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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, 1999
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)
Nevada 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 23, 2000, there were 7,449,364 shares of Common Stock
outstanding. The aggregate market value of voting stock held by nonaffiliates of
the Registrant was approximately $9,680,429.
Documents Incorporated By Reference:
The information required by Part III is incorporated by reference to the
definitive proxy statement for the 2000 Annual Meeting of Shareholders of
Reading Entertainment, Inc.
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PART I
Item 1. Business
General
Reading Entertainment, Inc., a Nevada corporation ("REI" and collectively
with its various subsidiaries and predecessors, the "Company" or "Reading"), was
formed in 1999 in a reorganization of the Company under a Nevada holding
company. Initially organized in 1833, the Company has been doing business in
the United States for over 165 years. Currently, operating 182 screens in
twenty-seven multiplex cinema complexes, located principally overseas, and
owning approximately 1.85 million square feet of land capable of supporting
approximately 0.75 million square feet of development in Australia and New
Zealand, the Company is principally in two lines of business (i) the development
and operation of multiplex cinemas in Australia, New Zealand, Puerto Rico and
the United States and (ii) the development and operation of cinema based
entertainment centers in Australia and New Zealand.
Prior to 1976, the Company was principally in the transportation business,
owning and operating the Reading Railroad. Following the disposition of
substantially all of its rolling stock and active rail lines 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
purposes. Since 1976, the Company has reduced its railroad real estate holdings
from approximately 700 parcels and rights-of-way to approximately fifteen.
In 1993, following the sale of its last major railroad real estate asset --
the historic Reading Terminal Headhouse in downtown Philadelphia -- the Company
entered the "Beyond the Home" or real estate based segment of the entertainment
industry. Since that date, the Company has acquired and updated a chain of
multiplex cinemas in Puerto Rico ("CineVista") featuring conventional film
product; acquired or developed certain multiplex cinemas in the United States
featuring principally art, specialty and sophisticated or upper-end conventional
film product ("Angelika Cinemas") and/or conventional film product ("Reading
Cinemas"); and developed a chain of cinemas currently comprising seventy-one
screens in Australia featuring conventional film product ("Reading Cinemas") and
a 50% interest in a thirteen screen cinema chain in New Zealand ("Berkley
Cinemas"). In 1999, the Company grew from 96 to 174 screens, most of the new
screens coming on line in the fourth quarter of that year. At December 31,
1999, the Company had under development or agreements to lease, acquire or
manage, cinemas representing approximately thirty-two additional screens. The
Company anticipates adding twenty-six of these screens in 2000, including an
Australian location with eight screens which commenced operations in March 2000.
In Australia and New Zealand, the Company is also in the business of
developing 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. Reading opened the cinema portion of
its first entertainment center in Perth in December 1999 (the entertainment
retail space is expected to be placed in operation in mid-2000), and anticipates
opening a second and substantially larger entertainment center in a suburb of
Auburn, Sydney in the third quarter of 2000.
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, the proliferation of suburban multiplex
cinemas and competition from existing developers and shopping center owners)
have caused the Company to rely on leasehold sites in established urban areas or
suburban malls. However, an ownership-oriented approach is being pursued in
urban centers in Australia and New Zealand. This means that many of the
Company's projects in Australia and New Zealand are more capital intensive, have
longer lead times, entail greater development risks and have initially lower
cash returns than the more leveraged development of cinemas in leased facilities
in established malls. However, the Company believes that these risks are more
than offset by the greater control and flexibility that the ownership of such
sites provides to the Company and by the opportunity given to the Company to
participate in the enhancement to the value of such land likely to result from
the consumer traffic generated by a successful cinema operation. To date, the
Company has acquired (directly or through joint venture or tenant-in-common
investments), or has the contract right to acquire, six sites in Australia and
New Zealand which it believes are suitable for development or redevelopment as
entertainment centers. During 1999 the Company acquired 100% ownership of an
entertainment site in Wellington, New Zealand. Prior thereto, the Company held
a 50% interest in such site. These sites (which include the entertainment
center to be opened
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in Sydney later this year) represent approximately 1.85 million square feet of
land area with the potential to support nearly 0.75 million square feet of
improvements.
The Company has elected to focus its future cinema exhibition activities in
Australia and New Zealand. The Company believes that, given its finite capital
resources, the scope and extent of its current activities, its investments and
commitments in Australia and New Zealand, and the opportunities available to it
in Australia and New Zealand, that it is in the best interests of the Company
and its stockholders to concentrate on Australia and New Zealand and to reduce
development undertakings relating to its domestic cinema assets and, over time
to reduce the position of the Company's assets directly invested in the domestic
cinema exhibition business. Accordingly, the Company has sold to a third party
a 50% membership interest in the Angelika Film Center LLC ("AFC"), has granted
to that same third party certain options to acquire the Company's remaining
33.33% membership interest in AFC and to acquire the remainder of the Company's
US based cinema assets (including its rights with respect to the City Cinemas
Transaction), is in negotiations with its affiliate, Citadel Holding
Corporation ("CHC and collectively with its predecessors and consolidated
subsidiaries "Citadel") to transfer to Citadel, subject to such option, the
Company's rights with respect to both the City Cinemas Transaction and the OBI
Transaction, and is in negotiations with a third party to sell its interest in
the Royal George Theatre ("RGT") in Chicago. The only domestic cinema
development contemplated for 2000 is the development of an eight screen cinema
in Dallas, which will feature art and upper end film product.
The Company currently has the right under an agreement with Messrs. James
J. Cotter (Chairman of the Company's Board of Directors) and Michael Forman (a
major shareholder in Craig Corporation ("CC"and collectively with its wholly
owned subsidiaries "Craig"), which corporation owns 78% of the Company's voting
stock) and certain of their affiliates (collectively referred to as "Sutton
Hill") a) to lease, with option to purchase, the Cinemas I, II and III, the
Murray Hill, the Sutton, and the Village East Cinemas, and to manage the
Angelika Film Center located in the Soho section (the "NY Angelika"), the
Gotham, the 56/th/ Street Playhouse, and the 86/th/ Street Theatre, all of which
are located in Manhattan, and which are operated collectively as the City
Cinemas Chain, b) to purchase the 1/6th interest in the NY Angelika not already
owned by the Company and c) to acquire, through a stock merger (the "OBI
Transaction"), the assets and business of Off Broadway Investments, Inc.("OBI"),
which assets currently consist of the Minetta Lane, Orpheum and Union Square
theaters in Manhattan (the "Off Broadway Theatres"). The acquisition of the
cinema leases, cinema interest and the related management rights is collectively
referred to as the "City Cinemas Transaction".
On April 5, 2000, the Company sold a 50% membership interest in the
Angelika Film Center LLC (the ("AFC") to National Auto Credit, Inc ("NAC"). AFC
is the owner of the NY Angelika. The 50% membership interest (the "Angelika
Interest") was conveyed in exchange for 8,999,900 shares of the common stock of
NAC, representing approximately 26% of the outstanding common stock of that
company (calculated after the issuance of such shares), and 100 shares of the
Series A Preferred Stock of NAC, representing 100% of such class. NAC common
stock, which is traded in the over-the-counter market, closed April 10, 2000 at
$1 5/64. The Series A Preferred Stock has a liquidation preference of $1.50 per
share, is convertible into the common stock of NAC on a share for shares basis,
is entitled to a dividend preference equal to any dividends declared on the NAC
common stock (determined on a per share basis), and enjoys certain special
voting rights. As a consequence of that transfer, (a) AFC is now owned 50% by
NAC, 33.33% by the Company and 16.67% by Sutton Hill and (b) the Company and its
affiliates own approximately 29% of the outstanding common stock of NAC.
NAC is a publicly traded company whose shares are traded in the over-the-
counter market. Historically, NAC has been in the business of originating,
purchasing and servicing sub-prime loans secured by second hand automobiles.
However, in recent periods, NAC has sold substantially all of its inventory of
loans, substantially reduced its work force and, in essence, reduced its assets
to cash and real estate. The Company is advised by NAC that it is considering
investments in several industries, one of them being domestic cinema exhibition,
and that the acquisition of the AFC Interest constituted a possible first step
in what may be a substantially larger commitment to that industry. Accordingly,
the Company has also granted to NAC two separate and independent options to
acquire additional US cinema assets of the Company.
Under the first option (the "AFC Option"), NAC has the right to acquire the
remaining 33.33% membership interest in AFC owned by the Company in exchange for
an additional 6 million shares of NAC common stock, to the extent that
authorized but unissued shares of NAC common stock are available for such
purpose. To the extent that NAC has less than 6 million shares available for
such purpose, NAC has the right to substitute cash for such shares (at the rate
of $1.50 per share) to the extent necessary to make up for any such shortfall.
The AFC Option can be exercised through
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May 20, 2000. Following the exercise of the AFC Option, the remaining 16.67%
membership interest in AFC would continue to be owned by Sutton Hill, and the
cinema would continue to be managed as a part of the City Cinemas Chain.
Under the second option (the "City Cinemas Option"), NAC has the right to
acquire the remainder of Reading's domestic assets for cash (including the
Company's rights to the City Cinemas Transaction, and, if NAC has not previously
exercised the AFC Option, the Company's remaining interest in AFC). The City
Cinemas Option can be exercised through June 5, 2000. The Company has received
$500,000 in consideration of the grant of the City Cinemas Option. NAC has the
right to extend the option for two thirty day periods, by payment of an
additional $100,000 for each such thirty day extension period.
If NAC exercises the City Cinemas Option, it is required to give to Citadel
a right to participate in the transaction on a 50/50 basis. The decision
whether or not to proceed with either of the options described above rests with
NAC and not with the Company or Citadel. Such transactions are also subject to
Hart Scott Rodino review and clearance. Accordingly, no assurances can be given
that any further transactions will be effected between the companies.
The Company is also in negotiations with Citadel to assign to it the
Company's rights to the City Cinemas Transaction and the OBI Transaction. The
negotiations with respect to the acquisition of the City Cinemas Chain are, of
course, subject to a determination by NAC not to exercise its rights under its
City Cinemas Option. Citadel has advised the Company that it is interested in
taking over the Company's position under these agreements, if certain
modifications to the transaction can be negotiated, and has delegated to a
committee comprised entirely of independent directors authority to review the
transactions and to negotiate such modifications directly with Sutton Hill.
While no assurances can be given, the Company, based upon conversations
with representatives of Citadel and Sutton Hill, is optimistic that a
transaction can be worked out which would be attractive to the Company, Citadel
and Sutton Hill. It is contemplated that, if Citadel consummates a transaction
with Sutton Hill, the Company will receive at the closing the $1 million deposit
made by the Company under its agreement with Sutton Hill. The Company has also
advised Citadel that, if Citadel consummates a transaction with Sutton Hill, the
Company will give Citadel a first right of negotiation to acquire the remaining
domestic cinema assets of the Company, including the Dallas cinema currently
under development. If NAC exercises its City Cinemas Option, the Company
anticipates that Citadel will seriously consider taking a 50% interest in that
transaction. Also, in such case, the Company believes that Citadel may still
elect to proceed with the OBI Transaction, which has not been offered to NAC.
The Company has taken writedowns in the amount of $31,330,000 with respect
to its Puerto Rico operations in 1999. In the third quarter of 1999 the Company
wrote off the entire carrying value of the Company's eight screen cinema at the
Plaza Las Americas Cinema (the "Plaza Cinema") $14,022,000 upon the
determination by the owners of the Plaza Las Americas in San Juan not to honor
what the Company believes to have been a contractually binding obligation to
lease to the Company a new state-of-the-art cinema complex at the Plaza Las
Americas. The Plaza Las Americas is the largest shopping center in Puerto Rico.
The Company currently leases an older eight screen cinema at another location at
the Plaza. The determination of the Plaza's owners to instead lease the new
facility in the Plaza to the Company's principal competitor in Puerto Rico has
eliminated the value of the Company's existing cinema in that shopping center,
and will likely materially adversely effect the value of the remainder of the
CineVista circuit. In the fourth quarter the Company reduced the carrying value
of CineVista to its estimated net realizable value based upon the Company's
decision to exit the Puerto Rico market recording an additional Impairment loss
of $17,308,000. The Company is currently reviewing its options with respect to
Puerto Rico. Among those options may be litigation against the Plaza for breach
of contract and against the Company's principal competitor in Puerto Rico who
already controls over 80% of the box office in Puerto Rico) for violation of
various antitrust and unfair competition laws. Given the difficulties inherent
in this type of litigation, no assurance of success can be given. The Company
intends to endeavor to sell its Puerto Rico circuit, in order to free up further
assets for deployment in Australia and New Zealand. No assurances can be given
that these endeavors will be successful.
In addition to its principal cinema and entertainment center development
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 to lease equipment to third parties. The Company also owns a
fifty acre property assemblage located in the greater Melbourne, Australia area.
Originally acquired in 1996 as a potential entertainment site, the property is
held for non cinema development. The Company believes this site to be the
largest site available for development in the greater
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Melbourne metropolitan area, and to have a value substantially in excess of its
book value. The Company is reviewing its alternatives with respect to this site.
In recognition of the significant amount 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 under a
Delaware holding company (the "96 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"). In March 2000, the Company completed an Australian dollar
credit facility which provides for initial funding of up to $15 million and,
under certain circumstances, up to $47.8 million, to provide funding for the
construction of additional entertainment centers in Australia.
At December 31, 1999, the Company had assets valued for balance sheet
purposes at approximately $138.5 million and no long term indebtedness. Over
the past thirty months the Company has liquidated the assets received in the
Stock Transactions and reinvested the proceeds together with its other cash
assets, in the development of cinemas and entertainment centers and the
acquisition of land held for the development of cinemas and entertainment
centers. Accordingly, at December 31, 1999, the Company held property and
equipment and property held for development with a net book value of
approximately $89.5 million.
The Company also owns approximately 31.7% of Citadel. 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"). Citadel is a publicly reporting and trading
company, whose common stock is traded on the American Stock Exchange. Citadel's
net earnings during 1999 were $9,487,000. The Company's share of such earnings
was $2,799,000 which amount is included in the Consolidated Statement of
Operations for the year ended December 31, 1999 as Equity in earnings of
affiliate.
In December 1997, Citadel capitalized Big 4 Ranch, Inc. ("BRI"), a wholly-
owned subsidiary, with a cash contribution of $1.2 million and distributed 100%
of the shares of BRI to Citadel's common shareholders. BRI , Citadel and
Visalia, LLC (a limited liability company controlled by James J. Cotter,
Chairman of the Company, and owned by Mr. Cotter and certain members of his
family) are general partners to three general partnerships (the "Agricultural
Partnerships") which also in December 1997 acquired an approximately 1,580 acre
agricultural property for approximately $7.6 million. The Agricultural
Partnerships are owned 40%, 40%, and 20% by Citadel, BRI and Visalia,
respectively. Through its equity interests in Citadel and BRI, the Company owns
approximately 26% of the Agricultural Partnerships. The partnership structure
was developed to comply with certain federal water laws which limit the amount
of acreage irrigated by federal water that can be owned by any one entity. In
1998, the Agricultural Partnerships' citrus crop was lost due to a freeze. BRI's
net loss (excluding the indirect share of such losses recorded by Citadel) was
$1,090,000. The Company's share of such loss was $346,000. As a consequence of
the freeze, BRI had virtually no revenues in 1999, and reported an additional
net loss of $322,000. As a result of the loss in 1998 the Company's investment
in BRI has been reduced to $0. Therefore the Company did not make provision for
BRI's 1999 loss in its Consolidated Statement of Operations. The Company has no
obligations to fund BRI's operating losses.
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 ("PHLX") under the symbols RDGE and RDGE,
respectively. The Company has filed an application with the Securities and
Exchange Commission ("SEC") to withdraw its listing from PHLX and anticipates it
acceptance on or about April 21, 2000.
Description of Business
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The Company is primarily engaged in the development in Australia and New
Zealand of cinema based entertainment centers and in the multiplex cinema
exhibition business (focusing on the market for multiplex complexes featuring
principally commercial film in, Australia and New Zealand and Puerto Rico, and
featuring art, specialty and more sophisticated upper-end film product as well
as commercial 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 cinema 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
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entertainment centers will typically be centered around a multiplex cinema, and
feature complementary retail and restaurant facilities and convenient parking
all on land owned or controlled by the Company. Where possible, the Company
prefers to own rather than lease properties.
In the future, the Company intends to focus on the cinema and entertainment
center market in Australia and New Zealand and to de-emphasize and ultimately to
phase-out the domestic and Puerto Rican cinema markets.
Reading Cinemas (Australia and New Zealand)
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The Company currently operates ten cinemas, consisting of seventy-one
screens, in Australia and holds a 50% joint venture interest in three cinemas,
consisting of thirteen screens in New Zealand. The Company anticipates that it
will open an additional cinema, consisting of ten screens in Australia, during
the remainder of 2000.
The Company commenced activities in Australia in mid-1995, and conducts
business in Australia through its wholly-owned affiliate, Reading Entertainment
Australia Pty. Limited ("REA" 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 in Australia and New Zealand. Reading
Australia's seventy-one screens are located in seven leased, one managed and two
owned locations.
The Company commenced operations in New Zealand in 1997 and conducts
operations in New Zealand through its wholly-owned affiliate, Reading New
Zealand Limited (collectively with its various subsidiaries, "Reading New
Zealand"). At the present time, all of the Company's cinema interests are held
through a 50/50 joint venture with an experienced cinema operator. The joint
venture currently operates three cinemas representing thirteen screens at two
owned and one leased facility.
Reading Australia and Reading New Zealand are also 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 the Company. In December 1999, the Company
opened the cinema portion of its first entertainment center in Australia.
Located in Perth, the entertainment center includes a ten screen cinema and upon
completion, approximately 17,000 square feet of retail space. The Company
anticipates opening a second and substantially larger entertainment center in
the third quarter of this year. That entertainment center, located in Sydney
near the site of the Olympic Village, includes a ten screen cinema and
approximately 60,000 square feet of retail space. At the present time, Reading
Australia owns or has development rights to own an additional three locations
which it intends to use for entertainment center purposes. None of the
properties under development currently produce material cash flow.
Reading Australia also owns a 50% joint venture interest in an existing
shopping center located on leased land in the Melbourne area of Victoria, which
it acquired in anticipation of redevelopment as an entertainment center (the
"Whitehorse Center"). In December 1998, that joint venture entered into an
agreement to acquire the land underlying that center. The Company's joint
venture partner has not proved to be the source of financial strength that was
anticipated by the Company at the time it entered into the joint venture.
Accordingly, the Company has advised its joint venture partner of its desire to
sell the shopping center and the rights of the joint venture to acquire the land
underlying the shopping center. While certain disputes exist between the
Company and its joint venture partner, the joint venture has retained a broker
to market the property and the Company's interest has been classified as Held
for sale in the Company's Consolidated Balance Sheet at December 31, 1999.
While the Company remains interested in building a cinema at the shopping
center, assuming that commercially reasonable terms can be negotiated with the
purchaser of the center, no assurances can be given that the Company will be
successful in developing a multiplex facility at that site. Accordingly, the
Company no longer considers the Whitehorse Center to be a potential
entertainment location.
Reading New Zealand owns a 115,000 square foot site located in downtown
Wellington, the capital and second largest city in New Zealand, and an 327,000
square foot, nine-story parking facility located adjacent to that property.
Reading New Zealand has also purchased a 678,000 square foot site in a
developing suburb of Auckland. The Company currently intends to develop these
properties as entertainment centers.
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The six potential entertainment center sites described above (calculated
exclusive of the Whitehorse Center) include the potential for the development of
over sixty-four screens. All of the projects hold government approvals (if
required) for development as entertainment centers.
Summarized below are the entertainment center projects currently open or
under development by Reading Australia and Reading New Zealand:
<TABLE>
<CAPTION>
Land Size Approximate Approximate Estimated Development
in Square Purchase Cinema Size in Size in Square Footage
Site Footage Price Square Feet of Improvements
- ------ ----------- ------------ --------------- -------------------------
<S> <C> <C> <C> <C>
Australia
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 129,949 $4,200,000 54,000 103,000
Newmarket, Queensland 172,160 $4,500,000 49,000 161,000
New Zealand
Wellington/2/ 115,000 $3,300,000 77,000 133,000
Takanini 678,132 $3,200,000 41,000 56,000
</TABLE>
In addition to the above, the Company has accumulated, as the consequence
of three separate acquisitions, a fifty acre site in Burwood, Victoria. This
site was originally acquired for development of a megaplex cinema. However,
such use is currently prohibited as a consequence of an adverse land use
determination, which negated certain permits for the construction of cinemas on
the site which were in place at the time the properties were acquired by Reading
Australia. Due to the size of the accumulation and its location at the
demographic center of the greater Melbourne metropolitan area, the Company
believes that the accumulation has value substantially over and above its
original purchase price and is currently reviewing its options as to potential
development alternatives for the site.
Two of the Company's cinemas, consisting of eleven screens, and located in
country towns, are owned by Australia Country Cinemas Pty Limited ("ACC"), a
company owned 75% by Reading Australia and 25% by a company owned by an
individual familiar with the market for cinemas in country towns. ACC has a
limited right of first refusal to develop any cinema sites identified by Reading
Australia or such individual which are located in country towns.
One of the Company's cinemas, a five screen facility in Melbourne, is owned
by a joint venture in which the Company has a 66.6% interest.
Reading New Zealand has a 50% joint venture interest in a five screen
multiplex cinema located in Whangaparoa, New Zealand, a four screen multiplex
cinema located in Mission Bay, New Zealand, and a four screen cinema located in
Takapuna. Reading New Zealand's partner in these ventures is an experienced
cinema owner and operator. Two of the joint venture cinemas are fee properties
and the third is leased.
At the present time the Company's activities in Australia and New Zealand
are in large part 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 of the Company's business will depend upon a number of variables
and are subject to a number of risks, some of which are outside of the Company's
control. These variables and risks include, without limitation:
. construction risks, such as weather, unknown and unknowable site
conditions, and the availability and cost of materials and labor;
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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/ Does not include adjacent parking garage owned by Reading New Zealand.
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. 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 and New Zealand markets for entertainment center
space;
. political risk, such as the possible change in mid-stream of existing
zoning or development laws to accommodate competitive interests at
Burwood; and
. 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 the
Company's projects are developmental in nature.
In light of these risks, no assurances can be given that the Company will
be able to accomplish its business objectives in Australia and/or New Zealand.
Furthermore, even if those objectives are eventually achieved, the realization
of these objectives may require a longer period of time and a greater level of
developmental costs than currently anticipated by the Company.
Reading Australia's cinemas are managed by employees of the Company.
Reading New Zealand's cinemas are operated by a joint venture partner.
Australia
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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.
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. On July 1, 2000, Australia will implement a goods and services
tax ("GST") on all goods and services at a consistent rate of 10%. The Company
currently believes that GST rules will allow it to pass 100% of such taxes
through to the ultimate consumers of its goods and services, subject to market
pricing restraints.
7
<PAGE>
New Zealand
- -----------
New Zealand is a self governing member of the Commonwealth of Nations. It
is comprised of two large islands, and numerous small islands, with a total land
area of approximately 104,500 square miles. The country has a population of
approximately 3.6 million people, most of whom are of European descent and the
principal language is English. Wellington, with a population of approximately
350,000, is the capital and Auckland, with a population of approximately one
million, the largest city. Most of the population lives in urban areas.
New Zealand is a prosperous country with a high standard of social
services. The national economy is largely dependent upon the export of raw and
processed foods, timber and wool. Principally a trading nation, New Zealand
exports about 30% of its gross national product. In the past (particularly
before the United Kingdom entered the Common Market in 1973), New Zealand's
marketing focused on a small number of countries, principally the United
Kingdom. Currently, only approximately 7% of New Zealand's trade is with the
United Kingdom, with Japan and Australia being its principal trading partners.
While no country currently accounts for more than 20% of its exports, its
economy remains sensitive to fluctuations and demand for its principal exports.
Like Australia, New Zealand has a largely ceremonial governor-general,
appointed by the Queen of England. However, the executive branch is run by a
prime minister -- typically the leader of the majority party in Parliament --and
appointed ministers (typically chosen from the members of Parliament). The
Parliament is elected by universal adult suffrage using a mixed member
proportional system. Under this system, each voter casts two votes at the
federal level, one for a local representative and one for a party. Fifty
percent of the 120 seats in Parliament are determined by the direct election of
local representatives, and the remaining fifty percent are elected based upon
the number of votes garnered by the parties. The Prime Minister and his cabinet
serve so long as they retain the confidence of the Parliament.
With the exception of special excise taxes on tobacco, liquor, petroleum
products and motor vehicles the only general sales tax is a GST imposed on all
such services at the consistent rate of 12.5%. In effect, by a series of
refunds, GST is only paid by the end-user of the goods or services in question.
Resident companies pay income tax at a rate of 33%, however, dividend imputation
credits generally prevent double taxation of company profits. There are no
restrictions on repatriation of capital or profits, but some payments to
overseas parties are subject to withholding tax. There is no capital gains tax,
and there are tax treaties with many countries, including the United States.
The laws for monitoring and approving significant overseas investment into
New Zealand reflect the country's generally receptive attitude towards such
investment and the generally facilitating nature of the country's foreign
investment policies. One hundred percent overseas ownership can be approved in
nearly all industry sectors, including motion picture exhibition and
distribution. A review process is also applicable to certain land transactions
and the purchase of businesses or assets having a value of NZ$l0,000 or more.
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 and Reading New Zealand license 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 principal exhibitors in Australia and New Zealand include
-----------
Village Roadshow Limited ("Village") with approximately 419 screens in Australia
and 85 in New Zealand, Greater Union and affiliates with approximately 328
screens in Australia and Hoyts Cinemas ("Hoyts") with approximately 242 screens
in Australia and 92 in New Zealand. Independents, as a group, operate
approximately 560 screens in Australia and 130 in New Zealand. The film
exhibition business in Australia and New Zealand is concentrated and, to a
certain extent, vertically integrated.
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 168 new multiplex screens in Australia by
2003 with 61 currently under construction.
8
<PAGE>
These companies have substantial capital resources. Village had a publicly
reported consolidated net worth of approximately A$900 million at June 30, 1999.
The Greater Union organization does not separately publish financial reports,
but its parent, Amalgamated Holdings, had a publicly reported consolidated net
worth of approximately A$300 million at June 30, 1999. Hoyts Cinemas does not
separately publish financial reports as it has been acquired by a major
Australian media and entertainment company, Consolidated Press Holdings.
The industry is somewhat vertically integrated in that Village also serves
as a distributor of film in Australia and New Zealand for Warner Bros. and New
Line. 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.
In the view of the Company, the principal competitive restraint on the
development of its business in Australia and New Zealand 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 fifty acre
site at Burwood, the Minister for Planning and Local Government preempted local
zoning authorities to prohibit the Company's intended development of a twenty-
five 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.
As reported in a recent documentary news presentation by the Australian
television Network Nine, this decision by the minister followed a record
breaking cash contribution by Village Roadshow to that minister's political
party. According to other published reports, the amount of that contribution was
in the range of A$800,000.
In light of recently published revelations about the extent to which major
shopping center interests such as Westfields and major film exhibition
companies, such as Village, have been willing to go to block competitive
developments, the Company is hopeful that the use of these types of tactics will
be reduced in Australia. Recently, for example, all opposition to the Company's
project at Whitehorse Plaza, Box Hill was dropped. However, it is clear that
the opposition of entrenched interests such as Westfields and Village have
substantially delayed and otherwise adversely effected the Company's endeavors
to become the largest independent cinema exhibitor in Australia and New Zealand.
The Company generally has not encountered problems in obtaining access to
first run film product in Australia or New Zealand. However, the Company has
encountered some difficulty where it has attempted to take on the established
competitors in the central business district of Sydney. As the theatre involved
is one managed, as opposed to leased or owned, by the Company, this difficulty
has not been material to the business or operations of the Company. However, the
Company has retained counsel experienced in trade practice matters, and intends
to vigorously contest the current division of product by the majors in the
downtown Sydney market.
In New Zealand, Village and Hoyts have announced a merger, which would
result in a new entity controlling over 80% of the cinema box office in New
Zealand. That merger is being opposed by the New Zealand Commerce Commission,
the government agency responsible for the enforcement of New Zealand's anti-
trust laws. The Commerce Commission has sued to prevent the merger, and it is
anticipated that that case will go to trial later this year. While no
assurances can be given, representatives of the Commerce Commission have advised
the Company that the Commission is confident that it will be able to prevent the
merger.
Currency Risk: Generally speaking, the Company does not engage in
-------------
currency hedging. The Company presently intends, to the fullest extent possible,
to operate each of its Australian and New Zealand operations on a self funding
basis. The book value, stated in US dollars, of the Company's net assets in
Australia, New Zealand, and in the United States and Puerto Rico combined (US
dollars being the currency of Puerto Rico as well as that of the United States),
are as follows:
9
<PAGE>
<TABLE>
<CAPTION>
Net Assets/1/
---------------
<S> <C>
Reading Australia $ 66,445,000
Reading New Zealand 14,007,000
CineVista - Domestic/2/ 29,231,000
----------------
$ 109,683,000/3/
================
</TABLE>
The Company believes that its asset base in Australia should provide a
sufficient capital base to support the borrowings needed to complete the cinema
and entertainment center projects contemplated for at least 2000. The Company
has put into place an Australia credit facility sufficient to permit the build-
out of its Auburn project in Sydney. That project is scheduled for completion in
the third quarter of this year. Subject to the syndication of the credit
facility, that credit facility will also provide the funds required by the
Company to complete the construction of at least one additional entertainment
center and one additional cinema complex in Australia.
With respect to New Zealand, the Company likewise believes that its assets
in New Zealand should provide a sufficient capital base to support the
borrowings needed to complete the currently contemplated entertainment center in
downtown Wellington and, possibly, its suburban Auckland Project. The Company
is in discussion with several New Zealand based lenders with regard to a New
Zealand credit facility sufficient to cover all of the costs of developing the
downtown Wellington site. It is currently contemplated that the Wellington
project will break ground in the second quarter of this year, depending upon the
pace of the Company's pre-leasing activities.
At the present time, the Australian and New Zealand dollars are trading at
the lower end of their historic range vis a vis the U.S. dollar. Set forth below
is a chart of the exchange ratios between these three currencies over the past
twenty-five years.
[THE FOLLOWING TABLE IS SUBSTITUTED FOR THE GRAPH USED IN THE ORIGINAL DOCUMENT]
<TABLE>
<CAPTION>
Date $US/AUS$ $US/NZ$ Date $US/AUS$ $US/NZ$
------------------------ ------------------------
<S> <C> <C> <C> <C> <C>
1975 $1.2545 $1.0385 1987 $0.7220 $0.6602
1976 $1.0890 $0.9450 1988 $0.8535 $0.6290
1977 $1.1380 $1.0160 1989 $0.7893 $0.5937
1978 $1.1500 $1.0640 1990 $0.7720 $0.5865
1979 $1.1057 $0.9830 1991 $0.7593 $0.5403
1980 $1.1814 $0.9618 1992 $0.6890 $0.5135
1981 $1.1280 $0.8230 1993 $0.6783 $0.5590
1982 $0.9800 $0.7325 1994 $0.7753 $0.6402
1983 $0.8965 $0.6545 1995 $0.7432 $0.6537
1984 $0.8250 $0.4755 1996 $0.7944 $0.7065
1985 $0.6818 $0.5005 1997 $0.6515 $0.5803
1986 $0.6653 $0.5305 1998 $0.6123 $0.5270
1999 $0.6560 $0.5234
</TABLE>
_______________
/1/ Assets less third party liabilities and minority interests. Liabilities do
not include redeemable preferred stock.
/2/ Includes corporate assets, Domestic Cinemas, the Company's remaining
domestic real estate properties and the Company's investment in Citadel.
/3/ Liabilities do not include Series A Preferred Stock.
10
<PAGE>
Seasonality: Major films are generally released to coincide with the
-----------
school holiday trading periods, particularly the summer holidays. Accordingly,
Reading Australia and Reading New Zealand record greater revenues and earnings
during the first half of the calendar year.
Employees: Reading Australia has twenty-three full time executive and
---------
administrative employees and approximately 350 theater employees. Reading New
Zealand currently has no employees. The Company believes its relations with its
employees to be good.
Puerto Rico (CineVista)
- -----------------------
Acquired in 1994, CineVista currently operates fifty-six screens in eight
leased facilities in Puerto Rico. During 1999, the Company opened a new twelve
screen complex at the Plaza Carolina, a regional shopping center in the San Juan
area. The Company does not presently anticipate further expansion of this
circuit, and would like to exit this market if a suitable buyer can be found.
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 are
being constructed in existing malls with proven foot traffic and self-contained
parking. All of CineVista's theaters are modern multiscreen facilities.
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. The United States mainland is Puerto Rico's largest trading
partner.
During the last five 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 six complexes adding
approximately eighty-two screens since the beginning of 1996, and is believed to
have at least thirty screens at three locations under development. These new
screens have adversely affected the Company's current operations, reducing the
Company's market share from approximately 34% in 1995 to approximately 20%
percent in 1999. The Company believes that the Puerto Rico market is
substantially built out, and that there will be few if any opportunities in the
near to medium term that would be attractive to the Company.
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 5% of total revenues.
CineVista has agreements with a major softdrink 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
-----------------
distributors and several local distributors specializing in films of special
interest to residents of Puerto Rico. Puerto Rico regulations generally require
that film exhibitors be provided with an opportunity to view films prior to
submitting bids, that film distributors provide advance notice of films which
will be provided to the market, and are generally designed to preclude
anticompetitive
11
<PAGE>
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.
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 1999, films licensed from CineVista's nine largest film suppliers
accounted for approximately 90% of CineVista's box office revenues.
Competition: The Company believes there are approximately thirty-one
-----------
first-run movie theaters in daily operation with approximately 220 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 1999, 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. CineVista's
principal competitor is expected to continue to open theaters competitive with
those of CineVista's.
Since the beginning of 1996, the Company's principal competitor has opened
four complexes in the San Juan metropolitan area, adding sixty-four 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 one additional competitive theater under development
which is expected to add thirteen screens to the San Juan market. Since 1994,
this competitor's share of the Puerto Rico box office has increased from 48% to
80%.
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.
The Company's principal competitor appears to have adopted a strategy of
market dominance, building cinemas in areas which are, in the view of the
Company, already overscreened, and offering rents which, again in the view of
the Company, do not provide for an adequate return on capital for the cinema
operator.
In 1999, the owner of the Plaza Las Americas and this competitor entered
into a lease with respect to the development of a new state-of-the-art cinema
complex in that shopping center. With the opening of this new cinema in late
2000 or early 2001, it is likely that this Competitor's market shares in Puerto
Rico will increase significantly from the 80% share realized in 1999. The
Company believes that this action was in violation of agreements reached between
it and the owner of the Plaza, and was an exercise of monopoly power by the
Plaza and this competitor. The Company presently intends to pursue these claims
as this action on the part of the Plaza and this competitor has eliminated value
of the Company's existing eight screen cinema at the Plaza. In 1999, the Plaza
cinema complex accounted for approximately 42% of the gross box office revenues
of CinaVista.
Seasonality: Most major films are released to coincide with the summer
-----------
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, except during 1998 when first half revenues
were unseasonably high due to the strong box office performance of "Titanic."
Employees: CineVista has approximately 180 employees in Puerto Rico,
---------
twelve 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
- ----------------
The Company has focused its domestic cinema activities on the art and
specialty film exhibition market, and the selective acquisition and/or
development of conventional commercial cinemas. At December 31, 1999, the
Company
12
<PAGE>
operated six domestic cinemas with forty-two screens. The Company has entered
into agreements to lease or manage an additional eight domestic locations with a
total of thirty screens. However, in light of the Company's decision to
concentrate its future activities on the Australian and New Zealand markets, the
Company has entered into negotiations with Citadel to permit Citadel to take
advantage of the Company's rights with respect to seven of these cinemas,
representing twenty-two screens. If Citadel acquires these cinema interests,
then the Company has agreed to give to Citadel a right of first negotiation with
respect to the acquisition by Citadel of the remainder of the Company's domestic
cinema assets.
The Company's first domestic art theater was acquired in August 1996. This
cinema, the NY Angelika, is a six screen multiplex theater located in the Soho
district of New York City, and was acquired by the Company and Sutton Hill
through a newly formed limited liability company, AFC. The Company contributed
83.3% of the capital of AFC and Sutton Hill contributed the remaining 16.7%.
The theater is held under a long term lease with a remaining term of
approximately twenty-six years. On April 5, 2000, the Company sold a 50%
membership interest in AFC to National Auto Credit, Inc. ("NAC") for 8,999,900
shares of NAC common stock, representing approximately 26% of the outstanding
NAC common stock (calculated after the issuance of such shares), and 100 shares
of NAC Series A Preferred Stock, representing 100% of the authorized shares of
such class. NAC common shares closed April 10, 2000 at $1 5/64. The
transaction is described in greater detail above under Item 1. Business,
General.
In 1997 the Company opened an eight screen, 31,700 square foot art and
specialty cinema and cafe facility at the Bayou Place entertainment center in
Houston, Texas and acquired an existing five screen, 18,100 square foot facility
in Minneapolis, the former featuring art and speciality film product and the
later commercial film product. In 1998, the Company commenced operation of a
three screen, 18,000 square foot facility in Sacramento, California. In 1999,
the Company opened a new 46,000 square foot twelve screen complex in Manville,
New Jersey for the exhibition of conventional film product and leased a 27,400
square foot eight screen complex in Buffalo, New York for use as an art cinema.
City Cinemas Corporation ("City Cinemas"), an affiliate of Sutton Hill,
manages AFC and the Company's Minneapolis and Houston cinemas. The Company
manages directly its Sacramento, Manville and Buffalo operations.
Licensing/Pricing: Art and specialty films are available from many sources
-----------------
ranging from the divisions of the larger film distributors specializing in the
distribution of specialty films to individuals that have acquired domestic
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 generally
-----------
exhibited at older independently owned one and two screen theater complexes.
Few such independent exhibitors operate cinemas in more than one metropolitan
area. The Company believes that the exhibition of first run art and specialty
films has historically been and in significant part continues to be a niche
business, in some ways distinct from the business of exhibiting bigger budget
wide release films. At the present time there exists one national chain
specializing in art and specialty film which circuit operates approximately 150
screens in approximately fifty locations, principally in California and
Washington. Many larger cities have smaller chains which operate one to five
locations. One major commercial cinema circuit has formed a joint venture which
is developing cinemas specializing in the exhibition of independent film.
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. This proliferation of
screens has increased the appetite of the conventional multiplex operators for
art and specialty product, bringing them into direct competition with art and
specialty cinema operators. Often, these conventional multiplex operators are
able to offer better facilities and better terms than are the smaller, less well
capitalized art and specialty operators. The availability of screens on a
national scale from the larger conventional multiplex operators has also
effected release patterns. Popular art and specialty films such as "Shakespeare
in Love" and "The Blair Witch Project" which might have had significant
exclusive or near exclusive runs in the art cinemas, are now offered in general
release immediately upon establishing themselves as potentially high grossing
films. Other films, such as "Cider House Rules" and "The Talented Mr. Ripley,"
have gone immediately into general release, with 1,600 to 2,000 copies of these
films being offered for initial release, as opposed to the between 800 to 1,000
copies which would typically be prepared for an art film release.
Due to the relatively small scale of the Company's US operations and the
geographical dispersion of its domestic cinemas, the Company may have difficulty
securing certain film product due to competitive pressures of larger
13
<PAGE>
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 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, $525,000,000, $545,000,000 and
approximately $550,000,000 in 1992 through 1999, respectively (based upon
management estimates).
Employees: At December 31, 1999 approximately 275 cinema employees were
---------
employed by City Cinemas to operate the Company's domestic cinemas including
forty employees employed under the terms of two collective bargaining agreements
one of which expires in December 2001 and the other of which has been extended
on a month-to-month basis for two years. The Company has approximately seventy-
five direct cinema employees, approximately forty employees at RGT and eighteen
executive and administrative staff which, while located in the Unites States,
provide service with respect to all of the Company's operations. The Company
believes its relationship with its employees to be good.
Financial Information Relating to Industry Segments and Foreign and Domestic
- ----------------------------------------------------------------------------
Operations
- ----------
See Note 3 to the Consolidated Financial Statements contained elsewhere
herein.
The 96 Reorganization and Stock Transactions
- --------------------------------------------
In October 1996, the Company reorganized under a new Delaware holding
company, Reading Entertainment, Inc., a Delaware corporation ("Reading
Delaware") (the "96 Reorganization"). In the 96 Reorganization, each
outstanding share of Reading common stock was, in effect, converted into a share
of Reading Delaware common stock. Following the 96 Reorganization, the law of
Delaware controlled the internal corporate affairs of the Company. Prior to the
96 Reorganization, the law of Pennsylvania controlled such matters. In December
1999, the Company reorganized under a new Nevada holding company, the current
Reading Entertainment, Inc., a Nevada corporation. Accordingly, the internal
corporate affairs of the Company are now controlled by the law of Nevada.
Immediately after the 96 Reorganization, Reading Delaware issued common
stock and preferred stock in exchange for cash and other assets valued at
approximately $93.4 million increasing shareholder's equity from approximately
$69 million to approximately $156 million (the "Stock Transactions"). In the
Stock Transactions, Reading Delaware issued to Citadel 70,000 shares of Series A
Voting Cumulative Preferred Stock (the "Series A Preferred Stock"), and granted
to Citadel the option to sell its assets to the Company on certain terms, in
exchange for $7 million in cash. Reading Delaware issued to Craig Corporation
550,000 shares of Series B Voting Cumulative Preferred Stock (the "Series B
Preferred Stock") and 2,476,140 shares of Common Stock in exchange for 693,650
shares of Stater Bros. Preferred Stock, the 50% membership interest in Reading
International Cinemas LLC ("RIC") not previously owned by the Company, and
1,329,114 shares of Citadel Preferred Stock. The Citadel Preferred Stock was
redeemed by Citadel in December 1996 for approximately $6.2 million. The Stater
Bros. Preferred Stock was repurchased by Stater Bros. in the third quarter of
1997 for approximately $73.9 million.
The option right granted to Citadel to sell its assets to the Company is
set forth in an Asset Put and Registration Rights Agreement. Under this
Agreement, Citadel has the right (the "Asset Put Option"), exercisable at any
time until thirty days after REI files this Annual Report on Form 10-K to
require REI to acquire substantially all of Citadel's assets, and assume related
liabilities (such as mortgages), in exchange for shares of REI Common Stock. In
exchange for up to $20 million in aggregate appraised value of Citadel assets,
REI is obligated to deliver to Citadel that 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 over $20 million by issuing Common Stock at the
then fair market value of such stock. REI is not obligated to acquire more than
$30 million of assets. On March 22, 2000, REI common stock closed at $4.1875 per
share. The Company has been advised that Citadel does not intend to exercise the
Asset Put Option.
14
<PAGE>
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 under certain
circumstances. The shares of Series A Preferred Stock may also be converted
after a change in control. REI has the right to require conversion of the
Series A Preferred Stock if the average market price of the Common Stock over a
180-calendar day period exceeds $15.525. REI granted certain registration
rights to Citadel with respect to the shares of Common Stock, issuable on
conversion of the Series A Preferred Stock and the Asset Put Option.
Citadel has the right during the ninety 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 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 is not included as a component of Shareholders' Equity in the
Consolidated Balance Sheet and is separately categorized as "Preferred Stock."
Item 2. Properties
Executive and Administrative Offices
- ------------------------------------
The Company leases approximately 25,000 square feet of office space in
Philadelphia, Manhattan and Los Angeles in the United States, Melbourne and
Sydney, in Australia and in San Juan, Puerto Rico. The space is typically held
under lease having remaining terms of less than three years.
Entertainment Properties
- ------------------------
Leasehold Interests
-------------------
The Company currently leases approximately 600,000 square feet of completed
theater space in Australia, the United States, and Puerto Rico as follows:
<TABLE>
<CAPTION>
Aggregate Approximate
Square Range of Terms
Footage (including renewals)
------- --------------------
<S> <C> <C>
Australia 233,000 29-40 years
United States 160,000 10-40 years
Puerto Rico 204,000 13-40 years
</TABLE>
In addition, the Company has signed leases or agreements to lease with
respect to additional to-be-built theater space of approximately 88,000 square
feet in Australia and 30,000 square feet in the U.S.
Fee Interests
-------------
In Australia, the Company currently owns approximately, 930,000 square feet
of land at five locations. Substantially all of this land is located in the
urban areas of Brisbane, Melbourne and Sydney as well as the fifty acre Burwood
site.
In New Zealand, the Company owns a 115,000 square foot site and an adjacent
372,000 square foot nine story parking structure in the heart of Wellington (the
capital of New Zealand) and a 678,100 square foot parcel in Takanini
15
<PAGE>
(a suburb of Auckland), both of which it intends to develop as entertainment
centers, subject to obtaining the necessary land use approvals.
In the United States, the Company owns the fee interest in the Royal George
Theatre, a 30,000 square foot, four auditorium live theater office and
restaurant complex located in Chicago, Illinois. Also, the Company has an
Agreement in Principle to acquire (i) the fee interests in the Minetta Lane and
Orpheum Theatres in Manhattan, New York and (ii) the option to acquire the fee
interests underlying the Sutton and Murray Hill Cinemas also in Manhattan. The
Company anticipates selling the Royal George Theatre in 2000 and is currently in
negotiation with Citadel to convey to Citadel its interest in the Agreement in
Principle.
Joint Venture Interests
-----------------------
Reading Australia owns a 50% joint venture interest in the Whitehorse
Center shopping center located on leased land in the Melbourne area of Victoria
a 66% joint venture interest in a leased five screen multiplex cinema in
Melbourne and a 75% interest in a venture which leases two cinemas with eleven
screens. In December 1998, the shopping center joint venture entered into an
agreement giving to it the right, subject to certain conditions, to acquire the
land underlying the shopping center property. The joint venture's rights to
acquire such fee interest is subject to the completion of certain improvements
to that shopping center. Certain disputes have arisen with the Company's joint
venture partner with respect to the development of the shopping center, and the
joint venture has retained a broker to market the property.
In New Zealand, the Company has 50% tenant in common interests in three
pieces of real property, totaling approximately 87,100 square feet. Two of these
parcels are improved with cinema/restaurant complexes. The third is improved
with a new multiplex cinemas.
Non-Entertainment Properties
- ----------------------------
Center City Philadelphia Properties
-----------------------------------
The Company's properties in center city Philadelphia, all of which are
owned in fee, consist of several parcels of land aggregating approximately .67
acres located near or adjacent to the site of the Convention Center 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 certain partnerships described below 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. The Company does not believe that its
general partnership interest has any value.
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 fifteen 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.
Reading Australia
-----------------
In December 1995, Reading Australia acquired a fifty acre site in Burwood,
a suburban area outside of Melbourne. Reading Australia had intended to build a
multiplex theater on this site but the Minister for Planning and
16
<PAGE>
Local Government has intervened to negate certain permits which were in place at
the time the land was acquired. The Company believes that the site has value as
an assemblage for other uses, even if it is unable to develop the site as a
theater.
Item 3. Legal Proceedings
Certain Shareholder Litigation
- ------------------------------
In September 1996, the holder of fifty 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 96 Reorganization and Stock Transactions. The complaint
in the action (the "Complaint") named the Company, Craig, two former directors
of the Company and all of the then current directors of the Company (other than
Gregory R. Brundage and Robert F. Smerling) 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 96 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.
In November 1996, plaintiffs filed an Amended Complaint against all of the
Company's directors at that time, its two former directors and Craig. The
Amended Complaint does not name the Company as a defendant. The Amended
Complaint essentially restated all of the allegations contained in the Complaint
and contended that the named defendant directors and Craig breached their
fiduciary duties to the alleged class. The Amended Complaint sought 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 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.
On September 28, 1998, the defendants filed a motion for summary judgment.
In February 2000 the Court granted summary judgment against the Plaintiff and in
favor of all of the defendant directors. Craig was not dismissed, however, the
Court has agreed to reconsider Craig's motion in light of its decision to
dismiss the claims against all of the defendant directors. The plaintiff has
not elected to seek any rehearing or interlocutory appeal of the Trial Court's
decision to dismiss the defendant directors. Accordingly, management believes
that the Company has no liability relating to the matter.
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.
17
<PAGE>
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. While the City of Philadelphia has asserted
that the Company's share of any environmental clean up costs related to its
North Viaduct Property would be in the range of $3.5 million, the Company does
not believe that it has any current obligation to commence such remediation and
believes such estimate to be inaccurate.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Company's 1999 Annual Meeting of Shareholders held on December 17,
1999, shareholders (i) elected six directors and (ii) approve the merger
agreement between Reading Entertainment, Inc. (Delaware) and Reading
Entertainment, Inc. (Nevada). The results of the votes were as follows:
(i) Election of Directors
<TABLE>
<CAPTION>
For Withheld
---------- --------
<S> <C> <C>
James J. Cotter 12,931,818 145,663
Scott A. Braly 12,930,484 146,997
Robert F. Loeffler 12,930,479 147,002
Kenneth S. McCormick 12,930,484 146,997
Robert F. Smerling 12,931,984 145,497
S. Craig Tompkins 12,931,818 145,663
</TABLE>
(ii) Approval of merger agreement
For: 12,108,200 Against: 115,576 Abstain: 6,061
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
The names of the executive officers and significant employees of the
Company, other than the nominees for director, together with certain information
regarding them, are as follows:
<TABLE>
<CAPTION>
Name Age Position
--------------------- --- --------------------------------------------------
<S> <C> <C>
James J. Cotter 62 Chairman of the Board of Directors
S. Craig Tompkins 49 Vice Chairman and Director
Robert F. Smerling 65 President and Director
Eugene Cheah 32 Financial Controller, Australia and New Zealand
Ellen M. Cotter 33 Vice President, Business Affairs
Charles S. Groshon 46 Vice President, Finance
David Lawson 41 Director of Real Estate Development, Australia and
New Zealand
Andrzej Matyczynski 47 Chief Administrative Officer
Neil Pentecost 42 Chief Operating Officer, Australia and New Zealand
James A. Wunderle 48 Executive Vice President, Chief Financial Officer
and Treasurer
</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 Chairman of the Board and a
director of
18
<PAGE>
Citadel since 1991 and the Chief Executive Officer of Citadel since August 1999.
Mr. Cotter is Chairman of the Board and a director of Citadel Agricultural, Inc.
("CAI"), a wholly-owned subsidiary of Citadel's, a member of the Management
Committee of each of the three agricultural partnerships which constitute the
principal assets of CAI (the "Agricultural Partnerships") and Chairman of the
Board and a member of the Management Committee of Big 4 Farming LLC ("Farming"),
a farm management company, 80% owned by Citadel and formed to manage the
properties owned by the Agricultural Partnerships. Also, Mr. Cotter has served
since December 1997 as the Managing Director of Visalia LLC ("Visalia"), which
holds a 20% interest in each of the Agricultural Partnerships and a 20% interest
in Farming. Mr. Cotter has been a director and Chief Executive Officer of
Townhouse Cinemas Corporation (motion picture exhibition) since 1987 and has
been the Executive Vice President and a director of the Decurion Corporation
(real estate and motion picture exhibition) and of Pacific Theaters, Inc.
(motion picture exhibition), a wholly-owned subsidiary of Decurion, since 1969.
Mr. Cotter is the general partner of a limited partnership which is, in turn,
the general partner of Hecco Ventures, a California general partnership engaged
in the business of investing in securities, and the holdings of which include
shares representing approximately 16.8% of the voting power of Craig. Mr. Cotter
was a director of Stater Bros. Holdings Inc. and its predecessors from 1987
until September 1997.
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 a
director of Craig and has served in such positions since March 1, 1994. Prior
thereto, Mr. Tompkins was a partner in the law firm of Gibson, Dunn & Crutcher.
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 and currently serves as Chairman of the Audit
Committee and Chairman of the Strategic Planning Committee of that company.
Since July 1994, Mr. Tompkins has been the Vice Chairman of Citadel, and
currently serves as that company's Secretary/Treasurer. From August 1994 until
November 18, 1999 Mr. Tompkins served as the Principal Accounting Officer for
Citadel. Mr. Tompkins is also President and a director of CAI, a member of the
Management Committee of each of the Agricultural Partnerships and of Farming,
and serves, for administrative convenience, as an Assistant Secretary of Visalia
and Big 4 Ranch, Inc. ("BRI"), a partner with CAI and Visalia in each of the
Agricultural Partnerships.
Mr. Smerling has been a director since September 1997 and President of the
Company since January 1997. Mr. Smerling has served as President of the
Company's various domestic and Puerto Rican exhibition subsidiaries since 1994.
Mr. Smerling served as President of Loews Theater Management Corporation from
May 1990 until November 1993. Mr. Smerling also serves as President and Chief
Executive Officer of City Cinemas Corporation ("City Cinemas"), a motion picture
exhibitor located in New York City. 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. Cheah has been the Financial Controller of Reading Entertainment
Australia since August 1998. Mr. Cheah served as the Planning and Projects
Manager (Retail Strategy and Projects) for Myer Grace Bros. from 1996 to 1998,
and as Project Accounting Manager (Property Development) for Coles Myer
Properties from 1992-1995. Prior thereto, he was a Senior Accountant (Business
Services) with Price Waterhouse.
Ms. Cotter has been the Vice President, Business Affairs of the Company
since March 1998 and has served as the Acting President of Reading Australia
since August 1999. Ms. Cotter served as the Vice President - Business Affairs
of Craig from August 1996 to March 1998 and has served as the
Secretary/Treasurer of Citadel Agriculture, Inc. since December 1997. From
October 1992 through July 1996, Ms. Cotter was an attorney specializing in
corporate law with White & Case, a New York law firm. Ms. Cotter is the
daughter of James J. Cotter. Ms. Cotter is a member of Visalia and a limited
partner in James J. Cotter, Ltd. (Mr. Cotter is the general partner), which is a
general partner of Hecco Ventures, a privately held investment partnership.
Mr. Groshon has been a Vice President of the Company since December 1988.
Mr. Lawson has been the Director of Real Estate Development for Australia
and New Zealand since December 1998 and since May 1999 has served as a director
of the Company's principal Australian operating company, Reading Entertainment
Australia Pty Limited. Prior to joining the Company, Mr. Lawson served as the
Asset General Manager responsible for New South Wales for Westfield from 1996 to
1998, and as the General Manager (Retail Property Development) for Coles Myer
from 1994 to 1995.
19
<PAGE>
Mr. Matyczynski became the Chief Administrative Officer of the Company on
November 15, 1999. On that date, Mr. Matyczynski also became the Chief
Financial Officer of the Company's parent, Craig Corporation, and the Chief
Financial Officer of its affiliate, Citadel Holding Corporation. Prior to
joining the Company, Mr. Matyczynski was the Finance Director of Beckman
Coulter, Inc. Mr. Matyczynski was associated with Beckman Coulter and its
predecessors for more than twenty years and also served as a director for
certain Beckman Coulter subsidiaries.
Mr. Pentecost has been the Chief Operating Officer for Australia and New
Zealand since August 1999 and a director of Reading Entertainment Australia
since September 1999. Prior to joining the Company, Mr. Pentecost was with
Hoyts, where he served in a number of positions, most recently serving as
Operations and Services Manager (National). Mr. Pentecost joined Hoyts in 1995.
Prior thereto, Mr. Pentecost served as the Director of Retail Services
(Operations) for KFC in Australia.
Mr. Wunderle has been Chief Financial Officer since January 1987 and
Executive Vice President, and Chief Financial Officer since December 1988. He
has been Treasurer since March 1986.
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 REI common stock
as reported on the NNM. REI common stock also trades on the Philadelphia Stock
Exchange. The Company has filed an application with the SEC to withdraw its
listing from PHLX and anticipates its acceptance on or about April 21, 2000.
<TABLE>
<CAPTION>
1999
------------------------------------------------------
Quarter 1st 2nd 3rd 4th
-------- ------------------------------------------------------
<S> <C> <C> <C> <C>
High 8 1/8 8 3/8 7 9/16 6 1/8
Low 7 6 5/8 5 3/4 5
1998
------------------------------------------------------
Quarter 1st 2nd 3rd 4th
-------- ------------------------------------------------------
High 13 3/4 15 13 9 1/8
Low 11 3/4 11 1/2 8 7
</TABLE>
On March 23, 2000, the high, low and closing prices for REI common stock on
the NNM were, $4.25, $4.125, and $4.25, respectively. On March 23, 2000, there
were approximately 1,000 shareholders of record of REI common stock, which
amount does not include individual participants in security position listings.
REI has not paid any dividends on the common stock. The Company's 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. All of the Series A
Preferred Stock is owned by Citadel and all of the Series B Preferred Stock is
owned by Craig. No dividends were paid on the Series B Preferred Stock in 1999.
On October 15, 1996, REI issued the Convertible Preferred Stock to Craig
and Citadel. See Item 1. Business - The 96 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.
20
<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, 1999/1/ 1998/2/ 1997/3/ 1996/4/ 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 40,319 $ 38,448 $ 36,288 $ 22,944 $17,632
Net (loss) income applicable to common
shareholders ($45,517) ($6,728) ($1,354) $ 6,092 $ 2,351
=============================================================================================
Earnings per share information:
Basic (loss) earnings per share ($6.11) ($.90) ($0.18) $ 1.11 $ 0.47
=============================================================================================
Diluted (loss) earnings per share ($6.11) ($.90) ($0.18) $ 1.02 $ 0.47
=============================================================================================
- ---------------------------------------------------------------------------------------------
December 31, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------
Total assets $ 138,496 $172,287 $178,012 $181,754 $75,544
Redeemable preferred stock 7,000 7,000 7,000 7,000 -0-
Shareholders' equity $ 102,683 $142,372 $150,485 $155,954 $68,712
=============================================================================================
</TABLE>
/1/ Includes the results of nine new cinemas (four of which opened in the fourth
quarter of the year) and one live theater which commenced operations during the
year.
/2/ Includes the results of three new cinemas which were opened during the year.
/3/ Includes the results of five new cinemas which opened during the year.
/4/ Includes the 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.
21
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction:
- -------------
The Company is principally in the business of developing and operating
multiplex cinemas in Australia, New Zealand, the United States and Puerto Rico,
and in developing cinema based entertainment centers in Australia and New
Zealand. During 1998 and 1999, the Company has invested substantially all of
its liquid assets in cinemas and in land held for development as entertainment
centers, principally in the Australian and New Zealand markets. In 1998 and
1999, the Company opened or acquired, directly or indirectly through joint
ventures, twenty-nine (after consideration of six closed screens) and seventy-
eight screens, respectively. Currently, the Company has, directly or through
joint ventures, seventy-one screens in ten cinema complexes in Australia,
thirteen screens in three cinema complexes in New Zealand, fifty-six screens in
eight cinema complexes in Puerto Rico and forty-two screens in six cinema
complexes in the United States.
Since most of the screens added in 1999 were opened late in the year,
neither their revenues or expenses are fully reflected in the Company's 1999
results of operations. Also, it is anticipated that the costs of operation for
these new cinemas will be higher during their initial periods of operation than
on a normalized basis, due to the higher staffing and advertising costs
typically associated with a new cinema.
Going forward, the Company has determined to focus its efforts on the
Australian and New Zealand markets. The Company opened an eight screen complex
in Australia in March 2000 and anticipates opening an additional ten screen
complex in Australia in the third quarter of 2000. At the present time, the
Company has no plans to expand its Puerto Rican circuit and plans to open only a
single additional cinema in the United States in 2000. Ultimately, the Company
intends to phase out of the exhibition business domestically and in Puerto Rico.
In April 2000, the Company sold a 50% interest in the NY Angelika to
National Auto Credit, Inc. and granted NAC options to (i) acquire the Company's
remaining 33.3% interest in the NY Angelika and (ii) to acquire the Company's
remaining Domestic Cinemas and the Company's rights under the Agreement in
Principle to the City Cinemas Transaction. Citadel is also in discussions with
the Company concerning the OBI Transaction and the City Cinemas Transaction.
(See Item 1. Business, General).
Generally speaking, the film exhibition industry in the United States and
Puerto Rico has suffered from the overbuilding of multiplex cinemas.
Fortunately, overbuilding is not currently, in the view of the Company, a
problem in Australia or New Zealand. In 1999, the Company took writedowns of
approximately $34.3 million. Of this, approximately $31,466,000 relates to the
impairment of the Company's domestic and Puerto Rican cinema assets. The
impairment relating to Puerto Rico ($31,330,000) was the result of the opening
and anticipated opening of competitive cinemas by the dominant exhibitor in that
market, including a new thirteen screen cinema to be opened at the Plaza Las
Americas Mall, in direct competition to an eightplex cinema currently operated
by the Company in that same shopping center and the Company's subsequent
decision to exit the Puerto Rico cinema market. The writedown with respect to
the Company's domestic cinema operations relates to the impairment of two
domestic cinemas, which fell victim to overbuilding by competitors. In
addition, the Company reduced its estimate of the residual value of certain
computer equipment held for lease by the Company resulting in an Impairment loss
of $2.125 million.
The Company is currently in the process of consolidating its general and
administrative functions in Los Angeles and closing its executive headquarters
in Philadelphia. The executive offices of the Company's affiliates, Craig and
Citadel, are also located in Los Angeles, and it is anticipated that certain
economies can be achieved if the general and administrative functions of these
three companies are consolidated. Accordingly, on a going forward basis, the
domestic general and administrative functions of the Company, Craig and Citadel
will be performed principally by employees of Craig. The cost of such functions
will be shared on an appropriate basis between the Company, Craig and Citadel.
As the relative demands of the Company, Craig and Citadel will likely vary from
year to year, it is currently expected that this allocation will be reviewed by
the participants on a periodic basis, as appropriate from time to time.
22
<PAGE>
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 timing of new
cinema openings and acquisitions and the long term nature of the Company's real
estate development activities, historical revenues and earnings have varied
significantly. None of the Company's entertainment center developments have
commenced full operations and several are in the early stage of development.
Accordingly, General and administrative expenses related to such real estate
development activities have not been supported by operating income. The cinema
at one of the Company's six entertainment center projects was placed in service
in December 1999, however, the entertainment related retail space is not
expected to be placed in operation until mid-2000. A second entertainment
center project which includes a ten screen cinema, commenced construction during
1999 and is expected to begin operations in the third quarter of 2000. During
1999, the Company opened nine new cinemas with a total of seventy-eight screens,
four of which cinemas (representing forty-four screens) commenced operation in
December 1999. Due to the varying pace of development activities and the timing
of new cinema openings, management believes that historical financial results
are not necessarily indicative of future operating results.
The following summarizes cinema activity for the three years ended December
31, 1999 and anticipated 2000 additions:
<TABLE>
<CAPTION>
Total Total
Cinemas Screens Location
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Reading Australia
-----------------
1997 1 6 Townsville
July 2 10 Bundaberg
November 3 16 Mandurah
1998
November 4 21 Market City
1999
May 5 26 Dubbo
September 6 31 Elsternwick
December/1/ 9 63 Belmont, Redbank, Harbour Town
2000 (Projected)
First Quarter 10 71 Warn Ponds
Third Quarter/1/ 11 81 Sydney
Reading New Zealand/2/
----------------------
1998
June 2 9 Mission Bay, Whangaparoa
1999
August 3 13 Takapuna
-----------------------------------------------------------------------------
</TABLE>
- ------------------------
/1/ Includes ten screen cinema located in an entertainment center.
/2/ New Zealand cinemas are 50% owned by the Company.
23
<PAGE>
<TABLE>
<CAPTION>
Total Total
Cinemas Screens Location
----------------------------------------------------------------------------
<S> <C> <C> <C>
CineVista
---------
1997 7 44
March 8 50 Mayaguez
May/1/ 8 48 Homigueros
1998
February/1/ 7 44 Homigueros
February/2/ 7 42 San Juan
June/1/ 8 50 Homigueros
September/2/ 7 44 Bayamon
1999
December 8 56 Carolina
Domestic Cinemas
----------------
1997 1 6 Manhattan, New York
December 2 14 Houston, Texas
December 3 19 Minneapolis, Minnesota
1998
November 4 22 Sacramento, California
1999
May 5 34 Manville, New Jersey
July 6 42 Buffalo, New York
2000/4/ (Projected)
Fourth Quarter 7 50 Dallas, Texas
----------------------------------------------------------------------------
</TABLE>
In March 1999, the Company also acquired the Royal George Theatre ("RGT"),
a four stage live theater located in Chicago. The Company is presently in
negotiation with a third party to sell this live theater complex.
- ------------------
/1/ CineVista replaced an existing six screen cinema in Homigueros with a
newly constructed 8 screen cinema which opened in June 1998. In order to
accommodate the construction of the new cinema, two screens were closed at this
location in May 1997. The remaining four screens were closed in January 1998.
/2/ Two screens were closed at this San Juan location where CineVista
continues to operate eight screens.
/3/ A location in Bayamon was damaged by hurricane Georges. In the fourth
quarter of 1998 CineVista determined that it would not reopen this six screen
cinema.
/4/ Does not include possible acquisition of City Cinemas Circuit.
24
<PAGE>
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, 1999, inclusive of
minority interests where applicable. Reading New Zealand's cinema operations
are conducted through a 50% owned joint venture the results of which are
reflected in the Company's Consolidated Statement of Operations under the equity
method (See "Equity in Earnings of Affiliates"). Accordingly, Reading New
Zealand's cinema results are not included in Theater Revenue.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cine Vista $12,974,000 $16,210,000 $15,186,000
Domestic Cinemas/1/ 15,504,000 11,134,000 7,978,000
Australia 9,333,000 6,212,000 3,820,000
----------- ----------- -----------
$37,811,000 $33,556,000 $26,984,000
=========== =========== ===========
</TABLE>
CineVista's Theater Revenues decreased approximately $3,236,000 or 20% to
----------------------------
$12,974,000 in 1999 from $16,210,000 in 1998, primarily due to deteriorating
market conditions as competing cinemas opened or completed a full year of
operations. In the San Juan market area, CineVista's Theater Revenues decreased
$1,461,000 from the prior year as twenty-seven new competing screens opened
between December 31, 1998 and December 31, 1999. In addition, 1998 Theater
Revenues included $459,000 in revenues from a San Juan six screen cinema which
was destroyed by a hurricane in September 1998. In the Cayey and Mayaguez
markets, CineVista recorded Theater Revenue decreases of $389,000 and $590,000,
respectively, as new competing screens captured market share. CineVista opened
a new twelve screen cinema in December 1999. CineVista has no new cinemas under
development.
CineVista's Theater Revenues increased approximately $1,024,000 or 6.7% to
$16,210,000 in 1998 from $15,186,000 in 1997, primarily as a result of more
favorable film product in the first quarter of 1998. The increase in Theater
Revenues is net of a decrease of approximately $279,000 resulting from the
closing of eight screens in 1997 and 1998, offset in part by increased revenues
associated with a full year of operations from a six screen cinema open in March
1997 and an eight screen cinema which opened in June 1998.
Domestic Cinemas Theater Revenues increased $4,370,000 or 39.4% to
---------------------------------
$15,504,000 in 1999 from 1998 primarily as a result of the inclusion of a three
screen cinema which opened in November 1998, a new twelve screen cinema which
opened in May 1999, a new eight screen cinema which opened in July 1999 and the
inclusion of $1,161,000 in Theater Revenues from the RGT in the current period.
The Company has one eight screen Domestic Cinema under development which is
expected to open in late 2000.
Domestic Cinemas Theater Revenues increased approximately $3,156,000 to
$11,134,000 in 1998 from $7,978,000 in 1997 due in part to new cinema openings.
The Company opened a new eight screen, 31,700 square foot cinema and cafe
complex in Houston, Texas and acquired a five screen cinema located in
Minneapolis, Minnesota in December 1997. The Company also acquired the lease on
an existing three screen cinema in Sacramento, California in November 1998.
Theater Revenues from the three screen Sacramento cinema were not material in
1998.
Reading Australia's Theater Revenues increased $3,121,000 or 50% in 1999
------------------------------------
from $6,212,000 in 1998 to $9,333,000 as a result of a 5.6% increase in Theater
Revenues in cinemas which were open for twelve months in each year and the
contribution of new screens opened during the year. During 1999, Reading
Australia commenced operations of five new cinemas with a total forty-two
screens. Most of these new cinemas were placed in operation late in the year
and are expected to significantly increase Reading Australia's Theater Revenues
in 2000 as a full year of operations is recorded. Reading Australia anticipates
opening two new cinemas in 2000 with a total of eighteen screens (an eight
screen cinema opened in March 2000) as well as the retail components of two
entertainment center retail projects.
Theater Revenues from Australian operations increased $2,392,000 or 62.6%
to $6,212,000 in 1998 from $3,820,000 in 1997. The increase from the prior year
includes the effect of a full year of operation of a four screen
- -----------------------
/1/ Includes $1,161,000 from the Royal George Theater in 1999, which live
theater is Held for sale.
25
<PAGE>
cinema located which was purchased in July 1997 for approximately $1,600,000 and
a six screen cinema which opened in November 1997. Reading Australia's first
cinema, a six screen facility, was open throughout each of the respective
periods. In November 1998, the Company opened a five screen cinema in Sydney,
Australia which it operates under a management contract; Theater Revenues from
this cinema were not material in 1998.
Real Estate Revenues include rental income and the net proceeds of sales of
--------------------
the Company's domestic real estate. Reading Australia did not have material
revenues relating to real estate and entertainment center development
activities in any of the three years ended December 31, 1999. Reading New
Zealand recorded $297,000 in Real Estate Revenues in 1999 primarily from rental
income on a parking garage which was acquired in 1999. Reading Australia
anticipates recording Real Estate revenues in 2000 as two entertainment centers
commence rental operations in 2000.
Real estate revenues were $677,000, $373,000 and $180,000 in 1999, 1998,
and 1997, respectively. Gains on sale of domestic real estate were not material
in any of the three years ended December 31, 1999, 1998, and 1997. The Company
has approximately 15 parcels and rights-of-way remaining from its historic
railroad operations, many of which are of limited marketability. Future
domestic real estate revenues with respect to these historic properties may
increase as larger properties are sold. However, management believes that most
of the properties held for sale will be liquidated within the next one to two
years.
Earnings from Stater preferred stock investment during 1997 the Company
-----------------------------------------------
recorded $5,877,000 as Earnings from Stater preferred stock investment as a
result of Reading Australia's sale of its holdings of Stater Bros. Holdings
Series B Preferred Stock (the "Stater Preferred Stock"). In addition to income
of $4,490,000 from accrued dividends on the Stater Preferred Stock, 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).
"Interest and dividend" revenues (exclusive of those from the Stater
-------------------------------
Preferred Stock) were as follows in each of the three years ended December 31,
1999, 1998, and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ---------- ----------
<S> <C> <C>
$1,831,000 $4,519,000 $3,247,000
</TABLE>
Interest and dividend revenues decreased $2,688,000 primarily due to
decreasing investable balances as "Cash and cash equivalents" decreased from
$58,593,000 at December 31, 1998 to $13,277,000 at December 31, 1999 as the
Company's funds were deployed in its real estate and cinema development
projects. Interest and dividend revenues increased $1,272,000 or 39.2% in 1998
primarily as a result of the investment of the proceeds, $73,915,000, received
from the redemption of the Stater Preferred Stock in money market investments in
the third quarter of 1997. "Interest and dividend" income will continue to
decrease as the Company's balance of liquid funds are deployed in cinema and
entertainment center development projects during 2000.
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 and totaled the
amounts set forth below in each of the three years ended December 31, 1999,
inclusive of minority interest where applicable.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cine Vista $13,326,000 $14,897,000 $14,490,000
Domestic Cinemas/1/ 13,319,000 9,475,000 5,989,000
Australia 8,753,000 5,286,000 3,664,000
------------- ----------- -----------
$35,398,000 $29,658,000 $24,143,000
============= =========== ===========
</TABLE>
/1/ Includes $782,000 in RGT Theater Operating Expenses.
26
<PAGE>
CineVista's Theater Operating Expenses decreased $1,571,000 or 10.6%
--------------------------------------
between 1999 and 1998 as primarily as a result of a reduction in expenses which
vary directly as a percentage of Theater Revenues, including film rent and cost
of concessions which decreased approximately 1.4% as a percentage of Theater
Revenues in 1999 from 1998 levels due to the reduction in Theater Revenues in
1999. Other theater operating expenses decreased approximately $229,000
primarily due to decreased labor costs which decrease was partially offset by a
$167,000 increase in Deprecation and amortization expense resulting from the
inclusion of a full year of operation of a new eight screen cinema in 1999
offset partially as a result of a reduction in Amortization expense as the
Beneficial leases were written off during 1999 (See Asset impairment charge
below).
CineVista Theater Operating Expenses increased approximately $407,000 or
2.8% to $14,897,000 in 1998 from $14,490,000 in 1997 due primarily to increases
in expense items which vary in proportion to Theater Revenues, offset by a net
decrease in Theater Operating Expenses of $1,283,000 from the closing of eight
screens during the period offset by the effect of opening eight screens in June
1998.
Domestic Cinema Operating Expenses increased $3,844,000 in 1999 from
----------------------------------
$9,475,000 in 1998 to $13,319,000 due primarily to the increased number of
locations and screens in 1999 and the operations of the RGT (acquired in March
1999) in the current period. Theater Operating Expenses as a percentage of
Theater Revenues increased by approximately 1%. Operating margins should
improve as a full year of operations are recorded and results no longer include
initial non-recurring start up expenses.
Domestic Cinemas Theater Operating Expenses increased approximately
$3,486,000 or 58.2% to $9,475,000 in 1998 from $5,989,000 in 1997 primarily as a
result of the inclusion of a full year of operations of the Houston Angelika and
the St. Anthony and startup costs associated with the Tower Theater from
November through year end.
Reading Australia's Theater Operating Expenses increased $3,467,000 in 1999
----------------------------------------------
from $5,286,000 in 1998. Operating Expenses as a percentage of Theater Revenues
increased from 85.1% to 93.8% due primarily to the inclusion of an additional
$420,000 in start up expenses in 1999 due to the opening of new locations.
Operating margins are expected to improve as the new cinemas commence full
operations.
Theater Operating Expenses from Australian operations increased $1,622,000
to $5,286,000 in 1998 from $3,664,000 in 1997. The increase is primarily due to
the inclusion of a full year of operations from the Bundaberg and Mandurah
Cinemas. Theater Operating Expenses as a percentage of Theater Revenues
remained constant throughout the period.
"General and administrative" expense, without consideration of intercompany
-----------------------------------
management fees, were as follows in each of the years presented:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -----------
<S> <C> <C> <C>
CineVista $ 910,000 $ 1,292,000 $ 767,000
Domestic Cinemas 618,000* 597,000 645,000
Australia** 4,074,000 3,739,000 3,714,000
New Zealand*** 455,000 176,000 -0-
Other 6,397,000 4,453,000 4,611,000
------------- ------------- -----------
Total $12,456,000 $10,257,000 $9,737,000
============= ============= ===========
</TABLE>
* Includes $80,000 relating to live theater operations.
** $3,102,000 and $3,021,000 of such amounts relates to Reading
Australia's real estate development segment in 1999 and 1998,
respectively.
*** All amounts relate to Reading New Zealand's real estate development
segment.
27
<PAGE>
CineVista's General and administrative expense decreased $382,000 from
----------------------------------------------
$1,292,000 in 1998 to $910,000 in 1999, due primarily to the elimination of
$413,000 in charges relating to the closing of ten screens during 1998
(described below) offset in part by the write-off of $121,000 in capitalized
development costs in 1999 and increased professional fees of $160,000 in 1999.
CineVista's "General and administrative" expenses increased approximately
$525,000 or 68.4% to $1,292,000 in 1998 from $767,000 in 1997, primarily as a
result of $413,000 of charges related to the closing of four screens in the
first quarter of 1998, and a charge relating to the Company's election not to
rebuild a six screen cinema in the fourth quarter of 1998 which had been damaged
by Hurricane Georges. The first quarter charge was comprised of a $395,000 loss
on leasehold improvements, net of a reversal of a $230,000 provision for
deferred rent. The fourth quarter charge was comprised of a $336,000 loss on
leasehold improvements net of a $88,000 gain on the cancellation of a capital
lease obligation.
Domestic Cinemas General and administrative expense remained unchanged
---------------------------------------------------
between 1999 and 1998. Domestic Cinemas General and administrative expense in
1999 includes $80,000 of General and administrative expenses associated with the
RGT. "General and administrative" expenses associated with the Domestic Cinemas
include $448,000, $488,000, and $370,000 in 1999, 1998, and 1997, respectively,
of management fees paid 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 expense increased $335,000
------------------------------------------------------
in 1999 from $3,739,000 as Reading Australia expended its cinema and
entertainment development and operating activities. Significant components of
the increase include a $180,000 increase in property carrying costs and a
$140,000 increase in write-offs of capitalized project costs.
General and Administrative expenses from Australian operations of
$3,739,000 in 1998 were comparable to $3,714,000 in 1997, as decreased write-
offs of capitalized project costs related to project abandonments totaled
$755,000. The decrease was in part offset by increased payroll costs,
professional fees, office expenses, and carrying costs of land held for
development, associated with Reading Australia's continued expansion of cinema
operations and development activities.
Reading New Zealand's General and administrative expense increased from
--------------------------------------------------------
$176,000 in 1998 to $455,000 in 1999 as the Company's expanding real estate
development activities in 1999, and the inclusion of a full year of activities
in 1999 versus seven months in 1998. Substantially all such expenses are
comprised of professional fees (legal and accounting) which are not direct
project expenses.
Other General and administrative expense increased $1,944,000 from
----------------------------------------
$4,453,000 in 1998 to $6,397,000 in 1999. Significant components of the
increase include, an increase in General and administrative expenses allocated
to the Company of approximately $580,000, the write-off of $500,000 of expenses
relating to the acquisition of City Cinemas and Off Broadway Investments which
were charged to expense in 1999, a $300,000 increase in professional fees, and
an increase in salary and wages of approximately $300,000. During the fourth
quarter of 1999, the Company's Board of Directors reviewed the allocations as
between the Company and Craig of the costs and expenses of Messrs. Cotter and
Tompkins, and certain administrative personnel of Craig who perform services for
the Company. As a result of the review, the Company reimbursed Craig $580,000
with respect to such costs and expenses.
Other "General and Administrative" expenses decreased $158,000 or 3.4% to
$4,453,000 in 1998 from $4,611,000 in 1997, primarily from the inclusion in 1997
of bonus expense of $475,000 for a bonus paid to the Company's Chairman and a
$110,000 investment banking fee paid to the Company's former Corporate
Secretary, offset by an increase in 1998 in non-capitalized development costs
associated with its Domestic Cinema development activities of approximately
$140,000 and an increase in travel expenses of approximately $149,000 related to
increased Domestic Cinema development activities.
Asset Impairment and Restructuring Charges
- ------------------------------------------
During 1999, the Company recorded an Asset Impairment charge of
$34,294,000, of which $31,330,000 related to the Company's investment in
CineVista, $703,000 to certain Pennsylvania real estate, $136,000 relating to
two
28
<PAGE>
Domestic Cinemas and the balance, $2,125,000, to a 1996 investment in leased
computer equipment. (See Note 5 to the Consolidated Financial Statements
Continued elsewhere herein.) The Company also recorded a Restructuring Charge
of $889,000 upon the adoption of a plan by the Company's Board of Directors to
relocate the Company's corporate headquarters from Philadelphia to Los Angeles.
During 1999 the Company recorded an Asset impairment charge of $31,330,000
relating to CineVista. During the third quarter of 1999 the Company recorded an
Asset impairment loss of $14,022,000 relating to CineVista. At that time, the
Company wrote off the entire carrying value of the Plaza Cinemas, after a
determination by the owners of the Plaza Las Americas Mall (the "Mall") to award
a lease for a new cinema in the Mall to CineVista's principal competitor. In the
fourth quarter of 1999, the Company determined that it would commence efforts to
exit the Puerto Rico cinema market and wrote down the value of the CineVista
circuit to its estimated net realizable value resulting in an additional Asset
impairment loss of $17,308,000.
During 1999, the Company was advised by the partnership which manages the
Company's portfolio of leased equipment that the market for used computer
equipment had deteriorated as a result of Year 2000 created oversupply of used
computer equipment. In addition, a decision by a large lessee to upgrade
certain computer equipment, including equipment leased from the Company's
leasing portfolio, is also anticipated to have an effect upon the future value
of the portfolio. Based upon discussions with computer equipment vendors, the
Company determined that the estimated residual value of the equipment should be
reduced to zero and wrote off the entire carrying value, $2,125,000, in 1999.
The Company wrote off the carrying value of two of its domestic cinemas,
$136,000 (which amount is net of payments due from a landlord of $100,000), in
1999. In addition, after a review of the estimated market value of certain
domestic real estate held for sale the Company recorded a $203,000 impairment
charge related to such real estate. In addition, in conjunction with a proposal
to the City of Philadelphia (the "City") for the possible disposition of the
environmentally impaired North Viaduct property in return for a cash payment
from the Company to the City, the Company increased its environmental reserve by
$500,000 from $1,256,000 to $1,756,000.
During the fourth quarter of 1999, the Company adopted a plan and commenced
steps to relocate the Company's headquarters from Philadelphia to Los Angeles
and recorded a "Restructuring Charge" of $889,000 in 1999. The Restructuring
Charge includes a provision for a lease termination charges, duplicate office
and employee expenditures and employee severance obligations.
Equity in Earnings of Affiliates
- --------------------------------
"Equity in earnings of affiliates" include earnings from the Company's
investment in Citadel, BRI, the Whitehorse Property Group ("WPG") and two New
Zealand joint ventures (the "NZ JV's") in 1998, and one in 1999. The investment
in WPG and the NZ JV's were made in the fourth quarter of 1997 and second
quarter of 1998, respectively. Equity in earnings of affiliates in 1999 totaled
$2,539,000 and included $2,799,000 from the Company's 31.7% interest in Citadel,
$21,000 in income from the NZ JV's offset by a $172,000 loss from the Company's
investment in WPG and a $109,000 loss from Love, Janis LLC. BRI recorded a loss
of $322,000 in 1999, however the Company did not record any portion of such loss
as Equity in earnings of affiliate since the carrying value of such investment
was reduced to $0 in 1998 in the Company's Consolidated Balance Sheet.
Citadel's income of $9,487,000 in 1999 includes a $13,337,000 gain from the sale
of one of two rental office properties held by Citadel.
Equity in earnings of affiliate were $1,070,000 and $298,000 in 1998 and
1997, respectively. The earnings of $1,070,000 recorded in 1998 was comprised
primarily of $1,390,000 earnings realized from the Company's share of Citadel's
net income for the year, $5,688,000, offset by a $346,000 loss representing the
Company's share of BRI's net loss for the year and a reduction of the Company's
carrying value of its investment in BRI to $0 at December 31, 1998. In 1998,
Citadel's earnings included an income tax benefit of approximately $4,828,000
resulting principally from a reversal of previously reserved deferred tax assets
offset in part by a $990,000 loss representing Citadel's share of the loss of
certain agricultural partnerships which were accounted for under the equity
method (See Item 13 contained elsewhere herein). In 1997 Citadel's net income
totaled $1,575,000 and the Company realized Equity in earnings of affiliates of
$298,000. The Company's share in the results of WPG and BRI were not material
in 1997.
In early 2000, Reading Australia and its joint venture partner in WPG
agreed to sell the shopping center and are actively seeking buyers. No
assurances can be made that the shopping center can or will be sold at a price
acceptable
29
<PAGE>
to the Company and the Company's joint venture partner. The Company believes
that the estimated net realizable value from the sale of WPG and repayment of a
loan due to the Company from the joint venture partner, is approximately equal
to the carrying value of such assets $2,847,000, which amount has been
classified as "Property held for sale" in the Company's consolidated balance
sheet at December 31, 1999.
Other Income (Expense)
- ----------------------
Other income (expense) totaled $721,000, ($642,000) and $1,531,000 in the
three years ended December 31, 1999, 1998, and 1997, respectively. Other income
in 1999 include a $604,000 gain from an insurance settlement for damage incurred
by CineVista from a 1998 hurricane. CineVista continues to have a business
interruption claim and additional property damage claims pending which will
result in additional Other income if favorably decided. Other expense in 1998
is primarily comprised of losses on foreign currency derivative contracts. (See
"Currency Transactions" below.) The Company does not presently have any foreign
currency derivative contracts in effect.
In 1997 Other income included $615,000 which REI received from Stater in
return for REI's one-year non-compete agreement, $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, a
$220,000 gain from currency transactions net of miscellaneous expenses of
$54,000.
Minority Interest
- -----------------
Minority interest in income of $322,000 in 1999 includes a 16.67% minority
interest in a domestic cinema and a 25% interest in two of Reading Australia's
cinemas.
Minority interest in income of $343,000 in 1998 included a provision for
$306,000 representing a 16.67% minority interest in one of the Company's
Domestic cinema's income and a provision for $37,000 representing a 25% minority
interest in one of the Company's Australian cinema's income.
Minority interest in income of $196,000 in 1997 includes a provision for
$238,000 for the 16.67% minority interest in the above-referenced Domestic
Cinema's income less $42,000 representing the 25% minority interest in the
above-referenced Australian cinema's loss.
Income Tax Provision
- --------------------
Income tax expense in 1999 of $923,000, $986,000 in 1998 and $1,067,000 in
1997 primarily reflect accruals for foreign withholding taxes which will be paid
if certain intercompany loans are repaid, in addition to tax amounts for federal
alternative minimum tax ("AMT") and state income and franchise taxes.
Net (Loss) Income
- -----------------
As a result of the above Net (loss) income totaled ($41,182,000),
($2,406,000), and $2,955,000 in 1999, 1998 and 1997, respectively.
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.
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
30
<PAGE>
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 recorded a loss which totaled approximately
$670,000.
Liquidity and Capital Resources
Since the Company determined to become principally involved in the Beyond
the Home or real estate based segment of the entertainment industry in 1993, it
has funded its development activities principally from cash derived from the
disposition of its historic railroad assets and other operating interests. In
1996, in view of the substantial capital resources required to take advantage of
the opportunities available to it in this industry, the Company acquired assets
with a gross book value of $93,422,000 from a private placement of its equity
securities. This increased the Company's shareholders equity by approximately
$86,000,000. With the exception of a 50% interest in Reading Australia, all of
the acquired assets were converted to liquid funds by September 1997.
As a consequence of the Company's business plan for Australia and New
Zealand, the Company is carrying significantly more land (undeveloped land is
classified as "Property held for development" in the Company's Consolidated
Balance Sheet) than might be the case with a more mature cinema company. The
acquisition of these properties has required the commitment of significant sums.
Since most of the acquired properties are not currently income producing, the
financing of such assets is more difficult and more expensive than would be the
financing of cash flowing assets.
In late 1999 the Company determined that it would be in the best interest
of the Company and its shareholders to concentrate on Australia and New Zealand
real estate and cinema development activities on properties now owned by the
Company. Accordingly, in April 2000 the Company sold NAC a 50% interest in the
AFC and granted NAC two options to acquire the remaining Domestic Cinema assets
of the Company. (See Item 1. Business, General). In addition, the Company may
assign its rights to the City Cinemas Transaction to Citadel if such rights are
not acquired by NAC. Citadel is also considering the acquisition of the
Company's rights to the OBI Transaction. (See Item 1. Business, General and Note
2 to the Consolidated Financial Statements contained elsewhere herein.)
In recognition of the decision to deploy for the funds in Australia and New
Zealand, the Company commenced efforts to sell the Royal George Theatre, a live
theater which was to have been operated in conjunction with the three live
theaters to have been acquired in the OBI Transaction. The Company has also
determined that it will exit the Puerto Rico cinema market and has no additional
cinemas under development in that market. The Company presently has only one
Domestic Cinema under development and may ultimately sell its existing Domestic
Cinemas to NAC or Citadel.
At December 31, 1999, the Company had $4,500,000 of bank debt outstanding,
$3,000,000 under CineVista's line of credit and $1,500,000 under a property term
loan in New Zealand (See Note 10 to the Consolidated Financial Statements
included elsewhere herein.) In March 2000, Reading Australia entered into a
$16,350,000 line of credit (the "Australian Line of Credit") which line of
credit may, if additional bank participants are secured, be increased to
$49,000,000 (the "Increased Commitment"). The Australian Bank Loan will provide
Reading Australia with adequate funds to complete, in 2000, an entertainment
center development currently under construction in Sydney, and if the Increased
Commitment is secured, to complete a second planned entertainment center project
in the Melbourne area during 2001. All amounts outstanding under CineVista's
line of credit are due on December 31, 2000, as are amounts outstanding under
the New Zealand loan and Australian Bank Loan if the Increased Commitment is not
secured (in which case the Australian Bank Loan matures in December 2003).
In addition to deficit working capital at December 31, 1999, of
approximately $4,000,000 (including maturing bank debt of $4,500,000), the
Company has committed development expenditures relating to cinema and
entertainment development projects of approximately $50,000,000, $25,000,000 of
which are expected to be funded in 2000 and $25,000,000 to be funded thereafter
(not including potential obligations relating to the City Cinemas Transaction
and the OBI Transaction or the rights of the Company's affiliate, Citadel, as
the holder of the $7,000,000 of Series A Preferred Stock to require redemption
of such stock during a ninety day period commencing October 15, 2001 (see Note
15)), which amounts are expected to be funded in part by an Australian dollar
line of credit (the "Australian Line of Credit"). The Company does not
anticipate incurring additional development commitments in New Zealand or
Australia
31
<PAGE>
until additional financing is secured. CineVista is in violation of certain of
the loan covenants in its line of credit and is seeking a waiver of such
violations from the lender. If a waiver is not received, CineVista will be in
default of the terms of the line of credit and the lender could demand immediate
repayment of amounts due thereunder, which amounts totaled $3,000,000 on
December 31, 1999, and $4,250,000 on April 12, 2000. No assurances can be made
that the lender will waive the covenant violations. In April 2000, the Company
received a commitment for an eighteen month $7 million line of credit secured by
a pledge of certain Domestic Cinema assets and the Company's interest in Citadel
(the "Domestic Line of Credit"). However, as a result of the sale of AFC
Interest to NAC (see Note 19), the terms of the loan commitment will have to be
renegotiated. No assurances can be made that the lender will be willing to fund
the Company under revised terms satisfactory to the Company. Proceeds of the
Domestic Line of Credit were expected to be used to pay a portion of the
accumulated dividends under the Series B Preferred Stock (during 1999 REI did
not pay $3,575,000 in dividends on the Series B Preferred Stock, all of which is
held by Craig), pay purchase money debt of $1,180,000 due in May 2000 from the
purchase of the RGT and fund the development cost of one additional Domestic
Cinema. The Company anticipates acquiring additional financing to fund its
development obligations which are due in 2001. In New Zealand the Company has a
$2,800,000 property purchase mortgage and a $1,500,000 bank loan due in 2000.
Reading New Zealand is presently evaluating a bank proposal to refinance both of
these obligations and provide construction funding for an entertainment center
in Wellington. The Company does not anticipate commencement of construction of
new projects until financing has been arranged and may be required to arrange
alternative financing, sell assets, or bring in joint venture partners with
respect to certain of its projects if the Domestic Line of Credit cannot be
restructured, the covenant violation waivers are not received from CineVista's
lender and NAC or Citadel does not acquire the Company's remaining Domestic
Cinemas.
Commitments and Contingencies
- -----------------------------
NAC has been granted on option to acquire the Company's rights to the City
Cinemas Transaction. Citadel has expressed an interest in acquiring the
Company's rights to the City Cinemas Transaction (if not acquired by NAC) and
the OBI Transaction. If assignment of the City Cinemas Transaction is not
completed, and if the Company elects to effect the transaction, the Company will
be obligated to fund $32,500,000 in credit lines eighteen months from closing of
the City Cinemas Transaction. Further, if the OBI Transaction is not effected
through a stock purchase and the Company were to undertake the transaction,
under certain circumstances, the Company could be required to fund approximately
$9,900,000 at closing. The Company currently believes, based upon discussions
with NAC, Citadel and representatives of City Cinemas, that the assignment will
be completed and that the Company will have no further obligations with respect
to these transactions.
Reading Australia has guaranteed repayment of $4,200,000 of bank debt and
other obligations of a joint venture. (See Note 10 to the Consolidated Financial
Statements contained elsewhere herein.)
The Company's 1996 tax return is under review by the Internal Revenue
Service (the "Service"). While the Company believes its reporting position in
such period to be reasonable and the Service has not alleged any deficiencies,
no assurances can be made that the Company's tax reporting position will be
upheld.
At December 31, 1999, the Company had book assets of $138,496,000 and
short term bank debt of approximately $4,500,000. These assets include
approximately $31,624,000 in undeveloped land, which the Company believes to be
relatively liquid. While no assurances can be given, the Company believes that
it will be able to complete its build-out commitments for the year 2000. These
build-out commitments include the completion of the Company's Auburn
entertainment center in Australia, the build-out of certain tenant improvements
at its rental facilities in Australia, and the build-out of a Domestic Cinema in
Dallas, Texas.
In the event that funding cannot be secured, the Company may seek joint
partners for its entertainment center projects, and/or reduce its inventory of
land. The Company is currently actively marketing the Royal George Theatre, and
the joint venture which owns the Whitehorse Shopping Center is actively
marketing its interests in that retail complex.
The following summarizes the major sources and uses of cash funds in each
of the three years ended December 31, 1999, 1998 and 1997:
32
<PAGE>
1999: Cash and cash equivalent decreased $45,316,000 in 1999 from $58,593,000
- ----
in 1998 to $13,277,000 at December 31, 1999. Working capital decreased
$49,293,000 from $45,378,000 at December 31, 1998 to a deficit of $3,915,000 at
December 31,1999.
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 interests of $322,000) operating cash flow
(income before depreciation and amortization, corporate charges and asset
impairment and restructuring charges) totaled $312,000 in 1999. Other sources
of liquid funds in 1999 include $1,831,000 in Interest and dividend income, a
net increase in short term debt of $4,639,000, and "Real Estate" revenue of
$677,000.
In addition to the payment of operating expenses, the principal use of cash
funds included the payment of $455,000 of dividends on the Company's Series A
Convertible Preferred Stock, purchases of property and equipment of $37,139,000
($24,063,000 which related to Reading Australia, $5,623,000 which related to
CineVista, and $7,453,000 relating to the Domestic Cinemas), the investment of
$1,739,000 in Property held for development of ($1,642,000 relates to Reading
New Zealand and $97,000 relates to Reading Australia), the payment of $7,938,000
in purchase commitments related to New Zealand real estate development and
increases in current liabilities of $3,350,000.
1998: Unrestricted cash and cash equivalent decreased $34,247,000 in 1998 from
- ----
$92,840,000 in 1997 to $58,593,000 at December 31, 1998. Working capital
decreased $41,748,000 from $87,126,000 at December 31, 1997 to $45,378,000 at
December 31,1998.
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 $343,000) operating cash flow
(income before depreciation and amortization and corporate charges) totaled
$177,000 in 1998. Other sources of liquid funds in 1998 include $4,519,000 in
Interest and dividend income, a net increase in purchase commitments of
$4,550,000, and Real Estate revenue of $373,000.
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, purchases of property and equipment of $11,078,000
($1,772,000 which related to Reading Australia, $7,106,000 which related to
CineVista, and $2,200,000 relating to the Domestic Cinemas), the investment of
$12,445,000 in property held for development of ($2,645,000 relates to Reading
New Zealand and $9,800,000 relates to Reading Australia), the payment of
$1,370,000 relating to the acquisition of the Royal George Theatre, the payment
of $1,272,000 relating to a deposit and other costs associated with the Cinema
Transaction and the Theater Transaction, the investment of $4,290,000 by Reading
New Zealand in two joint ventures including a loan of $587,000 to a joint
venture partner with respect to property on which Reading New Zealand intends to
develop an entertainment center, and investments in common stock of $2,211,000
(See Note 4 to the Consolidated Financial statements contained elsewhere
herein).
1997: Unrestricted cash and cash equivalent increased $44,160,000 in 1997 from
- ----
$48,680,000 in 1996 to $92,840,000 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.)
33
<PAGE>
Effects on Inflation
The Company does not believe that inflation has a material effect upon its
existing operations.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for derivative Instruments
and Hedging Activities," ("SFAS 133"). SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and requires all derivatives to be recorded on the
balance sheet at fair value as either assets or liabilities depending on the
rights or obligations under the contract. SFAS 133 also establishes new
accounting methodologies for the following three classifications of hedges:
fair value, cash flow and net investment in foreign operations. Management
believes the adoption of SFAS 133 will not have a material impact on the
Company's financial position or results of operations.
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 7A. Quantitative and Qualitative Disclosure about Market Risk
The financial performance and results of operations of the Company may be
affected by changes in interest rates and currency exchange rates.
Historically the Company maintained most of its cash and cash equivalent
balances in Eurodollar time deposits (US dollar denominated deposits in banks
located outside of the United States) and short-term money market instruments
with original maturities of six months or less. Eurodollar time deposits are
not readily marketable and therefore are not subject to price risk due to
changes in interest rates, although the Company may lose the ability to realize
the benefit of increased interest income if interest rates were to rise. Other
money market investments are subject to price risk and will decline in value if
interest rates increase. Due to the short-term nature of such investments and
the small amount of the Company's cash and cash equivalents invested in such
instruments, a change of 1% in short-term interest rates would not have a
material effect on the Company's financial condition. The Company anticipates
expenditure of its remaining cash balances during 2000. Thereafter, the Company
anticipates funding its commitments with borrowed funds and cash flow. The
Company may, from time to time, elect to fix interest rates on borrowed funds,
however, no decision has been made at this time.
Approximately 61% and 13% of the company's net assets (assets less
liabilities) were invested in assets denominated in Australian dollars (Reading
Australia) and New Zealand dollars (Reading New Zealand), respectively, at
December 31, 1999 compared to 22% and 4% at December 31, 1998. The Company
anticipates expenditure of its remaining cash balances in 2000 in furtherance of
its development activities and has therefore converted portions of its cash
funds to Australian and New Zealand dollars. At December 31, 1999, $9,770,000
of the Company's $13,277,000 in Cash and cash equivalents was invested in
Australian and New Zealand dollars compared to $1,272,000 of the $58,593,000 in
Cash and cash equivalents for the prior year. Upon the expenditure of the
remaining cash balances, it is expected that funding for development
expenditures will be secured through bank borrowing. Such borrowing will
34
<PAGE>
be originated in the same currencies as the expenditures. Accordingly, unless
the Company elects to hedge its foreign exchange exposure, approximately 74% of
the Company's net assets (based upon the amount at December 31, 1999) will
continue to be invested in assets subject to exchange fluctuations between the
US and Australian and New Zealand dollars. At December 31, 1998 approximately
26% of the Company's net assets were invested in assets subject to currency
fluctuations. The Company has no current plan to hedge such exposure.
During 1999, the company recognized an unrealized foreign currency
translation gain of approximately $1,948,000 (included as a component of
comprehensive income in the Consolidated Statement of Shareholders' Equity
contained elsewhere herein) compared to an unrealized loss of $1,677,000 during
1998. The unrealized gain recognized in 1999 related primarily to an increase
in the value of the Australian and New Zealand dollars relative to the U.S.
dollar of approximately 6.7% and 1.3% between December 31, 1998 and December 31,
1999, respectively, and the corresponding effect upon the carrying value of
Reading Australia's and Reading New Zealand's assets. The unrealized loss
during 1998 related primarily to a decrease in the value of the Australian
dollar relative to the U.S. dollar of approximately 5.7% between December 31,
1997 and December 31, 1998, and the corresponding effect upon the carrying value
of Reading Australia's assets.
Since foreign dollar income is minimal as most of the Company's projects
are under development, the impact upon income from operations of fluctuations in
the relative value of the U.S., the Australian and New Zealand dollars was not
material in 1999, 1998 or 1997.
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.
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 2000 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 2000 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 2000 Annual Meeting of
Shareholders.
Item 13. Certain Relationships and Related Transactions
Management and Ownership Overlaps:
- ---------------------------------
There are significant cross ownerships between the Company, Craig, Citadel
and BRI as follows:
35
<PAGE>
Craig a publicly traded company listed on the New York Stock Exchange owns
Common Stock and the Series B Preferred Stock comprising approximately 78% of
the voting interest in REI and, assuming conversion of the Series B Preferred
Stock approximately 81% of the equity interest REI.
Craig and Reading each own stock in Citadel, a public traded company listed
on the American Stock Exchange. The Company currently owns approximately 31.7%
of the voting interests in Citadel. Craig currently owns approximately 17.3% of
the voting interests of Citadel directly, and on a consolidated basis with the
Company, approximately 49%. In addition, Citadel owns 70,000 shares of the
Series A Preferred Stock of REI, a 5% voting interest and, assuming conversion
of the Series B Preferred Stock into Common Stock, approximately a 7.6 % equity
interest in the Company. Citadel also has the Asset Put Option to put its
assets to REI in exchange for Common Stock. However, that option lapses 30 days
after the filing of this Report on Form 10K, and Citadel has advised the Company
that it does not intend to exercise this option.
BRI is a publicly held company, but is not listed on any exchange. Its
sole asset is a 40% interest in the Agricultural Partnerships, formed to hold
approximately 1,580 acres of agricultural land in Kern County, California. The
remaining 60% interests are held 40% by Citadel and 20% by Visalia, a limited
liability company owned by James J. Cotter and certain members of his family.
The Company currently owns approximately 33.4% of the equity interest in BRI.
Craig currently owns approximately 16.4% of the equity interest in BRI and, on a
consolidated basis with the Company, approximately 49.8% of such equity
interest. In addition, Cecelia Packing (a company owned by Mr. Cotter,
"Cecelia") and a trust for the benefit of one of Mr. Tompkins' children own
additional shares in BRI representing, when aggregated with the shares held by
the Company and Craig, more than a majority of the outstanding shares of BRI.
Farming was formed to provide farming services to the Agricultural
Partnerships and is owned 80% by Citadel and 20% by Visalia.
The Company, as a consequence of its ownership of both Citadel common stock
and BRI common stock, owns approximately 26% of the Agricultural Partnerships.
There are also substantial management overlaps between these companies, as
follows:
James J. Cotter, the principal stockholder of Craig, is the Chairman of the
Board of Directors of each of the Company, CC and CHC, and the Chief Executive
Officer of CHC. Mr. Cotter also serves as a managing director of each of the
Agricultural Partnerships and of Farming and is the managing member of Visalia
LLC.
S. Craig Tompkins, the Vice Chairman of the Board of Directors of the
Company is also a director and the President of CC and the Vice Chairman of the
Board and Secretary of CHC. Mr. Tompkins also serves as the President of
Citadel Agriculture Inc., a wholly owned subsidiary of CHC, and as a managing
director of each of the Agricultural Partnerships and Farming, and serves for
administrative convenience, as the assistant secretary of BRI and Visalia.
Andrzej Matyczynski, the Chief Administrative Officer of the Company is
also the Chief Financial Officer of each of CC and CHC.
Ellen Cotter, Vice President of Business Affairs of the Company and Acting
President of Reading Australia is a member of Visalia and the daughter of James
J. Cotter.
Robert Loeffler, a member of the Board of Directors of the Company, and the
Chairman of the Audit Committee of the Company, also serves as a director and as
the Chairman of the Audit Committee of each CC and CHC.
The Company, Craig and Citadel are currently working on a plan to
centralize all administrative functions for the three companies in Los Angeles.
Upon consummation of this centralization, it is contemplated that all general
and administrative personnel will be employees of Craig, and that the costs of
such personnel will be allocated between the three companies on an appropriate
basis, taking into account the amount of time spent by such personnel on the
business and affairs of the three companies. Following a review of the time
spent by Messrs. Cotter and Tompkins and certain administrative employees of
Craig, the Board of Directors of the Company determined it appropriate to
reimburse Craig in the amount of $580,000 with respect to services performed by
these individuals and administrative employees for the benefit of the Company.
There was no similar reimbursement with respect to 1998. In both 1998 and 1999
Messrs.
36
<PAGE>
Cotter and Tompkins received directly from the Company $150,000 in directors
fees and $180,000 as compensation, respectively. Also in 1998 and 1999, the
Company paid Citadel $410,000 and $185,000, respectively, for real estate
consulting services provided by that company.
BRI and the Agricultural Partnerships
- -------------------------------------
The Agricultural Partnerships use Farming to farm their properties. Farming
receives in consideration of its services reimbursement of its costs plus 5% of
the net revenues of the farming operations after picking, packing and hauling.
Farming, in turn, contracts with Cecelia for certain bookkeeping and
administrative services, for which it pays a fee of $6,000 per month. Cecelia
also packs fruit for the Agricultural Partnerships. The acquisition of the
properties owned by the Agricultural Partnerships 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. In December 1998, the
Partnerships suffered a freeze which destroyed the 1998-1999 crop. The
Agricultural Partnerships have no funds to repay the line of credit from Citadel
or fund the costs associated with production of a 1999-2000 crop and complete
the anticipated capital improvements other than to call upon the partners for
funding. BRI has no funds or resources with which to provide such funding,
other than to call upon its separate line of credit from Citadel. Since January
1, 1999, Citadel and Visalia have provided the funding required by the
Agricultural Partnerships on an 80/20 basis, but no assurances can be given
that Citadel and Visalia will continue to provide such funding. As of December
31, 1999, Citadel and Visalia had advanced $1,227,000 and $334,000,
respectively, to the Agricultural Partnerships. The Board of Directors and
executive officers of BRI are comprised of three Craig directors, including
Margaret Cotter, James Cotter's daughter and a member of Visalia.
City Cinema and OBI Transactions
- --------------------------------
The Angelika Film Center ("NY Angelika") is owned jointly by the Company
and Sutton Hill, a partnership affiliated with City Cinemas, a Manhattan based
cinema operator owned in equal parts by James J. Cotter and Michael Forman.
City Cinemas manages the NY Angelika and two other cinemas operated by the
Company pursuant to management agreements. Robert F. Smerling, President of the
Company, and Neil Sefferman, Vice President - Film of the Company, also serve in
the same positions with City Cinemas.
In December 1998, the Company and Sutton Hill entered into an Agreement in
Principle to lease and operate four cinemas and manage three other cinemas all
of which are located in Manhattan and which together constitute the City Cinemas
circuit. In addition the Agreement in Principle provides for the acquisition by
the Company of three live "Off Broadway" theaters also located in Manhattan.
The Conflicts Committee of the Board of Directors (the "Conflicts Committee"),
comprised entirely of directors independent of Messrs. Cotter and Forman,
reviewed and negotiated the transaction. Consummation of the transaction is
contingent upon, among other things, receipt of fairness opinions relating to
the transactions and approval of REI's shareholders of the issuance of Common
Stock for the acquisition of the "Off Broadway Theaters."
Consistent with its determination to reduce its operations in the United
States, the Company is currently in negotiations with Citadel and Sutton Hill
regarding the assumption of the Company's rights and obligations under the
Agreement in Principle. Based upon discussions with Citadel and with
representatives of Sutton Hill, the Company believes that Citadel will likely
assume such rights and obligations. The Company has advised Citadel that if it
completes the City Cinemas Circuit and the "Off Broadway" theaters it will give
to Citadel a right of first negotiation to acquire the remainder of the
Company's domestic cinema assets
It is anticipated that the Manhattan "Off Broadway" theaters, as well as
another live theater owned by the Company will be booked and managed by Union
Square Management, Inc., a live theater management company specializing in the
booking and management of "Off Broadway" style live theaters. Margaret Cotter,
daughter of Mr. James J. Cotter, is a Senior Vice President with Union Square
Management, Inc. In December 1998 the Company agreed to guarantee a $100,000
bank loan to the principal shareholder of Union Square Management, Inc.
The 96 Reorganization and Stock Transactions
- --------------------------------------------
The Stock Transactions (See Item 1. Business) involved the issuance of
Common Stock and Series B Preferred Stock to Craig in return for certain assets
owned by Craig. The Company is a subsidiary of Craig. At the time that the
37
<PAGE>
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.
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 the NY Angelika's revenues.
Loans to Officers:
- ------------------
In 1997 the Company loaned Robert Smerling, President, $70,000. The non-
interest bearing loan is payable upon demand.
38
<PAGE>
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
<TABLE>
<CAPTION>
(a)(1) Financial Statements PAGE
----
<S> <C>
Consolidated Balance Sheets as of December 31, 1999 and December 31, 1998. F-1 -- F-2
Consolidated Statements of Operations for the years ended December 31, 1999, F-3
December 31, 1998 and December 31, 1997.
Consolidated Statements of Cash Flows for the years ended December 31, 1999, F-4
December 31, 1998 and December 31, 1997.
Consolidated Statements of Shareholders' Equity for the years ended F-5
December 31, 1999, December 31, 1998 and December 31, 1997.
Notes to Consolidated Financial Statements. F-6 -- F-31
Report of Independent Auditors - Deloitte & Touche LLP. F-32
Report of Independent Auditors - Ernst & Young, LLP. F-33
</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.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) 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.)
2.2 Agreement and Plan of Merger between Reading Entertainment, Inc. (a
Delaware corporation) and Reading Entertainment, Inc. (a Nevada
corporation) dated November 19, 1999. (Incorporated by reference to
Exhibit C to the Definitive Proxy Statement on Schedule 14A of
Reading Entertainment, Inc. dated November 22, 1999.)
3(i) Articles of Incorporation of Reading Entertainment, Inc.
3(ii) By-laws of Reading Entertainment, Inc.
4.1 Certificate of Designation of Reading Entertainment, Inc. setting
forth the voting powers, designations, preferences, limitations,
restrictions and relative rights of Series A Voting Cumulative
Convertible Preferred Stock and Series B Voting Cumulative Preferred
Stock. (Incorporated by reference to Exhibit A-2 to the Definitive
Proxy Statement on Schedule 14A of Reading Entertainment, Inc. dated
November 22, 1999.)
39
<PAGE>
10.1* Reading Company 1992 Nonqualified Stock Option Plan, as amended.
(Incorporated by reference to Exhibit 10.1 to Reading Entertainment,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.)
10.2* 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 Reading Entertainment,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.)
10.3* 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.)
10.4* Master Management Agreement between Angelika Holding, Inc. and City
Cinemas Corporation dated November 26, 1997. (Incorporated by
reference to Exhibit 10.29 to Reading Entertainment, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997.)
10.5 Agreement by and among Public Transport Corporation, Reading
Properties Pty Ltd, and Mackie Group Pty Ltd for development at the
Frankston Railway Station dated May 28, 1998. (Incorporated by
reference to Exhibit 10.1 to Reading Entertainment, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.)
10.6 Agreement in Principle between Reading Entertainment, Inc. and City
Cinemas dated December 2, 1998. (Incorporated by reference to
Exhibit 10.23 to Reading Entertainment, Inc.'s Annual Report of Form
10-K for the year ended December 31, 1998.)
10.7* Employment Agreement by and between Craig Corporation and Andrejz
Matyczynski.
10.8 Letter agreement dated April 5, 2000, by and between National Auto
Credit, Inc. and Reading Entertainment, Inc. and FA, Inc. to acquire
additional one-third membership interest in Angelika Film Centers,
LLC.
10.9 Letter agreement dated April 5, 2000, by and between National Auto
Credit, Inc. and Reading Entertainment, Inc. to acquire the
remaining domestic cinema assets of Reading Entertainment, Inc.
10.10 Purchase agreement dated as of April 5, 2000, among National Auto
Credit, Inc., National Cinemas, Inc., FA. Inc., and Reading
Entertainment, Inc.
21 (i) List of Subsidiaries of Reading Entertainment, Inc.
23.1 Consent of Independent Auditors - Deloitte & Touche LLP.
23.2 Consent of Independent Auditors - Ernst & Young, LLP.
27 Financial Data Schedule for the year ended December 31, 1999.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the reporting period.
(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.
40
<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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James J. Cotter April 13, 2000
- --------------------------- ----------------
James J. Cotter Chairman and Director
(Principal Executive Officer)
/s/ S. Craig Tompkins April 13, 2000
- --------------------------- ----------------
S. Craig Tompkins Vice Chairman and Director
/s/ James A. Wunderle April 13, 2000
- --------------------------- ----------------
James A. Wunderle Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer,
Principal Accounting Officer)
/s/ Scott A. Braly April 13, 2000
- --------------------------- ----------------
Scott A. Braly Director
/s/ Robert M. Loeffler April 13, 2000
- --------------------------- ----------------
Robert M. Loeffler Director
/s/ Kenneth S. McCormick April 13, 2000
- --------------------------- ----------------
Kenneth S. McCormick Director
</TABLE>
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
December 31, December 31,
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 13,277 $ 58,593
Amounts receivable 409 575
Restricted cash 948 904
Inventories 316 236
Prepayments and other current assets 931 532
- -----------------------------------------------------------------------------------------------------------------------------
Total current assets 15,881 60,840
- -----------------------------------------------------------------------------------------------------------------------------
Due from affiliate 1,000 1,000
Investments in unconsolidated affiliates 13,098 13,345
Net investment in leased equipment - 2,125
Property held for sale 5,740 -
Property held for development 31,624 32,949
Property and equipment - net 57,854 32,534
Note receivable from joint venture partners 1,549 2,357
Other assets 1,775 3,729
Intangible assets:
Beneficial leases - net of accumulated amortization of $4,111
in 1998 - 12,797
Cost in excess of assets acquired - net of accumulated
amortization of $2,062 in 1999 and $1,426 in 1998 9,975 10,611
- -----------------------------------------------------------------------------------------------------------------------------
121,615 111,447
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $138,496 $172,287
=============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-1
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
December 31, December 31,
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 3,131 $ 3,031
Accrued taxes 631 418
Accrued property costs and other 4,355 1,734
Film rent payable 1,718 1,347
Notes payable and short-term debt 8,617 743
Purchase commitments - 8,066
Other liabilities 497 123
Accrued restructuring costs 847 -
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 19,796 15,462
- -----------------------------------------------------------------------------------------------------------------------------
Notes payable 1,035 920
Other liabilities 5,918 4,606
- -----------------------------------------------------------------------------------------------------------------------------
Total long term liabilities 6,953 5,526
- -----------------------------------------------------------------------------------------------------------------------------
Minority interests 2,064 1,927
Reading Entertainment Convertible Redeemable Series A Preferred Stock, par value $.001 7,000 7,000
per share, stated value $7,000; Authorized, issued and outstanding - 70,000 shares
Shareholders' Equity
Reading Entertainment Series B Preferred Stock, par value $.001 per share,
stated value $55,000; Authorized, issued and outstanding - 550,000 shares 1 1
Reading Entertainment preferred stock, par value $.001 per share:
Authorized -9,380,000 shares: None issued - -
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 138,637 138,637
Accumulated (deficit) retained earnings (31,910) 9,727
Accumulated other comprehensive (loss) (4,052) (6,000)
- -----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 102,683 142,372
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders equity $138,496 $172,287
=============================================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-2
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except shares and per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Theater:
Admissions $ 27,604 $ 24,792 $ 19,978
Concessions 8,450 7,625 6,078
Advertising and other 1,757 1,139 928
Real estate 677 373 180
Earnings from Stater preferred stock investment - - 5,877
Interest and dividends 1,831 4,519 3,247
- ---------------------------------------------------------------------------------------------------------------------
40,319 38,448 36,288
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Theater costs 29,644 24,370 20,081
Theater concession costs 1,930 1,653 1,296
Depreciation and amortization 3,923 3,673 2,785
General and administrative 12,456 10,257 9,737
Asset impairment and restructuring charges 35,183 - -
- ---------------------------------------------------------------------------------------------------------------------
83,136 39,953 33,899
- ---------------------------------------------------------------------------------------------------------------------
(Loss) income from operations (42,817) (1,505) 2,389
Equity in earnings of affiliates 2,539 1,070 298
Other (expense) income, net 721 (642) 1,531
Interest expense 380 - -
- ---------------------------------------------------------------------------------------------------------------------
(Loss) income before minority interests and
income taxes (39,937) (1,077) 4,218
Minority interests 322 343 196
- ---------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes (40,259) (1,420) 4,022
Income taxes 923 986 1,067
- ---------------------------------------------------------------------------------------------------------------------
Net (loss) income (41,182) (2,406) 2,955
Less: Preferred stock dividends and amortization
of asset put option (4,335) (4,322) (4,309)
- ---------------------------------------------------------------------------------------------------------------------
Net (loss) applicable to common
shareholders ($45,517) ($6,728) ($1,354)
=====================================================================================================================
Basic and diluted loss per share ($6.11) ($0.90) ($0.18)
=====================================================================================================================
</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,
- ---------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income ($41,182) ($2,406) $ 2,955
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Depreciation 2,544 2,084 1,240
Amortization 1,379 1,589 1,545
Deferred rent expense 395 217 406
Write off of capitalized development costs 385 542 1,308
Loss (gain) on disposal of assets 273 634 (15)
Asset impairment and restructuring charges 35,183 - -
Equity in income of affiliates (2,539) (1,070) (298)
Minority interests 322 343 196
Preferred stock redemption premium - - (5,877)
Changes in operating assets and liabilities:
Decrease in amounts receivable 292 636 1,854
Increase in inventories (65) (45) (50)
(Increase) decrease in prepayments and other current assets (424) 742 858
Increase (decrease) in accounts payable and accrued expenses 1,525 (644) (3,347)
Increase (decrease) in film rent payable 357 (284) 545
Increase (decrease) in other liabilities (19) (321) 654
Other, net 595 - (10)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in (provided by) operating activities (979) 2,017 1,964
- ---------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property held for development (1,739) (12,445) (5,106)
Purchase of property and equipment, net (37,179) (11,078) (14,760)
Decrease in purchase committment (7,938) (3,397) -
Decrease (increase) in restricted cash 44 3,664 (1,421)
Investment in joint ventures (164) (2,601) (1,850)
Loans to joint venture partners (111) (594) (2,021)
Investment in Citadel common stock - (2,211) -
Investment in Royal George Theatre (105) (1,369) -
Investment in New York Live Theaters and City Cinemas - (1,332) -
Proceeds from redemption of Stater Preferred Stock investment - - 73,915
Purchase of Domestic Cinema - - (229)
Increase in long term deposits - - (76)
- ---------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (47,192) (31,363) 48,452
- ---------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from short-term debt 4,639 601 -
Payments of equity issuance costs - - (366)
Minority interest distributions (470) (417) (371)
Decrease in notes payable (739) (766) (1,500)
Payment of preferred stock dividends (455) (4,030) (4,030)
Proceeds from minority partner of Australian joint venture 278 - 93
Proceeds from Angelika, Houston landlord - - 280
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 3,253 (4,612) (5,894
- ---------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (398) (289) (362)
- ---------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (45,316) (34,247) 44,160
Cash and cash equivalents at beginning of year 58,593 92,840 48,680
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 13,277 $ 58,593 $ 92,840
=====================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1999, 1998, 1997
(in thousands, except shares)
<TABLE>
<CAPTION>
Common Stock Series B Preferred Stock Other
-------------------------------------------------------------
Shares Amount Shares Amount Capital
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 7,449,364 $7 550,000 $1 $138,594
Net income (including comprehensive loss)
Issuance costs of Stock Transactions 43
Reading Entertainment Series A and B
preferred dividends declared
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 7,449,364 7 550,000 1 138,637
Net loss (including comprehensive loss)
Reading Entertainment Series A and B
preferred dividends declared
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 7,449,364 7 550,000 1 138,637
Net loss (including comprehensive income)
Reading Entertainment Series A
preferred dividends declared
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 7,449,364 $7 550,000 $1 $138,637
====================================================================================================================================
<CAPTION>
Accumulated
(deficit) Accumulated Total
retained Comprehensive Shareholder's
earnings Income (Loss) Equity
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1997 $17,238 $ 114 $155,954
Net income (including comprehensive loss) 2,955 (4,437) (1,482)
Issuance costs of Stock Transactions 43
Reading Entertainment Series A and B
preferred dividends declared (4,030)/1/ (4,030)
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 16,163 (4,323) 150,485
Net loss (including comprehensive loss) (2,406) (1,677) (4,083)
Reading Entertainment Series A and B
preferred dividends declared (4,030)/1/ (4,030)
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 9,727 (6,000) 142,372
Net loss (including comprehensive income) (41,182) 1,948 (39,234)
Reading Entertainment Series A
preferred dividends declared (455)/2/ (455)
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 ($31,910) ($4,052) $102,683
===================================================================================================================
</TABLE>
(1) Represents dividends per share of $6.50 for Reading Entertainment Series A
Preferred Stock and dividends per share of $6.50 for Reading Entertainment
Series B Preferred Stock.
(2) Represents dividends per share of $6.50 for Reading Entertainment Series A
Preferred Stock
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1999, 1998, 1997
(in thousands, except shares)
<TABLE>
<CAPTION>
Common Stock Series B Preferred Stock Other
-------------------------------------------------
Shares Amount Shares Amount Capital
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 7,449,364 $7 550,000 $1 $138,594
Net income
Foreign currency translation
adjustments
Comprehensive Income
Issuance costs of Stock Transactions 43
Reading Entertainment Series A and B
preferred dividends declared
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 7,449,364 7 550,000 1 138,637
Net loss
Foreign currency translation
adjustments
Comprehensive Income
Reading Entertainment Series A and B
preferred dividends declared
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 7,449,364 7 550,000 1 138,637
Net loss
Foreign currency translation
adjustments
Comprehensive Income
Reading Entertainment Series A
preferred dividends declared
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 7,449,364 $7 550,000 $1 $138,637
=====================================================================================================================
<CAPTION>
Accumulated Accumulated
(deficit) or Other Total
retained Comprehensive Shareholder's
earnings Income (Loss) Equity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1997 $ 17,238 $ 114 $155,954
Net income 2,955 2,955
Foreign currency translation
adjustments (4,437) (4,437)
------------
Comprehensive Income (1,482)
------------
Issuance costs of Stock Transactions 43
Reading Entertainment Series A and B
preferred dividends declared (4,030) /(1)/ (4,030)
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 16,163 (4,323) 150,485
Net loss (2,406) (2,406)
Foreign currency translation
adjustments (1,677) (1,677)
------------
Comprehensive Income (4,083)
------------
Reading Entertainment Series A and B
preferred dividends declared (4,030) /(1)/ (4,030)
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 9,727 (6,000) 142,372
Net loss (41,182) (41,182)
Foreign currency translation
adjustments 1,948 1,948
------------
Comprehensive Income (39,234)
------------
Reading Entertainment Series A
preferred dividends declared (455) /(2)/ (455)
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 ($31,910) ($4,052) $102,683
=====================================================================================================================
</TABLE>
(1) Represents dividends per share of $6.50 for Reading Entertainment Series A
Preferred Stock and dividends per share of $6.50 for Reading Entertainment
Series B Preferred Stock.
(2) Represents dividends per share of $6.50 for Reading Entertainment Series A
Preferred Stock
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
In December 1999, Reading Entertainment Inc., a Delaware corporation, was
merged into a newly formed wholly-owned subsidiary, Reading Entertainment, Inc.,
a Nevada corporation. The purpose of the merger was to change the domicile of
the corporation from Delaware to Nevada. The Nevada corporation was the
surviving corporation and the corporation's operations, assets, liabilities and
capitalization were not changed as a result of the merger. As used herein "REI"
or "Reading Entertainment" shall refer to either the Delaware or Nevada
corporation and REI, together with its subsidiaries and predecessors as,
"Reading" or the "Company."
The Company is in the business of developing and operating multiplex
cinemas and developing, and eventually operating, entertainment centers in
Australia and New Zealand. The Company also operates cinemas in Puerto Rico and
the United States. Reading's cinemas are owned through various subsidiaries and
operate 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"); through Reading Entertainment
Australia Pty. Limited (collectively with its subsidiaries referred to herein as
"Reading Australia") under the Reading Cinemas name in Australia (the "Australia
Circuit"); and through a 50/50 joint venture in New Zealand under the Berkeley
Cinemas name. The Company's entertainment center development activities in
Australia and New Zealand are conducted through Reading Australia and through
affiliates of Reading New Zealand Ltd. (collectively referred to herein as
"Reading New Zealand"), respectively. The Company operates in two business
segments, cinema operations and real estate development. (See Note 3.)
The Company is also a participant in two real estate joint ventures in
Philadelphia, Pennsylvania and holds certain property for sale located in
Philadelphia and Australia and owns certain 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 profits. The Company's investments in 20% to 50%-
owned companies, in which it has the ability to exercise significant influence
over operating and financial policies, are accounted for on the equity method.
Investments in other companies are carried at cost.
Accounting Principles: The consolidated financial statements of Reading
Entertainment, Inc. have been prepared in accordance with generally accepted
accounting principles in the United States of America.
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: 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, interest-bearing bank deposits, federal agency securities and other
short-term money market instruments.
F-6
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
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.
Property held for development: Property held for development consists of
land (including land acquisition costs) acquired for the potential development
of multiplex cinemas and/or entertainment centers and held either for such
purposes or for other development purposes. Property held for development is
carried at cost and, at the time that construction of the related multiplex
cinema and/or entertainment center commences, is transferred to Property and
equipment and accounted for as Construction-in-progress.
Property and Equipment: Property and equipment are carried at cost.
Depreciation of buildings, leasehold improvements and equipment are 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:
Building and Improvements 20-40 years
Equipment 3-15 years
Furniture and Fixtures 3-7 years
Leasehold Improvements 10-20 years
Construction in Progress and Property Development Costs: Construction in
progress and property development costs are comprised of direct costs associated
with the development of potential cinemas (whether for purchase or lease) or
entertainment center locations. Startup costs and other costs not directly
related to the acquisition of long term assets are expensed as incurred.
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
cinema leases used in CineVista's operations (in 1998), and cost in excess of
net assets acquired in the acquisition of the Angelika Film Center, a six-screen
cinema located in the Soho area of Manhattan (the "NY Angelika") and the
acquisition of 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 acquired 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 four 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 were amortized on a straight-line basis over a period of 19.5
years. The remaining beneficial leases were written off in 1999 in conjunction
with asset impairment charges recorded in 1999 (See Note 5).
F-7
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
Advertising Costs: The Company expenses the costs of advertising as
incurred. Advertising expense was $1,518,000, $1,005,000 and $670,000 for the
years ended December 31, 1999, 1998, and 1997 respectively.
Impairment of Long Lived Assets: The Company reviews long-lived assets,
including intangibles, for impairment if events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable.
If the sum of the estimated future cash flows, undiscounted and without interest
charges, is less than the carrying amount of the asset, an impairment loss is
recognized on the amount by which the carrying value of the asset exceeds its
estimated fair value. The fair value of assets is determined as either the
expected selling price less selling costs or the present value of the estimated
future cash flows. (See Note 5.)
Translation of Non-U.S. Currency Amounts: The financial statements and
transactions of Reading Australia's and Reading New Zealand's cinema and real
estate operations are maintained in their functional currency (Australian and
New Zealand dollars, respectively) 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 their functional currency 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
"Accumulated other comprehensive income," a component of Shareholders equity.
Loss Per Share: Net loss applicable to common stock shareholders reflects
the reduction for dividends declared or accumulated 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 Note 15.)
Basic loss per share (Reading Entertainment common stock (the "Common
Stock")) 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 loss per share were 7,449,364 in 1999, 1998 and 1997.
Diluted income (loss) per share is calculated by dividing net income (loss) 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-Based Compensation: The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and complies with the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). Under APB 25, compensation cost is recognized over the vesting period
based on the difference, if any, on the date of grant between the fair value of
the Company's stock and the amount an employee must pay to acquire the stock.
Recent Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.133,
"Accounting for Derivative Instruments and Hedging Activities,"("SFAS 133").
SFAS 133 is effective for fiscal years beginning after June 15, 2000 and
requires all derivatives to be recorded on the balance sheet at fair value as
either assets or liabilities depending on the rights or obligations under the
contract. SFAS 133 also establishes new accounting methodologies for the
following three classifications of hedges: fair value, cash flow and net
investment in foreign operations. Management believes the adoption of SFAS 133
will not have a material impact on the Company's financial position or results
of operations.
F-8
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
Reclassification: Certain amounts in previously issued financial
statements have been reclassified to conform with the current presentation.
NOTE 2 -- RELATED PARTY TRANSACTIONS
Management and Ownership Overlaps:
- ---------------------------------
There are significant cross ownerships between the Company, Craig
Corporation, Citadel Holding Corporation and Big 4 Ranch, Inc., as follows:
Craig Corporation ("CC" and collectively with its predecessors and wholly-
owned subsidiaries "Craig"), a publicly traded company listed on the New York
Stock Exchange, owns Common Stock and Convertible Preferred Stock comprising
approximately 78% of the voting interest in REI and, assuming conversion of the
Convertible Preferred Stock, approximately 81% of the equity interest REI.
Craig and Reading each own stock in Citadel Holding Corporation, a publicly
traded company listed on the American Stock Exchange ("CHC" and collectively
with its consolidated subsidiaries "Citadel"). The Company currently owns
approximately 31.7% of the voting interests in CHC. Craig owns approximately
17.3% of the voting interests of CHC directly, and on a consolidated basis with
the Company, approximately 49%. In addition, Citadel owns 70,000 shares of the
Series A Preferred Stock of REI, a 5% voting interest and, assuming conversion
of the Convertible Preferred Stock into Common Stock, approximately a 7.6%
equity interest in the Company. Citadel also has the Asset Put Option to put
its assets to REI in exchange for Common Stock. However, that option lapses 30
days after the filing of this Report on Form 10K, and Citadel has advised the
Company that it does not intend to exercise this option.
Big 4 Ranch, Inc. ("BRI") is a publicly held company, but is not listed on
any exchange. Its sole asset is a 40% interest in three agricultural
partnerships (the "Agricultural Partnerships"), formed to hold approximately
1,580 acres of agricultural land in Kern County, California. The remaining 60%
interests are held 40% by Citadel and 20% by Visalia, LLC., a limited liability
company owned by James J. Cotter and certain members of his family ("Visalia").
The Company currently owns approximately 33.4% of the equity interest in BRI.
Craig currently owns approximately 16.4% of the equity interest in BRI and, on a
consolidated basis with the Company, approximately 49.8% of such equity
interest. In addition, Cecelia Packing (a company owned by Mr. Cotter,
"Cecelia") and a trust for the benefit of one of Mr. Tompkins' children own
additional shares in BRI representing, when aggregated with the shares held by
the Company and Craig, more than a majority of the outstanding shares of BRI.
Big 4 Farming, LLC. (Farming") was formed to provide farming services to
the Agricultural Partnerships and is owned 80% by Citadel and 20% by Visalia.
The Company, as a consequence of its ownership of both CHC common stock and
BRI common stock, owns approximately 26% of the Agricultural Partnerships.
There are also substantial management overlaps between these companies, as
follows:
James J. Cotter, the principal stockholder of Craig, is the Chairman of the
Board of Directors of each of the Company, CC and CHC, and the Chief Executive
Officer of Citadel. Mr. Cotter also serves as a managing director of each of
the Agricultural Partnerships and of Farming and is the managing member of
Visalia LLC.
F-9
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
S. Craig Tompkins, the Vice Chairman of the Board of Directors of the
Company is also a director and the President of CC and the Vice Chairman of the
Board and Secretary of CHC. Mr. Tompkins also serves as the President of
Citadel Agriculture Inc., a wholly-owned subsidiary of CHC, and as a managing
director of each of the Agricultural Partnerships and Farming, and serves for
administrative convenience, as the assistant secretary of BRI and Visalia.
Andrzej Matyczynski, the Chief Administrative Officer of the Company is
also the Chief Financial Officer of Craig and Citadel.
Ellen Cotter, Vice President of Business Affairs of the Company and Acting
President of Reading Australia is a member of Visalia and is the daughter of
James J. Cotter.
Robert Loeffler, a member of the Board of Directors of the Company, and the
Chairman of the Audit Committee of the Company, also serves as a director and as
the Chairman of the Audit Committee of CC and CHC.
The Company, Craig and Citadel are currently working on a plan to
centralize all administrative functions for the three companies in Los Angeles.
Upon consummation of this centralization, it is contemplated that all general
and administrative personnel will be employees of Craig, and that the costs of
such personnel will be allocated between the three companies on an appropriate
basis, taking into account the amount of time spent by such personnel on the
business and affairs of the three companies. Following a review of the time
spent by Messrs. Cotter and Tompkins and certain administrative employees of
Craig, the Board of Directors of the Company determined it appropriate to
reimburse Craig in the amount of $580,000 with respect to services performed by
these individuals and administrative employees for the benefit of the Company.
There was no similar reimbursement with respect to 1998. In both 1998 and 1999
Messrs. Cotter and Tompkins received directly from the Company $150,000 in
directors fees and $180,000 as compensation, respectively. Also in 1998 and
1999, the Company paid Citadel $410,000 and $185,000, respectively, for real
estate consulting services provided by that company.
BRI and the Agricultural Partnerships
- -------------------------------------
The Agricultural Partnerships use Farming to farm their properties.
Farming receives in consideration of its services reimbursement of its costs
plus 5% of the net revenues of the farming operations after picking, packing and
hauling. Farming, in turn, contracts with Cecelia for certain bookkeeping and
administrative services, for which it pays a fee of $6,000 per month. Cecelia
also packs fruit for the Agricultural Partnerships. The acquisition of the
properties owned by the Agricultural Partnerships 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. In December 1998 the
Partnerships suffered a freeze which destroyed the 1998-1999 crop. The
Agricultural Partnerships have no funds to repay the line of credit from Citadel
or fund the costs associated with production of a 1999-2000 crop and complete
the anticipated capital improvements other than to call upon the partners for
funding. BRI has no funds or resources with which to provide such funding,
other than to call upon its separate line of credit from Citadel. Since January
1, 1999, Citadel and Visalia have provided the funding required by the
Agricultural Partnerships on an 80/20 basis, but no assurances can be given that
Citadel and Visalia will continue to provide such funding. As of December 31,
1999, Citadel and Visalia had advanced $1,227,000 and $334,000,respectively, to
the Agricultural Partnerships. The Board of Directors and executive officers of
BRI are comprised of three Craig directors, including Margaret Cotter, James
Cotter's daughter and a member of Visalia.
F-10
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
City Cinema and OBI Transactions
- --------------------------------
The Angelika Film Center LLC ("AFC") is owned jointly by the Company and
Sutton Hill Associates ("Sutton Hill"), a partnership affiliated with City
Cinemas, a Manhattan based cinema operator owned in equal parts by James J.
Cotter and Michael Forman. City Cinemas manages the AFC and two other cinemas
operated by the Company pursuant to management agreements. Robert F. Smerling,
President of the Company, and Neil Sefferman, Vice President - Film of the
Company, also serve in the same positions with City Cinemas.
In December 1998 the Company and Sutton Hill entered into an Agreement in
Principle to lease and operate four cinemas and manage three other cinemas all
of which are located in Manhattan and which together constitute the City Cinemas
circuit (the "City Cinemas Transaction"). In addition the Agreement in
Principle provides for the acquisition by the Company of three live "Off
Broadway" theaters also located in Manhattan (the "OBI Transaction"). The
Conflicts Committee of the Board of Directors (the "Conflicts Committee"),
comprised entirely of directors independent of Messrs. Cotter and Forman,
reviewed and negotiated the transaction. Consummation of the transaction is
contingent upon, among other things, receipt of fairness opinions relating to
the transactions and approval of REI's shareholders of the issuance of Common
Stock for the OBI Transaction.
Consistent with its determination to reduce its operations in the United
States, the Company is currently in negotiations with Citadel and Sutton Hill
regarding the assumption of the Company's rights and obligations under the
Agreement in Principle as it relates to the OBI Transaction and, if not
consummated by National Auto Credit, Inc. ("NAC") (see Note 19), the City
Cinemas Transaction. Based upon discussions with Citadel and with
representatives of Sutton Hill, the Company believes that Citadel will likely
assume such rights and obligations under such circumstances.
It is anticipated that the Manhattan "Off Broadway" theaters, as well as
another live theater owned by the Company will be booked and managed by Union
Square Management, Inc., a live theater management company specializing in the
booking and management of "Off Broadway" style live theaters if the OBI
Transaction is consummated by the Company. Margaret Cotter, daughter of Mr.
James J. Cotter, is a Senior Vice President with Union Square Management, Inc.
In December 1998 the Company agreed to guarantee a $100,000 bank loan to the
principal shareholder of Union Square Management, Inc.
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 the NY Angelika's revenues.
The Company paid City Cinemas $449,000, $488,000 and $370,000 pursuant to these
management agreements in 1999, 1998 and 1997, respectively.
Loans to Officers:
- ------------------
In 1997 the Company loaned Robert Smerling, President, $70,000. The non-
interest bearing loan is payable upon demand.
F-11
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
NOTE 3 -- BUSINESS SEGMENTS AND GEOGRAPHIC AREA INFORMATION
The Company operates multiplex cinemas in the United States, Puerto Rico,
Australia and New Zealand and is developing cinemas and cinema based
entertainment centers in Australia and New Zealand. The Company operates in two
business segments, cinema development and operations, and real estate
development (entertainment center development activities).
The Company evaluates performance and allocates resources based on several
factors, of which the primary financial measure is operating income (loss) from
operations. Accounting policies of the business segments are the same as those
described in the summary of significant accounting polices. (See Note 1.)
Business segment assets are the owned or allocated assets used in each
geographic or functional area.
The corporate component of income (loss) from operations includes corporate
general and administrative expenses, interest and dividends, and other income.
Corporate assets consist of corporate cash, property and equipment, certain
intangibles and the Company's investment in Citadel.
F-12
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
The following sets forth certain information concerning the Company's two
segments, real estate development (which amounts do not include domestic real
estate revenues) and cinema operations:
<TABLE>
<CAPTION>
Real Estate Cinema Corporate and
1999 Development/1/,/2/ Operations/3/ Eliminations/4/ Consolidated
- ---- ------------------ ----------------- ----------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 297 $ 37,811 $ 2,211 $ 40,319
Operating (loss) Income (3,389) (31,503) (7,925) (42,817)
Identifiable assets 61,962 50,969 25,565 138,496
Depreciation and Amortization 128 3,773 22 3,923
Capital expenditures/5/6/ 9,569 29,547 15 39,131
</TABLE>
<TABLE>
<CAPTION>
Real Estate Cinema Corporate and
1998 Development/1/,/2/ Operations/3/ Eliminations/4/ Consolidated
- ---- ------------------ ----------------- ----------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 0 $33,556 $ 4,892 $ 38,448
Operating (loss) Income (3,197) 1,307 385 (1,505)
Identifiable assets 42,125 57,247 72,915 172,287
Depreciation and Amortization 0 3,598 75 3,673
Capital expenditures 12,445 11,011 67 23,523
</TABLE>
<TABLE>
<CAPTION>
Real Estate Cinema Corporate and
1997 Development/1/,/2/ Operations/3/ Eliminations/4/ Consolidated
- ---- ------------------ ----------------- ----------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 0 $26,984 $ 9,304 $ 36,288
Operating (loss) Income (3,198) 916 4,671 2,389
Identifiable assets 18,910 53,525 105,577 178,012
Depreciation and Amortization 0 2,735 50 2,785
Capital expenditures/5/ 7,586 12,213 67 19,866
</TABLE>
_____________________
/1/ Real estate capital expenditures are net of "Purchase commitments" of
$8,066,000 and $3,516,000 in 1998 and 1997, respectively.
/2/ Includes investments in unconsolidated affiliates of $2,847,000,
$3,608,000 and $1,608,000 at December 31, 1999, 1998 and 1997, respectively.
/3/ Includes investments in unconsolidated affiliates of $2,139,951,
$1,578,000 and $0 at December 31, 1999, 1998 and 1997, respectively.
/4/ Includes investments in unconsolidated affiliates of $10,958,000,
$8,159,000 and $4,903,000 at December 31, 1999, 1998 and 1997, respectively.
/5/ Includes purchases of property held for development of $31,623,000,
$12,445,000 and $7,382,000 at December 31, 1999, 1998 and 1997 respectively.
/6/ Capital expenditures have not been reduced by proceeds of $213,000
received from disposals during 1999.
F-13
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
The following table indicates the relative amounts of revenues from
operations and property, plant and equipment of the Company by geographic area
during the three-year period ended December 31, 1999. The Company has no export
revenues.
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Revenues:
Puerto Rico..................... $12,974 $16,210 $15,186
Mainland United States.......... 15,504 11,134 8,158
Australia....................... 9,333 6,212 3,820
Property, plant and equipment:
Puerto Rico..................... 3,006 18,389 13,391
Mainland United States/1/....... 17,681 8,125 6,372
Australia/2/.................... 56,831 29,420 20,549
New Zealand/3/.................. 14,853 9,549 0
</TABLE>
NOTE 4 -- ACQUISITION AND DEVELOPMENT ACTIVITIES
Live Theater Acquisition
------------------------
On March 18, 1999, the Company acquired a four auditorium live theater
complex in Chicago which operates under the name "The Royal George Theatre" (the
"RGT") for approximately $2,800,000 of which $1,180,000 of the purchase price
was financed with a purchase money mortgage due in May 2000. The balance of the
purchase price was paid in cash.
Domestic Cinema Activity
------------------------
The Company acquired the six screen NY Angelika in August 1996. Since then
the Company has acquired or built five cinemas increasing the domestic screen
count to forty-two. All domestic cinemas are leased.
New York Acquisition - In December 1998, the Company entered into an
Agreement in Principle with Sutton Hill (See Note 3) to lease and operate the
cinemas constituting the City Cinemas Circuit located in Manhattan and to
acquire three live "Off Broadway" theaters also located in Manhattan. Pursuant
to the Cinemas Transaction, the Company was to also acquire the 16.7% interest
in the AFC not already owned by it and certain management rights with respect to
three other cinemas located in Manhattan. In April 2000, the Company sold NAC a
50% interest in the AFC (See Note 19) and options to acquire the Company's
rights to the City Cinemas Transaction.
- ---------------
/1/ Includes property held for sale of $2,893,000 at December 31, 1999.
/2/ Includes property held for development of $23,702,000, $23,400,000 and
$14,714,000 at December 31, 1999, 1998 and 1997, respectively.
/3/ Includes property held for development of $7,922,000 and $9,549,000 at
December 31, 1999 and 1998, respectively.
F-14
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
The Company has offered Citadel the opportunity to take over its position
under the OBI Transaction and the City Cinemas Transaction under certain
circumstances (See Notes 3 and 19). Citadel has advised the Company that it is
interested in taking over the Company's position under these agreements, if
certain modifications to the transactions can be negotiated, and has delegated
authority to review the transactions and to negotiate such modifications
directly with Sutton Hill to a committee comprised of independent directors.
It is contemplated that, if NAC or Citadel consummates a transaction with
Sutton Hill, the Company will receive at the closing the $1,000,000 deposit made
by the Company under its agreement with Sutton Hill.
In connection with the cinema transaction, the Company made a deposit of
$1,000,000 to Sutton Hill. Such deposit has been recorded as "Due from
affiliate" in the Consolidated Balance Sheets at December 31, 1999 and 1998.
Reading Australia
-----------------
In 1995, the Company commenced cinema development activities in Australia.
Since formation, Reading Australia has opened ten cinemas (inclusive of one
entertainment center, the cinema portion of which opened in December 1999),
seven in leased facilities, two in owned facilities and one at a managed
facility, with a total of 71 screens (including an eight screen cinema which
opened in March 2000). In 2000, Reading Australia also anticipates opening an
entertainment center with a ten screen cinema as well as the entertainment
center portion of a recently completed facility. Reading Australia has acquired
rights to, or fee interests in, land on which it intends to develop an
additional two entertainment centers.
Puerto Rico
-----------
The Company acquired CineVista effective in 1994. Since that time the
Company has opened four new cinemas with a total of thirty-four screens.
CineVista opened a new twelve screen cinema in December 1999 and an eight-screen
cinema in June 1998 which replaced a six-screen cinema at the same location.
New Zealand
-----------
During 1998, Reading New Zealand Limited (together with its subsidiaries,
"Reading New Zealand") entered into two 50/50 joint ventures, one of which
currently operates thirteen screens in three locations.
The second joint venture owned a parcel of land in Wellington on which the
Company intends to develop an entertainment center featuring a twelve screen
multiplex cinema. In July 1999 Reading New Zealand acquired 100% ownership of
the property. In addition, in 1998 Reading New Zealand acquired ownership of a
property adjacent to the development site and a multiple story parking garage.
Also in 1998, Reading New Zealand acquired a fifteen acre site in a suburb of
Auckland on which it intends to develop a cinema and an entertainment center.
NOTE 5 -- ASSET IMPAIRMENT AND RESTRUCTURING CHARGES
During 1999, the Company recorded an Asset impairment charge of
$34,294,000. Of this amount, $31,330,000 related to the Company's investment in
CineVista, $703,000 to certain Philadelphia real estate, $136,000 to two
domestic cinemas and the balance, $2,125,000, to a 1996 investment in leased
computer equipment. (See Note 7.) The
F-15
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
Company also recorded a Restructuring charge of $889,000 during the fourth
quarter of 1999 upon the adoption of a plan to relocate the Company's corporate
headquarters from Philadelphia to Los Angeles.
During the third quarter of 1999 CineVista recorded an Asset impairment
charge of $14,022,000 after CineVista wrote off the entire carrying value of the
eight screen cinema it operates at the Plaza Las Americas Mall (the "Plaza
Cinema"). Prior thereto, CineVista believed it had reached agreement with the
landlord as to the terms of the lease with respect to the opening of a new ten
screen cinema at a second location in the Mall. However, CineVista was advised
by the landlord that the landlord had entered into a lease for the new cinema
complex with a third party. In light of the anticipated adverse change in the
Plaza Cinemas' business prospects upon the opening of a competing state-of-the
art cinema in the same mall, the Company evaluated the recoverability of its
investment in the Plaza Cinema and determined that the entire carrying value of
the Plaza Cinemas, $13,884,000 ($11,838,000 "Beneficial lease", $1,438,000
"Leasehold improvements" and $1,009,000 "Machinery and equipment" net of certain
related liabilities of $401,000) was impaired and should be written off. Also
in the third quarter of 1999, CineVista determined to close a four screen leased
cinema and recorded an Asset impairment charge of $138,000 equal to the
difference of the carrying value of the cinema and the appraised value of the
leasehold interest.
During the fourth quarter of 1999 the Company decided it should initiate
efforts to exit the Puerto Rico market and therefore wrote down the carrying
value of CineVista to its estimated net realizable value resulting in an
additional Asset impairment charge of $17,308,000. The estimated net realizable
value of CineVista was determined by computing the net present value of
CineVista's estimated future cash flows. The discount rate utilized was
determined based upon an analysis of comparable sale transactions. In
conjunction with the Asset impairment charge, the Company wrote off the
remaining Beneficial lease, $273,000, and created a $17,034,000 Asset
impairment reserve which is a component of Property and equipment. (See Note
8.)
In the fourth quarter of 1999, the Company was advised by the partnership
which manages the Company's portfolio of leased equipment that the market for
used computer equipment had deteriorated as a result of Year 2000 created
oversupply of used computer equipment. In addition, a decision by a large
lessee under one of the "User Leases" (as defined in Note 7) to upgrade certain
computer equipment, including equipment leased from the Company, is also
anticipated to have an effect upon the estimated residual value of the
portfolio. Based upon discussions with computer equipment vendors, the Company
determined that the estimated residual value of the equipment should be reduced
to $0 and wrote off the entire carrying value, $2,125,000, in the fourth quarter
of 1999.
The Company wrote off the entire carrying value of two of its domestic
cinemas, $136,000 (which amount is net of $100,000 which is to be paid to the
Company by a landlord), in the fourth quarter of 1999. In addition, after a
review of the estimated market value of certain domestic real estate held for
sale, the Company recorded a $203,000 impairment charge related to such real
estate. In addition, in conjunction with a proposal to the City of Philadelphia
for the possible disposition of the environmentally impaired North Viaduct
property in return for a cash payment from the Company to the City, the Company
increased its environmental reserve by $500,000, from $1,256,000 to $1,756,000.
(See Note 13).
During the fourth quarter of 1999, the Company adopted a plan and commenced
steps to relocate the Company's headquarters from Philadelphia to Los Angeles
and recorded a Restructuring charge of $889,000 in 1999. The Restructuring
charge includes a provision for lease termination charges, duplicate office and
employee expenditures and employee severance obligations.
F-16
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
NOTE 6 -- PROPERTY HELD FOR SALE
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 located on land leased pursuant to a long-term lease (the
"Land Lease"). In early 2000, Reading Australia and Burstone agreed to sell the
shopping center and are actively seeking buyers. No assurances can be made that
the shopping center can or will be sold at a price acceptable to the Company and
Burstone. The Company believes that the estimated net realizable value from the
sale of WPG and repayment of the partner loan described below, is approximately
equal to the carrying value of such assets $2,847,000, which amount has been
classified as Property held for sale in the Company's consolidated balance sheet
at December 31, 1999.
WPG incurred a net loss of approximately $194,000 during 1999 as compared
to net earnings of $50,000 in 1998. The Company recorded a loss of $172,000 in
1999 and income of $25,000 in 1998 which are included in Equity in earnings of
affiliates. During 1999 the Company recognized 100% of WPG's loss in excess of
WPG's retained earnings to prevent the aggregate carrying value of WPG from
exceeding WPG's total net asset value. WPG's assets and liabilities totaled
$11,100,000 and $8,200,000, at December 31, 1999. The Company has guaranteed
the repayment of 50% of a secured bank loan which is owed by WPG and deferred
rent and related charges pursuant to the Land Lease. The principal outstanding
on the loan totaled approximately $3,700,000 and the deferred rent totaled
$500,000 at December 31,1999, resulting in a guarantee by the Company of
approximately $4,200,000. The bank loan originally was due in June 1999. The
lender has agreed to extend the maturity of the loan on a month to month basis
pending a sale of WPG. No assurances can be made that the bank loan will
continue to be available to WPG.
Royal George Theatre
--------------------
In early 2000, in order to maximize capital available for the Reading
Australia's and Reading New Zealand's development activities, the Company
determined that it would sell the RGT. Accordingly, $2,893,000, the Company's
net carrying value of the RGT, which the Company believes is less than the
estimated net realizable value (based upon an appraisal of the property), has
been classified as Property held for sale in the Consolidated Balance Sheet at
December 31, 1999. The Company recognized revenues of $1,165,000 and Income
before taxes and interest of $303,000 from the RGT in 1999.
NOTE 7 -- INVESTMENTS
Citadel Holding Corporation
---------------------------
In 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%. In September 1998 the Company
acquired an additional 549,200 shares of Citadel common stock at a price of
$3.875 per share. After giving effect to this transaction, the Company owns
2,113,673 shares of common stock of Citadel representing an ownership interest
of approximately 31.7%. The Company accounts for its investment in the Citadel
common stock by the equity method. Citadel's net earnings in 1999 were
$9,487,000 and the Company has recorded its share of such earnings, $2,799,000,
in the Consolidated Statement of Operations as Equity in earnings of affiliate.
The carrying value of the Company's investment
F-17
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
at December 31, 1999 of $10,958,000 is included in Investments in unconsolidated
affiliates in the Consolidated Balance Sheet and is less than the Company's
underlying equity in the net assets of Citadel plus a $1,998,000 loan receivable
from Craig held by Citadel which amount is deducted from Citadel's Shareholders
equity for financial reporting purposes as disclosed in Citadel's December 31,
1999 Annual Report on Form 10-K. The closing price of Citadel's common stock on
the American Stock Exchange at December 31, 1999 was $3 7/16 per share.
Citadel's assets and liabilities totaled $47,206,000 and $13,723,000,
respectively, as of December 31, 1999.
Big 4 Ranch, Inc.
----------------
In December 1997, Citadel capitalized a wholly owned subsidiary, BRI, with
a cash contribution of $1,200,000 and distributed 100% of the shares of BRI to
Citadel's common shareholders. The Company received 1,564,473 shares or 23.4%
of BRI. In September 1998, the Company acquired 661,700 additional shares
increasing its interest to 2,226,173 shares of common stock of BRI, an ownership
interest of approximately 33.4%. The carrying value of the Company's interest
in BRI was reduced to $0 in 1998. Accordingly, the Company did not recognize
any share of BRI's $322,000 net loss in 1999. The Company recorded its share
of BRI's 1998 net loss of $346,000 in the Consolidated Statement of Operations
as Equity in earning of affiliates in 1998. BRI had negative assets at December
31, 1999. The Company has no obligation to fund BRI's operating losses.
New Zealand Joint Ventures
--------------------------
During the second quarter of 1998, Reading New Zealand entered into a 50/50
joint venture, with a cinema operator in New Zealand (the "NZ JV"). At December
31, 1999, the Company's aggregate investment in the joint venture totaled
$2,100,000. This amount is reflected in the December 31, 1999 Consolidated
Balance Sheet under Investments in unconsolidated affiliates. In connection
with the joint venture, the Company has made a loan to the joint venture of
$1,200,000 in order to finance a portion of the acquisition price of two
multiplex cinemas and the underlying property acquisition and construction costs
of a cinema which the joint venture developed.
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 was reflected at its net cost, $2,125,000, in the
Consolidated Balance Sheet at December 31, 1998 as "Net investment in leased
equipment." In 1999 the Company determined that the asset was impaired and
wrote off the total carrying value of the equipment, $2,125,000, in conjunction
with an Asset impairment charge. (See Note 5.)
Love Janis, LLC
---------------
During the third quarter of 1999, the Company invested $109,000 to acquire
a 25% interest in a live theater production of the play Love, Janis which played
in the RGT. The play ran from August through November 1999 and
F-18
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
was closed. The Company wrote off the investment of $109,000 in Love Janis LLC
and included such loss in Equity in earnings of affiliates for the year ended
December 31, 1999. James J. Cotter and Michael Forman (see Note 2) were
investors in Love Janis LLC.
NOTE 8 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
-------- --------
<S> <C> <C>
Land* $ 3,015 $ 378
Buildings 13,258 1,858
Leasehold improvements 29,539 20,522
Equipment 24,200 8,792
Construction-in-progress and property development costs 11,137 5,714
-------- --------
81,149 37,264
Less: Accumulated depreciation (6,261) (4,730)
Provision for Asset Impairment of CineVista (17,034) 0
-------- --------
$ 57,854 $32,534
======== ========
</TABLE>
*Includes land associated with owned cinema properties. Does not include
land held for development, which is included in "Property held for development"
in the Consolidated Balance Sheets.
NOTE 9 -- LEASE AGREEMENTS AND 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 $5,274,000, $4,670,000 and $4,184,000 in
1999, 1998 and 1997, respectively. In 1999, 1998 and 1997, contingent rental
expense under operating leases totaled $336,000, $134,000 and $25,000,
respectively.
CineVista and the Domestic Cinemas conduct their operations in leased
premises. Seven of Reading Australia's nine operating multiplexes are in leased
facilities. The Company's cinema leases have remaining terms inclusive of
options of 10 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. All leases are accounted for as operating
leases.
F-19
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
Future minimum lease payments by year and in the aggregate, under
noncancellable operating leases consist of the following at December 31, 1999.
The Company has no leases which require capitalization.
<TABLE>
<CAPTION>
Operating
Leases
-----------
<S> <C>
2000.............................. $ 6,511
2001.............................. 6,853
2002.............................. 6,808
2003.............................. 6,143
2004.............................. 6,229
Thereafter........................ 92,563
----------
Total net minimum lease payments $125,107
==========
</TABLE>
In addition to deficit working capital at December 31, 1999 of
approximately $4,000,000 (including maturing bank debt of $4,500,000), the
Company has committed development expenditures relating to cinema and
entertainment development projects of approximately $50,000,000, $25,000,000 of
which are expected to be funded in 2000 and $25,000,000 to be funded thereafter
(not including potential obligations relating to the City Cinemas Transaction
and the OBI Transaction or the rights of the Company's affiliate, Citadel, as
the holder of the $7,000,000 of Series A Preferred Stock to require redemption
of such stock during a ninety day period commencing October 15, 2001 (see Note
15)), which amounts are expected to be funded in part by an Australian dollar
line of credit (the "Australian Line of Credit"). The Company does not
anticipate incurring additional development commitments in New Zealand or
Australia until additional financing is secured. CineVista is in violation of
certain of the loan covenants in its line of credit and is seeking a waiver of
such violations from the lender. If a waiver is not received, CineVista will be
in default of the terms of the line of credit and the lender could demand
immediate repayment of amounts due thereunder, which amounts totaled $3,000,000
on December 31, 1999, and $4,250,000 on April 12, 2000. No assurances can be
made that the lender will waive the covenant violations. In April 2000, the
Company received a commitment for an eighteen month $7 million line of credit
secured by a pledge of certain Domestic Cinema assets and the Company's interest
in Citadel (the "Domestic Line of Credit"). However, as a result of the sale of
AFC Interest to NAC (see Note 19), the terms of the loan commitment will have to
be renegotiated. No assurances can be made that the lender will be willing to
fund the Company under revised terms satisfactory to the Company. Proceeds of
the Domestic Line of Credit were expected to be used to pay a portion of the
accumulated dividends under the Series B Preferred Stock (during 1999 REI did
not pay $3,575,000 in dividends on the Series B Preferred Stock, all of which is
held by Craig), pay purchase money debt of $1,180,000 due in May 2000 from the
purchase of the RGT and fund the development cost of one additional Domestic
Cinema. The Company anticipates acquiring additional financing to fund its
development obligations which are due in 2001. In New Zealand the Company has
a $2,800,000 property purchase mortgage and a $1,500,000 bank loan due in 2000.
Reading New Zealand is presently evaluating a bank proposal to refinance both of
these obligations and provide construction funding for an entertainment center
in Wellington. The Company does not anticipate commencement of construction of
new projects until financing has been arranged and may be required to arrange
alternative financing, sell assets, or bring in joint venture partners with
respect to certain of its projects if the Domestic Line of Credit cannot be
restructured, the covenant violation waivers are not received from CineVista's
lender and NAC or Citadel does not acquire the Company's remaining Domestic
Cinemas.
The OBI Transaction contemplates the acquisition of certain live theater
assets, in exchange for stock. However, under certain circumstances, the Company
could be required to fund the OBI Transaction with a cash payment of
approximately $9,900,000. Citadel is presently considering the acquisition of
the Company's rights to the OBI
F-20
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
Transaction and accordingly, the Company believes it unlikely that the
transaction will be consummated by the Company.
Under the terms of the joint venture agreement with WPG (see Note 5), the
Company has guaranteed approximately $3,700,000 of WPG's debt and Land Lease
obligations.
The City of Philadelphia (the "City") has asserted that the Company's North
Viaduct property requires environmental decontamination and that the Company's
share of any such remediation cost will aggregate approximately $3,500,000. The
Company presently is in discussions with the City involving a possible
conveyance of the property and believes that reserves related to the North
Viaduct are adequate. (See Note 5.)
The Company's 1996 tax return is under review by the Internal Revenue
Service (the "Service"). While the Company believes its reporting position in
such period to be reasonable and the Service has not alleged any deficiencies,
no assurances can be made that the Company's tax reporting position will be
upheld.
NOTE 10 -- BANK CREDIT FACILITIES
CineVista has a $5 million line of credit (the Line of Credit") which
expires December 31, 2000. Under the terms of the Line of Credit, CineVista may
borrow up to $5,000,000 until June 30, 2000, $4,650,000 through September 30 and
$4,300,000 until December 31, 2000, when all amounts outstanding under the Line
of Credit are due and payable. As security for the loan, CineVista has pledged
substantially all of its assets. At December 31, 1999, $3,000,000 was
outstanding under the Line of Credit. The provisions of the Line of Credit
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 thereunder 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. In accordance with the provisions of the Line of Credit,
CineVista is required to pay a commitment fee on the unused commitment equal to
1/2 of 1%. CineVista is in violation of certain of the loan covenants in the
Line of Credit and is seeking a waiver of such violations from the lender. If a
waiver is not received, CineVista will be in default of the terms of the Line of
Credit and the lender could demand immediate repayment of amounts due under the
Line of Credit, which amounts totaled $4,250,000 on April 12, 2000. No
assurances can be made that the lender will waive the covenant violations.
In March 2000, Reading Australia entered into the Australian Line of Credit
with a major bank which provides for borrowings of up to approximately
$15,000,000 ($16,350,000 less an interest reserve of $1,350,000) for the
construction of an entertainment center and cinema in Sydney. The Australian
Line of Credit contemplates an increase in the commitment amount to
approximately $49,000,000 (the "Expanded Commitment") if additional banks elect
to participate in the credit agreement. Under the Expanded Commitment, the term
of the credit facility will be extended from December 31, 2000 to December 31,
2003 providing funding for the construction of a proposed entertainment center
in Melbourne. No assurances can be made that additional participants will be
found. The Australian Line of Credit Agreement is secured by a pledge of
substantially all of Reading Australia's assets and those of its 100% owned
subsidiaries and requires Reading Australia to maintain various financial
covenants, restricts dividends and limits additional borrowings. Reading
Australia is required to pay a commitment fee of .60% on the commitment amount.
In April 2000, the Company received a commitment for the Domestic Line of
Credit, an eighteen month $7,000,000 million line of credit secured by a pledge
of certain Domestic Cinema assets and the Company's interest in Citadel.
However, also in April 2000, the Company sold a portion of its interest in the
AFC (See Note 19). Such
F-21
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
interest was to be included as collateral for the Domestic Line of Credit and
the terms of such commitment will therefore have to be renegotiated. No
assurances can be given that the lender will agree to terms satisfactory to the
Company.
Reading New Zealand has a term loan in the amount of approximately
$1,500,000 secured by a property in Wellington. The term loan matures in
December 2000 and the Company is presently evaluating several proposals for
refinancing such debt.
NOTE 11 -- STOCK OPTION PLANS
As of December 31, 1999, the Company had options outstanding under two
stock option plans: the 1992 Non-qualified Stock Option Plan (the "1992 Plan")
(amended in 1997) and the 1997 Equity Incentive Plan (the "1997 Plan"). Each
plan was approved by shareholders in its year of adoption.
The 1992 Plan reserves 500,000 shares for grant and the 1997 Plan reserves
200,000 shares for grant. The exercise price, term and other conditions
applicable to each grant of options under the Company's two plans are generally
determined at the time of grant by the Compensation Committee of the Board of
Directors and may vary with each option grant. Generally, options granted under
both plans vest on the anniversary of the date of grant in four equal, annual
installments, have exercise prices equal to or greater than 100% of the fair
market value of the underlying shares on the date of grant and expire ten years
from the date of grant.
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 Options"). The Cotter Options are divided into three groups: 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 (the "Basic
Options"); 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 (the "Convertible Preferred Options"); and 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 (the "Asset Put Options").
(See Note15.) All shares granted under the Cotter Options have an exercise
price of $12.80 per share.
Changes in the number of option shares available under the Plans are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- ----------------------------- ---------------------------
Weighted Average Weighted Average Weighted Average
1982 Plan: Options Exercise Price Options Exercise Price Options Exercise Price
- --------- --------------------------- ----------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 5,000 $12.50
Canceled (5,000) $12.50
Expired 0
---------------------------
Outstanding at end of period 0 0
---------------------------
</TABLE>
F-22
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- ----------------------------- ---------------------------
Weighted Average Weighted Average Weighted Average
Options Exercise Price Options Exercise Price Options Exercise Price
--------------------------- ----------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
1992 Plan:
- ---------
Outstanding at beginning of year 360,232 $13.76 360,232 $13.76 342,732 $14.00
Canceled/1/ (15,000) $12.80 0 (55,000) $14.00
Granted/1/ 70,000 $ 6.34 0 72,500 $12.81
--------------------------- ----------------------------- ---------------------------
Outstanding at the end of year 415,232 $12.54 360,232 $13.76 360,232 $13.76
--------------------------- ----------------------------- ---------------------------
1997 Plan:
- ---------
Outstanding at beginning of year 147,000 $12.82 152,000 $12.82
Canceled (20,000) $12.88 (5,000) $12.80
Granted 0 0 152,000 $12.82
--------------------------- ----------------------------- ---------------------------
Outstanding at the end of year 127,000 $12.81 147,000 $12.82 152,000 $12.82
--------------------------- ----------------------------- ---------------------------
Cotter Option/2/:
- ----------------
Outstanding at beginning of year 110,000 $12.80 110,000 $12.80
Canceled 0 0
Granted 0 0 110,000 $12.80
--------------------------- ----------------------------- ---------------------------
Outstanding at the end of year 110,000 $12.80 110,000 $12.80 110,000 $12.80
--------------------------- ----------------------------- ---------------------------
Total
- -----
Outstanding at Year End 637,232 $12.64 617,232 $13.37 622,232 $13.36
=========================== ============================= ===========================
Exercisable at Year End 453,357 $13.42 386,732 $13.70 310,232 $13.91
=========================== ============================= ===========================
</TABLE>
The weighted-average remaining contractual life of all options outstanding
at December 31, 1999 was 4.79 years.
The Company applies Accounting Principles Board Opinion No. 25, the
intrinsic value method, in accounting for the compensation expense of its stock
option plans. Under the intrinsic value method, no compensation expense is
recognized for stock option awards granted at or above fair market value.
Effective January 1, 1996, SFAS No. 123, "Accounting for Stock-Based
Compensation", encouraged adoption of a fair value based method for valuing the
cost of stock option grants. SFAS No. 123 allows companies to continue to
employ APB No. 25, but requires disclosure of 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 in each of the
years that a company grants stock options. The Company granted options in 1999
and 1997; no options were granted in 1998. In computing the pro forma effect of
the grants of stock options granted 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 employing the weighted average
assumptions in the following 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-23
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- --------
<S> <C> <C> <C>
Stock Option Exercise Price $ 6.34 n/a $ 12.81
Risk Free Interest Rate 5.61% n/a 6.71%
Expected Dividend Yield 0.00% n/a 0.00%
Expected Option Life 5 n/a 5
Expected Volatility 25.01% n/a 22.31%
Fair Value of Options $ 2.11 n/a $ 1.79
</TABLE>
The pro forma effect of the issuance of these options would have been to
increase the "Net loss applicable to common shareholders" by $164,000 ($.02 per
share), $258,000 ($.03 per share) and $264,000 ($.04 per share) to $45,681,000
($6.13 per share), $6,986,000 ($.94 per share) and $1,618,000 ($.22 per share)
in 1999, 1998 and 1997, respectively. 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
options are predicated.
NOTE 12 -- INCOME TAXES
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income (loss) before income taxes consists of the
following components:
United States ($215) $ 4,917 $ 7,349
Foreign (40,044) (6,337) (3,327)
---------- ---------- ----------
Total ($40,259) ($1,420) $ 4,022
========== ========== ==========
</TABLE>
Significant components of the provisions for income taxes attributable to
operations are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Income taxes (benefit):
Current:
United States $ 0 $ 122 $ 146
Foreign 817 786 698
State and local 106 78 223
------- -------- --------
Total 923 986 1,067
Increase (decrease) in valuation allowance from
net operating loss carryforwards 0 0 0
------- -------- --------
Total income taxes (benefit) $ 923 $ 986 $1,067
======= ======== ========
</TABLE>
Reconciliation of income taxes at United States statutory rates to income
taxes as reported are as follows:
F-24
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Tax provision (benefit) at U.S. statutory rates ($13,688) ($483) $ 1,367
Foreign and U.S. losses not currently benefitted 13,688 605 1,124
Foreign withholding taxes 817 786 698
State income taxes 106 78 223
Use of net operating loss carryforwards 0 0 (2,344)
--------- --------- ---------
Total income taxes (benefit) $ 923 $ 986 $ 1,067
--------- --------- ---------
</TABLE>
Carryforwards and temporary differences which give rise to the deferred tax
asset at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net operating loss carryforwards......... $ 20,715 $ 16,314
Alternative minimum taxes................ 3,189 3,189
Wrap Lease rental sale................... 6,981 8,485
Reserves and other, net.................. 16,314 1,578
--------- ----------
Gross deferred asset..................... 47,119 29,566
Valuation allowance...................... (47,199) (29,566)
--------- ----------
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, 1999.
The Company's federal tax net operating loss carryforwards expire as
follows:
<TABLE>
<CAPTION>
Year Amount
---- ---------
<S> <C>
2000 $16,196
2002 7,382
2003 589
2007 1,443
2008 1,155
2009 32
2018 311
2019 2,100
---------
$29,208
=========
</TABLE>
In addition to the federal net operating loss carryforwards, the Company
has Federal Alternative Minium Tax ("AMT") credits of $3,189,000, which can be
carried forward indefinitely. Also, the Company has foreign net operating loss
carryforwards of $27,639,000, $14,102,000 in Puerto Rico which expire between
2002 and 2006 unless utilized prior thereto.
F-25
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
The Company paid $88,000, $192,000 and $2,405,000 in income taxes in 1999,
1998 and 1997, respectively. The Company is subject to regular federal income
tax; however, due to its net operating loss carryforwards, the Company is only
required to pay AMT. AMT is calculated separately from the regular federal
income tax and is based on a flat rate applied to a broader tax base. Amounts
payable thereunder cannot be totally eliminated through the application of net
operating loss carryforwards.
The Company's 1996 tax return is under review by the Internal Revenue
Service (the "Service"). While the Company believes its reporting position in
such period to be reasonable and the Service has not alleged any deficiencies,
no assurances can be made that the Company's tax reporting position will be
upheld.
NOTE 13 -- LEGAL PROCEEDINGS
Certain Shareholder Litigation
- ------------------------------
In September 1996, the holder of 50 shares of Common Stock commenced a
purported class action on behalf of the Company's minority shareholders owning
Reading Company Class A Common Stock in the Philadelphia County Court of Common
Pleas relating to the Reorganization and Stock Transactions. The complaint in
the action (the "Complaint") named the Company, Craig, two former directors of
the Company and all of the then current directors of the Company (other than
Gregory R. Brundage and Robert F. Smerling) 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 96 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.
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 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.
On September 28, 1998, the defendants filed a motion for summary judgment.
In February 2000 the court granted summary judgment against the Plaintiff and in
favor of all of the defendant directors. Craig was not dismissed, however, the
Court has agreed to reconsider Craig's motion in light of its decision to
dismiss the claims against all of
F-26
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
the defendant directors. The plaintiff has not elected to seek any rehearing or
interlocutory appeal of the trial court's decision to dismiss the defendant
directors. Accordingly, management does not believe that the Company has any
liability related to this matter.
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. While the City of Philadelphia has asserted
that the Company's share of any environmental clean-up costs related to its
North Viaduct Property would be in the range of $3,500,000, the Company does not
believe that it has any current obligation to commence such remediation and
believes the estimate to be inaccurate.
NOTE 14 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for 1999 and 1998 is summarized below:
<TABLE>
<CAPTION>
1999: First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 8,256 $ 9,974 $ 11,716 $ 10,373
Net loss applicable to common shareholders (2,540) (815) (16,411) (25,751)
======== ======== ======== ========
Basic and Diluted loss per share: ($0.34) ($0.11) ($2.20) ($3.46)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1998: First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $10,073 $ 9,713 $ 9,916 $ 8,746
Net loss applicable to common shareholders (1,436) (1,266) (1,941) (2,085)
======== ======== ======== ========
Basic and Diluted loss per share: ($.19) ($.17) ($.26) ($.28)
======== ======== ======== ========
</TABLE>
F-27
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
1999:
- ----
First quarter revenues decreased from those recorded in the prior year's
first quarter due to the significant contribution the Company received from the
movie Titanic in 1998's first quarter. Third quarter results include a
$14,022,000 Asset impairment charge and a full quarter of operating results of
two new cinemas opened in May. Fourth quarter results include an Asset
impairment charge of $20,272,000, a Restructuring charge of $889,000 and an
additional allocation of expenses charged to the Company by Craig of
approximately $580,000, and a full quarter of results of a new cinema which
opened in September.
1998:
- ----
The first quarter loss applicable to common shareholders reflects a charge
of $165,000 relating to the closing of four screens at a CineVista location.
The results of the third quarter included a loss of $114,000 representing the
Company's share in losses of unconsolidated affiliates. In the fourth quarter
1998, the Company closed a CineVista cinema as a result of damage sustained from
Hurricane Georges and recorded a write-off of $248,500 related to abandoned
assets. Further, in the fourth quarter, the Company recorded a charge of
$332,000 for previously capitalized project costs related to Australian
development activities. Additionally, in the fourth quarter, the Company
recorded income of $1,074,000 representing the Company's share of earnings in
unconsolidated affiliates.
NOTE 15 -- 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 purposes 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. All of the Series A Preferred Stock is held by Citadel and all of
the Series B Preferred Stock is held by Craig.
F-28
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
No dividends were declared or paid on the Series B Preferred Stock, all of
which is owned by Craig, during 1999. All dividends dues on the Series A
Preferred Stock, all of which is held by Citadel, were paid during 1999.
Accumulated dividends related to the Series B Preferred Stock totaled $3,575,000
at December 31, 1999.
Holders of the Convertible Preferred Stock are entitled to cast 9.64 votes
per share. In the event that dividends are not paid on either series of the
Convertible Preferred Stock for six consecutive quarters, the holders of such
series of the Convertible Preferred Stock will be entitled to elect one
director.
Each share of Series A Preferred Stock is convertible into shares of Common
Stock at a conversion price of $11.50 per share and each share of Series B
Preferred Stock is convertible into shares of Common Stock at a price of $12.25
per share, at any time after April 15, 1998. The shares of Series A Preferred
Stock are convertible prior to April 15, 1998 in the event that a change in
control of the Company occurs. The Company also has the right to require
conversion of the Series A Preferred Stock in the event that the average market
price of the Common Stock over a 180-day period exceeds 135% of the conversion
price of the Series A Preferred Stock. The Series B Preferred Stock has no
mandatory conversion provisions. Citadel has certain registration rights with
respect to the shares of the Common Stock to be received upon the conversion of
the Series A Preferred Stock or the exercise of the Asset 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. 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. No dividends were declared or
paid on the Series B Preferred Stock during 1999.
NOTE 16 -- 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 of approximately $670,000 which
has been included in the Consolidated Statement of Operations as a component of
"Other Expense."
The Company does not presently have any foreign currency positions and did
not take any positions during 1998 and 1999.
F-29
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
NOTE 17 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During fiscal years 1999, 1998 and 1997, interest paid amounted to
$371,000, $70,000 and $60,000 respectively.
Income taxes paid during fiscal years 1999, 1998 and 1997 amounted to
$96,000, $192,000 and $2,405,000, respectively.
Non-cash investing activities during 1999 consisted of obtaining a seller
provided purchase money mortgage of $1,180,000 and assuming liabilities of
$308,000 relating to the acquisition of the RGT and the assumption of a
$2,816,000 mortgage on property purchased and held for development.
NOTE 18 -- COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 establishes rules for the reporting and presentation of comprehensive
income and its components. SFAS 130 requires the Company to classify foreign
currency translation adjustments which, prior to adoption, were reported
separately in shareholders' equity to be included in comprehensive income.
The following sets forth the Company's comprehensive (loss) income for the
three years ended December 31, 1999:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Net (loss) income $(41,182) $(2,406) $ 2,955
Other comprehensive income (loss), net of tax 1,948 (1,677) (4,437)
-------- ------- -------
Comprehensive (loss) $(39,234) $(4,083) $(1,482)
======== ======= =======
</TABLE>
NOTE 19 -- SUBSEQUENT EVENT
On April 5, 2000, the Company sold a 50% interest in the AFC to National
Auto Credit, Inc. AFC is the owner of the NY Angelika. The 50% membership
interest (the "Angelika Interest") was conveyed in exchange for 8,999,900 shares
of the common stock of NAC, representing approximately 26% of the outstanding
common stock of that company (calculated after the issuance of such shares), and
100 shares of the Series A Preferred Stock of NAC, representing 100% of such
class. The Series A Preferred Stock has a liquidation preference of $1.50 per
share, is convertible into the common stock of NAC on a share for shares basis,
is entitled to a dividend preference equal to any dividends declared on the NAC
common stock (determined on a per share basis), and enjoys certain special
voting rights. As a consequence of that transfer, (a) AFC is now owned 50% by
NAC, 33.3% by the Company and 16.7% by Sutton Hill and (b) the Company and its
affiliates own approximately 29% of the outstanding common stock of NAC. NAC
Common Stock closed on April 10, 2000 at $1 5/64.
NAC is a publicly traded company whose shares are traded in the over-the-
counter market. Historically, NAC has been in the business of originating,
purchasing and servicing sub-prime loans secured by second hand automobiles.
F-30
<PAGE>
Reading Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 1999
(amounts in tables in thousands, except shares and per share data)
However, in recent periods, NAC has sold substantially all of its inventory of
loans, substantially reduced its work force and, in essence, reduced its assets
to cash and real estate. The Company is advised by NAC that it is considering
investments in several industries, one of them being domestic cinema exhibition,
and that the acquisition of the AFC Interest constituted a possible first step
in what may be a substantially larger commitment to that industry. Accordingly,
the Company has also granted to NAC two separate and independent options to
acquire additional US cinema assets of the Company.
Under the first option (the "AFC Option"), NAC has the right to acquire the
remaining 33.3% membership interest in AFC owned by the Company in exchange for
an additional 6 million shares of NAC common stock, to the extent that
authorized but unissued shares of NAC common stock are available for such
purpose. To the extent that NAC has less than 6 million shares available for
such purpose, NAC has the right to substitute cash for such shares (at the rate
of $1.50 per share) to the extent necessary to make up for any such shortfall.
The AFC Option can be exercised through May 20, 2000. Following the exercise of
the AFC Option, the remaining 16.7% membership interest in AFC would continue to
be owned by Sutton Hill, and the cinema would continue to be managed as a part
of the City Cinemas Chain.
Under the second option (the "City Cinemas Option"), NAC has the right to
acquire the remainder of Reading's domestic assets for cash (including the
Company's rights to the City Cinemas Transaction, and, if NAC has not previously
exercised the AFC Option, the Company's remaining interest in AFC). The City
Cinemas Option can be exercised through June 5, 2000. The Company has received
$500,000 in consideration of the grant of the City Cinemas Option. NAC has the
right to extend the option for two thirty day periods, by payment of an
additional $100,000 for each such thirty-day extension period.
If NAC exercises the City Cinemas Option, it is required to give to Citadel
a right to participate in the transaction on a 50/50 basis. The decision
whether or not to proceed with either of the options described above rests with
NAC and not with the Company or Citadel. Such transactions are also subject to
Hart Scott Rodino review and clearance. Accordingly, no assurances can be given
that any further transactions will be effected between the companies.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Reading Entertainment, Inc.
We have audited the accompanying consolidated balance sheet of Reading
Entertainment, Inc. and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 1999. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on the financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Reading Entertainment, Inc. and
subsidiaries at December 31, 1999, and the results of their operations and their
cash flows for the year ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Los Angeles, California
April 11, 2000
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Reading Entertainment, Inc.
We have audited the accompanying consolidated balance sheet of Reading
Entertainment, Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the two years in the period ended December 31, 1998. 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 auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Reading
Entertainment, Inc. and subsidiaries at December 31, 1998, and the consolidated
results of their operations and its cash flows for each of the two years in the
period ended December 31, 1998, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 18, 1999
<PAGE>
EXHIBIT 3(I)
ARTICLES OF INCORPORATION
OF
READING ENTERTAINMENT, INC.
A NEVADA CORPORATION
I, the Undersigned, being the original incorporator herein named, for the
purpose of forming a corporation under Chapter 78 of the Nevada Revised
Statutes (the "NRS"), to do business both within and without the State of
Nevada, do make and file these Articles of Incorporation hereby declaring and
certifying that the facts herein stated are true:
ARTICLE I
Name
The name of the corporation is Reading Entertainment, Inc. (the
"Corporation").
ARTICLE II
Resident Agent and Registered Office
The name and address of the Corporation's resident agent for service of
process is Kummer Kaempfer Bonner & Renshaw, 3800 Howard Hughes Parkway,
Seventh Floor, Las Vegas, Nevada 89109.
ARTICLE III
Purpose
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the NRS.
ARTICLE IV
Capital Stock
4.1. Number of Shares Authorized; Par Value. The aggregate number of shares
which the Corporation shall have authority to issued is thirty-five million
(35,000,000) shares of which ten million (10,000,000) shares with the par
value $.001 per share shall be designated "Preferred Stock" and twenty-five
million (25,000,000) shares with the par value $.001 per share shall be
designated "Common Stock."
4.2. Preferred Stock. The Preferred Stock may be issued at any time from
time to time, in any one or more series, and any such series shall be
comprised of such number of shares and may have such voting powers, whole or
limited, or no voting powers, and such designations, preferences and relative,
participating, optional or other special rights and qualifications,
limitations and restrictions thereof, including liquidation preferences, as
shall be stated and expressed in the resolution or resolutions of the board of
directors of the Corporation, the board of directors being hereby expressly
vested with such power and authority to the full extent now or hereafter
permitted by law.
<PAGE>
4.3. Restrictions on Common Stock. No share of Common Stock, or of any other
security of the Corporation which is treated as stock for purposes of Section
382 of the Internal Revenue Code of 1986, as amended (the "Code") (the Common
Stock and any such other securities being hereinafter referred to as "New
Stock"), shall be transferable or assignable in any respect, either of record
or beneficially, unless such transfer or assignment is permitted under the
following provisions:
(a) Until the earliest of January 1, 2003, such date as the Corporation
shall no longer have any unutilized federal income tax net operating loss
carry forwards (the "Carryforwards") or such date after which Section 382
of the Code is repealed or so substantially modified that in the opinion of
counsel to the Corporation the restrictions on transfer described herein
are no longer necessary to accomplish their intended purpose: (i) any
attempted sale, transfer, assignment or other disposition (including the
granting of any option or entering into any agreement for the sale transfer
assignment or other disposition), whether voluntary or involuntary, whether
of record or beneficially and whether by operation of law or otherwise (a
"Transfer"), of any share or shares of the New Stock of the Corporation or
of any option, convertible security or other right to purchase or acquire
such stock (collectively, "Rights") to any person or entity or group or
persons or entities acting in concert (a "Transferee") who or which,
directly or indirectly or by application of the constructive ownership
rules set forth in Section 382(1)(3) of the Code and the Income Tax
Regulations as now in effect or hereinafter promulgated pursuant thereto
(the "Regulations"), owns, prior to the Transfer, an aggregate number of
shares of the Corporation's outstanding New Stock having a fair market
value equal to or greater than four point seven five percent (4.75%) of the
fair market value of the total number of shares of the Corporation's
outstanding New Stock shall be void ab initio insofar as it purports to
transfer ownership to such Transferee, and (ii) any attempted Transfer of
any share or shares of the New Stock of the Corporation or of any Rights to
any Transferee not described in clause (i) hereof who or which directly,
indirectly or by application of the constructive ownership rules in Section
382(1)(3) of the Code and Regulations, would own as a result of the
Transfer, or as a result of a subsequent Transfer of any share or shares of
the New Stock or Rights, an aggregate number of shares of the Corporation's
outstanding New Stock having a fair market value equal to or greater than
four point seven five percent (4.75%) of the fair market value or total
number of shares of the Corporation's outstanding New Stock shall, as to
the number of shares or Rights representing such excess over four point
seven five percent (4.75%), be void ab initio insofar as it purports to
transfer ownership to such Transferee of any shares of New Stock or Rights.
(b) The restrictions contained in paragraph (a) of this Section 4.3 of
this Article Fourth have been included herein for the purpose of reducing
the risk of occurrence of an "ownership change" as that term is defined in
Section 382(g) of the Code and the Regulations that would result in the
limitation or elimination of the Corporation's utilization of the
Carryforwards.
(c) Neither clause (i) or (ii) of paragraph (a) of this Section 4.3 of
this Article Fourth shall restrict any Transfer of New Stock of the
Corporation or Rights if (i) the prior written approval of the board of
directors of the Corporation shall have been obtained with respect to such
Transfer and (ii) if so requested by the board of directors of the
Corporation, counsel to the Corporation shall have delivered its opinion
that such Transfer would not result in an "ownership change" within the
meaning of Section 382(g) of the Code and the Regulations that would result
in the limitation or elimination or the Corporation's utilization of the
Carryforwards. The board of directors shall have the authority, in its sole
discretion, to adopt procedures for the orderly and effective
administration and implementation of this Section 4.3, and, in deciding
whether to approve any proposed Transfer of New Stock or Rights, the
Corporation acting through any officer may request all relevant
information, as well as an opinion of counsel, in form and substance
reasonably satisfactory to the board of directors. No employee or agent of
the Corporation shall be permitted to record any attempted or purported
Transfer of the New Stock or Rights made in violation of this Article
Fourth and no Transferee of the New Stock or Rights effected in violation
of this Article Fourth shall be deemed to have acquired ownership of New
Stock or Rights for any purpose. Such intended Transferee shall not be
entitled to any rights as a stockholder of the Corporation with respect to
such New Stock, including, without limitation, the right to vote such New
Stock or to receive any distributions in respect thereof, whether as
dividends or in liquidation.
<PAGE>
(d) If the procedures adopted by the board of directors of the
Corporation so require, the Corporation's transfer agent for any of the
Corporation's securities (the "Transfer Agent") shall not issue any
certificates transferring, assigning or disposing of or purporting to
transfer assign or otherwise dispose of legal ownership of any shares of
New Stock or Rights unless the Transfer Agent receives from the proposed
Transferee, in addition to any other information requested by it, a
certificate signed under penalty of perjury attesting to the fact that the
Transferee is not and will not become as a result of the proposed Transfer,
an owner of an aggregate number of shares of the Corporation's outstanding
New Stock or Rights having a fair market value equal to or greater than
four point seven five percent (4.75%) of the fair value of the total number
of shares of the Corporation's outstanding New Stock. If at any time the
Transfer Agent receives a request to make a change in record ownership of
shares of New Stock or Rights which, if effective, would appear to the
Transfer Agent on the basis of information in its possession to constitute
a violation of this Article Fourth, then, prior to registering such change
in ownership on the books of the Corporation, the Transfer Agent shall
notify the Corporation. If the board of directors or an officer designated
by the board of directors determines that the proposed change in ownership
would violate this Article Fourth, then the Corporation shall so advise the
Transfer Agent and the Transfer Agent shall not make such change in
ownership on the books of the Corporation and shall return the certificates
representing such shares of New Stock or Rights to the holder of record
thereof.
(e) If, notwithstanding the foregoing prohibition, a Transferee shall,
voluntarily or involuntarily, purportedly become or attempt to become the
purported owner (the "Purported Owner") of shares of New Stock or Rights,
or both, in excess of the limitations set forth above (the shares and
Rights, including shares of New Stock issued in respect of Rights, so
exceeding such limitations set forth herein shall be referred to herein as
the "Excess Shares"), then:
(i) The Purported Owner shall not obtain any rights in and to the
Excess Shares, and the purported Transfer of the Excess Shares to the
Purported Owner shall not be recognized by the Corporation or its
Transfer Agent. Until the Excess Shares are transferred to a person
whose acquisition thereof will not violate the foregoing limitations (a
"Permitted Transferee"), (A) the Excess Shares shall be voted by such
person as shall be appointed by the board of directors of the
Corporation, which person shall be deemed to have been granted a proxy
to vote the Excess Shares, (B) the transferor of the Excess Shares to
the Purported Owner (the "Purported Owner's Transferor") shall be
deemed to have retained the Excess Shares and shall hold and be
entitled to exercise all other rights incident to ownership of such
Excess Shares, and (C) if the Excess Shares are Rights, they may not be
exercised, converted or exchanged until transferred to, and exercised,
converted or exchanged in accordance with their terms by, a Permitted
Transferee; provided, however, that notwithstanding the foregoing, in
the event shares of New Stock are issued in respect of Rights which are
Excess Shares prior to notice to the Corporation or its Transfer Agent
that such Rights are Excess Shares, the shares of New Stock so issued
shall be deemed to be issued and outstanding shares of New Stock of the
Corporation and shall be Excess Shares deemed retained by the Purported
Owner's Transferor. Rights issued by the Corporation shall reflect the
provisions of the foregoing sentence. All Excess Shares will continue
to be issued and outstanding.
(ii) If the Transfer Agent obtains possession of a certificate or
certificates representing the Excess Shares, the Transfer Agent shall
deliver such certificate or certificates to a trustee appointed by the
Corporation's board of directors (the "Share Trustee") who shall
proceed forthwith to sell or cause the sale of the Excess Shares to a
Permitted Transferee. If the Transfer Agent does not have possession of
such certificate, upon notice from the Corporation of the existence of
Excess Shares and the identity of the Purported Owner, the Share
Trustee shall take all lawful action to cause the Purported Owner to
deliver or cause delivery of the Excess Shares and any indicia of
ownership thereof to the Share Trustee and, upon obtaining possession
thereof, the Share Trustee shall proceed forthwith to sell or cause the
sale of the Excess Shares to a Permitted Transferee. The Share Trustee
shall sell or cause the sale of the Excess Shares in the then existing
public market or in such other commercially reasonable fashion as the
Corporation shall direct. In performing the duties herein imposed upon
it, the Share Trustee shall act at all times as the agent for the
Purported Owner's Transferor.
<PAGE>
(iii) Once the Excess Shares are acquired by a Permitted Transferee,
the Permitted Transferee shall have and shall be entitled to exercise
all rights incident to the ownership of such Excess Shares.
(iv) The proceeds from the sale of the Excess Shares (the "Proceeds")
shall be distributed as follows: (A) first, to the Share Trustee to
cover its costs and expenses; (B) second, to the Purported Owner, if
known, in an amount up to the amount paid by the Purported Owner, if
determinable, for the Excess Shares; and (C) third and finally, the
remaining Proceeds, if any, shall be distributed to the Purported
Owner's Transferor, if known, and if not known, such remaining Proceeds
shall be held by the Corporation for the benefit of the Purported
Owner's Transferor or such other person as their interests may appear.
Notwithstanding anything contained in this Article Fourth to the
contrary, the Corporation shall at all times be entitled to make
application to any court of equitable jurisdiction within the State of
Nevada for an adjudication of the respective rights and interests of
any person in and to the Proceeds pursuant to this Article Fourth and
applicable law and for leave to pay the Proceeds into such court.
(f) Immediately upon the purported acquisition of any Excess Shares, the
Purported Owner thereof shall give, or cause to be given, written notice
thereof to the Corporation. Each owner of shares of New Stock and Rights
shall furnish to the Corporation all information reasonably requested with
respect to all shares of New Stock and Rights directly and indirectly owned
by such person.
(g) Upon a determination by the board of directors of the Corporation
that a person has attempted or may attempt to transfer or to acquire Excess
Shares, the board of directors may take such action as it deems advisable
to refuse to give effect to such Transfer or acquisition on the books and
records of the Corporation, including, without limitation, to cause the
Transfer Agent to record the Purported Owner's Transferor as the record
owner of the Excess Shares, to refuse to issue shares of New Stock upon the
purported exercise of Rights which are Excess Shares and to institute
proceedings to enjoin or rescind any such Transfer or acquisition.
(h) To the extent permitted by the Regulations promulgated under Section
382 of the Code, in determining whether any person has become a Purported
Owner of Excess Shares, the Corporation may rely on filings on Schedules
13D and 13G as required by Rule 13d-1 of the Securities Exchange Act of
1934, as amended.
(i) If any provision of this Article Fourth or any application of any
such provision is determined to be invalid by any federal or state court
having jurisdiction over the issues, the validity of the remaining
provisions shall not be affected and other applications of such provision
shall be affected only to the extent necessary to comply with the
determination of such court.
(j) All certificates representing shares of New Stock shall conspicuously
bear the following legend:
The shares represented by this certificate are subject to certain
restrictions on transfer set forth in Article Fourth of the Corporation's
Articles of Incorporation, the full text of which is available at the offices
of the Corporation or on request to the Corporation. ANY ATTEMPT TO ACQUIRE
STOCK OF THE CORPORATION IN VIOLATION OF SUCH RESTRICTIONS SHALL BE NULL AND
VOID AND MAY RESULT IN FINANCIAL LOSS TO THE PERSON OR ENTITY ATTEMPTING SUCH
ACQUISITION.
ARTICLE V
Directors
The business and affairs of the Corporation shall be managed by or under the
direction of the board of directors, which initially shall consist of one
director. Provided that the Corporation has at least one director, the number
of directors may at any time or times be increased or decreased as provided in
the bylaws; provided,
<PAGE>
however that the number of directors shall not exceed ten. The name and
address of the initial member of the board of directors is as follows:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<S> <C>
S. Craig Tompkins c/o Craig Corporation
550 South Hope Street, Suite 1825
Los Angeles, California 90071
</TABLE>
ARTICLE VI
Bylaws
In furtherance and not in limitation of the powers conferred upon the board
of directors of the Corporation by the NRS, the board of directors shall have
the power to alter, amend, change, add to and repeal, from time to time, the
bylaws of the Corporation, subject to the rights of the stockholders entitled
to vote with respect thereto to alter, amend, change, add to and repeal the
bylaws adopted by the directors of the Corporation.
ARTICLE VII
Election of Directors
Except as may otherwise be provided in the bylaws of the Corporation, the
election of directors may be conducted at a meeting of the stockholders,
whether telephonic or not, within or without the State of Nevada or by written
consent and such election need not be by written ballot.
ARTICLE VIII
Sale of Assets
In furtherance of the powers conferred on the stockholders of the
Corporation by the NRS, the stockholders of the Corporation shall have the
power to vote on any proposed sale of substantially all of the Corporation's
assets.
ARTICLE IX
Amendment of Articles of Incorporation
In the event the board of directors of the Corporation determines that it is
in the Corporation's best interest to amend these Articles of Incorporation,
the board of directors shall adopt a resolution setting forth the proposed
amendment and declaring its advisability and submit the matter to the
stockholders entitled to vote thereon for the consideration thereof in
accordance with the provisions of the NRS and these Articles of Incorporation.
In the resolution setting forth the proposed amendment, the board of directors
may insert a provision allowing the board of directors to later abandon the
amendment, without concurrence by the stockholders, after the amendment has
received stockholder approval but before the amendment is filed with the
Nevada Secretary of State.
ARTICLE X
Incorporator
The name and address of the incorporator of the Corporation is Elizabeth A.
Savage, Kummer Kaempfer Bonner & Renshaw, 3800 Howard Hughes Parkway, Seventh
Floor, Las Vegas, Nevada 89109.
<PAGE>
ARTICLE XI
Acquisitions of Controlling Interest
The Corporation elects not to be governed by the provisions of Chapters
78.378 to 78.3793, inclusive, of the NRS pertaining to acquisitions of
controlling interest.
ARTICLE XII
Combinations With Interested Stockholders
The Corporation elects not to be governed by the provisions of Chapters
78.411 to 78.444, inclusive, of the NRS pertaining to combinations with
interested stockholders.
ARTICLE XIII
Directors' and Officers' Liability
A director or officer of the Corporation shall not be personally liable to
this Corporation or its stockholders for damages for breach of fiduciary duty
as a director or officer, but this Article shall not eliminate or limit the
liability of a director or officer for (i) acts or omissions which involve
intentional misconduct, fraud or a knowing violation of law or (ii) the
unlawful payment of distributions. Any repeal or modification of this Article
by the stockholders of the Corporation shall be prospective only, and shall
not adversely affect any limitation on the personal liability of a director or
officer of the Corporation for acts or omissions prior to such repeal or
modification.
ARTICLE XIV
Indemnity
Every person who was or is a party to, or is threatened to be made a party
to, or is involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he, or a person of
whom he is the legal representative, is or was a director, officer, employee
or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
or as its representative in a partnership, joint venture trust or other
enterprise, shall be indemnified and held harmless to the fullest extent
legally permissible under the laws of the State of Nevada from time to time
against all expenses, liability and loss (including attorneys' fees,
judgments, fines and amounts paid or to be paid in settlement) reasonably
incurred or suffered by him in connection therewith. Such right of
indemnification shall be a contract right which may be enforced in any manner
desired by such person. The expenses of directors, officers, employees and
agent incurred in defending a civil or criminal action, suit or proceeding
must be paid by the Corporation as they are incurred and in advance of the
final disposition of the action suit or proceeding, upon receipt of an
undertaking by or on behalf of the director, officer, employee or agent to
repay the amount if it is ultimately determined by a court of competent
jurisdiction that he is not entitled to be indemnified by the Corporation.
Such right of indemnification shall not be exclusive of any other right which
such directors, officers, employees or agents may have or hereafter acquire,
and, without limiting the generality of such statement, they shall be entitled
to their respective rights of indemnification under any bylaw, agreement, vote
of stockholders, provision of law, or otherwise, as well as their rights under
this Article.
Without limiting the application of the foregoing, the board of directors
may adopt bylaws from time to time with respect to indemnification, to provide
at all times the fullest indemnification permitted under the laws of the State
of Nevada, and may cause the Corporation to purchase and maintain insurance on
behalf of any
<PAGE>
person who is or was a director or officer of the Corporation, or is or was
serving at the request of the Corporation as a director or officer of another
corporation, or as its representative in a partnership, joint venture, trust
or other enterprise against any liability asserted against such person and
incurred in any such capacity or arising out of such status, whether or not
the Corporation would have the power to indemnify such person. The
indemnification provided in this Article shall continue as to a person who has
ceased to be a director, officer, employee, agent, and shall inure to the
benefit of the heirs, executors and administrators of such person.
In witness whereof, I have hereunto set my hand this 25th day of October,
1999, declaring and certifying that the facts stated hereinabove are true.
/s/ Elizabeth A. Savage
By: _________________________________
Elizabeth A. Savage, Incorporator
<PAGE>
CERTIFICATE OF ACCEPTANCE
OF APPOINTMENT BY RESIDENT AGENT
In the Matter of Reading Entertainment, Inc.:
We, Kummer Kaempfer Bonner & Renshaw, do, hereby certify that on the 25th
day of October, 1999, we accepted the appointment as Resident Agent of the
above-entitled corporation in accordance with Section 78.090 of the Nevada
Revised Statutes.
Furthermore, that the registered office in this State is located at 3800
Howard Hughes Parkway, Seventh Floor, Las Vegas, Nevada 89109.
In witness whereof, I have hereunto set my hand this 25th day of October,
1999.
Kummer Kaempfer Bonner & Renshaw
/s/ Elizabeth A. Savage
By: _________________________________
Elizabeth A. Savage
<PAGE>
EXHIBIT 3(II)
BYLAWS
OF
READING ENTERTAINMENT, INC.
A Nevada corporation
ARTICLE I
Stockholders
Section 1 Annual Meeting
Annual meetings of the stockholders, commencing with the year 2000, shall be
held at such time as may be set by the Board of Directors from time to time,
at which the stockholders shall elect by vote a Board of Directors and
transact such other business as may properly be brought before the meeting.
Section 2 Special Meetings
Special meetings of the stockholders, for any purpose or purposes, unless
otherwise prescribed by statute or by the Articles of Incorporation, may be
called by the Chairman or Vice Chairman of the Board, if any, the Chief
Executive Officer, the President or the Secretary, or any three or more
members of the Board of Directors by resolution or at the request in writing
of stockholders who together own of record shares of stock entitling them to
cast a majority of the votes entitled to be cast by the holders of the
outstanding stock of all classes entitled to vote at such meeting. Such
request shall state the purpose of the proposed meeting.
Section 3 Notice of Meetings
Written notice of stockholders meetings, stating the place, date and hour
thereof, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be given by the Chairman or Vice Chairman
of the Board, if any, the Chief Executive Officer, the President, any Vice
President, the Secretary or an Assistant Secretary, to each stockholder
entitled to vote thereat at least ten days but not more than sixty days before
the date of the meeting, unless a different period is prescribed by statute.
Section 4 Place of Meetings
All annual meetings of the stockholders shall be held at the registered
office of the Corporation or at such other place within or without the State
of Nevada as the directors shall determine. Special meetings of the
stockholders may be held at such time and place within or without the State of
Nevada as shall be stated in the notice of the meeting, or in a duly executed
waiver of notice thereof. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
Section 5 Quorum; Adjourned Meetings
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the Articles of Incorporation.
If, however, such quorum shall not be present or represented at any meeting of
the stockholders, the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have the power to adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
shall be present or represented. At such adjourned meeting at which a quorum
shall be present or represented, any business may be transacted which might
have been transacted at the meeting as originally noticed.
Section 6 Voting
Except as otherwise provided by statute or the Articles of Incorporation or
these Bylaws, and except for the election of directors, at any meeting duly
called and held at which a quorum is present, a majority of the votes
<PAGE>
cast at such meeting upon a given matter by the holders of outstanding shares
of stock of all classes of stock of the Corporation entitled to vote thereon
who are present in person or by proxy shall decide such matter. At any meeting
duly called and held for the election of directors at which a quorum is
present, directors shall be elected by a plurality of the votes cast by the
holders (acting as such) of shares of stock of the Corporation entitled to
elect such directors.
Section 7 Proxies
At any meeting of the stockholders any stockholder may be represented and
vote by a proxy or proxies appointed by an instrument in writing. In the event
that any such instrument in writing shall designate two or more persons to act
as proxies, a majority of such persons present at the meeting, or, if only one
shall be present, then that one shall have and may exercise all of the powers
conferred by such written instrument upon all of the persons so designated
unless the instrument shall otherwise provide. No proxy or power of attorney
to vote shall be used to vote at a meeting of the stockholders unless it shall
have been filed with the secretary of the meeting. All questions regarding the
qualification of voters, the validity of proxies and the acceptance or
rejection of votes shall be decided by the inspectors of election who shall be
appointed by the Board of Directors, or if not so appointed, then by the
presiding officer of the meeting.
Section 8 Action Without Meeting
Any action which may be taken by the vote of the stockholders at a meeting
may be taken without a meeting if authorized by the written consent of
stockholders holding at least a majority of the voting power, unless the
provisions of the statutes or of the Articles of Incorporation require a
greater proportion of voting power to authorize such action in which case such
greater proportion of written consents shall be required. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous
written consent shall be given to those stockholders who have not consented in
writing.
ARTICLE II
Directors
Section 1 Management Of Corporation
The business of the Corporation shall be managed by its Board of Directors
which may exercise all such powers of the Corporation and do all such lawful
acts and things as are not by statute or by the Articles of Incorporation or
by these Bylaws directed or required to be exercised or done by the
stockholders.
Section 2 Number, Tenure, and Qualifications
The number of directors which shall constitute the whole board shall be six.
The number of directors may from time to time be increased or decreased to not
less than one nor more than ten by action of the Board of Directors. The
directors shall be elected by the holders of shares entitled to vote thereon
at the annual meeting of the stockholders and, except as provided in Section 5
of this Article, each director elected shall hold office until his successor
is elected and qualified. Directors need not be stockholders.
Section 3 Nomination of Stockholders
No stockholder shall be permitted to nominate a candidate for election as a
director at any annual meeting unless such stockholder shall provide in
writing, not later than one hundred twenty days before the first anniversary
of the preceding annual meeting of the stockholders, to the Nominating
Committee of the Board of Directors or, in the absence of such committee, to
the Secretary of the Corporation, information about such candidate which, were
such candidate a nominee of the Board of Directors for whom the Corporation
solicited proxies, would be required to be disclosed in the proxy materials
pursuant to which such proxies would be solicited as set forth in Items 7-8 of
Schedule 14A promulgated by the Securities and Exchange Commission, or any
successor provisions.
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Section 4 Chairman and Vice Chairman of the Board
The directors may elect one of their members to be Chairman of the Board of
Directors and may elect one of their members to be the Vice Chairman of the
Board of Directors. The Chairman and the Vice Chairman shall be subject to the
control of and may be removed by the Board of Directors. The Chairman and Vice
Chairman shall perform such duties as may from time to time be assigned to
them by the Board of Directors.
Section 5 Vacancies
Vacancies in the Board of Directors, including those caused by an increase
in the number of directors, may be filled by a majority of the remaining
directors, though less than a quorum, or by a sole remaining director, and
each director so elected shall hold office until his successor is elected at
an annual or a special meeting of the stockholders. The holders of no less
than two-thirds of the voting power may at any time peremptorily terminate the
term of office of all or any of the directors by vote at a meeting called for
such purpose or by written consent filed with the Secretary or, in his
absence, with any other officer. Such removal shall be effective immediately,
even if successors are not elected simultaneously.
A vacancy or vacancies in the Board of Directors shall be deemed to exist in
case of the death, resignation or removal of any directors, or if the
authorized number of directors be increased, or if the stockholders fail at
any annual or special meeting of stockholders at which any director or
directors are elected to elect the full authorized number of directors to be
voted for at that meeting.
If the Board of Directors accepts the resignation of a director tendered to
take effect at a future time, the Board or the stockholders shall have power
to elect a successor to take office when the resignation is to become
effective.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of his term of office.
Section 6 Annual and Regular Meetings
Annual and regular meetings of the Board of Directors shall be held at any
place within or without the State of Nevada which has been designated from
time to time by resolution of the Board of Directors or by written consent of
all members of the Board of Directors. In the absence of such designation,
annual and regular meetings shall be held at the registered office of the
Corporation. Regular meetings of the Board of Directors may be held without
call or notice at such time and at such place as shall from time to time be
fixed and determined by the Board of Directors.
Section 7 First Meeting
The first meeting of each newly elected Board of Directors shall be held
immediately following the adjournment of the meeting of stockholders and at
the place thereof. No notice of such meeting shall be necessary to the
directors in order legally to constitute the meeting, provided a quorum is
present. In the event such meeting is not so held, the meeting may be held at
such time and place as shall be specified in a notice given as hereinafter
provided for special meetings of the Board of Directors.
Section 8 Special Meetings
Special meetings of the Board of Directors may be called by the Chairman or
Vice Chairman of the Board of Directors or the President or any three of the
directors then in office.
The Secretary, or in his absence any other officer of the Corporation, shall
give each director notice of the time and place of the special meetings of the
Board of Directors by telecopy or electronic mail at least forty-eight hours
before the meeting, or by mail at least two days before the meeting, or by
telegram, cable, radiogram or
<PAGE>
personal service at least two days before the meeting. Unless otherwise stated
in the notice thereof, any and all business may be transacted at any meeting
without specification of such business in the notice.
Section 9 Business of Meetings
The transactions of any meeting of the Board of Directors, however called
and noticed or wherever held, shall be as valid as though had at a meeting
duly held after regular call and notice, if a quorum be present, and if,
either before or after the meeting, each of the directors not present signs a
written waiver of notice, or a consent to holding such meeting, or an approval
of the minutes thereof. All such waivers, consents or approvals shall be filed
with the corporate records or made a part of the minutes of the meeting.
Section 10 Quorum; Adjourned Meetings
A majority of the authorized number of directors shall be necessary to
constitute a quorum for the transaction of business, except to adjourn as
hereinafter provided. Every act or decision done or made by a majority of the
directors present at a meeting duly held at which a quorum is present shall be
regarded as the act of the Board of Directors, unless a greater number be
required by law or by the Articles of Incorporation. Any action of a majority,
although not at a regularly called meeting, and the record thereof, if
assented to in writing by all of the other members of the Board shall be as
valid and effective in all respects as if passed by the Board of Directors in
regular meeting.
A quorum of the directors may adjourn any directors meeting to meet again at
a stated day and hour; provided, however, that in the absence of a quorum, a
majority of the directors present at any directors meeting, either regular or
special, may adjourn from time to time until the time fixed for the next
regular meeting of the Board of Directors.
Meetings shall be presided over by the Chairman of the Board, if any, or in
his absence by the Vice Chairman, or in their absence by the President, or in
the absence of all of the foregoing by such other person as the directors may
select. The Secretary of the Corporation shall act as secretary of the
meeting, but in his absence the chairman of the meeting may appoint any person
to act as secretary of the meeting.
Notice of the time and place of holding an adjourned meeting need not be
given to the absent directors if the time and place are fixed at the meeting
adjourned.
Section 11 Committees
The Board of Directors may, by resolution adopted by a majority of the whole
Board, designate one or more committees of the Board of Directors, each
committee to consist of at least one or more of the directors of the
Corporation which, to the extent provided in the resolution, shall have and
may exercise the power of the Board of Directors in the management of the
business and affairs of the Corporation and may have power to authorize the
seal of the Corporation to be affixed to all papers which may require it. Such
committee or committees shall have such name or names as may be determined
from time to time by the Board of Directors. The members of any such committee
present at any meeting and not disqualified from voting may, whether or not
they constitute a quorum, unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any absent or disqualified
member. At meetings of such committees, a majority of the members or alternate
members shall constitute a quorum for the transaction of business, and the act
of a majority of the members or alternate members at any meeting at which
there is a quorum shall be the act of the committee.
The committees shall keep regular minutes of their proceedings and report
the same to the Board of Directors.
Section 12 Action Without Meeting; Telephone Meetings
Any action required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may be taken without a meeting if a
written consent thereto is signed by all members of the Board of
<PAGE>
Directors or of such committee, as the case may be, and such written consent
is filed with the minutes of proceedings of the Board or committee.
Nothing contained in these Bylaws shall be deemed to restrict the powers of
members of the Board of Directors, or any committee thereof, to participate in
a meeting of the Board or committee by means of telephone conference or
similar communications equipment whereby all persons participating in the
meeting can hear each other.
Section 13 Special Compensation
The directors may be paid their expenses of attendance at each meeting of
the Board of Directors and may be paid a fixed sum for attendance at each
meeting of the Board of Directors or a stated salary as director. No such
payment shall preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor. Members of committees may be
allowed like reimbursement and compensation for attending committee meetings.
ARTICLE III
Notices
Section 1 Notice of Meetings
Notices of meetings of stockholders shall be in writing and signed by the
President or a Vice-President or the Secretary or an Assistant Secretary or by
such other person or persons as the directors shall designate. Such notice
shall state the purpose or purposes for which the meeting is called and the
time and the place, which may be within or without this State, where it is to
be held. A copy of such notice shall be either delivered personally to or
shall be mailed, postage prepaid, to each stockholder of record entitled to
vote at such meeting not less than ten nor more than sixty days before such
meeting. If mailed, it shall be directed to a stockholder at his address as it
appears upon the records of the Corporation and upon such mailing of any such
notice, the service thereof shall be complete and the time of the notice shall
begin to run from the date upon which such notice is deposited in the mail for
transmission to such stockholder. Personal delivery of any such notice to any
officer of a corporation or association, or to any member of a partnership
shall constitute delivery of such notice to such corporation, association or
partnership. In the event of the transfer of stock after delivery of such
notice of and prior to the holding of the meeting it shall not be necessary to
deliver or mail notice of the meeting to the transferee.
Section 2 Effect of Irregularly Called Meetings
Whenever all parties entitled to vote at any meeting, whether of directors
or stockholders, consent, either by a writing on the records of the meeting or
filed with the Secretary, or by presence at such meeting and oral consent
entered on the minutes, or by taking part in the deliberations at such meeting
without objection, the doings of such meeting shall be as valid as if had at a
meeting regularly called and noticed, and at such meeting any business may be
transacted which is not excepted from the written consent or to the
consideration of which no objection for want of notice is made at the time,
and if any meeting be irregular for want of notice or of such consent,
provided a quorum was present at such meeting, the proceedings of said meeting
may be ratified and approved and rendered likewise valid and the irregularity
or defect therein waived by a writing signed by all parties having the right
to vote at such meeting; and such consent or approval of stockholders may be
by proxy or attorney, but all such proxies and powers of attorney must be in
writing. Presence at any irregularly called meeting either in person or by
proxy, will constitute a waiver of any defect with respect to the notices
given, and/or the failure to give any notices whatsoever, with respect to such
meeting.
<PAGE>
Section 3 Waiver of Notice
Whenever any notice whatever is required to be given under the provisions of
the statutes, of the Articles of Incorporation or of these Bylaws, a waiver
thereof in writing, signed by the person or persons entitled to said notice,
whether before or after the time stated therein, shall be deemed equivalent
thereto.
ARTICLE IV
Officers
Section 1 Election
The officers of the Corporation shall be chosen by the Board of Directors
and shall be a Chief Executive Officer or a President, or both, one or more
Vice Presidents, a Treasurer and a Secretary, and such other officers with
such titles and duties as the Board of Directors may determine, none of whom
need be directors. Any person may hold one or more offices and each officer
shall hold office for such term as may be prescribed by the Board of Directors
from time to time.
Section 2 Chairman of the Board
The Chairman of the Board shall preside at meetings of the stockholders and
the Board of Directors, and shall see that all orders and resolutions of the
Board of Directors are carried into effect. The Chairman of the Board will
also serve, unless resolved otherwise by the Board of Directors, as the Chief
Executive Officer of the Corporation.
Section 3 Vice Chairman of the Board
The Vice-Chairman shall, in the absence or disability of the Chairman of the
Board, perform the duties and exercise the powers of the Chairman of the Board
and shall perform such other duties as the Board of Directors may from time to
time prescribe.
Section 4 Chief Executive Officer
The Chief Executive Officer shall be the head of the Corporation and in the
recess of the Board of Directors shall have the general control and management
of all the business and affairs of the Corporation. The Chief Executive
Officer shall make annual reports and submit the same to the Board of
Directors showing the condition and affairs of the corporation. The Chief
Executive Officer shall, from time to time, make recommendations to the Board
of Directors and any other committee of the Board of Directors deems proper
and shall perform such other duties as the Board of Directors may from time to
time prescribe.
Section 5 President
The President shall be the chief operating officer of the Corporation and
shall have active management of the business of the Corporation. The President
shall execute on behalf of the Corporation all instruments requiring such
execution except to the extent the signing and execution thereof shall be
expressly designated by the Board of Directors to some other officer or agent
of the Corporation.
Section 6 Chief Administrative Officer
The Chief Administrative Officer will be responsible for the management of
the financial control and reporting, treasury, human resources, and public
reporting functions of the Corporation. The Chief Administrative Officer shall
in addition, perform such other duties and have such other powers as the Chief
Executive Officer or the Board of Directors may from time to time prescribe.
<PAGE>
Section 7 Vice-President
The Vice-President shall act under the direction of the President and in the
absence or disability of the President shall perform the duties and exercise
the powers of the President. The Vice-President shall perform such other
duties and have such other powers as the President or the Board of Directors
may from time to time prescribe. The Board of Directors may designate one or
more Executive Vice-Presidents or may otherwise specify the order of seniority
of the Vice-Presidents. The duties and powers of the President shall descend
to the Vice-Presidents in such specified order of seniority.
Section 8 Secretary
The Secretary shall act under the direction of the President. Subject to the
direction of the President, the Secretary shall attend all meetings of the
Board of Directors and all meetings of the stockholders and record the
proceedings. The Secretary shall perform like duties for the standing
committees when required. The Secretary shall give, or cause to be given,
notice of all meetings of the stockholders and special meetings of the Board
of Directors, and shall perform such other duties as may be prescribed by the
President or the Board of Directors.
Section 9 Assistant Secretaries
The Assistant Secretaries shall act under the direction of the President. In
order of their seniority, unless otherwise determined by the President or the
Board of Directors, they shall, in the absence or disability of the Secretary,
perform the duties and exercise the powers of the Secretary. They shall
perform such other duties and have such other powers as the President or the
Board of Directors may from time to time prescribe.
Section 10 Treasurer
The Treasurer shall act under the direction of the President. Subject to the
direction of the President, the Treasurer shall have custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all
monies and other valuable effects in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the President or the Board of Directors, taking proper vouchers for
such disbursements, and shall render to the President and the Board of
Directors, at its regular meetings, or when the Board of Directors so
requires, an account of all transactions as Treasurer and of the financial
condition of the Corporation.
If required by the Board of Directors, the Treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of such person's office and for the restoration to the Corporation, in
case of such person's death, resignation, retirement or removal from office,
of all books, papers, vouchers, money and other property of whatever kind in
such person's possession or under such person's control belonging to the
Corporation.
Section 11 Assistant Treasurers
The Assistant Treasurers in the order of their seniority, unless otherwise
determined by the President or the Board of Directors, shall, in the absence
or disability of the Treasurer, perform the duties and exercise the powers of
the Treasurer. They shall perform such other duties and have such other powers
as the President or the Board of Directors may from time to time prescribe.
Section 12 Compensation
The salaries and compensation of all officers of the Corporation shall be
fixed by the Board of Directors.
<PAGE>
Section 13 Removal; Resignation
The officers of the Corporation shall hold office at the pleasure of the
Board of Directors. Any officer elected or appointed by the Board of
Directors, or any member of a committee, may be removed at any time, with or
without cause, by the Board of Directors by a vote of not less than a majority
of the entire Board at any meeting thereof or by written consent. Any vacancy
occurring in any office of the Corporation by death, resignation, removal or
otherwise shall be filled by the Board of Directors.
Any director or officer of the Corporation, or any member of any committee,
may resign at any time by giving written notice to the Board of Directors, the
Chairman or Vice Chairman of the Board, the Chief Executive Officer, the
President, or the Secretary of the Corporation. Any such resignation shall
take effect at the time specified therein or, if the time is not specified,
then upon receipt thereof. The acceptance of such resignation shall not be
necessary to make it effective.
Section 14 Vacancies
Any vacancy in the office of any officer through death, resignation,
removal, disqualification or other cause may be filled at any time by a
majority of the directors then in office (even though less than a quorum), the
person so chosen shall hold office until his successor shall have been elected
and qualified.
ARTICLE V
Capital Stock
Section 1 Certificates
Every stockholder shall be entitled to have a certificate signed by the
President or a Vice-President and the Treasurer or an Assistant Treasurer, or
the Secretary or an Assistant Secretary of the Corporation, certifying the
number of shares owned by such person in the Corporation. If the Corporation
shall be authorized to issue more than one class of stock or more than one
series of any class, the designations, preferences and relative,
participating, optional or other special rights of the various classes of
stock or series thereof and the qualifications, limitations or restrictions of
such rights, shall be set forth in full or summarized on the face or back of
the certificate which the Corporation shall issue to represent such stock.
If a certificate is signed (1) by a transfer agent other than the
Corporation or its employees or (2) by a registrar other than the Corporation
or its employees, the signatures of the officers of the Corporation may be
facsimiles. In case any officer who has signed or whose facsimile signature
has been placed upon a certificate shall cease to be such officer before such
certificate is issued, such certificate may be issued with the same effect as
though the person had not ceased to be such officer. The seal of the
Corporation, or a facsimile thereof, may, but need not be, affixed to
certificates of stock.
Section 2 Surrendered; Lost or Destroyed Certificates
The Board of Directors or any transfer agent of the Corporation may direct a
new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost
or destroyed upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost or destroyed. When authorizing
such issue of a new certificate or certificates, the Board of Directors (or
any transfer agent of the Corporation authorized to do so by a resolution of
the Board of Directors) may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost or destroyed certificate
or certificates, or the owner's legal representative, to advertise the same in
such manner as it shall require and/or give the Corporation a bond in such sum
as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost or
destroyed.
<PAGE>
Section 3 Regulations
The Board of Directors shall have the power and authority to make all such
rules and regulations and procedures as it may deem expedient concerning the
issue, transfer, registration, cancellation and replacement of certificates
representing stock of the Corporation.
Section 4 Record Date
The Board of Directors may fix in advance a date not exceeding sixty days
nor less than ten days preceding the date of any meeting of stockholders, or
the date for the payment of any distribution, or the date for the allotment of
rights, or the date when any change or conversion or exchange of capital stock
shall go into effect, or a date in connection with obtaining the consent of
stockholders for any purpose, as a record date for the determination of the
stockholders entitled to notice of and to vote at any such meeting, and any
adjournment thereof, or entitled to receive payment of any such distribution,
or to give such consent, and in such case, such stockholders, and only such
stockholders as shall be stockholders of record on the date so fixed, shall be
entitled to notice of and to vote at such meeting, or any adjournment thereof,
or to receive payment of such dividend, or to receive such allotment of
rights, or to exercise such rights, or to give such consent, as the case may
be, notwithstanding any transfer of any stock on the books of the Corporation
after any such record date fixed as aforesaid.
Section 5 Registered Owner
The Corporation shall be entitled to recognize the person registered on its
books as the owner of shares to be the exclusive owner for all purposes
including voting and distribution, and the Corporation shall not be bound to
recognize any equitable or other claim to or interest in such share or shares
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of Nevada.
ARTICLE VI
General Provisions
Section 1 Registered Office
The registered office of the Corporation shall be in the County of Clark,
State of Nevada.
The Corporation may also have offices at such other places both within and
without the State of Nevada as the Board of Directors may from time to time
determine or the business of the Corporation may require.
Section 2 Checks; Notes
All checks or demands for money and notes of the Corporation shall be signed
by such officer or officers or such other person or persons as the Board of
Directors may from time to time designate.
Section 3 Fiscal Year
The fiscal year of the Corporation shall be fixed by resolution of the Board
of Directors.
Section 4 Stock of Other Corporations or Other Interests
Unless otherwise ordered by the Board of Directors, the Chief Executive
Officer, the President, the Secretary, and such other attorneys or agents of
the Corporation as may be from time to time authorized by the Board of
Directors or the President, shall have full power and authority on behalf of
the Corporation to attend and to act an vote in person or by proxy at any
meeting of the holders of securities of any corporation or other entity in
which the Corporation may own or hold shares or other securities, and at such
meetings shall possess and may exercise all the rights and powers incident to
the ownership of such shares or other securities which the
<PAGE>
Corporation, as the owner or holder thereof, might have possessed and
exercised if present. The Chief Executive Officer, the President, the
Secretary or other such attorneys or agents may also execute and deliver on
behalf of the Corporation, powers of attorney, proxies, consents, waivers and
other instruments relating to the shares or securities owned or held by the
Corporation.
Section 5 Corporate Seal
The Corporation will have a corporate seal, as may from time to time be
determined by resolution of the Board of Directors. If a corporate seal is
adopted, it shall have inscribed thereon the name of the Corporation and the
words "Corporate Seal" and "Nevada". The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or in any manner reproduced.
ARTICLE VII
Indemnification
Section 1 Indemnification Generally
As provided in this Article VII, the Corporation shall indemnify each person
who was or is made a party or is threatened to be made a party to or is
involved in any threatened, pending, or completed action, suit, or proceeding,
whether civil, criminal, administrative, or investigative (hereinafter a
"Proceeding"), by reason of the fact that he or she, or a person of which he
or she is the legal representative, is or was a director or officer, or had
agreed to serve as a director or officer, of the Corporation or is or was
serving or has agreed to serve at the request of the Corporation as a
director, officer, employee, or agent of another corporation or of a
partnership, joint venture, trust, or other enterprise, including service with
respect to employee benefit plans, or by reason of any act alleged to have
been taken or omitted in such capacity, whether the basis of such Proceeding
is alleged action in an official capacity as a director, officer, employee, or
agent or alleged action in any other capacity while serving as a director,
officer, employee, or agent, to the maximum extent authorized by the NRS, as
the same exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than such law permitted the Corporation
to provide prior to such amendment), against all cost, expense, liability, and
loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties, and amounts paid or to be paid in settlement) reasonably incurred
by such person or on his or her behalf in connection with such Proceeding, and
such indemnification shall continue as to a person who has ceased to be a
director, officer, employee, or agent and shall inure to the benefit of his or
her heirs, executors, and administrators. The right to indemnification
conferred in this Article VII shall be a contract right and shall include the
right to be paid by the Corporation the expenses incurred in defending any
such Proceeding in advance of its final disposition; provided that, if the NRS
so requires, the payment of such expenses incurred by a director or officer in
advance of the final disposition of a Proceeding shall be made only upon
receipt by the Corporation of an undertaking by or on behalf of such person to
repay all amounts so advanced if it shall ultimately be determined that such
person is not entitled to be indemnified by the Corporation as authorized in
this Article Eight or otherwise and provided that the Corporation shall not be
required to advance expenses in connection with a Proceeding (or part thereof)
alleging liability under Section 16(b) of the Securities Exchange Act of 1934,
as amended (a "16(b) Claim"). The termination of any Proceeding by judgment,
order, settlement, or conviction, or upon a plea of nolo contendre or its
equivalent, shall not, of itself, create a presumption that the person did not
meet any standard of conduct for indemnification imposed by the NRS. The
Corporation shall be required to indemnify a person in connection with a
Proceeding (or part thereof) initiated by such person only if such Proceeding
(or part thereof) was authorized by the Board of Directors of the Corporation.
Section 2 Indemnification for Costs, Charges, and Expenses for Successful
Party
Notwithstanding the other provisions of this Article VII, to the extent that
a director or officer of the Corporation has been successful on the merits or
otherwise, including, without limitation, the dismissal of an
<PAGE>
action without prejudice, in defense of any Proceeding referred to in Section
1, or in the defense of any claim, issue, or matter therein, he or she shall
be indemnified against all costs, charges, any expenses (including attorneys'
fees) actually and reasonably incurred by him or her or on his or her behalf
in connection therewith.
Section 3 Determination of Right to Indemnification
Any indemnification under Section 1 or 2 (unless ordered by a court) shall
be paid by the Corporation unless a determination is made (a) by the Board of
Directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit, or proceeding, or (b) if such a quorum is not
obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (c) by the
stockholders, that indemnification of the director or officer is not proper in
the circumstances because he or she has not met the applicable standards of
conduct set forth in the NRS.
Section 4 Advance of Costs, Charges and Expenses
Costs, charges, and expenses (including attorneys' fees) incurred by a
person referred to in Section 1 of this Article VII in defending a civil or
criminal Proceeding (including investigations by any government agency and all
costs, charges, and expenses incurred in preparing for any threatened
Proceeding) shall be paid by the Corporation in advance of the final
disposition of such Proceeding; provided, however, that the payment of such
costs, charges, and expenses incurred by a director or officer in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer) in
advance of the final disposition of such Proceeding shall be made only upon
receipt of an undertaking by or on behalf of the director or officer to repay
all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified by the Corporation as
authorized in this Article VII and provided that the Corporation shall not be
required to advance expenses in connection with a 16(b) Claim. No security
shall be required for such undertaking and such undertaking shall be accepted
without reference to the recipient's financial ability to make repayment. The
Board of Directors may, in the manner set forth above, and subject to the
approval of such director or officer, authorize the Corporation's counsel to
represent such person in any Proceeding, whether or not the Corporation is a
party to such Proceeding.
Section 5 Procedure for Indemnification
Any indemnification under Section 1 or advance of costs, charges, and
expenses under Section 4 shall be made promptly, and in any event within 60
days, upon the written request of the director or officer directed to the
Secretary of the Corporation. The right to indemnification or advances as
granted by this Article VII shall be enforceable by the director or officer in
any court of competent jurisdiction if the Corporation denies such request, in
whole or in part, or if no disposition thereof is made within 60 days. Such
person's costs and expenses incurred in connection with successfully
establishing his or her right to indemnification or advances, in whole or in
part, in any such action shall also be indemnified by the Corporation. It
shall be a defense to any such action (other than an action brought to enforce
a claim for the advance of costs, charges, and expenses under Section 4 where
the required undertaking, if any, has been received by the Corporation) that
the claimant has not met the standard of conduct, if any, set forth in the
NRS, but, to the extent permitted by applicable law, the burden of proving
that such standard of conduct has not been met shall be on the Corporation. To
the extent permitted by applicable law, neither the failure of the Corporation
(including its Board of Directors, its independent legal counsel, and its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct, if any, set
forth in the NRS, nor the fact that there has been an actual determination by
the Corporation (including its Board of Directors, its independent legal
counsel, and its stockholders) that the claimant has not met such applicable
standard of conduct, shall be a defense to the action or create a presumption
that the claimant has not met the applicable standard of conduct.
<PAGE>
Section 6 Other Rights; Continuation of Right of Indemnification
The indemnification provided by this Article VII shall not be deemed
exclusive of any other rights to which a person seeking indemnification may be
entitled under any law (common or statutory), agreement, vote of stockholders
or disinterested directors, or otherwise, both as to action in his or her
official capacity and as to action in another capacity while holding office,
and shall continue as to a person who has ceased to be a director or officer
and shall inure to the benefit of the estate, heirs, executors, and
administrators of such person. All rights to indemnification under this
Article VII shall be deemed to be a contract between the Corporation and each
director and officer of the Corporation who serves or served in such capacity
at any time while this Article VII is in effect. No amendment or repeal of
this Article VII or of any relevant provisions of the NRS or any other
applicable laws shall adversely affect or deny to any director or officer any
rights to indemnification which such person may have, or change or release any
obligations of the Corporation under this Article VII with respect to any
costs, charges, expenses (including, attorneys' fees), judgments, fines, and
amounts paid in settlement which arise out of a Proceeding based in whole or
substantial part on any act, actual or alleged, which takes place before or
while this Article VII is in effect. The provisions of this Section 6 shall
apply to any such Proceeding whenever commenced, including any such Proceeding
commenced after any amendment or repeal of this Article VII. The right to
indemnification and advancement of expenses conferred on any person by this
Article VII shall not limited the Corporation from providing any other
indemnification permitted by law.
Section 7 Definitions
For purposes of this Article VII:
"the Corporation" includes any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which, if
its separate existence continued, would have had power and authority to
indemnify its directors or officers, so that any person who is or was a
director or officer of such constituent corporation, or is or was serving at
the request of such constituent corporation as a director, officer, employee,
or agent of another corporation, partnership, joint venture, trust, or other
enterprise, shall stand in the same position under the provisions of this
Article VII with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence
had continued;
"other enterprises" includes employee benefit plans, including but not
limited to any employee benefit plans of the Corporation;
"serving at the request of the Corporation" includes, but is not limited to,
any service which imposes duties on, or involves services by, a director or
officer of the Corporation with respect to an employee benefit plan, its
participants, or beneficiaries, including acting as a fiduciary there;
"fines" shall include any penalties and any excise or similar taxes assessed
on a person with respect to an employee benefit plan;
a person who acted in good faith and in a manner he reasonably believed to
be in the interest of the participants and beneficiaries of an employee
benefit plan shall be deemed to have acted in a manner "not opposed to the
best interests of the Corporation" as referred to in Section 1; and
service as a partner, trustee, or member of management or similar committee
of a partnership or joint venture, or as a director, officer, employee, or
agent of a corporation which is a partner, trustee, or joint venturer, shall
be considered service as a director, officer, employee, or agent of the
partnership, joint venture, trust, or other enterprise.
Section 8 Saving Clause
If this Article VII or any portion hereof shall be invalidated on any ground
by a court of competent jurisdiction, then the Corporation shall nevertheless
indemnify each director and officer of the Corporation as to
<PAGE>
costs, charges, expenses (including attorneys' fees), judgments, fines, and
amounts paid in settlement with respect to any action, suit, or proceeding,
whether civil, criminal, administrative, or investigative, including an action
by or in the right of the Corporation, to the full extent permitted by any
applicable portion of this Article VII that shall not have been invalidated
and to the full extent permitted by applicable law.
Section 9 Indemnification of Other Persons
If authorized by the Board of Directors, the Corporation may indemnify and
advance expenses to any other person whom it has the power to indemnify under
the NRS to the fullest extent permitted by such statutes.
Section 10 Insurance
The Corporation may purchase and maintain insurance, at its expense, to
protect itself and any director, officer, employee, or agent of the
Corporation or another corporation, partnership, joint venture, trust, or
other enterprises against any expense, liability or claim, whether or not the
Corporation would have the power to indemnify such person under the NRS.
ARTICLE VIII
Amendments
Section 1 Amendments by Stockholders
The Bylaws may be amended by a majority vote of all the stock issued and
outstanding and entitled to vote for the election of directors of the
stockholders, provided notice of intention to amend shall have been contained
in the notice of the meeting.
Section 2 Amendments by Board of Directors
The Board of Directors by a majority vote of the whole Board of Directors at
any meeting may amend these Bylaws, including Bylaws adopted by the
stockholders, but the stockholders may from time to time specify particular
provisions of the Bylaws which shall not be amended by the Board of Directors.
<PAGE>
EXHIBIT 10.7
PERSONAL AND CONFIDENTIAL
October 28, 1999
Mr. James J. Cotter
Chairman & CEO
Craig Corporation
This memo will set out the details of the job offer discussed between us in our
meetings of October 21 and October 27, 1999.
Position Description: CFO Craig Corporation
CFO Citadel Holding Corporation
CAO Reading Entertainment, Inc.
Reporting To: James J. Cotter, Chairman & CEO
Main Responsibilities: All financial and administrative functions for the
above mentioned three (3) Companies with reporting
lines from all finance/accounting Managers in the
various subsidiaries.
Salary: Base salary $180,000/annum
Bonus: Unconditional - 12,0000/annum
Conditional - 25% of base salary.
In the first year, conditional bonus will be
conditioned on the successful transfer of the
finance group from Philadelphia to California.
Signing Bonus - $40,0000 payable on starting date.
Interest Free Loan: $33,000 payable on starting date. This amount will
be repaid on the date of my leaving Craig
Corporation employment, at which time a $50,000
leaving bonus will be paid to offset the loan.
<PAGE>
James J. Cotter
Craig Corporation
October 28, 1999
Page 2
Leaving Bonus: In the event of termination of employment for other
than unlawful causes, a 6-month base salary will be
paid.
Stock Options: 30,000 stock options from Craig Corporation.
30,000 stock options from Citadel Holding
Corporation.
The above stock options will be deeded to me on the
starting date. These 60,000 stock options will vest
in the following manner:
- 30,000 shares at the end of 12 months from start
of employment.
- 10,000 shares at the end of 24 months from start
of employment.
- 10,000 shares at the end of 36 months from start
of employment.
- 10,000 shares at the end of 48 months from start
of employment.
Company Car: A company car will be available for this position
valued at $1000/month for the total package.
401K Contribution: The Company will contribute a matching amount of 3%
of total pay (salary & unconditional and
conditional bonus) into the 401K Plan.
Vacation: Official vacation of 2 weeks/annum.
3 weeks after 5 years, however, flexibility will be
available at the discretion of the Chairman/CEO.
Medical: Benefits to be the same as currently being enjoyed
under the Beckman Coulter, Inc. Plan for medical,
dental and vision and will be reimbursed by the
Company.
Incidentals: Parking fees will be paid by the Company.
Cellular phone and internet connection at home will
be paid by the Company.
Normal business expenses will be reimbursed.
Starting date: ASAP
James J. Cotter
<PAGE>
Craig Corporation
October 28, 1999
Page 3
Based on the above, if this is acceptable to you, can you please sign and refax
back to me at (714) 508-5726.
ACCEPTED: /s/ James J. Cotter
-------------------------
James J. Cotter
Chairman and CEO
Best regards,
Andrzej Matyczynski
<PAGE>
EXHIBIT 10.8
NATIONAL AUTO CREDIT, INC.
LETTERHEAD
April 5, 2000
James J. Cotter, Chairman James J. Cotter, Chairman
Reading Entertainment, Inc. FA, Inc.
One Penn Square West c/o Reading Entertainment, Inc.
30 South Fifteenth Street, Suite 1300 One Penn Square West
Philadelphia, PA 19103-4831 30 South Fifteenth Street, Suite 1300
Philadelphia, PA 19103-4831
Re: Acquisition of Additional 1/3 Membership interest in
Angelika Film Center, LLC
Dear Mr. Cotter:
National Auto Credit, Inc. ("National") and its wholly-owned subsidiary,
National Cinemas, Inc. ("National Cinemas"), have entered into an agreement (the
"Angelika Agreement") with FA, Inc. and Reading Entertainment, Inc. ("RDG" and
collectively with its consolidated subsidiaries, "Reading") to acquire a 50%
membership interest in Angelika Film Centers, LLC ("AFC"). The purpose of this
letter is to set out the terms under which Reading has agreed to grant to
National an option to acquire an Additional 1/3 Membership Interest in AFC.
A. The Option Grant: For good and valuable consideration, the receipt and
----------------
sufficiency of which is hereby acknowledged, Reading does hereby grant to
National that option more specifically described hereinbelow.
B. Exercise Option: National will have a period of forty-five (45) days,
---------------
through and including May 20, 2000 in which to determine whether or not it
wishes to proceed with the acquisition of the 1/3 Membership Interest owned
by Reading that is not subject to the Angelika Agreement (the "Subject
Interest"), for a purchase price of $9,000,000, on substantially the same
terms and conditions set forth in the Angelika Agreement (except as
otherwise provided herein). If National determines that it wishes to
exercise the option, it will give written notice of that election to
Reading within this period. Thereafter, National and Reading will cooperate
and work in good faith to complete the definitive documentation necessary
to complete the transaction, with an intention to close such transactions
within thirty (30) days of the date of such election. Closing shall be
subject to compliance with the Hart-Scott-Rodino Antitrust Improvements
Act.
C. Exclusivity: Reading agrees to deal exclusively with National during the
-----------
term of this
<PAGE>
option, other then its ongoing discussions with Citadel Holding
Corporation.
D. Form and Payment of the Purchase Price: The purchase price of $9,000,000
--------------------------------------
will be paid in full at the Closing by the issuance of the Common Stock of
National, priced at $1.50 per share. In the event that National lacks
sufficient authorized and unissued shares to pay the entire purchase price
in Common Stock, it will pay the balance in cash by wire transfer of
currently available funds. National will grant to Reading registration
rights equivalent to the registration rights granted to Reading pursuant to
the Angelika Agreement.
Sincerely,
/s/ David L. Huber
David L. Huber
Chairman of the Board and
Chief Executive Officer
ACCEPTED AND AGREED
AS OF THIS 5/th/ DAY
OF APRIL, 2000
READING ENTERTAINMENT, INC.
By: /s/ S. Craig Tompkins
------------------------
Its: Vice Chairman
------------------------
2
<PAGE>
EXHIBIT 10.9
NATIONAL AUTO CREDIT, INC.
LETTERHEAD
April 5, 2000
James J. Cotter, Chairman
Reading Entertainment, Inc.
One Penn Square West
30 South Fifteenth Street, Suite 1300
Philadelphia, PA 19103-4831
Re: Acquisition of Domestic Cinema Assets
Dear Mr. Cotter:
As we have discussed, National Auto Credit, Inc. ("National") is interested in
entering into the motion picture exhibition business in the United States
through it wholly-owned subsidiary National Cinemas, Inc. ("National Cinemas").
National and National Cinemas have entered into an agreement (the "Angelika
Agreement") with Reading Entertainment, Inc. ("RDG" and collectively with its
consolidated subsidiaries, "Reading") to acquire a 50% membership interest in
Angelika Film Centers, LLC ("AFC"). The purpose of this letter is to set out the
terms under which Reading has agreed to grant to National an option to acquire
the remainder of Reading's domestic cinema assets.
A. The Option Fee: Promptly following the execution and delivery of this
--------------
letter agreement, National will transfer to Reading the sum of $500,000, in
consideration of the rights granted by Reading to National pursuant to this
letter agreement.
B. The Assets Covered: In consideration of the payment of this fee, National
------------------
will have the option, as described hereinbelow, to acquire the following assets:
1. The City Cinemas Rights: These are the rights held by Reading under
-----------------------
that certain Agreement in Principle between RDG, James J. Cotter and Michael
Forman dated December 2, 1998, a copy of which is appended as Appendix A to this
letter (the "City Cinemas Agreement"), other than the right to acquire the 1/6th
interest in AFC and the right to acquire by merger Off Broadway, Inc. described
in that Agreement in Principle. The purchase price of this asset will be an
amount equal to Reading's transaction costs with respect to such transaction
(including reimbursement of the $1 million deposit previously made by Reading
and which counts as a credit against the option fee specified in the City
Cinemas Agreement).
2. The Domestic Cinema Assets: These include the following cinema assets:
--------------------------
<PAGE>
a) The remaining interest held by Reading in AFC (including the
interest being acquired pursuant to the City Cinemas Agreement);
b) The Angelika Film Center Houston (Houston, Texas);
c) The Reading Mansville 12 (Mansville, New Jersey);
d) The St. Anthony Main (Minneapolis, Minnesota);
e) The Tower Cinema (Sacramento, California)
f) The Angelika Film Center Buffalo (Buffalo, New York); and
g) The Angelika Film Center Dallas (under development in Dallas,
Texas).
Provided, that Reading is currently in negotiations with respect to
the Angelika Film Center Buffalo, and may terminate its rights and
obligations with respect to such cinema complex if it is not satisfied
with the results of such negotiation.
The purchase price of the Domestic Cinema Assets will be as follows:
a) With respect to the remaining interest in AFC, the million;
amount of $13.5
b) With respect to the cinemas at Houston, Mansville, Minneapolis,
Sacramento and Buffalo, the lesser of Reading's historic cost
basis in such assets and the fair market value of such cinemas
(such fair market value to be determined, in the event of dispute
between the parties, by binding arbitration under the rules of
the American Arbitration Association); and
c) With respect to the cinema under development in Dallas, Reading's
cost basis in such asset.
C. Exercise Option: National will have a period of sixty (60) days, through
---------------
and including June 5, 2000 in which to determine whether or not it wishes to
proceed with the acquisition of the City Cinema Rights and the Domestic Cinema
Assets. National shall have the right to extend the sixty (60) day period
provided in the immediately preceding sentence for up to two (2) additional
periods of thirty (30) days, by written notice to Reading given on or before the
expiration of such sixty (60) day period (or extension thereof) accompanied by
payment to Reading of $100,000 in immediately available funds for each such
thirty (30) day extension. If National determines that it wishes to exercise the
option, it will give written notice of that election to Reading within this
period. Thereafter, National and Reading will cooperate and work in good faith
to complete the definitive documentation necessary to complete the transaction,
with an intention to close such transactions within sixty (60) days of the date
of such election. Closing shall be subject to compliance with the Hart-Scott-
Rodino Antitrust Improvements Act.
D. Citadel Offer: In the event that National elects to exercise the Option
-------------
that is the subject of this letter agreement, National will offer to Citadel
Holding Corporation ("Citadel") the right to form a joint venture with National
or National Cinemas (as the case may be) to acquire the City Cinemas Rights and
the Domestic Cinema Assets. The joint venture would be structured as a
2
<PAGE>
Delaware limited liability company, and would be generally on the terms set out
in Appendix B to this letter. Citadel will have until the later of (i) thirty
(30) days following the date on which National offers Citadel such right and
(ii) two (2) business days following the date on which National notifies Citadel
(by coy of its notice to Reading) whether it elects to exercise the option
granted to National by RDG and FA, Inc. by letter of even date herewith to
purchase the additional 1/3 Membership Interest in AFC held by FA, Inc., in
which to elect in writing to accept such offer. Thereafter, if Citadel elects to
accept such offer, National and Citadel will cooperate and work in good faith to
complete the definitive documentation necessary to complete the transaction
within the time periods specified above. If Citadel has elected to participate
in the joint venture and then fails for any reason, other than default by
National or National Cinemas, to close, National will be entitled, at its
option, within ten (10) business days of such default, to revoke through written
notice to Reading, its exercise of the option to acquire the city Cinema Rights
and the Domestic Cinema Assets.
E. Exclusivity: Reading agrees to deal exclusively with National during the
-----------
term of this option; provided, however, that Reading will be entitled to
continue its negotiations with Citadel and to enter into agreements with Citadel
with respect to the City Cinema Rights and the Domestic Cinema Assets, so long
as any agreements entered into with Citadel are entered into subject to the
rights of National under this letter agreement. National also acknowledges and
agrees that Reading may elect to dispose of its interest in the Angelika Film
Center Buffalo separate from this agreement.
F. Return of Option Fee: In the event of failure to close the acquisition of
--------------------
the City Cinemas Rights and the Domestic Cinema Assets due to default on the
part of Reading, National will be entitled to a refund of the option fee. In all
other cases, such fee will be deemed fully earned by Reading upon the execution
and delivery of this letter agreement by Reading.
G. Form and Payment of the Purchase Price: The purchase price will be paid in
--------------------------------------
full at the Closing by wire transfer of currently available funds. In the event
of such a closing, the option fee will be credited to the purchase price
(including any fee paid for the extension thereof).
[THE REMAINDER OF THIS PAGE IS LEFT INTENTIONALLY BLANK.]
3
<PAGE>
Should you have any questions, please feel free to contact me at (440) 349-1000.
Sincerely,
/s/ David L. Huber
David L. Huber
Chairman of the Board and
Chief Executive Officer
ACCEPTED AND AGREED
AS OF THIS 5th DAY
---
OF APRIL, 2000
READING ENTERTAINMENT, INC.
By: /s/ S. Craig Tompkins
--------------------------
Its: Vice Chairman
--------------------------
4
<PAGE>
EXHIBIT 10.10
================================================================================
PURCHASE AGREEMENT
AMONG
NATIONAL AUTO CREDIT, INC.,
NATIONAL CINEMAS, INC.
FA, INC.
and
READING ENTERTAINMENT, INC.
______________________________
Dated as of April 5, 2000
______________________________
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I. DEFINITIONS.......................................................... 1
Section 1.1 Definitions...................................................... 1
ARTICLE II. PURCHASE AND SALE.................................................... 6
Section 2.1 Transfer of Shares............................................... 6
Section 2.2 Closing.......................................................... 6
Section 2.3 Purchase Price................................................... 6
Section 2.4 Certain Indemnitees.............................................. 7
Section 2.5 Newco............................................................ 7
Section 2.6 Option Letters................................................... 7
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE PARENT.......... 7
Section 3.1 Organization..................................................... 8
Section 3.2 Capitalization; Title to the Interests........................... 8
Section 3.3 Subsidiaries and Investments..................................... 8
Section 3.4 Authorization and Validity of Agreement.......................... 8
Section 3.5 No Conflict or Violation......................................... 9
Section 3.6 Consents and Approvals........................................... 9
Section 3.7 Financial Statements............................................. 9
Section 3.8 Absence of Certain Changes or Events............................. 10
Section 3.9 Tax Matters...................................................... 11
Section 3.10 Intentionally Omitted............................................ 12
Section 3.11 Intellectual Property............................................ 12
Section 3.12 Personal Property................................................ 12
Section 3.13 Real Property.................................................... 13
Section 3.14 Licenses, Permits and Governmental Approvals..................... 14
Section 3.15 Compliance with Law.............................................. 14
Section 3.16 Contracts........................................................ 15
Section 3.17 Intentionally Omitted............................................ 16
Section 3.18 Litigation....................................................... 16
Section 3.19 Insurance........................................................ 16
Section 3.20 Employee Plans................................................... 16
Section 3.21 Labor Matters.................................................... 16
Section 3.22 Environmental Matters............................................ 17
Section 3.23 Brokers and Finders.............................................. 17
Section 3.24 Year 2000 Compliance............................................. 17
Section 3.25 Intentionally Omitted............................................ 17
Section 3.26 Change in Ownership.............................................. 18
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Section 3.27 Intentionally Omitted........................................... 18
Section 3.28 Absence of Undisclosed Liabilities.............................. 18
Section 3.29 Purchase for Investment......................................... 18
Section 3.30 Restricted Securities........................................... 18
Section 3.31 Due Diligence................................................... 19
Section 3.32 Survival........................................................ 19
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE BUYER AND NEWCO.............. 19
Section 4.1 Corporate Organization.......................................... 19
Section 4.2 Subsidiaries and Investments.................................... 20
Section 4.3 Authorization and Validity of Agreement......................... 20
Section 4.4 Capitalization.................................................. 20
Section 4.5 No Conflict or Violation........................................ 21
Section 4.6 Consents and Approvals.......................................... 21
Section 4.7 Financial Statements............................................ 21
Section 4.8 Absence of Certain Changes or Events............................ 21
Section 4.9 Tax Matters..................................................... 22
Section 4.10 Real Property................................................... 23
Section 4.11 Litigation...................................................... 25
Section 4.12 Employee Plans.................................................. 25
Section 4.13 Labor Matters................................................... 28
Section 4.14 Environmental Matters........................................... 28
Section 4.15 Purchase for Investment......................................... 29
Section 4.16 Brokers and Finders............................................. 29
Section 4.17 Due Diligence................................................... 29
Section 4.18 Survival........................................................ 29
ARTICLE V. COVENANTS OF THE PARTIES........................................... 30
Section 5.1 Consents and Approvals Required on Closing Date................. 30
Section 5.2 Further Assurances.............................................. 30
Section 5.3 Best Efforts.................................................... 30
Section 5.4 Nondisclosure................................................... 30
Section 5.5 Tax Matters..................................................... 30
Section 5.6 Cooperation on Tax Matters...................................... 31
Section 5.7 Amendment to Management Agreement............................... 31
Section 5.8 Amendment to Trademark License Agreement........................ 31
Section 5.9 Notification and Put Rights..................................... 31
Section 5.10 Amendment to Certificate of Incorporation....................... 32
Section 5.11 Board Representation............................................ 32
ARTICLE VI. INDEMNIFICATION.................................................... 32
Section 6.1 Indemnification by the Seller and the Parent.................... 32
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Section 6.2 Procedures for Indemnification by the Seller and the Parent....... 33
Section 6.3 Indemnification by the Buyer and Newco............................ 34
Section 6.4 Procedures for Indemnification by the Buyer and Newco............. 35
ARTICLE VII. CONDITIONS TO OBLIGATIONS OF THE SELLER AND THE PARENT............... 36
Section 7.1 Representations and Warranties of the Buyer and Newco............. 36
Section 7.2 Performance of the Obligations of the Buyer and Newco............. 36
Section 7.3 Consents and Approvals............................................ 36
Section 7.4 No Violation of Orders............................................ 36
Section 7.5 Registration Rights Agreement..................................... 36
Section 7.6 Buyer Closing Documents........................................... 36
Section 7.7 Legal Matters..................................................... 37
ARTICLE VIII. CONDITIONS TO OBLIGATIONS OF THE BUYER AND NEWCO..................... 37
Section 8.1 Representations and Warranties of the Seller and the Parent....... 37
Section 8.2 Performance of the Obligations of the Seller and the Parent....... 37
Section 8.3 Consents and Approvals............................................ 37
Section 8.4 No Violation of Orders............................................ 37
Section 8.5 Sellers Closing Documents......................................... 38
Section 8.6 Legal Matters..................................................... 38
ARTICLE IX. TERMINATION.......................................................... 38
Section 9.1 Conditions of Termination......................................... 38
Section 9.2 Effect of Termination............................................. 39
Section 9.3 Intentionally Omitted............................................. 39
ARTICLE X. MISCELLANEOUS........................................................ 39
Section 10.1 Successors and Assigns............................................ 39
Section 10.2 Governing Law; Jurisdiction....................................... 39
Section 10.3 Service of Process................................................ 39
Section 10.4 Expenses; Fees.................................................... 39
Section 10.5 Severability...................................................... 39
Section 10.6 Notices........................................................... 39
Section 10.7 Amendments; Waivers............................................... 40
Section 10.8 Public Announcements.............................................. 41
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Section 10.9 Entire Agreement.................................................. 41
Section 10.10 Parties in Interest............................................... 41
Section 10.11 Scheduled Disclosures............................................. 41
Section 10.12 Specific Performance.............................................. 41
Section 10.13 Section and Paragraph Headings.................................... 41
Section 10.14 Counterparts...................................................... 41
</TABLE>
Exhibits
- --------
Exhibit A - Form of Amendment and Waiver
Exhibit B - Option Letters
Exhibit C - Company Financial Statements
Exhibit D - Form of Registration Rights Agreement
Exhibit E - Form of Amendment to Trademark License Agreement
Exhibit F - Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional and Other Special Rights and the
Qualifications, Limitations, Restrictions, and Other Distinguishing
Characteristics of the Series A Convertible Preferred Stock of
National Auto Credit, Inc.
iv
<PAGE>
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (this "Agreement") is made and entered into as of
this 4/th/ day of April, 2000, by and among National Auto Credit, Inc., a
Delaware corporation (the "Buyer"), National Cinemas, Inc. ("Newco"), FA, Inc.
(d/b/a FA of Delaware), a Delaware corporation (the "Seller"), and Reading
Entertainment, Inc., a Nevada corporation (the "Parent").
PRELIMINARY STATEMENT
WHEREAS, Angelika Film Centers LLC, a Delaware limited liability company
(the "Company"), owns and operates the Angelika Film Center, consisting of a
multiplex cinema and cafe complex, located at 18 W. Houston Street, New York,
New York, in the SOHO District of Manhattan;
WHEREAS, the Seller owns an 83.34% membership interest in the Company
which, together with the remaining 16.66% membership interest in the Company
owned by Sutton Hill Associates, a California general partnership ("Sutton
Hill"), constitutes all of the outstanding membership interests in the Company
(the "Interests"); and
WHEREAS, the Parent owns indirectly all of the issued and outstanding
shares of capital stock of the Seller and Buyer owns all of the issued and
outstanding capital stock of Newco; and
WHEREAS, the Buyer desires to enter into the motion picture exhibition
business in the United States and to purchase a 50% membership interest in the
Company from the Seller (the "Purchased Interests"), and the Seller desires to
sell the Purchased Interests to the Buyer, on the Closing Date (as hereinafter
defined), upon the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual terms, conditions and other
agreements set forth herein, the parties hereto hereby agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.1. Definitions. As used in this Agreement (including the
recitals and Schedules hereto), the following terms shall have the following
meanings (such meanings to be applicable equally to both singular and plural
forms of the terms defined):
"Affiliate" shall mean, as to any Person, any other Person which directly
or indirectly controls, or is under common control with, or is controlled by,
such Person. As used in this definition, "control" (including, with its
correlative meanings, "controlled by" and "under common control with") shall
mean possession, directly or indirectly, of the power to direct or cause the
direction of management, policies or investments (whether through ownership of
securities or partnership or other ownership interests, by management or
advisory contract or otherwise) of such Person.
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"Agreement" shall have the meaning set forth in the preamble hereto.
"Amended Trademark License Agreement" shall have the meaning set forth in
Section 5.9 hereof.
"Amendment and Waiver" means the Amendment and Waiver to the Limited
Liability Company Agreement between the Seller and Sutton Hill to be entered
into among the Seller and Sutton Hill on or prior to the Closing Date in the
form attached hereto as Exhibit A.
"Benefit Arrangement" shall have the meaning set forth in Section 3.20
hereof.
"Buyer" shall have the meaning set forth in the preamble hereto.
"Buyer Common Stock" means the Common Stock, par value $.05 per share, of
the Buyer.
"Buyer Series A Preferred Stock" means the Series A Convertible Preferred
Stock, par value $.05 per share, of the Buyer, described on Exhibit F hereto.
"Buyer Employee Plans" shall have the meaning set forth in Section 4.12
hereof.
"Buyer ERISA Affiliate" shall have the meaning set forth in Section 4.12
hereof.
"Buyer Events of Breach" shall have the meaning set forth in Section 6.3
hereof.
"Buyer Indemnitees" shall have the meaning set forth in Section 6.1 hereof.
"Buyer Leased Property" shall have the meaning set forth in Section 4.10(b)
hereof.
"Buyer Leases" shall have the meaning set forth in Section 4.10(b) hereof.
"Buyer Losses" shall have the meaning set forth in Section 6.1 hereof.
"Buyer Material Adverse Effect" shall mean a material adverse effect on the
business, operations, assets, properties or condition (financial or otherwise)
of the Buyer and its subsidiaries, taken as a whole.
"Buyer Multiemployer Plan" shall have the meaning set forth in Section
4.12(b) hereof.
"Buyer Owned Real Property" shall have the meaning set forth in Section
4.10(a) hereof.
"Buyer Pension Plans" shall have the meaning set forth in Section 4.12
hereof.
"Buyer Plans" shall have the meaning set forth in Section 4.12 hereof.
"Buyer Financial Statements" shall have the meaning set forth in Section
4.7 hereof.
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"CERCLA" shall have the meaning set forth in Section 3.22(b) hereof.
"Certificate of Designation" shall mean that Certificate of Designation,
Number, Powers, Preferences and Relative, Participating, Optional and Other
Special Rights and the Qualifications, Limitations, Restrictions, and Other
Distinguishing Characteristics of the Series A Convertible Preferred Stock of
National Auto Credit, Inc., the form of which is attached hereto as Exhibit F.
"Closing" shall have the meaning set forth in Section 2.2 hereof.
"Closing Date" shall have the meaning set forth in Section 2.2 hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and all
regulations promulgated thereunder, as in effect from time to time.
"Commission" means the Securities and Exchange Commission.
"Company" shall have the meaning set forth in the preliminary statement
hereof.
"Company Balance Sheet" shall have the meaning set forth in Section 3.7
hereof.
"Company Financial Statements" shall have the meaning set forth in Section
3.7 hereof.
"Company Material Adverse Effect" shall mean a material adverse effect on
the business, operations, assets, properties or condition (financial or
otherwise) of the Company.
"Company Permits" shall have the meaning set forth in Section 3.14 hereof.
"Company Unaudited Financial Statements" shall have the meaning set forth
in Section 3.7 hereof.
"Contracts" shall have the meaning set forth in Section 3.16 hereof.
"Employee Plans" shall have the meaning set forth in Section 3.20(a)
hereof.
"Employment and Labor Agreements" shall have the meaning set forth in
Section 4.13(a) hereof.
"Environmental Laws" shall have the meaning set forth in Section 3.22(a)
hereof.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended, and all regulations promulgated thereunder, as in effect from time to
time.
"GAAP" shall mean United States generally accepted accounting principles as
in effect on the date on which the document or calculation to which it refers
relates, applied on a consistent basis throughout the periods covered thereby.
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"Government" shall mean any agency, division, subdivision, audit group or
procuring office of the Government of the United States, any state of the United
States or any foreign government, including the employees or agents thereof.
"Hazardous Materials" shall have the meaning set forth in Section 3.22(c)
hereof.
"Income Tax" or "Income Taxes" shall mean all Taxes based upon, measured
by, or calculated with respect to (i) gross or net income or gross or net
receipts or profits (including, but not limited to, any capital gains, minimum
taxes and any Taxes on items of tax preference, but not including sales, use,
goods and services, real or personal property transfer or other similar Taxes),
(ii) multiple bases (including, but not limited to, corporate franchise, doing
business or occupation Taxes) if one or more of the bases upon which such Tax
may be based upon, measured by, or calculated with respect to, is described in
clause (i) above or (iii) withholding taxes measured by, or calculated with
respect to, any payments or distributions (other than wages).
"Indebtedness" shall mean all loan and credit agreements, indentures,
debentures, promissory notes and other evidences of indebtedness, and all
guarantees related thereto, of the Company.
"Intellectual Property" shall have the meaning set forth in Section 3.11
hereof.
"Interests" shall have the meaning set forth in the Preliminary Statement
hereof.
"Leases" shall have the meaning set forth in Section 3.13(b) hereof.
"Leased Property" shall have the meaning set forth in Section 3.13(b)
hereof.
"Lien" shall mean any mortgage, pledge, security interest, encumbrance,
lien (statutory or other) or conditional sale agreement.
"Management Agreement" shall mean the Management Agreement, dated as of
August 27, 1996, by and between the Company and City Cinemas Corporation, a New
York corporation.
"Newco" shall have the meaning set forth in the preamble hereto.
"NLRB" shall have the meaning set forth in Section 4.13(b) hereof.
"Option Letters" shall have the meaning set forth in Section 2.6 hereof.
"Parent" shall have the meaning set forth in the preamble hereto.
"PBGC" shall have the meaning set forth in Section 4.12(e) hereof.
"Permits" shall mean licenses, permits, franchises, authorizations and
approvals issued or granted by the Government, any state or local government,
any foreign national or local
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government, or any department, agency, board, commission, bureau or
instrumentality of any of the foregoing.
"Person" shall mean and include any individual, corporation, limited
liability company, partnership, joint venture, association, joint-stock company,
trust, any other unincorporated organization or Government.
"Plans" shall have the meaning set forth in Section 3.20(a) hereof.
"Proceeding" shall have the meaning set forth in Section 6.2 hereof.
"Purchased Interests" shall have the meaning set forth in the Preliminary
Statement hereof.
"Reading Investment" shall have the meaning set forth in Section 5.9
hereof.
"Registration Rights Agreement" means the Registration Rights Agreement to
be entered into among the Buyer and the Seller on the Closing Date in the form
attached hereto as Exhibit D.
"SEC Reports" means the registration statements, reports and proxy
statements filed with the Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Seller Events of Breach" shall have the meaning set forth in Section 6.1
hereof.
"Seller Indemnitees" shall have the meaning set forth in Section 6.3
hereof.
"Seller Losses" shall have the meaning set forth in Section 6.3 hereof.
"Seller" shall have the meaning set forth in the preamble hereto.
"Share Consideration" shall have the meaning set forth in Section 2.3
hereof.
"Sutton Hill" shall have the meaning set forth in the Preliminary Statement
hereof.
"Taxes" shall mean any and all federal, state, local, foreign and other
taxes, levies, fees, imposts, duties and charges of whatever kind (including any
interest, penalties or additions to the tax imposed in connection therewith or
with respect thereto), whether or not imposed on the Company, including, without
limitation, taxes imposed on, or measured by, income, franchise, profits or
gross receipts, and also ad valorem, value added, sales, use, service, real or
personal property, capital stock, license, payroll, withholding, employment,
social security, workers' compensation, unemployment compensation, utility,
severance, production, excise, stamp, occupation, premium, windfall profits,
transfer and gains taxes and customs duties.
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"Tax Returns" shall mean returns, reports, information statements and other
documentation (including any additional or supporting material) filed or
maintained, or required to be filed or maintained, in connection with the
calculation, determination, assessment or collection of any Tax and shall
include any amended returns required as a result of examination adjustments made
by the Internal Revenue Service or other Tax authority.
"Transaction Documents" shall mean this Agreement and the Exhibits and
Schedules hereto, the Registration Rights Agreement, the Option Letters, the
Amendment and Waiver, the Amended Trademark License Agreement and all other
agreements, instruments, certificates and other documents to be entered into or
delivered by any party in connection with the transactions contemplated to be
consummated pursuant to any of the foregoing.
ARTICLE II.
PURCHASE AND SALE
Section 2.1. Transfer of Interests. On the Closing Date and upon the
terms and subject to the conditions set forth in this Agreement, the Seller
shall sell, assign, transfer, convey and deliver the Purchased Interests, free
and clear of any liens, claims, charges, security interests or other legal or
equitable encumbrances, limitations or restrictions, to the Buyer, and the Buyer
shall purchase and accept the Purchased Interests from the Seller.
Section 2.2. Closing. The closing of the sale and purchase of the
Purchased Interests (the "Closing") shall take place on the 5/th/ day of April,
2000, or at such other time and date as the parties hereto shall agree in
writing (the "Closing Date"), at the offices of De Martino Finkelstein Rosen &
Virga, 1818 N Street, N.W., Suite 400, Washington, D.C. 20036, or at such other
place as the parties hereto shall agree. At the Closing, the Seller shall
deliver to the Buyer or its designees instruments of transfer reasonably
acceptable to the Buyer transferring the Purchased Interests, with all stamp or
other taxes attributable to the transfer of such Purchased Interests paid or
provided for as contemplated herein, and the Seller and the Parent shall execute
and deliver the Transaction Documents to which each of them is a party. In full
consideration and exchange for the Purchased Interests, the Buyer shall
thereupon pay to the Seller the purchase price as provided in Section 2.3
hereof, and the Buyer and Newco shall execute and deliver the Transaction
Documents to which each of them is a party.
Section 2.3. Purchase Price. Upon the terms and subject to the conditions
set forth in this Agreement, in reliance on the representations, warranties,
covenants and agreements of the parties contained herein, the consideration for
the sale and transfer of the Purchased Interests on the Closing Date shall
consist of (i) 8,999,900 shares of Buyer Common Stock (the "Common Share
Consideration") and (ii) 100 shares of Buyer Series A Preferred Stock (the
"Preferred Share Consideration"). The Buyer shall deliver to the Seller the
certificates representing the Common Share Consideration on the Closing Date,
and the Buyer shall deliver to the Seller the certificates representing the
Preferred Share Consideration promptly following the acceptance for filing under
the Delaware General Corporation Law of the Certificate of Designation. In the
event that the Certificate of Designation for the Buyer's Series A Preferred
Stock has not been filed with the appropriate Delaware authorities at the
Closing Date, the parties will nevertheless
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close the transaction, based upon Buyer's covenant to file such Certificate of
Designation and to issue the Buyer Series A Preferred Stock immediately
thereafter. In such case, stock certificates representing such Buyer Series A
Preferred Stock will be conditionally delivered to Seller at the Closing to be
effective immediately upon the filing of the Certificate of Designation. The
failure to file the Certificate of Designation within 48 hours of the Closing
will give to Seller the right, at its election, either (a) to rescind the
transactions provided for in this Agreement or (b) to surrender to Buyer the
Buyer Common Stock received and its rights to receive the Buyer Series A Common
Stock in exchange for cash in the amount of $13.5 million.
Section 2.4. Certain Indemnitees. Reference is made to that certain
Guarantee dated August 28, 1996 by Parent in favor of Cable Building Associates,
pursuant to which Parent has guaranteed the obligations of the Company under the
lease between Cable Building Associates and the Company (the "Cable Guarantee").
Effective upon the Closing, NAC agrees to indemnify Parent for 50% of any
liability that Parent may incur under the Cable Guarantee other than any
liability resulting solely from the breach by Parent of its obligations under
the Cable Guarantee. Upon the request of Parent, NAC and Parent will cooperate
and work in good faith to separately document such indemnity, with the intention
that Parent and NAC be, in effect, each responsible for 50% of the obligations
of the guarantor under such guarantee.
Section 2.5. Newco. On the Closing Date, the Buyer shall transfer to
Newco the Purchased Interests. Seller hereby consents to the transfer of the
Purchased Interests to Newco. The parties acknowledge and agree that other than
Newco's obligations pursuant to this Agreement, ownership and management of the
Purchased Interests, ownership of any distributions received from the Company
and obligations pursuant to the operating agreement with respect to the Company,
Newco shall not incur any liabilities or obligations or conduct any business.
Buyer hereby covenants and agrees that it will not take, and will cause Newco
not to take, any action that would foreseeably cause Newco to be unable to
satisfy its obligations hereunder or would foreseeably render such obligations
unenforceable, including, without limitation, any action with respect to the
sale or other disposition by Newco of any of its assets, the declaration of
dividends by Newco, the repurchase, redemption or other acquisition by Newco of
any of its stock, the incurrence of indebtedness by Newco, the creation of any
liens or encumbrances by Newco on any of its assets, or the merger,
consolidation, liquidation or dissolution of Newco.
Section 2.6. Option Letters. The Buyer and the Parent acknowledge that
they are executing and delivering simultaneously with this Agreement the Option
Letters in the form set forth as Exhibits B-1 and B-2 hereto (the "Option
Letters").
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE PARENT
The Seller and the Parent (jointly and severally) represent and warrant to
the Buyer as follows:
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Section 3.1. Organization. The Company is a limited liability company
duly formed, validly existing and in good standing under the laws of the State
of Delaware and has all requisite power and authority and all governmental
licenses, authorizations, permits, consents and approvals to own its properties
and assets and to conduct its businesses as now conducted and as proposed to be
conducted, except where the failure to be so organized, existing and in good
standing or to have such power and authority will not, in the aggregate, have a
Company Material Adverse Effect. The Company is duly qualified to do business as
a foreign company and is in good standing in every jurisdiction where the
character of the properties owned or leased by it or the nature of the business
conducted by it makes such qualification necessary, except where the failure to
be so qualified would not have a Company Material Adverse Effect. The Company is
qualified to do business only in the State of New York. Copies of the Limited
Liability Company Agreement, the Management Agreement of the Company and other
formation documents of the Company, with all amendments thereto to the date
hereof, have been furnished by the Parent to the Buyer or its representatives,
and such copies are accurate and complete as of the date hereof.
Section 3.2. Capitalization; Title to the Interests. The authorized and
outstanding capitalization of the Company is as set forth in Schedule 3.2. All
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of the Purchased Interests are issued and outstanding as of the date of this
Agreement and are owned of record and beneficially by the Seller as set forth in
Schedule 3.2. The Purchased Interests have been duly authorized and validly
- ------------
issued and no personal liability attaches to the ownership thereof. The
Purchased Interests represent 50% of the issued and outstanding Interests of the
Company. Except for this Agreement and as set forth on Schedule 3.2, there are
------------
no outstanding options, warrants, agreements, conversion rights, preemptive
rights or other rights to subscribe for, purchase or otherwise acquire the
Interests, any unissued or treasury shares of capital stock or interests of the
Company, any outstanding obligations of the Company to repurchase, redeem or
otherwise acquire outstanding Interests or any securities convertible into or
exchangeable for any shares of capital stock or interests of the Company. The
Seller owns beneficially and of record and has all of the ownership interests
in, all of the Purchased Interests, free and clear of any mortgage, pledge,
hypothecation, rights of others, claim, security interest, charge, encumbrance,
title defect, title retention agreement, voting trust agreement, interest,
option, lien, charge or similar restriction or limitation (including any
restriction on the right to vote, sell or otherwise dispose of the Purchased
Interests).
Section 3.3. Subsidiaries and Investments. The Company does not, directly
or indirectly, own, of record or beneficially, any outstanding voting securities
or other equity interests in or control any corporation, limited liability
company, partnership, trust, joint venture or other entity.
Section 3.4. Authorization and Validity of Agreement. Each of the Seller
and the Parent has all requisite corporate or other authority to enter into the
Transaction Documents to which it is a party and to carry out its obligations
thereunder. The execution and delivery of the Transaction Documents to which the
Seller and Parent are parties by the Seller and the Parent and the performance
by the Seller and the Parent of their respective obligations thereunder have
been duly authorized by all necessary action on the part of the Seller and the
Parent, and no other
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proceedings on the part of the Seller and the Parent are necessary to authorize
such execution, delivery and performance. The Transaction Documents to which the
Seller and Parent are parties have been duly and validly executed and delivered
by each of the Seller and the Parent and constitute a valid and binding
obligation of each of the Seller and the Parent, enforceable against each of
them in accordance with their terms, except as may be limited by applicable
bankruptcy, insolvency, moratorium or similar laws of general application
relating to or affecting creditors' rights generally and except for the
limitations imposed by general principles of equity.
Section 3.5. No Conflict or Violation. Assuming the consents and
approvals listed on Schedule 3.6 are obtained or waived, the execution, delivery
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and performance by each of the Seller and the Parent of the Transaction
Documents to which it is a party (i) does not and will not violate or conflict
with the Limited Liability Company Agreement, Operating Agreement, Management
Agreement or any formation documents of the Company, (ii) does not and will not
violate any provision of law, or any order, judgment or decree of any court or
other governmental or regulatory authority binding on the Company, the Seller or
the Parent except which individually or in the aggregate would not have a
Company Material Adverse Effect, (iii) does not violate and will not result in a
breach of or constitute (with due notice or lapse of time or both) a default
under any contract, lease, loan agreement, mortgage, security agreement, trust
indenture or other agreement or instrument to which the Seller, the Parent or
the Company is a party or by which the Seller, the Parent or the Company is
bound or to which any of their respective properties or assets is subject,
except which in the aggregate would not have a Company Material Adverse Effect,
(iv) will not result in the creation or imposition of any Lien upon any of the
Purchased Interests, and (v) will not result in the cancellation, modification,
revocation or suspension of any of the licenses, franchises, Permits,
authorizations or approvals referred to on Schedule 3.14, except which in the
aggregate would not have a Company Material Adverse Effect.
Section 3.6. Consents and Approvals. Except as set forth on Schedule 3.6,
------------
no consent, waiver, authorization or approval of, or declaration or filing with,
any governmental or regulatory authority, domestic or foreign, or other Person
is required in connection with the execution and delivery of the Transaction
Documents by the Seller and the Parent or the performance by the Seller and the
Parent of their respective obligations thereunder.
Section 3.7. Financial Statements. The Parent has heretofore furnished to
the Buyer copies of (i) the unaudited consolidated balance sheet of the Company
as of December 31, 1999 (the "Company Balance Sheet"), together with the related
statements of operations, members' equity and cash flows for the twelve month
period then ended and the notes thereto, if any (the "Company Unaudited
Financial Statements"); and (ii) the unaudited consolidated balance sheet of the
Company as of December 31, 1998, together with the related statement of
operations, members' equity and cash flows for the twelve month period then
ended and the notes thereto, if any and (iii) the audited consolidated balance
sheet of the Company as of the fiscal years ended January 1, 1998 and December
31, 1996, together with the related statements of operations, members' equity
and cash flows for the periods then ended and the notes thereto, if any, (the
financial statements listed in clause (i) (ii) and (iii) above being hereinafter
referred to as the "Company Financial Statements"). Except as set forth therein,
the Company Financial
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Statements: (i) were prepared in accordance with GAAP applied on a consistent
basis throughout the periods covered thereby; (ii) present fairly in all
material respects the financial position, results of operations and cash flow of
the Company as of such dates and for the periods then ended, except for
customary audit adjustments which are not material to the financial position or
results of operations of the Company; and (iii) are in accordance with the books
of account and records of the Company. The Company Financial Statements are
attached hereto as Exhibit C.
Section 3.8. Absence of Certain Changes or Events. Except as contemplated
by this Agreement, or as set forth in Schedule 3.8, since December 31, 1999, the
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business of the Company has been conducted in the ordinary course consistent
with past practices and, other than any of the following actions taken in the
ordinary course of business, there has not been any:
(a) Event that has had or is reasonably likely to have a Company
Material Adverse Effect, and no factor or condition exists and no event has
occurred that would be likely to result in a Company Material Adverse Effect;
(b) Destruction of, damage to, or loss of, any material asset of
the Company (whether or not covered by insurance);
(c) Change in accounting methods or practices (including,
without limitation, any change in depreciation or amortization methods,
policies, or rate) by the Company;
(d) Declaration or making of, or agreement to declare or make,
any payment of dividends or distribution of any asset of any kind whatsoever in
respect to any of the Company's interests, nor any purchase, redemption, or
other acquisition or agreement to purchase, redeem, or otherwise acquire, any of
such outstanding interests;
(e) Borrowing of, or agreement to borrow, any funds by the
Company, and the Company has not incurred or become subject to any material
obligation or liability (whether absolute, accrued, contingent or otherwise);
(f) Payment of any obligation or liability (absolute or
contingent), by the Company other than current liabilities reflected in or shown
on the Company Financial Statements and current liabilities incurred in the
ordinary course of business;
(g) Mortgage, pledge, or subjection to lien, charge, or other
encumbrance, of any of the assets, properties, or rights (tangible or
intangible) of the Company, except for mechanics lien and Liens for taxes, in
each case, not yet due and payable;
(h) Sale, transfer or disposal of any of the assets, properties,
or rights (tangible or intangible) of the Company;
(i) Agreement entered into granting any preferential rights to
purchase any of the assets, properties, or rights (tangible or intangible) of
the Company (including management and control thereof), or requiring the consent
of any party to the transfer and
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assignment of any such assets, properties, or rights (including management and
control thereof);
(j) Amendment, modification, or termination of any contract,
lease, license, promissory note, commitment, indenture, mortgage, deed of trust,
collective bargaining agreement, employee benefit plan, or any other agreement,
instrument, indebtedness, or obligation to which the Company is a party, or by
which it or any of its assets or properties are bound, except those agreements,
amendments, or terminations effected in the ordinary course of business
consistent with past practices;
(k) Capital expenditure by the Company exceeding $25,000, or
additions to property, plant and equipment used in the operations of the Company
other than ordinary repairs and maintenance;
(l) Citation received by the Company from any governmental
entity or agency for any violations of any act, law, rule, regulation, or code
of any governmental entity or agency, which citations in the aggregate would be
reasonably likely to result in a Company Material Adverse Effect;
(m) Claim against the Company for damages or alleged damages for
any actual or alleged negligence or other tort or breach of contract (whether or
not fully covered by insurance) except as would not have a Company Material
Adverse Effect; or
(n) Agreement by the Seller, the Parent or the Company to do any
of the things described in the preceding clauses.
Section 3.9. Tax Matters. Except as otherwise disclosed in Schedule 3.9,
------------
(i) the Company has filed (or joined in the filing of) when due all Tax Returns
required by applicable law to be filed with respect to the Company and all Taxes
shown to be due on such Tax Returns have been paid; (ii) all such Tax Returns
were true, correct and complete in all material respects as of the time of such
filing; (iii) all Taxes relating to periods ending on or before the Closing
Date, owed by the Company (whether or not shown on any Tax Return) at any time
on or prior to the Closing Date, if required to have been paid, have been paid
(except for Taxes which are being contested in good faith); (iv) any liability
of the Company for Taxes not yet due and payable, or which are being contested
in good faith, has been provided for on the financial statements of the Company
in accordance with and to the extent required by GAAP; (v) there is no action,
suit, proceeding, investigation, audit or claim now pending against, or with
respect to, the Company in respect of any Tax or assessment, nor is any claim
for additional Tax or assessment asserted by any Tax authority; (vi) no material
claim has been made by any Tax authority in a jurisdiction where the Company
does not currently file a Tax Return that it is or may be subject to Tax by such
jurisdiction, nor to the Company's knowledge is any such assertion threatened;
(vii) there is no outstanding request for any extension of time within which to
pay any Taxes or file any Tax Returns; (viii) there has been no waiver or
extension of any applicable statute of limitations for the assessment or
collection of any Taxes of the Company; (ix) no property of the Company is "tax-
exempt use property" within the meaning of Section 168(h) of the Code; (x) the
Company is not a party to any lease made pursuant to former Section
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168(f)(8) of the Internal Revenue Code of 1954; (xi) the Company is currently
and for all periods since its formation has qualified as a "partnership" within
the meaning of Section 7701(a)(2) of the Code; (xii) the Company has a valid
election in effect under Section 754 of the Code or, at the request of Buyer,
will make a timely election under Section 754 of the Code with respect to the
Purchased Interests; (xiii) Seller is not a "foreign person" within the meaning
of Section 1445 of the Code; (xiv) the Company is not a party to any agreement,
whether written or unwritten, providing for the payment of Taxes, payment for
Tax losses, entitlements to refunds or similar Tax matters; and (xiv) the
Company has withheld and paid all material Taxes required to be withheld in
connection with any amounts paid or owing to any employee, creditor, independent
contractor or other third party.
Section 3.10. Intentionally Omitted.
Section 3.11. Intellectual Property. Schedule 3.11 sets forth a true and
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complete list of all domestic and foreign trademarks, trademark applications,
patents, registered copyrights (except copyrighted software and theatrical films
and film trailers licensed to the Company in its ordinary course of business)
and patent applications owned by, registered in the name of or licensed to or
from the Company as of the date hereof. The Company owns or possesses adequate
patents, patent rights, licenses, inventions, copyrights, know-how (including
trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service marks and
trade names or other intellectual property (collectively, "Intellectual
Property") necessary to carry on its business as presently conducted. Except as
set forth on Schedule 3.11, the Company has not received any notice of any
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infringement of or conflict with asserted rights of others with respect to any
Intellectual Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of the
Company, and which infringement or conflict (if the subject of any unfavorable
decision, ruling or finding) or invalidity or inadequacy, individually or in the
aggregate, would result in a Company Material Adverse Effect.
Section 3.12. Personal Property. Except as set forth in Schedule 3.12,
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the Company owns and has good and marketable title, free and clear of all title
defects and objections, security interests, Liens, charges and encumbrances of
any nature whatsoever to each item of personal property owned or leased by the
Company and reflected on the Company Balance Sheet and all such property
acquired or leased since the date thereof, except for sales and dispositions in
the ordinary course of business since such date. The property owned, leased or
used by the Company is sufficient and adequate to carry on its business as
presently conducted and all items thereof are in good operating condition and
repair. Except as set forth in Schedule 3.12, the Company holds good and
-------------
transferable leaseholds under valid and enforceable leases in all of the
personal property leased by it, and none of the property leased by the Company
is subject to any sublease, license or other agreement granting to any person
any right to use such personal property. Except as set forth in Schedule 3.12,
-------------
the Company is not in breach of or default (and no event has occurred which,
with due notice or lapse of time or both, may constitute such a lapse or
default) of any provision of any of its personal property leases. Except as
disclosed in Schedule 3.12, and except for the personal property of the Seller
-------------
located at 950 Third Avenue,
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New York, New York, the Company does not hold any personal property of the
Seller or any of their respective Affiliates or any other Person.
Section 3.13. Real Property.
(a) The Company does not own any real property.
(b) Schedule 3.13(b) contains a list of all leases and subleases,
----------------
together with any amendments thereto and any subordination, nondisturbance and
attornment agreements (the "Leases"), with respect to all real property leased
by the Company (the "Leased Property"). Each Lease is in full force and effect.
The Company has performed all material obligations required to be performed by
it to date under each of the Leases and neither the Company nor, to the best
knowledge of the Parent or the Seller, any other party thereto is (except as set
forth on Schedule 3.13(b)) in material default under any of the Leases (and,
----------------
except as set forth on Schedule 3.13(b), no event has occurred which, with due
----------------
notice or lapse of time or both, would constitute such a lapse or default).
Except as set forth on Schedule 3.13(b), no amount due under the Leases remains
----------------
unpaid and no material controversy, claim, dispute or disagreement exists
between the parties to any of the Leases. The Company has delivered to the
Buyer a copy of each Lease, and all amendments thereto, listed in Schedule
--------
3.13(b), except to the extent otherwise noted therein.
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(c) To the knowledge of the Parent and the Seller, the covenants,
conditions, restrictions, encroachments, encumbrances, easements, rights of way,
licenses, grants, building or use restrictions, exceptions, reservations,
limitations or other impediments affecting the Leased Property do not and will
not, with respect to each Leased Property, materially impair the Company's
ability to use any such Leased Property in the operation of the Company's
business as presently conducted. There are no pending or, to the knowledge of
the Company, threatened condemnation or similar proceedings affecting the Leased
Property. The Company has access to public roads, streets or the like or valid
easements over private streets, roads or other private property for such ingress
to and egress from the Leased Property, except as would not materially impair
the Company's ability to use any such Leased Property in the operation of the
Company's business as presently conducted.
(d) All brokerage commissions and other compensation and fees payable
by reason of the Leases have been paid in full or are reflected in the Company
Financial Statements except for such commissions and other compensation related
to options or extensions in the Leases which are not yet exercised.
(e) No notices of violations have been received with respect to the
improvements on the Leased Property and the operations therein conducted,
including without limitation, health, fire, environmental, safety, zoning and
building laws, ordinances and administrative regulations, except as set forth on
Schedule 3.13(e).
- ----------------
(f) There are no outstanding requirements or recommendations by any
insurance company which has issued to the Company a policy covering the Leased
Property, or
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<PAGE>
by any board of fire underwriters or other body exercising similar functions,
requiring or recommending any repairs or work to be done on such property.
(g) All public utilities required for the operation of the Leased
Property, as it is currently operated, and necessary for the conduct of the
business of the Company, as it is presently conducted, are installed and
operating, and all installation and connection charges are paid in full.
(h) Except as set forth in Schedule 3.13(b), the Leased Property is
----------------
not subject to any lease, sublease, license or other agreement granting to any
person any right to the use, occupancy or enjoyment of such property or any
portion thereof.
(i) The plumbing, electrical, heating, air conditioning, elevator,
ventilating and all other mechanical or structural systems for which the Company
is responsible under the Leases in the buildings or improvements are, to the
knowledge of the Company, in good working order and condition, and the roof,
basement and foundation walls of such buildings and improvements for which the
Company is responsible under said Leases are, to the knowledge of the Company,
in good condition and free of leaks and other material defects. All such
mechanical and structural systems and such roofs, basement and foundation walls
for which others are responsible under said Leases are, to the knowledge of the
Company, in good working order and condition and free of leaks and other
material defects.
Section 3.14. Licenses, Permits and Governmental Approvals. Schedule 3.14
-------------
sets forth a true and complete list of all material Permits issued or granted to
the Company (the "Company Permits"), and all pending applications therefor. Such
list contains a summary description of each such item and, where applicable,
specifies the date issued, granted or applied for, the expiration date and the
current status thereof. Except as set forth in Schedule 3.14, each Company
Permit has been duly obtained, is valid and in full force and effect, and is not
subject to any pending or threatened administrative or judicial proceeding to
revoke, cancel or declare such Company Permit invalid in any respect. The
Company Permits have never been suspended, revoked or otherwise terminated,
subject to any fine or penalty, or subject to judicial or administrative review,
for any reason other than the renewal or expiration thereof nor has any
application of any of the Company for any Company Permit ever been denied. The
Company Permits are sufficient and adequate in all material respects to permit
the continued lawful conduct of the Company's business in the manner now
conducted, and none of the operations of the Company are being conducted in a
manner that violates any of the terms or conditions under which any Company
Permit was granted, except for such Company Permits the absence of which would
not have a Company Material Adverse Effect or any non-compliance which will not
have a Company Material Adverse Effect. Except as set forth in Schedule 3.14, no
-------------
such Company Permit will in any way be affected by, or terminate or lapse by
reason of, the transactions contemplated by the Transaction Documents.
Section 3.15. Compliance with Law. Except as set forth in Schedule 3.15
or as would not reasonably be expected to have a Company Material Adverse
Effect, the operations of the Company have been conducted in accordance with all
applicable laws, regulations, orders and
14
<PAGE>
other requirements of all courts and other governmental or regulatory
authorities having jurisdiction over the Company and its assets, properties and
operations. Except as set forth in Schedule 3.15 or as would not reasonably be
-------------
expected to have a Company Material Adverse Effect, the Company has not received
notice of any violation of any such law, regulation, order or other legal
requirement binding on it, and the Company is not in default with respect to any
order, writ, judgment, award, injunction or decree of any federal, state or
local court or governmental or regulatory authority or arbitrator, domestic or
foreign, applicable to it or any of its assets, properties or operations. The
Company does not have knowledge of any proposed change in any such laws, rules
or regulations (other than laws of general applicability) that would materially
and adversely affect the transactions contemplated by the Transaction Documents
or all or a material part of the Company's business.
Section 3.16. Contracts.
(a) Schedule 3.16 sets forth (subject to the dollar amount
-------------
limitations of clause (i) below) a true and complete list of all material
contracts, agreements, instruments, commitments and other arrangements to which
the Company is a party or to which the Parent or the Seller is a party and which
otherwise relate to or affect in a material way any of the Company's assets,
properties or operations including, without limitation, all written or oral,
express or implied, (i) contracts, agreements and commitments for the purchase
or sale of products or services which involve a consideration in excess of
$25,000; (ii) contracts, loan agreements, letters of credit, repurchase
agreements, mortgages, security agreements, guarantees, pledge agreements, trust
indentures, promissory notes and other documents or arrangements relating to the
borrowing or lending of money or for lines of credit (including intercompany
Indebtedness); (iii) personal property leases, agreements relating to intangible
assets; (iv) agreements and other arrangements for the sale, pledge, transfer
of, or placing of a Lien on any Interests of the Company, any material assets,
property or rights or for the grant of any options or preferential rights to
purchase any assets, property or rights; (v) documents granting any power of
attorney with respect to the affairs of the Company; (vi) suretyship contracts,
performance bonds, working capital maintenance or other forms of guaranty
agreements; (vii) contracts or commitments limiting or restraining the Company
from engaging or competing in any lines of business or with any person, firm, or
corporation; (viii) partnership or joint venture agreements; (ix) shareholder or
membership agreements or agreements relating to the issuance of any securities
of the Company or the granting of any registrations rights with respect thereto;
and (x) all amendments, modifications, extensions or renewals of any of the
foregoing (the foregoing contracts, agreements and documents are hereinafter
referred to collectively as the "Contracts" and individually as a "Contract").
(b) Each Contract is valid, binding and enforceable against the
Company in accordance with its terms, and in full force and effect on the date
hereof. The Seller, the Parent and the Company have performed all material
obligations, including, but not limited to, the timely making of any rental or
other payments, required to be performed by it under, and is not in default or
in breach of in respect of, any Contract, and no event has occurred which, with
due notice or lapse of time or both, would constitute such a default. To the
Company's knowledge, no other party to any Contract is in default in respect
thereof, and no event has
15
<PAGE>
occurred which, with due notice or lapse of time or both, would constitute such
a default. The Parent has delivered to the Buyer or its representatives true and
complete originals or copies of all the Contracts.
Section 3.17. Intentionally Omitted.
Section 3.18. Litigation. Except as set forth in Schedule 3.18, there are
-------------
no claims, actions, suits, proceedings, labor disputes or investigations pending
or, to the knowledge of the Seller or the Parent, threatened, before any
federal, state or local court or governmental or regulatory authority, domestic
or foreign, or before any arbitrator of any nature, brought by or against any of
the Seller, Parent or, to their knowledge after due inquiry, the Company or any
of its respective officers, directors, employees, agents or Affiliates, except
as would not have a Company Material Adverse Effect. Schedule 3.18 sets forth a
-------------
list and a summary description of all such pending actions, suits, proceedings,
disputes or investigations. None of the Seller, the Parent nor the Company is
subject to any order, writ, judgment, award, injunction or decree which of any
national, state or local court or governmental or regulatory authority or
arbitrator, domestic or foreign, which would have a Company Material Adverse
Effect, or that would interfere with the transactions contemplated by the
Transaction Documents.
Section 3.19. Insurance. Schedule 3.19 sets forth a complete and accurate
-------------
list of the insurance policies of the Company as in effect on the date hereof,
including in each case the applicable coverage limits, deductibles and the
policy expiration dates. No notice of any termination or threatened termination
of any of such policies has been received by the Company and such policies are
in full force and effect.
Section 3.20. Employee Plans.
The Company has no employee benefit plans (as defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974) covering former and current
employees of the Company, or under which the Company has any obligation or
liability. Schedule 3.20 lists all material plans, contracts, bonuses,
-------------
commissions, profit-sharing, savings, stock options, insurance, deferred
compensation, or other similar fringe or employee benefits covering former or
current employees of the Company or under which the Company has any obligation
or liability (each, a "Benefit Arrangement"), if any. The Benefit Arrangements
are and have been administered in substantial compliance with their terms and
with the requirements of applicable federal, state and local laws.
Section 3.21. Labor Matters.
The Company is in material compliance with all laws, if applicable,
regarding employment, wages, hours, equal opportunity, collective bargaining and
payment of social security and other taxes. The Company is not engaged in any
unfair labor practice or discriminatory employment practice and no complaint of
any such practice against the Company has been filed or, to the best of the
Company's knowledge, threatened to be filed with or by the National Labor
Relations Board, the Equal Employment Opportunity Commission or any other
administrative agency, federal or state, that regulates labor or
16
<PAGE>
employment practices. The Company is in compliance with all applicable federal,
state and local laws and regulations regarding occupational safety and health
standards.
Section 3.22. Environmental Matters. Notwithstanding anything to the
contrary contained in this Agreement and in addition to the other
representations and warranties contained herein:
(a) The Company and its operations are in material compliance with
all applicable laws, regulations and other requirements of governmental or
regulatory authorities or duties under the common law relating to Hazardous
Materials (as defined below) or to the protection of health, safety or the
environment (collectively, "Environmental Laws") and has obtained, maintained in
effect and complied in all material respects with all licenses, permits and
other authorizations or registrations required under Environmental Laws except
where such noncompliance or such failure to obtain, maintain in effect or comply
with such licenses, permits and other authorizations or registrations would not
give rise to a Material Adverse Effect.
(b) The Company has not performed any act which would reasonably be
expected to give rise to, and has not otherwise incurred, liability to any
person (governmental or not) under the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. (S) 9601 et seq. ("CERCLA"), or any
-- ----
similar state or municipal law, except in either case where such liability would
not constitute a Material Adverse Effect. nor has the Company received notice of
any such liability or any claim therefor or submitted notice pursuant to Section
103 of CERCLA to any governmental agency.
(c) To the knowledge of James A. Wunderle or Robert F. Smerling, no
asbestos, lead, petroleum, hazardous substance, hazardous waste, contaminant,
pollutant or toxic substance (as such terms may be defined in any Environmental
Law and collectively referred to herein as "Hazardous Materials") has been
released, placed, dumped or otherwise come to be located on, at, beneath or
near, and no storage tank containing any Hazardous Materials is located at, any
of the real property and/or improvements currently or formerly owned or leased
by the Company which could subject the Company to a claim or claims pursuant to
Environmental Laws.
Section 3.23. Brokers and Finders. None of the Seller, the Parent, the
Company or any of their respective officers, directors or employees has employed
any broker or finder and none of the Seller, the Parent, the Company or any of
their respective officers, directors or employees has incurred any liability for
any investment banking fees, brokerage fees, commissions or finders' fees in
connection with the transactions contemplated by this Agreement.
Section 3.24. Year 2000 Compliance. To the knowledge of the Seller and
the Parent after due inquiry, the software used by the Company will be year 2000
compliant, which, for purposes of this Agreement, shall mean that the data
outside the range 1900-1999 will be correctly processed.
Section 3.25. Intentionally Omitted.
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<PAGE>
Section 3.26. Change in Ownership. Neither the purchase of the Purchase
Interests by the Buyer nor the consummation of the transactions contemplated by
the Transaction Documents are reasonably likely to result in any material
adverse change in the business operations of the Company or in the loss of the
benefits of any servicing relationship.
Section 3.27. Intentionally Omitted.
Section 3.28. Absence of Undisclosed Liabilities. Except as set forth in
Schedule 3.28, the Company has no indebtedness or liability, absolute or
- -------------
contingent, direct or indirect, which is not shown or provided for on the
balance sheets of the Company included in the Company Financial Statements other
than liabilities incurred or accrued in the ordinary course of business
(including liens of current taxes and assessments not in default) since December
31, 1999 and other than liabilities which GAAP does not require to be shown or
provided for and there is no existing condition, situation or set of
circumstances which would reasonably be expected to result in such a liability.
Except as shown in such balance sheets or in the Company Financial Statements,
the Company is not, directly or indirectly, liable upon or with respect to (by
discount, repurchase agreements or otherwise), or obligated in any other way to
provide funds in respect of, or to guarantee or assume, any debt, obligation or
dividend of any person.
Section 3.29. Purchase for Investment. Each of the Seller and the Parent
is an accredited investor as defined under Rule 501(a) of the Securities Act.
The Share Consideration will be acquired for investment for the Seller's own
account and not with a view to the resale or distribution of any part thereof,
except in compliance with the registration provisions of the Securities Act or
an exemption therefrom.
Section 3.30. Restricted Securities. Each of the Seller and the Parent
understands that the Share Consideration is characterized as "restricted
securities" under the federal securities laws inasmuch as they are being
acquired from the Buyer in a transaction not involving a public offering and
that under such laws and applicable regulations the Share Consideration may be
resold without registration under the Securities Act only in certain limited
circumstances.
Each of the Seller and the Parent further agrees that each certificate
representing the Share Consideration shall be stamped or otherwise imprinted
with a legend substantially in the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY
NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS SUCH
SECURITIES HAVE BEEN REGISTERED UNDER THAT ACT OR AN
EXEMPTION FROM REGISTRATION IS AVAILABLE."
A certificate shall not bear such legend if the Seller shall have delivered
to the Buyer an opinion of counsel reasonably satisfactory to the Buyer to the
effect that the securities being sold may be publicly sold without registration
under the Securities Act. The foregoing shall not be deemed to affect the
obligations of the Buyer under the Registration Rights Agreement.
18
<PAGE>
Section 3.31. Due Diligence. Each of the Seller and the Parent has
sufficient knowledge and experience in investing in companies similar to the
Buyer and is capable of evaluating the merits and risks of its investment in the
Buyer as contemplated by this Agreement and is able to bear the economic risk of
such investment for an indefinite period of time. Each of the Seller and the
Parent has been given access to full and complete information regarding the
Buyer and has utilized such access to its satisfaction for the purpose of
obtaining information each of the Seller and the Parent desires or deems
relevant to its decision to acquire the Share Consideration. Each of the Seller
and the Parent has had the opportunity to ask questions of and receive answers
from management and representatives of the Buyer, including the Buyer's
accountants, to discuss the Buyer's business, management and financial affairs
and to obtain any additional information each of the Seller and the Parent
desires or deems relevant. Each of the Seller and the Parent has obtained, to
the extent it has deemed necessary, professional advice with respect to the
risks inherent in the acquisition of the Share Consideration, including, without
limitation, the matters relating to the Buyer's business and financial condition
set forth in the Buyer's internal reports and public filings.
Section 3.32. Survival. Except where a representation or warranty
expressly refers to another date, in which case such representation or warranty
need be true and correct only as of such date, each of the representations and
warranties set forth in this Section 3 shall be deemed represented and made by
the Seller and the Parent at the Closing as if made at such time and shall
survive the Closing for a period terminating on the later of (a) the date 6
months after the Closing Date, and (b) with respect to claims asserted pursuant
to Section 6.1 of this Agreement before the expiration of the applicable
representation or warranty, on the date such claim is finally liquidated or
otherwise resolved; provided, however, that (x) the representations and
-------- -------
warranties in Sections 3.22 hereof shall survive until the third anniversary of
the Closing Date and (y) the representations and warranties in Sections 3.2 and
3.9 hereof shall survive until the applicable statute of limitations for third
party or governmental actions has expired.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF THE BUYER AND NEWCO
The Buyer and Newco represent and warrant (jointly and severally) to the
Seller as follows:
Section 4.1. Corporate Organization. The Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to own its
properties and assets and to conduct its businesses as now conducted, except
where the failure to be so organized, existing and in good standing or to have
such power or authority will not, in the aggregate, have a Buyer Material
Adverse Effect. The Buyer is duly qualified to do business as a foreign
corporation and is in good standing in every jurisdiction in which the character
of the properties owned or leased by it or the nature of the business conducted
by it makes such qualification necessary, except where the failure to be so
qualified would not have a Buyer Material Adverse Effect. Newco is a
corporation duly organized, validly existing and in good standing under the laws
of the State of
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<PAGE>
Delaware, and has all requisite corporate power and authority to own its
properties and assets and to conduct its businesses as now conducted.
Section 4.2. Subsidiaries and Investments. Except as set forth in
Schedule 4.2, the Buyer does not, directly or indirectly, own, of record or
- ------------
beneficially, any outstanding voting securities or other equity interests in or
control any corporation, limited liability company, partnership, trust, joint
venture or other entity.
Section 4.3. Authorization and Validity of Agreement. Each of the Buyer
and Newco has all requisite power and authority to enter into the Transaction
Documents to which it is a party and to carry out its obligations thereunder.
The execution and delivery of the Transaction Documents to which Buyer and Newco
are parties and the performance of the Buyer's and Newco's obligations
thereunder have been duly authorized by all necessary corporate action by the
Buyer and Newco, respectively, and no other proceedings on the part of the Buyer
or Newco are necessary to authorize such execution, delivery and performance.
The Transaction Documents to which the Buyer and Newco are parties have been
duly executed by the Buyer and Newco, respectively, and constitute a valid and
binding obligation of each of them, enforceable against each of them in
accordance with their terms, except as may be limited by applicable bankruptcy,
insolvency, moratorium or similar laws of general application relating to or
affecting creditors' rights generally and except for the limitations imposed by
general principles of equity. The Buyer has authorized the issuance and
delivery of the Share Consideration in accordance with this Agreement. For
purposes of Section 203 of the General Corporation Law of the State of Delaware,
the Board of Directors of the Buyer, prior to the execution and delivery of this
Agreement by the Buyer, and as a condition to the parties' reaching agreement
hereunder, has approved the transactions that are the subject hereof as
contemplated by subsection (a)(1) of said Section 203.
Section 4.4. Capitalization. The authorized and outstanding capital stock
of the Buyer is as set forth in Schedule 4.4. Upon issuance, sale and delivery
------------
as contemplated by this Agreement, the shares which constitute the Share
Consideration will be duly authorized, validly issued, fully paid and non-
assessable shares of the Buyer, free of all preemptive or similar rights, and
entitled to the rights therein described. Except as set forth in Schedule 4.4,
------------
there are no outstanding options, warrants, agreements, conversion rights,
preemptive or similar rights to subscribe for or purchase shares of capital
stock of the Buyer. The fair market value of the Buyer's net assets (calculated
net of all liabilities whether or not currently liquidated and whether currently
known or unknown, including, without limitation, all contingent liabilities
which may be asserted against the Buyer by a Person with respect to the actions
of the Buyer, its officers and/or directors during the time that Sam Frankino
was an officer and/or director of the Buyer, all current litigation claims, and
any liabilities, if any, which may result from the current audit of the Buyer by
the Internal Revenue Service) is not less than $1.65 per share. Notwithstanding
the provisions of Section 4.18 to the contrary, the representation and warranty
set forth in the penultimate sentence of this Section 4.4 shall be deemed
represented and made by the Buyer at the Closing as if made at such time and
shall survive the Closing for a period terminating on the earlier of (a) the
date that the Buyer files its Annual Report on Form 10-K for the fiscal year
ended January 31, 2001 with the Securities and Exchange Commission; or (b) April
1, 2001.
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<PAGE>
Section 4.5. No Conflict or Violation.
(a) Assuming the consents and approvals listed on Schedule 4.6 are
obtained or waived, the execution, delivery and performance by the Buyer and
Newco of the Transaction Documents to which it is a party does not and will not
violate or conflict with any provision of the Certificate of Incorporation or
the By-laws of the Buyer or Newco and does not and will not violate any
provision of law, or any order, judgment or decree of any court or other
governmental or regulatory authority, nor violate nor will result in a breach of
or constitute (with due notice or lapse of time or both) a default under any
contract, lease, loan agreement, mortgage, security agreement, trust indenture
or other agreement or instrument to which the Buyer or Newco is a party or by
which either of them is bound or to which any of the Buyer's or Newco's
properties or assets is subject, except for such violations, breaches or
defaults which, in the aggregate, will not have a Buyer Material Adverse Effect.
(b) Neither the transfer to Newco of the Purchased Interests and cash
as contemplated in Section 2.5 hereof, nor the payment by Newco to the Seller of
any amount required to be paid pursuant to Section 2.4(a) or (b) hereof, will
render the Buyer or Newco insolvent or be made with the intention to hinder,
delay or defraud creditors of either the Buyer or Newco, nor will any such
transfer or payment contravene any requirement under Delaware or other
applicable law that such payment be made only out of legally available funds.
Section 4.6. Consents and Approvals. Except as set forth in Schedule 4.6,
------------
no consent, waiver, authorization or approval of, or declaration or filing with,
any governmental or regulatory authority, domestic or foreign, or other Person
is required in connection with the execution and delivery of the Transaction
Documents by the Buyer or Newco or the performance by the Buyer or Newco of its
obligations thereunder.
Section 4.7. Financial Statements. The Buyer has heretofore furnished to
the Seller copies of the audited consolidated balance sheets of the Company as
of: (i) January 31, 1999, 1998 and 1997, together with the related statements
of income, stockholders' equity and cash flows for the twelve month period then
ended and the notes thereto, if any, and (ii) the unaudited consolidated balance
sheet of the Company as of October 31, 1999, together with the related
statements of income, stockholders' equity and cash flows for the nine month
period then ended and the notes thereto, if any, (the "Buyer Financial
Statements"). Except as set forth therein, the Buyer Financial Statements,
including the notes thereto: (i) were prepared in accordance with GAAP; (ii)
present fairly in all material respects the consolidated financial position,
results of operations and changes in cash flows of the Buyer as of such dates
and for the periods then ended; and (iii) are in accordance with the books of
account and records of the Buyer.
Section 4.8. Absence of Certain Changes or Events.
(a) Except as contemplated by this Agreement or as set forth in
Schedule 4.8, since October 31, 1999, there has not been:
------------
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(i) Any material adverse change in the business, operations,
properties, assets, condition (financial or other) or prospects of the
Buyer, or any event that has had or is reasonably likely to have a Buyer
Material Adverse Effect, and no factor or condition exists and no event has
occurred that would be likely to result in any such change;
(ii) Any material loss, damage, destruction or other casualty to its
business (whether or not insurance awards have been received or
guaranteed); or
(iii) Any material change in any method of accounting or accounting
practice of the Buyer.
(b) Except as contemplated by the Transaction Documents or as set
forth in Schedule 4.8, since October 31, 1999, the Buyer has not:
------------
(i) Incurred any material obligation or liability (whether
absolute, accrued, contingent or otherwise) relating to the operations of
Buyer except in the ordinary course of business consistent with past
practice;
(ii) Sold or transferred any assets material to its business or
canceled any debts or claims or waived any material rights relating to the
operations of its business, except in the ordinary course of business
consistent with past practice;
(iii) Defaulted on any of its material obligations;
(iv) Entered into any material transaction, except in the
ordinary course of business consistent with past practice;
(v) Made any capital expenditure in excess of $25,000, or
additions to property, plant and equipment used in the operations of its
business other than ordinary repairs and maintenance;
(vi) Entered into any agreement or made any commitment to do
any of the foregoing.
Section 4.9. Tax Matters. Except as otherwise disclosed in Schedule 4.9,
------------
(i) the Buyer has filed (or joined in the filing of) when due all Tax Returns
required by applicable law to be filed with respect to the Buyer and all Taxes
shown to be due on such Tax Returns have been paid; (ii) all such Tax Returns
were true, correct and complete in all material respects as of the time of such
filing; (iii) all Taxes relating to periods ending on or before the Closing Date
owed by the Buyer (whether or not shown on any Tax Return) or to which the Buyer
may be liable under Treasury Regulations (S) 1.1502-6 (or analogous state or
foreign provisions) by virtue of having been members of any "affiliated group"
(or other group filing on a combined or unitary basis) at any time on or prior
to the Closing Date, if required to have been paid, have been paid (except for
Taxes which are being contested in good faith); (iv) any liability of the Buyer
for Taxes not yet due and payable, or which are being contested in good faith,
has been provided for
22
<PAGE>
on the financial statements of the Buyer in accordance with and to the extent
required by GAAP; (v) there is no action, suit, proceeding, investigation, audit
or claim now pending against, or with respect to, the Buyer in respect of any
Tax or assessment, nor is any claim for additional Tax or assessment asserted by
any Tax authority; (vi) no material claim has been made by any Tax authority in
a jurisdiction where the Buyer does not currently file a Tax Return that it is
or may be subject to Tax by such jurisdiction, nor to the Buyer's knowledge is
any such assertion threatened; (vii) there is no outstanding request for any
extension of time within which to pay any Taxes or file any Tax Returns; (viii)
there has been no waiver or extension of any applicable statute of limitations
for the assessment or collection of any Taxes of the Buyer; (ix) no property of
the Buyer is "tax-exempt use property" within the meaning of Section 168(h) of
the Code; (x) the Buyer is not a party to any lease made pursuant to former
Section 168(f)(8) of the Internal Revenue Code of 1954; (xi) the Buyer has not
filed any agreement or consent under Section 341(f) of the Code; (xii) the Buyer
is not a "foreign person" within the meaning of Section 1445 of the Code; (xiii)
the Buyer is not a party to any agreement, whether written or unwritten,
providing for the payment of Taxes, payment for Tax losses, entitlements to
refunds or similar Tax matters; and (xiv) the Buyer has withheld and paid all
material Taxes required to be withheld in connection with any amounts paid or
owing to any employee, creditor, independent contractor or other third party.
Section 4.10. Real Property.
(a) Schedule 4.10(a) lists all real property owned by the Buyer or
----------------
its subsidiaries (the "Buyer Owned Real Property"). Except as disclosed on
Schedule 4.10(a), the Buyer or its subsidiaries have good and marketable title
- ----------------
in fee simple to the Buyer Owned Real Property free and clear of any Liens. All
buildings, plants and structures included on the Buyer Owned Real Property lie
wholly within the boundaries of the Buyer Owned Real Property and do not
encroach upon the property of, or otherwise conflict with the property rights
of, any other Person.
(b) Schedule 4.10(b) contains a list of all leases and subleases,
----------------
together with any amendments thereto and any subordination, nondisturbance and
attornment agreements (the "Buyer Leases"), with respect to all real property
leased by the Buyer or its subsidiaries (the "Buyer Leased Property"). Each
Lease is in full force and effect. Each of the Buyer or its subsidiaries has
performed all material obligations required to be performed by it to date under
each of the Leases and neither the Buyer or its subsidiaries nor any other party
thereto is, except as set forth on Schedule 4.10(b), in material default under
----------------
any of the Leases (and, except as set forth on Schedule 4.10(b), no event has
----------------
occurred which, with due notice or lapse of time or both, would constitute such
a lapse or default). No amount due under the Leases remains unpaid and no
material controversy, claim, dispute or disagreement exists between the parties
to any of the Leases. The Buyer has delivered to the Seller a copy of each
Lease, and all amendments thereto, listed in Schedule 4.10(b), except to the
----------------
extent otherwise noted therein.
(c) The covenants, conditions, restrictions, encroachments,
encumbrances, easements, rights of way, licenses, grants, building or use
restrictions, exceptions,
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reservations, limitations or other impediments affecting the Buyer Owned Real
Property or Buyer Leased Property do not and will not, with respect to each
Buyer Owned Real Property or Buyer Leased Property, materially impair the
Buyer's or its subsidiaries' ability to use any such Buyer Owned Real Property
or Buyer Leased Property in the operation of the Buyer's and its subsidiaries'
business as presently conducted. There are no pending or, to the knowledge of
the Buyer, threatened condemnation or similar proceedings affecting the Buyer
Owned Real Property. There are no pending or, to the knowledge of the Buyer,
threatened condemnation or similar proceedings affecting the Buyer Leased
Property. The Buyer and its subsidiaries have access to public roads, streets or
the like or valid easements over private streets, roads or other private
property for such ingress to and egress from the Buyer Owned Real Property and
the Buyer Leased Property, except as would not materially impair the Buyer's and
its subsidiaries' ability to use any such Buyer Owned Real Property or Buyer
Leased Property in the operation of the Buyer's and its subsidiaries' business
as presently conducted.
(d) All brokerage commissions and other compensation and fees payable
by reason of the Buyer Leases or the Buyer Owned Real Property have been paid in
full or are reflected in the Buyer Unaudited Financial Statements except for
such commissions and other compensation related to options or extensions in the
Buyer Leases which are not yet exercised.
(e) No notices of violations have been received with respect to the
improvements on the Buyer Owned Real Property and Buyer Leased Property and the
operations therein conducted, including without limitation, health, fire,
environmental, safety, zoning and building laws, ordinances and administrative
regulations, except as set forth on Schedule 4.10(e).
----------------
(f) There are no outstanding requirements or recommendations by any
insurance company which has issued to the Buyer or its subsidiaries a policy
covering the Buyer Owned Real Property or Buyer Leased Property, or by any board
of fire underwriters or other body exercising similar functions, requiring or
recommending any repairs or work to be done on such property.
(g) All public utilities required for the operation of the Buyer
Owned Real Property and the Buyer Leased Property, as they are currently
operated, and necessary for the conduct of the business of the Buyer and its
subsidiaries, as it is presently conducted, are installed and operating, and all
installation and connection charges are paid in full.
(h) Except as set forth in Schedule 4.10(b), the Buyer Owned Real
----------------
Property and the Buyer Leased Property are not subject to any lease, sublease,
license or other agreement granting to any person any right to the use,
occupancy or enjoyment of such property or any portion thereof.
(i) The plumbing, electrical, heating, air conditioning, elevator,
ventilating and all other mechanical or structural systems for which the Buyer
or its subsidiaries are responsible under the Buyer Leases in the buildings or
improvements are, to the knowledge of the Buyer, in good working order and
condition, and the roof, basement and foundation walls of such buildings and
improvements for which the Buyer or its subsidiaries are responsible
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under said Buyer Leases, to the knowledge of the Buyer, are in good condition
and free of leaks and other material defects. All such mechanical and structural
systems and such roofs, basement and foundation walls for which others are
responsible under said Buyer Leases are, to the knowledge of the Buyer, in good
working order and condition and free of leaks and other material defects.
Section 4.11. Litigation. Except as set forth in the Buyer's public
filings or in Schedule 4.11, there are no claims, actions, suits, proceedings,
-------------
labor disputes or investigations pending or, to the knowledge of Buyer,
threatened before any federal, state or local court or governmental or
regulatory authority, domestic or foreign, or before any arbitrator of any
nature, brought by or against Buyer, any of its officers, directors, employees,
agents or Affiliates, nor is any basis known to Buyer or its Affiliates for any
such action, suit, proceeding or investigation which would reasonably be
expected to have a Buyer Material Adverse Effect. The Buyer is not subject to
any order, writ, judgment, award, injunction or decree of any national, state or
local court or governmental or regulatory authority or arbitrator, domestic or
foreign, which would have a Buyer Material Adverse Effect, or that would or
might interfere with the transactions contemplated by the Transaction Documents.
Section 4.12. Employee Plans.
(a) Schedule 4.12 sets forth: (i) all "employee benefit plans," as
-------------
defined in Section 3(3) of ERISA, and all other employee benefit arrangements or
payroll practices, including, without limitation, any employment or consulting
agreements, any such arrangements or payroll practices providing severance pay,
sick leave, vacation pay, salary continuation for disability, retirement
benefits, deferred compensation, bonus pay, incentive pay, stock options,
hospitalization insurance, medical insurance, life insurance, scholarships or
tuition reimbursements, maintained by the Buyer or its subsidiaries or to which
the Buyer or its subsidiaries are obligated to contribute thereunder for current
or former employees, consultants and directors of the Buyer or its subsidiaries
(the "Buyer Plans"), and (ii) all "employee pension plans", as defined in
Section 3(2) of ERISA, maintained by the Buyer or its subsidiaries or any trade
or business (whether or not incorporated) which is or has ever been under
control or treated as a single employer with the Buyer or its subsidiaries under
Section 414(b), (c), (m), or (o) of the Code ("Buyer ERISA Affiliate") or to
which the Buyer or its subsidiaries or any Buyer ERISA Affiliate has contributed
or has ever been obligated to contribute thereunder (the "Buyer Pension Plans")
(the Buyer Plans and Buyer Pension Plans are hereafter collectively referred to
as the "Buyer Employee Plans").
(b) None of the Buyer Employee Plans is a multiemployer plan, as
defined in Section 3(37) of ERISA ("Buyer Multiemployer Plan"), and neither the
Buyer or its subsidiaries nor any Buyer ERISA Affiliate has withdrawn in a
complete or partial withdrawal from any Buyer Multiemployer Plan, nor has any of
them incurred any liability due to the termination or reorganization of a Buyer
Multiemployer Plan.
(c) Each Buyer Employee Plan that is intended to qualify under
Section 401 of the Code has received a determination letter from the Internal
Revenue Service to the effect
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that it meets the requirements of Code Section 401(a) and the trust maintained
pursuant thereto is exempt from federal income taxation under Section 501 of the
Code, and nothing has occurred with respect to the operation of any such Buyer
Employee Plan that could cause the loss of such qualification or exemption or
the imposition of any liability, penalty or tax under ERISA or the Code.
(d) All contributions (including all employer contributions and
employee salary reduction contributions) required to have been made under any of
the Buyer Employee Plans or by law (without regard to any waivers granted under
Section 412 of the Code) to any funds or trusts established thereunder or in
connection therewith have been made by the due date thereof (including any valid
extension), and all contributions for any period ending on or before the Closing
Date which are not yet due will have been paid or accrued on or prior to the
Closing Date. No accumulated funding deficiencies exist in any of the Buyer
Employee Plans subject to Section 412 of the Code.
(e) There is no "amount of unfunded benefit liabilities" within the
meaning of Section 4001(a)(18) of ERISA in any of the respective Buyer Pension
Plans which are subject to Title IV of ERISA. Each of the respective Buyer
Pension Plans are fully funded in accordance with the actuarial assumptions used
by the Pension Benefit Guaranty Corporation (the "PBGC") to determine the level
of funding required in the event of the termination of the Buyer Pension Plans.
(f) None of the Buyer or its subsidiaries or any Buyer ERISA
Affiliate has terminated any Buyer Pension Plan subject to Title IV, or incurred
any outstanding liability under Section 4062 of ERISA to the PBGC or to a
trustee appointed under Section 4042 of ERISA. All premiums due the PBGC with
respect to the Buyer Pension Plans have been paid. None of the Buyer or its
subsidiaries or any Buyer ERISA Affiliate has engaged in any transaction
described in Section 4069 of ERISA.
(g) There has been no "reportable event" within the meaning of
Section 4043 of ERISA with respect to any Buyer Pension Plans subject to Title
IV of ERISA which would require the giving of notice or any other event
requiring disclosure under Section 4041(c)(3)(C) or 4063(a) of ERISA.
(h) There has been no material violation of ERISA or the Code with
respect to the filing of applicable reports, documents and notices regarding the
Buyer Employee Plans with the Secretary of Labor or the Secretary of the
Treasury or the furnishing of required reports, documents or notices to the
participants or beneficiaries of the Buyer Employee Plans.
(i) True, correct and complete copies of the following documents,
with respect to each of the Buyer Employee Plans, have been delivered to the
Seller by the Buyer: (i) all plans and related trust documents, and amendments
thereto; (ii) the most recent Forms 5500; (iii) the last IRS determination
letter; (iv) summary plan descriptions; (v) the most recent actuarial report
relating to the Buyer Employee Plans; and (vi) written descriptions of all non-
written agreements relating to the Buyer Employee Plans.
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(j) There are no pending actions, claims or lawsuits which have been
asserted or instituted against the Buyer Employee Plans, the assets of any of
the trusts under such plans or the plan sponsor or the plan administrator, or
against any fiduciary of the Buyer Employee Plans with respect to the operation
of such plans (other than routine benefit claims), nor do the Buyer or Newco
have knowledge of facts which could form the basis for any such claim or
lawsuit.
(k) All amendments and actions required to bring the Buyer Employee
Plans into conformity in all material respects with all of the applicable
provisions of ERISA, the Code and other applicable laws have been made or taken
except to the extent that such amendments or actions are not required by law to
be made or taken until a date after the Closing Date.
(l) Any bonding required with respect to the Buyer Employee Plans in
accordance with applicable provisions of ERISA has been obtained and is in full
force and effect.
(m) The Buyer Employee Plans have been maintained, in all material
respects, in accordance with their terms and with all provisions of ERISA and
the Code (including rules and regulations thereunder) and other applicable
federal and state laws and regulations, and none of the Buyer or its
subsidiaries or any "party in interest" or "disqualified Person" with respect to
the Buyer Employee Plans has engaged in a "prohibited transaction" within the
meaning of Section 406 of ERISA or 4975 of the Code. No fiduciary has any
liability for breach of fiduciary duty or any other failure to act or comply in
connection with the administration or investment of the assets of any Buyer
Employee Plan.
(n) None of the Buyer Employee Plans provide retiree life or retiree
health benefits except as may be required under Section 4980B of the Code or
Section 601 of ERISA and at the expense of the participant or the participant's
beneficiary. The Buyer and its subsidiaries and the Buyer ERISA Affiliates have
at all times complied with the notice and health care continuation requirements
of Section 4980B of the Code and Sections 601 through 608 of ERISA.
(o) Except as disclosed on Schedule 4.12, no stock or other security
-------------
issued by the Seller, the Buyer or its subsidiaries or any of their Affiliates
forms or has formed part of the assets of any Buyer Employee Plan.
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<PAGE>
Section 4.13. Labor Matters.
(a) Except as set forth in Schedule 4.13: (i) none of the Buyer or
-------------
its subsidiaries is a party to any outstanding employment, consulting or
management agreements or contracts with officers or employees that provide for
the payment of any bonus or commission; (ii) none of the Buyer or its
subsidiaries is party to any collective bargaining agreement or other labor
union contract applicable to persons employed by the Buyer or its subsidiaries
nor do the Seller, the Buyer or its subsidiaries know of any activities or
proceedings of any labor union to organize any such employees. The Buyer has
furnished to the Seller complete and correct copies of all such agreements
("Employment and Labor Agreements"). The Buyer and its subsidiaries have not
breached or otherwise failed to comply with any provisions of any Employment and
Labor Agreement, and are in full compliance with all terms of any collective
bargaining agreement and there are no grievances outstanding thereunder.
(b) The Buyer and its subsidiaries are in compliance with all
applicable laws relating to employment and employment practices, wages, hours,
and terms and conditions of employment and are not engaged in any unfair labor
practice; (ii) there is no unfair labor practice charge or complaint pending
before the National Labor Relations Board ("NLRB"); (iii) there is no labor
strike, material slowdown or material work stoppage or lockout actually pending
or threatened against or affecting the Buyer or its subsidiaries, and the Buyer
and its subsidiaries have not at any time experienced any strike, material slow
down or material work stoppage, lockout or other collective labor action by or
with respect to employees of the Buyer or its subsidiaries; (iv) there is no
representation claim or petition pending before the NLRB or any similar foreign
agency and no question concerning representation exists relating to the
employees of the Buyer or its subsidiaries; (v) there are no charges with
respect to or relating to the Buyer or its subsidiaries pending before the Equal
Employment Opportunity Commission or any state, local or foreign agency
responsible for the prevention of unlawful employment practices; and (vi) the
Buyer and its subsidiaries have no formal notice from any federal, state, local
or foreign agency responsible for the enforcement of labor or employment laws of
an intention to conduct an investigation of the Buyer or its subsidiaries and no
such investigation is in progress.
Section 4.14. Environmental Matters. Notwithstanding anything to the
contrary contained in this Agreement and in addition to the other
representations and warranties contained herein:
(a) The Buyer and its subsidiaries and their operations are in
compliance with all applicable Environmental Laws and have obtained, maintained
in effect and complied with all licenses, permits and other authorizations or
registrations required under Environmental Laws.
(b) The Buyer and its subsidiaries have not performed or suffered any
act which could give rise to, or have otherwise incurred, liability to any
person (governmental or not) under CERCLA or any similar state or municipal law,
nor has the Buyer or its
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subsidiaries received notice of any such liability or any claim therefor or
submitted notice pursuant to Section 103 of CERCLA to any governmental agency.
(c) No Hazardous Materials have been released, placed, dumped or
otherwise come to be located on, at, beneath or near, and no storage tank
containing any Hazardous Materials is located at, any of the real property
and/or improvements currently or, to the knowledge of the Buyer, formerly owned
or leased by the Company which could subject the Buyer to a claim or claims
pursuant to Environmental Laws.
Section 4.15. Purchase for Investment. Each of the Buyer and Newco is an
accredited investor as defined under Rule 501(a) of the Securities Act. The
Purchased Interest will be acquired for investment for Buyer's own account and
not with a view to the resale or distribution of any part thereof, except in
compliance with the registration provisions of the Securities Act or an
exemption therefrom.
Section 4.16. Brokers and Finders. None of the Buyer or its subsidiaries
or any of their respective officers, directors or employees has employed any
broker or finder, except for Slusser Associates, Inc., and none of the Buyer or
its subsidiaries or any of their respective officers, directors or employees has
incurred any liability for any investment banking fees, brokerage fees,
commissions or finders' fees in connection with the transactions contemplated by
this Agreement other than fees payable to Slusser Associates, Inc.
Section 4.17. Due Diligence. Each of the Buyer and Newco has sufficient
knowledge and experience in investing in companies similar to the Company and is
capable of evaluating the merits and risks of its investment in the Company as
contemplated by this Agreement and is able to bear the economic risk of such
investment for an indefinite period of time. Each of the Buyer and Newco has
been given access to full and complete information regarding the Company and has
utilized such access to its satisfaction for the purpose of obtaining
information each of the Buyer and Newco desires or deems relevant to its
decision to acquire the Purchased Interests. Each of the Buyer and Newco has
had the opportunity to ask questions of and receive answers from management and
representatives of the Company to discuss the Company's business, management and
financial affairs and to obtain any additional information each of the Buyer and
Newco desires or deems relevant. Each of the Buyer and Newco has obtained, to
the extent it has deemed necessary, professional advice with respect to the
risks inherent in the acquisition of the Purchased Interests, including, without
limitation, the matters relating to the Company's business and financial
condition.
Section 4.18. Survival. Except where a representation or warranty
expressly refers to another date, in which case such representation or warranty
need be true and correct only as of such date, each of the representations and
warranties set forth in this Section 4 shall be deemed represented and made by
the Buyer at the Closing as if made at such time and shall survive the Closing
for a period terminating on the later of (a) date 6 months after the Closing
Date, and (b) with respect to claims asserted pursuant to Section 6.2 of this
Agreement before the expiration of the applicable representation or warranty, on
the date such claim is finally liquidated or otherwise resolved; provided,
--------
however, that (x) the representations and warranties in Sections 4.14 hereof
- -------
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shall survive until the third anniversary of the Closing Date and (y) the
representations and warranties in Sections 4.4 and 4.9 hereof shall survive
until the applicable statute of limitations for third party or governmental
actions has expired.
ARTICLE V.
COVENANTS OF THE PARTIES
The Parties hereto covenant as follows (all covenants of the Seller and the
Parent being joint and several obligations and all covenants of the Buyer and
Newco being joint and several obligations):
Section 5.1. Consents and Approvals Required on Closing Date. Each of the
parties hereto has or will have on or prior to the Closing Date, at its cost and
expense, obtained all necessary consents, waivers, authorizations and approvals
of all governmental and regulatory authorities, domestic and foreign, and of all
other Persons required on the Closing Date in connection with the execution,
delivery and performance by it of the Transaction Documents.
Section 5.2. Further Assurances. Upon the request of another party at any
time after the Closing Date, the Buyer, Newco, the Seller and the Parent shall
forthwith execute and deliver such further instruments of assignment, transfer,
conveyance, endorsement, direction or authorization and other documents as the
requesting party or its counsel may request to perfect title of the Buyer and
its successors and assigns to the Purchased Interests and to perfect title of
the Seller in and to the Share Consideration or otherwise to effectuate the
purposes of the Transaction Documents.
Section 5.3. Best Efforts. Upon the terms and subject to the conditions
of this Agreement, each party shall use its reasonable best efforts to take, or
cause to be taken, all action, and to do, or cause to be done, all things
necessary, proper or advisable consistent with applicable law to consummate and
make effective in the most expeditious manner practicable the transactions
contemplated hereby and in the Transaction Documents.
Section 5.4. Nondisclosure. Except as required under applicable law, from
and after the Closing Date, no party shall use, divulge, furnish or make
accessible to anyone any proprietary, material non-public, confidential or
secret information to the extent relating to the Buyer or its subsidiaries, in
the case of the Seller and the Parent, or relating to the Seller and the Parent,
in the case of the Buyer and Newco (in each case including, without limitation,
customer lists, supplier lists and pricing and marketing arrangements with
customers or suppliers), and each of the parties shall cooperate reasonably with
the others in preserving such proprietary, confidential or secret aspects of the
parties.
Section 5.5. Tax Matters. All transfer, documentary, sales, use, stamp,
registration, value added and other such taxes and fees (including any penalties
and interest) incurred in connection with this Agreement shall be borne and paid
equally by the Parent and the Seller, on the one hand, and the Buyer and Newco,
on the other hand, when due, and the Seller will file all necessary tax returns
and other documentation with respect to all such taxes and fees, and, if
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required by applicable law, the Buyer will, and will cause its affiliates to,
join in the execution of any such tax returns and other documentation.
Section 5.6. Cooperation on Tax Matters. The Buyer and the Seller shall
cooperate fully, as and to the extent reasonably requested by the other party,
in connection with the preparation and filing of any tax return, statement,
report or form (including any report required pursuant to Section 6043 of the
Code and all Treasury Regulations promulgated thereunder), any audit, litigation
or other proceeding with respect to taxes. Such cooperation shall include the
retention and (upon the other party's request) the provision of records and
information which are reasonably relevant to any such audit, litigation or other
proceeding and making employees available on a mutually convenient basis to
provide additional information and explanation of any material provided
hereunder. The Seller and the Buyer agree (i) to retain, and to cause the
Company to retain, all books and records with respect to tax matters pertinent
to the Company relating to any pre-closing tax period, and to abide by all
record retention agreements entered into with any taxing authority and (ii) to
give the other party reasonable written notice prior to destroying or discarding
any such books and records and, if the party so requests, the Buyer or the
Seller, as the case may be, shall allow the other party to take possession of
such books and records.
Section 5.7. Amendment to Management Agreement. The Parent shall use its
best efforts to cause the Company and City Cinemas Corporation to amend the
Management Agreement so that it provides the Buyer with the same rights as the
Parent pursuant to Section 3.2(b) thereof, and in any event, the Parent shall
deliver to the Buyer the financial statements referenced in such Section
promptly following receipt thereof.
Section 5.8. Amendment to Trademark License Agreement. The Parent shall
cause its affiliate Reading Investment Company, Inc. ("Reading Investment") and
the Company to execute an amended Angelika-SOHO Trademark License Agreement
dated as of April 15, 1997 by and between Reading Investment (as amended, the
"Amended Trademark License Agreement") in the form attached hereto as Exhibit E.
Section 5.9. Notification and Put Rights.
(a) Buyer covenants and agrees that it shall provide written notice
to Parent at least thirty (30) days prior to the date on which any of the
following is proposed to occur: (i) the issuance of shares of Common Stock or of
any class or series of Preferred Stock (in one or a series of related
transactions) representing more than fifteen percent (15%) of the number or
voting power of the shares of Common Stock or Buyer Preferred Stock, as the case
may be, outstanding immediately prior to such issuance, or (ii) the making of an
investment or series of related investments involving aggregate payments by
Buyer of $10 million or more (calculated on a consolidated basis);
(b) Parent shall notify Buyer within thirty (30) days after the date
of the notice in paragraph (a) above whether it agrees with the proposed
issuance or investment described in such notice. If (x) Parent objects to any
such proposed transaction and (y) Buyer notifies Parent
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that Buyer will nonetheless proceed with the proposed transaction, Parent shall
have the option, exercisable within fifteen (15) days after the date of such
written notice, to cause Buyer to repurchase, out of funds legally available
therefor, all of the Common Share Consideration and the Preferred Share
Consideration, for an aggregate purchase price equal to (aa) $13.5 million plus
(bb) interest at a per annum rate of ten percent (10%) calculated on a daily
basis through the date of such repurchase, which repurchase shall be consummated
no later than thirty (30) days after the date of the notice of exercise of the
option provided herein; and
(c) The rights of Parent to receive notice and to require the Buyer to
repurchase the Common Share Consideration and the Preferred Share Consideration
shall expire on the date that is thirty (30) days following the date on which
Buyer files with the Securities and Exchange Commission its Annual Report on
Form 10-K for the fiscal year ended January 30, 2001, provided that the parties
shall be obligated to consummate any repurchase for which Parent has provided
notice of exercise of the repurchase option provided in Section 5.9(b) prior to
such expiration date.
Section 5.10. Amendment to Certificate of Incorporation. Buyer hereby
covenants, subject to the fiduciary duty of the Board of Directors of Buyer, to
present to the stockholders of Buyer, at Buyer's next annual or special meeting
of stockholders, a proposed amendment to Buyer's restated Certificate of
Incorporation to eliminate Article SIXTH thereof, and shall use their best
efforts to solicit proxies in favor of such amendment.
Section 5.11. Board Representation. Parent will be entitled to have a
representative attend all meetings of the Board of Directors of the Buyer, and
of any meetings of any executive or other similar committee of the Board of
Directors as may be formed from time to time. Buyer will give Parent
substantially the same notice of any such meeting as Parent provides to its
directors, so as to allow such representative to attend such meetings in person,
and provide to such representative copies of any materials provided to directors
from time to time, whether or not in connection with any particular Board or
executive committee meeting, contemporaneously with the delivery of such
materials to such directors. Notwithstanding the above, it is acknowledged and
agreed that such representative will not be entitled to attend any portions of
any such meeting where specific advice is being given by legal counsel to the
directors and where the presence of such representative would result in a waiver
of any otherwise applicable attorney-client communication privilege.
ARTICLE VI.
INDEMNIFICATION
Section 6.1. Indemnification by the Seller and the Parent.
Notwithstanding the Closing and except to the extent that the Buyer or Newco has
any knowledge or information with respect to such matter on or prior to the
Closing Date, the Seller and the Parent, jointly and severally, shall indemnify
and fully defend, save and hold the Buyer, Newco, and their directors, officers
and employees (the "Buyer Indemnitees"), harmless if any Buyer Indemnitee shall
at any time or from time to time suffer any damage, liability, loss, cost,
expense (including all
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reasonable attorneys' fees and expenses of investigation incurred by the Buyer
Indemnitees in any action or proceeding between the Seller or the Parent and the
Buyer Indemnitees or between the Buyer Indemnitees and any third party or
otherwise), deficiency, interest, penalty, impositions, assessments or fines
(collectively, "Buyer Losses") arising out of or resulting from, or shall pay or
become obliged to pay any sum on account of, any and all the Seller Events of
Breach. As used herein, "Seller Events of Breach" shall be and mean any one or
more of the following:
(a) any untruth or inaccuracy in any representation of the Seller or
the Parent or the breach of any warranty of the Seller or the Parent contained
in the Transaction Documents written notice of which has been given to the
Seller and the Parent prior to the expiration of any survival period applicable
thereto;
(b) any failure of the Seller or the Parent duly to perform or
observe any term, provision, covenant, agreement contained in the Transaction
Documents on the part of such Person to be performed or observed, provided,
however, that, except for Buyer Losses incurred by the Buyer Indemnitees in
connection with the inaccuracy of any representation or the breach of any
warranty of the Seller or the Parent relating to Taxes, the representations and
warranties contained in Section 3.2 or actual fraud by the Seller or the Parent,
the Seller and the Parent shall not have any obligation to make any payment
under Section 6.1(a) hereof with respect to any representation or warranty
unless (i) the Buyer Indemnitees have suffered Buyer Losses by reason of any
particular representation or warranty, together with all other particular claims
arising from the same facts and circumstances, in excess of $50,000 and (ii)
until all Buyer Indemnitees have suffered Buyer Losses (other than Buyer Losses
below the $50,000 threshold referred to in clause (i) above) by reason of all
such claims that exceed $500,000, it being understood that once such amount is
exceeded, the aggregate of all such claims in excess of $500,000 shall be
payable by the Seller and Parent on demand by the Buyer.
Section 6.2. Procedures for Indemnification by the Seller and the Parent.
If a Seller's Event of Breach occurs or is alleged and a Buyer Indemnitee
asserts that the Seller or the Parent has become obligated to such Buyer
Indemnitee pursuant to Section 6.1 hereof, or if any suit, action,
investigation, claim or proceeding (a "Proceeding") is begun, made or instituted
by a third party as a result of which the Seller or the Parent may become
obligated to a Buyer Indemnitee hereunder, such Buyer Indemnitee shall give
written notice to the Seller and the Parent. The Seller and the Parent, jointly
and severally, agree to defend, contest or otherwise protect the Buyer
Indemnitee against any Proceeding at their sole cost and expense. The Buyer
Indemnitee shall have the right, but not the obligation, to participate at its
own expense in the defense thereof by counsel of the Buyer Indemnitee's choice
and shall in any event cooperate with and assist the Seller and the Parent to
the extent reasonably possible. If the Seller and the Parent fail timely to
defend, contest or otherwise protect against such Proceeding, the Buyer
Indemnitee shall have the right to do so, including, without limitation, the
right to make any compromise or settlement thereof, and the Buyer Indemnitee
shall be entitled to recover the entire cost thereof from the Seller or the
Parent, including, without limitation, reasonable attorneys' fees, disbursements
and amounts paid as the result of such Proceeding, as such costs are
33
<PAGE>
incurred, and the Seller and the Parent shall be bound by any determination made
in such Proceeding or any compromise or settlement effected by the Buyer. If the
Buyer Indemnitee shall have reasonably concluded upon advice from counsel that
there may be a conflict of interest between the Buyer Indemnitee and the Seller
or the Parent, the Buyer Indemnitee shall have the right to defend, contest or
otherwise protect against such Proceeding, provided that if the Buyer Indemnitee
--------
shall compromise or settle such claims without consent of Seller and Parent,
such compromise or settlement shall not bind Seller or Parent. If the Seller or
the Parent assumes the defense of any Proceeding, (a) it will be conclusively
established for purposes of this Agreement that the claims made in that
Proceeding are within the scope of and subject to indemnification, (b) no
compromise or settlement of such claims may be effected by the Seller or the
Parent without the Buyer Indemnitee's consent unless (i) there is no finding or
admission of any violation of federal, state, local, municipal, foreign,
international, multinational or other administrative order, law, ordinance,
principal of common law, regulation, statute or treaty or any violation of the
rights of any Person and no effect on any other claims that may be made against
the Buyer Indemnitee and (ii) the sole relief provided is monetary damages that
are paid in full by the Seller or the Parent; and (c) the Buyer Indemnitee will
have no liability with respect to any compromise or settlement of such claims
effected without its consent.
Section 6.3. Indemnification by the Buyer and Newco. Notwithstanding the
Closing, and, with respect to paragraph (a) only, except to the extent that the
Seller or the Parent has any knowledge or information with respect to such
matter on or prior to the Closing Date (it being agreed that the Seller
Indemnitees are entitled to indemnification under this Section 6.3 regardless of
their knowledge of facts giving rise to any litigation referred to in paragraph
(b) hereof or of their knowledge for purposes of the representation and warranty
set forth in the penultimate sentence of Section 4.4 of any liabilities or
claims against the Buyer or any of its Affiliates), the Buyer and Newco shall,
jointly and severally, indemnify and agree to fully defend, save and hold the
Seller, the Parent, or any Affiliate of the Seller or of the Parent and their
directors, officers and employees (the "Seller Indemnitees"), harmless if any
Seller Indemnitee shall at any time or from time to time suffer any damage,
liability, loss, cost, expense (including all reasonable attorneys' fees and
expenses of investigation incurred by the Seller Indemnitees in any action or
proceeding between the Buyer or Newco and the Seller Indemnitees or between the
Seller Indemnitees and any third party or otherwise), deficiency, interest,
penalty, impositions, assessments or fines (collectively, "Seller Losses")
arising out of or resulting from, or shall pay or become obligated to pay any
sum on account of, any and all the Buyer Events of Breach. As used herein,
"Buyer Events of Breach" shall be and mean any one or more of the following:
(a) any untruth or inaccuracy in any representation of the Buyer or
Newco or the breach of any warranty of the Buyer or Newco contained in the
Transaction Documents written notice of which has been given to the Buyer and
Newco prior to the expiration of any survival period applicable thereto;
(b) any Proceeding is brought by any stockholder of the Buyer, either
directly or derivatively, challenging any of the transactions contemplated
herein or in any other Transaction Document or asserting any liability on the
part of Parent, any of its affiliates or any of the respective officers or
directors;
34
<PAGE>
(c) any failure of the Buyer or Newco duly to perform or observe
any term, provision, covenant, agreement or condition contained herein or in the
Transaction Documents on the part of the Buyer or Newco to be performed or
observed;
provided, however, that, except for Seller Losses incurred by the Seller
Indemnitees in connection with the inaccuracy of any representations or the
breach of any warranty of the Buyer or Newco relating to Taxes, the
representations and warranties contained in Section 5.4 hereof or actual fraud
by the Buyer or Newco, the Buyer and Newco shall have no obligation to make any
payment under Section 6.3(a) hereof with respect to any representation or
warranty unless (i) the Seller Indemnitees have suffered Seller Losses by reason
of any particular representation or warranty, together with all other particular
claims arising from the same facts and circumstances, in excess of $50,000 and
(ii) until all Seller Indemnitees have suffered Seller Losses (other than Seller
Losses below the $50,000 threshold referred to in clause (i) above) by reason of
all such claims that exceed $500,000, it being understood that once such amount
is exceeded, the aggregate of all such claims in excess of $500,000 shall be
payable by the Buyer and Newco on demand by the Seller.
Section 6.4. Procedures for Indemnification by the Buyer and Newco. If a
Buyer Event of Breach occurs or is alleged and a Seller Indemnitee asserts that
the Buyer or Newco has become obligated to such Seller Indemnitee pursuant to
Section 6.3 hereof, or if any Proceeding is begun, made or instituted by a third
party as a result of which the Buyer or Newco may become obligated to a Seller
Indemnitee hereunder, such Seller Indemnitee shall give written notice to the
Buyer and Newco. The Buyer and Newco, jointly and severally, agree to defend,
contest or otherwise protect the Seller Indemnitee against any Proceeding at
their sole cost and expense. The Seller Indemnitee shall have the right, but
not the obligation, to participate at its own expense in the defense thereof by
counsel of the Seller Indemnitee's choice and shall in any event cooperate with
and assist the Buyer and Newco to the extent reasonably possible. If the Buyer
or Newco fail timely to defend, contest or otherwise protect against such
Proceeding, the Seller Indemnitee shall have the right to do so, including,
without limitation, the right to make any compromise or settlement thereof, and
the Seller Indemnitee shall be entitled to recover the entire cost thereof from
the Buyer or Newco, including, without limitation, reasonable attorneys' fees,
disbursements and amounts paid as the result of such Proceeding, as such costs
are incurred, and the Buyer or Newco shall be bound by any determination made in
such Proceeding or any compromise or settlement effected by the Seller. If the
Seller Indemnitee shall have reasonably concluded upon advice from counsel that
there may be a conflict of interest between the Seller Indemnitee and the Buyer
or Newco, the Seller Indemnitee shall have the right to defend, contest or
otherwise protect against such Proceeding, provided that if the Seller
--------
Indemnitee shall compromise or settle such claims without consent of Buyer and
Newco, such compromise or settlement shall not bind the Buyer or Newco. If the
Buyer or Newco assumes the defense of any Proceeding, (a) it will be
conclusively established for purposes of this Agreement that the claims made in
that Proceeding are within the scope of and subject to indemnification, (b) no
compromise or settlement of such claims may be effected by the Buyer or Newco
without the Seller Indemnitee's consent unless (i) there is no finding or
admission of any violation of federal, state, local, municipal, foreign,
international, multinational or other administrative order, law, ordinance,
principal of common law, regulation, statute or treaty or
35
<PAGE>
any violation of the rights of any Person and no effect on any other claims that
may be made against the Seller Indemnitee and (ii) the sole relief provided is
monetary damages that are paid in full by the Buyer or Newco; and (c) the Seller
Indemnitee will have no liability with respect to any compromise or settlement
of such claims effected without its consent. Notwithstanding the above, in the
event of any claim for indemnity under clause 6.3(b) the Seller Indemnitees will
be entitled to retain their own counsel and Buyer will promptly reimburse such
Seller Indemnitees for the reasonable costs and disbursements of such separate
counsel.
ARTICLE VII.
CONDITIONS TO OBLIGATIONS OF THE SELLER AND THE PARENT
The obligations of the Seller and the Parent to consummate the transactions
contemplated by the Transaction Documents are subject to the fulfillment, at or
before the Closing Date of the following conditions, any one or more of which
may be waived by the Parent and the Seller in their sole discretion:
Section 7.1. Representations and Warranties of the Buyer and Newco. All
representations and warranties made by the Buyer and Newco in this Agreement
shall be true and correct in all material respects on and as of the Closing Date
as if again made by the Buyer and Newco on and as of such date, except for any
warranties made with reference to a specific date, which shall be true and
correct as of such specific date.
Section 7.2. Performance of the Obligations of the Buyer and Newco. The
Buyer and Newco shall have performed in all material respects all obligations
required under this Agreement to be performed by them on or before the Closing
Date.
Section 7.3. Consents and Approvals. All consents, waivers,
authorizations and approvals of any governmental or regulatory authority,
domestic or foreign, and of any Person, other than the Seller, the Parent or
their respective subsidiaries or affiliates, required on the Closing Date in
connection with the execution, delivery and performance of the Transaction
Documents shall have been duly obtained and shall be in full force and effect on
the Closing Date.
Section 7.4. No Violation of Orders. No preliminary or permanent
injunction or other order issued by any court or other governmental or
regulatory authority, domestic or foreign, nor any statute, rule, regulation,
decree or executive order promulgated or enacted by any government or
governmental or regulatory authority, domestic or foreign, that declares any of
the Transaction Documents invalid or unenforceable in any respect or which
prevents the consummation of the transactions contemplated hereby shall be in
effect on the Closing Date.
Section 7.5. Registration Rights Agreement. On the Closing Date, the
Buyer and the Seller shall enter into the Registration Rights Agreement in the
form attached hereto as Exhibit D for the registration of the Buyer Common Stock
included in the Share Consideration.
Section 7.6. Buyer Closing Documents. The Buyer shall have delivered to
the Seller or cause Newco to deliver to the Seller the following documents on
the Closing Date:
36
<PAGE>
(a) the certificates representing the Share Consideration;
(b) a certificate dated the Closing Date of the Secretary of
State of the jurisdiction of incorporation of the Buyer as to its good standing
in such jurisdiction;
(c) the Transaction Documents; and
(d) such other documents, including legal opinions, or
certificates relating to the transactions contemplated by the Transaction
Documents as the Seller reasonably requests.
Section 7.7. Legal Matters. All certificates, instruments, opinions and
other documents required to be executed or delivered by or on behalf of the
Buyer and Newco under the provisions of the Transaction Documents, and all other
actions and proceedings required to be taken by or on behalf of the Buyer and
Newco in furtherance of the transactions contemplated hereby and thereby, shall
be reasonably satisfactory in form and substance to counsel for the Seller.
ARTICLE VIII.
CONDITIONS TO OBLIGATIONS OF THE BUYER AND NEWCO
The obligations of the Buyer to consummate the transactions contemplated by
the Transaction Documents are subject to the fulfillment, at or before the
Closing Date of the following conditions, any one or more of which may be waived
by the Buyer in its sole discretion:
Section 8.1. Representations and Warranties of the Seller and the Parent.
All representations and warranties made by the Seller and the Parent in this
Agreement shall be true and correct in all material respects on and as of the
Closing Date as if again made by the Seller and the Parent on and as of such
date, except for any warranties made with reference to a specific date, which
shall be true and correct as of such specific date.
Section 8.2. Performance of the Obligations of the Seller and the Parent.
The Seller and the Parent shall have performed in all material respects all
obligations required under this Agreement to be performed by them on or before
the Closing Date and the Buyer shall have received a certificate dated the
Closing Date signed by the duly authorized representatives of the Seller and the
Parent to that effect.
Section 8.3. Consents and Approvals. All consents, waivers, authorizations
and approvals of any governmental or regulatory authority, domestic or foreign,
and of any Person, other than the Buyer, Newco or their respective subsidiaries
or affiliates, in connection with the execution, delivery and performance of the
Transaction Documents shall have been duly obtained and shall be in full force
and effect on the Closing Date, subject to the proviso in Section 8.4 hereof.
Section 8.4. No Violation of Orders. No preliminary or permanent
injunction or other order issued by any court or other governmental or
regulatory authority, domestic or foreign, nor
37
<PAGE>
any statute, rule, regulation, decree or executive order promulgated or enacted
by any government or governmental or regulatory authority, domestic or foreign,
that declares any of the Transaction Documents invalid or unenforceable in any
respect or which prevents the consummation of the transactions contemplated
hereby shall be in effect on the Closing Date; provided that if Buyer or Newco
--------
fail to consummate the transactions contemplated by the Transaction Documents
because of a failure of the conditions specified in Sections 8.3 and 8.4 based
solely upon the entry by the Delaware Court of Chancery in the Chancery Court
Litigation or another court in related litigation of an injunction or other
order barring the Closing, then the parties agree that their contractual rights
under this agreement are not affected.
Section 8.5. Seller Closing Documents. The Seller shall have delivered to
the Buyer or caused the Parent to deliver to the Buyer the following documents
on the Closing Date:
(a) instruments of transfer duly transferring all the Purchased
Interests on the Closing Date with appropriate transfer stamps, if any, affixed
thereto;
(b) a certificate dated the Closing Date of the Secretary of
State of the State of Delaware as to its good standing in such jurisdiction;
(c) copies of the consents, waivers and approvals specified on
Schedule 3.6;
- ------------
(d) the Transaction Documents; and
(e) such other documents, including legal opinions, or
certificates relating to the transactions contemplated by the Transaction
Documents as the Buyer reasonably requests.
Section 8.6. Legal Matters. All certificates, instruments, opinions and
other documents required to be executed or delivered by or on behalf of the
Seller and the Parent under the provisions of the Transaction Documents, and all
other actions and proceedings required to be taken by or on behalf of the Seller
and the Parent in furtherance of the transactions contemplated hereby and
thereby, shall be reasonably satisfactory in form and substance to counsel for
the Buyer.
ARTICLE IX.
TERMINATION
Section 9.1. Conditions of Termination. Notwithstanding anything to the
contrary contained herein, this Agreement may be terminated at any time before
the Closing (a) by mutual consent of the Seller and the Buyer, (b) by the Seller
if the conditions set forth in Section 8 hereof are not satisfied or waived by
the Closing Date, (c) by the Buyer if the conditions set forth in Section 9
hereof are not satisfied or waived by the Closing Date or (d) by any party
hereto that is not in breach of its material obligations hereunder if the
Closing shall not have occurred on or prior to April 30, 2000, provided that the
--------
Buyer and Newco shall not have a right to terminate this Agreement pursuant to
clause (d) if they are prohibited from closing because of a preliminary or
permanent injunction binding on them.
38
<PAGE>
Section 9.2. Effect of Termination. In the event of termination pursuant
to Section 9.1 hereof, this Agreement shall become null and void and have no
effect, with no liability on the part of the Seller, the Company or the Buyer,
or their respective directors, officers, agents or stockholders, with respect to
this Agreement, except for the (i) liability of a party for expenses pursuant to
Section 11.3 hereof, (ii) liability for any breach of this Agreement and (iii)
Buyer and Newco's indemnification obligations under Section 6.3(b).
Section 9.3. Intentionally Omitted.
ARTICLE X.
MISCELLANEOUS
Section 10.1. Successors and Assigns. Except as otherwise provided in
this Agreement, no party hereto shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other parties
hereto and any such attempted assignment without such prior written consent
shall be void and of no force and effect, provided that the Buyer may assign its
rights to a wholly-owned subsidiary. This Agreement shall inure to the benefit
of and shall be binding upon the successors and permitted assigns of the parties
hereto.
Section 10.2. Governing Law; Jurisdiction. This Agreement shall be
construed, performed and enforced in accordance with, and governed by, the laws
of the State of New York, without giving effect to the principles of conflicts
of laws thereof. The parties hereto irrevocably elect as the sole judicial
forum for the adjudication of any matters arising under or in connection with
this Agreement, and consent to the jurisdiction of, the courts of the State of
New York.
Section 10.3. Service of Process. The parties hereto acknowledge and
agree that under this Agreement process may be served, in the case of the Buyer
and Newco, by delivery to CT Corporation, 111 8th Avenue, New York, New York,
10011, in the case of the Seller, the Parent and the Company, by delivery to
Duane, Morris & Heckscher LLP, 380 Lexington Avenue, New York, New York 10168,
Attn: Michael H. Margulis, Esq. or to such other address or to the attention of
such other person in New York City as the parties may provide by notice by given
in accordance with Section 10.6 hereof.
Section 10.4. Expenses; Fees. Except as otherwise provided herein, each
of the parties hereto shall pay its own expenses in connection with this
Agreement and the transactions contemplated hereby, including, without
limitation, any legal and accounting fees, whether or not the transactions
contemplated hereby are consummated.
Section 10.5. Severability. In the event that any part of this Agreement
is declared by any court or other judicial or administrative body to be null,
void or unenforceable, said provision shall survive to the extent it is not so
declared, and all of the other provisions of this Agreement shall remain in full
force and effect.
Section 10.6. Notices. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed to
have been duly given (i) on the date of
39
<PAGE>
service if served personally on the party to whom notice is to be given, (ii) on
the day of transmission if sent via facsimile transmission to the facsimile
number given below, and telephonic confirmation of receipt is obtained promptly
after completion of transmission, (iii) on the day after delivery to Federal
Express or similar overnight courier or the Express Mail service maintained by
the U.S. Postal Service or (iv) on the fifth day after mailing, if mailed to the
party to whom notice is to be given, by first class mail, registered or
certified, postage prepaid and properly addressed, to the party as follows:
If to the Seller:
Reading Entertainment, Inc.
One Penn Square West
30 South Fifteenth Street, Suite 1300
Philadelphia, Pennsylvania 19102-4813
Attention: James J. Cotter, Chairman
Facsimile: (215) 569-2862
Copy to:
Potter Anderson & Corroon LLP
Hercules Plaza
1313 N. Market Street
Wilmington, Delaware 19801
Attention: John F. Grossbauer, Esq.
Facsimile: (302) 984-1192
If to the Buyer:
National Auto Credit, Inc.
30000 Aurora Road
Solon, Ohio 44139
Attention: David L. Huber, Chairman of the Board
Facsimile: (440) 349-0442
Copy to:
National Auto Credit, Inc.
30000 Aurora Road
Solon, Ohio 44139
Attention: Raymond A. Varcho, Esq., Vice President,
Secretary and General Counsel
Facsimile: (440) 349-3959
Any party may change its address for the purpose of this Section by giving
the other party written notice of its new address in the manner set forth above.
Section 10.7. Amendments; Waivers. This Agreement may be amended or
modified, and any of the terms, covenants, representations, warranties or
conditions hereof may be waived, only by a written
40
<PAGE>
instrument executed by the parties hereto, or in the case of a waiver, by the
party waiving compliance. Any waiver by any party of any condition, or of the
breach of any provision, term, covenant, representation or warranty contained in
this Agreement, in any one or more instances, shall not be deemed to be nor
construed as further or continuing waiver of any such condition, or of the
breach of any other provision, term, covenant, representation or warranty of
this Agreement.
Section 10.8. Public Announcements. The parties agree that after the
signing of this Agreement, neither party shall make any press release or public
announcement concerning the transactions contemplated by the Transaction
Documents without the prior written approval of the other parties unless the
disclosing party is advised by counsel that a press release or public
announcement is required by law. If any such announcement or other disclosure
is required by law, the disclosing party agrees to give the nondisclosing
parties prior notice and an opportunity to comment on the proposed disclosure.
Section 10.9. Entire Agreement. The Transaction Documents contain the
entire understanding between the parties hereto with respect to the transactions
contemplated hereby and thereby and supersedes and replaces all prior and
contemporaneous agreements and understandings, oral or written, with regard to
such transactions. All schedules hereto and any documents and instruments
delivered pursuant to any provision hereof are expressly made a part of this
Agreement as fully as though completely set forth herein.
Section 10.10. Parties in Interest. Except for the rights granted to the
Buyer Indemnitees and the Seller Indemnitees in Article VI hereof, nothing in
this Agreement is intended to confer any rights or remedies under or by reason
of this Agreement on any persons other than the Seller, the Parent, the Company,
the Buyer and Newco and their respective successors and permitted assigns.
Nothing in this Agreement is intended to relieve or discharge the obligations or
liability of any third persons to the Seller, the Parent, the Company, the Buyer
or Newco. No provision of this Agreement shall give any third persons any right
of subrogation or action over or against the Seller, the Parent, the Company,
the Buyer or Newco.
Section 10.11. Scheduled Disclosures. Disclosure of any matter, fact or
circumstance in a Schedule to this Agreement shall not be deemed to be
disclosure thereof for purposes of any other Schedule hereto.
Section 10.12. Specific Performance. The parties recognize that the
Purchased Interests and the Company's principal asset, the Angelika Film Center,
are unique and not capable of duplication. Accordingly, without limited or
waiving any rights or remedies the parties may have under this Agreement now or
hereinafter existing at law or in equity or by statute, each of the parties
hereto shall be entitled to seek specific performance by the other of the
obligations to be performed by the other in accordance with the provisions of
this Agreement.
Section 10.13. Section and Paragraph Headings. The section and paragraph
headings in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
Section 10.14. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which shall
constitute the same instrument.
41
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
April 5, 2000.
SELLER:
FA, INC.
By: /s/ S. Craig Tompkins
---------------------
Name: S. Craig Tompkins
Title: Vice Chairman
PARENT:
READING ENTERTAINMENT, INC.
By: /s/ S. Craig Tompkins
---------------------
Name: S. Craig Tompkins
Title: Vice Chairman
BUYER:
NATIONAL AUTO CREDIT, INC.
By: /s/ David L. Huber
------------------
Name: David L. Huber
Title: President Chairman CEO
NEWCO:
NATIONAL CINEMAS, INC.
By: /s/ David L. Huber
------------------
Name: David L. Huber
Title: President
42
<PAGE>
EXHIBIT 21(i)
<TABLE>
<CAPTION>
Reading Entertainment, Inc. Consolidated Subsidiaries
- ------------------------------------------------------------------------------------------------------
JURISDICTION OF
SUBSIDIARY INCORPORATION D/B/A
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Domestic Subsidiaries:
- ----------------------
AHGP, Inc. Delaware, USA
AHLP, Inc. Delaware, USA
Angelika Film Centers LLC Delaware, USA Angelika Film Center
Angelika Holding, Inc. Delaware, USA
Bayou Cinemas, LP Delaware, USA Angelika Film Center & Cafe
Cine Vista Holdings, Inc. Delaware, USA
Entertainment Holdings, Inc. Delaware, USA
FA, Inc. Delaware, USA
Puerto Rico Holdings, Inc Delaware, USA
Railroad Investments, Inc. Delaware, USA
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 Holdings, Inc. Delaware, USA
Reading International Cinemas LLC Delaware, USA
Reading Investment Company Delaware, USA
Reading Real Estate Company Pennsylvania, USA
Reading Resources, Inc. Delaware, USA
Reading Theaters, Inc. Delaware, USA Tower Angelika Theater
Reading Transportation Company Pennsylvania, USA
RG-I, Inc. Delaware, USA
RG-II, Inc. Delaware, USA
Royal George, LLC Delaware, USA
The Port Reading Railroad Company New Jersey, USA
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Reading Entertainment, Inc. Consolidated Subsidiaries
- ------------------------------------------------------------------------------------------------------
JURISDICTION OF
SUBSIDIARY INCORPORATION D/B/A
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
International Subsidiaries:
- ---------------------------
Australia Cinema Management Pty Limited New South Wales, Australia
Australia Country Cinemas Pty Limited New South Wales, Australia Reading Cinemas
Darnelle Enterprises Limited Auckland, New Zealand
R&W Cinema Properties Limited Auckland, New Zealand
Reading Australia Leasing Pty Limited New South Wales, Australia
Reading Cinema Properties Limited Auckland, New Zealand
Reading Entertainment Australia Pty Limited New South Wales, Australia Reading Cinemas
Reading Properties Pty Limited Victoria, Australia
Reading New Zealand Limited Auckland, New Zealand
Ronwood Investments Limited Auckland, New Zealand
Tington Investments Limited Auckland, New Zealand
Tobrooke Holdings Limited Auckland, New Zealand Berkeley Cinemas
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 33-
57222 of Reading Entertainment, Inc. on Form S-8 of our report dated April 11,
2000, appearing in this Annual Report on Form 10-K of Reading Entertainment,
Inc. for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
Los Angeles, California
April 11, 2000
<PAGE>
EXHIBIT 23.2
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 18, 1999, with respect to
the consolidated financial statements of Reading Entertainment, Inc. as of
December 31, 1998 and for each of the two years in the period ended December 31,
1998 included in Reading Entertainment Inc.'s Annual Report (Form 10-K) for the
year ended December 31, 1999.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 12, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,277
<SECURITIES> 0
<RECEIVABLES> 409
<ALLOWANCES> 0
<INVENTORY> 316
<CURRENT-ASSETS> 15,881
<PP&E> 95,772
<DEPRECIATION> 6,294
<TOTAL-ASSETS> 138,496
<CURRENT-LIABILITIES> 19,796
<BONDS> 1,035
7,000
1<F1>
<COMMON> 7
<OTHER-SE> 102,675
<TOTAL-LIABILITY-AND-EQUITY> 138,496
<SALES> 8,450
<TOTAL-REVENUES> 40,319
<CGS> 1,930
<TOTAL-COSTS> 35,497
<OTHER-EXPENSES> 47,639
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 380
<INCOME-PRETAX> (40,259)
<INCOME-TAX> 923
<INCOME-CONTINUING> (41,182)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41,182)
<EPS-BASIC> (6.11)
<EPS-DILUTED> (6.11)
<FN>
<F1>Represents par value of Reading Entertainment Series B preferred stock.
</FN>
</TABLE>
