10.1 to
30
<PAGE>
Reading Entertainment, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997.)
10.27*Reading Entertainment, Inc. Incentive Compensation Plan.
(Incorporated by reference to Exhibit 10.1 to Reading
Entertainment, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.)
10.28*Reading Entertainment, Inc. 1997 Equity Incentive Plan.
(Incorporated by reference to Exhibit A to Reading Entertainment,
Inc.'s Definitive Proxy Statement on Schedule 14A as filed with
the Securities and Exchange Commission on August 21, 1997.)
10.29 Master Management Agreement between Angelika Holding, Inc. and
City Cinemas Corporation dated November 26, 1997.
21(i) List of Subsidiaries of Reading Entertainment, Inc.
23.1 Consent of Independent Auditors - Ernst & Young LLP.
27.1 Financial Data Schedule for the year ended December 31, 1997.
27.2 Restated Financial Data Schedule for the quarter ended
September 30, 1997.
27.3 Restated Financial Data Schedule for the quarter ended
June 30, 1997.
27.4 Restated Financial Data Schedule for the quarter ended
March 31, 1997.
27.5 Restated Financial Data Schedule for the year ended
December 31, 1996.
27.6 Restated Financial Data Schedule for the quarter ended
September 30, 1996.
27.7 Restated Financial Data Schedule for the quarter ended
June 30, 1996.
27.8 Restated Financial Data Schedule for the quarter ended
March 31, 1996.
27.9 Restated Financial Data Schedule for the year ended
December 31, 1995.
(b) Reports on Form 8-K.
NONE
(c) See item 14(a)(3) above.
(d)(1) Not applicable.
(d)(2) Not applicable.
(d)(3) Not applicable.
* These exhibits constitute the executive compensation plans and
arrangements of the Company.
31
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except shares and per share amounts)
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $92,870 $48,680
Amounts receivable, less allowance of $37 in 1997 and $70 in 1996 1,195 3,117
Restricted cash 4,755 3,683
Inventories 194 151
Note receivable 721 0
Prepayments and other current assets 568 814
- ---------------------------------------------------------------------------------------
Total current assets 100,303 56,445
- ---------------------------------------------------------------------------------------
Investment in Stater Preferred Stock 0 67,978
Investment in Citadel Common Stock 4,903 4,850
Net investment in leased equipment 2,125 2,125
Investment in WPG Unit Trust 1,608 0
Property and equipment - net 40,312 21,130
Note receivable from joint venture partner 1,771 0
Other assets 2,033 2,997
Intangible assets:
Beneficial leases - net of accumulated amortization of $3,197
in 1997 and $2,284 in 1996 13,711 14,624
Cost in excess of assets acquired - net of accumulated
amortization of $791 in 1997 and $197 in 1996 11,246 11,605
- ---------------------------------------------------------------------------------------
77,709 125,309
- ---------------------------------------------------------------------------------------
$178,012 $181,754
=======================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-1
<PAGE>
<TABLE>
<CAPTION>
Reading Entertainment, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
(in thousands, except share and per share amounts)
December 31,
- ----------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $2,464 $5,183
Accrued taxes 657 2,549
Accrued property costs and other 3,319 1,240
Film rent payable 1,637 1,102
Note payable 645 1,500
Purchase commitment 3,516 230
Other liabilities 939 1,305
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 13,177 13,109
- ----------------------------------------------------------------------------------------------------------
Capitalized lease, less current portion 509 516
Note payable 1,100 500
Other liabilities 3,735 2,579
- ----------------------------------------------------------------------------------------------------------
Total long term liabilities 5,344 3,595
- ----------------------------------------------------------------------------------------------------------
Minority interests 2,006 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 16,163 17,238
Foreign currency translation adjustment (4,323) 114
- ----------------------------------------------------------------------------------------------------------
Total shareholders' equity 150,485 155,954
- ----------------------------------------------------------------------------------------------------------
$178,012 $181,754
==========================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Theater:
Admissions $19,978 $12,986 $10,356
Concessions 6,078 4,486 3,883
Advertising and other 928 764 686
Real estate 180 543 272
Earnings from Stater preferred stock investment 5,877 0 0
Interest and dividends 3,247 4,165 2,435
- -----------------------------------------------------------------------------------
36,288 22,944 17,632
- -----------------------------------------------------------------------------------
EXPENSES:
Theater costs 20,081 13,631 10,784
Theater concession costs 1,296 821 640
Depreciation and amortization 2,785 1,793 1,369
General and administrative 9,737 7,106 4,200
Equity loss from investment in Australian
theater developments 0 0 390
- -----------------------------------------------------------------------------------
33,899 23,351 17,383
- -----------------------------------------------------------------------------------
Income (loss) from operations 2,389 (407) 249
Equity in earnings of affiliate 298 1,526 0
Other income, net 1,531 4,327 2,341
- -----------------------------------------------------------------------------------
Income before minority interests and income
taxes (benefit) 4,218 5,446 2,590
Minority interests 196 (321) 0
- -----------------------------------------------------------------------------------
Income before income taxes (benefit) 4,022 5,767 2,590
Income taxes (benefit) 1,067 (1,236) 239
- -----------------------------------------------------------------------------------
Net income 2,955 7,003 2,351
Less: Preferred stock dividends and amortization
of asset put option (4,309) (911) 0
- -----------------------------------------------------------------------------------
Net income (loss) applicable to common
shareholders ($1,354) $6,092 $2,351
===================================================================================
Basic (loss) earnings per share ($0.18) $1.11 $0.47
===================================================================================
Diluted (loss) earnings per share ($0.18) $1.02 $0.47
===================================================================================
</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,
- ---------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $2,955 $7,003 $2,351
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Condemnation award 0 0 (1,146)
Depreciation 1,240 644 453
Amortization 1,545 1,149 916
Write off of capitalized development costs 1,308 0 0
Deferred rent expense 406 245 165
Deferred income tax expense (benefit) 0 (3,957) 132
Equity in earnings of affiliate (298) (1,526) 0
Equity loss from Australian joint venture 0 0 390
Minority interest in net loss of Australian joint venture (42) (388) 0
Minority interest in net income of the Angelika 238 67 0
Preferred stock redemption premium (5,877) (941) 0
Gain on sale of real estate (15) (43) 0
Discharge of reorganization obligations 0 0 (223)
Changes in operating assets and liabilities:
(Increase) decrease in amounts receivable 1,884 (2,406) 135
(Increase) decrease in inventories (50) (17) (26)
(Increase) decrease in prepaids and other current assets 858 (177) 95
Increase (decrease) in accounts payable and accrued expenses (3,347) 4,544 (119)
Increase (decrease) in film rent payable 545 769 (60)
Increase (decrease) in other liabilities 654 (134) (392)
Other, net (10) (470) (49)
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,994 4,362 2,622
- ---------------------------------------------------------------------------------------------------
</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,
- ---------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net cash provided by operating activities $1,994 $4,362 $2,622
- ---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of the Angelika 0 (12,570) 0
Reimbursement proceeds for the Angelika judgement 0 1,293 0
Purchase of the Angelika Minnesota (229) 0 0
Purchase of property and equipment (19,887) (11,075) (1,828)
Proceeds from redemption of Citadel preferred stock investment 0 6,191 0
Proceeds from redemption of Stater preferred stock investment 73,915 0 0
Purchase of Citadel common stock 0 (3,325) 0
(Increase) decrease in restricted cash (1,421) (1,478) 208
(Increase) decrease in long term deposits (76) 0 0
(Decrease) increase in due from affiliate 0 1,040 (1,040)
Investment in leased equipment (See Note 5) 0 (75) 0
Net proceeds from sales of real estate 21 91 0
Investment in Australian joint venture 0 0 (1,040)
Investment in WPG Unit Trust (1,850) 0 0
Loans to joint venture partners in Australia (2,021) 0 0
Purchase of the Angelika judgement (See Note 4) 0 0 (1,285)
Net proceeds from condemnation award 0 0 1,146
Net proceeds from real estate joint venture investments 0 0 185
Purchases of available-for-sale securities 0 0 (510)
Sales and maturities of available-for-sale securities 0 0 36,319
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 48,452 (19,908) 32,155
- ---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from minority partner of Australian joint venture 93 12,888 0
Proceeds from Angelika, Houston landlord 280 0 0
Cash acquired as a result of consolidation of Australian joint venture 0 95 0
Proceeds from issuance of Series A redeemable preferred stock 0 7,000 0
Proceeds from minority partner for purchase of the Angelika 0 2,068 0
Distributions to minority partner of the Angelika (371) (38) 0
Payments of Stock Transactions issuance costs (366) (1,056) 0
Payment of preferred stock dividends (4,030) (843) 0
Decrease in note payable (1,500) 0 0
Payments of debt financing costs 0 (256) 0
Purchase of treasury stock 0 (1) (1)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (5,894) 19,857 (1)
- ---------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (362) 180 0
- ---------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 44,190 4,491 34,776
Cash and cash equivalents at beginning of year 48,680 44,189 9,413
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $92,870 $48,680 $44,189
=========================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1997, 1996, 1995
(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, 1994 12,291 $1 5,144,400 $51 (183,250) ($2,621)
Net income
Change in unrealized gains and
losses
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 (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)
- --------------------------------------------------------------------------------------------------------------------------
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 accor-
dance 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
<CAPTION>
----------Reading Entertainment--------
Common Stock Seris B Preferred Stock Unrealized
--------------------------------------- Gains And Other Retained
Shares Amount Shares Amount (Losses) Capital Earnings
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 0 $0 0 $0 ($286) $55,057 $13,884
Net income 2,351
Change in unrealized gains and
losses 286
Realization of tax benefit resulting
from pre-quasi-reorganization
operating loss carryforwards 1,200 (1,200)
Foreign currency translation
adjustment resulting from equity
method of accounting in Reading
International
Reading Company common stock
converted to Reading Company Class A
common stock
Reading Company treasury stock
purchased
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 0 0 0 0 0 56,257 15,035
- -----------------------------------------------------------------------------------------------------------------------------------
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
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 Company Class A common
stock in treasury retired (2,622)
Issuance of Reading Entertainment common
stock and Series B Preferred to Craig in accor-
dance 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
<CAPTION>
Foregin
Currency
Translation
Adjustment
- ------------------------------------------------------------
<S> <C>
Balance at December 31, 1994 $0
Net income
Change in unrealized gains and
losses
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 (10)
Reading Company common stock
converted to Reading Company Class A
common stock
Reading Company treasury stock
purchased
- -----------------------------------------------------------
Balance at December 31, 1995 (10)
- -----------------------------------------------------------
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 124
Reading Company common stock
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
Reading Company Class A common
stock in treasury retired
Issuance of Reading Entertainment common
stock and Series B Preferred to Craig in accor-
dance with terms of Stock Transactions
Issuance costs of Stock Transactions
Reading Entertainment Series A and B
preferred dividends declared
- -----------------------------------------------------------
Balance at December 31, 1996 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-6
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity (continued)
Years ended December 31, 1997, 1996, 1995
(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, 1996 0 $0 0 $0 0 $0
Net income
Issuance costs of Stock Transactions
Foreign currency translation
adjustments
Reading Entertainment Series A and B
preferred dividends declared
=======================================================================================================================
Balance at December 31, 1997 0 $0 0 $0 0 $0
=======================================================================================================================
<CAPTION>
----------Reading Entertainment-------- Foregin
Common Stock Seris B Preferred Stock Unrealized Currency
--------------------------------------- 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, 1996 7,449,364 $7 550,000 $1 $0 $138,594 $17,238 $114
Net income 2,955
Issuance costs of Stock Transactions 43
Foreign currency translation
adjustments (4,437)
Reading Entertainment Series A and B
preferred dividends declared (4,030)(1)
===================================================================================================================================
Balance at December 31, 1997 7,449,364 $7 550,000 $1 $0 $138,637 $16,163 ($4,323)
===================================================================================================================================
</TABLE>
(1) Represents dividends per share of $6.50 for Reading Entertainment Series A
redeemable preferred stock and dividends per share of $6.50 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, 1997
(amounts in tables in thousands, except shares and per share data)
In 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 shareholders of REI (the "Reorganization") and Reading Company
became a wholly-owned subsidiary of REI. (See Note 2.)
The Company is in the business of developing and operating multi-plex
cinemas in the United States, Puerto Rico and Australia and of developing, and
eventually operating, entertainment centers in Australia. The Company operates
its cinemas through various subsidiaries under the Angelika Film Centers and
Reading Cinemas names in the mainland United States (the "Domestic Cinemas")
through Reading Cinemas of Puerto Rico, Inc., a wholly owned subsidiary, under
the CineVista name in Puerto Rico ("CineVista" or the "Puerto Rico Circuit");
and through Reading Australia Pty, Limited (collectively with its subsidiaries
referred to herein as "Reading Australia") under the Reading Cinemas name in
Australia (the "Australia Circuit"). The Company's entertainment center
development activities in Australia are also conducted through Reading
Australia, under the Reading Station name.
The Company is also a participant in two real estate joint ventures in
Philadelphia, Pennsylvania and holds certain property for sale located primarily
in Philadelphia and owns certain leased equipment which it leases to third
parties.
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, after elimination of all significant intercompany
transactions, accounts and profit. The Company's investments in 20% to 50% -
owned companies, in which it has the ability to exercise signigficant influence
over operating and financial policies, are accounted for on the equity method.
Investments in other companies are carried at cost.
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.
Income Taxes: The Company underwent a quasi-reorganization in 1981 in which
it eliminated its accumulated deficit by a charge to other capital. 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 was 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 Eurodollar time
deposits, federal agency securities and other short-term money market
instruments.
Inventories: Inventories are comprised of confection goods used in theater
operations and are stated at the lower of cost (first-in, first-out method) or
net realizable value.
F-8
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(amounts in tables in thousands, except shares and per share data)
Property and Equipment: Property and equipment are carried at cost.
Depreciation of buildings, capitalized premises lease, leasehold improvements
and equipment is recorded on a straight-line basis over the estimated useful
lives of the assets or, if the assets are leased, the remaining lease term
(inclusive of renewal options, if likely to be exercised), whichever is shorter.
The estimated useful lives are generally as follows:
<TABLE>
<S> <C>
Building and Improvements 40 years
Equipment 7-15 years
Furniture and Fixtures 7 years
Leasehold Improvements 20 years
</TABLE>
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 (whether for
purchase or lease) or entertainment center locations. Amounts are carried at
cost unless management decides that a particular location will not be pursued to
completion or if the costs are no longer relevant to the proposed project. If
such a judgement is made, previously capitalized costs which are no longer of
value are written-off.
Intangible Assets: Intangible assets are comprised of acquired beneficial
theater leases used in CineVista's operations and cost in excess of net assets
acquired in the acquisition of the Angelika Film Center, 6-screen cinema located
in the Soho area of Manhattan (the "NY Angelika") and a five screen cinema
located in Minneapolis, Minnesota (the "St. Anthony").
The amount of the purchase price of the NY Angelika assets in excess of the
appraised value of the assets is being amortized on a straight-line basis over a
period of 20 years. The fair value of the NY Angelika assets was determined by
an independent appraiser. The purchase price of the St. Anthony is being
amortized on a straight-line basis over the remaining life of the lease term
which approximates 5 years.
The amount of the CineVista 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
CineVista's leases at the time of the Company's acquisition of CineVista and
allocating such amount as a component of the purchase price of CineVista. The
beneficial leases are amortized on a straight-line basis over the remaining term
of the underlying leases, which approximates 16 years.
Translation of Non-U.S. Currency Amounts: The financial statements and
transactions of Reading Australia's cinema and real estate operations are
maintained in their functional currency (Australian dollars) and translated into
U.S. dollars in accordance with Statement of Financial Accounting Standards,
("SFAS") No. 52, "Foreign Currency Translation." Assets and liabilities of such
operations are denominated in Australian dollars and 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.
F-9
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(amounts in tables in thousands, except shares and per share data)
Income (Loss) Per Share: Net (loss) income available to common stock
shareholders reflects the reduction for dividends declared on the Company's
Series A Voting Cumulative Convertible Redeemable Preferred Stock (the "Series A
Preferred Stock"), and Series B Voting Cumulative Convertible Preferred Stock (
the "Series B Preferred Stock") (collectively, the "Convertible Preferred
Stock") and for amortization of the value of an estimate of an asset put option
(the "Asset Put Option") had one been recorded (See Notes 2 and 13).
In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings
Per Share." SFAS No. 128 requires net income per share to be presented under two
calculations, basic income per share and diluted income per share. Basic income
(loss) per share (Reading Entertainment common stock (the "Common Stock") for
the period subsequent to the Reorganization and Reading Company Class A common
and common stock for periods prior to the Reorganization) is calculated using
the weighted average number of shares outstanding during the periods presented.
The weighted average number of shares used in the computation of basic earnings
per share were 7,449,364 in 1997, 5,494,145 in 1996, and 4,973,369 in 1995.
Diluted income (loss) per share is calculated by dividing net income by the
weighted average common shares outstanding for the period plus the dilutive
effect of stock options, convertible securities and the Asset Put Option. Stock
options to purchase 347,732 and 359,732 shares of Common Stock were outstanding
at a weighted average exercise price of $13.98 and $14.03 during 1996 and 1995,
respectively, but were not included in the computation of diluted earnings per
share because the options' exercise prices were greater than the average market
price of the common shares during such periods. The Asset Put Option conversion
rate of $11.75 was also higher than the average market price of the Common Stock
during that portion of the year in which it was in effect in 1996. In October
1996 the Company issued the Convertible Preferred Stock. If the Convertible
Preferred Stock had been converted in 1996, the weighted average number of
shares would have increased by 1,274,623 to 6,768,768 and income available to
common shareholders' would have increased by $843,000 (the amount of preferred
stock dividends recorded during such period) to $6,935,000, resulting in diluted
earnings per share of $1.02 versus basic earnings per share of $1.11 in 1996.
During 1997 the Company recorded a net loss available to shareholders of
$1,574,000 and therefore the stock options, the Convertible Preferred Stock and
the Asset Put Option, were anti-dilutive.
Recent Accounting Pronouncements: In June 1997 the Financial Accounting
Standards Board issued SFAS No. 130,"Reporting Comprehensive Income,"and SFAS
No. 131, "Disclosure About Segments of an Enterprise and Related Information."
SFAS No. 130 establishes standards for reporting comprehensive income and its
components in the financial statements. SFAS No. 131 requires publicly held
companies to report financial and other information about key revenue-producing
segments of the entity and is utilized by the chief operation decision-maker.
The Company is evaluating its implementation approach for SFAS Nos. 130 and 131,
both of which will be adopted in 1998.
Reclassification: Certain amounts in previously issued financial statements
have been reclassified to conform with the current presentation.
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 Corporation (together with its wholly owned
subsidiaries "Craig") (the "Stock Transactions"). Both transactions were
completed on October 15, 1996.
F-10
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(amounts in tables in thousands, except shares and per share data)
In the Stock Transactions, REI issued (i) 70,000 shares of 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 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 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 Cinemas LLC ("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 which shares were exchanged by REI immediately after conclusion of the
Stock Transactions for Citadel preferred stock (the Citadel Preferred Stock")
with the same terms except for a reduced accrual rate on the redemption premium.
The Series A and Series B Preferred Stock have stated values of $7 million and
$55 million, respectively.
The contractual rights granted to Citadel in the Stock Transactions include
the Asset Put Option pursuant to which Citadel has the option 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 $12.25. 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. 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 options include numerous subjective assumptions and such
methods are not intended to value non-transferable options such as the Asset Put
Option.
Both the Stater Preferred Stock and the Citadel Preferred Stock have been
redeemed (See Note 5).
NOTE 3 -- 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.
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.
The Company acquired the NY Angelika on August 27, 1996 (See Note 4). 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. A company controlled by Mr. Forman and his family beneficially own
12.4% of Craig's currently outstanding capital stock.
City Cinemas manages the NY Angelika, the Houston Angelika and
the St. Anthony pursuant to management agreements (See Note 4). Robert F.
Smerling, President of the Company, and John Foley, Vice President, Marketing of
the Company also serve in the same positions with 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. During 1997, the amount
paid to Citadel for such services totalled $252,000.
On December 29, 1997, Citadel capitalized a wholly owned subsidiary, Big 4
Ranch, Inc., ("BRI") with a cash contribution of $1.2 million and then
distributed 100% of the shares of BRI to Citadel's common shareholders of
record as of the close of business on December 23, 1997, as a spin-off dividend.
Reading received 1,564,473 shares or 23.4% of BRI. The Board of Directors and
executive officers of BRI are comprised of one director of REI and two Craig
Directors.
On December 31, 1997, BRI (owning 40%), Citadel (owning 40%) and Visalia
LLC (a limited liability company controlled by Mr. James J. Cotter, the Chairman
of the Board of REI, Craig, and Citadel, and owned by Mr. Cotter and certain
members of his family) entered into three general partnerships in December 1997,
which Partnerships on December 31, 1997 acquired an agricultural property
(purchase price amounting to approximately $7.6 million). The acquisition was
financed by a ten year purchase money mortgage in the amount of $4.05 million, a
line of credit from Citadel and pro-rata contributions from the partners.
Through its holdings in BRI and Citadel, the Company owns approximately 18.8% of
such Partnerships at December 31, 1997.
NOTE 4 -- ACQUISITION AND DEVELOPMENT ACTIVITIES
Domestic Activity
-----------------
The Company commenced operation of the eight screen Houston Angelika
theater located in downtown Houston, in December 1997. The cinema and a cafe,
which is included in the lobby area and operated by a local restaurant operator,
occupy approximately 31,700 square feet and is leased pursuant to a long-term
lease. The theater was designed and built to Company specification and is the
Company's first purpose built theater specializing in art, foreign and
sophisticated commercial product similar to that offered in the NY Angelika.
The Company acquired the St. Anthony, a leased five screen theater, located
in Minneapolis Minnesota from a national theater owner operator in December
1997. The theater operates under the Reading Cinemas name. The Company paid the
former lessee approximately $229,000 for the theater and assumed all obligations
of the lessee under the lease, which lease has a remaining term of approximately
5 years, subject to an option to extend for an additional five years.
In August 1996, the Company and Sutton Hill Associates ("Sutton Hill"),
acquired the assets comprising the NY Angelika, a multiplex theater located in
Soho area of New York City. The purchase price 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 NY Angelika assets with a combination of available
cash, a promissory note collateralized by escrowed cash issued to the sellers in
the amount of $2,000,000 (the "Sellers Note") and credit at December 31, 1997
F-11
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(amounts in tables in thousands, except shares and per share data)
in full satisfaction of a judgement encumbering certain of the stock of the
sellers. The final payment on the Sellers Note of $500,000 was made in February
1998. At December 31, 1996 this amount was classified as "Note Payable" and
"Restricted cash" on the Company's Consolidated Balance Sheet.
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 Houston Angelika, the St. Anthony and the NY Angelika are managed by
City Cinemas pursuant to management agreements. The management agreements for
the St. Anthony and the Houston Angelika provide for City Cinemas to receive a
fee equal to 2.5% of revenues. The NY Angelika management agreement provides for
the payment of a minimum fee of $125,000 plus an incentive fee equal to 50% of
annual cash flow (as defined) over prescribed levels provided, however, that the
maximum annual aggregate fee cannot exceed 5% of NY Angelika's revenues.
The Company's 83.3% interest in the NY Angelika was accounted for using the
purchase method and the NY 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 NY Angelika's
net earnings for the period subsequent to the acquisition of the NY Angelika
have been recorded as "Minority interest" in the Consolidated Balance Sheet as
of December 31, 1997.
The unaudited pro forma consolidated operating results set forth below
assume that the acquisition of the NY Angelika was completed at the beginning of
1996 and include the impact of certain adjustments, including amortization of
intangibles, depreciation and reductions in "Interest and dividend" income
resulting from payment of the purchase price.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1996 1995
------- -------
<S> <C> <C>
Revenues $27,443 $24,350
======= =======
Net income $6,861 $1,944
======= =======
Earnings per share:
Basic $1.25 $ .39
======= =======
Diluted $1.14 $ .39
======= =======
</TABLE>
F-12
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(amounts in tables in thousands, except shares and per share data)
Reading Australia
-----------------
In November 1995, the Company and Craig formed Reading International to
develop and operate multiplex cinemas in Australia under the operating name
Reading Cinemas. Reading International was equally owned by the Company and
Craig prior to conclusion of the Stock Transactions, and wholly-owned by the
Company subsequent thereto.
Since formation, Reading Australia has opened three cinemas, two in leased
facilities and one in an owned facility, with a total of sixteen screens. In
addition, Reading Australia has acquired several sites which may be developed as
entertainment center projects.
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 unaudited pro forma consolidated operating results set forth below
assume that the Company owned 100% of Reading International as of the beginning
of 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.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
------- -------
<S> <C> <C>
Revenues $22,943 $17,632
======= =======
Net income $6,614 $1,961
======= =======
Earnings per share:
Basic $1.20 $ .39
======= =======
Diluted $1.10 $ .39
======= =======
</TABLE>
Puerto Rico
-----------
The Company acquired CineVista effective as of July 1, 1994. Since that
time the Company has opened two new cinemas with a total of 14 screens and has
eight screens under construction and scheduled to open in summer 1998, which
cinema replaces a six screen cinema at the same location.
NOTE 5 -- INVESTMENTS
Stater Preferred Stock
----------------------
The Stater Preferred Stock received by the Company in the Stock
Transactions was contributed to Reading Australia in 1996. During the third
quarter of 1997 Stater exercised an option to acquire the Stater Preferred
Stock. Pursuant to the option exercise, Stater paid Reading Australia
$73,915,000, an amount equal to the stated value of the Stater Preferred Stock
plus accrued dividends. A gain of $5,877,000 was recorded by the Company in 1997
related to the sale of the Stater Preferred Stock, comprised of $4,490,000 of
accrued dividends and the difference between the carrying value of the Stater
Preferred Stock (98% of stated value) and the redemption price at stated value
which difference totaled $1,387,000. Stater also paid REI $615,000 in return for
REI's agreement not to
F-13
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(amounts in tables in thousands, except shares and per share data)
provide consulting services for, nor own a controlling interest in, a business
which competes with Stater (the retail sale of groceries in the "Inland Empire"
region of Southern California) for a period of one year. This payment has been
recorded as "Other income" in the 1997 Consolidated Statement of Operations.
The unaudited pro forma effect on "Interest and dividend" revenues, "Other
income", and "Net loss or income" from the sale of the Stater Preferred Stock
would have been to reduce net income by $3,140,000 and $741,000 in 1997 and
1996, respectively, exclusive of the non-recurring $1,387,000 gain associated
with the writeup to stated value had the sale occurred at the beginning of each
period. The pro forma "Net loss" in 1997 would have been $188,000 and the "Net
loss available to common shareholders" would have totaled $4,497,000 (basic and
diluted loss of $.60 per share). The pro forma "Net income" in 1996 would have
been $3,790,000 and "Net loss available to common shareholders" would have
totaled $519,000 (basic and diluted loss of $.07 per share).
Whitehorse Property Group
-------------------------
In November 1997, Reading Australia acquired a 50% interest from Burstone
Victoria Pty. Ltd. ("Burstone") in the Whitehorse Property Group Unit Trust
("WPG") for approximately $1,600,000. WPG owns a shopping center located near
Melbourne, Australia. WPG is currently studying the redevelopment of the
Whitehorse Shopping Center as an entertainment center through development of a
multiplex cinema and complementary restaurants and retail shops. In conjunction
with Reading Australia's acquisition of its interest in WPG, Reading Australia
loaned approximately $1,400,000 to the joint venture partner which loan accrues
interest at 7.5% annum. Reading Australia also guaranteed 50% of the underlying
property debt of WPG, which amount totals approximately $4,000,000. The carrying
amount of the Company's 50% interest approximates half the appraised
value of WPG. Management believes that the December 31, 1997 carrying value of
the WPG investment approximates its fair value. WPG operated at a break-even
level from the November 1997 acquisition date through the end of the year.
Accordingly no gains or losses have been recorded from the investment in the
1997 Consolidated Statement of Operations.
Citadel Holding Corporation
---------------------------
In March 1996, the Company acquired 1,564,473 shares of Citadel common
stock from Craig representing an interest of approximately 26.1%. In 1997,
Citadel issued 666,000 common shares pursuant to the exercise of warrants which
reduced 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 in 1997 were $1,575,000 and the Company's share of such earnings was
$298,000 which amount is included in the Consolidated Statement of Operations as
"Equity in earnings of affiliate." Citadel's assets and liabilities totaled
$28,860,000 and $10,806,000, respectively, as of December 31, 1997. The closing
price of Citadel's common stock on the American Stock Exchange was $4.50 per
share. Accordingly, the market value of the Company's interest in Citadel was in
excess of the carrying value of this investment at December 31, 1997.
F-14
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(amounts in tables in thousands, except shares and per share data)
The unaudited 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.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1995
------- -------
<S> <C> <C>
Revenues $22,943 $17,632
======= =======
Net income $6,992 $ 2,406
======= =======
Earnings per share:
Basic $1.27 $ .48
======= =======
Diluted $1.16 $ .48
======= =======
</TABLE>
During 1996, the Company exercised its right to convert the Citadel
Preferred Stock it received from Craig in the Stock Transactions to Citadel
common stock whereupon Citadel exercised its right to redeem the Citadel
Preferred Stock. Under the terms of the Citadel 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 1996 Consolidated Statement
of Operations.
Net Investment in Leased Equipment
----------------------------------
During 1996, a wholly-owned subsidiary of the Company purchased computer
equipment for $40,934,000 which equipment was leased to various retail 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, 1997 as "Net investment in leased
equipment."
F-15
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(amounts in tables in thousands, except shares and per share data)
NOTE 6 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------- --------
<S> <C> <C>
Land $10,978 $7,332
Property under development* 4,137 0
Buildings 1,959 743
Capitalized premises lease 538 538
Leasehold improvements 13,480 5,774
Equipment 7,611 5,990
Construction-in-progress and
property development costs 4,599 2,562
-------- --------
43,302 22,939
Less: Accumulated depreciation (2,990) (1,809)
-------- --------
$ 40,312 $ 21,130
======== ========
</TABLE>
* Includes the net purchase price of a property which was acquired by the
Company in March 1998 and which the Company was obligated to reimburse seller
for demolition costs at December 31, 1997.
(See Note 10.)
NOTE 7 -- STOCK OPTION PLANS
In October 1995, the Financial Accounting Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 encourages
companies to adopt a fair value approach to valuing stock options that would
require compensation cost to be recognized based on the fair value of the stock
option granted. As permitted by SFAS No. 123, 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 and will provide the footnote disclosures required by SFAS No.
123. 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.
As of December 31, 1997, the Company had options outstanding under two
Stock Option Plans, the 1992 Non-qualified Stock Option Plan (the "1992 Plan")
and the 1997 Equity Incentive Plan (the "1997" Plan). Each plan was approved by
shareholders in the year of adoption. The 1997 Plan reserved 200,000 shares for
grant and provides for one-fourth of the options granted to be exercisable on
the first anniversary of the date of grant, and an additional one-fourth on each
subsequent anniversary, unless the Compensation Committee of the Board of
Directors (the "Committee"), in its discretion, decides otherwise.
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 Committee in its
discretion, decides otherwise.
Options granted under both the 1992 Plan and the 1997 Plan must have
exercise prices equal to or less than 100 percent of the fair market value of
the underlying shares on the date of grant and expire ten years from the date
F-16
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(amounts in tables in thousands, except shares and per share data)
of grant and may contain certain other terms and conditions as determined by the
Committee. Shareholders of the Company approved a grant of options on September
16, 1997 to James J. Cotter, Chairman of the Board of Directors of the Company
(the "Cotter Option"). The Cotter Options are divided into three groups: options
(the "Basic Options") to purchase up to 110,000 shares of Common Stock, which
become exercisable in four equal installments commencing one year from the date
of grant: options (the "Convertible Preferred Options") to purchase up to
260,000 shares of Common Stock, which become exercisable over a similar vesting
schedule, but only in proportion to the number of shares of Convertible
Preferred Stock which are converted into Common Stock; and options (the "Asset
Put Options") to purchase up to 90,000 shares of Common Stock which become
exercisable over a similar vesting schedule, but only in proportion to the
number of shares of Common Stock which are issued pursuant to the Asset Put
Option (See Note 2). All shares granted under the Cotter Option have a
exercisable price of $12.80 per share.
Changes in the number of shares subject to options under the plans are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------ -----------------------
Weighted Average Weighted Average Weighted Average
Options Exercise Price Options Exercise Price Options Exercise Price
------------------------ ------------------------ -----------------------
<S> <C> <C> <C> <C> <C> <C>
1982 Plans:
Outstanding at beginning of year 5,000 $12.50 17,000 $14.57 17,000 $14.57
Canceled (5,000) $12.50
Expired (12,000) $15.44
------------------------ ------------------------ -----------------------
Outstanding at end of period 0 5,000 $12.50 17,000 $14.57
------------------------ ------------------------ -----------------------
1992 Plan:
Outstanding at beginning of year 342,732 $14.00 342,732 $14.00 357,732 $14.00
Canceled(1) (55,000) $14.00 (15,000) $14.00
Granted(1) 72,500 $12.81 0 0
------------------------ ------------------------ -----------------------
Outstanding at the end of year 360,232 $13.76 342,732 $14.00 342,732 $14.00
------------------------ ------------------------ -----------------------
1997 Plan:
Outstanding at beginning of year
Granted 152,000 $12.82
------------------------
Outstanding at the end of year 152,000 $12.82
------------------------
Cotter Option(2):
Outstanding at beginning of year
Granted 110,000 $12.80
------------------------
Outstanding at the end of year 110,000 $12.80
------------------------
Total
Outstanding at Year End 622,232 $13.36 347,732 $13.98 359,732 $14.03
======================== ======================== =======================
Exercisable at Year End 310,232 $13.91 337,357 $13.98 341,982 $14.03
======================== ======================== =======================
</TABLE>
- --------
(1) Includes 22,500 options which were amended to reduce the exercise price
from $14.00 per share to $12.80 per share.
(2) Does not include the Asset Put Options or the Convertible Preferred Stock
Options since the conditions precedent to the granting of such options have
not occurred.
F-17
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(amounts in tables in thousands, except shares and per share data)
The weighted-average remaining contractual life of all options outstanding
at December 31, 1997 was 6.73 years.
Pro forma net income and earnings per share information reflecting the fair
value approach to valuing stock options and the corresponding increase in
compensation expense is required by SFAS No. 123 in each of the years that a
company grants stock options. The Company did not grant any stock options in
1995 or 1996. In computing the pro forma effect of the grants of Stock Options
in 1997, all options granted under the 1997 Plan and 1992 Plan in 1997,
modifications to options previously granted under the 1992 Plan, the Basic
Options and the Asset Put Options have been included. The fair value of these
options was estimated at the respective dates of grant using a Black-Scholes
option pricing model with the following weighted average assumptions: stock
option exercise price of $12.81, risk free interest rate of 6.71%, expected
dividend yield at 0%, expected option life of 5 years and expected volatility of
22.31%. The weighted-average fair value of options granted in 1997 was $12.81
per share. The pro forma effect of the issuance of these options would have been
to increase the "Net loss available to common shareholders" by $264,000 ($.04
per share) to $1,618,000 ($.22 per share). The pro forma adjustments may not be
representative of future disclosures because the estimated fair value of stock
options is amortized to expense over the vesting period, and additional options
may be granted in future years. Further, SFAS 123 requires assumptions by
management regarding the likelihood of events on which the vesting of
contingent, performance based options are predicated.
NOTE 8 -- 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. Through December 31,
1996, 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 in 1996 and $1,152,000 or $.23 per share in 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Income (loss) before income taxes consists
of the following components:
United States $7,349 $10,497 $3,916
Foreign (3,327) (4,730) (1,326)
------ ------ ------
Total $4,022 $5,767 $2,590
====== ====== ======
</TABLE>
F-18
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(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,
--------------------------------------
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
Income taxes (benefit):
Current:
United States $146 $2,195 $1,419
Foreign 698 446 20
State and local 223 80 0
------ ------- ------
Total 1,067 2,721 1,439
Increase (decrease) in valuation allowance
from net operating loss carry forwards
0 (3,957) (1,200)
------ ------- ------
Total income taxes (benefit) $1,067 ($1,236) $239
====== ======= ======
</TABLE>
Reconciliation of income taxes at United States statutory rates to income
taxes as reported are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
Tax provision (benefit) at U.S. statutory rates $1,367 $1,961 $881
Foreign and U.S. losses not currently benefitted 1,123 234 538
Foreign withholding taxes 698 446 20
State income taxes 223 80 0
Use of net operating loss carry forwards (2,344) (3,957) (1,200)
------ ------- ------
Total income taxes (benefit) $1,067 ($1,236) $239
====== ======= ======
</TABLE>
The 1996 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 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 $64,524,000 was recorded by the Company.
F-19
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(amounts in tables in thousands, except shares and per share data)
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 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 5 resulted in a
taxable gain of approximately $39 million in 1996. 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>
1997 1996
------- -------
<S> <C> <C>
Net operating loss carryforwards $14,996 $16,291
Alternative minimum taxes 3,073 2,928
Foreign Tax Credits 1,168 470
Wrap Lease rental sale 10,712 12,938
Reserves and other, net 1,311 977
------- -------
Gross deferred asset 31,260 33,604
Valuation allowance (31,260) (33,604)
------- -------
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, 1997.
The Company's federal tax net operating loss carryforwards expire as
follows:
<TABLE>
<CAPTION>
Year Amount
---------------- -------
<S> <C>
2000 ................................................. $21,983
2002 ................................................. 7,382
2003 ................................................. 589
2007 ................................................. 1,443
2008 ................................................. 1,155
2009 ................................................. 32
-------
$32,584
=======
</TABLE>
F-20
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(amounts in tables in thousands, except shares and per share data)
In addition to the federal net operating loss carryforwards, the Company
has AMT credits of $3,073,000 which can be carried forward indefinitely. Also,
the Company has foreign net operating loss carryforwards of $9,517,000,
$8,189,000 of which expire between 2000 and 2002 unless utilized prior thereto.
In 1996, the Company had $13,426,000 of federal net operating loss carryforwards
that expired unused.
The Company is required to pay AMT for 1997, 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 $146,000, $2,195,000 and $87,000 in 1997 , 1996
and 1995, respectively.
The Company paid $2,405,000, $139,000 and $1,000 in income taxes in 1997,
1996 and 1995, respectively.
NOTE 9 -- LEGAL PROCEEDINGS
Environmental
- -------------
Reading Company had 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. 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 was appealed and the appeal was heard in
July 1996. A decision upholding the Company's position was rendered in June 1997
by the United States Court of Appeals for the Third Circuit (the "Appeals
Court"). A subsequent request for a rehearing was rejected by the Appeals Court,
and the period for appeal to the United States Supreme Court has expired.
Accordingly, the Company believes that Reading Company has no liability relating
to the site. However, a subsidiary of Reading Company was also named as a PRP at
the site and if that subsidiary's defenses (including insolvency), proved
ineffective the liability is estimated to be less than $300,000.
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 fifteen 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.
Redevelopment Authority of the City of Philadelphia v. Reading
- --------------------------------------------------------------
On December 12, 1997 the Redevelopment Authority of the City of
Philadelphia (the "RDA") filed an action in the Philadelphia Court of Common
Pleas which relates to the 1993 sale of the Headhouse property by the Company to
the RDA. Plaintiff has alleged discovery of asbestos, PCB's, lead paint, and
alleges past and future clean-up costs in excess of $1,000,000. The action is
based upon theories of contract and state environmental law. The Company has
denied liability and intends to vigorously defend. It is management's opinion
that the RDA's
F-21
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(amounts in tables in thousands, except shares and per share data)
claim is meritless in that the Company adequately disclosed the condition of the
property and expressly limited its representations made in connection with the
sale.
Certain Shareholder Litigation
- ------------------------------
In September, 1996, the holder of 50 shares of the 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 Court of Common Pleas
relating to the Reorganization and Stock Transactions. (See Note 2.) 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; 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 1996, 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 1996, 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. On December 9,
1997, the Court certified the case as a Class Action and approved the plaintiff
as Class Representative.
On April 24, 1997, plaintiff filed a purported derivative action against
the same defendants. This action included claims substantially similar to those
asserted in the class action and also alleged waste of tax benefits relating to
the Company's historic railroad operating losses. The Company moved to dismiss
this case for failure of the plaintiff to comply with the mandated procedures
for bringing such an action. On January 23, 1998, the Court dismissed the
derivative action. The Company intends to pursue recovery of counsel fees
expended in the defense of the case. The dismissal of the derivative action does
not affect the class action case, nor does it preclude re-assertion of the
claims contained in the derivative action.
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.
F-22
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(amounts in tables in thousands, except shares and per share data)
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 10 -- LEASE AGREEMENTS AND PURCHASE COMMITMENTS
The Company determines annual base rent expense by amortizing total minimum
lease obligations on a straight-line basis over the lease terms. Base rent
expense under operating leases totaled $4,184,000, $2,675,000 and $2,139,000 in
1997, 1996 and 1995, respectively. In 1997, 1996 and 1995, contingent rental
expense under the CineVista operating leases totaled $25,000, $220,000 and
$197,000, respectively.
CineVista and the Domestic Cinemas conduct their operations in leased
premises. Two of Reading Australia's three operating multiplexes are in leased
facilities. The Company's cinema leases have remaining terms inclusive of
options of 12 to 40 years. Certain of the Company's cinema leases 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
noncancellable operating leases. With the exception of one capital lease, all
leases are accounted for as operating leases.
Future minimum lease payments by year and in the aggregate, under
noncancellable operating leases and the CineVista capital lease consist of the
following at December 31, 1997:
<TABLE>
<CAPTION>
Capital Operating
Lease Leases
------------ ------------
<S> <C> <C>
1998 $ 95 $ 3,215
1999 95 3,101
2000 95 3,068
2001 95 3,098
2002 95 3,099
Thereafter 1,069 41,511
------------ ------------
Total net minimum lease payments 1,544 $ 57,092
============
Less amount representing interest 1,028
------------
Present value of net minimum lease
payments under capital lease $ 516
============
</TABLE>
At December 31, 1997 the Company had four lease agreements for theater
facilities with a total of 46 screens which were then under construction or for
which construction is anticipated to be completed in 1998 and 1999. The
aggregate anticipated contribution for construction costs for such facilities
was approximately $27 million at December 31, 1997. The aggregate minimum annual
rental for such leases is approximately $1.9 million (excluding one lease which
provides for the payment of rent currently, which amount is included in the
minimum lease payments set forth above), which rentals commence upon the opening
of the theaters.
F-23
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(amounts in tables in thousands, except shares and per share data)
During 1997, Reading Australia entered into two property purchase
agreements and one option agreement to acquire land. Pursuant to the terms of
the agreements, Reading Australia has made deposits of approximately $700,000,
which amounts have been classified as "Restricted Cash" on the Company's
Consolidated Balance Sheet.
Under the terms of one of the purchase contracts, Reading Australia was
required to pay the balance of the purchase price, approximately $4,137,000 upon
completion of certain demolition activities to be performed by the property
owner. Reading Australia also issued a fully cash-collateralized guarantee prior
to the commencement of the demolition activities in favor of the property owner
in the amount of approximately $2.9 million, which amount has been reflected as
"Restricted Cash" in the Company's Consolidated Balance Sheet. The Company has
included the full amount of the purchase price of the property as "Property
under development" in the 1997 Consolidated Balance Sheet and reflected the
obligation for the remaining purchase price, $3,516,000, as a "Purchase
commitment"on the Consolidated Balance Sheet. Closing on the property purchase
occurred in March 1998. Reading Australia intends to develop an entertainment
center on the site at an estimated cost of approximately $19 million, exclusive
of the property purchase price.
Reading Australia has an option to acquire a 12 acre site located in
Sydney, Australia. The option exercise price is approximately $6.8 million. If
the option is exercised, the Company intends to develop an entertainment center
on the site at an estimated cost of in excess of $23 million.
In April 1997, Reading Australia entered into a joint venture agreement
with an experienced theater operator whereby the joint venture partner may
borrow up to approximately $650,000 from Reading Australia to invest in certain
country cinema developments. In accordance with the agreement, the partner has
borrowed approximately $325,000 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.
Under the terms of the joint venture agreement with WPG (See Note 5),
Reading Australia is required to build a multiplex theater with a minimum of ten
screens with a cost of not less than approximately $6.5 million, if the
Company's joint venture partner prepares and funds a plan to renovate and expand
the joint venture property.
F-24
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(amounts in tables in thousands, except shares and per share data)
NOTE 11 -- LONG-TERM DEBT
CineVista has a $7.5 million, eight-year revolving credit agreement (the
"Credit Agreement") with a bank. Under terms of the Credit Agreement, CineVista
may borrow up to $7.5 million to fund new theater development costs. Through
December 31, 1998, CineVista may borrow and repay amounts outstanding under the
Credit Agreement. Amounts outstanding at December 31, 1998 are payable in
increasing quarterly installments over the balance of the loan term. At December
31, 1997 and 1996, no amounts were outstanding under this agreement.
As security for the loan, CineVista has pledged substantially all of its
assets. In addition, the stock of CineVista'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 certain loans and fees
payable by CineVista to the Company under certain circumstances.
The provisions of the Credit Agreement require CineVista 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%, or the base rate plus 1/2 of 1%, at CineVista's
election.
F-25
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(amounts in tables in thousands, except shares and per share data)
In accordance with the provisions of the Credit Agreement, CineVista is required
to pay a commitment fee on the unused commitment equal to 1/2 of 1%.
NOTE 12 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for 1997 and 1996 is summarized below:
<TABLE>
<CAPTION>
First Second Third Fourth
1997: Quarter Quarter Quarter Quarter
- ---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 8,242 $ 9,064 $ 10,429 $ 8,553
Net income (loss)
applicable to
common shareholders $ 349 ($ 522) $ 697 ($ 1,878)
========== ========== ========== ==========
Earnings (loss) per share:
Basic $ .05 ($ .07) $ .09 ($ .25)
========== ========== ========== ==========
Diluted $ .05 ($ .07) $ .09 ($ .25)
========== ========== ========== ==========
<CAPTION>
First Second Third Fourth
1996: Quarter Quarter Quarter Quarter
- ---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 4,670 $ 4,857 $ 5,775 $ 7,642
Net (loss) income
applicable to
common shareholders ($ 273) $ 1,313 $ 1,372 $ 3,680
========== ========== ========== ==========
Earnings (loss) per share:
Basic ($ .05) $ .26 $ .28 $ .52
========== ========== ========== ==========
Diluted ($ .05) $ .26 $ .28 $ .37
========== ========== ========== ==========
</TABLE>
1997:
- ----
Revenues in the first three quarters include income from the Stater
Preferred Stock of $1,975,000, $1,816,000 and $2,086,000 respectively. First
quarter revenues include $260,000 received from a third party as reimbursement
of certain acquisition related expenditures which were expensed by the Company
in prior periods. Third Quarter income includes $615,000 received from Stater in
return for REI's agreement not to provide consulting services for, nor own a
controlling interest in, a business which competes with Stater (the retail sale
of groceries in the "Inland Empire" region of Souther California) for a period
of one year. During the fourth quarter the Company concluded all obligations
relating to SWS Industries. The Company had been a guarantor on various
performance bonds issued on behalf of SWS. As a result of the conclusion of
activities, $490,000 was recorded as income to reverse the provision for this
matter recorded in prior years. Also, during the fourth quarter, Reading
Australia wrote off $554,000 of previously capitalized project costs.
F-26
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(amounts in tables in thousands, except shares and per share data)
1996:
- ----
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%(current ownership is 23.5% See Note 5) 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 purposes of previously deferred proceeds
from the bulk sale of loans by a previously owned subsidiary of Citadel (See
Note 5). 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.
The fourth quarter also includes a $941,000 preferred stock redemption
premium (See Note 5) and a deferred tax benefit of $3,957,280 related to the
reduction in the deferred tax asset valuation allowance (See Note 7). 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) was $1,468,000.
NOTE 13 -- CAPITALIZATION
Common Stock
- ------------
Common Stock (par value $.001) is traded on the Nasdaq National Market
system 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
F-27
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(amounts in tables in thousands, except shares and per share data)
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.
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.
NOTE 14 -- Business Segments and Geographic Area Information
In order to more accurately identify its operating activities and future
development plans, Reading Australia undertook steps to separate its real estate
development activities from its cinema operations in Australia during 1997.
Accordingly, effective as of January 1997 Reading Australia commenced operations
in two business segments, cinema development and operations, and real estate
development. Prior thereto, the Company conducted operations in one business
segment, the development and operations of cinemas. Domestically, and in Puerto
Rico, the Company is primarily engaged in one business segment, the operation
and development of cinemas. The following sets forth certain information
concerning the Company's two segments, real estate development, and cinema
operations in 1997 the only period in which the Company's operated in more than
one segment:
<TABLE>
<CAPTION>
Real Estate Cinema Corporate and
1997 Development Operations Eliminations(1) Consolidated
- ---- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 0 $ 26,984 $ 180 $ 27,164
Operating Income (2,506) 778 (5,007) (6,735)
Identifiable assets 18,910 53,525 105,577 178,012
Depreciation and
Amortization 0 2,735 50 2,785
Capital expenditures(2) 7,586 12,463 67 20,116
</TABLE>
- --------
(1) Amounts do not include "Interest and Dividend" income, or "Earnings from
Stater Preferred stock investment". "Real estate" revenues from the
Company's domestic property liquidating activities have been included in
Corporate.
(2) Real estate capital expenditures are net of "Purchase commitment" of
$3,516,000.
F-28
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(amounts in tables in thousands, except shares and per share data)
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, 1997. The Company has no export revenues.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Puerto Rico ........................ $ 15,186 $ 15,523 $ 14,925
Mainland United States ............. 8,158 3,256 272
Australia .......................... 3,820 0 0
Income (loss) from operations:(1)
Puerto Rico ........................ (70) 385 1,225
Mainland United States ............. 1,288 889 273
Australia .......................... (3,518) (2,429) (391)
Corporate and Other(2) ............. 6,404 7,159 1,482
Identifiable assets:(3)
Puerto Rico ........................ 27,838 26,529 26,979
Mainland United States ............. 20,860 15,824 0
Australia .......................... 28,379 12,948 2,380
Corporate and other .................. 100,935 126,453 46,184
Consolidated Assets(4) ............. $ 178,012 $ 181,754 $ 75,543
</TABLE>
- --------
(1) Reflects earnings before interest expense, taxes and intercompany interest
and management fees.
(2) Corporate and other income includes corporate General and Administrative
expense, Earnings from Stater Preferred Stock, Other Income, and Interest
Income/expense and excludes intercompany interest and management fees.
(3) Reading Australia has cash and cash equivalents, which assets had a value
of $60,889,000 and $14,232,000 in 1997 and 1996, respectively. Such amounts
have been included in the value of Corporate and other Assets.
(4) Consolidated assets for 1995, 1996 and 1997 include the assets of Reading
Australia.
F-29
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1997
(amounts in tables in thousands, except shares and per share data)
NOTE 15 -- Financial Instruments
During the fourth quarter of 1997, the Company entered into several foreign
currency swaps and a currency forward position with a major bank. The agreements
provided for the Company to receive $12,363,800 U.S. dollars ("USD") in return
for the delivery of $18,659,300 Australian dollars ("AUD") in January 1998. The
value of the contracts at December 31, 1997 was established by computing the
difference between the contractual exchange rates of the swap and forward
positions (AUD/USD) and the exchange rates in effect at December 31, 1997 and an
unrealized gain of $220,000 was recorded in 1997 from these transactions which
gain has been included in "Other income".
During the first quarter of 1998, the currency positions and extensions
thereof matured and the Company incurred a loss. The loss, which will be
recognized in the first quarter of 1998, totals approximately $700,000.
F-30
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Reading Entertainment, Inc.
We have audited the accompanying consolidated balance sheets of Reading
Entertainment, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 13, 1998
F-31
<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 and Director
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 March 30, 1998
- -------------------------- --------------
James J. Cotter Chairman and Director
/s/ S. Craig Tompkins March 30, 1998
- -------------------------- --------------
S. Craig Tompkins Vice Chairman and Director
/s/ James A. Wunderle March 30, 1998
- -------------------------- --------------
James A. Wunderle Executive Vice President,
Chief Financial Officer and
Treasurer
(Principal Financial and
Accounting Officer)
/s/ Gregory R. Brundage March 30, 1998
- -------------------------- --------------
Gregory R. Brundage Director
/s/ Edward L. Kane March 30, 1998
- -------------------------- --------------
Edward L. Kane Director
<PAGE>
Signature Title Date
- --------- ----- ----
/s/ John W. Sullivan March 30, 1998
- -------------------------- --------------
John W. Sullivan Director
/s/ Albert J. Tahmoush March 30, 1998
- -------------------------- --------------
Albert J. Tahmoush Director
<PAGE>
Exhibit Index
-------------
Exhibit
No.
---
10.3* Reading Company 1992 Nonqualified Stock Option Plan, as Amended.
10.29 Master Management Agreement between Angelika Holding, Inc. and City
Cinemas Corporation dated November 26, 1997.
21(i) List of Subsidiaries of Reading Entertainment, Inc.
23.1 Consent of Independent Auditors - Ernst & Young LLP.
27.1 Financial Data Schedule for the year ended December 31, 1997.
27.2 Restated Financial Data Schedule for the quarter ended September 30,
1997.
27.3 Restated Financial Data Schedule for the quarter ended June 30, 1997
27.4 Restated Financial Data Schedule for the quarter ended March 31, 1997.
27.5 Restated Financial Data Schedule for the year ended December 31, 1996.
27.6 Restated Financial Data Schedule for the quarter ended September 30,
1996.
27.7 Restated Financial Data Schedule for the quarter ended June 30, 1996.
27.8 Restated Financial Data Schedule for the quarter ended March 31, 1996.
27.9 Restated Financial Data Schedule for the year ended December 31, 1995
* These exhibits are part of the executive compensation plans and
arrangements of the Company.
<PAGE>
Exhibit 10.3
------------
READING COMPANY
---------------
NONQUALIFIED STOCK OPTION PLAN
------------------------------
1. Purpose. The purpose of the Reading Company Nonqualified Stock Option Plan
-------
(the "Plan") is to further the growth, development and financial success of
Reading Company (the "Company") and any subsidiary by providing additional
incentives to those officers, key employees and outside directors who are
responsible for the management of the business affairs of the Company and
any subsidiary, and which will enable them to participate directly in the
growth of the capital stock of the Company. The Company intends that the
Plan will facilitate securing, retaining, and motivating management
employees and outside directors of high caliber and potential.
2. Administration.
--------------
(a) The Executive Committee of the Company's Board of Directors (the
"Board") shall, subject to the provisions of the Plan, have full and final
authority, in its sole discretion, to interpret the provisions of the Plan
and to decide all questions of fact arising in its application; to
determine the employees and outside directors to whom options shall be
granted under the Plan; to determine the time when options shall be
granted; and to make all other determinations necessary or advisable for
the administration of the Plan.
(b) All decisions, determinations, and interpretations of the
Executive Committee (the "Committee") shall be final and binding on all
optionees. All actions of the Committee shall be taken by a majority vote
of its members. The Committee may appoint a secretary to keep minutes of
its meetings and shall make rules and regulations for their conduct as it
shall deem advisable.
3. Stock Subject to the Plan. The shares that may be issued under the Plan
-------------------------
shall not exceed in the aggregate 500,000 shares of Class A common stock,
par value $.01, of the Company (the "Common Stock"). Such shares may be
authorized and unissued shares or shares issued and subsequently reacquired
by the Company. Except as otherwise provided herein, any shares subject to
an option which for any reason expires or is terminated unexercised as to
such shares shall again be available under the Plan. The Committee may
grant to holders of outstanding options, in exchange for the surrender and
cancellation of such options, new options having purchase prices lower than
provided in the options so surrendered and cancelled, and containing such
other terms and conditions as the Committee may prescribe in accordance
with the provisions of the Plan, without regard to the price, period of
exercise, or any other terms or conditions of the option surrendered.
Shares delivered under the Plan shall be fully paid and non-assessable.
4. Eligibility to Receive Options. Persons eligible to receive stock options
------------------------------
under the Plan shall be limited to those officers, key employees and
directors of the Company and any subsidiary (as defined in Section 424 of
the Internal Revenue Code of 1986 (the "Code"), or any amendment or
substitute thereto), who are in positions in which their decisions, actions
and counsel significantly impact upon the profitability and success of the
Company and any subsidiary.
5. Form of Grants. Grants may be made at any time and from time to time by
--------------
the Committee in the form of stock options to purchase shares of Common
Stock. These stock options are not intended to qualify as incentive stock
options within the meaning of Section 422 of the Code.
6. Stock Option Agreements. Stock options for the purchase of Common Stock
-----------------------
("Options") shall be evidenced by written agreements in such form not
inconsistent with the Plan as the Committee shall approve from time to time
and which shall contain in substance the following terms and conditions:
(a) Type of Option. Each option agreement shall identify the Options
--------------
represented thereby as nonqualified stock options.
(b) Option Price. The purchase price of the Common Stock subject to an
------------
Option shall not be less than 100% of the fair market value of such stock
on the date the Option is granted, as determined by the Committee. In no
event shall the purchase price per share be less than the par value of such
share. For this purpose, fair market value on any date shall mean the
closing price of the Common Stock,
<PAGE>
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 the Common Stock is not reported by
NASDAQ, the fair market value shall be as determined by the Committee.
(c) Exercise Term. Unless the Committee in its discretion determines
-------------
otherwise, each option agreement shall state that the Option is exercisable
in three (3) cumulative installments with one-third (1/3) of the shares
covered by the Option becoming exercisable commencing on the date of grant
and another one-third (1/3) of such shares becoming exercisable on each
anniversary of the date of grant thereafter until the Option becomes fully
exercisable. Moreover, the Committee, in its discretion, may have each
option agreement provide that any unexercisable portion of the Option will
become exercisable at the time an optionee ceases to be an employee of the
Company or any subsidiary for any reason other than resignation or a
discharge for cause or at the time an optionee no longer serves as a member
of the Board for any reason other than resignation or removal for cause.
Anything in the foregoing to the contrary notwithstanding, no Option shall
be exercisable after ten years from the date of grant thereof and no Option
shall be exercisable with respect to fractional shares. Subject to the
foregoing, the Committee shall have the power, at or prior to the time
Options are granted, to determine in its discretion any conditions to be
met before Options become exercisable with respect to all or any part of
the shares covered thereby, including the time or times of exercise and
performance standards to be met by the optionees. The Committee shall have
the power to permit an acceleration of previously established exercise
terms, subject to the requirements set forth herein, upon such
circumstances and subject to such terms and conditions as the Committee
deems appropriate.
(d) Exercise and Payment for Shares. Options may be exercised in whole or
-------------------------------
in part, from time to time, by giving written notice of exercise to the
Secretary or his office, specifying the number of shares to be purchased.
The purchase price of the shares with respect to which an Option is
exercised shall be payable in full with the notice of exercise by certified
check, by delivery of shares of Common Stock already owned by the optionee
at fair market value, including shares obtained through exercise of an
Option granted hereunder, or a combination thereof, as the Committee may
determine from time to time and subject to such terms and conditions as may
be prescribed by the Committee for such purpose.
(e) Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option
and the issuance and delivery of such shares pursuant thereto shall comply
with all relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended, the Securities and Exchange Act of 1934
(the "Exchange Act"), the rules and regulations promulgated thereunder and
the requirements of any stock exchange upon which the Common Stock may then
be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance. As a condition to the exercise of
an Option, the Company may require the person exercising such Option to
represent and warrant at the time of any such exercise that the shares are
being purchased only for investment and without any present intention to
sell or distribute such sharesif, in the opinion of counsel for the
Company, such a representation is required by any of the aforementioned
relevant provisions of law.
(f) Rights Upon Termination of Service. In the event an optionee resigns
----------------------------------
as an employee of the Company or any subsidiary or as a director of the
Company or is discharged by the Company or any subsidiary for cause or is
removed as a director for cause, the Optionee shall have no further right
to exercise the Option following such resignation, discharge or removal.
In the event that an optionee ceases to be an employee of the Company or
any subsidiary for any reason other than resignation or a discharge for
cause or in the event that an optionee no longer serves as a member of the
Board for any reason other than resignation or removal for cause, the
optionee shall have the right to exercise the Option within a period of
sixty (60) days after such termination of employment or such termination of
service on the Board (but in no event after the expiration of the term of
the Option) to the extent that the Option was exercisable at the time of
such termination, or within such other period, and subject to such terms
and conditions, as may be specified by the Committee.
(g) Nontransferability. Each option agreement shall state that the Option
------------------
is not transferable other than by will or by the laws of descent and
distribution, and that during the lifetime of the optionee the Option is
exercisable only by him.
-2-
<PAGE>
(h) Substitution of Options. Options may be granted under the Plan from
-----------------------
time to time in substitution for stock options held by employees of other
corporations who are about to become and who do concurrently with the grant
of such options become employees of the Company or a subsidiary as a result
of a merger or consolidation of the employing corporation with the Company
or a subsidiary, or the acquisition by the Company or a subsidiary of the
assets of the employing corporation or the acquisition by the Company or a
subsidiary of the stock of the employing corporation. The terms and
conditions of the substitute options so granted may vary from the terms and
conditions set forth in this Section 6 of the Plan to such extent as the
Committee at the time of grant may deem appropriate to conform, in whole or
in part, to the provisions of the stock options in substitution for which
they are granted.
(i) Other Provisions. Each option agreement shall contain such other
----------------
provisions not inconsistent with the Plan as the Committee shall deem
advisable.
7. Date of Grant. The initial grant of Options under this Plan shall be made on
-------------
the effective date set forth in Section 23(f), below. Thereafter, the date
on which an Option shall be deemed to have been granted under this Plan shall
be the date of the Committee's authorization of the Option or such later date
as may be determined by the Committee at the time the Option is authorized.
Notice of the determination shall be given to each individual to whom an
Option is so granted within a reasonable time after the date of such grant.
8. General Restrictions. Each Option under the Plan shall be subject to the
--------------------
requirement that if at any time the Committee shall determine that (i) the
listing, registration or qualification of the shares of Common Stock subject
or related thereto upon any securities exchange or under any state or federal
law, or (ii) the consent or approval of any government regulatory body, or
(iii) an agreement by the recipient of an Option with respect to the
disposition of shares of Common Stock is necessary or desirable as a
condition of or in connection with the granting of such Option or the
issuance or purchase of shares of Common Stock thereunder, such Option shall
not be consummated in whole or in part unless such listing, registration,
qualification, consent, approval, or agreement shall have been effected or
obtained free of any conditions not acceptable to the Committee.
9. Single or Multiple Agreements. The Options granted hereunder may be
-----------------------------
evidenced by a single agreement or by multiple agreements, as determined by
the Committee, in its sole discretion.
10. Rights of a Shareholder. The recipient of any Option under the Plan, unless
-----------------------
otherwise provided by the Plan, shall have no rights as a shareholder with
respect thereto unless and until certificates for shares of Common Stock are
issued and delivered to him.
11. Right to Terminate Service. Nothing in the Plan nor in any agreement
--------------------------
entered into pursuant to the Plan shall confer upon any optionee the right
to continue in the service of the Company or any subsidiary or affect any
right which the Company or any subsidiary may have to terminate the
employment of such optionee.
12. Withholding. Whenever the Company proposes or is required to issue or
-----------
transfer shares of Common Stock under the Plan, the Company shall have the
right to require the recipient to remit to the Company an amount sufficient
to satisfy any federal, state or local withholding tax requirements prior to
the delivery of any certificate or certificates for such shares. Whenever
under the Plan payments are to be made in cash, such payments shall be net
of an amount sufficient to satisfy any federal, state or local withholding
tax requirements. If and to the extent authorized by the Committee, in its
sole discretion, an optionee may make an election, by means of a form of
election to be prescribed by the Committee, to have shares of Common Stock
which are acquired upon exercise of an Option withheld by the Company or to
tender other shares of Common Stock or other securities of the Company owned
by the optionee to the Company at the time of exercise of an Option to pay
the amount of tax that would otherwise be required by law to be withheld by
the Company as a result of any exercise of an Option from amounts payable to
such optionee. Any such election shall be irrevocable and shall be subject
to the disapproval of the Committee at any time. Any securities so withheld
or tendered will be valued by the Committee as of the date of exercise.
13. Non-Assignability. No Option under the Plan shall be assignable or
-----------------
transferable by the recipient thereof except by will or by the laws of
descent and distribution or by such other means as the Committee may
approve. During the life of the recipient such Option shall be exercisable
only by such person or by such person's guardian or legal representative.
-3-
<PAGE>
14. Non-Uniform Determinations. The Committee's determinations under the Plan
--------------------------
(including without limitation determinations of the persons to receive
grants of Options, the form, amount and timing of such grants, the terms and
provisions of such grants, and the agreements evidencing same) need not be
uniform and may be made selectively among persons who receive, or are
eligible to receive, grants of Options under the Plan whether or not such
persons are similarly situated.
15. Adjustments Upon Changes in Capitalization or Merger. Subject to any
----------------------------------------------------
required action by the stockholders of the Company, the number of shares of
Common Stock covered by each outstanding Option and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as
to which no Options have yet been granted or which have been returned to the
Plan upon cancellation or expiration of an Option, as well as the price per
share of Common Stock covered by each such outstanding Option, 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 by the Committee, whose determination in that
respect shall be final, binding and conclusive. 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 or price of shares of Common Stock subject to an Option.
In the event of the proposed dissolution or liquidation of the Company, the
Committee shall declare that each outstanding Option shall terminate as of a
date fixed by the Committee and shall give each optionee the right to
exercise his Option as to all or any part of the optioned Common Stock,
including shares as to which the Option would not otherwise be exercisable.
In the event of the merger of the Company or any subsidiary with or into
another corporation, the affected Options shall be assumed or an equivalent
option shall be substituted by such successor corporation or a parent or
subsidiary of such successor corporation, provided that the successor
corporation consents to such assumption or substitution. Moreover, the
Committee may determine, in the exercise of its sole discretion and in lieu
of such assumption or substitution, that the affected optionees shall have
the right to exercise their Options as to all of the optioned Common Stock,
including shares as to which the Option would not otherwise be exercisable.
If the Committee makes an Option fully exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Committee shall
notify the optionee that the Option shall be fully exercisable for a period
of thirty (30) days from the date of such notice, and the Option will
terminate upon the expiration of such period.
16. Amendment or Termination. The Committee may terminate or amend the Plan at
------------------------
any time. The termination or any modification or amendment of the Plan
shall not, without the consent of an optionee, affect his rights under an
Option previously granted.
17. Effect on Other Plans. Participation in this Plan shall not affect any
---------------------
employee's eligibility to participate in any other benefit or incentive plan
of the Company or any subsidiary. Any Options granted pursuant to this Plan
shall not be used in determining the benefits provided under any other plan
of the Company or any subsidiary unless specifically provided.
18. Duration of the Plan. The Plan shall remain in effect until all Options
--------------------
granted under the Plan have been satisfied by the issuance of shares, but no
Option shall be granted more than ten years after the earlier of the date
the Plan is adopted by the Company or is approved by the Company's
shareholders.
19. Forfeiture for Dishonesty. Notwithstanding anything to the contrary in this
-------------------------
Plan, if the Committee finds, by a majority vote, after full consideration
of the facts presented on behalf of both the Company and any optionee, that
the optionee has been engaged in fraud, embezzlement, theft, commission of a
felony or other dishonest conduct which damaged the Company or any
subsidiary or that the optionee has disclosed trade secrets of the Company
or any subsidiary, the optionee shall forfeit all unexercised Options and
all exercised Options under which the Company has not yet delivered the
certificates. The decision of the Committee as to the cause of an
optionee's discharge and the damage done to the Company or any subsidiary
shall be final. No decision of the Committee, however, shall affect the
finality of the discharge of such optionee by the Company or any subsidiary
in any manner.
-4-
<PAGE>
20. No Prohibition on Corporate Action. No provision of this Plan shall be
----------------------------------
construed to prevent the Company or any officer or director thereof from
taking any corporate action deemed by the Company or such officer or
director to be appropriate or in the Company's best interest, whether or not
such action could have an adverse effect on the Plan or any Options granted
hereunder, and no optionee or optionee's estate, personal representative or
beneficiary shall have any claim against the Company or any officer or
director thereof as a result of the taking of such action.
21. Use of Proceeds. The proceeds received by the Company from the exercise of
---------------
any Option issued pursuant to the Plan shall be used for general corporate
purposes.
22. Indemnification. With respect to the administration of the Plan, the
---------------
Company shall indemnify each present and future member of the Committee and
the Board against, and each member of the Committee and the Board shall be
entitled without further act on his part to indemnity from the Company for
all expenses (including the amount of judgments and the amount of approved
settlements made with a view to the curtailment of costs of litigation,
other than amounts paid to the Company itself) reasonably incurred by him in
connection with or arising out of, any action, suit or proceeding in which
he may be involved by reason of his being or having been a member of the
Committee and the Board, whether or not he continues to be such member of
the Committee and the Board at the time of incurring such expenses;
provided, however, that such indemnity shall not include any expenses
incurred by any such member of the Committee and the Board (i) in respect of
matters as to which he shall be finally adjudged in any such action, suit or
proceeding to have been guilty of gross negligence or willful misconduct in
the performance of his duty as such member of the Committee and the Board;
or (ii) in respect of any matter in which any settlement is effected for an
amount in excess of the amount approved by the Company on the advice of its
legal counsel; and provided further that no right of indemnification under
the provisions set forth herein shall be available to or enforceable by any
such member of the Committee and the Board unless within 60 days after
institution of any such action, suit or proceeding, he shall have offered
the Company in writing the opportunity to handle and defend same at its own
expense. The foregoing right of indemnification shall inure to the benefit
of the heirs, executors or administrators of each such member of the
Committee and the Board and shall be in addition to all other rights to
which such member of the Committee and the Board may be entitled as a matter
of law, contract or otherwise.
23. Miscellaneous Provisions.
------------------------
(a) No optionee or other person shall have any right with respect to the
Plan, the Common Stock reserved for issuance under the Plan or in any Option
until written evidence of the Option shall have been delivered to the optionee
and all the terms, conditions and provisions of the Plan and the Option
applicable to such optionee (and each person claiming under or through him)
have been met.
(b) No shares of Common Stock, other securities or property of the
Company, or other forms of payment shall be issued hereunder with respect to
any Option unless counsel for the Company shall be satisfied that such
issuance will be in compliance with applicable federal, state, local and
foreign legal, securities exchange and other applicable requirements.
(c) The Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Option under the Plan, and rights to the
payment of Options shall be no greater than the rights of the Company's
general creditors.
(d) By accepting any Option or other benefit under the Plan, each
optionee and each person claiming under or through him shall be conclusively
deemed to have indicated his acceptance and ratification of, and consent to,
any action taken under the Plan by the Company, the Board or the Committee or
its delegates.
(e) The masculine pronoun shall include the feminine and neuter, and the
singular shall include the plural, where the context so indicates.
(f) This Plan shall be effective as of May 4, 1992, subject to the
approval of the Company's shareholders at the first annual meeting of
shareholders next following such effective date. If the
-5-
<PAGE>
shareholders do not approve the Plan, the Plan shall not be effective. No
Option shall be granted pursuant to this Plan after May 3, 2002.
TO RECORD the adoption of this Plan, the Board has caused this instrument to
be executed on this 4th day of May, 1992.
READING COMPANY
By: /s/ James J. Cotter
---------------------------------
Chairman
-6-
<PAGE>
READING ENTERTAINMENT, INC.
---------------------------
AMENDMENTS TO READING COMPANY NONQUALIFIED STOCK OPTION PLAN
------------------------------------------------------------
The 1992 Nonqualified Stock Option Plan (the "Plan") of Reading Company
("Reading"), as previously adopted and assumed by Reading Entertainment, Inc.
("Reading Entertainment" or the "Company"), is hereby amended as follows:
i. To reflect the assumption of the Plan by Reading Entertainment, (a)
the reference to "Reading Company" in Section 1 of the Plan is deleted
and the phrase "Reading Entertainment, Inc." is inserted in its stead
and (b) the phrase "Class A common stock, par value $.01" is deleted
and the phrase "Common Stock, par value $.001 per share" is inserted
in its stead.
ii. The phrase "Executive Committee" in Sections 2(a) and (b) is hereby
deleted and the phrase "Compensation Committee" is inserted in its
stead.
iii. The first sentence of Section 6(c) is amended in its entirety to read
as follows:
Unless the Committee in its discretion determines otherwise, each option
agreement shall state that the Option is exercisable in four (4) cumulative
installments with one-fourth (1/4) of the shares covered by the Option
becoming exercisable commencing on the first anniversary of the date of
grant and another one-fourth (1/4) of such shares becoming exercisable on
each anniversary of the date of grant thereafter until the Option becomes
fully exercisable.
iv. Section 6(f) is amended in its entirety to read as follows:
(f) Rights Upon Termination of Service. Unless otherwise provided by the
----------------------------------
Committee (at the time of grant of an Option, the time of termination
of employment, or otherwise), (i) in the event an optionee resigns as
an employee of the Company or any subsidiary or as a director of the
Company or is discharged by the Company or any subsidiary for cause or
is removed as a director for cause, the Optionee shall have no further
right to exercise the Option following such resignation, discharge or
removal, and (ii) in the event that an optionee ceases to be an
employee of the Company or any subsidiary for any reason other than
resignation or a discharge for cause or in the event that an optionee
no longer serves as a member of the Board for any reason other than
resignation or removal for cause, the optionee shall have the right to
exercise the Option within a period of sixty (60) days after such
termination of employment or such termination of service on the Board
(but in no event after the expiration of the term of the Option) to
the extent that the Option was exercisable at the time of such
termination.
v. This Amendment shall be effective when adopted by the Board of
Directors. This Amendment shall not affect the rights of an option
holder under any option previously granted.
TO RECORD the adoption of this Amendment, the Board has caused this
instrument to be executed on this 16/th/ day of November, 1997.
READING ENTERTAINMENT, INC.
By: /s/ James J. Cotter
--------------------------------
Chairman
-7-
<PAGE>
Exhibit 10.29
-------------
MASTER MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (the "Agreement") is made and entered into as of
the 26/th/ day of November, 1997, by and between ANGELIKA HOLDINGS, INC., a
Delaware corporation ("Owner"), and CITY CINEMAS CORPORATION, a New York
corporation ("Manager").
RECITALS
A. Owner directly or through certain wholly owned subsidiaries is the
owner of certain multiplex cinemas located in various cities in the United
States.
B. Manager is experienced in operating and managing multiplex cinemas and
buying and booking films.
C. Owner desires to engage Manager to manage certain of these cinemas
pursuant to the terms set forth hereinbelow.
AGREEMENT
NOW, THEREFORE, in consideration of the above stated premises, the mutual
covenants and agreements contained herein and other valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, Owner and Manager agree
follows:
1. APPOINTMENT.
------------
Commencing December 1, 1997 (the "Commencement Date") and continuing
thereafter until December 31, 1998 (the "Initial Term"), Owner hereby engages
Manager to operate, manage and maintain the Designated Cinemas, as hereinbelow
defined, in accordance with the terms and conditions set forth in this
Agreement, and Manager hereby accepts such engagement. After the Initial Term,
this Agreement shall automatically renew and continue in full force and effect
for successive one (1) year periods (the "Successive Terms"), unless and until
either party terminates this Agreement by giving to the other party written
notice of its desire to terminate the Agreement, delivered no less than one
hundred eighty (180) days prior to the expiration of either the Initial Term, or
any Successive Term. As used herein, the term "Designated Cinemas" means the
cinemas identified on Exhibit 1 hereto, as such list may be amended from time to
time by the mutual agreement of the parties.
2. POWERS OF MANAGER.
------------------
2.1 Grant and Delegation. Owner hereby grants and delegates to Manager
---------------------
the following authority, powers and duties:
(a) Licensing Accounting. To arrange, provide accounting and
---------------------
bookkeeping functions with respect to the calculation and payments of licensing
fees for all motion picture films for the Designated Cinemas.
(b) Maintenance and Repair. To maintain or cause to be maintained the
----------------------
Designated Cinemas; to make or cause to be made and supervise minor repairs; to
purchase supplies required for the operation and maintenance of the Designated
Cinemas, and pay all bills therefor, and to report to Owner any conditions in
the Designated Cinemas requiring the attention of Owner; provided that, absent
Owner's consent, Manager shall not make any expenditures for maintenance and
repairs with respect to any individual Designated Cinemas in excess of
$25,000.00, except for emergency repairs if, in the opinion of Manager, such
repairs are necessary to protect the Designated Cinemas or its patrons or
personnel;
(c) Employees. To hire personnel for the Designated Cinemas, in such
----------
reasonable numbers as shall be required for the operation and maintenance of the
Designated Cinemas and to supervise, direct and discharge all such personnel;
all such theatre personnel are to be deemed the employees of Manager and not of
Owner;
(d) Utilities and Service Contracts. To make arrangements for
-------------------------------
electricity, gas, fuel, water and telephone service and any and all necessary
contracts for landscaping, security, elevator maintenance, window cleaning,
trash and rubbish hauling, pest control, HVAC and similar services;
1
<PAGE>
(e) Taxes. To promptly send to Owner upon receipt, all notices of
------
assessment or reassessment and tax bills affecting the Designated Cinemas;
provided that Manager will be responsible to pay before delinquency any and all
real and personal property taxes and assessments (other than income taxes) on
behalf of Owner. In no event shall Manager have any obligation for the payment
of any income or other taxes of Owner;
(f) Licenses and Permits. To acquire and keep in force all licenses
--------------------
and permits required for the operation of the Designated Cinemas as a motion
picture theatre with concession and merchandising facilities and operations and
such uses incidental or accessory thereto;
(g) Insurance. To obtain for the benefit of Owner, and for the
----------
Landlord under the Lease (if and to the extent required under the Lease), the
following insurance, and to cooperate with the insurance carriers under such
policies to make, administer and settle any claims thereunder:
1. Comprehensive general liability insurance (including bodily
injury and property damage) in an amount not less than a
combined single limit of Fifty Million Dollars
($50,000,000), or such other amount as may be agreed upon by
Owner or Manager;
2. Property damage insurance covering the Designated Cinemas
and all improvements and property, providing "all risk"
protection coverage; and
3. Such other insurance as may be required to be carried by
Owner under the terms of the Lease and otherwise as may be
reasonably agreed upon by Owner and Manager from time to
time.
Manager shall also be named as an insured under any policy carried
under this subparagraph (g); at Manager's option, Manager may fulfill its
obligations hereunder by naming Owner (and, if and to the extent required under
the Lease, Landlord) as an additional insured(s) under any applicable blanket
insurance policy. Manager may carry, and charge Owner its pro rata share of
such coverage; provided, however, that Owner may, at its election, require that
such insurance be obtained through one or more insurance companies, agencies or
brokers providing such insurance or service to Owner or any one or more of its
affiliates.
(h) Advertising. In consultation with the Owner, to advertise the
------------
films to be exhibited in the Designated Cinemas in such manner as is customary
in the industry or as the Owner may direct from time to time. Manager may
combine such advertisement of films to be exhibited in other theatres owned or
operated by Manager; provided, however, that only the prorated cost of such
advertisement properly allocable to the Designated Cinemas shall be charged as
expenses of the Designated Cinemas; provided, further, however, that Manager
will consult with and follow the directions of Owner with respect to the use of
the "Angelika" and "Reading" names and/or any other names under which the
various Designated Cinemas may be operated from time to time.
(i) Concessions. To purchase inventory and supplies;
------------
(j) Supervision. To supervise the general operation of the Designated
-----------
Cinemas; and
(k) Payment of Operating Expenses. To incur and pay or cause to be
-----------------------------
paid, out of Gross Income and any operating reserve which may be established,
all normal and proper operating expenses of the Designated Cinemas (except
mortgage payments, if any, which shall be paid directly by Owner) incurred or
authorized by Manager in the performance of the duties required to be performed
by Manager under this Agreement. All such expenses incurred by Manager,
including, without limitation, (A) rental under any lease pertaining to any
Designated Cinema; (B) the prorated cost of labor (including without limitation
the prorated cost of fringe benefits, withholdings, payroll accounting and
overhead in connection with such labor) employed by Manager and of the equipment
of Manager used in connection with and while engaged on site in the operation,
maintenance and repair of the Designated Cinemas; and (C) the cost of the items
and services described in subparts (a) - (i), above, shall be charged as
expenses of such Designated Cinemas. Notwithstanding the foregoing, the
following expenses incurred by Manager under this Agreement shall not be paid
out of Gross Income or the operating reserve, they being deemed expenses not
properly allocable
2
<PAGE>
to the Designated Cinemas, but rather deemed expenses of Manager for which
Manager is compensated by the Management Fee: (x) expenses for off-site office
and administration, and (y) direct or indirect overhead expenses.
2.2 Reservation. All powers not expressly granted to Manager by this
-----------
Agreement are reserved by Owner.
3. DUTIES OF MANAGER.
-----------------
3.1 Management. Manager agrees to use reasonable efforts in the exercise
----------
of the powers conferred and assumed in Section 2.1 hereof and in the operation,
management and maintenance of the Designated Cinemas in accordance with this
Agreement.
3.2 Accounting.
----------
(a) Manager shall maintain books of account based upon its ordinary
accounting practices at its offices in Los Angeles, California, with respect to
the Designated Cinemas. Said books of account shall be available to properly
authorized representatives and agents of Owner during all reasonable business
hours upon reasonable notice. Manager shall furnish Owner with a monthly profit
and loss statement in a form normally and customarily used by Manager, which
form shall show all receipts and estimated expenses of each Designated Cinema
for the preceding month, and shall furnish Owner with weekly reports of "Gross
Income" (as hereinafter defined) after the close of each week. Manager shall
retain all original statements and invoices for the expenses of the Designated
Cinemas for a period of at least two (2) years and such statements shall be
available to Owner during all reasonable business hours upon reasonable notice.
(b) As soon as practicable, but in any event within forty-five (45)
days of the end of each calendar year, Manager shall prepare and furnish to
Owner a profit and loss statement based upon generally accepted accounting
principles consistently applied which shall show the Gross Income and actual
expenses of each Designated Cinema for the immediately preceding calendar year.
Manager understands that Owner's affiliate, Reading Entertainment, Inc., will
use such information in the preparation of its annual audited financial
statements and agrees to cooperate fully with Reading Entertainment's
independent public accountants in the preparation of such audited financial
statements. Similar information will be provided quarterly by Manager within
twenty-five (25) days after the end of each of the first three calendar quarters
of each calendar year.
3.3 Bank Account.
------------
(a) Manager shall cause a bank account or bank accounts (hereinafter
collectively referred to as the "Bank Account") to be opened and maintained
separate and apart from all other bank accounts of Manager for the sole purpose
of handling transactions under this Agreement. All receipts from the operation
of the Designated Cinemas shall be deposited in the Bank Account, and all
payments of costs, expenses and charges to be made by Manager under this
Agreement (including the remuneration to be paid Manager as hereinafter
provided) shall be paid out of the Bank Account. In the event the balance in
the Bank Account is insufficient to enable Manager to meet the obligations
incurred or accrued pursuant to the provisions of this Agreement as they mature,
Owner, within five (5) days following receipt of a request from Manager, shall
furnish such additional sums to Manager as Manager may reasonably require in
order to enable Manager to meet said obligations as they mature. Manager shall
have the right, but shall not be obligated, to advance on behalf of Owner, upon
the failure of Owner to timely provide such sums, the amounts which Manager
requires for such purposes. Manager is hereby authorized at any time, in the
event of such advances by it, to withdraw from the Bank Account, after five (5)
days notice to Owner, sufficient sums to repay itself with interest thereon at
the fluctuating rate equal to the discount rate announced from time to time by
the Federal Reserve Bank of San Francisco, plus 200 basis points, or the maximum
amount allowed by law, whichever is less (the "Agreement Rate"). The Bank
Account will be the property of the Owner. Any check of more than $50,000 (other
than regularly scheduled periodic payments such as rent) shall be subject to the
written authorization of Robert Smerling or, in his absence another designee
acceptable to Owner.
(b) All withdrawals from the Bank Account shall be made by checks
signed by the authorized signatories of Manager, and Manager will furnish to
Owner, within thirty (30) days following the expiration of each month, a
statement of the receipts and expenses of the operation of the Designated
Cinemas during such month.
3
<PAGE>
(c) As often as reasonably practicable, but in no event less than
promptly following the end of each calendar month, Manager shall remit to Owner,
from the Bank Account, the excess of moneys which were on deposit therein at the
expiration of such theatre month, or other applicable period, after deducting
the amount required to make the payments herein provided to be paid by or to
Manager during such month and reasonable reserves for anticipated expenses.
3.4 Notices and Documents. Manager shall advise Owner promptly of the
---------------------
service upon Manager of any summons, subpoena, or other like legal document,
including any notices, letters or other communications setting out or claiming
an actual or alleged potential liability of Owner or any Designated Cinemas
(including all notices from any landlord), and will reasonably cooperate with
Owner in connection with any legal or arbitration proceeding arising in
connection with any Designated Cinemas, or its operation. Manager shall also
notify Owner promptly of (i) any notice of violation or claimed violation of any
governmental requirement; (ii) any material damage to any Designated Cinemas;
and (iii) any actual or alleged personal injury or property damage occurring to
or formally claimed by any landlord, third party or employee on or with respect
to any Designated Cinemas.
4. TERMINATION.
-----------
4.1 Default by Manager. In the event of a breach of the provisions of
------------------
this Agreement by Manager, Owner shall have the right to give to Manager thirty
(30) days' written notice to cure such breach, and in the event of the failure
of Manager to do so within such period, Owner shall have the right to thereafter
terminate this Agreement upon at least thirty (30) days' written notice of such
election to terminate, such termination to be effective as of the end of the
first full month following the giving of such termination notice; provided that
if the breach is of such nature that it cannot be cured within such thirty (30)
day period, this Agreement shall not be terminable on account of such breach so
long as, within such thirty (30) day period, Manager shall have commenced to
cure such breach and shall thereafter diligently prosecute the cure thereof.
4.2 Default by Owner. In the event of any failure by Owner to supply any
----------------
funds required under this Agreement, Manager shall have the right to terminate
this Agreement upon five (5) days' written notice to Owner, or such longer time
as such notice may state, unless Owner has, within such time period, deposited
such funds in the Bank Account or otherwise delivered to Manager good and
sufficient funds in the amount required. In the event of any other breach of
the provisions of this Agreement by Owner, Manager shall have the right to give
to Owner thirty (30) days written notice to cure such breach, and in the event
of the failure of Owner to do so within such period, Manager shall have the
right to thereafter terminate this Agreement upon an additional thirty (30) days
written notice of such election to terminate, such termination to be effective
as of the end of the first full month following the giving of such termination
notice; provided that if the breach is of such nature that it cannot be cured
within such thirty (30) day period, this Agreement shall not be terminable on
account of such breach so long as, within such thirty (30) day period, Owner
shall have commenced to cure such breach and shall thereafter diligently
prosecute the cure thereof.
4.3. Special Owner Termination Rights: Owner will have the right, but not
--------------------------------
the obligation to terminate this Agreement in the event of any of the following:
(a) Bankruptcy: Immediately, with or without notice, in the event of
----------
any Event of Bankruptcy by Manager or any affiliate of Manager. "Event of
Bankruptcy" shall mean the filing of a voluntary or involuntary petition in
bankruptcy with respect to such party (unless, in the case of an involuntary
petition, the same is dismissed within sixty (60) days); the adjudication of
such party as insolvent; the filing of a petition or answer with respect to such
party seeking any reorganization, liquidation, or similar relief for itself
under the present or any future applicable law relating to relief for debtors
(unless, in the case of a petition filed against such party, the same is
dismissed within sixty (60) days); or the appointment of any trustee, receiver,
conservator, or liquidated with respect to all or any substantial part of such
party's property (where possession of such property is not restored to such
party within in sixty (60) days).
(b) Change of Control: Upon not less than five (5) days notice in the
-----------------
event that more than 50% of the capital stock or partnership interests of
Manager or Sutton Hill Associates are transferred to a person or persons
unaffiliated with James J. Cotter and/or Michael Forman. Manager agrees to give
written notice to Owner both of any such contemplated transfer and of the
completion of any such transfer.
4
<PAGE>
(c) Sale of Interest: Upon not less than five (5) days notice in the
----------------
event that all or any portion of the equity interest in Manager currently held
by Sutton Hill Associates is sold to a person or persons unaffiliated with James
J. Cotter and/or Michael Forman. Manager agrees to give written notice to Owner
both of any such contemplated sale and of the completion of any such sale.
4.4 Delivery of Records; Final Accounting. Upon termination, Manager
-------------------------------------
shall (i) deliver to Owner all books, records and the like maintained solely in
connection with the operation and management of the Designated Cinemas; (ii)
render a final accounting to Owner within ninety (90) days after termination,
reflecting the balance of income and expenses of the Designated Cinemas, as of
the date of termination; and (iii) deliver to Owner the balance of the Bank
Account.
4.5 Right of Termination on Other Remedies. The right to terminate
---------------------------------------
provided under this Section 4 shall be in addition to, and not in lieu of, any
other rights or remedies which the parties may have under this Agreement, at
law or in equity, including, without limitation, the right to receive specific
performance and/or to obtain damages.
5. COMPENSATION TO MANAGER.
-----------------------
5.1 Gross Income Defined. For the purposes of this Agreement, the term
--------------------
"Gross Income" shall mean: (i) all monies received for admission to the
Designated Cinemas, exclusive of admission taxes or other taxes required by law
to be collected from the patron at the time of the sale of the tickets at the
box office or other place where admissions are sold, and exclusive of all bona
fide refunds made to patrons; (ii) all monies received from sales of food,
beverages and merchandise at the Designated Cinemas, exclusive of sales tax
required by law to be paid in connection with such sales; (iii) the gross amount
received (less any applicable taxes) by Owner from the use of any one or more
auditoriums in any Designated Cinemas by a third party for the exhibitions of
films (i.e., a "four wall deal") or for theatrical performances, lectures,
concerts or the like where the party using the Designated Cinemas is entitled to
retain the receipts from admissions to such event and pays a flat fee or
percentage of receipts for such use; (iv) the receipts retained by Owner from
any vending or video machines located at the Designated Cinemas; and (v) all
other monies received from the operation or use of the Designated Cinemas which
would be deemed to be revenue of the Owner under generally accepted accounting
principals. Admission prices and classifications shall be determined by
Manager, subject to the approval of Owner prior to any change, which approval
shall not be unreasonably withheld or delayed. Notwithstanding the above, Gross
Income will not include the Gross Income or any amounts paid to Owner with
respect to any cafe or restaurant operation which may be located within property
owned or leased by the Owner in conjunction with any Designated Cinema, so long
as such cafe or restaurant is operated or managed by a party other than the
Manager.
5.2 Management Fee. As compensation to Manager for the full and faithful
--------------
performance of its duties under this Agreement, Owner shall pay Manager that
amount equal to two and one half (2.5%) of the Gross Income of the Designated
Cinemas.
5.3 Payment of Management Fee. Manager shall be entitled to withdraw from
-------------------------
the Bank Account, as its Management Fee for such month, an amount equal to two
and one half percent (2.5%) of the prior months Gross Income.
6. ACKNOWLEDGMENT AND OBLIGATIONS OF OWNER.
---------------------------------------
6.1 Operations of Other Designated Cinemas by Manager. Owner specifically
-------------------------------------------------
acknowledges that Manager and its affiliates may own and operate other theatres
in the same area in which the Designated Cinemas may be located, which may be in
direct competition with the Designated Cinemas, and nothing herein contained
shall in any way affect the right of Manager and its affiliates now or in the
future to own, operate, or manage, or book and buy for other theatres for their
own account or for the account of others or to expand or contract their
operations.
6.2 Lease. Owner shall remain obligated to perform all of its obligations
------
as tenant under any lease pertaining to any Designated Cinema. Manager shall,
however, perform certain of those obligations on Owner's behalf as its agent,
but only as provided for in this Agreement, and Manager shall have no obligation
to the Landlord under any such lease.
5
<PAGE>
6.3 Limitation on Damages. Owner acknowledges and agrees that in no event
---------------------
shall Manager be liable, under Sections 4.5 and/or 7 or at law or otherwise, for
punitive or consequential damages.
7. INDEMNIFICATION.
---------------
7.1 Indemnification by Manager. Manager shall defend, indemnify and hold
--------------------------
Owner harmless from and against any and all claims, demands, causes of action,
loss and liability to third parties (including all costs and reasonable
attorneys fees) arising out of or resulting from (i) breach by Manager (or
Manager's agents, employees, or subcontractors) of any of its duties or
obligations under this Agreement (except that Manager shall have no liability
for (a) failure to take any action under this Agreement that requires Owner's
prior approval or authorization, if Manager provided timely notification to
Owner that such action is necessary and Owner has refused or failed to authorize
Manager to take the same or (b) any action taken in good faith by Manager under
this Agreement (x) in what it reasonably believed to be the best interests of
Owner and consistent with the approvals or authority given to it under or
pursuant to this Agreement or (y) with Owner's knowledge or consent); or (ii)
actions taken by Manager outside the scope of this Agreement. If under this
Section 7.1, Manager defends, indemnifies, or holds Owner harmless with respect
to an item that is covered by an insurance policy obtained in accordance with
the provisions of Subparagraph 2.1(g) hereof, then to the extent that amounts
are actually paid under such insurance policy in connection with such item, the
liability of Manager under this Section 7.1 in connection with such item shall
be reduced.
7.2 Indemnification by Owner. Owner shall defend, indemnify and hold
------------------------
Manager harmless from and against any and all claims, demands, causes of action,
loss and liability to third parties (including all costs and reasonable
attorneys' fees) arising out of or resulting from (i) damage to property, or
injury to, or death of, persons (including the property and person of the
parties hereto, and their agents, subcontractors and employees) occasioned by or
in connection with the acts or omissions of Owner or Owner's agents, employees
or subcontractors (including the failure to timely authorize any action; under
this Agreement that requires Owner's prior approval or authorization if Manager
has not yet notified Owner that the same is necessary); (ii) contracts entered
into by Owner (including contracts entered into prior to the execution of this
Agreement); (iii) breach by Owner (or Owner's agents, employees or
subcontractors), of any of its duties or obligations under this Agreement; and
(iv) any act or action taken by Manager pursuant to this Agreement (including
without limitation the buying of inventory for the Theater) taken in good faith
(x) in what Manager reasonably believed to be consistent with the approvals or
authority given to it under or pursuant to this Agreement or (y) or with Owner's
knowledge or consent. Notwithstanding anything to the contrary contained
herein, it is understood and agreed that Owner shall advance to Manager all
costs of litigation , (including without limitation reasonable attorneys' fees)
and pay any judgments and/or settlements resulting from litigation in the event
that Manager is made a defendant in any litigation resulting from its activities
under this Agreement except to the extent it is ultimately determined that such
liability is the proximate result of a matter with respect to which Manager is
not entitled to indemnification hereunder; provided that Manager undertakes to
repay such advances, together with interest, in the event it is ultimately
determined that it was not entitled to indemnification. Interest will be
calculated at the Agreement Rate. If, under this Section 7.2, Owner defends,
indemnifies, or holds Manager harmless with respect to an item that is covered
by an insurance policy obtained in accordance with the provisions of
Subparagraph 2.1(g) hereof, then to the extent that amounts are actually paid
under such insurance policy in connection with such item, the liability of Owner
under this Section 7.2 in connection with such item shall be reduced.
7.3 Procedure Relative to Indemnification.
-------------------------------------
(a) In the event that any party hereto shall claim that it is entitled
to be indemnified pursuant to the terms of this Section 7 (the "Indemnified
Claim"), it (the "Claiming Party") shall so notify the party against which the
Indemnified Claim is made (the "Indemnifying Party") in writing of such
Indemnified Claim within ninety (90) days after receipt of a notice of such
Indemnified Claim or notice of any claim of a third party that may reasonably be
expected to result in a claim by such party (the "Third Party Claim") against
the party to which such notice is given; provided, however, that failure to give
such notification shall not affect the indemnification provided hereunder except
to the extent the Indemnifying Party shall have been actually prejudiced as a
result of such failure. Such notice shall specify the nature of the Indemnified
Claim and the liability, loss, cost or expense incurred by or imposed upon the
Claiming Party on account hereof. If such liability, loss, cost or expense is
liquidated in amount, the notice shall so state and such amount shall be deemed
the amount of the claim of the Claiming Party. If the amount is not liquidated,
the notice shall so state and in such event an Indemnified Claim shall be deemed
asserted against the Indemnifying Party
6
<PAGE>
on behalf of the Claiming Party, but no payment shall be made on account thereof
until the amount of such Indemnified Claim is liquidated and finally determined.
(b) The Indemnifying Party shall, upon receipt of such written notice
and at its expense, defend such Indemnified Claim in its own name or, if
necessary, in the name of the Claiming Party unless the Claiming Party
reasonably believes that its interests are adverse to those of the Indemnifying
Party in which event the Claiming Party may control its defense of the claim and
be reimbursed for its expenses, including reasonable attorneys' fees, as herein
provided. The Claiming Party will cooperate with and make available to the
Indemnifying Party such assistance and materials as may be reasonably requested
of it, and the Claiming Party shall have the right, at its expense (except as
provided above), to participate in the defense. The Indemnifying Party shall
have the right to settle and compromise any Third Party Claim only with the
consent of the Claiming Party unless the settlement does not involve any
confession or other acknowledgment of wrongdoing by the Claiming Party and
provides a complete release of all Third Party Claims against it, in which event
the Claiming Party's consent shall not be required. If the proceeding involves
a matter solely of concern to the Claiming Party in addition to the claim for
which indemnification under this Section 7 is being sought, such matter shall be
within the sole responsibility of the Claiming Party and its counsel.
(c) In the event the Indemnifying Party shall notify the Claiming
Party that it disputes any Indemnified Claim made by the Claiming Party and/or
it shall refuse to conduct a defense against any Third Party Claim, then the
Claiming Party shall have the right to conduct a defense against such Third
Party Claim and shall have the right to settle and compromise such Third Party
Claim without the consent of the Indemnifying Party. Once the amount of such
claim is liquidated and the claim is finally determined, the Claiming Party
shall be entitled to pursue each and every remedy available to it at law or in
equity to enforce the indemnification provisions of this Section 7 and, in the
event it is determined, or the Indemnifying Party agrees, that it is obligated
to indemnify the Claiming Party for such Third Party and Indemnified Claim, the
Indemnifying Party agrees to pay, in addition to all damages, costs, expenses,
and fees, including all reasonable attorneys' fees which may be incurred by the
Claiming Party in attempting to enforce indemnification under this Section 7,
whether the same shall be enforced by suit or otherwise, and interest thereon at
the Agreement Rate.
7.4 Effect of Insurance and Other Benefits. The determination of any
--------------------------------------
liability, claim, lien, encumbrance, charge, fine or penalty for which
indemnification may be claimed under this Section 7 shall be net of any benefit
derived and insurance proceeds received by the party bearing such liability,
claim, lien, encumbrance, charge, fine or penalty as a result thereof.
8. GENERAL PROVISIONS
------------------
8.1 Counterparts. This Agreement may be executed in counterparts , each
------------
of which shall be deemed an original, but all or which, taken together, shall
constitute one and the same instrument.
8.2 Entire Agreement. This Agreement contains the entire agreement
----------------
between the parties respecting the subject matter of this Agreement and
supersedes all prior understanding and agreements, whether oral or in writing,
between the parties respecting the subject matter of this Agreement.
8.3 Legal Advice; Neutral Interpretation. Each party has received
-------------------------------------
independent legal advice from its attorneys with respect to the advisability
executing this Agreement and the meaning of the provisions hereof. The
provisions of this Agreement shall be construed as to their fair meaning, and
not for or against any party based upon any attribution to such party as the
source of the language in question. In the event of any dispute pertaining to
the agreement or the interpretation thereof, the prevailing party will be
entitled to receive, in addition to any other relief to which it may be
entitled, reimbursement of its reasonable attorneys' fees.
8.4 Choice of Law. This Agreement shall be governed by the laws of the
-------------
State of New York, applicable to contracts entirely performed and made in New
York.
8.5 Severability. If any term, covenant, condition or provision of this
------------
Agreement, or the application thereof to any person or circumstance, shall to
any extent be held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, covenants, conditions or provisions
of this Agreement, or the application
7
<PAGE>
thereof to any person or circumstance, shall remain in full force and effect and
shall in no way be affected, impaired or invalidated thereby.
8.6 Waiver of Covenants, Conditions or Remedies. The waiver by one party
-------------------------------------------
of the performance of any covenant or condition under this Agreement shall not
invalidate this Agreement nor shall it be considered a waiver by it of any other
covenant or condition under this Agreement. The waiver by either or both
parties of the time for performing any act under this Agreement shall not
constitute a waiver of the time for performing any other act or an identical act
required to be performed at a later time. The exercise of any remedy provided
in this Agreement shall not be a waiver of any consistent remedy provided by
law, and the provision in this Agreement for any remedy shall not exclude other
consistent remedies unless they are expressly excluded.
8.7 Exhibits. All exhibits to which reference is made in this Agreement
--------
are deemed incorporated in this Agreement.
8.8 Amendment. This Agreement may be amended only by the written
---------
agreement of owner and manager. All amendments, changes, revisions and
discharges of this Agreement, in whole or in part, and from time to time, shall
be binding upon the parties despite any lack of legal consideration, so long as
the same shall be in writing and executed by the parties hereto.
8.9 Relationship of Parties. The parties agree that their relationship is
-----------------------
that of owner and manager, and that nothing contained herein shall constitute
either party as employee or legal representative of the other for any purpose
whatsoever, nor shall this Agreement be deemed to create any form of business
organization, joint venture or partnership between the parties hereto or as
giving Manager any type of property interest in the Designated Cinemas, nor is
either party granted any right or authority to assume or create any obligation
or responsibility on behalf of the other party, except as otherwise provided
herein, nor shall either party be in any way liable to third parties for any
debt of the other.
8.10 No Third Party Benefit. This Agreement is intended to benefit only
----------------------
the parties hereto and no other person or entity has or shall acquire any rights
hereunder.
8.11 Time of the Essence. Time shall be of the essence as to all dates and
-------------------
times of performance contained herein.
8.12 Further Acts. Each party agrees to perform any further acts and to
------------
execute, acknowledge and deliver any documents which may be reasonably necessary
to carry out the provisions of this Agreement.
8.13 Successors and Assigns. This Agreement shall be binding upon and
----------------------
shall inure to the benefit of the successors and assigns of the parties to this
Agreement; provided, however, that in the event of assignment to any person
other than a wholly owned subsidiary, parent or sister company, or pursuant to a
sale of all or substantially all of the assets of the assigning party to a
single buyer, any such assignment shall give rise to a right of termination by
the non-assigning party which right may be exercised at any time within ninety
(90) days of the effectuation of such assignment.
8.14 Manner of Giving Notice. All notices and demands which either party
-----------------------
is required or desires to give to the other shall be given in writing by
personal delivery or by express courier services or by certified mail, return
receipt requested, to the address set forth below for the respective party,
provided that if any party gives notice of a change of name or address, notices
to that party shall thereafter be given as demanded in that notice. All notices
and demands given by personal delivery or by express courier service shall be
effective on the date of delivery; all notices and demands given by mail as set
forth above shall be effective on the fourth business day after mailing.
To Owner:
- --------
c/o Reading Entertainment, Inc.
30 South 15/th/ Street, Suite 1300
Philadelphia, PA 19102-4813
Attn: James A. Wunderle
8
<PAGE>
To Manager: With copies to:
- --------------------------- -----------------------------
City Cinemas Corporation City Cinemas Corporation
950 Third Avenue 120 North Robertson Boulevard
26th Floor Third Floor
New York, NY 10022 Los Angeles, CA 90048
Attn: Robert F. Smerling Attn: Ira S. Levin, Esq.
9. Separate Management Agreements.
-------------------------------
The parties agree that they will, upon the request of either party, enter
into a separate agreement with the direct owner of any one or more Designated
Cinemas, which separate agreements will be on substantially the same terms and
conditions as this agreement, and which will include mutually acceptable cross
default provisions.
IN WITNESS WHEREOF, the parties have caused this instrument to be executed
as of the day and year first above written.
OWNER:
ANGELIKA HOLDINGS, INC.
A DELAWARE CORPORATION
By: /s/ James A. Wunderle
------------------------------------
Name: James A. Wunderle
Title: Vice President
MANAGER:
CITY CINEMAS CORPORATION,
a New York corporation
By: /s/ Ira S. Levin
----------------------------------
Name: Ira S. Levin
Title: Vice President
9
<PAGE>
EXHIBIT 1
DESIGNATED CINEMAS
------------------
Angelika Film Center & Cafe
510 Texas Avenue
Houston, Texas 77002
St. Anthony Main
219 North Second Street
Minneapolis, Minnesota 55401
10
<PAGE>
EXHIBIT 21(i)
<TABLE>
<CAPTION>
Reading Entertainment, Inc. Consolidated Subsidiaries
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
SUBSIDIARY JURISDICTION OF D/B/A
INCORPORATION
- ---------------------------------------------------------------------------------------------------
AHGP, Inc. Delaware, USA
- ---------------------------------------------------------------------------------------------------
AHLP, Inc. Delaware, USA
- ---------------------------------------------------------------------------------------------------
Angelika Film Centers LLC Delaware, USA Angelika Film Center
- ---------------------------------------------------------------------------------------------------
Angelika Holding, Inc. Delaware, USA
- ---------------------------------------------------------------------------------------------------
Australia Cinema Management Pty. Limited New South Wales, Australia
- ---------------------------------------------------------------------------------------------------
Australia Country Cinemas Pty. Limited New South Wales, Australia Reading Cinemas
- ---------------------------------------------------------------------------------------------------
Cine Vista Holdings, Inc. Delaware, USA
- ---------------------------------------------------------------------------------------------------
Bayou Cinemas, LP Delaware, USA Angelika Film Center & Cafe
- ---------------------------------------------------------------------------------------------------
Entertainment Holdings, Inc. Delaware, USA
- ---------------------------------------------------------------------------------------------------
FA, Inc. Delaware, USA
- ---------------------------------------------------------------------------------------------------
Ionagold Pty. Limited New South Wales, Australia
- ---------------------------------------------------------------------------------------------------
The Port Reading Railroad Company New Jersey, USA
- ---------------------------------------------------------------------------------------------------
Puerto Rico Holdings, Inc Delaware, USA
- ---------------------------------------------------------------------------------------------------
Railroad Investments, Inc. Delaware, USA
- ---------------------------------------------------------------------------------------------------
Reading Australia Pty Limited New South Wales, Australia Reading Cinemas
- ---------------------------------------------------------------------------------------------------
Reading Capital Corporation Delaware, USA
- ---------------------------------------------------------------------------------------------------
Reading Center Development Corp. Pennsylvania, USA
- ---------------------------------------------------------------------------------------------------
Reading Cinemas, Inc. Delaware, USA
- ---------------------------------------------------------------------------------------------------
Reading Cinemas of Puerto Rico, Inc. Puerto Rico, USA CineVista Theaters
- ---------------------------------------------------------------------------------------------------
Reading Cinemas New Jersey, Inc. Delaware, USA
- ---------------------------------------------------------------------------------------------------
Reading Company Pennsylvania, USA
- ---------------------------------------------------------------------------------------------------
Reading Entertainment, Inc. Delaware, USA
- ---------------------------------------------------------------------------------------------------
Reading Holdings, Inc. Delaware, USA
- ---------------------------------------------------------------------------------------------------
Reading International Cinemas LLC Delaware, USA
- ---------------------------------------------------------------------------------------------------
Reading Investment Company Delaware, USA
- ---------------------------------------------------------------------------------------------------
Reading Properties Pty Limited Victoria, Australia
- ---------------------------------------------------------------------------------------------------
Reading Real Estate Company Pennsylvania, USA
- ---------------------------------------------------------------------------------------------------
Reading Resources, Inc. Delaware, USA
- ---------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Reading Entertainment, Inc. Consolidated Subsidiaries
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
SUBSIDIARY JURISDICTION OF D/B/A
INCORPORATION
- ---------------------------------------------------------------------------------------------------
Reading Transportation Company Pennsylvania, USA
- ---------------------------------------------------------------------------------------------------
Trenton-Princeton Traction Company New Jersey, USA
- ---------------------------------------------------------------------------------------------------
Twin Cities Cinemas, Inc. Delaware, USA Reading Cinemas
- ---------------------------------------------------------------------------------------------------
Washington and Franklin Railway Company Penna. & Maryland, USA
- ---------------------------------------------------------------------------------------------------
Western Gaming, Inc. Delaware, USA
- ---------------------------------------------------------------------------------------------------
Wilmington & Northern Railroad Penna. & Delaware, USA
</TABLE>
<PAGE>
Exhibit 23.1
------------
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-57222) pertaining to the Reading Entertainment, Inc. 1992 Non-
Qualified Stock Option Plan of our report dated March 13, 1998 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, 1997.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 31, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the Condensed
Consolidated Statements of Operation for the Year Ended December 31, 1997 and
the Condensed Consolidated Balance Sheet as of December 31, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 92,870
<SECURITIES> 0
<RECEIVABLES> 1,232
<ALLOWANCES> 37
<INVENTORY> 194
<CURRENT-ASSETS> 100,303
<PP&E> 43,302
<DEPRECIATION> 2,990
<TOTAL-ASSETS> 178,012
<CURRENT-LIABILITIES> 13,177
<BONDS> 509
7,000
1<F1>
<COMMON> 7
<OTHER-SE> 150,477
<TOTAL-LIABILITY-AND-EQUITY> 178,012
<SALES> 6,078
<TOTAL-REVENUES> 36,288
<CGS> 1,296
<TOTAL-COSTS> 24,162
<OTHER-EXPENSES> 9,737
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,022
<INCOME-TAX> 1,067
<INCOME-CONTINUING> 2,955
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,955
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
<FN>
<F1> Represents par value of Reading Entertainment Series B Preferred Stock
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The schedule contains restated summary financial information extracted from the
Condensed Consolidated Statements of Operation for the Nine Months Ended
September 30, 1997 and the Condensed Consolidated Balance Sheet as of September
30, 1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 108,994
<SECURITIES> 0
<RECEIVABLES> 1,159
<ALLOWANCES> 39
<INVENTORY> 155
<CURRENT-ASSETS> 113,966
<PP&E> 28,359
<DEPRECIATION> 2,532
<TOTAL-ASSETS> 174,049
<CURRENT-LIABILITIES> 6,180
<BONDS> 512
7,000
1<F1>
<COMMON> 7
<OTHER-SE> 154,594
<TOTAL-LIABILITY-AND-EQUITY> 174,049
<SALES> 4,540
<TOTAL-REVENUES> 27,736
<CGS> 968
<TOTAL-COSTS> 17,426
<OTHER-EXPENSES> 6,730
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,454
<INCOME-TAX> 699
<INCOME-CONTINUING> 3,755
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,755
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
<FN>
<F1> Represents par value of Reading Entertainment Series B Preferred Stock
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The schedule contains restated summary financial information extracted from the
Condensed Consolidated Statements of Operation for the Six Months Ended June 30,
1997 and the Condensed Consolidated Balance Sheet as of June 30, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 38,977
<SECURITIES> 0
<RECEIVABLES> 5,038
<ALLOWANCES> 39
<INVENTORY> 156
<CURRENT-ASSETS> 115,686
<PP&E> 24,546
<DEPRECIATION> 2,262
<TOTAL-ASSETS> 173,457
<CURRENT-LIABILITIES> 5,966
<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>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The schedule contains restated summary financial information extracted from the
Condensed Consolidated Statements of Operation for the Three Months Ended March
31, 1997 and the Condensed Consolidated Balance Sheet as of March 31, 1997 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 45,635
<SECURITIES> 0
<RECEIVABLES> 2,984
<ALLOWANCES> 55
<INVENTORY> 120
<CURRENT-ASSETS> 53,988
<PP&E> 25,034
<DEPRECIATION> 2,039
<TOTAL-ASSETS> 180,789
<CURRENT-LIABILITIES> 12,667
<BONDS> 514
7,000
1<F1>
<COMMON> 7
<OTHER-SE> 156,081
<TOTAL-LIABILITY-AND-EQUITY> 180,789
<SALES> 1,310
<TOTAL-REVENUES> 8,242
<CGS> 298
<TOTAL-COSTS> 5,344
<OTHER-EXPENSES> 1,563
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,584
<INCOME-TAX> 159
<INCOME-CONTINUING> 1,425
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,425
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
<FN>
<F1> Represents par value of Reading Entertainment Series B Preferred Stock
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The schedule contains restated summary financial information extracted from the
Condensed Consolidated Statements of Operation for the Year Ended December 31,
1996 and the Condensed Consolidated Balance Sheet as of December 31, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<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> 3,187
<ALLOWANCES> 70
<INVENTORY> 151
<CURRENT-ASSETS> 56,445
<PP&E> 22,939
<DEPRECIATION> 1,809
<TOTAL-ASSETS> 181,754
<CURRENT-LIABILITIES> 13,109
<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> 1.02
<FN>
<F1> Represents par value of Reading Entertainment Series B Preferred Stock
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The schedule contains restated summary financial information extracted from the
Condensed Consolidated Statements of Operation for the Nine Months Ended
September 30, 1996 and the Condensed Consolidated Balance Sheet as of September
30, 1996 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 21,144
<SECURITIES> 0<F1>
<RECEIVABLES> 723
<ALLOWANCES> 111
<INVENTORY> 151
<CURRENT-ASSETS> 24,079
<PP&E> 11,618
<DEPRECIATION> 1,621
<TOTAL-ASSETS> 82,261
<CURRENT-LIABILITIES> 5,771
<BONDS> 518
0
0
<COMMON> 52
<OTHER-SE> 71,111
<TOTAL-LIABILITY-AND-EQUITY> 82,261
<SALES> 3,290
<TOTAL-REVENUES> 16,159
<CGS> 588
<TOTAL-COSTS> 11,463
<OTHER-EXPENSES> 3,238
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98
<INCOME-PRETAX> 2,491
<INCOME-TAX> 79
<INCOME-CONTINUING> 2,412
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,412
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.49
<FN>
<F1> See "Note 2 - Summary of Significant Accounting Policies, Availabe-for-Sale
Securities" to the Notes to Condensed Financial Statements for September 30,
1996.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The schedule contains restated summary financial information extracted from the
Condensed Consolidated Statements of Operation for the Six Months Ended June 30,
1996 and the Condensed Consolidated Balance Sheet as of June 30, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 32,431
<SECURITIES> 49<F1>
<RECEIVABLES> 840
<ALLOWANCES> 114
<INVENTORY> 88
<CURRENT-ASSETS> 34,292
<PP&E> 10,594
<DEPRECIATION> 1,469
<TOTAL-ASSETS> 80,077
<CURRENT-LIABILITIES> 7,695
<BONDS> 519
0
0
<COMMON> 52
<OTHER-SE> 69,651
<TOTAL-LIABILITY-AND-EQUITY> 80,077
<SALES> 2,064
<TOTAL-REVENUES> 10,662
<CGS> 347
<TOTAL-COSTS> 7,231
<OTHER-EXPENSES> 2,394
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,061
<INCOME-TAX> 22
<INCOME-CONTINUING> 1,039
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,039
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
<FN>
<F1> See "Note 2 - Summary of Significant Accounting Policies, Availabe-for-Sale
Securities" to the Notes to Condensed Financial Statements for June 30, 1996.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The schedule contains restated summary financial information extracted from the
Condensed Consolidated Statements of Operation for the Three Months Ended March
31, 1996 and the Condensed Consolidated Balance Sheet as of March 31, 1996 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 32,045
<SECURITIES> 42<F1>
<RECEIVABLES> 756
<ALLOWANCES> 114
<INVENTORY> 86
<CURRENT-ASSETS> 33,981
<PP&E> 10,461
<DEPRECIATION> 1,323
<TOTAL-ASSETS> 78,393
<CURRENT-LIABILITIES> 3,898
<BONDS> 520
0
0
<COMMON> 52
<OTHER-SE> 68,418
<TOTAL-LIABILITY-AND-EQUITY> 78,393
<SALES> 1,021
<TOTAL-REVENUES> 4,670
<CGS> 168
<TOTAL-COSTS> 3,524
<OTHER-EXPENSES> 1,424
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (263)
<INCOME-TAX> 10
<INCOME-CONTINUING> (273)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (273)
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
<FN>
<F1> See "Note 2 - Summary of Significant Accounting Policies,
Available-for-Sale Securities" to the Notes to Condensed Financial Statements
for March 31, 1996.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The schedule contains restated summary financial information extracted from the
Condensed Consolidated Statements of Operation for the Year Ended December 31,
1995 and the Condensed Consolidated Balance Sheet as of December 31, 1995 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 44,147
<SECURITIES> 42<F1>
<RECEIVABLES> 915
<ALLOWANCES> 291
<INVENTORY> 112
<CURRENT-ASSETS> 46,910
<PP&E> 10,389
<DEPRECIATION> 1,176
<TOTAL-ASSETS> 75,544
<CURRENT-LIABILITIES> 4,083
<BONDS> 521
0
0
<COMMON> 52
<OTHER-SE> 68,660
<TOTAL-LIABILITY-AND-EQUITY> 75,544
<SALES> 3,883
<TOTAL-REVENUES> 17,632
<CGS> 640
<TOTAL-COSTS> 12,793
<OTHER-EXPENSES> 4,200
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,590
<INCOME-TAX> 239
<INCOME-CONTINUING> 2,351
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,351
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.47
<FN>
<F1> See Note 2 to Consolidated Financial Statements.
</FN>
</TABLE>
