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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _____________________
Commission file number 1-6123
CRAIG CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 95-1620188
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
550 South Hope Street
Suite 1825 Los Angeles CA 90071
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 239-0555
Securities Registered pursuant to Section 12(b) of the Act:
Names of exchanges on
Title of each class which each class registered
- ----------------------------------------------- ---------------------------
Common stock, $0.25 par value New York Stock Exchange and
Class A Common preference stock, $.01 par value Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
------- _______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes No [X]
------- ______
The aggregate market value of voting stock held by non-affiliates of the
Registrant was $37,621,000 as of January 12, 1996.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. As of January 12, 1996 there
were 4,171,870 shares of Common Stock, $0.25 par value per share, and 1,622,000
shares of Class A Common Preference Stock, $0.01 par value per share
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's 1995 Proxy Statement, which will be filed with the
Securities and Exchange Commission in connection with the Company's Annual
Meeting of Stockholders, are incorporated by reference in Part III hereof.
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PART I
------
ITEM 1. BUSINESS
General
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Craig Corporation (the "Company") is a diversified corporation whose primary
business activity is the ownership and strategic management of its significant
holdings, which currently include a 50% economic ownership interest in the
common stock of Stater Bros. Holdings Inc. ("SBH" and, collectively with its
wholly owned subsidiaries, "Stater"), approximately 49% of the outstanding stock
of Reading Company ("Reading") and approximately 39.4% of the voting securities
of Citadel Holding Corporation ("CHC" and, collectively with its wholly owned
subsidiaries, "Citadel").
Stater, established in 1936, is a leading supermarket chain that operates
110 retail supermarkets under the name "Stater Bros. Markets". Stater Bros.
supermarkets are located principally in the "Inland Empire" area of Southern
California, which includes the counties of San Bernardino and Riverside. Stater
also operates stores in eastern Los Angeles, Orange and Kern Counties in
Southern California. In addition to the Company's 50% ownership (48% voting),
SBH's remaining 50% ownership (52% voting) is held by La Cadena Investments (La
Cadena), a general partnership consisting of key management executives of
Stater. The interests of the Company in SBH are subject to certain agreements,
including an Option providing SBH the right to acquire the Company's 50% equity
interest in SBH. The Company has the right to designate one member of the SBH
Board of Directors, and this position is currently occupied by the Company's
Chairman. See "Stater Restructuring" below.
Reading was organized under the laws of Pennsylvania in 1833. Over the past
several years, Reading has been divesting most of its major assets and building
up its working capital. In 1993, Reading determined to focus its attentions on
the "Beyond the Home" segment of the entertainment industry. Effective July 1,
1994, Reading acquired Theater Acquisitions of Puerto Rico, Inc. ("TAPR") for an
aggregate purchase price of approximately $22.7 million. At the time of
acquisition, TAPR operated six motion picture exhibition theaters with a total
of 36 screens in the Commonwealth of Puerto Rico. In December 1994, TAPR was
merged into its parent corporation and the operating name changed to Cine Vista.
Reading added a new multiplex with 8 screens in 1995 and currently has an
additional two complexes with 16 screens (inclusive of 6 replacement screens to
be reconstructed as part of an expanded complex in Mayaguez) under development.
At September 30, 1995, Reading's working capital included approximately $47.5
million in cash, cash equivalents and marketable treasury and federal agency
securities. Reading intends to utilize a portion of its cash balances and short-
term investments to continue and expand its existing theater exhibition business
domestically and internationally. In furtherance of Reading's business plan to
seek out foreign opportunities for the development and
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operation of multiplex cinemas, in November 1995 Reading and the Company formed
Reading International Cinemas LLC (referred to herein collectively with its
subsidiaries and Australian affiliates as "Reading International"). Reading
International is owned in equal shares by Reading and the Company, and was
organized with an initial capitalization of $10 million.
Five members of the seven member Reading Board of Directors are directors
of the Company. Two of these directors, the Chairman of the Board and President
of the Company, hold the same respective positions at Reading. See "Business -
Reading".
Prior to August 1994, CHC owned 100% of Fidelity Federal Bank (Fidelity), a
federally chartered savings association located in southern California. In
August 1994, CHC and Fidelity completed a series of transactions (the "CHC
Restructuring") which resulted in the recapitalization of Fidelity, the transfer
to Citadel of certain real estate interests and the reduction of CHC's ownership
in Fidelity from 100% to approximately 16%. In April 1995, CHC sold
substantially all of its remaining 16% interest in Fidelity. Since the
restructuring, Citadel has been engaged primarily in the ownership and
management of commercial and residential property. At September 30, 1995, CHC's
balance sheet assets amounted to approximately $39.7 million and consisted
primarily of real estate and cash. CHC management is currently evaluating the
assets and opportunities available to CHC with a view to either developing a new
line of business, merger or sale of the entire Company, or liquidation. Such
alternatives may include the participation with the Company and or the Company's
affiliates in land based entertainment businesses, such as motion picture
exhibition.
As of January 10, 1995, the Company owns 1,564,673 shares or approximately
26% of the CHC Common Stock and 1,329,114 shares of CHC 3% Cumulative Voting
Convertible Preferred Stock, which together with the common stock held by the
Company represent approximately 39.4% of the outstanding voting securities of
CHC. The Company also holds warrants exercisable at $3.00 per share, to purchase
an additional 666,000 shares of CHC Common Stock. Assuming full exercise of the
warrants and full conversion into CHC Common Stock of the 3% Cumulative Voting
Convertible Preferred Stock (assuming a market price of $2.25), the Company
would own approximately 50.7% of the then issued outstanding voting securities
of CHC.
Three members of CHC's five member Board of Directors are directors of the
Company. The Company's Chairman of the Board is the Chairman of the Board of
CHC. The Company's President is the Vice-Chairman of the Board of CHC and the
Secretary, Treasurer and Principal Accounting Officer of CHC. See "Business -
Citadel".
Stater
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General
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Stater operates 110 retail supermarkets under the name Stater Bros.
Markets. For information with respect to a description of Stater's business,
property, legal proceedings and management see Part I to Stater Bros. Holdings
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Inc. Report on Form 10-K for the period ended September 24, 1995 which is set
forth after Item 4 below.
Stater Restructuring
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On March 8, 1994, the Company consummated several separate agreements with
SBH and La Cadena with respect to a series of restructuring transactions under
the terms of which the Company received from Stater pre-tax cash proceeds
approximating $42 million, including a dividend distribution of $20 million, an
option payment of $14.65 million, $5 million in connection with a Consulting
Agreement, and $2.2 million for the redemption of preferred stock plus cumulated
dividends.
On the date of the restructuring, La Cadena elected to exchange its shares
of Common Stock of SBH for an equal number of shares of SBH Class A Common Stock
which are entitled to 1.1 vote per share for a period of five years, while the
Company elected to retain its shares of SBH Common Stock which are entitled to
one vote per share (representing upon issuance of the SBH Class A Common Stock
approximately 48% of the vote).
The restructuring was funded through SBH's $165 million offering of 11%
Senior Notes due 2001, which notes were exchanged for a like amount of New Notes
in August 1994. The New Notes are listed and trade on the American Stock
Exchange. The proceeds of SBH's financing were used to (i) repay $75.5 million
SBH's 9.8% Senior Notes, (ii) repay outstanding bank loans and mortgages
amounting to approximately $21 million, (iii) pay restructuring fees and
expenses and (iv) pay the Company amounts due under the restructuring
agreements.
The option payment of $14.65 million represents an option to purchase all,
but not less than all, the Common Stock held by the Company for a purchase price
of $60 million plus an adjustment factor equal to 8.833% per annum, exercisable
at any time prior to March 8, 1996. The option period may be extended for an
additional ten years, if SBH converts the Company's SBH Common Stock into SBH
Series B Preferred Stock on or prior to March 8, 1996. If SBH exercises its
right to convert the Company's Common Stock of SBH into Series B Preferred
Stock, the option will entitle SBH to purchase all issued and outstanding shares
of such Series B Preferred Stock for $69.4 million plus accrued and unpaid
dividends.
Under the terms of the Option Agreement between Stater and the Company, in
the event that Stater were to exercise its option on or about March 8, 1996 to
purchase the Company's Stater stock for cash, the Company would receive gross
proceeds of approximately $69.4 million. Such gross proceeds would be subject to
income taxes which, assuming an effective combined federal and state tax rate of
40.1%, would result in net proceeds to the Company of $41.5 million. In
addition, upon the occurrence of the exercise by Stater of the option, the
$14.65 million option payment received in Fiscal 1994 would become taxable. Such
tax liability, assuming an effective combined federal and state tax rate of
40.1%, would amount to $5.9 million and has been included in the financial
statements as a deferred tax liability at September 30, 1995. While no
assurances can be given that Stater will determine to exercise its option on
March 8, 1996, or at
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any other given time, the Company does anticipate that Stater will exercise its
right to extend the option by exchanging Series B Preferred Stock for the
Company's SBH Common Stock.
The Series B preferred stock will have a liquidation preference of
approximately $69.4 million and a cumulative dividend beginning March 8, 1996
with the rate beginning at 10.5%, increasing to 12% after 78 months, and further
increasing every twelve months thereafter by an additional 1%, to a terminal
cumulative dividend rate of 15%. The Company would have the right to have the
preferred stock redeemed at any time following March 8, 2009. As long as the
Company holds the shares of the Series B Preferred Stock, it will have the right
to vote 20% of the total voting power of SBH and to elect one director to the
SBH Board. If dividends on the Series B Preferred Stock with respect to any two
or more quarterly periods are and remain unpaid, the Company will have a right
to elect a majority of SBH's Board of Directors.
The Company has agreed to render consulting services to SBH through March
1999, in consideration for which SBH paid the Company $5 million on March 8,
1994 and agreed to pay $375,000 quarterly thereafter. As of September 30, 1995,
the Company has received all such payments due under the agreement. The
consulting services may be terminated by SBH in the event SBH exercises its
purchase option. As part of this agreement, the Company has agreed that, for a
period of five years from the date of the closing, it will not provide
consulting services or own any controlling interest in any business that
competes with SBH.
Since May 1989 the Company has been a party to an Agreement of Stockholders
of Stater which, among other things, provided that for a period of twenty years
(i) neither party may sell or transfer its Stater shares without offering the
other party a right of first refusal; and (ii) either party may offer to
purchase the other party's interest, and the party receiving the offer has the
option to sell at the offer price or purchase the offering party's interest at
that price (the "Option Rights"). In connection with the Restructuring, the
Stockholders Agreement was amended to provide that, among other things, (a) the
Stockholders Agreement may be terminated by either party upon exercise by Stater
of its right to convert the Company's common stock in Stater into Preferred
Stock of Stater as described above, and (b) the "Option Rights" are suspended
until after the expiration of Stater's right to convert the Company's Stater
common stock into Stater Preferred Stock.
Reading
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General
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Reading was organized under the laws of Pennsylvania in 1833. It operated
the Reading Railroad until April 1, 1976, when substantially all of its railroad
assets were conveyed to Consolidated Rail Corporation ("Conrail"). In 1993,
Reading determined to focus its activities on the "Beyond the Home" sector of
the entertainment industry. Effective July 1, 1994 Reading acquired all of the
outstanding common stock of Theater Acquisitions of Puerto Rico, Inc. (TAPR) for
an aggregate cash purchase price of approximately $22.7 million, inclusive of
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acquisition costs of $.3 million. In December 1994, TAPR was merged into its
parent corporation and the operating name was changed to Cine Vista. Cine Vista
operates motion picture exhibition theaters in seven leased locations with a
total of 44 screens in the Commonwealth of Puerto Rico. Cine Vista currently has
16 screens under development in two locations. Ten of the new screens will
replace six screens presently operated by Cine Vista at one site. Accordingly,
based upon current development plans, Reading anticipates a net increase of 10
screens over the next 12 months.
Reading has significant liquidity and no debt outstanding. At September 30,
1995, Reading had cash, cash equivalents, and marketable treasury securities of
approximately $47.5 million. In January 1996, Reading reached agreement with the
defendant in certain litigation pertaining to the clean up of certain property
previously used by Reading in its railroad operations, pursuant to which these
defendants have agreed, among other things, to pay to Reading $2.35 million,
which funds are anticipated to be received in 1996.
Reading intends to expand Cine Vista's existing operations by developing
new multiplex theaters in the Commonwealth of Puerto Rico which will require the
expenditure of additional funds during the next several years. Reading is also
pursuing a number of motion picture theater acquisition and development
opportunities, both domestically and internationally. If Reading were to enter
into all the transactions currently being considered, Reading would not have
adequate working capital to fund all the proposals. Therefore, Reading has
obtained a commitment from a major money center bank for a $15 million line of
credit with respect to Cine Vista's operations which line of credit will provide
sufficient funds to complete Cine Vista's new theater development plans and
provide additional liquid funds for the parent Company. In addition, Reading and
the Company have formed Reading International to develop and operate multiplex
cinemas in Australia and authorized initial funding of $10 million.
Description of Business
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Theater Exhibition
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Cine Vista operates motion picture exhibition theaters in seven leased
locations in Puerto Rico. All of Cine Vista theaters are modern multi-screen
facilities.
<TABLE>
<CAPTION>
Existing Theaters Location Screens
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<S> <C> <C>
Plaza de las Americas Mall San Juan 10
El Senorial Shopping Center San Juan 4
Cinema Centro Bayamon 6
Plaza del Norte Shopping Center Hatillo 6
Mayaguez (1) Hormigueros 6
Cayey Shopping Center Cayey 4
Plaza Palma Real Humacao 8
</TABLE>
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<TABLE>
<CAPTION>
Under Development
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<S> <C> <C>
Mayaguez Shopping Center Mayaguez 6
Mayaguez Mall (1) Hormigueros 10
</TABLE>
(1) Cine Vista intends to demolish a building housing four of the existing
six screens at Mayaguez Mall and rebuild an 10 plex on this site. After
completion of the 10-plex, the remaining two screens, will be returned to
the Landlord.
Puerto Rico is a self-governing Commonwealth of the United States with a
population of approximately 3.8 million. The Commonwealth exercises control over
internal affairs similar to states, however, the relationship with the United
States 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
instead paid under a system established by the Commonwealth. In recent years
there have been two major views concerning the future relationship with the
United States Government, one favoring statehood and the other favoring
continuation of commonwealth status. In 1993, Puerto Rico voters were asked in a
plebiscite to express their preference for statehood (48.4%), commonwealth
status (46.2%) or independence (4.4%). The United States mainland is Puerto
Rico's largest trading partner.
Since 1989, annual real gross national product growth of Puerto Rico has
exceeded the growth of the United States. During the most recent years the
Commonwealth has undergone significant retail shopping center development during
which period the number of multiplex theaters increased substantially. With
approximately one screen per 24,000 of population, versus approximately one
screen per 10,000 in the mainland United States, Reading believes that Cine
Vista has an opportunity to expand its operations through development of new
multiplex theaters and improvement of its existing operations.
Cine Vista derives approximately 70% of its revenues from box office
receipts. Ticket prices vary by location, and provide for reduced rates for
senior citizens and children. Box office receipts are reported net of a 10%
excise tax imposed by the Commonwealth. Show times and features are placed in
advertisements in local newspapers with the costs of such advertisements paid by
Cine Vista. Film distributors may supplementally advertise certain feature films
with the costs generally paid by the distributors.
Reading International Cinemas LLC
---------------------------------
In November 1995, Reading and the Company formed Reading International to
develop and operate multiplex cinemas in Australia. Reading and Craig have each
committed to make an initial contribution of $5 million, on an as needed basis
for an aggregate initial capitalization of $10 million. The LLC agreement
provides, among other things, that each party will have preemptive rights with
respect to the provision of future capital and rights of first refusal regarding
any proposed disposition of the other's interest in Reading International.
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Reading International through its various Australian subsidiaries, has
retained the services of several executive employees who will be providing
services to Reading International on a full time or substantially full time
basis and has acquired a site in Melbourne, Australia, on which the Company
intends to develop a 25 screen multiplex theater, subject to obtaining the
necessary governmental land use entitlements and approvals. The contracts with
respect to the multiplex site provide for a total purchase price to Reading
International of approximately $6.5 million. In addition, corporate joint
venture agreements between Reading International and an existing owner and
operator of cinemas in Australia are currently being documented with respect to
the development and management of certain additional cinema sites. Reading
International is also in negotiation with several developers and landlords with
respect to other potential locations.
Other theater development and acquisitions
------------------------------------------
In November 1995, Reading acquired from a major bank, for approximately
$1,285,000, a judgement encumbering, among other things, a controlling interest
in a Manhattan multiplex theater. The judgement has been acquired as part of
Reading's plan to acquire, in conjunction with Manhattan based City Cinemas
(James J. Cotter, Chairman of the Company has an ownership interest in City
Cinemas), all or at least a controlling interest in that multiplex theater.
Employees
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Cine Vista employment is seasonal and ranges from approximately 165 to 230
depending upon the time of the year. Approximately 15 projectionists are covered
by a collective bargaining agreement which expires in May 1997. In addition, to
Cine Vista employees, the Reading employs 10 persons, exclusive of those persons
who are officers or otherwise employed by the Company, and two part-time people
in various administrative positions. At the present time Reading International
has six employees. Reading believes relations with its employees at all levels
to be good.
Properties
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Center City Philadelphia Properties
-----------------------------------
Properties in Center City Philadelphia, all of which are owned in fee,
consist of several parcels of vacant land near the site of the Pennsylvania
Convention Center in Center City Philadelphia, aggregating approximately .67
acres; the Viaduct north of Vine Street to Fairmont Avenue and adjacent parcels,
comprising approximately 6.75 acres; and properties owned by partnerships in
which Reading has interests.
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Partnership Properties
----------------------
S.R. Developers: A subsidiary of the Reading is a general partner in S.R.
Developers, a general partnership which owns one property in Center City
Philadelphia.
Parametric Garage Associates: A subsidiary of Reading is a general partner
in Parametric Garage Associates, a partnership which owns the 750-car
Gallery II Parking Garage ("Garage"). The Garage is adjacent to the
Philadelphia Convention Center Complex. Reading has primary responsibility
for the leasing and management of 19,000 gross rentable square feet of
retail space on the ground level of the Garage pursuant to a management
agreement and provides certain other management services to the partner
ship.
Other Domestic Real estate
--------------------------
When Reading's railroad assets were conveyed to Conrail, Reading retained
fee ownership of approximately 650 parcels of real estate located throughout
Pennsylvania, Delaware and New Jersey. In addition, Reading retained portions of
52 abandoned rights-of-way with about 200 more parcels abutting these rights-of-
way. Approximately 23 parcels and rights-of-way located outside of Center City
Philadelphia are still owned by Reading. The parcels consist primarily of vacant
land and buildings, some of which are leased to third parties.
Cine Vista Properties
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All of Cine Vista's real properties are leased. The seven theaters are
leased pursuant to long-term leases with remaining terms and renewal options
ranging from 17 to 38 years. The landlord of one of Cine Vista's theaters has
the right to terminate the lease relating to space presently housing two
theaters, subject to six months notice. All of Cine Vista's theater leases
provide for the payment of fixed rental payments, and, in certain cases, may
require additional payments based upon a percentage of theater revenues. Cine
Vista also leases approximately 6,300 square feet of warehouse space and office
space.
Legal Proceedings
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Historical Railroad Operations
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Reading is a defendant in various personal injury legal actions relating to
its railroad operations prior to its reorganization and has insurance coverage
relating to such actions. In general,these actions also name Conrail, which
acquired substantially all of Reading's railroad assets in connection with
Reading's reorganization, as a defendant. Approximately 115 plaintiffs seek
damages under the Federal Employers Liability Act ("FELA") in varying amounts
for illnesses or death allegedly caused by exposure to asbestos fibers while
employed by the Reading Railroad and, in some cases by Conrail. The underlying
actions are preceding to trial.
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The eventual outcome of the above described litigation cannot be predicted
at this time, and Reading's liability, if any, cannot be accurately determined.
However, during 1990, Reading and its insurance carriers entered into an
agreement (the "Settlement Agreement") which provided Reading with reimbursement
for prior payments made to claimants in certain personal injury actions and
which provides for Reading to receive reimbursement of amounts expended in
conjunction with the matters described above or, if Reading elects, to receive
reimbursement from the parties to the Settlement Agreement prior to
expenditures. At September 30, 1995, $327,000 was reimbursable to Reading for
amounts expended in defense and settlement of such actions. Three participants
in the insurance settlement are insolvent. Unreimbursed claims insured by these
insolvent companies totaled $55,000 from 1992 through September 30, 1995.
Reading believes that it may be entitled to reimbursement of such amounts from
the other parties to the agreement and may file for an arbitration hearing on
such matters. Based on the backlog of pending personal injury cases and the
Company's experience in settling such cases, Reading has an accrual of $148,000
reflecting the potential effect of such insolvencies on future settlements if no
recovery is received from either the insolvent carriers or the other parties to
the insurance Settlement Agreement. Reading believes that the amounts available
under the Settlement Agreement are sufficient to prevent a materially adverse
effect on the financial position, results of operations, or liquidity of
Reading.
Environmental
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Reading Company and a wholly owned subsidiary, Reading Transportation
Company ("RTC"), have each been advised by the Environmental Protection Agency
(the "EPA") that they are potentially responsible parties ("PRPs") for a site
under environmental laws including Federal Superfund legislation ("Superfund").
The EPA issued an Administrative Order under Superfund against 34 PRP's
requiring the named parties to incinerate materials at the site pursuant to a
June 30, 1989 Record of Decision ("ROD"). The ROD estimated that the
incineration would cost approximately $53 million. Thirty-six PRPs were also
named in a civil action brought by the United States government which seeks to
recover alleged costs incurred at the site by the United States government of
approximately $22 million. Both Reading and RTC have been named in a third-party
action instituted by the 36 PRPs. The actions instituted against Reading and RTC
and approximately 300 PRPs seek to have the parties contribute to reimbursement
for past costs and any costs associated with further remediation at the site.
During 1994, based upon the Reading's and counsel's evaluation of possible
outcomes in the matter, Reading increased its provision for environmental
matters by $1.2 million. On September 14, 1995 the federal district court judge
who presided over Reading's reorganization ruled that all liability asserted
against Reading relating to the site was discharged pursuant to the consummation
order issued in conjunction with Reading's amended plan of reorganization on
December 31, 1980. The United States Department of Justice and Consolidated Rail
Corporation have appealed the decision. The judge's decision did not affect the
potential liability of RTC for this site. RTC has no assets and therefore cannot
fund a settlement or judgement relating to this matter and Reading believes that
the potential liability of RTC, if any is not in excess of $300,000. Based upon
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the appeals and possible alternate attempts by the PRPs to obtain Reading's
participation in funding for the site, Reading has not adjusted its provision
for environmental matters.
Reading is a party to a consent decree relating to one Superfund site, a
portion of which is located on land owned by Reading. Apart from future
operation and maintenance expenses ("O&M), remediation is complete. During 1994,
Reading paid $106,000 as its estimated share of ten years of O&M and charged
such amount to provision for environmental expenses. Reading believes that the
amounts expended to date will be adequate to fund O&M at the site. If additional
amounts were required, such amounts are not expected to be material.
Reading was named as a defendant in an action seeking recovery of $3.8
million of alleged environmental cleanup costs from five defendants under
various provisions of New Jersey law. The action alleged that certain
contamination at the site relates in part to the prior railroad operations of
the Pennsylvania Reading Seashore Lines in which Reading has a 33% ownership
interest. In May 1995, Reading and the involved parties agreed to settle this
matter. Reading's share of the settlement totalled $235,000, which approximated
the amount previously accrued by Reading to provide for its share of the
liability.
Reading has undertaken remediation activities at the site of a former
gasoline filing station owned by Reading. In accordance with an agreement
between Reading and a major oil company, Reading is responsible for 20% of the
remediation cost and the balance of such cost is being paid by the oil company.
Reading believes that the amounts accrued related to this matter are adequate to
fund the required remediation.
In 1991 Reading filed a lawsuit against the Southeastern Pennsylvania
Transportation Authority, Consolidated Rail Corporation, the City of
Philadelphia, and other parties which seeks to recover costs of approximately $9
million expended by the Company in conjunction with the cleanup of PCBs in the
Reading Terminal Train Shed and a portion of the Viaduct south of Vine Street.
The action also seeks declaratory judgment as to future costs which may be
incurred in cleaning up the remaining portions of the Viaduct owned by Reading.
In January 1996, Reading and the parties agreed in principle to settle all
outstanding litigation with respect to this matter, As part of the settlement,
Reading will receive $2.35 million which under the terms of the proposed
settlement is expected to be paid during fiscal 1996.
Prior to Reading's reorganization, it had extensive railroad and related
operations. Such operations could have contributed to environmental
contamination of properties now owned, previously sold or leases by Reading, or
to which Reading, prior to reorganization, sent waste. The ultimate extent of
liabilities, if any, with respect to such matters, as well as the timing of cash
disbursements, if any, cannot be determined. However, Reading management is of
the opinion that while the ultimate liability resulting from such matters could
have a material effect on the results of operation in a given year, they will
not have a material adverse effect on the financial position or liquidity of
Reading.
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Cine Vista
----------
A landlord of Cine Vista has alleged that Cine Vista underpaid rent by
approximately $180,000 for the twelve months ended June 30, 1994. Reading is
contesting the landlord's claim and believes the claim is without merit. If the
landlord were to prevail in his assertion, Reading is indemnified by the seller
of the theaters. However, the landlord has asserted a similar argument
concerning the computation of rent subsequent to June 30, 1994, which amount
would total approximately $240,000 to September 30, 1995.
Restrictions on Reading Class A Common Stock
- --------------------------------------------
As of September 30, 1995, Reading had available approximately $167 million
in tax loss carryforwards. In order to preserve these carryforwards, Reading in
1989 in essence replaced its Common Stock with a like number of shares of a
newly created Class A Common Stock. Substantially all of Reading's outstanding
capital stock is now comprised of Class A Common Stock, which limits the ability
of a holder of thereof to acquire more than 4.75% of Reading's outstanding
capital stock unless waived by the Board of Directors of Reading. The Board of
Director of Reading has waived certain restrictions on the transfer of Class A
Common Stock in order to permit the Company to acquire up to approximately 49.9%
of Reading's outstanding shares. The Company's current holdings in Reading
Company approximate 49% of Reading's outstanding capital stock. The Class A
common stock is traded on the NASDAQ National Market System.
Citadel
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General
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CHC, a Delaware corporation, was incorporated in 1983 to serve as the
holding company for Fidelity Federal Bank (Fidelity), a federally chartered
savings bank located in Southern California. In August 1994, CHC completed a
series of transactions which resulted in the restructuring and recapitalization
of Fidelity, the transfer to Citadel of certain real estate interests and the
reduction of CHC's ownership in Fidelity from 100% to approximately 16%. During
fiscal 1995, substantially all such remaining interest by Citadel in Fidelity
was sold. In January 1996, Citadel received notice from the Office of Thrift
Supervision that it had been deregistered as a savings and loan holding company.
Since the restructuring, Citadel has been engaged primarily in the
ownership and management of commercial and residential property. At September
30, 1995, CHC's balance sheet assets amounted to approximately $39.7 million and
consisted primarily of real estate and cash. CHC management is currently
evaluating the assets and opportunities available to CHC with a view to
developing a new line of business. Such opportunities may include the
participation with the Company and or the Company's affiliates in land based
entertainment businesses such as motion picture exhibition.
12
<PAGE>
At September 30, 1994, the Company owned 592,712 shares of CHC Common
Stock, which stock is traded on the American Stock Exchange under the symbol
CDL. The Company has increased its common equity ownership in Citadel to
1,564,673 shares or 26%, as of December 31, 1995. The common shares, together
with the 1,329,114 3% Cumulative Voting Convertible Preferred Stock described
below, represent 39.4% of the outstanding voting power of Citadel. The Company
also holds warrants exercisable at $3.00 per share, to purchase an additional
666,000 shares of CHC Common Stock. Assuming full exercise of the warrants and
full conversion into CHC Common Stock of the 3% Cumulative Voting Convertible
Preferred Stock (assuming a market price of $2.25), the Company would own
approximately 50.7% of the then issued outstanding voting securities of CHC.
As described above, at the time of the Citadel restructuring, Citadel
Realty Inc., a wholly owned subsidiary of Citadel, purchased four REO properties
from Fidelity, at a bulk sale transfer price of approximately $19.8 million. The
property acquisitions were financed by $13.9 million in mortgage loans from
Fidelity and $6.2 million borrowed from the Company under a credit agreement. On
November 10, 1994, the Company acquired from CHC, in satisfaction of $5.25
million of the $6.2 million outstanding indebtedness due under the Credit
Agreement, 1,329,114 shares of newly issued CHC 3% Cumulative Voting Convertible
Preferred Stock. The preferred shares represent approximately 18.1% of the
voting power of CHC. In connection with this transaction, the credit available
under the credit agreement was reduced to approximately $950,000, all of which
was repaid during 1995. The 1,329,114 preferred shares ($3.95 per share) were
issued to the Company pursuant to a Stock Purchase Agreement and a Certificate
of Designation which provide, among other things, that (i) the preferred shares
carry a liquidation preference equal to their stated value and bear a cumulative
(noncompounded) annual dividend equal to 3% of the stated value, payable
quarterly, (ii) are convertible under certain circumstances into shares of
common stock of CHC at an exercise price equal to the average closing price of
CHC Common Stock over the preceding 60 business days, (iii) are redeemable at
the option of CHC at any time after November 10, 1997, and (iv) are redeemable
(subject to Delaware limitations upon distributions to shareholders) at the
option of the Company in the event of a change of control of CHC.
In November 1994, an action was filed by a shareholder of CHC against the
Company, CHC and the directors of CHC in the Delaware Court of Chancery claiming
that the individual defendants, directors of CHC (two of which were, at that
time, directors of the Company),breached their duties by causing CHC to issue
shares of common and preferred stock to the Company for purposes of perpetuating
the individual defendants as directors of CHC. In April 1995, the Company, CHC
and entered into settlement agreement with the plaintiff to resolve the
litigation. Under the settlement agreements, all existing litigation was
terminated and the plaintiff purchased from CHC 1,295,000 shares of Fidelity
stock owned by CHC in exchange for which CHC received from the plaintiff
$2,220,000 and 666,000 shares of CHC common stock owned by the plaintiff.
Additionally, pursuant to an agreement by the Company and the plaintiff the
Company agreed not to exercise the conversion feature of its preferred stock
prior to February 4, 1996, without the prior approval of CHC shareholders. In
exchange for such concession by the Company, CHC granted the Company a two year
13
<PAGE>
option to purchase the 666,000 shares of CHC common stock at $3.00 per share and
agreed to reimburse the Company for its litigation costs, which amounted to
approximately $62,000.
The Company's right to convert its preferred stock of CHC into Common Stock
of CHC is subject to CHC's compliance with the rules of the American Stock
Exchange which generally requires shareholder approval if the number of shares
being issued exceeds 20% At the current time, this would permit the Company to
convert only that portion of its holdings of CHC Preferred Stock which would
convert into approximately 1.2 million shares of CHC Common Stock. If such
shareholder approval is not received, then CHC (subject to Delaware restrictions
on the making of distributions to stockholders) is obligated to repurchase the
remainder of the Company's CHC Preferred Stock at par plus accrued dividends and
premium. The premium is designed to put the Company, for a reasonable period of
time, in the same position as it would have been if it had not accepted such
redeemed CHC Preferred Stock in satisfaction of debt owed under the Line of
Credit. During the first four years following the issuance of CHC Preferred
Stock the premium is an amount equal to an accrual of 9% per annum, thereafter
declining 1% per year until November 2006. Second, in the event that the
exercise price of the conversion feature is less than $3.00 per share, CHC has
the right, but not the obligation, in the event of an election by the Company to
exercise its conversion feature, to redeem the CHC Preferred Stock at par, plus
accrued interest, plus premium.
Employees
- ---------
Citadel currently has three employees, calculated exclusively of those
persons who are also officers or directly employed by the Company.
Properties
- ----------
An overview of the four properties which constitute all of the real
properties owned by Citadel follows:
Arboleda, Phoenix
-----------------
This office/restaurant property is 178,000 square feet and is located at
1661 Camelback Road in Phoenix, Arizona. Although this property was fully leased
at September 30, 1995, American Express, which occupies 58% (100,098 square
feet) of the property, has previously advised Citadel that it may not renew at
the expiration of the current term of its lease in February 1997. While Citadel
management believes that the leasing market in Phoenix will continue to
strengthen, it is anticipated that significant capital expenditures would be
necessary to relet the American Express space and that the space may remain
vacant for some time.
Brand, Glendale
---------------
As part of the Restructuring, Citadel acquired, by way of dividend, an
option to acquire at book value an 89,000 square foot office building located at
14
<PAGE>
600 N. Brand, Glendale, CA which is 100% leased and used in part by Fidelity in
its operations. The Building was the headquarters building of Fidelity. Citadel
and Fidelity entered into a ten year, full service gross lease for four of six
floors of the building. The rental rate for the first five years of the lease
term is $26,000 per month for the ground floor and approximately $75,000 per
month for the fourth through sixth floors. The lease provides for annual rental
increases at a rate equal to the lower of the increase in the Consumer Price
Index or 3%. After the first five years of the lease term, the lease terms will
be adjusted to the higher of the then current market rate or the prevailing
rental rate in the fifth year with respect to the ground floor or $1.50 per
square foot with respect to the upper floors. Fidelity has an option to extend
the lease for two consecutive five year terms at a market rental and has an
option to purchase the Building at the market value at the expiration of the
lease term, provided Citadel then owns the Building. Fidelity is currently
attempting to sublease all or a portion of their leased premises.
Public Storage occupies 30,879 square feet (two floors) on a lease that
expires in April 1996 with a total rental of $53,900 per month. Public Storage
has notified Citadel that it does not expect to renew their lease. Citadel
continues to have discussions with Public Storage and other potential tenants
for these premises.
Parthenia
---------
Parthenia is a 27 unit apartment complex located at 21028 Parthenia, Canoga
Park, CA which is 96% leased with lease terms of less than twelve months.
Veselich
--------
Veselich is a 216 unit apartment complex, 95% leased located at 3939
Veselich Ave., Los Angeles, CA. As this property has reached a stabilized
occupancy, Citadel is currently seeking offers for its interest in this
building.
Legal Proceedings
- -----------------
Roven Litigation
----------------
Citadel, Hecco Ventures I and James J. Cotter were defendants in a civil
action filed in 1990 by Alfred Roven in the United States District Court for the
Central District of California. The complaint alleged fraud by Citadel in a
proxy solicitation relating to Citadels's 1987 annual meeting of stockholders
and breach of fiduciary duty. The complaint also sought compensatory and
punitive damages in an amount alleged to exceed $40 million. The complaint grew
out of and was originally asserted as a counter claim in an action brought by
Citadel against Roven to recover alleged short swing profits. In October 1995,
Citadel, Hecco Ventures I and James J. Cotter were granted summary judgement on
all causes of action asserted in the 1990 complaint in federal court. Roven has
since filed a notice of appeal from that judgement.
15
<PAGE>
In 1995, Roven filed a complaint in the California Superior Court against
Citadel, Hecco Ventures I and James J. Cotter and, in addition, S. Craig
Tompkins and certain other persons, including Citadel's outside counsel and
certain former directors of Citadel (which directors are directors of the
Company), alleging malicious prosecution in connection with the short swing
profits litigation. Citadel believes that it has meritorious defenses to these
claims, and has not reserved any amounts with respect thereto. Defense of the
action has been accepted by Citadel's insurers, however, additional costs of
defense could be material to Citadel's future operating results considering
Citadel's limited revenue and operating profits.
Fidelity Employee Claims
------------------------
Following the Restructuring of Fidelity, Fidelity significantly reduced
staffing as part of its efforts to reduce costs. Certain terminated employees
have threatened, and in one case filed as detailed below, claims asserting that
Citadel is in some manner liable for what is asserted to be wrongful termination
of these individuals by Fidelity. In light of the fact that, among other things,
these employees were never employees of Citadel and were terminated only after
Citadel's interest in Fidelity had been reduced to 16% in essentially non-voting
interests in Fidelity, Citadel believes it has no liability to these
individuals. Citadel's insurers have offered to provide a defense to this
action.
Restructuring Litigation
------------------------
In July 1995, Citadel was named as a defendant in a lawsuit alleging
violations of federal securities laws in connection with the offering of common
stock of Citadel's then wholly owned subsidiary, Fidelity, in 1994 as part of
the Restructuring (the "Harbor Finance Litigation"). The suit was filed by
Harbor Finance Partners in an alleged class action complaint in the United
States District Court - Central District of California, and named as defendants
Citadel, Fidelity, Richard M. Greenwood (Fidelity's chief executive officer and
Citadel's former chief executive officer), J.P. Morgan Securities, Inc. and
Deloitte & Touche LLP. The suit alleges false and misleading information was
provided by the defendants in connection with Fidelity's stock offering and the
defendants knew and failed to disclose negative information concerning Fidelity.
Fidelity and Citadel have filed a Motion to Dismiss, and the plaintiff has filed
a notice that it doe not intend to defend that motion, but that it will file an
amended complaint by January 22, 1996. Fidelity and Citadel are advised that the
plaintiff has changed counsel, and that such new counsel is seeking one or more
new plaintiffs. Defense of the action has been accepted by Fidelity under the
terms of the Stockholders Agreement entered into between Citadel and Fidelity as
part of the CHC Restructuring, and Citadel to date has not retained separate
counsel with respect to this litigation and is not incurring outside costs of
defense. Since the filing of the Harbor Finance Litigation, Fidelity has
completed a second recapitalization transaction, in which it raised gross
proceeds of approximately $146 million, through the sale of common and preferred
stock. Citadel has been named in only two of the four alleged claims for relief
and only in its capacity as an alleged controlling entity of Fidelity.
16
<PAGE>
The complaint filed by Harbor Finance Partners raises certain claims
previously made in a wrongful termination and defamation action brought by
William Strocco against Fidelity and Citadel, which was filed in Los Angeles
County Superior Court on March 9, 1995. The plaintiff in that case is the former
manager of Fidelity's REO Department who alleges that his employment was
terminated in violation of public policy and was a result of breaches of his
implied employment contract and the implied covenant of good faith and fair
dealing. The plaintiff alleges his termination was related to the fact that he
objected to various aspects of Fidelity's Restructuring, including the selling
of REO properties in bulk sales, as not in the interests of Fidelity, and he
asserted that the same was not fully disclosed to potential investors and the
Office of Thrift Supervision. The plaintiff also seeks damages for defamation
and interference with contractual relationship. Citadel has been named in only
one of the five causes of action for allegedly inducing Fidelity to breach its
employment agreement with its employee.
Both the Harbor Finance Partners and Strocco complaints seek damages in an
unspecified amount. Citadel believes that these claims against it are without
merit and plans to vigorously contest them.
Company Employees
- -----------------
The Company operates in substantial part through its operating affiliates,
Stater, Reading, Reading International and Citadel. The Company has six
employees, inclusive of the Chairman of the Board. The Company believes
relations with its employees at all levels to be good.
For information concerning Reading employees, see "Business-Reading-
Employees". For information concerning Stater employees, see "Business-Stater-
Employees". For information concerning Citadel, see "Business-Citadel-
Employees")
ITEM 2. PROPERTIES
The Company owns a condominium in a high rise located in Hollywood,
California, which the Company uses as executive offices and is used by the
directors of the Company (see "Item 11" below).
For information concerning Stater properties, see Part I of Stater's Report
on Form 10-K set forth below. For information concerning Reading and Citadel see
"Business-Reading-Properties", and "Business-Citadel-Properties".
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
For information concerning Reading legal proceedings, see
"Business-Reading-Legal Proceedings". For information concerning Stater legal
proceedings see Part I to Stater's Report on Form 10-K set forth below. For
information concerning Citadel legal proceedings, see "Business-Citadel-Legal
Proceedings".
17
<PAGE>
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDINGS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal period covered by this report.
Included on pages 19 through 25 are the relevant portions from Part I of the
Stater Bros. Holdings Inc. Report on Form 10-K for the fiscal year ended
September 24, 1995 as filed by Stater Bros. Holdings Inc. with the Securities
and Exchange Commission.
18
<PAGE>
PART I
------
ITEM 1. BUSINESS
GENERAL
Stater Bros. Holdings Inc. was incorporated in Delaware in 1989 and together
with its wholly-owned subsidiaries, Stater Bros. Markets and Stater Bros.
Development, Inc., (collectively "Stater Bros." or the "Company") were founded
in 1936 when the first Stater Bros. Market opened in Yucaipa, California. The
Company is a leading supermarket chain in Southern California, operating 110
supermarkets in the Inland Empire Region of Southern California.
The Company has grown, primarily by constructing supermarkets in its primary
trading areas and through the enlargement of existing supermarkets. The Company
offers its customers a high level of customer service, broad selections of
grocery, meat, produce, liquor and general merchandise. All of the Company's
supermarkets have full-service meat departments and many of the supermarkets
have service delicatessens and service bakery departments. All of the Company's
supermarkets have expanded selections of produce merchandise.
The Company utilizes a central warehouse and distribution facility which
provides the Company's supermarkets with approximately 80% of the merchandise
they offer for sale. The Company's warehouse and distribution facilities
encompass approximately 955,000 square feet and include a 118,000 square foot
modern produce facility that was constructed in 1989 as well as facilities for
grocery, meat, frozen foods, health and beauty aids and bakery products.
19
<PAGE>
BUSINESS STRATEGY
STORE PROFILE AND LOCATIONS
The Company's existing supermarkets have well-established locations and low
overhead expenses, including fixed rent payments in most stores. In addition,
the Company believes that its existing supermarkets are well-maintained and
generally require capital expenditures only for customary maintenance. An
average Stater Bros. supermarket is approximately 28,700 square feet, while
newly constructed Stater Bros. supermarkets range from approximately 35,300 to
40,600 square feet. Stater Bros. supermarkets typically utilize approximately
72% of total square feet for retail selling space. The Company operates its
supermarkets with minimal back-room storage space because of the close proximity
of its distribution facility to its store locations. Generally, all Stater Bros.
supermarkets are similarly designed and stocked thereby allowing Stater Bros.
customers to find items easily in any of the Company's supermarkets.
Substantially all of the Company's 110 supermarkets are located in neighborhood
shopping centers in well-populated residential areas. The Company endeavors to
locate its supermarkets in growing areas that will be convenient to potential
customers and will accommodate future expansion.
Management actively pursues the acquisition of sites for new supermarkets. In an
effort to determine sales potential, new supermarket sites are carefully
researched and analyzed by management for population shifts, zoning changes,
traffic patterns, nearby new construction and competitive locations. Stater
Bros. works with developers to attain the Company's criteria for potential
supermarket sites, and to insure adequate parking and a complementary co-tenant
mix.
20
<PAGE>
STORE EXPANSION AND REMODELING
The Company has historically focused its expansion in the Inland Empire. Such
expansion has been accomplished through improving and remodeling existing stores
and constructing new supermarkets rather than by acquiring other supermarket
operations. The number of supermarkets operated by the Company has grown from
82 in September 1979 to 110 as of September 24, 1995. The Company intends to
continue to expand its existing supermarket operations by enlarging and
remodeling existing supermarkets and constructing new supermarkets. The Company
may also make selective acquisitions of existing supermarkets within the Inland
Empire, if such opportunities arise.
The Company monitors sales and profitability of its operations on a store-by-
store basis and enlarges, remodels or replaces stores in light of their
performance and management's assessment of their future potential.
Approximately 60% of the Company's supermarkets have been either newly
constructed or remodeled within the last five years. Minor remodels usually
include new fixtures, a change in decor, and the addition of one or more
specialty service departments such as a delicatessen or bakery. Major remodels
typically involve more extensive refurbishment of the store's interior and often
increase the retail selling space per store. Expansions entail enlargement of
the store building. The primary objectives of remodelings and expansions are to
improve the attractiveness of supermarkets, increase sales of higher margin
product categories and, where feasible, to increase selling area. The Company
conducts all of its new construction and remodeling through its wholly-owned
subsidiary, Stater Bros. Development, Inc., which serves as the general
contractor for all Company construction projects.
21
<PAGE>
STORE EXPANSION AND REMODELING (CONTD.)
The following table sets forth certain statistical information with respect to
the Company's supermarket expansion and remodeling for the periods indicated.
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------------
Sept. 29, Sept. 27, Sept. 26, Sept. 25, Sept. 24,
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Number of supermarkets:
Opened.......................... 5 4 2 3 0
Closed/Replaced................. 1 3 - 1 1
Total at end of year............ 106 107 109 111 110
Minor Remodel................... 13 10 10 4 8
Major Remodel................... 1 - - - -
Expansion....................... - - - - 1
</TABLE>
Beyond 1995, the Company plans to open approximately two to four new stores per
year, based upon a number of factors, including customer demand, market
conditions, profitability, costs of opening, and availability of financing for
such new stores. The Company's plans with respect to major and minor remodels,
expansion and new construction are reviewed continually and are revised, if
appropriate, to take advantage of marketing opportunities. The Company finances
its new store construction primarily from cash provided by operating activities
and short-term borrowings under its credit facilities. Long-term financing of
new stores generally will be obtained through either sale/leaseback transactions
or secured long-term financings. However, no assurances can be made as to the
availability of such financings.
WAREHOUSE AND DISTRIBUTION FACILITIES
The Company's warehouse and distribution facilities and administrative offices
are located in Colton, California, and encompass approximately 955,000 square
feet. The facilities include warehouses for grocery, produce and deli products,
meats and frozen products, health and beauty aids and bakery merchandise.
Management believes that its existing warehouse and distribution facilities are
adequate to meet its currently identified expansion plans. Approximately 80% of
the products offered for sale in the Company's supermarkets are processed
through the Company's warehouse and distribution facilities.
The Company's warehouse and distribution facilities are centrally located and
are an average distance of approximately 30 miles from its supermarkets. Most
stores can be reached without using the most congested portions of the Southern
California freeway system.
The Company's transportation fleet consists of modern well-maintained vehicles.
As of September 24, 1995, the Company operated approximately 92 tractors and 261
trailers, approximately 31% of which were leased by the Company. The Company
also operates a fuel and repair terminal at the Colton distribution facility.
PURCHASING AND MARKETING
The Company uses an Everyday Low Price ("EDLP") format as an integral part of
its purchasing and marketing strategy to provide its customers with the best
overall supermarket value in its primary market areas. The Company supplements
its everyday low price structure with chain-wide temporary price reductions on
selected food and non-food merchandise. The geographic location of the
Company's supermarkets allows it to reach its target consumers through a variety
of media and the Company aggressively advertises its everyday low prices through
local and regional newspapers, direct mail and printed circulars as well as
advertisements on radio and television.
22
<PAGE>
PURCHASING AND MARKETING (CONTD.)
A key factor in the Company's business strategy is to provide its customers with
a variety of quality brand-name merchandise as well as alternative selections of
high-quality private label and generic brands of merchandise. To meet the needs
of customers, most supermarkets are stocked with approximately 35,000 items.
The Company places particular emphasis on the freshness and quality of its meat
and produce merchandise and maintains high standards for these perishables by
processing and distributing the merchandise through its perishable warehouses
and distribution facilities.
RETAIL OPERATIONS
The Company's supermarkets are well maintained, have sufficient off-street
parking and generally are open from 7:00 a.m. until 10:00 p.m. or 11:00 p.m.,
seven days a week, including all holidays with the exception of Christmas Day.
Because Stater Bros. operates all its supermarkets under a single format,
management believes it is able to achieve certain operating economies.
Store Management. Each of the Company's supermarkets is managed by a store
manager and an assistant manager, each of whom receives a base salary and may
receive a bonus based on the individual supermarket's overall performance and
management of labor costs within the supermarket. The store manager and
assistant manager are supported by their store management staff who have the
training and skills necessary to provide proper customer service, operate the
store and manage personnel in each department. Additionally, the store manager
is supported by individual department managers for grocery, meat, produce, and
where applicable, bakeries and delicatessens. Store managers report to one of
six district managers, each of whom is responsible for an average of 18
supermarkets.
Customer Service. The Company considers customer service and customer
confidence to be critical to the success of its business strategy. This
strategy, to provide courteous and efficient customer service through specific
programs and training, is a focus of the executive officers and is implemented
at all levels of employees. The Company maintains an intensive checker training
school to train prospective checkers and to provide a refresher program for
existing checkers. All of the Company's supermarkets provide customers with
purchase carry-out service and have express check-out lanes for purchases of 10
items or less.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information systems and point-of-sale scanning
technology reduce the labor costs attributable to product pricing and customer
check-out, and provide management with information that facilitates purchasing,
receiving and management of inventory and accounts payable. The Company has
point-of-sale scanning checkout technology in all of its stores. All stores use
electronic systems for employee time and attendance records and inventory
ordering.
Approximately one-half of the Company's supermarkets currently utilize
electronic labor scheduling, which assists store management in developing a more
efficient and customer-sensitive work schedule.
EMPLOYEES
The Company has approximately 8,300 employees, approximately 500 of whom are
management and administrative employees and approximately 7,800 of whom are
hourly employees. Approximately 68% of the Company's employees work part-time.
Substantially all of the Company's hourly employees are members of either the
Retail Clerks, Meatcutters or Teamsters labor unions and are represented by
several different collective bargaining agreements. The Company's collective
bargaining agreements, with the Meatcutters and Retail Clerks, which covers the
largest number of employees, were renewed in October 1995 and expire in October
1999. The Teamsters collective bargaining agreement was renewed in September
1994 and expires in 1998.
23
<PAGE>
EMPLOYEES (CONTD.)
The Company values its employees and believes its relationship with them is good
and that employee loyalty and enthusiasm are key elements of its operating
performance.
COMPETITION
The Company operates in a highly competitive industry characterized by narrow
profit margins. Competitive factors include price, quality and variety of
products, customer service, and store location and condition. The Company
believes that its competitive strengths include its specialty services, everyday
low prices, breadth of product selection, high product quality, one-stop
shopping convenience, attention to customer service, convenient store locations
and a long history of community involvement.
Given the wide assortment of products it offers, the Company competes with
various types of retailers, including local, regional and national supermarket
retailers, convenience stores, retail drug stores, national general
merchandisers and discount retailers, membership clubs and warehouse stores.
The Company's primary competitors include Lucky, Vons, Hughes, Albertson's,
Ralphs, Smith's Food & Drug and a number of independent supermarket operators.
GOVERNMENT REGULATION
The Company is subject to regulation by a variety of governmental authorities,
including federal, state and local agencies that regulate trade practices,
building standards, labor, health, safety and environmental matters and regulate
the distribution and sale of alcoholic beverages, tobacco products, milk and
other agricultural products and other food items.
ENVIRONMENTAL
Environmental remediation costs incurred over the past five years have been
approximately $100,000 in the aggregate including remediation costs of
approximately $30,000 in 1994 and $8,000 in 1995. Management believes that any
such future remediation costs will not have an adverse material effect on the
financial condition or results of operations of the Company.
ITEM 2. PROPERTIES
The Company leases its warehouse and distribution facilities located in Colton,
California, and management believes that its warehouse and distribution
facilities are well maintained and are adequate to serve the currently
identified expansion plans of the Company. The following schedule presents the
Company's warehouse and distribution facilities by product classification and
the size of each such facility as of September 24, 1995.
<TABLE>
<CAPTION>
Square
Facility Feet
-------- -----
<S> <C>
Grocery................................... 416,000
Forward-buy grocery....................... 175,000
Produce/deli.............................. 118,000
Meat/frozen............................... 116,000
Health and beauty aids.................... 35,000
Bakery.................................... 21,000
Support and administrative offices........ 74,000
-------
Total.................................. 955,000
=======
</TABLE>
24
<PAGE>
ITEM 2. PROPERTIES (CONTD.)
The Company owns 31 of its supermarkets and leases the remaining 79
supermarkets. Management believes that its supermarkets are well maintained and
adequately meet the expectations of its customers. The Company operates 110
supermarkets in the Southern California counties of San Bernardino, Riverside,
Orange, Los Angeles and Kern. The following schedule reflects the Company's
store counts by size, county, and the number of stores that are either leased or
owned as of September 24, 1995.
<TABLE>
<CAPTION>
No. of Stores Total Square Feet
----------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Under 25,000- 30,001-
35,001- 40,001-
County Total Owned Leased 25,000 30,000 35,000 40,000 45,000
- ------ ----- ----- ------ ------ ------ ------ ------ ------
San Bernardino.. 45 13 32 6 18 7 11 3
Riverside....... 35 10 25 10 14 5 5 1
Orange.......... 14 5 9 3 10 - 1 -
Los Angeles..... 14 2 12 3 10 - 1 -
Kern............ 2 1 1 - - 1 1 -
----- ----- ------ ------ ------ ------ ------ ------
Total........... 110 31 79 22 52 13 19 4
===== ===== ====== ====== ====== ====== ====== ======
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is party to various legal
actions which the Company believes are incidental to the operation of the
business of the Company and its subsidiaries. The Company has recorded reserves
for loss contingencies based on the specific circumstances of each case. Such
reserves are recorded when the occurrence of loss is probable and can be
reasonably estimated. The Company believes that the outcome of such legal
proceedings to which the Company is currently a party will not have a material
adverse effect upon its results of operations or its consolidated financial
condition.
On May 2, 1993, the Company was named as a defendant along with all of the other
major supermarket chains located in the Los Angeles County area in a class
action complaint filed in the California Superior Court in Los Angeles,
California, alleging among other things that the milk pricing policies of each
of the defendants violate certain antitrust laws and regulations under
California law. In this class action lawsuit, Barela et al. v. Ralphs Grocery
Co. et al., plaintiffs seek unspecified damages. The principal allegations of
the complaint are that milk prices of the defendants operating in the Los
Angeles County area are higher than milk prices for the same products in the San
Francisco Bay area and that the prices for such products in Los Angeles County
are higher than the prices charged in Riverside and San Bernardino counties.
Because the Company does not conduct business in the San Francisco Bay area and
its prices for milk are generally consistent throughout all of its supermarkets
in the Los Angeles County area and Riverside and San Bernardino counties, the
Company believes the claim is without merit with respect to the Company and the
Company intends to vigorously defend such litigation. The Company believes that
the ultimate outcome of this litigation will not have a material adverse effect
on the Company's results of operations or its consolidated financial condition.
ENVIRONMENTAL MATTERS
Environmental remediation costs incurred during the last five years have been
approximately $100,000 in the aggregate including remediation costs of
approximately $30,000 in 1994 and $8,000 in 1995. Management believes that any
such future remediation costs will not have an adverse material effect on the
financial condition or results of operations of the Company.
25
<PAGE>
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock and the Class A Common Preference Stock of the Company are
traded on the New York and Pacific Stock Exchanges. Set forth below are
quarterly high and low closing prices on the NYSE for the following periods:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
September 30, 1995 September 30, 1994
--------------------------------- -----------------------------------
Class A Class A
Common Common
Preference Preference
Stock Common Stock Stock Common Stock
-------------- -------------- --------------- ---------------
Quarter Ended High Low High Low High Low High Low
- ------------- ---- --- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31 10 7/8 8 6/8 11 1/4 8 2/8 12 1/2 11 1/8 13 1/8 11 1/2
March 31 9 1/2 8 1/2 10 1/4 8 3/4 12 1/2 11 12 7/8 11 3/8
June 30 9 3/8 8 6/8 10 3/8 9 3/4 12 3/4 10 7/8 12 7/8 11 6/8
September 30 9 1/2 8 3/4 10 3/8 9 3/8 12 10 1/4 12 7/8 10 6/8
</TABLE>
The approximate number of holders of record of the Company's Common Stock
and Class A Common Preference Stock as of January 4, 1995 was 820 and 11,
respectively. No cash dividends were declared or paid on the Company's Common
Stock or Class A Common Preference Stock during the fiscal years ended September
30, 1995 and 1994. It is the current intention of the Board of Directors not to
declare cash dividends, due to the Company's intention to use its excess cash in
connection with the operation of the Company.
26
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain historical 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.
<TABLE>
<CAPTION>
Year Ended September 30,
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net revenues $ 7,338 $13,591 $ 2,616 $ 6,479 $ 9,167
Earnings (loss) before
extraordinary items 3,458 1,030 (5,915) (7,954) 4,435
Extraordinary items -- (2,408) -- (735) 378
Earnings (loss) 3,458 (1,378) (5,915) (8,689) 4,813
Earnings (loss) per
common share before
extraordinary items 0.58 0.16 (0.93) (1.26) 0.70
Extraordinary items -- (0.38) -- (0.12) 0.06
Earnings (loss) per
share 0.58 (0.22) (0.93) (1.38) 0.76
Total assets 84,669 80,027 84,181 71,282 93,836
Long-term obligations 5,436 3,889 18,452 3,292 21,358
Cash dividends declared -- -- -- -- --
</TABLE>
27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The Company's investments in Stater Bros. Holdings Inc. ("SBH" and,
together with its wholly owned subsidiaries, "Stater"), Reading Company
("Reading") and Citadel Holding Corporation ("CHC" and together with its wholly
owned subsidiaries, "Citadel") are included in the Company's Consolidated
Financial Statements on the equity method of accounting. See Note 1 of Notes to
the Consolidated Financial Statements.
Year Ended September 30, 1995 ("Fiscal 1995") Versus Year Ended September
- -------------------------------------------------------------------------
30, 1994 ("Fiscal 1994")
- ------------------------
The Company's net earnings for the year ended September 30, 1995 was
$3,458,000 or $0.58 per share, as compared with a net loss of $1,378,000 or
$0.22 per share for the year ended September 30, 1994. The net loss for Fiscal
1994 includes an extraordinary charge amounting to $2,408,000 or $0.38 per share
representing the Company's equity ownership share of refinancing costs included
in Stater's operating results, after an income tax benefit of $1,610,000.
The Company's operating results have varied significantly reflecting the
Company's share of the operating results of its affiliates, Stater, Reading and
Citadel. Comparisons between the fiscal years is difficult due to (i) the Stater
restructuring that occurred in March 1994, (ii) the 1994 acquisition by Reading
of Cine Vista, its Puerto Rico based cinema chain, (iii) the increase by the
Company of its voting interest in Citadel, after its 1994 restructuring, to the
position where it is required to report such interest on the equity method of
accounting.
The increase in the Fiscal 1995 net earnings as compared to Fiscal 1994
losses is principally a result of the Fiscal 1994 inclusion of a $8,792,000
writedown of the Company's investment in CHC. The impact of the Fiscal 1994
writedown of CHC was reduced, in part, by $5 million of revenue reported with
respect to proceeds received from SBH pursuant to a consulting agreement
executed in March 1994, and a gain of $1.3 million on the sale of property. In
addition, Fiscal 1995 includes a $935,000 increase in reported interest and
dividend income from $695,000 in Fiscal 1994 as compared to $1,630,000 in Fiscal
1995. This increase was due to higher investable operating cash balances
received as part of the Stater restructuring in March 1994.
Service income
- --------------
In connection with the SBH restructuring consummated in March 1994, the
Company entered into a consulting agreement with SBH pursuant to which the
Company has agreed, among other things, to render consulting services for a five
28
<PAGE>
year period. In accordance with this agreement, SBH paid the Company $5 million
in March 1994 and committed to remit $1.5 million a year, payable quarterly,
through the five year term of the agreement. SBH has the right to terminate the
agreement without refund of any amounts paid, if it exercises the option
discussed below and acquires the Company's interest in SBH. Included in service
income for the 1995 and 1994 fiscal years is $1,500,000 and $5,849,000,
respectively.
Equity in earnings of affiliates
- --------------------------------
Equity in earnings of affiliates reflects the Company's share of net
earnings and losses of Stater, Reading and Citadel before extraordinary items
and after preferred dividends. The following table sets forth the contribution
by affiliate of the equity in earnings of affiliates.
<TABLE>
<CAPTION>
Year Ended September 30,
1995 1994
-------- --------
<S> <C> <C>
SBH - reported as equity
earnings of affiliate $ 3,693 $ 6,422
Reading - reported as equity
earnings of affiliate 989 (678)
CHC - reported as equity
losses of affiliate (474) --
------- -------
Equity earnings 4,208 5,744
SBH - reported by Company
as extraordinary item -- (4,018)
------- -------
Contribution by affiliates $ 4,208 $ 1,726
======= =======
</TABLE>
Stater
- ------
On March 8, 1994, the Company and Stater consummated a series of
restructuring transactions. Concurrently with the closing of the restructuring
transactions, Stater obtained $165 million in new debt, the proceeds of which
were primarily used to retire outstanding indebtedness together with a
prepayment premium, pay a dividend to the holders of SBH Common Stock, and to
acquire an option from the Company to purchase the SBH Common Stock held by the
Company. The significant increase in debt resulted in Stater interest expense
increasing in the 1995 Fiscal Year as compared to the 1994 Fiscal Year. SBH
reported net income of $6.7 million for Fiscal 1995 as compared to $1.1 million
for Fiscal 1994.
Stater sales amounted to $1.580 billion in Fiscal 1995 as compared to
$1.540 billion in Fiscal 1994. Stater operated 110 supermarkets at September 24,
1995 as compared to 111 supermarkets at September 25, 1994. Like store sales
increased 1.2% in Fiscal 1995 compared to a decrease of 0.7% in Fiscal 1994. The
increase in like store sales in Fiscal 1995 compared to decreases in Fiscal 1994
is due to a variety of factors including decreases in competitor openings,
slight
29
<PAGE>
improvements in the Southern California economy and favorable customer response
to Stater's introduction of prepackaged gourmet vegetables and fresh cut
flowers.
Stater's gross profits increased to $352.5 million or 22.31% of sales in
Fiscal 1995 compared to $339.9 million or 22.08% of sales in Fiscal 1994. The
increase in gross profits in Fiscal 1995 was due to continued increased
efficiencies in Stater's warehousing and transportation departments, the
introduction of higher gross margin products such as prepackaged gourmet
vegetables and fresh cut flowers and a decrease in the number of competitive new
store openings.
Operating expenses include selling, general and administrative,
depreciation and amortization and consulting fee expenses. Selling, general and
administrative expenses were $308.3 million or 19.52% of sales as compared to
$297.5 million or 19.32% for Fiscal 1994. Selling, general and administrative
expenses in 1995 include reductions in expense categories such as worker's
compensation and general liability self insurance expenses of $2.8 million,
which was offset by increases in direct labor, store supplies and advertising
expenses. Additional expenses were incurred in 1995 to operate the new stores
opened in June and August of 1994. Selling, general and administrative expenses
for Fiscal 1994 included certain non-recurring expenses including a $4 million
charge for the 311,404 shares of common stock paid to the Company as part of the
Restructuring and a one-time payment of $3.4 million to members of the Retail
Clerks collective bargaining unit. Such non-recurring expenses were offset, in
part by a non-recurring reduction in employer contributions to a collective
bargaining unit health and welfare benefit trust of $13.6 million.
Interest expense amounted to $20.1 million in Fiscal 1995 as compared to
$15.5 million for Fiscal 1994. The increase in Fiscal 1995 is due to the
issuance of additional debt in March 1994 as part of the Stater restructuring
transaction.
Stater's income before the cumulative effect of a change in accounting for
income taxes and extraordinary loss amounted to $6.7 million in Fiscal 1995 as
compared to $8.8 million in Fiscal 1994. In connection with the March 8, 1994
Restructuring, Stater entered into a series of transactions that included the
sale of $165 million of 11% Senior Notes due 2001, the early retirement of the
outstanding 9.8% Senior Notes due 2001 and certain bank financings. The early
retirement of debt resulted in an after tax extraordinary charge to earnings,
net of income tax benefit, of $8 million. Accordingly, the Company reported its
50% share of Stater's debt retirement costs amounting to $4,018,000, after an
income tax benefit of $1,610,000, as an extraordinary item.
Stater's net income for Fiscal 1995 amounted to $6.7 million compared to
$1.1 million in Fiscal 1994. Such Fiscal 1994 results include a credit of
approximately $.4 million resulting from Stater's adoption of the Statement of
Financial Accounting Standard No. 109 "Accounting for Income Taxes".
At September 24, 1995, Stater was in compliance with the restrictive
covenants of its Bank Facility and 11% Senior Notes due 2001 and had a current
ratio of 1.40:1; tangible net worth and debt subordinated to the bank of $176.4
million; a ratio of total liabilities to tangible net worth and debt subordinat-
30
<PAGE>
ed to the Bank of 0.76:1 and a fixed charge ratio (as defined in the Bank
Facilities) of 1.30:1. However, there can be no assurance that Stater Bros.
Markets will be able to achieve the expected operating results or implement the
capital expenditure strategy upon which the covenants in the Bank Facilities are
based. If for any reason Stater Bros. Markets is unable to comply with the terms
of the Bank Facilities, including the covenants contained therein, such
noncompliance would result in an event of default under the Bank Facilities, and
could result in the acceleration of the payment of outstanding indebtedness or,
in certain situations, the prohibition of dividends to SBH, which is SBH's
primary source of anticipated cash to pay interest on the 11% Senior Notes and
if converted, dividends on Preferred Stock.
Reading
- -------
On August 17, 1994, Reading acquired Theater Acquisitions of Puerto Rico,
Inc. ("Cine Vista") for an aggregate purchase price of approximately $22.7
million, inclusive of acquisition costs of $.3 million. For accounting purposes,
the acquisition was effective July 1, 1994. Cine Vista operates motion picture
exhibition theaters in seven leased locations with a total of 44 screens in the
Commonwealth of Puerto Rico. Accordingly, the operating results of Cine Vista
are only included in the operating results of Reading for six months of Fiscal
1994 as compared to twelve months in Fiscal 1995.
For the twelve month period ended September 30, 1995, Reading reported net
income of approximately $2,097,000 (the Company's share amounting to
approximately $989,000), as compared to a net loss of $1,437,000 (the Company's
share amounting to $678,000) for the twelve month period ended September 30,
1994. The net income for the twelve month period ended September 30, 1995
includes $1,890,000 from the settlement of various litigation claims. The net
loss from the twelve months 1994 includes (i) a provision for environmental
matters of $1,306,000 and (ii) a development expense charge of approximately
$795,000 related to Reading's investment in Oz Resorts and Entertainment, Inc.
Revenues for the twelve months ended September 30, 1995 amounted to
$19,533,000 as compared to $8,193,000 for the twelve month period ending
September 30, 1994. As discussed above, Reading's significant increase in
revenues during 1995 reflects the inclusion of the operating results of Cine
Vista for twelve months as compared to six months during the 1994 twelve months,
as well as, the inclusion of the litigation settlements amounting to $1,890,000
in the 1995 twelve months.
Reading's general and administrative expenses amounted to approximately
$4,454,000 for the twelve months ended September 30, 1995 as compared to
$3,423,000 for the twelve months ended September 30, 1994. This was due to the
addition of (i) approximately $973,000 associated with Cine Vista's general and
administrative expenses and (ii) the inclusion of certain expenses related to
diligence performed with respect to acquisition opportunities, as well as,
theater development activities in Australia. The 1994 general and administrative
costs include a development expense charge of approximately $795,000 related to
Reading's investment in Oz Resorts and Entertainment Inc. and a $1,306,000
provision for environmental matters.
31
<PAGE>
At September 30, 1995, Reading had significant liquidity including cash,
cash equivalents, and marketable treasury securities of approximately $47.5
million and no debt outstanding. Reading intends to expand Cine Vista's existing
operations by developing new multiplex theaters in the Commonwealth of Puerto
Rico which will require the expenditure of additional funds during the next
several years. Reading is also pursuing a number of motion picture theater
development opportunities, both domestically and internationally. If Reading
were to enter into all the transactions currently being considered, Reading
would not have adequate working capital to fund all the proposals. Therefore,
Reading has obtained a commitment from a major money center bank for a $15
million line of credit with respect to Cine Vista's operations which line of
credit will provide sufficient funds to complete Cine Vista's new theater
development plans and provide additional liquid funds for the parent Company. In
addition, Reading and the Company in November 1995 formed Reading International,
to develop and operate multiplex theaters in Australia, and authorized initial
funding of $10 million.
Citadel
- -------
At September 30, 1994, the Company reported its common stock investment in
CHC at $2.625 or share or $1,556 million. During fiscal 1995, the Company
increased its common stock ownership in CHC from 592,712 shares (9%) at
September 30, 1994 to 993,112 shares (16.5%) at September 30, 1995, through the
purchase of 400,400 shares of CHC stock for approximately $1,013,000. In
addition, in November 1994 the Company acquired, in satisfaction of $5.25
million of a $6.2 million outstanding indebtedness of Citadel to the Company,
1,329,114 shares of a newly issued CHC 3% Cumulative Voting Convertible
Preferred Stock. The preferred shares represent approximately 18.1% of the
voting power of CHC at September 30, 1995, and together with the common shares
owned by the Company represent approximately 31.6% of the voting power of CHC at
September 30, 1995.
Based on the increase in voting ownership in November 1994 through the
acquisition of Preferred Stock, the investment in CHC met the criteria for using
the equity method of accounting. As a result of the Company's previous
writedowns of the CHC common stock investment below the underlying book value no
retroactive adjustment to the results of operations was required. In accordance
with accounting for this investment under the equity method of accounting, the
Company has reclassified its investment in CHC to investment in equity
affiliates.
CHC, whose common stock is traded on the American Stock Exchange, was prior
to the recapitalization of Fidelity, the holding company for Fidelity. CHC is
referred to collectively with its wholly owned subsidiaries as "Citadel". As a
consequence of a recapitalization and restructuring of Fidelity in August 1994,
Citadel's interest in Fidelity was reduced to approximately 16%. During fiscal
1995, substantially all such remaining interest of Citadel in Fidelity was sold.
Since the restructuring Citadel has been engaged primarily in the ownership and
management of commercial and residential property. At September 30, 1995,
Citadel's balance sheet assets amounted to approximately $39.7 million and
consisted principally of real estate and cash.
32
<PAGE>
CHC reported a net loss for the three months ended December 31, 1994 of
$8,898,000, including a writedown of its remaining investment in Fidelity of
$7,081,000 and net earnings of $1,282,000 for its nine months ended September
30, 1994. The Company has included its share of such losses amounting to a loss
of $474,000 for the twelve months ended September 30, 1995 as earnings (losses)
from equity affiliates.
Included in CHC's earnings for the nine month period ended September 30,
1995 is approximately $1,541,000 from the sale of two properties. In addition,
during this period CHC sold substantially all of its investment in Fidelity,
which resulted in the CHC receiving net cash proceeds of $11,938,000 and the
return of 666,000 shares of CHC common stock. The net proceeds, when combined
with the amount ascribed to the common stock received, approximated the carrying
value of such Fidelity stock held at the date of sale. The sale of the
properties and the Fidelity stock attributed to the significant increase in cash
and cash equivalents at September 30, 1995.
Interest income and expense
- ---------------------------
Interest and dividend income increased in the Fiscal 1995 to $1,630,000
compared to $695,000 in Fiscal 1994. The increase was due to higher investable
operating cash balances which occurred in March 1994 upon the Stater
restructuring. As part of the restructuring, the Company received approximately
$42 million from Stater which was used in part to repay all outstanding debt of
the Company amounting to $14 million thereby eliminating interest costs in
Fiscal 1995. Included in interest and dividend income in Fiscal 1995 and Fiscal
1994 is $301,000 and $140,000, respectively, earned pursuant to a credit
agreement between the Company, as lender, and Citadel, as borrower, which was
paid in full in May 1995. The initial loan to Citadel made in August 1994
amounted to $6.2 million. In November 1994, the Company agreed to acquire $5.25
million of 3% Cumulative Voting Convertible Preferred Stock in CHC in partial
satisfaction of $5.25 million of the $6.2 million loan to Citadel. Included in
interest and dividend income is dividend income from the Company's holdings in
CHC Preferred Stock amounting to approximately $140,000.
Operating, general and administrative expenses
- ----------------------------------------------
Operating, general and administrative expenses decreased slightly to
$2,230,000 in Fiscal 1995 from $2,404,000 in Fiscal 1994. Included in operating,
general and administrative expenses in Fiscal 1994 is a $500,000 bonus awarded
by the Board of Directors to the Chairman of the Board, based largely upon
Chairman's contribution to the success of the Stater Restructuring, offset in
part by a reduction in goodwill amortization of $200,000 and the receipt of
insurance proceeds amounting to $144,000. Fiscal 1995 wages increased
approximately $200,000 due to the hiring of an additional employee in the last
six months of 1994 and bonus awards of $125,000.
Income taxes
- ------------
The provision for income taxes from continuing operations amounted to
$1,650,000 in Fiscal 1995 as compared to $1,010,000 in Fiscal 1994. As of
33
<PAGE>
September 30, 1995, deferred tax assets amounting to $8,362,000 have been
recognized to offset deferred tax liabilities of $13,742,000.
Year Ended September 30, 1994 ("Fiscal 1994") Versus Year Ended September
- -------------------------------------------------------------------------
30, 1993 ("Fiscal 1993")
- ------------------------
The Company's net loss for the year ended September 30, 1994 was $1,378,000
or $0.22 per share (including an extraordinary loss of approximately $2,408,000
or $0.38 per share), as compared with a net loss for Fiscal 1993 of $5,915,000
or $0.93 per share. The Fiscal 1993 loss includes a $4,900,000 provision for
income taxes as compared to a $1,010,000 provision in Fiscal 1994. The Fiscal
1994 loss of $1,378,000 includes a charge of $8,792,000 attributable to a
further writedown of the Company's investment in Citadel Holding Corporation
(Citadel) and the Company's portion of equity losses from its investment in
Reading amounting to $678,000 in Fiscal 1994 as compared to equity losses of
$348,000 in Fiscal 1993. The impact of these charges in Fiscal 1994 was offset
by various factors including (i) $5,849,000 of revenue reported with respect to
proceeds received from Stater pursuant to a consulting agreement which became
effective upon the closing of the Stater restructuring, (ii) a gain of
approximately $1,303,000 on the sale of property, and (iii) a reduction in
interest expense.
Service income
- --------------
In connection with the SBH restructuring consummated in March 1994, the
Company entered into a consulting agreement with SBH pursuant to which the
Company has agreed, among other things, to render consulting services for a
five-year period and has agreed not to provide consulting services or own any
controlling interest in any business that competes with Stater. Under this
agreement SBH paid the Company $5 million in March 1994, and has committed
thereafter $1.5 million a year, payable quarterly through the term of the
Consulting Agreement. Included in service income for the year ended September
30, 1994 is approximately $5.849 million earned pursuant to this agreement.
Equity in Earnings of Affiliates
- --------------------------------
Equity in earnings of affiliates reflects the Company's share of net
earnings or losses of its affiliates before extraordinary items and after
preferred dividends. The following table sets forth the contribution by
affiliate of the equity in earnings of affiliates:
Equity in Earnings of Affiliates - Contribution by Affiliates
-------------------------------------------------------------
(In thousands of dollars)
<TABLE>
<CAPTION>
Year Ended September 30,
1994 1993
--------- --------
<S> <C> <C>
SBH - reported as equity
earnings of affiliate $ 6,422 $ 2,685
SBH - reported by Company
as extraordinary item (4,018) --
------ ------
SBH - Company share of SBH
operating results 2,404 2,685
Reading - equity losses (678) (348)
------ ------
$ 1,726 $ 2,337
====== ======
</TABLE>
34
<PAGE>
Stater
- ------
As previously described, in March 1994, the Company and Stater consummated
several a series of restructuring agreements which resulted in the Company
receiving from Stater pre-tax cash proceeds approximating $42 million including
a dividend distribution of $20 million, an option payment of $14.65 million, $5
million in connection with a Consulting Agreement, and $2.2 million for the
redemption of existing preferred stock plus outstanding dividends. The Company
recorded the dividend proceeds received in connection with the Restructuring as
a reduction of the carrying amount of its investment and the amount previously
recorded as excess of cost over the net assets acquired. The $14.65 million
received in connection with the option granted by the Company to Stater is
included in the balance sheet as a deferred credit under the caption "Option to
sell investment in affiliate".
In addition to the cash proceeds described above, the Company received in
Fiscal 1994, 311,404 Company common shares previously held by Stater. The
Company recorded the receipt of these shares as a reduction of shareholder's
equity in the amount of $3.658 million. In addition, the Company has recorded
50% of the value ascribed to the shares returned net of expected income taxes,
(representing the La Cadena portion of Stater's ownership), as a contribution to
paid in capital in the amount of $1.024 million.
Stater sales amounted to $1.540 billion in Fiscal 1994 as compared to
$1.526 billion in Fiscal 1993. Sales from like stores (stores that have been
open at least one year) decreased 0.7% in Fiscal 1994 compared to a decrease of
1.9% in Fiscal 1993. Stater operated 111 stores at September 30, 1994, including
three new stores that were opened in Fiscal 1994, one of which replaced a
smaller, less efficient store.
Stater's gross profits increased to $339.9 million or 22.08% of sales in
Fiscal 1994 compared to $330.6 million or 21.66% of sales in Fiscal 1993. The
increase in gross profits in Fiscal 1994 was due to increased efficiencies in
Stater's warehousing and transportation departments, the introduction of higher
gross margin products such as prepackaged gourmet vegetables and cut flowers and
a decrease in the number of competitive new store openings in the current fiscal
year when compared to prior years.
General and administrative expenses was $297.5 million in Fiscal 1994 as
compared to $300.8 million in Fiscal 1993. The decrease in general and
administrative expenses reflects a $13.6 million non-recurring reduction in
employer contributions to a collective bargaining unit and health and welfare
benefit trust offset in part by reductions in expense categories such as
workers' compensation and general liability self insurance expenses, advertising
and store supply expenses.
Stater's income before income taxes and the cumulative effect of a change
in accounting for income taxes and extraordinary loss amounted to $14.6 million
in Fiscal 1994 as compared to $10.1 million for Fiscal 1993. In connection with
the March 8, 1994 Restructuring, Stater entered into a series of transactions
that included the sale of $165 million of 11% Senior Notes due 2001, the early
35
<PAGE>
retirement of the outstanding 9.8% Senior Notes due 2001 and certain bank
financings. The early retirement of debt resulted in an after tax extraordinary
charge to earnings, net of income tax benefit, of $8 million. Accordingly, the
Company has reported its 50% share of Stater's debt retirement costs amounting
to $4,018,000, before an income tax benefit of $1,610,000, as an extraordinary
item.
Stater's net income for Fiscal 1994 amounted to $1.1 million compared to
$5.7 million in Fiscal 1993. Such results include a credit of approximately $.4
million resulting from Stater's adoption of the Statement of Financial
Accounting Standard No. 109 "Accounting for Income Taxes".
Reading
- -------
On August 17, 1994, Reading acquired Theater Acquisitions of Puerto Rico,
Inc. ("TAPR") for an aggregate purchase price of approximately $22.7 million,
inclusive of acquisition costs of $.3 million. For accounting purposes, the
acquisition was effective July 1, 1994. TAPR operated motion picture exhibition
theaters in six leased locations with a total of 36 screens in the Commonwealth
of Puerto Rico and three additional theaters representing an additional 18
screens, were under development at the time of the acquisition.
For the twelve month period ended September 30, 1994, Reading reported a
net loss of approximately $1,437,000 (the Company's share amounting to
approximately $678,000), as compared to a net loss of $817,000 (the Company's
share amounting to $348,000) for the twelve month period ended September 30,
1993. The loss for the twelve month period ended September 30, 1994 includes (i)
a provision for environmental matters of $1.306 million, (ii) a development
expense charge of approximately $.8 million related to Reading's investment in
Oz Resorts and Entertainment, Inc. and (iii) a reduction of interest and
dividend revenue due to lower investable balances as a result of the TAPR
acquisition, as well as lower realized interest yields as compared to the twelve
month period ended September 30, 1993. The impact of these charges was offset by
a contribution to earnings from TAPR of approximately $1 million for the three
months ended September 30, 1994.
Citadel
- -------
Prior to the restructuring of Citadel in August 1994, the Company's
investment in CHC was accounted for at the lower of cost or market. Changes in
net unrealized losses were included in shareholders' equity or, if a decline in
market value was considered other than temporary, were included in the
determination of net income. In light of a significant restructuring completed
by CHC in August 1994 and a decline in the trading price of CHC shares, the
Company recorded a loss on its investment in CHC of $8,792,000 for Fiscal 1994.
As of September 30, 1994 the Company held 592,712 shares of CHC, or
approximately 9% of CHC's outstanding securities. Included in the consolidated
balance sheet at September 30, 1994, the Company's common stock investment in
Citadel was reported at $1,556,000 or $2.625 per share. On October 21, 1994, the
Company purchased in a private acquisition from CHC, 74,300 shares of CHC common
stock for a
36
<PAGE>
purchase price of approximately $286,000. This acquisition increased the
Company's common stock ownership in October 1994 to slightly more than 10%.
In addition to its common stock investment as of September 30, 1994, the
Company had loaned Citadel $6.2 million pursuant to a credit agreement dated
August 4, 1994. On November 10, 1994, the Company agreed to acquire in
satisfaction of $5.25 million of the $6.2 million outstanding indebtedness due
under the credit agreement 1,329,114 shares of newly issued CHC 3% Cumulative
Convertible Preferred Stock. The preferred shares represent approximately 18.1%
of the voting power of CHC and, together with the common shares owned by the
Company at that time, represented approximately 24.9% of the voting power of CHC
as of December 31, 1994. In connection with this transaction, the credit
available under the $8.2 million credit agreement was reduced to approximately
$950,000. The 1,329,114 preferred shares ($3.95 per share) were issued to the
Company pursuant to a Stock Purchase Agreement and Certificate of Designation
which provide, among other things, that (i) the preferred shares carry a
liquidation preference equal to their stated value and bear a cumulative
(noncompounded) annual dividend equal to 3% of the stated value, payable
quarterly, (ii) are convertible under certain circumstances into shares of
common stock of CHC at an exercise price equal to the average closing price of
Citadel shares over the preceding 60 business days, (iii) are redeemable at the
option of CHC at any time after November 10, 1997 and (iv) are redeemable
(subject to Delaware limitations upon distributions to shareholders) at the
option of the Company in the event of a change of control of CHC.
Operating, general and administrative expenses
- ----------------------------------------------
Operating, general and administrative expenses increased slightly from
$2,383,000 in Fiscal 1993 to $2,404,000 in Fiscal 1994. Included in operating,
general and administrative expenses in Fiscal 1994 is approximately $610,000 due
to increased compensation and consulting expenses, principally attributable to a
$.5 million bonus awarded by the Board of Directors to the Chairman of the
Board, based largely upon Chairman's contribution to the success of the Stater
Restructuring. These increases were offset in part, by a reduction in goodwill
amortization of $300,000 and the receipt of insurance proceeds amounting to
$144,000.
Interest expense
- ----------------
Interest expense was eliminated in the fourth quarter of Fiscal 1994 as a
result of the expiration of the Company's credit agreement upon the repayment of
$14 million in debt obligations in March 1994. Interest expense amounted to
$355,000 in Fiscal 1994 compared to $1,248,000 in Fiscal 1993. The decline in
interest expense in Fiscal 1994 was attributable to the repayment of debt in
March 1994 as well as the expiration in March 1993 of an Interest Rate and
Currency Exchange Agreement which required the Company to pay the difference
between the three month LIBOR rate and 8%, determined quarterly on $30 million
through March 1993. Included in interest expense in Fiscal 1993 is $648,000
attributable to this agreement.
37
<PAGE>
Income taxes
- ------------
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" effective October 1, 1992, without restating prior
years financial statements. There was no cumulative effect on prior years from
this change in accounting principle. The provision for income taxes from
continuing operations amounted to $1,010,000 in Fiscal 1994 as compared to
$4,900,000 in Fiscal 1993. As of September 30, 1994, deferred tax assets
amounting to $8,275,000 had been recognized to offset deferred tax liabilities
of $12,060,000. The reported deferred tax assets are expected to be realized as
an offset against reversing temporary differences which create net future tax
liabilities.
Prior to 1993, no provision had been made by the Company on the accrued
undistributed earnings of equity investments (Stater and Reading) because such
earnings were expected to remain invested indefinitely. In the fourth quarter of
Fiscal 1993, the Company no longer anticipated having such Stater earnings
remain invested indefinitely. Accordingly, the Company recorded a $4,900,000
provision in Fiscal 1993 to record deferred income taxes with respect to the
cumulative undistributed equity earnings, net of applicable operating/capital
loss carryforwards, available for financial statement purposes.
Liquidity
- ---------
At September 30, 1995, the Company had cash and cash equivalents totaling
approximately $21.1 million and no debt outstanding. Cash and cash equivalents
decreased $146,000 from $21,205,000 at September 30, 1994 to $21,059,000 at
September 30, 1995. Principal sources of funds during Fiscal 1995 included
service income from SBH of $1,500,000 and interest and dividend income of
approximately $1,630,000. During Fiscal 1995 the Company received interest
earnings and dividend income from CHC amounting to $192,000 as a result of its
ownership of preferred stock and loans made to Citadel. In addition, the Company
received $950,000 from Citadel in repayment of all outstanding loans.
In addition to operating expenses, principal uses of funds during Fiscal
1995 were $320,000 for the acquisition of Reading Class A Common Stock and
$1,011,000 for the acquisition of CHC common stock. Subsequent to September 30,
1995 the Company purchased an additional 77,800 shares of Reading Class A Common
Stock for approximately $708,000 and 571,361 shares of CHC Common Stock for
$1,281,000.
During Fiscal 1995, the Board of Directors provided authorization to the
management of the Company to spend up to $3 million to purchase from time to
time shares of the Company's Common and/or Class A Common Preference Stock. In
connection with this authorization the Company repurchased 90,000 shares of the
Company's Common Stock for approximately $823,000. Subsequent to September 30,
1995, the Company has repurchased and additional 118,100 shares of Common Stock
and 23,000 shares of Class A Common Preference Stock at a purchase price of
approximately $1,342,000.
38
<PAGE>
Cash and cash equivalents increased by approximately $20.5 million from
September 30, 1993 to September 30, 1994. During March 1994, the Company
received approximately $42 million from SBH in connection with the
Restructuring. The proceeds received are reflected in the statement of cash
flows for Fiscal 1994 as $5.4 million ($5 million reported as service income and
$.4 million of outstanding dividend and interest income) in net income provided
by operating activities, $1.8 million as investing activities from the
redemption of long-term investment in SBH, and financing activities of $34.65
million (reported as $20 million and $14.65 million as a dividend from equity
affiliate and the sale of option to affiliate, respectively).
Net cash provided by (used in) financing activities amounted to $21.2
million and $10.3 million in Fiscal 1994 and Fiscal 1993. Concurrently, with the
receipt of proceeds from SBH in Fiscal 1994, the Company repaid its outstanding
debt obligation to its lenders of $14 million. In addition, during Fiscal 1994
the Company loaned Citadel $6.2 million. During Fiscal 1995, the Company agreed
to acquire in satisfaction of $5.25 million of such loan, $1,329,114 shares of
newly issued CHC 3% Cumulative Voting Convertible Preferred Stock. Net cash
provided by financing activities during Fiscal 1993 consisted primarily of bank
borrowings used to finance the Company's acquisition of stock of Reading and CHC
amounting to approximately $9.2 million.
In November 1995, the Company committed to make an initial contribution of
$5 million to Reading International. The Company has significant liquidity and
believes that the Company's sources of funds will be sufficient to meet its cash
flow requirements for the foreseeable future.
39
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX PAGE
- ----- ----
<S> <C>
Report of Independent Auditors............................................ 41
Consolidated Balance Sheets
Years Ended September 30, 1995 and 1994................................. 42
Consolidated Statements of Operations
Years Ended September 30, 1995, 1994 and 1993........................... 43
Consolidated Statements of Shareholders' Equity
Three Years Ended September 30, 1995.................................... 44
Consolidated Statements of Cash Flows
Years Ended September 30, 1995, 1994 and 1993........................... 45
Notes to Consolidated Financial Statements.............................. 46-59
</TABLE>
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes therein.
40
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Craig Corporation
We have audited the accompanying consolidated balance sheets of Craig
Corporation and subsidiaries as of September 30, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended September 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Craig
Corporation and subsidiaries at September 30, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1995, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
January 11, 1996
41
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995 1994
---------------------------
(In thousands of dollars)
<S> <C> <C>
ASSETS
- --------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 21,059 $ 21,205
Other current assets 323 150
--------- ---------
Total current assets 21,382 21,355
Investments in affiliates 60,171 49,131
Note receivable from affiliate -- 6,200
--------- ---------
Excess of cost over net assets acquired, net 2,201 2,347
--------- ---------
Other assets 915 994
--------- ---------
Total assets $ 84,669 $ 80,027
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 362 $ 77
Accrued expenses 330 326
--------- ---------
Total current liabilities 692 403
Other long-term liabilities 56 104
Option to sell investment in affiliate 14,650 14,650
Deferred tax liabilities 5,380 3,785
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, par value $.25,
1,000,000 shares authorized, none issued -- --
Class A common preference stock, par value
$.01, 10,000,000 shares authorized,
1,645,000 issued and outstanding 16 16
Class B common stock, par value $.01,
20,000,000 shares authorized, none issued -- --
Common stock, par value $.25,
7,500,000 shares authorized, 5,444,065
shares issued 1,361 1,361
Additional paid-in capital 30,793 30,793
Affiliate's unrealized security loss -- (171)
Retained earnings 43,858 40,400
Cost of treasury shares, 1,154,095 and 1,064,095 (12,137) (11,314)
--------- ---------
Total shareholders' equity 63,891 61,085
--------- ---------
Total liabilities and shareholders' equity $ 84,669 $ 80,027
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
September 30,
1995 1994 1993
---------------------------------
(In thousands of dollars,
except per share amounts)
<S> <C> <C> <C>
Service income from affiliate $ 1,500 $ 5,849 $ --
Equity in earnings of affiliates 4,208 5,744 2,337
Interest and dividend income 1,630 695 260
Other income -- 1,303 19
-------- -------- --------
7,338 13,591 2,616
-------- -------- --------
Costs and expenses:
Loss from writedown of
investment in affiliate -- 8,792 --
Operating, general and
administrative expenses 2,230 2,404 2,383
Interest expense -- 355 1,248
-------- -------- --------
2,230 11,551 3,631
-------- -------- --------
Earnings (loss) before taxes and
extraordinary items 5,108 2,040 (1,015)
Provision for income taxes 1,650 1,010 4,900
-------- -------- --------
Net earnings (loss) before
extraordinary items 3,458 1,030 (5,915)
Extraordinary item:
Debt refinancing - equity in earnings
of affiliate, net of income tax
benefit of $1,610 in 1994 (2,408) --
-------- -------- --------
Net earnings (loss) $ 3,458 $ (1,378) $ (5,915)
======== ======== ========
Earnings (loss) per common and
common equivalent share
Continuing operations $ 0.58 $ 0.16 $ (0.93)
Extraordinary items -- (0.38) --
-------- -------- --------
Net earnings (loss) $ 0.58 $ (0.22) $ (0.93)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED SEPTEMBER 30, 1995
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Common Stock Class A
Outstanding Common Stock
----------- ------------
Treasury
Shares Par Shares Par Paid-In Valuation Retained Stock
Value Value Capital Reserve Earnings At Cost
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
October 1, 1992 5,444 $1,361 1,645 $ 16 $29,769 $ (3,536) $47,693 $(7,656)
Net (loss) (5,915)
Investment valu-
ation reserve 3,536
----- ------ ----- ---- ------- -------- ------- -------
Balances at
Sept. 30, 1993 5,444 1,361 1,645 16 29,769 -- 41,778 (7,656)
Treasury stock 1,024 (3,658)
Net (loss) (1,378)
Investment valu-
ation reserve (171)
----- ------ ----- ---- ------- -------- ------- -------
Balances at
Sept. 30, 1994 5,444 1,361 1,645 16 30,793 (171) 40,400 (11,314)
Repurchase stock (823)
Net (loss) 3,458
Investment valu-
ation reserve 171
----- ------ ----- ---- ------- -------- ------- -------
Balances at
Sept. 30, 1995 5,444 $1,361 1,645 $ 16 $30,793 $ -- $43,858 $(12,137)
===== ====== ===== ==== ======= ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Years Ended
September 30,
1995 1994 1993
-----------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) $ 3,458 $ (1,378) $ (5,915)
Adjustments to reconcile net earnings (loss) to
net cash provided (used) by operating activities:
Loss on long-term investment -- 8,792 --
Depreciation 100 100 99
Amortization of excess cost over assets acquired 66 266 563
Amortization of deferred finance costs -- 24 40
Undistributed earnings of affiliates (4,208) (1,726) (2,337)
Increase (decrease) in deferred tax liability 1,595 (2,575) 4,900
Changes in operating assets and liabilities:
Decrease (increase) in other assets (176) 231 (220)
Increase (decrease) in accrued liabilities 289 (58) 119
-------- --------- --------
Net cash provided by (used in) operating activities 1,124 3,676 (2,751)
INVESTING ACTIVITIES
Increase in note receivable to affiliates -- (6,200) --
Proceeds from note receivable pay-off 950
Purchase of property and equipment (18) -- (12)
Redemption of investment in affiliate -- 1,800 --
(Acquisition) of stock of affiliate (1,331) -- (9,199)
--------- -------- ---------
Net cash provided by (used in) investing activities (399) (4,400) (9,211)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 600 10,300
Payments of long-term debt and other liabilities (48) (14,048) (40)
Dividend received from equity affiliate -- 20,000 --
Proceeds from sale of option to affiliate -- 14,650 --
Common stock repurchase (823) -- --
--------- -------- --------
Net cash provided by (used in) financing activities (871) 21,202 10,260
Increase (decrease) in cash and cash equivalents (146) 20,478 (1,702)
Cash and cash equivalents at beginning of year 21,205 727 2,429
-------- -------- --------
Cash and cash equivalents at end of year $ 21,059 $ 21,205 $ 727
======== ======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURES:
Interest paid during the periods ended September 30, 1995, 1994 and 1993 was
$0, $450,000 and $1,130,000, respectively. During fiscal 1995, the Company
acquired $5.25 million of Citadel 3% Cumulative Convertible Preferred Stock in
satisfaction of $5.25 million of outstanding indebtedness. With respect to non-
cash financing activities, in September 1993, the Company received preferred
stock of Stater Bros. Holdings Inc. in exchange for the early retirement of a
note receivable amounting to $1,000,000.
See notes to accompanying consolidated financial statements.
45
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Basis of Presentation and Principle of Consolidation
- ----------------------------------------------------
The consolidated financial statements include the accounts of Craig Corporation
(the "Company") and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. Investments in
affiliates in which the Company holds a 20 to 50 percent ownership interest are
accounted for using the equity method (Note 3).
Depreciation and Amortization
- -----------------------------
Depreciation and amortization of property and leasehold improvements is
generally provided using the straight-line method over the estimated useful
lives of the assets or the shorter of the estimated lives or lease term for
leasehold improvements.
The excess of cost over net assets acquired is amortized using the straight-line
method over 40 years. Accumulated amortization at September 30, 1995 and 1994
was approximately $585,000 and $519,000, respectively.
Income Taxes
- ------------
The Company and its subsidiaries file consolidated federal and state tax
returns. During the fourth quarter of the year ended September 30, 1993, the
Company adopted the Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes" without restating prior years' financial
statements. There was no cumulative effect on prior years from this change in
accounting principle. Under SFAS No. 109, deferred income taxes reflect the net
tax effect of temporary differences between the financial statement carrying
amount of assets and liabilities and the amounts used for income tax purposes.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash equivalents are
stated at cost plus accrued interest, which approximates market value, and
consist primarily of federal agency securities. Included in cash and cash
equivalents at September 30, 1995 is approximately $19.8 million, which is held
in government securities having maturities of three months or less.
46
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 2 - PER SHARE DATA
- -----------------------
Earnings per share is based on 5,969,585, 6,310,424, and 6,336,374, the weighted
average number of shares of common stock outstanding during the years ended
September 30, 1995, 1994 and 1993, respectively. Fully diluted earnings per
share have been omitted because the effect of such computation was not
significant or anti-dilutive in the years reported.
NOTE 3 - INVESTMENTS IN AFFILIATES
- ----------------------------------
The Company's investments in affiliates at September 30, 1995 and 1994 consist
of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Stater Bros. Holding, Inc. (Stater) $20,160 $16,467
Reading Company ("Reading") 32,725 31,108
Citadel Holding Corporation ("CHC") 7,286 1,556
------ ------
$60,171 $49,131
====== ======
</TABLE>
Consolidated retained earnings represented by undistributed earnings of
investments reported on the equity method amounted to approximately $21.8
million at September 30, 1995.
Stater
- ------
Investments in affiliates include the Company's 50% interest (48% voting
interest) in Stater Bros. Holdings Inc. ("SBH" and collectively with its
operating subsidiaries, "Stater"). The remaining 50% interest (52% voting) in
Stater is owned by La Cadena Investments ("La Cadena"), a general partnership
consisting of key management executives of Stater.
During March 1994, the Company consummated several separate agreements with SBH
and La Cadena with respect to a series of restructuring transactions under the
terms of which the Company received from Stater pre-tax cash proceeds
approximating $42 million, including a dividend distribution of $20 million, an
option payment of $14.65 million, $5 million in connection with a Consulting
Agreement, and $2.2 million for the redemption of existing preferred stock plus
outstanding dividends. In connection with reporting the dividend proceeds
received in the restructuring, the Company reduced the carrying amount of its
investment by $5.2 million and the amount previously recorded as excess of cost
over the net assets acquired related to Stater by $14.8 million. The $14.65
million received in connection with the option to sell the Company's investment
in SBH is included in the balance sheet as a deferred credit under the caption
"Option to sell investment in affiliate".
47
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 3 - INVESTMENTS IN AFFILIATES (CONT'D)
- -------------------------------------------
The Company expects to account for the deferred option proceeds amounting to
$14.65 million at the earlier of the exercise of the option or its expiration.
The option payment to the Company of $14.65 million pertains to an option
granted by the Company to SBH, which in turn provides the means by which the
Company's continuing 50% economic interest in SBH may, in the future, be
acquired by SBH, at SBH's option. The option exercise price at March 8, 1994
amounted to $60 million, adjusting upwards at an annual rate of approximately
8.833%. The option has an initial term of two years, but may be extended for ten
additional years if SBH converts the Company's common stock interest in SBH to
preferred stock prior to the expiration of the initial two year option period.
The reciprocal option rights held by the Company and La Cadena Investments under
the existing Shareholder Agreement have been suspended. The preferred stock, if
issued at the end of two years, or March 8, 1996, will have a liquidation
preference of approximately $69.4 million and a cumulative dividend preference
beginning at 10.5%, increasing to 12% after 78 months, and further increasing
every twelve months thereafter by an additional 1%, to a maximum cumulative
dividend rate of 15%. In the event dividends on the preferred stock for two or
more quarterly dividend periods remain unpaid by SBH, the Company will have a
right to elect a majority of SBH's directors. The Company has the right to have
the preferred stock redeemed at any time following the fifteenth anniversary of
the granting of the option.
Since May 1989, the Company has been a party to an Agreement of Stockholders of
SBH which, among other things, provided that for a period of twenty years (i)
neither party may sell or transfer its Stater shares without offering the other
party a right of first refusal; and (ii) either party may offer to purchase the
other party's interest, and the party receiving the offer has the option to sell
at the offer price or purchase the offering party's interest at that price (the
"Option Rights"). Pursuant to an amendment of this agreement dated as of
September 3, 1993, the Company agreed to standstill under its Option Rights
during the period of time Stater pursued consummation of the restructuring
described above, but no later than March 31, 1994 if such restructuring was not
successful. In consideration for such provision, Stater was obligated to return
to the Company 311,404 shares of the Company's common stock transferred to
Stater in May 1989. The Company recorded the 311,404 Company common shares,
which were received in August 1994, as a reduction of shareholder's equity in
the amount of $3.658 million, representing the closing stock market of the
shares on the agreement date of September 3, 1993. In addition, the Company has
recorded 50% of the value of the shares returned (representing the La Cadena
portion of Stater's ownership), net of expected income taxes, as a contribution
to paid in capital in the amount of $1.024 million. As of the date of the
restructuring, the Amended Stockholders Agreement provides that, among other
things, (a) the Stockholders Agreement may be terminated by either party upon
exercise by Stater
48
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 3 - INVESTMENTS IN AFFILIATES (CONT'D)
- -------------------------------------------
of its right to convert the Company's common stock in SBH into preferred stock
of SBH as described above, and (b) the "Option Rights" shall be suspended until
after the expiration of Stater's right to convert the Company's SBH common stock
into SBH Preferred Stock.
Also in connection with the Stater restructuring, the Company entered into a
subsequent consulting agreement with Stater pursuant to which the Company has
agreed, among other things, to render consulting services for a five-year period
and has agreed not to provide consulting services or own any controlling
interest in any business competing with Stater. In consideration for such
agreement, SBH paid the Company $5 million in March 1994, and agreed to pay $1.5
million a year, payable quarterly, through the term of the agreement. Included
in service income for the years ended September 30, 1995 and 1994, is
approximately $1.5 million and $5.849 million, respectively, earned pursuant to
this agreement. SBH has the right to terminate its obligations under the
Consulting Agreement, in the event it exercises its option to purchase the
Common Stock of SBH from the Company.
The Company loaned Stater $1,800,000 as evidenced by a seven year interest
bearing note in the fiscal year ended 1991. In September 1993 and September
1992, the Company exchanged $1,000,000 and $800,000 of the $1,800,000 note due
in September 1998 for 40,000 and 32,000 shares of Stater preferred stock In
connection with the Stater restructuring, the Company received $2.2 million in
consideration for the redemption of the preferred stock and outstanding interest
and dividends due thereon.
Stater files the required periodic reports with the Securities and Exchange
Commission (SEC). Copies of these reports are available from the SEC. Summarized
financial information of Stater is as follows:
<TABLE>
<CAPTION>
September 24, September 25,
1995 1994
----------------------------
(In thousands)
<S> <C> <C>
CONDENSED BALANCE SHEET
Current assets $158,647 $151,108
Property, plant and equipment, net 118,627 111,645
Other assets 36,808 43,736
Current liabilities 113,633 109,686
Long-term debt 173,099 174,187
Other liabilities 13,772 15,765
Shareholders' common equity 13,578 6,851
</TABLE>
The payment of dividends by Stater to the Company are restricted subject to
various financial covenants in the Stater credit agreements.
49
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 3 - INVESTMENTS IN AFFILIATES (CONT'D)
- -------------------------------------------
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
Sept. 24, Sept. 25, Sept. 26,
1995 1994 1993
-----------------------------------
(In thousands)
<S> <C> <C> <C>
CONDENSED STATEMENT OF INCOME
Sales $1,579,895 $1,539,717 $1,526,002
Cost of goods sold 1,227,355 1,199,794 1,195,399
---------- ---------- ----------
Gross profit 352,540 339,923 330,603
General and administrative 308,332 297,474 300,826
Depreciation and amortization 11,756 11,656 9,910
Consulting costs 1,500 830 --
---------- ---------- ----------
Income from operations 30,952 29,963 19,867
Interest expense, net 20,076 15,501 10,292
Other income 69 183 543
---------- ---------- ----------
Income before provision for taxes
and extraordinary item 10,945 14,645 10,118
Income taxes 4,218 5,856 4,218
---------- ---------- ----------
Income before extraordinary
item and accounting change 6,727 8,789 5,692
Change in accounting for taxes -- 372 --
Extraordinary loss -- (8,036) --
---------- ---------- ----------
Net income $ 6,727 $ 1,125 $ 5,692
---------- ---------- ----------
</TABLE>
In connection with the Restructuring, Stater completed a debt financing of $165
million which occurred in March 1994. The net proceeds from the debt refinancing
were used to consummate the Stater Restructuring and replace outstanding debt of
$96.7 million. In connection with the early redemption of outstanding debt,
Stater recorded an extraordinary charge of approximately $8.036 million, net of
tax benefits amounting to $5.9 million, for costs related to the redemption
premium to holders of the previous outstanding debt securities. Accordingly, the
Company has reported its 50% share of Stater's debt retirement costs amounting
to $4.018 million, before income tax benefits of $1.610 million, as an
extraordinary item.
Reading
- -------
At September 30, 1995 and 1994, the Company held 2,367,976 and 2,334,957 shares
with a purchase price of $31,954,000 and $31,635,000, respectively. Based on the
closing price per share of Reading at September 30, 1995 of $10, the aggregate
market value of the Company's investment in Reading at was approximately
$23,680,000. Subsequent to September 30, 1995, the Company increased its
ownership in Reading to 2,445,776 or 49.2% of the outstanding Reading
securities,
50
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 3 - INVESTMENTS IN AFFILIATES (CONT'D)
- -------------------------------------------
through the purchase of an additional 77,800 shares for a total purchase price
of approximately $708,000.
Summarized financial information of Reading at September 30, 1995 and 1994 and
for the three years then ended is as follows:
<TABLE>
<CAPTION>
September 30,
1995 1994
------------------------
(In thousands)
<S> <C> <C>
CONDENSED BALANCE SHEET
Current assets $50,263 $46,706
Property and equipment 7,118 7,037
Intangible assets 15,770 16,640
Other assets 2,111 2,213
Current liabilities 3,596 3,414
Other long-term liabilities 2,907 2,884
Shareholders' equity 68,759 66,298
</TABLE>
At September 30, 1994, Reading included as a separate component of shareholders'
equity $364,000 reflecting the net adjustment for unrealized holding losses on
available for sale securities. Accordingly, the Company reflected its 47%
ownership allocation of such valuation reserve as a separate component of
shareholders' equity, titled affiliate's unrealized security losses, at
September 30, 1994.
<TABLE>
<CAPTION>
Years Ended September 30,
1995 1994 1993
-------------------------------------
(In thousands)
<S> <C> <C> <C>
CONDENSED STATEMENT OF INCOME
Revenue:
Theatre $ 14,878 $ 4,908 $ --
Interest and dividend 2,194 2,367 2,959
Other 2,461 918 401
-------- ------- -------
19,533 8,193 3,360
Theater costs 11,451 3,433 --
Depreciation and amortization 1,339 339 --
General and administrative 4,457 3,769 4,068
Provision for environmental -- 1,306 241
Development expense -- 795 --
-------- ------- -------
Earnings (Loss) before income
taxes and accounting change 2,286 (1,449) (949)
Income taxes (benefit) 189 (12) --
Cumulative effect of
accounting change -- -- 132
-------- ------- -------
Net income (loss) $ 2,097 $(1,437) $ (817)
-------- ------- -------
</TABLE>
51
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 3 - INVESTMENTS IN AFFILIATES (CONT'D)
- -------------------------------------------
Reading files the required periodic reports with the Securities and Exchange
Commission (SEC). Copies of these reports are available from the SEC.
In November 1995, Reading and the Company formed Reading International LLC to
develop and operate multiplex cinemas in Australia. Reading and Craig have each
committed to make an initial contribution of $5 million, on an as needed basis
for an aggregate initial capitalization of $10 million. The LLC agreement
provides, among other things, that each party will have rights of first refusal
regarding any proposed disposition of the other's interest in Reading
International.
Citadel ("CHC")
- ---------------
CHC, whose common stock is traded on the American Stock Exchange, was prior to
the recapitalization of Fidelity Federal Bank, ("Fidelity"), the holding company
for Fidelity. CHC is referred to collectively with its wholly owned subsidiaries
as "Citadel". As a consequence of a recapitalization and restructuring of
Fidelity in August 1994, Citadel's interest in Fidelity was reduced to
approximately 16%. During fiscal 1995, substantially all such remaining interest
by Citadel in Fidelity was sold. At September 30, 1995, Citadel's assets
amounted to approximately $39.7 million and consisted principally of real estate
and cash.
As of September 30, 1995 and 1994, the Company's investment in CHC is as
follows:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Common Stock $ 2,036 $ 1,556
3% Cumulative Convertible Preferred Stock 5,250 --
------- -------
Total investment $ 7,286 $ 1,556
------- -------
</TABLE>
During fiscal 1995, the Company increased its common stock ownership in CHC from
592,712 shares (9%) at September 30, 1994 to 993,112 shares (16.5%) at September
30, 1995, through the purchase of 400,400 shares of CHC stock for approximately
$1,013,000. In addition, in November 1994 the Company acquired, in satisfaction
of $5.25 million of a $6.2 million outstanding indebtedness of Citadel to the
Company, 1,329,114 shares of a newly issued CHC 3% Cumulative Voting Convertible
Preferred Stock. The preferred shares represent approximately 18.1% of the
voting power of CHC at September 30, 1995, and together with the common shares
owned by the Company represent approximately 31.6% of the voting power of CHC at
September 30, 1995. Based on the closing price of CHC's common stock of $2.25 at
September 30, 1995, the aggregate market value of the Company's common stock
interest in CHC was approximately $2,234,000.
52
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 3 - INVESTMENTS IN AFFILIATES (CONT'D)
- -------------------------------------------
Subsequent to September 30, 1995, the Company acquired an additional 571,361
common shares for approximately $1,281,000, increasing the Company's common
stock ownership in CHC to 1,564,673 or 26% which, together with the preferred
stock, represents 39.4% of the outstanding voting power of CHC.
The 3% Cumulative Voting Convertible Preferred Stock was issued to the Company
pursuant to a stock purchase Agreement and Certificate of Designation which
provides, among other things, that (i) the preferred shares carry a liquidation
preference equal to their stated value and bear a cumulative (noncompounded)
annual dividend equal to 3% of the stated value, (ii) are convertible under
certain circumstances into shares of common stock of CHC, (iii) are redeemable
at the option of CHC at any time after November 1997 and (iv) are redeemable
(subject to Delaware limitations upon distributions to shareholders) at the
option of the Company in the event of a change of control of CHC. Subject to
certain limitations, the Preferred Stock is convertible into common shares of
CHC at a conversion price equal to the "market price" per share of CHC common
stock, calculated as the per share stated value of $3.95 divided by the average
of the closing price per share of the CHC common stock for each of the 60 days
preceding the conversion. Assuming a market price of $2.25, the Company's
preferred stock if converted would be at 2,333,333 shares, resulting in an
increase in the Company's voting ownership in CHC to 46.8% at December 31, 1995.
For financial statement purposes the Company carries its preferred stock
investment at cost amounting to $5.25 million as of September 30, 1995.
Dividends earned and included in dividend and interest income for the year ended
September 30, 1995 amounted to approximately $140,000.
In November 1994, an action was filed against the Company, CHC and the directors
of CHC in the Delaware Court of Chancery claiming that the individual
defendants, directors of CHC (two of which are also directors of the
Company),breached their duties by causing CHC to issue shares of common and
preferred stock to the Company for purposes of perpetuating the individual
defendants as directors of CHC. On April 12, 1995, the Company entered into a
Settlement Agreement with the plaintiff pursuant to which the Company agreed not
to exercise the conversion feature of its preferred stock prior to February 4,
1996, without the prior approval of CHC shareholders. In consideration of this
agreement by the Company, CHC granted the Company a two year option to purchase
666,000 shares of CHC common stock at $3.00 per share and agreed to reimburse
the Company for its litigation costs, which amounted to approximately $62,000.
At September 30, 1994, the carrying value of CHC common stock, as adjusted for
market declines considered to be other than temporary, amounted to $1,556,000 or
$2.625 per share. After CHC determined to cease its role as a thrift holding
company, the Company increased, as described above, its voting interest in CHC
to 31.6% through the purchase of common stock and convertible preferred stock as
53
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 3 - INVESTMENTS IN AFFILIATES (CONT'D)
- -------------------------------------------
of September 30, 1995. As a result of the increase, the Company's investment in
CHC met the criteria for using the equity method of accounting, which the
Company has adopted in Fiscal 1995. Prior writedowns of the Company's investment
in CHC continued to be reflected as "Loss from writedown of investment in
affiliate. Included in equity earnings from affiliates is the Company's portion
of CHC's operating results, less preferred dividends, amounting to a loss of
$474,000 for the year ended September 30, 1995.
CHC's fiscal year end is December 31. Summarized financial information of CHC
for the three months ended December 31, 1994 and the nine months ended September
30, 1995 follows:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
-------- --------
<S> <C> <C>
Cash and cash equivalents $15,913 $ 4,805
Investment in Fidelity Federal Bank 11 13,405
Rental Properties 21,832 19,858
Other assets 1,965 1,844
Mortgage liabilities 16,204 13,896
Other liabilities 5,913 8,178
Stockholders' equity 17,604 17,838
</TABLE>
Stockholders' equity includes 1,329,114 outstanding shares of 3% Cumulative
Voting Convertible Preferred Stock with a stated value of $5,250,000 issued to
the Company. At September 30, 1995, cumulative dividends not yet declared by the
Board of CHC amounted to $39,375. Pursuant to the terms of a settlement
agreement with a stockholder in April 1995, the stockholder purchased from CHC
1,295,000 shares of Fidelity stock in exchange for which CHC received $2.22
million and 666,000 shares of CHC stock held by the stockholder. CHC reflected
the return of the CHC common stock as treasury stock in the amount of $1.415
million, or $2.125 per share.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, December 31,
1995 1994
----------------- -----------------
<S> <C> <C>
Rental and other income $ 4,357 $ 1,303
Real estate operating expenses (1,922) (899)
Depreciation (343) (162)
Interest expense (889) (365)
General and administrative expenses (1,423) (1,694)
Loss from Fidelity (39) (7,081)
Gain on sale of rental property 1,541 --
-------- --------
Net earnings (loss) $ 1,282 $(8,898)
-------- --------
</TABLE>
54
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 4 - NOTE RECEIVABLE FROM AFFILIATE
- ---------------------------------------
On August 4, 1994, CHC completed a series of transactions which resulted in the
restructuring of Citadel and the recapitalization of Fidelity. In connection
with CHC restructuring, Citadel Realty Inc., a wholly owned subsidiary of
Citadel, purchased four REO properties from Fidelity, at a transfer price of
approximately $19.8 million. The property acquisitions were financed by $13.9
million in mortgage loans and $6.2 million borrowed from the Company. Such funds
were loaned by the Company to Citadel Realty Inc. in August 1994 pursuant to the
terms of a credit agreement between the Company, Citadel Realty Inc., as
borrower, and CHC, as guarantor. In November 1994, the Company acquired, in
satisfaction of $5.25 million of the $6.2 million outstanding indebtedness of
Citadel to the Company, 1,329,114 shares of a newly issued CHC 3% Cumulative
Voting Convertible Preferred Stock. During May 1995, the note was canceled upon
the repayment of the remaining $950,000 outstanding. Included in dividend and
interest income for the year ended September 30, 1995 and 1994 is approximately
$301,000 and $140,000, respectively, earned pursuant to the loan.
NOTE 5 - TAXES ON INCOME
- ------------------------
At September 30, 1995 and 1994, the components of the deferred tax liabilities
and assets are as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
1995 1994
------- -------
<S> <C> <C>
Deferred tax liabilities:
Undistributed earnings from
equity investments $13,742 $12,060
------- -------
Total deferred tax liabilities 13,742 12,060
------- -------
Deferred tax assets:
Unrealized capital loss from
writedown of equity securities (7,680) (7,680)
Federal benefit of state taxes (450) (545)
Other (232) (50)
------- -------
Total deferred tax assets (8,362) (8,275)
------- -------
Net deferred tax liabilities $ 5,380 $ 3,785
------- -------
</TABLE>
55
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 5 - TAXES ON INCOME (CONT'D)
- ---------------------------------
SFAS No. 109 requires that a valuation allowance be recognized if, based on the
weight of information available at the time of preparing financial statements,
it is more likely than not that some portion or all of the deferred asset may
not be realized. As of September 30, 1995 and 1994, the reported deferred tax
assets are expected to be realized as an offset against reversing temporary
differences which create net future tax liabilities.
The provision for income taxes attributable to continuing operations are as
follows:
<TABLE>
<CAPTION>
Year Ended September 30,
1995 1994 1993
-----------------------------
(In thousands)
Liability
Method
-----------------------------------
<S> <C> <C> <C>
Current
Federal $ 85 $ (170) $ --
State (30) 685 --
------ ------ ------
55 515 --
------ ------ ------
Deferred
Federal 1,090 1,185 2,900
State 505 (690) 2,000
------ ------ ------
1,595 495 4,900
------ ------ ------
$1,650 $1,010 $4,900
====== ====== ======
</TABLE>
Prior to 1993, no provision for income taxes was made by the Company on the
undistributed earnings of equity investments (Stater and Reading) because such
earnings were expected to remain invested indefinitely. Pursuant to a series of
agreements entered into in the fourth quarter of 1993 regarding a restructuring
of the Company's investment in Stater, the Company no longer expected to have
such Stater earnings remain invested indefinitely. Accordingly, during the
fourth quarter ended September 30, 1993, the Company recorded a provision for
deferred income taxes on the cumulative undistributed equity earnings
(approximately $30 million) of Stater.
The provision for income taxes is different from amounts computed by applying
the U.S. statutory rate to earnings before taxes and extraordinary item. The
reason for these differences follows:
56
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
<TABLE>
<CAPTION>
Year Ended September 30,
1995 1994 1993
--------------------------------
(In thousands)
Liability Method
--------------------------------
<S> <C> <C> <C>
Expected tax provision (benefit) $ 1,737 $ (695) $ (345)
(Increase) reduction in benefit
resulting from:
Unremitted earnings of equity
investments -- -- 10,133
Previously unrecognized tax
benefits (365) -- (3,035)
Unrealized capital loss
carryforwards -- -- (3,040)
State taxes provided, net of
Federal tax benefit 313 -- 1,298
Excess purchase price of net
assets acquired -- -- --
Dividend exclusion -- -- (43)
Other (35) (315) (68)
------ ------- ------
Actual tax provision $ 1,650 $ 1,010 $4,900
====== ======= ======
</TABLE>
Taxes paid during the years ended September 30, 1995, 1994 and 1993 were
approximately $0, $2,050,000 and $3,000, respectively.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
The Company leases certain office space under a lease agreement expiring in
October 2001. Pursuant to the lease, the Company has the right to terminate the
lease between the February and July 1998 for a cancellation fee of $45,000. The
lease agreements require that the Company pay for its share of building
operating costs and taxes, which together with the base rent is estimated at
$67,000. Rental expense for the years ended September 30, 1995, 1995 and 1993
was $69,000, $100,000 and $153,000, respectively; subrental income was $7,000,
$0 and $120,000, for the same respective years.
Prior to a lease expiration in June 1994, the Company leased office and
warehouse space in New Jersey, which lease included a purchase option of said
property. During 1994, the Company exercised the purchase option and sold the
property to a third party. Included in other income for the year ended September
30, 1994 is a gain of approximately $1,303,000 resulting from such sale.
The Company has a consulting contract with the Chairman of the Board for a term
expiring on September 30, 1997 providing for annual payments of $350,000.
57
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 7 - STOCK OPTIONS
- ----------------------
A stock option plan adopted in 1984, as amended, provided for granting options
to purchase a maximum of 200,000 shares of common stock at exercise prices not
less than the market price at the date of grant. Under terms of the plan which
expired in 1995, options could be granted to officers, directors and other key
employees who own 10% or less of the voting power and value of all classes of
the Company's stock. Options granted under the plan expire, unless extended,
after five years and may be exercisable in installments, generally beginning one
year after the date of grant.
Information regarding this option plan is as follows:
<TABLE>
<CAPTION>
September 30,
1995 1994 1993
-----------------------------------------
<S> <C> <C> <C>
Outstanding, October 1 30,000 30,000 30,000
Granted -- -- --
Exercised -- -- --
-------- -------- --------
Outstanding, September 30 30,000 30,000 30,000
-------- -------- --------
Exercisable, September 30 25,000 25,000 25,000
-------- -------- --------
Exercise price per share $12.75-$13.88 $12.75-$13.88 $12.75-$13.88
</TABLE>
On February 9, 1993, the shareholders approved a proposal to grant the Chairman
of the Board an option to acquire 175,000 shares of the Company's Class A Common
Preference Stock at an exercise price of $10.50 per share, with options on
87,500 shares vesting on September 30, 1993 and on 87,500 shares vesting on
September 30, 1994. In June 1995, in consideration of, among other things, the
Chairman's agreement to cancel his previously vested option rights and to extend
his consulting agreement with the Company for an additional year with no
increase in compensation, the Board canceled the option to purchase the 175,000
shares of Class A Common Preference Stock and approved the grant of an option to
acquire 300,000 shares of the Company's common stock at an exercise price of
$11.75 per share. At September 30, 1995, such 300,000 shares are currently
exercisable. In March 1993, the Board of Directors granted the President of the
Company an option to acquire 17,500 shares of the Company's Class A Common
Preference Stock, subject to a four year vesting schedule (25 percent of such
options vesting at the end of each anniversary of such employment) at an
exercise price of $10.50. At September 30, 1995, 8,750 shares are currently
exercisable.
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 8 - COMMON AND CLASS A COMMON PREFERENCE STOCK
- ---------------------------------------------------
The rights of the holders of Class A common stock and the common stock differ
with respect to dividend, voting and liquidation rights. Holders of Class A
common stock are entitled to receive such dividends as may be declared thereon
exclusively and, in addition, such dividends as may be paid on the common stock
in equal amounts as if a single class of securities; they will be entitled to
one vote per share, while holders of the common stock are entitled to 30 votes
per share; and, in the event of a liquidation, they will be entitled to receive
a liquidation preference of $5.00 per share.
In December 1994, the Board provided authorization to the Company to repurchase
up to $3 million of the Company's currently outstanding Common or Class A Common
preference stock. In connection with such authorization the Company purchased
90,000 shares of the Common stock at a purchase price of approximately $823,000.
Subsequent to September 30, 1995, the Company repurchased an additional 118,100
and 23,000 shares of the Company's Class A Common Stock at a purchase price
amounting to approximately $1,342,000.
NOTE 9 - QUARTERLY OPERATING DATA (UNAUDITED)
- ---------------------------------------------
<TABLE>
<CAPTION>
Income
Before
Extra-
Net ordinary Net Earnings
Revenues Item Earnings Per Share
-------- -------- -------- ---------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
1995
Quarter ended December 31 $ 1,506 $ 421 $ 421 $ 0.07
Quarter ended March 31 1,229 447 447 0.07
Quarter ended June 30 2,144 990 990 0.17
Quarter ended September 30 2,459 1,600 1,600 0.27
------ ------ ------ -----
$ 7,338 $ 3,458 $ 3,458 $ 0.58
====== ====== ====== =====
1994
Quarter ended December 31 $ 1,862 $(3,277) $(3,277) $(0.52)
Quarter ended March 31 9,243 5,473 3,335 0.53
Quarter ended June 30 1,647 (171) (171) (0.03)
Quarter ended September 30 839 (1,265) (1,265) (0.20)
------ ------ ------ -----
$13,591 $(1,030) $(1,378) $(0.22)
====== ====== ====== =====
</TABLE>
During the first, third and fourth quarter of fiscal 1994, the Company provided
a $6,495,000, $889,000 and $1,408,000, respect loss on long-term investments to
reflect a decline in market value, to be other than temporary.
59
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference
to the Company's Proxy Statement to be filed for its 1995 Annual Meeting of
Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to the Company's Proxy Statement to be filed for its 1995 Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to the Company's Proxy Statement to be filed for its 1995 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the Company's Proxy Statement to be filed for its 1995 Annual Meeting of
Stockholders.
60
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements. See Financial Statements and
Supplementary Data Index included in Item 8 of Part II of the
Form 10-K.
(a)(2) Consolidated Financial Statements of Stater Bros. Holdings Inc.
See Exhibit 28.
(a)(3) Exhibits. See Item 14(c) for Index of Exhibits.
(b) Registrant did not file any Reports on Form 8-K with the
Securities and Exchange Commission during the quarter ended
September 30, 1995.
(c) Exhibits (Items denoted by * represent management or compensatory
contract)
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to the Company's Registration
Statement on Form S-1; No. 33-34297, dated May 15, 1990).
3.2 Bylaws of the Company, as amended to date (i)
incorporated by reference to the Company's Registration
Statement on Form S-1; No. 33-34297, dated May 15, 1990;
(2) incorporated by reference to the Company's Form 10-Q
Report for the Quarter ended December 31, 1992; (iii)
amended on November 10, 1994 and incorporated by
reference to the Company's Form 10-K Report for the year
ended September 30, 1994.
10.1 Stock Agreement dated as of May 10, 1989 among Craig
Corporation, Stater Bros. Holdings Inc., La Cadena
Investments and James J. Cotter (incorporated by
reference to the Company's Form 8-K Report, dated May 25,
1989).
10.2 Agreement of Stockholders of Stater Bros. Holdings Inc.
dated May 10, 1989 among Craig Corporation, La Cadena
Investments, Stater Bros. Holdings Inc. and Stater Bros.
Inc. (incorporated by reference to the Company's Form 8-
K Report dated May 25, 1989.
10.4* Amendment to 1984 Stock Option Plan (incorporated by
reference to the Company's Registration Statement on
Form S-1; No. 33-34297, dated May 15, 1990).
10.5 Consulting Agreement between Craig Management, Inc.,
Craig Corporation and Stater Bros. Holdings Inc. dated as
of
61
<PAGE>
February 1, 1992 (incorporated by reference to the
Company's Form 10-K Report for the year ended September
30, 1992).
10.6* Stock Option Agreement dated as of June 8, 1992 between
James J. Cotter and Craig Corporation (incorporated by
reference to the Company's Form 10-K Report for the year
ended September 30, 1992).
10.7* Employment Agreement dated as of October 7, 1991 between
Robin W. Skophammer and Craig Corporation (incorporated
by reference to the Company's Form 10-K Report for the
year ended September 30, 1991).
10.8 Reclassification Agreement dated September 3, 1993
between Stater Bros. Holdings Inc., the Company and La
Cadena Investments (incorporated by reference to the
Company's Form 10-K Report for the year ended September
30, 1993).
10.9 Amendment to Agreement of Stockholders dated September 3,
1993 between Stater Bros. Holdings Inc., the Company and
La Cadena Investments (incorporated by reference to the
Company's Form 10-K Report for the year ended September
30, 1993).
10.10 Option Agreement dated September 3, 1993 between Stater
Bros. Holdings Inc. and the Company (incorporated by
reference to the Company's Form 10-K Report for the year
ended September 30, 1993).
10.11 Consulting Agreement dated September 3, 1993 between
Stater Bros. Holdings Inc. and the Company (incorporated
by reference to the Company's Form 10-K Report for the
year ended September 30, 1993).
10.12 Second Amended and Restated Stock Agreement of
Stockholders dated January 12, 1994 between Stater Bros.
Holdings Inc., the Company, La Cadena Investments and
James J. Cotter (incorporated by reference to the
Company's Form 10-K/A Amendment No. 1 for the year ended
September 30, 1993).
10.13 Amendment to Option Agreement dated January 12, 1994
between Stater Bros Holdings Inc. and the Company
(incorporated by reference to the Company's Form 10-K/A
Amendment No. 1 for the year ended September 30, 1993).
10.14 Credit Agreement among Citadel Realty, Inc. Citadel
Holding Corporation and Craig Corporation (incorporated
by reference to the Company's Form 10-Q Report for the
quarter ended June 30, 1994).
62
<PAGE>
10.15* Consulting Agreement dated as of October 1, 1994 between
James J. Cotter and Craig Corporation (incorporated by
reference to the Company's Form 10-K Report for the year
ended September 30, 1994).
10.16 Stock Purchase Agreement dated as of October 21, 1994
between Citadel Holding Corporation and Craig Corporation
(incorporated by reference to the Company's Form 10-K
Report for the year ended September 30, 1994).
10.17 Preferred Stock Purchase Agreement dated as of November
10, 1994 between Citadel Holding Corporation and Craig
Corporation (incorporated by reference to the Company's
Report on Form 10-K for the year ended September 30,
1994).
10.18 Amendment to Credit Agreement among Citadel Realty, Inc.
Citadel Holding Corporation and Craig Corporation
(incorporated by reference to the Company's Report on
Form 10-K for the year ended September 30, 1994).
10.19 Limited Liability Company Agreement of Reading
International Cinemas LLC.
10.20 Certificate of Formation of Reading International Cinemas
LLC.
10.21* Amendment to Consulting Agreement between James J. Cotter
and Craig Corporation.
10.22* Stock Option Agreement between James J. Cotter and Craig
Corporation.
10.23 Conversion Deferral, Warrant and Reimbursement Agreement
dated April 11, 1995 between Citadel Holding Corporation
and Craig Corporation (incorporated by reference to the
Company's Report on Form 10-Q for the quarter ended March
31, 1995).
10.24 Settlement Agreement dated April 3, 1995 between Craig
Corporation, Dillon Investors L.P., Roderick H. Dillon,
Jr.
22 Subsidiaries of the Registrant.
24 Consent of Ernst & Young.
27 Financial Data Schedule, Article 5.
28 Financial Statements of Unconsolidated Affiliate.
(d) All other schedules are omitted because they are not applicable
or because the required information is shown in the financial
statements or the notes thereto.
63
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CRAIG CORPORATION
-----------------
By: /s/ S. Craig Tompkins By: /s/ Robin W.Skophammer
---------------------------- ------------------------
S. CRAIG TOMPKINS ROBIN W. SKOPHAMMER
President Chief Financial Officer
January 12, 1996 Treasurer & Secretary
January 12, 1996
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 capabilities and on the dates indicated.
By: /s/ James J. Cotter By:
---------------------------- ------------------------
JAMES J. COTTER EDWARD L. KANE
Director Director
January 12, 1996 January 12, 1996
By: /s/ William D. Gould By: /s/ Ralph B. Perry III
---------------------------- -------------------------
WILLIAM D. GOULD RALPH B. PERRY III
Director Director
January 12, 1996 January 12, 1996
By: By: /s/ S. Craig Tompkins
---------------------------- -------------------------
GERARD P. LAHENEY S. CRAIG TOMPKINS
Director Director
January 12, 1996 January 12, 1996
64
<PAGE>
EXHIBIT 10.19
_________________________________________
LIMITED LIABILITY COMPANY AGREEMENT
OF
READING INTERNATIONAL CINEMAS LLC
________________________________________
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I DEFINITIONS; CONSTRUCTION................................... 1
1.1 Definitions................................................. 1
1.2 Directly or Indirectly...................................... 3
1.3 Captions.................................................... 3
1.4 Interpretation.............................................. 3
1.5 References to this Agreement................................ 4
ARTICLE II FORMATION................................................... 4
2.1 Formation................................................... 4
2.2 Name........................................................ 4
2.3 Principal Office; Pennsylvania Office....................... 4
2.4 Agent....................................................... 4
2.5 Business; Purpose; Powers................................... 4
2.6 Term of the Company......................................... 4
ARTICLE III MEMBERS AND MEMBERSHIP INTERESTS............................ 4
3.1 Members..................................................... 4
3.2 Voting Rights; Approval Required............................ 5
3.3 Meetings of Members......................................... 5
3.4 Disposition of Interests.................................... 6
3.5 Right of First Refusal...................................... 6
3.6 Buy-Sell Agreement.......................................... 8
3.7 Amendment of Agreement to Reflect New Members............... 9
3.8 No Resignation or Removal................................... 9
3.9 No Liability to Third Parties............................... 9
3.10 Rights of Assignees......................................... 9
3.11 Rights of Voting Members.................................... 10
ARTICLE IV CAPITAL CONTRIBUTIONS AND CAPITAL ACCOUNTS.................. 10
4.1 Capital Contributions....................................... 10
4.2 No Return of Capital Contribution; No Interest.............. 10
4.3 Capital Accounts............................................ 10
4.4 No Obligation to Restore Deficits........................... 11
4.5 Additional Capital Contributions............................ 11
ARTICLE V ALLOCATIONS AND DISTRIBUTIONS............................... 11
5.1 Allocations of Income and Loss.............................. 11
5.2 Special Allocations......................................... 11
5.3 Allocation of Income and Loss in Respect of a
Transferred Interest........................................ 13
5.4 Distributions............................................... 14
5.5 Form of Distributions....................................... 14
ARTICLE VI MANAGEMENT AND OPERATION.................................... 14
6.1 Management of Company by Members............................ 14
</TABLE>
i.
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE VII TAX MATTERS................................................ 14
7.1 Tax Returns................................................ 14
7.2 Tax Matters Partner........................................ 15
7.3 Tax Elections.............................................. 15
7.4 Withholding................................................ 15
ARTICLE VIII INFORMATION................................................ 16
8.1 Information................................................ 16
ARTICLE IX BOOKS, RECORDS, REPORTS, AND BANK ACCOUNTS................. 16
9.1 Maintenance of Books....................................... 16
9.2 Financial Information...................................... 16
9.3 Bank Accounts.............................................. 16
ARTICLE X DISSOLUTION AND WINDING UP................................. 16
10.1 Conditions of Dissolution.................................. 16
10.2 Liquidation and Termination................................ 17
10.3 Cancellation of Filings.................................... 18
ARTICLE XI INDEMNIFICATION AND INSURANCE.............................. 18
11.1 Indemnification by Company................................. 18
ARTICLE XII GENERAL PROVISIONS......................................... 19
12.1 Notices.................................................... 19
12.2 Entire Agreement; Waivers and Modifications................ 19
12.3 Binding Effect; No Third-Party Beneficiaries............... 20
12.4 Governing Law.............................................. 20
12.5 Further Assurances......................................... 20
12.6 Waiver of Certain Rights................................... 20
12.7 Multiple Counterparts; Facsimile Transmissions............. 20
12.8 Submission to Jurisdiction................................. 21
</TABLE>
ii.
<PAGE>
This Limited Liability Company Agreement of Reading International Cinemas
LLC is made and entered into as of this 9th day of November, 1995 by and between
the Members.
For and in consideration of the mutual covenants, rights, and obligations
set forth herein, the benefits to be derived therefrom, and other good and
valuable consideration, the receipt and sufficiency of which each Member
acknowledges, the Members agree as follows:
ARTICLE I
DEFINITIONS; CONSTRUCTION
1.1 Definitions. When used herein, the following capitalized terms shall
-----------
have the meanings indicated:
"Act" means the Delaware Limited Liability Company Act and any
---
successor statute, as amended from time to time.
"Affiliate" means as to any Person a director of such Person or any
---------
other Person who, directly or indirectly, through one or more
intermediaries, Controls or is Controlled by or under common Control with
that Person.
"Agreement" means this Limited Liability Company Agreement, as
---------
originally executed and as amended from time to time.
"Capital Account" means the capital account established and maintained
---------------
for a Member pursuant to Article IV.
"Capital Contribution" means as to any Member the cumulative sum of
--------------------
money contributed by the Member to the capital of the Company, as provided
in Article IV.
"Certificate" or "Certificate of Formation" means the certificate of
----------- ------------------------
formation of the Company filed on November 7, 1995 in accordance with the
Act and as amended from time to time.
"Code" means the Internal Revenue Code of 1986 and any successor
----
statute, as amended from time to time.
"Company" means Reading International Cinemas LLC, the Delaware
-------
limited liability company.
"Company Minimum Gain" has the meaning ascribed to the term
--------------------
"Partnership Minimum Gain" in Treas. Reg. (S) 1.704-2(d).
"Control," "Controls," or "Controlled" (and derivations thereof) means
------- -------- ----------
as to a corporation the right to exercise, directly or indirectly, more
than 50% of the voting rights in the corporation, and as to any other
Entity the possession,
1.
<PAGE>
directly or indirectly, of the power to direct or cause the direction of
the management or policies of the same.
"Craig" means Craig Corporation, a Delaware corporation.
-----
"Dispose," "Disposing," or "Disposition" means a sale, assignment,
------- --------- -----------
transfer, exchange, mortgage, pledge, grant of a security interest, or
other disposition or encumbrance (including, without limitation, by
operation of law), or the acts thereof.
"Dissolution Event" means a Member's resignation, removal, withdrawal,
-----------------
bankruptcy or dissolution.
"Distributable Cash" means the amount of money on hand of the Company
------------------
and available for distribution to the Members, taking into account all
accrued debts, liabilities, and obligations of the Company and any amounts
necessary or advisable to reserve, designate, or set aside for actual or
anticipated costs, payments, liabilities, obligations, claims with respect
to the Company's business or reinvested in any lawful activity that may be
undertaken by the Company, as determined by a Majority in Interest of the
Members.
"Entity" means any association, corporation, estate, limited
------
liability company, limited partnership, partnership, venture or other
entity.
"Income" means any item of Company economic income not includable in
------
gross income for federal income tax purposes, and Company taxable income
for federal income tax purposes, including Tax Items (items of income,
gain, loss, deduction, or credit of the Company) taken into account
separately by the Members.
"Liquidation Member" means the trustee for the time being of RC Trust.
------------------
"Loss" means (i) any Company deduction specially allocable to a
----
Member, (ii) any Company expenditure that is neither deductible nor
chargeable to capital account under section 705(e)(2)(B) of the Code or
Treasury Regulation section 1.704-1(b)(2)(iv) and (d)(2), and (iii) the
Company's net loss for federal income tax purposes, excluding deductions
described in clause (i) and including Company Tax Items taken into account
separately by the Members.
"Member Nonrecourse Debt" has the meaning ascribed to the term
-----------------------
"Partner Nonrecourse Debt" in Treas. Reg. (S) 1.704-2(b)(4).
2.
<PAGE>
"Member Nonrecourse Deductions" means items of Company loss, deduction
-----------------------------
or Code section 705(a)(2)(B) expenditures which are attributable to Member
Nonrecourse Debt.
"Members" means the persons listed in Section 3.1 of this Agreement
-------
and those persons subsequently admitted as Members pursuant to the terms of
this Agreement, so long as they have not ceased being Members pursuant to
the terms of this Agreement. A reference to a "Member" means any of the
Members, and a reference to a "Majority in Interest" of the Members means a
Member or Members owning a majority of the interest in the Company.
"Membership Interest" means a Member's allocable share of the
-------------------
Company's Income, Loss, and similar items and the Member's rights to
receive distributions from the Company, together with all obligations of
such Member to comply with the provisions of this Agreement.
"Nonrecourse Liability" has the meaning set forth in Treas. Reg. (S)
---------------------
1.752-1(a)(2).
"Person" means any individual or Entity.
------
"RC Trust" means RC Revocable Trust, a trust formed in the State of
--------
California as of November 9, 1995.
"Reading" means Reading Investment Company, Inc., a Delaware
-------
corporation.
"Secretary of State" means the California Secretary of State of the
------------------
State of Delaware.
"Tax Items" has the meaning set forth under the definition of
---------
"Income."
"Voting Members" means all Members of the Company except for the
--------------
Liquidation Member.
1.2 Directly or Indirectly. Any provision of this Agreement which refers
----------------------
to an action which may be taken by any Person, or which a Person is prohibited
from taking, shall include any such action taken directly or indirectly by or on
behalf of such Person, including by or on behalf of any Affiliate or agent of
such Person.
1.3 Captions. All captions in this Agreement are inserted for reference
--------
only and are not to be considered in the construction or interpretation of any
provision hereof.
1.4 Interpretation. In the event any claim is made by any Person relating
--------------
to any conflict, omission or ambiguity in this Agreement, no presumption or
burden of proof or persuasion shall be
3.
<PAGE>
implied by virtue of the fact that this Agreement was prepared by or at the
request of a particular Person or its counsel.
1.5 References to this Agreement. References to numbered or lettered
----------------------------
articles, sections, and subsections refer to articles, sections, and subsections
of this Agreement unless otherwise expressly stated.
ARTICLE II
FORMATION
2.1 Formation. As of the effective date of this Agreement, the Company
---------
has been formed as a Delaware limited liability company under and pursuant to
the Act. The Company has executed and filed the Articles with the Secretary of
State.
2.2 Name. The name of the Company shall be Reading International Cinemas
----
LLC. The business of the Company shall be conducted under that name or any
other name or names selected by the Voting Members.
2.3 Principal Office; Pennsylvania Office. The principal office of the
-------------------------------------
Company shall be Reading, The Graham Building, One Penn Square West, 30 South
15th, Suite 1300, Philadelphia, Pennsylvania 19102, or such other office as the
Voting Members may designate from time to time. The Company also may have such
other offices within the United States as the Voting Members may from time to
time determine.
2.4 Agent. The Company shall at all times maintain a registered agent as
-----
required under the Act who shall be as stated in the Certificate or as otherwise
may be determined from time to time by the Voting Members in the manner provided
by law.
2.5 Business; Purpose; Powers. The business and purpose of the Company is
-------------------------
through one or more other entities to develop, own, hold, lease and operate
motion picture exhibition assets in Australia.
2.6 Term of the Company. The term of the Company shall commence on the
-------------------
date hereof and the Company shall continue in existence until December 31, 2025,
or such earlier time as specified in or pursuant to this Agreement.
ARTICLE III
MEMBERS AND MEMBERSHIP INTERESTS
3.1 Members. Reading and Craig are hereby admitted as Members. Reading
-------
and Craig are admitted as the "Voting Members" and the initial Liquidation
Members, but have directed that their interests as Liquidation Members be
transferred to and held by RC
4.
<PAGE>
Trust as the sole "Liquidation Member." After the date hereof, no Person may be
admitted as an additional Member except with the approval of the Voting Members.
3.2 Voting Rights; Approval Required. Except as otherwise specifically
--------------------------------
provided in this Agreement, the vote, consent, or approval of Voting Members
holding in the aggregate fifty one (51%) percent of the interest in the income
of the Company as determined under Section 5.1 (a "Majority in Interest") shall
be required as to all matters as to which the vote, consent or approval of the
Members is required or permitted under this Agreement. The vote, consent or
approval of the Voting Members, wherever required or permitted hereunder, may be
obtained in any manner permitted hereunder or under the Act.
3.3 Meetings of Members.
-------------------
3.3.1 No annual or regular meetings of the Members shall be
required; if convened, however, meetings of the Members may be held at such
date, time, and place as the Voting Members may fix from time to time.
3.3.2 A meeting of the Members may be called at any time by a
Majority in Interest of the Voting Members for the purpose of addressing any
matter on which the vote, consent or approval of the Voting Members is required
under this Agreement.
3.3.3 Notice of any meeting of the Members shall be sent or
otherwise given to the Members in accordance with this Agreement not less than
ten nor more than 60 days before the date of the meeting. The notice shall
specify the place, date, and hour of the meeting and the general nature of the
business to be transacted. Except as the Voting Members may otherwise agree, no
business other than that described in the notice may be transacted at the
meeting.
3.3.4 Attendance, in person or by proxy, of a Voting Member at a
meeting shall constitute a waiver of notice of that meeting, except when the
Voting Member objects, at the beginning of the meeting, to the transaction of
any business because the meeting is not fully called or convened, and except
that attendance at a meeting is not a waiver of any right to object to the
consideration of matters not included in the notice of the meeting if that
objection is expressly made at the meeting. Neither the business to be
transacted nor the purpose of any meeting of Members need be specified in any
written waiver of notice. The Voting Members may participate in any meeting of
the Members by means of conference telephone or similar means as long as both
Voting Members can hear one another. A Member so participating shall be deemed
to be present in person at the meeting.
3.3.5 Any action that can be taken at a meeting of the Members may
be taken without a meeting if a consent in writing
5.
<PAGE>
setting forth the action so taken is signed and delivered to the Company by a
Majority in Interest of the Voting Members. All such consents shall be
maintained in the books and records of the Company.
3.3.6 Any Voting Member entitled to vote on any matter shall have
the right to do so either in person or by one or more agents authorized by a
written proxy signed by the Voting Member and delivered to the other Voting
Member. The use of proxies in all other respects shall be governed by the
provisions of the Delaware General Corporation Law pertaining to the use of
proxies by corporate stockholders.
3.4 Disposition of Interests.
------------------------
3.4.1 No Member shall Dispose of all or any part of its Membership
Interest without the approval each of the other Voting Members, except as
provided below. Any attempted Disposition of a Membership Interest, or any part
thereof, other than in accordance with either Section 3.4, Section 3.5 or
Section 3.6 shall be, and hereby is declared, null and void ab initio.
3.4.2 If, in connection with a permitted Disposition of a
Membership Interest, a Member purports to grant the Person to which the
Membership Interest is Disposed the right to be admitted as a member of the
Company, such Person shall have the right to be so admitted as a member if (a)
the other Voting Members consent in writing to such admission, and (b) the other
Voting Members receive a document (i) executed by both the Member effecting such
Disposition and the Person to which the Membership Interest is Disposed, (ii)
including the notice and payment address and facsimile number of the Person to
be admitted to the Company as a member and the written acceptance by such Person
of all the terms and provisions of this Agreement and an agreement by such
Person to perform and discharge timely all of the obligations and liabilities in
respect of the Membership Interest being acquired, (iii) setting forth the
respective percentage interests in Company allocations after the Disposition of
the Member effecting the Disposition and the Person to which the Membership
Interest is Disposed, which together shall total the percentage interest in
Company allocations of the Member effecting such Disposition prior thereto, (iv)
containing a representation and warranty by the Member effecting the
Disposition and the Person to which the Membership Interest is Disposed to the
effect that such Disposition was made in accordance with all laws and
regulations, including securities laws, applicable to such Member or Person, as
appropriate, and (v) setting forth the effective date of the Disposition.
3.5 Right of First Refusal.
----------------------
No Voting Member shall directly or indirectly sell, assign, transfer,
or otherwise dispose of (collectively, a "transfer") its Voting Membership
Interest ("VMI"), or any part thereof
6.
<PAGE>
or interest therein, at any time, except (i) once during a trailing 12-month
period and then only (ii) in a sale exclusively for cash or in a transfer
expressly permitted by this subsection; and no Voting Member shall transfer its
VMI in a sale for cash at any time without first giving written notice to the
Company and the other Voting Members of its intention to transfer such VMI. Any
such notice shall specify the identity of the transferee and the amount of the
cash purchase price proposed to be paid for such VMI. This subsection shall not
prohibit, and no such notice shall be required for, a transfer to a corporation
wholly-owned, directly or indirectly, except for director's qualifying shares
and executive stock options (provided that such director's qualifying shares and
shares issuable upon exercise of such stock options do not represent more than
20% of the outstanding share or equity interests of such corporation on a fully-
diluted basis), by one or more Voting Members.
Any transfer of VMI requiring the giving of written notice under this
Section 3.5 shall be subject to a right of first refusal on the part of the
Company exercisable within thirty (30) days of receipt of such written notice
(the "Company Period"). During the Company Period, the Company, subject to any
restrictions imposed by law, shall have the right to elect to purchase all or
any part (subject to the condition set forth below) of the VMI (the "Subject
VMI") proposed to be sold by the Voting Member delivering such notice (the
"Selling Voting Member") for cash equal to the cash purchase price, if any,
proposed to be paid for such VMI. The Company shall exercise its election right
by written notice delivered to the Selling Voting Member and the other Voting
Members within the Company Period. If the Company does not elect to purchase
all of the Subject VMI, then such right of first refusal shall pass to the other
Voting Members as follows.
Upon the expiration of the Company Period, each Voting Member, other
than the Selling Voting Member, shall have fifteen (15) days (the "Member
Period") to elect in writing to purchase all or any part of the Subject VMI not
subject to purchase by the Company. In the event that the other Voting Members
elect to purchase in the aggregate more VMI than the Subject VMI available for
sale, the Subject VMI shall be apportioned among the other Voting Members in
proportion to their respective VMIs. The other Voting Members shall exercise
their election right by written notice delivered to the Selling Voting Member
and the Company within the Member Period. If the Company and the other Voting
Members entitled to this right of first refusal decline to purchase in the
aggregate an amount equal to all of the Subject VMI, the Selling Voting Member
may thereafter transfer all, but not less than all, the Subject VMI in
accordance with the terms set forth in the written notice to the Company and the
other Voting Members.
If the Company elects to purchase all of the Subject VMI it shall tender
payment for such interest at the end of the Company Period to the Selling Voting
Member. If the Company does not elect
7.
<PAGE>
to purchase all of the Subject VMI but the Company and/or the other Voting
Members elect to purchase all of the Subject VMI they shall tender payment for
such interest at the end of the Member Period to the Selling Voting Member.
No transfer of the Subject VMI shall be made after the end of ninety
(90) days after the original notice given to the Company and the Voting Members
under this Section 3.5 or for a price that is lower than the price specified in
the notice referred to in this Section 3.5, unless the VMI are first offered
again to the Company and the other Voting Members in accordance with this
Section 3.5.
3.6 Buy-Sell Agreement.
------------------
In the event that a Voting Member holding at least fifty (50%) percent
of the Voting Membership Interests desires to purchase all of the VMI held by
the other Voting Members, it shall be entitled, at any time, to make an offer in
writing to the other Voting Members to purchase all, but not less than all, of
remaining VMI (the "Initial Offer"). Such written offer shall specify the price
which shall be payable in cash per one (1%) percent of VMI, and all other
relevant information concerning the Initial Offer. The other Voting Members
(the "Offeree Members") shall then have forty-five (45) days from the giving of
the Initial Offer in which to elect, in writing, (i) to accept the Initial
Offer, or (ii) to purchase (the "Purchase Option") in the aggregate the entire
VMI of the Voting Member making the Initial Offer (the "Offering Member") at the
same price per one (1%) percent of VMI and on the terms and conditions of the
Initial Offer, or, if terms and conditions are not amenable to exact
duplication, upon substantially equivalent terms and conditions. If there is
more than one Offeree Member, then each Offeree Member can elect to purchase
all, or any portion, of the Offering Member's VMI. In the event that the
Offeree Members elect to purchase more than the VMI held by the Offering Member,
the Offering Member VMI will be apportioned among the Offeree Members in
proportion to their respective VMIs. All Voting Members agree to be bound by
and to sell their VMI in accordance with this Section 3.6 and specifically waive
any rights to challenge or otherwise contest the sufficiency or adequacy of the
consideration to be paid for VMI pursuant to this Section 3.6. If no election
is so made by the Offeree Member within forty-five (45) day period, the Initial
Offer shall be deemed to have been accepted.
Once the Initial Offer or the Purchase Option has been accepted, the
purchaser(s) shall have one hundred twenty (120) days from delivery of notice of
acceptance or, if the Initial Offer is not expressly accepted, from the last day
of the forty-five (45) day period referenced in this Section 3.6 to consummate
the purchase and pay the seller. Should the purchaser(s) fail to consummate the
purchase and pay for the VMI within the period specified above, time being
expressly of the essence, the
8.
<PAGE>
purchaser(s) shall be liable for all reasonable out-of-pocket costs incurred by
the seller. In addition, the Voting Members acknowledge and agree that in view
of (i) the length of the purchase period and the reliance and change of position
which must necessarily result from the purchaser's election to purchase
hereunder and (ii) the fact that the damages which would result from the
purchaser's failure to consummate the purchase are uncertain in amount and
cannot be determined with certainty, a reasonable estimation of damages is an
amount equal to ten percent (10%) of the offered price, provided that damages
shall not be recoverable in cash but only by way of any adjustment in the
offered price if the option described in the next succeeding sentence is
exercised. Accordingly, the Voting Members agree that in the event of the
purchaser's unexcused failure to consummate the purchase, in addition to the
seller's remedies at law or in equity, and in addition to the seller's right to
collect from the defaulting party out-of-pocket costs and expenses, the selling
Voting Member (the "Option Holder") shall have an option for the six (6) month
period following the expiration of one hundred twenty (120) day closing period
to purchase all, but not less than all, the defaulting purchaser's VMI for the
offered price (again calculated on a per 1% basis), in cash, less ten percent
(10%); the Option Holder may exercise this option by giving notice to the
defaulting purchaser not later than 90 days after the expiration of 120-day
period, and must tender payment in full not later than the end of six-month
option period.
3.7 Amendment of Agreement to Reflect New Members. If a Person is to be
---------------------------------------------
admitted to the Company as a new member, the Person to be admitted as a new
member shall execute appropriate amendments to this Agreement to take into
account the Person's admission as a new member. In the case of any admission
pursuant to Section 3.4.2, amendment shall provide, among things, that the
admission of the new member shall be deemed to occur immediately before any
withdrawal of the transferor Member.
3.8 No Resignation or Removal. Except as otherwise specifically provided
-------------------------
in this Agreement, a Member does not have the right or power to resign or
withdraw from the Company as a Member and shall be entitled to do so only with
the approval of the other Members.
3.9 No Liability to Third Parties. No Member shall have any personal
-----------------------------
obligation for any liabilities of the Company, whether liabilities arise in
contract, tort or otherwise, except to the extent that any liabilities are
expressly assumed in a separate writing by the Member.
3.10 Rights of Assignees. In the event the Company is required to
-------------------
recognize the validity of a Disposition notwithstanding the provisions of this
Article III to the contrary, the assignee of a Membership Interest who has not
been admitted to the Company in accordance with this Article III shall be
entitled only to alloca-
9.
<PAGE>
tions and distributions with respect to Membership Interest as provided in this
Agreement, but shall have no right to any information or accounting of the
affairs of the Company, or to inspect the books or records of the Company, and
shall not have any rights of a Member under the Act or this Agreement.
3.11 Rights of Voting Members. Notwithstanding any other provision of this
------------------------
Agreement, with effect on and from the commencement of the dissolution of the
Company, Voting Members will not have any right to participate in a distribution
of the property of the Company; that right will be possessed only the
Liquidation Member.
ARTICLE IV
CAPITAL CONTRIBUTIONS AND CAPITAL ACCOUNTS
4.1 Capital Contributions. Reading and Craig shall each make an initial
---------------------
Capital Contribution of $5,000,000, on an as needed basis. RC Trust shall not
be required to make any Capital Contributions.
4.2 No Return of Capital Contribution; No Interest. Except as otherwise
----------------------------------------------
specifically provided in this Agreement, a Member shall not be entitled to
demand or receive the return of all or any portion of the Member's Capital
Contribution or to be paid interest in respect of either its Capital Account or
Capital Contribution. Under circumstances permitting or requiring a return of a
Member's Capital Contribution, the Member shall have no right to receive
property other than cash. No Member shall be required to contribute or to lend
any money or property to the Company to enable the Company to return any other
Member's Capital Contribution.
4.3 Capital Accounts. A Capital Account shall be established and
----------------
maintained for each Member. Each Member's Capital Account (a) shall be
increased by (i) the amount of money contributed by or on behalf of that Member
to the Company, (ii) the fair market value of property contributed by or on
behalf of that Member to the Company (net of liabilities secured by contributed
property that the Company is considered to assume or take subject to under
section 752 of the Code), and (iii) allocations to that Member of Company Income
and gain (or items thereof), including income and gain exempt from tax and
income and gain described in Treas. Reg. (S) 1.704-1(b)(2)(iv)(g), but
excluding income and gain described in Treas. Reg. (S) 1.704-1(b)(4)(i), and (b)
shall be decreased by (i) the amount of money distributed to that Member by the
Company, (ii) the fair market value of property distributed to that Member by
the Company (net of liabilities secured by the distributed property that the
Member is considered to assume or take subject to under section 752 of the
Code), (iii) allocations to that Member of expenditures of the Company described
in section 705(a)(2)(B) of the Code, and (iv) allocations of Company loss and
deduction (or items thereof), including loss and deduction described in Treas.
10.
<PAGE>
Reg. (S) 1.704-1(b)(2)(iv)(g), but excluding items described in clause (b)(iii)
of this sentence and loss or deduction described in Treas. Reg. (S) 1.704-
1(b)(4)(i) or 1.704-1(b)(4)(iii). The Capital Accounts shall also be maintained
and adjusted as permitted by the provisions of Treas. Reg. (S) 1.704-
1(b)(2)(iv)(f) and as required by the other provisions of Treas. Reg. (S)(S)
1.704-1(b)(2)(iv) and 1.704-1(b)(4), including adjustments to reflect the
allocations to the Members of depreciation, depletion, amortization, and gain or
loss as computed for book purposes rather than the allocation of the
corresponding items as computed for tax purposes, as required by Treas. Reg. (S)
1.704-1(b)(2)(iv)(g). On the transfer of all or part of a Membership Interest,
the Capital Account of the transferor that is attributable to the transferred
Membership Interest or part thereof shall carry over to the transferee in
accordance with the provisions of Treas. Reg. (S) 1.704-1(b)(2)(iv)(l).
4.4 No Obligation to Restore Deficits. No Member shall have any liability
---------------------------------
or obligation to the Company, the other Members or any creditor of the Company
to restore at any time any deficit balance in Member's Capital Account.
4.5 Additional Capital Contributions. In the event that a Majority in
--------------------------------
Interest of the Voting Members determine that additional capital contributions
are required by the Company, each Voting Member shall be entitled to make
additional capital contributions pro rata in accordance with their interests in
the Company as determined under Section 5.1.
ARTICLE V
ALLOCATIONS AND DISTRIBUTIONS
5.1 Allocations of Income and Loss. Income and Loss for each year shall
------------------------------
be allocated as follows:
5.1.1 After giving effect to the special allocations set forth in
Section 5.2, Income shall be allocated to the Voting Members equally.
5.1.2 After giving effect to the special allocations set forth in
Section 5.2, Loss shall be allocated to the Voting Members equally.
5.2 Special Allocations.
-------------------
5.2.1 Notwithstanding the provisions of Section 5.1, if there is a
net decrease in Company Minimum Gain during any taxable year, each Member shall
be specially allocated items of Company income and gain for year (and, if
necessary, in subsequent years) in an amount equal to the portion of Member's
share of the net decrease in Company Minimum Gain that is allocable to the
disposition of Company property subject to a Nonrecourse Liability,
11.
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which share of net decrease shall be determined in accordance with Treas. Reg.
(S) 1.704-2(g)(2). Allocations pursuant to this Section 5.2.1 shall be made in
proportion to the amounts required to be allocated to each Member under this
Section 5.2.1. The items to be so allocated shall be determined in accordance
with Treas. Reg. (S) 1.704-2(f). This Section 5.2.1 is intended to comply with
the minimum gain chargeback requirement contained in Treas. Reg. (S) 1.704-2(f)
and shall be interpreted consistently therewith.
5.2.2 Notwithstanding the provisions of Section 5.1, if there is a
net decrease in Minimum Gain attributable to a Nonrecourse Liability during any
taxable year, each Member who has a share of Company Minimum Gain attributable
to Nonrecourse Debt (which share shall be determined in accordance with Treas.
Reg. (S) 1.704-2(i)(5)) shall be specially allocated items of Company income and
gain for taxable year (and, if necessary, in subsequent years) in an amount
equal to that portion of Member's share of the net decrease in Company Minimum
Gain attributable to Nonrecourse Liability that is allocable to the disposition
of Company property subject to Nonrecourse Debt (which share of net decrease
shall be determined in accordance with Treas. Reg. (S) 1.704-2(i)(5)).
Allocations pursuant to this Section 5.2.2 shall be made in proportion to the
amounts required to be allocated to each Member under this Section 5.2.2. The
items to be so allocated shall be determined in accordance with Treas. Reg. (S)
1.704-2(i)(4). This Section 5.2.2 is intended to comply with the minimum gain
chargeback requirement contained in Treas. Reg. (S) 1.704-2(i)(4) and shall be
interpreted consistently therewith.
5.2.3 Notwithstanding the provisions of Section 5.1, any
nonrecourse deductions (as defined in Treas. Reg. (S) 1.704-2(b)(1)) for any
taxable year or other period shall be specially allocated to the Voting Members
in accordance with their respective percentage interests in Income and Member
Nonrecourse Deductions shall be allocated to the Member to whom the Member
Nonrecourse Debt is allocated.
5.2.4 Notwithstanding the provisions of Section 5.1, those items
of Company loss, deduction, or expenditures under section 705(a)(2)(B) of the
Code which are attributable to Member Nonrecourse Debt for any taxable year or
other period shall be specially allocated to the Member who bears the economic
risk of loss with respect to the Member Nonrecourse Debt to which items are
attributable in accordance with Treas. Reg. (S) 1.704-2(i).
5.2.5 Notwithstanding the provisions of Section 5.1, if a Member
unexpectedly receives any adjustments, allocations, or distributions described
in Treas. Reg. (S) 1.704-1(b)(2)(ii)(d)(4), (5) or (6), or any other event
creates a deficit balance in Member's Capital Account in excess of Member's
share of Minimum Gain, items of Company income and gain shall be specially
allocated to Member in an amount and manner sufficient to eliminate excess
deficit balance as quickly as possible. Any special allocations of
12.
<PAGE>
items of income and gain pursuant to this Section 5.2.5 shall be taken into
account in computing subsequent allocations of income and gain pursuant to this
Article V so that the net amount of any item so allocated and the income, gain,
and losses allocated to each Member pursuant to this Section 5.2.5 to the extent
possible, shall be equal to the net amount that would have been allocated to
each Member pursuant to the provisions of this Article V if unexpected
adjustments, allocations, or distributions had not occurred.
5.2.6 Notwithstanding any other provision in this Article V, in
accordance with section 704(c) of the Code, income, gain, loss, and deduction
with respect to any property contributed to the capital of the Company shall,
solely for tax purposes, be allocated among the Members so as to take account of
any variation between the adjusted basis of property to the Company for federal
income tax purposes and its fair market value on the date of contribution.
Allocations pursuant to this Section 5.2.5 are solely for purposes of federal,
state, and local taxes; as, they shall not affect or in any way be taken into
account in computing a Member's Capital Account or share of Income, Loss, or
items of distribution pursuant to any provision of this Agreement.
5.2.7 In the event any Member has a deficit Capital Account at the
end of any Company taxable year which is in excess of the sum of (i) the amount,
if any, Member is obligated to restore and (ii) the amount Member is deemed to
be obligated to restore pursuant to the next to the last sentences of Treas.
Reg. (S)(S) 1.704-2(g)(1) and 1.704(2)(i)(5), each Member shall be specially
allocated items of Company income and gain in the amount of excess as quickly
as possible, provided that an allocation pursuant to this Section 5.2.7 shall be
made if and only to the extent that Member would have a deficit Capital Account
in excess of sum after all other allocations provided for in this Article V
have been tentatively made as if this Section 5.2.7 and Section 5.2.5 hereof
were not in this Agreement.
5.3 Allocation of Income and Loss in Respect of a Transferred Interest.
------------------------------------------------------------------
5.3.1 If a Member's Membership Interest is transferred, or is
adjusted by reason of additional Capital Contributions, the admission of a new
Member, or otherwise, during any taxable year, each item of income, gain, loss,
deduction, or credit of the Company for taxable year shall be assigned pro rata
to each day in the particular period of year to which item is attributable
(i.e., the day on or during which it is accrued or otherwise incurred) and the
amount of each item so assigned to any day shall be allocated to the Member
based upon its percentage interest in Company allocations at the close of day.
For the purpose of accounting convenience, except as provided below, the Company
may treat a transfer of, or an adjustment in, a Membership Interest which occurs
at any time during a semi-monthly period
13.
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(commencing with the semi-monthly period including the date hereof) as having
been consummated on the first day of semi-monthly period, regardless of when
during semi-monthly period transfer or adjustment actually occurs.
5.3.2 Notwithstanding any provision to the contrary in this
Agreement, gain or loss of the Company realized in connection with a Disposition
of any of the assets of the Company shall be allocated solely to the Members as
of the date Disposition occurs (or to any particular Member or Members as
required by Code section 704(c), if applicable to Disposition).
5.4 Distributions.
-------------
5.4.1 Subject to any restrictions under applicable law, the
Company shall periodically distribute Distributable Cash to the Voting Members
not less frequently than annually, with the amount and timing of distributions
to be determined by the Voting Members.
5.4.2 Except as otherwise provided in the case of the Company's
liquidation and termination, all distributions of Distributable Cash shall be
made to the Voting Members equally.
5.5 Form of Distributions. A Member has no right to demand or receive any
---------------------
distribution from the Company in any form other than cash. Likewise, except in
connection with the dissolution of the Company as provided herein no Member
shall be compelled to accept from the Company a distribution of any asset in
kind.
ARTICLE VI
MANAGEMENT AND OPERATION
6.1 Management of Company by Members.
--------------------------------
6.1.1 The business, property, and affairs of the Company shall be
managed exclusively by the Voting Members. The full, complete, and exclusive
authority to manage and control the business, affairs, and properties of the
Company in accordance with the terms of this Agreement, to make all decisions
regarding the same, and to perform any and all other acts or activities
consistent therewith which are customary or incidental to the management of the
Company's business is subject to approval of a Majority in Interest of the
Voting Members.
ARTICLE VII
TAX MATTERS
7.1 Tax Returns. The Company shall prepare or cause to be prepared and
-----------
filed all necessary federal, state, and local income tax returns for the
Company. The Company shall furnish to each
14.
<PAGE>
Member copies of all returns that are actually filed and shall keep them
informed of any and all pending or threatened tax proceedings regarding the
Company.
7.2 Tax Matters Partner. Reading shall be the "tax matters partner" of
-------------------
the Company pursuant to section 6231(a)(7) of the Code. Reading shall take
action as may be necessary to cause each other Member to become a "notice
partner" within the meaning of section 6231(a)(8) of the Code, and shall inform
each other Member of all significant matters that may come to its attention in
its capacity as "tax matters partner" and, shall forward to each Member copies
of all significant written communications it may receive in capacity. Reading
shall not take any action contemplated by sections 6222 through 6231 of the Code
without the consent of the Members.
7.3 Tax Elections. The Company shall make the following elections on the
-------------
appropriate tax returns:
7.3.1 to adopt the calendar year as the Company's fiscal year;
7.3.2 to adopt an appropriate method of accounting and to keep the
Company's books and records on that method; and
7.3.3 any other election Reading deems appropriate and in the best
interests of the Company and the Members. It is the intent of the Members that
the Company be treated as a partnership for United States federal income tax
purposes and, to the extent permitted by applicable law, for state and local
franchise and income tax purposes. Neither the Company nor any other Member may
make an election for the Company to be excluded from the application of the
provisions of subchapter K of chapter 1 of subtitle A of the Code or any similar
provisions of applicable state or local law, and no provision of this Agreement
shall be construed to sanction or approve an election.
7.4 Withholding. With respect to any Member who is not a United States
-----------
person within the meaning of the Code, any tax required to be withheld under
section 1446 or other provisions of the Code, or under state law, shall, unless
already reflected by an appropriate charge to that Member's Capital Account, be
charged to that Member's Capital Account as if the amount of tax had been
distributed to Member. The amount so withheld shall be treated as a
distribution of Distributable Cash to Member for all purposes of this
Agreement.
15.
<PAGE>
ARTICLE VIII
INFORMATION
8.1 Information. In addition to the other rights specifically set forth
-----------
in this Agreement, each Member shall have access to all information to which a
Member is entitled to have access pursuant to the Act and other information
regarding the Company, as it may reasonably request from time to time.
ARTICLE IX
BOOKS, RECORDS, REPORTS, AND BANK ACCOUNTS
9.1 Maintenance of Books. The books of account for the Company shall be
--------------------
maintained on an accrual basis in accordance with the terms of this Agreement,
except that Capital Accounts shall be maintained in accordance with Article IV.
The calendar year shall be the accounting year of the Company.
9.2 Financial Information. The Company shall prepare, or shall cause to
---------------------
be prepared, as soon as practicable after the end of each fiscal year of the
Company, and in any event on or before the 90th day thereafter, a balance sheet,
an income statement and a statement of changes in Members' capital in the
Company for, or as of the end of, that year. In addition, the Company shall
deliver to each Member within 90 days after each fiscal year a copy of the
Company's federal income tax return for that year and a Schedule K-1 setting
forth Member's distributions and allocations.
9.3 Bank Accounts. The Company shall establish and maintain one or more
-------------
separate bank and investment accounts for the Company's funds in the Company's
name with financial institutions and firms as the Voting Members may select and
designate signatories thereon. The Company's funds may not be commingled with
other funds of any other Person.
ARTICLE X
DISSOLUTION AND WINDING UP
10.1 Conditions of Dissolution. The Company shall be dissolved, its assets
-------------------------
shall be disposed of, and its affairs wound up on the first to occur of the
following:
(a) the vote, consent or approval of a Majority in Interest of the
Voting Members at any time to dissolve the Company;
(b) the occurrence of a Dissolution Event, unless within 90 days
after the occurrence, the remaining Voting Members (other than the Member as to
which Dissolution Event occurred) consent to continue the Company;
16.
<PAGE>
(c) the Disposition of all of the property and assets of the Company;
(d) the entry of a decree of judicial dissolution under the Act; or
(e) the expiration of the term of existence of the Company.
10.2 Liquidation and Termination.
---------------------------
10.2.1 Upon the dissolution of the Company as provided in Section
10.1, the Company shall continue solely for the purpose of winding up its
affairs in an orderly manner, liquidating its assets, and satisfying the claims
of its creditors. The Voting Members shall act as liquidators or may appoint
one or more other Persons to act as liquidator. The liquidator shall oversee
the winding up and liquidation of the Company, take full account of the
liabilities of the Company and assets, either cause the Company's assets to be
sold as promptly as is consistent with obtaining fair market value therefor (or,
with the consent of the Voting Members, distributed to the Liquidation Member)
and, if sold, shall cause the proceeds therefrom, to the extent sufficient
therefor, to be applied and distributed as provided in paragraphs (c) and (d)
below. Until final distribution, the liquidator shall manage the Company's
business and other property and assets with all of the power and authority of
the Voting Members. The steps to be accomplished by the liquidator are as
follows:
(a) as promptly as possible after dissolution and again after final
liquidation, the liquidator shall cause a proper accounting to be made of the
Company's assets, liabilities, and operations through the last day of the
calendar month in which the dissolution shall occur or the final liquidation
shall be completed, as applicable;
(b) during the period commencing on the first day of dissolution
pursuant to Section 10.1 hereof and ending on the date on which all of the
assets of the Company have been distributed to the Liquidation Member in
accordance with this Section 10.2, the Voting Members shall continue to share
Income, Loss, and other items of Company income, gain, loss or deduction in the
manner provided in Article V, provided that no distributions shall be made
pursuant to Section 5.4;
(c) the liquidator shall pay or discharge from Company funds all of
the debts, liabilities and obligations of the Company (including, without
limitation, but subject to the provisions of applicable law, all expenses
incurred in liquidation) or otherwise make reasonably adequate provision
therefor (including, without limitation, the establishment of a cash escrow fund
for contingent liabilities in amount and for terms as the liquidator may
reasonably determine); and
17.
<PAGE>
(d) all remaining assets of the Company shall be distributed to the
Liquidation Member.
(e) the liquidator may sell any or all Company property, including to
the Voting Members for fair market value.
10.2.2 Any distributions in kind to the Liquidation Member shall be
made subject to the liability of distributee for costs, expenses, and
liabilities theretofore incurred or for which the Company has committed prior to
the date of termination.
10.3 Cancellation of Filings. Upon completion of the distribution of
-----------------------
Company assets as provided herein, the Company is terminated, and the liquidator
shall take actions as may be necessary to terminate the Company.
ARTICLE XI
INDEMNIFICATION AND INSURANCE
11.1 Indemnification by Company.
--------------------------
11.1.1 The Company shall indemnify and defend each Member or
officer or employee of the Company who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding
(a "Proceeding") by reason of the fact that it is or was a Member, manager,
----------
officer, or other agent of the Company or that, being or having been a Member,
manager, officer or agent, it is or was serving at the request of the Company as
a manager, director, officer, employee, or other agent of another Person (all
Persons being referred to hereinafter as an "agent"), to the fullest extent
-----
permitted by applicable law in effect on the date hereof and to such greater
extent as applicable law may hereafter from time to time permit; provided,
however, that no Person shall be entitled to indemnification hereunder for any
act or omission constituting gross negligence, wilful misconduct or material
breach of this Agreement. Furthermore, the Company may, but shall not be
obligated to, indemnify any other Person who was or is a party or is threatened
to be made a party to, or otherwise becomes involved in, a Proceeding by reason
of the fact that person is or was an agent to the same extent as is provided
for in the preceding sentence with respect to a Member or agent.
11.1.2 The indemnification provided by, or granted pursuant to, the
provisions of this Article XI shall not be deemed exclusive of any other rights
to which any Person seeking indemnification may be entitled under any agreement,
vote of Members, or otherwise, both as to action in Person's capacity as an
agent of the Company and as to action in another capacity while serving as an
agent. All rights to indemnification under this Article XI shall be deemed to
be provided by a contract between the Company and each Member and officer who
serves in capacity at any
18.
<PAGE>
time while this Agreement and relevant provisions of the Act and other
applicable law, if any, are in effect. Any repeal or modification hereof or
thereof shall not affect any rights then existing.
ARTICLE XII
GENERAL PROVISIONS
12.1 Notices. All notices and other communications provided for or
-------
permitted to be given under this Agreement shall be in writing and shall be
given by depositing the notice in the United States mail, addressed to the
Person to be notified, postage paid, and registered or certified with return
receipt requested, or by notice being delivered in person or by facsimile
communication to party. Notices given or served pursuant hereto shall be
effective upon receipt by the Person to be notified. All notices to be sent to
a Member shall be sent to or made at, and all payments hereunder shall be made
at, the address given for that Member or other address as that Member may
specify by notice to the Company and the other Members.
12.2 Entire Agreement; Waivers and Modifications.
-------------------------------------------
12.2.1 The Certificate and this Agreement constitute the entire
agreement of the Members and their respective Affiliates relating to the Company
and supersedes any and all prior contracts, understandings, negotiations, and
agreements with respect to the Company and the subject matter hereof, whether
oral or written.
12.2.2 The Certificate and this Agreement may be amended or
modified from time to time only by a written instrument executed by both of the
Voting Members. However, no amendment or modification which has an adverse
affect upon the Liquidation Member may be adopted without the written consent of
the Liquidation Member.
12.2.3 In the event of an inconsistency or conflict between the
provisions of this Agreement and any resolution adopted by the Voting Members,
resolution shall be deemed an amendment to this Agreement and a waiver by the
Voting Members of the inconsistent or conflicting provision of this Agreement.
Any waiver or consent, express, implied or deemed to or of any breach or default
by any Person in the performance by that Person of its obligations with respect
to the Company or any action inconsistent with this Agreement is not a consent
or waiver to or of any other breach or default in the performance by that Person
of the same or any other obligations of that Person with respect to the Company
or any other action. Failure on the part of a Person to complain of any act of
any Person or to declare any Person in default with respect to the Company,
irrespective of how long that failure continues, does not constitute a waiver by
that Person of
19.
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its rights with respect to that default until the applicable statute of
limitations period has run. Except with respect to the matters described in the
first sentence of this Section 12.2.3, all waivers and consents hereunder shall
be in writing and shall be delivered to the Company and the Members in the
manner set forth in Section 12.1. A Member may grant or withhold any waiver or
consent in its absolute sole discretion.
12.3 Binding Effect; No Third-Party Beneficiaries. Subject to the
--------------------------------------------
restrictions on Dispositions set forth herein, this Agreement is binding on and
inures to the benefit of the Members and their respective successors and
assigns. Nothing in this Agreement shall provide any benefit to any third party
or entitle any third party to any claim, cause of action, remedy or right of any
king, it being the intent of the parties that this Agreement shall not be
construed as a third-party beneficiary contract.
12.4 Governing Law. This Agreement is governed by and shall be construed
-------------
in accordance with the law of the State of Delaware, excluding any conflict-of-
laws rule or principle that might refer the governance or construction of this
agreement to the law of another jurisdiction. If any provision of this
Agreement or the application thereof to any Person or circumstance is held
invalid or unenforceable to any extent, the remainder of this Agreement and the
application of that provision to other Persons or circumstances is not affected
thereby, and that provision shall be enforced to the greater extent permitted by
law.
12.5 Further Assurances. In connection with this Agreement and the
------------------
transactions contemplated hereby, each Member shall execute and deliver any
additional documents and instruments and perform any additional acts that may be
necessary or appropriate to effectuate and perform the provisions of this
Agreement and those transactions.
12.6 Waiver of Certain Rights. Each Member irrevocably waives any right it
------------------------
might have to maintain any action for partition of the property of the Company.
12.7 Multiple Counterparts; Facsimile Transmissions. This Agreement may be
----------------------------------------------
executed in multiple counterparts with the same effect as if the signing parties
had signed the same document. All counterparts shall be construed together and
constitute the same instrument. Delivery of an executed counterpart of this
Agreement by facsimile shall be equally as effective as delivery of a manually
executed counterpart of this Agreement. Upon the request of any party, any
party who shall have delivered an executed counterpart of this Agreement by
facsimile shall deliver a manually executed counterpart as well, but the failure
to so deliver a manually executed counterpart shall not affect the validity,
enforceability and binding effect of this Agreement.
20.
<PAGE>
12.8 Submission to Jurisdiction. Each of the Members hereby consents to
--------------------------
the jurisdiction of any state or federal court located within the State of
Delaware, and, subject to the provisions of Section 12.8, irrevocably agrees
that all actions or proceedings relating to this Agreement shall be instituted
and heard by the courts of jurisdiction. Each Member hereby waives any
objection that it may have based on improper venue or forum non conveniens to
the conduct of any proceeding in any court and personal service of any and all
process upon it, and consents to any service of process made in the manner
provided herein for the giving of notices under this Agreement.
IN WITNESS WHEREOF, the parties hereto executed this Agreement effective as
of the date first above written.
MEMBERS:
-------
CRAIG CORPORATION
By__________________________________
READING INVESTMENT COMPANY, INC.
By__________________________________
TRUSTEE OF RC REVOCABLE TRUST
CRAIG MANAGEMENT, INC.
By__________________________________
21.
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EXHIBIT 10.20
CERTIFICATE OF FORMATION
OF
READING INTERNATIONAL CINEMAS LLC
This Certificate of Formation of Reading International Cinemas LLC is being
duly executed and filed by James C. Lockwood, as an authorized person, to form a
limited liability company under the Delaware Limited Liability Company Act.
1. The name of the limited liability company is Reading International Cinemas
LLC.
2. The address of its registered office in the State of Delaware is 103
Springer Building, 3411 Silverside Road, Wilmington, New Castle County,
Delaware 19810. The name of its registered agent at such address is
Organization Services, Inc.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Formation this 7th day of November 1995.
---
/s/ James C. Lockwood
-------------------------------
James C. Lockwood
<PAGE>
EXHIBIT 10.21
AMENDMENT NO. 1
TO
JAMES J. COTTER CONSULTING AGREEMENT
This Amendment No. 1 to the James J. Cotter Consulting Agreement entered
into as of October 1, 1994 (the "Consulting Agreement") by and between Craig
Corporation, a Delaware corporation (the "Company") and James J. Cotter ("Mr.
Cotter"), is made and entered into effective June 12, 1995.
R E C I T A L S
---------------
A. Mr. Cotter and the Company entered into the Consulting Agreement as
of October 1, 1994.
B. Mr. Cotter and the Company desire to extend by one year the term of
the Consulting Agreement through September 30, 1997 in consideration for the
cancellation of Mr. Cotter's option to purchase 175,000 shares of the Company's
Class A Common Preference Stock (the "Class A Option") granted pursuant to a
certain stock option agreement, dated June 8, 1992, and the granting of an
option to Mr. Cotter to purchase 300,000 shares of the common stock (the "Common
Stock") of the Company, exercisable from time to time subject to the provisions
of a certain stock option agreement to be effective June 12, 1995 (the "Stock
Option Agreement").
1
<PAGE>
C. This Amendment was approved by the Board of Directors of the Company
at a special telephonic meeting held on June 12, 1995.
NOW, THEREFORE, in consideration of the mutual promises and covenants made
herein and the mutual benefits to be derived herefrom, the parties hereto agree
as follows:
A G R E E M E N T
-----------------
1. Term. Section 1(a) of the Consulting Agreement is hereby amended to
----
extend the term of the Consulting Agreement through September 30, 1997.
2. Cancellation of Previous Stock Option Agreement. Mr. Cotter hereby
-----------------------------------------------
agrees that effective as of the date of this Amendment, the option agreement
dated June 8, 1992 is terminated and he has no further rights or benefits
thereunder.
3. Effect of Amendment. Except as specifically amended herein, the
-------------------
Consulting Agreement shall remain in full force and effect subject to all of the
terms and conditions set forth therein.
2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 to the
Consulting Agreement as of June 12, 1995.
CRAIG CORPORATION
By: /s/ Craig Tompkins
--------------------
S. Craig Tompkins
President
/s/ James J. Cotter
-----------------------
James J. Cotter
3
<PAGE>
EXHIBIT 10.22
CRAIG CORPORATION
STOCK OPTION AGREEMENT
THIS AGREEMENT is made and entered into as of this 12th day of June, 1995,
by and between CRAIG CORPORATION, a Delaware corporation (the "Company"), and
JAMES J. COTTER ("Mr. Cotter").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Mr. Cotter is entering into Amendment No. 1 to a Consulting
Agreement with the Company originally dated as of October 1, 1994, which
Amendment is being entered into in part in consideration of the granting of the
option described herein; and
WHEREAS, as additional consideration for the granting of the option
described herein, which is vested subject to divestiture, Mr. Cotter is
cancelling his existing fully vested option to purchase 175,000 shares of the
Company's Class A Common Preference Stock at $10.50 per share.
NOW, THEREFORE, in consideration of the mutual promises and covenants made
herein and the mutual benefits to be derived herefrom and from the Consulting
Agreement, the parties hereto agree as follows:
1. Grant of Option. The Company grants to Mr. Cotter the right and
---------------
option to purchase, on the terms and conditions hereinafter set forth, all or
any part of an aggregate of 300,000 shares (the "Shares") of the common stock
(the "Common Stock") of the Company at the price of $11.75 per Share (the
"Option"), exercisable from time to time subject to the provisions of this
Agreement prior to the close of business on June 11, 2005 (the "Expiration
Date"). The Option granted hereby is intended to be a nonqualified stock
option.
2. Exercisability of Option. Except as otherwise provided in this
------------------------
Agreement, and subject to the provisions of Section 5 below, this Option shall
be fully vested upon the date hereof and may be exercised from time to time as
to all or any portion of the Shares.
3. Method of Exercise of Option and Payment of Purchase Price. This
----------------------------------------------------------
Option shall be exercisable by the delivery to the Secretary of the Company of a
written notice stating the number of shares to be purchased pursuant to the
Option and accompanied by payment of the purchase price in full (i) in cash, or
(ii) by check made payable to the order of the Company. In addition, Mr. Cotter
shall furnish any written statements required pursuant to Section 11 below.
Fractional Share interests shall be cashed out at that price equal to the fair
market value of a single share multiplied by the fraction
1.
<PAGE>
representing the fractional Share which, but for this sentence, would otherwise
have been issuable.
4. Continuance of Consulting Agreement. Nothing contained in this
-----------------------------------
Agreement shall confer upon Mr. Cotter any right with respect to the
continuation of his status as a consultant by the Company or interfere in any
way with the rights of the Company under the Consulting Agreement, as amended.
5. Termination of the Consulting Agreement. In the event that the
---------------------------------------
Consulting Agreement, as amended, is terminated for any reason other than (a)
the death of Mr. Cotter, (b) in the case of termination by Mr. Cotter, for any
reason other than Company Breach as defined in Section 1(c) of the Consulting
Agreement, as amended, or (c) in the case of termination by the Company, for any
reason other than cause, as defined therein (the foregoing hereinafter
collectively referred to as a "Termination"), on or before September 30, 1996,
the Option shall lose its vested status as to 125,000 of the Shares subject
thereto, and the Option shall be reduced to an option to purchase 175,000 shares
of Common Stock, and the Option as to the 175,000 Shares may still be exercised
in whole or in part on any one or more occasions on or prior to the Expiration
Date. In the event that a Termination occurs after September 30, 1996 and
before October 1, 1997, the Option shall lose its vested status as to 62,500 of
the Shares subject thereto, and the Option shall be reduced to an option to
purchase 237,500 shares of Common Stock, and the Option as to the 237,500 Shares
may still be exercised in whole or in part on any one or more occasions on or
prior to the Expiration Date.
6. Company Repurchase Option. If Mr. Cotter exercises the Option in
-------------------------
whole or in part prior to October 1, 1997, and there is a Termination prior to
October 1, 1977, the Company shall have an option (the "Repurchase Option"),
exercisable within thirty (30) days of the Termination, to repurchase at the
exercise price, plus simple interest at the rate of eight (8%) percent per
annum, any Shares purchased by Mr. Cotter which would have otherwise been
subject to divestiture under Section 5 hereof if such Option had not been
exercised.
Notwithstanding any other provision of this Stock Option Agreement, Mr.
Cotter shall not transfer, other than to a Permitted Transferee (as defined in
Section 7 hereof), any Shares subject to the Repurchase Option described in this
Section 6, and all such Shares shall bear a legend in substantially the
following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE (1) ARE SUBJECT TO A CERTAIN
STOCK OPTION AGREEMENT, DATED JUNE 12, 1995, BY AND BETWEEN CRAIG
CORPORATION AND JAMES J. COTTER, (2) ARE SUBJECT TO A REPURCHASE OPTION
HELD BY CRAIG CORPORATION, AS SET FORTH IN SECTION 6 OF SAID
2.
<PAGE>
STOCK OPTION AGREEMENT, AND (3) MAY NOT BE TRANSFERRED OTHERWISE THAN IN
ACCORDANCE WITH THE PROVISIONS OF SAID STOCK OPTION AGREEMENT.
7. Non-Assignability of Option. During Mr. Cotter's lifetime, the Option
---------------------------
and any other rights hereunder may be exercised only by Mr. Cotter or by a
Permitted Transferee. The term "Permitted Transferee" shall mean any trust for
the benefit of Mr. Cotter and/or any one or more of his children or other heirs
and/or any foundation, trust or not-for-profit corporation established by Mr.
Cotter for charitable purposes. In the event of the death of Mr. Cotter, the
Option in addition may be exercised in whole or in part by the person or persons
(including individuals and trusts, corporations, partnerships and other
entities) to whom Mr. Cotter's rights under this Option shall pass by will or by
the applicable laws of descent at any time on or prior to the Expiration Date.
The Option and such rights shall not be offered, sold, transferred, assigned,
pledged, hypothecated or otherwise disposed of in any way (whether by operation
of law or otherwise) except by will or the laws of descent and distribution or
to a Permitted Transferee, and shall not be subject to execution, attachment or
similar process. In the event of the death of Mr. Cotter or a Permitted
Transfer, each recipient of all or any portion of this Option, and/or each
Permitted Transferee, will have and succeed to the rights and obligations of Mr.
Cotter under the Option (provided that no such person will have any obligation
to perform under the Consulting Agreement). No sale, transfer, assignment,
pledge, hypothecation or other disposition of all or any portion of the Option
by Mr. Cotter to a Permitted Transferee or by a Permitted Transferee to another
Permitted Transferee shall be effective unless and until the Company shall have
received an agreement in writing executed by the Permitted Transferee agreeing
to be bound by all the terms and conditions of this Agreement, including,
without limitation, Section 5 above.
8. Adjustment and Other Rights. If the outstanding shares of Common
---------------------------
Stock are increased, decreased or changed into, or exchanged for, a different
number or kind of shares or securities of the Company through reorganization,
merger, combination, recapitalization, re-classification, stock/split, reverse
stock split, stock dividend, stock consolidation or otherwise, or a dividend or
other distribution is made with respect to the Common Stock either in Common
Stock or Class A Common Preference Stock or any other security of which the
Company or any affiliate of the Company is the issuer, or otherwise, an
appropriate and proportionate adjustment shall be made in the unexercised
portion of the Option or portions thereof so that Mr. Cotter shall be entitled
to receive the number and kind of securities which he would have owned or would
have been entitled to receive immediately after the happening of any of the
events described above, had the Option been exercised immediately prior to the
happening of such event or any record date with respect thereto. Any such
3.
<PAGE>
adjustment, however, shall be made without change in the total price applicable
to the unexercised portion of the Option, but with a corresponding adjustment in
the price for each share.
In the event of an extraordinary dividend of cash or other property (other
than securities), the Board of Directors will consider the extent to which it
would be equitable under the circumstances to reduce the option exercise price
to reflect the extraordinary nature of such dividend. If the Board determines
that such an adjustment would be equitable under the circumstances, an
appropriate reduction in the exercise price will be made, the amount of such
adjustment to be in the discretion of the Board.
If the Company proposes to dissolve, or to liquidate or proposes in one or
more transactions to combine, merge or consolidate with or into any other
corporation, or to sell, all or substantially all of its assets whether for
cash, securities, notes or any other property or consideration, the Option shall
be adjusted effective as of the Closing of such transaction so as to apply to
the cash, securities, notes or other property or consideration to which a holder
of the number of shares of Common Stock subject to the unexercised portion of
the Option would have been entitled by reason of such transaction. In the event
the consideration to be received by holders of Common Stock in any such
transaction is other than exclusively cash and/or publicly traded common stock
listed on the New York Stock Exchange, the American Stock Exchange or the
NASDAQ-NMS and having voting rights no less than those granted to any other
class or series of the voting securities of such surviving corporation, and in
the further event that, upon consummation, the holders of Common Stock hold a
minority of the outstanding voting equity of the surviving entity, then the
Option will be deemed fully vested, and not subject to the divestiture or
repurchase provisions of Section 5 above, and may be exercised at the option of
Mr. Cotter without the payment of any exercise price, by the netting of the
exercise price against the cash, securities, notes or other property or
consideration to be received in connection with or as a result of such
transaction.
The Company and Mr. Cotter will meet and confer in good faith to determine
any appropriate adjustments which may be required in order to carry out the
intent of the immediately preceding paragraphs; provided, however, that if the
parties are unable to agree as to such adjustments within a period of five (5)
days or such longer period as they may mutually agree, the matter shall be
resolved by binding arbitration conducted in Los Angeles, California under the
rules of the American Arbitration Association (the "AAA"). The arbitrators will
be chosen from one or more panels proposed by the AAA as follows: the Company
and Mr. Cotter will each select one arbitrator and those two arbitrators will
then select a third arbitrator from the panel. The parties shall use their good
faith efforts to resolve such arbitration within a period of
4.
<PAGE>
forty-five (45) days following selection of the arbitration panel. All costs of
arbitration will be paid for by the Company, unless the arbitration panel
determines that the last adjustment proposed by the Company was the correct
adjustment, in which case the cost of arbitration will be borne by Mr. Cotter.
Until such determination is made, all such costs will be advanced by the
Company. The determination of the arbitrators will be final and non-
appealable, but may be enforced in any court of competent jurisdiction. If the
arbitration results in a delay in the receipt by Mr. Cotter of any cash,
securities, notes, property or other consideration due to exercise of all or any
portion of this Option prior to the completion of such arbitration, the
arbitrator will also award to Mr. Cotter, in the event he is the prevailing
party, such amount in cash as will fairly compensate Mr. Cotter for such delay.
9. Limitation of Mr. Cotter's Rights. In no event shall Mr. Cotter have
---------------------------------
any of the rights or privileges of a shareholder of the Company in respect of
any Shares issuable upon exercise of this Option unless and until such Option
shall have been exercised by Mr. Cotter.
10. Effect of Agreement. This Agreement shall be assumed by, binding upon
-------------------
and inure to the benefit of any successor corporation to the Company.
11. Representations of Mr. Cotter. Mr. Cotter represents, agrees and
-----------------------------
certificates that:
a. If Mr. Cotter exercises the Option in whole or in part at a time
when there is not in effect under the Securities Act of 1933, as amended (the
"Act"), a registration statement relating to the Shares issuable upon exercise
hereof and available for delivery to him a prospectus meeting the requirements
of Section 10(a)(3) of the Act, Mr. Cotter will acquire the Shares issuable upon
such exercise for the purposes of investment and not with a view to their resale
or distribution and, upon each exercise of this Option, Mr. Cotter will furnish
to the Company a written statement to such effect, reasonably satisfactory in
form and substance to the Company and its counsel;
b. If and when Mr. Cotter proposes to offer to sell Shares which are
issued to Mr. Cotter upon exercise of this Option at a time when there is not in
effect under the Act a registration statement relating to the resale of such
Shares and available for delivery a prospectus meeting the requirements of
Section 10(a)(3) of the Act, Mr. Cotter will notify the Company prior to any
such offering or sale and will not offer or sell such Shares without first
delivering to the Company an opinion of counsel reasonably acceptable to the
Company to the effect that such offering and sale should not constitute a
violation of such laws for which the Company would be liable; and
5.
<PAGE>
c. No Shares may be acquired hereunder pursuant to exercise of the
Option granted hereby unless and until any then applicable requirements of the
Securities and Exchange Commission, the California Department of Corporations,
other regulatory agencies, including any other state securities law
commissioners, having jurisdiction over the Company or such issuance, and any
exchanges upon which Common Stock of the Company may be listed shall have been
fully satisfied. The Company undertakes, at its own cost, to promptly satisfy
all such then applicable requirements and to promptly reimburse Mr. Cotter for
any costs which he may incur (including, without limitation, reasonable
attorneys fees and expenses) in satisfying all such then applicable
requirements.
Mr. Cotter understands that the certificate or certificates representing
any Shares acquired upon the exercise, in whole or in part, of the Option may
bear a legend referring to the foregoing matters and any limitations under the
Act and state securities laws with respect to the transfer of such Shares, and
the Company may impose stop transfer instructions to implement such limitations,
if applicable.
12. Notices. Any notice to be given under the terms of this Agreement
-------
shall be in writing and addressed to the Secretary of the Company at its
principal office and to Mr. Cotter at the address given beneath Mr. Cotter's
signature hereto, or at such other address as either party or any Permitted
Transferee, if any, may hereinafter designate in writing to the other.
13. Laws Applicable to Construction. The interpretation, performance and
-------------------------------
enforcement of this Agreement and all rights and obligations of the parties
hereunder shall be governed by the laws of the State of California.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on
its behalf by a duly authorized officer and Mr. Cotter has hereunto set his
hand.
CRAIG CORPORATION
By: /s/ Craig Tompkins
----------------------------
S. Craig Tompkins, President
/s/ James J. Cotter
___________________________________
JAMES J. COTTER
116 N. Robertson Blvd.
Los Angeles, California 90048
6.
<PAGE>
EXHIBIT 10.24
SETTLEMENT AGREEMENT
This Settlement Agreement (this "Agreement") is made and entered into
on April 3, 1995 by and among Craig Corporation, a Delaware corporation
("Craig"), and Dillon Investors, L.P., a Delaware partnership ("Dillon LP"),
Roderick H. Dillon, Jr., an individual ("Dillon"), Roderick H. Dillon, Jr.
Foundation, an Ohio trust ("Dillon Trust"), and Roderick H. Dillon, Jr.-IRA
("Dillon IRA"; and collectively with Dillon LP, Dillon Trust, and Dillon, the
"Dillon Parties").
R E C I T A L S
- - - - - - - -
1. Craig and Dillon LP are parties to a lawsuit filed by Dillon LP in
the Court of Chancery of the State of Delaware in and for New Castle County
(C.A. No. 13867) (the "Delaware Action").
2. The Dillon Parties are parties to a lawsuit filed by Citadel
Holding Corporation, a Delaware corporation ("Citadel"), in the United States
District Court, Central District of California (Case No. CV-94-7735 R) (the
"Federal Action," and collectively with the Delaware Action, the "Actions").
3. Craig and the Dillon Parties desire to avoid the cost, expense and
risk associated with further litigation with respect to the Actions.
NOW, THEREFORE, in consideration of the foregoing and the provisions
set forth below, the parties hereto agree as follows:
ARTICLE ONE
SETTLEMENT OF THE ACTIONS
1.1 In consideration of all the promises, conditions, and covenants
set forth herein and subject to the provisions of this Agreement, and except for
the obligations of the Dillon Parties hereunder, effective as of and conditioned
upon consummation of the Closing (as defined below), Craig hereby forever
releases, acquits, and discharges the Dillon Parties, Bradley C. Shoup
("Shoup"), Timothy M. Kelley ("Kelley"), Ralph V. Whitworth ("Whitworth") and
Jordan M. Spiegel ("Spiegel"), and all of their past and present predecessors,
successors, assigns, directors, employees, partners, agents, attorneys,
affiliates, and parent and subsidiary corporations and partnerships (Shoup,
Kelley, Whitworth, Spiegel, the Dillon Parties and such other persons are
collectively referred to herein as the "Dillon Releasees"), of and from any and
all manner of actions, causes of action, rights in law or in equity, suits,
debts, liens, judgments, indebtedness, contracts, agreements, promises,
liabilities, claims, cross-claims, demands, damages, losses, accounts,
reckonings, obligations, interest, costs, or expenses, of any type, kind, or
nature whatsoever, known or unknown, fixed or contingent, liquidated or
unliquidated, claimed or unclaimed, whether based in contract, tort, or other
legal, statutory, or equitable theory of recovery, each as though fully set
forth at length herein, that Craig has or at anytime has had against the Dillon
Releasees, or any of them, by reason of any matter, cause, act, omission, or
thing whatsoever from the beginning of time through the Closing Date (as defined
below), arising out of or in connection with (i) all claims asserted or that
could have been asserted in, or arising out of the facts asserted or that could
have been asserted in, the Actions, (ii) the initiation, prosecution and defense
of the Actions, (iii) all claims asserted, that could have been asserted, or
that relate in any way to, the securities of Citadel, including, without
limitation, claims under the Securities
<PAGE>
Exchange Act of 1934, as amended, and the rules and regulations thereunder
(collectively, the "Exchange Act Laws"), and (iv) all claims asserted or that
could have been asserted with respect to, or that relate in any way to, the
purchase or ownership of the securities of Citadel by the Dillon Parties.
1.2 In consideration of all the promises, conditions, and covenants
set forth herein and subject to the provisions of this Agreement, and except for
the obligations of Craig hereunder, effective as of and conditioned upon
consummation of the Closing, the Dillon Parties hereby forever release, acquit,
and discharge Craig and all of its past and present predecessors, successors,
assigns, directors, employees, partners, agents, attorneys, affiliates, and
parent and subsidiary corporations and partnerships (Craig and such other
persons are collectively referred to herein as the "Craig Releasees"), of and
from any and all manner of actions, causes of action, rights in law or in
equity, suits, debts, liens, judgments, indebtedness, contracts, agreements,
promises, liabilities, claims, cross-claims, demands, damages, losses, accounts,
reckonings, obligations, interest, costs, or expenses, of any type, kind, or
nature whatsoever, known or unknown, fixed or contingent, liquidated or
unliquidated, claimed or unclaimed, whether based in contract, tort, or other
legal, statutory, or equitable theory of recovery, each as though fully set
forth at length herein, that the Dillon Parties, or any of them, have or at
anytime have had against the Craig Releasees, or any of them, by reason of any
matter, cause, act, omission, or thing whatsoever from the beginning of time
through the Closing Date, arising out of or in connection with (i) all claims
asserted or that could have been asserted in, or arising out of the facts
asserted or that could have been asserted in, the Actions, (ii) the initiation,
prosecution and defense of the Actions, (iii) all claims asserted, that could
have been asserted, or that relate in any way to, the securities of Citadel,
including, without limitation, claims under the Exchange Act Laws, and (iv) all
claims asserted or that could have been asserted with respect to, or that relate
in any way to, the purchase or ownership of the securities of Citadel by Craig.
1.3 As used herein, the terms "Closing" and "Closing Date" shall mean
the Closing and Closing Date, respectively, contemplated by the Stock Exchange
and Settlement Agreement of even date herewith among Citadel and the Dillon
Parties.
1.4 It is understood and agreed that the parties hereto, and each of
them, hereby expressly waive all rights under Section 1542 of the Civil Code of
California, and any law or principle of similar effect of any state or territory
of the United States. Said section reads as follows:
"SECTION 1542. A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH
THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED
HIS SETTLEMENT WITH THE DEBTOR."
The advice of legal counsel has been obtained by each of the parties
hereto prior to signing this Agreement.
1.5 The parties hereto agree that they shall forthwith cause their
respective Delaware trial counsel to apply to the Court of Chancery to vacate
the trial date for the Delaware Action, currently set for April 18-21, 1995.
The parties further agree that, upon approval of the Court of Chancery to vacate
the trial date, all discovery and pretrial proceedings in the Delaware Action
will be stayed for a period of 30 days from the date hereof. Upon the
expiration of such 30 days, in the absence of either the Closing or an agreement
of the parties hereto to a further stay of proceedings, the parties shall
forthwith
2
<PAGE>
cause their respective counsel jointly to confer, to the extent necessary, with
the Court of Chancery to establish a schedule for completion of discovery and
other pretrial proceedings and the fixing of a new trial date at the earliest
time consistent with the discovery requirements and the Court's calendar.
1.6 Craig and the Dillon Parties hereby authorize and direct their
respective attorneys to execute and file on the Closing Date stipulations for
dismissal with prejudice of the Delaware Action, and such actions at such time
shall be a term of this Agreement.
1.7 This Agreement constitutes the compromise, settlement and release
of disputed claims, denials and defenses made or that could have been made by
Craig or the Dillon Parties, or any of them, and is being entered into solely
for the purpose of avoiding the burdens, inconveniences and expenses of further
litigation and disputes between the parties with respect to the Actions.
Therefore, this Agreement is not to be, and shall never be construed or deemed
to be, an admission or concession by Craig or the Dillon Parties, or any of
them, of liability or culpability, or lack thereof, at any time for any purpose
concerning the Actions hereby compromised, settled and released. Further,
nothing contained herein or in any form of communication between Craig and the
Dillon Parties, their respective attorneys and representatives, or any of them,
pertaining to the consummation of this Agreement or the compromise, settlement
and releases reflected herein shall be construed or deemed to be an admission or
concession of liability or culpability, or lack thereof, by Craig or the Dillon
Parties, or any of them, concerning such matters.
ARTICLE TWO
AGREEMENT NOT TO ELECT TO CONVERT
CITADEL HOLDING CORPORATION PREFERRED STOCK
2.1 As further consideration of all the promises, conditions, and
covenants set forth herein and subject to the provisions of this Agreement,
Craig hereby covenants that, prior to February 4, 1996, Craig will not, absent
the approval of a majority of the outstanding shares of common stock of Citadel,
exercise its right to tender any share or shares of the 3% Cumulative Voting
Convertible Preferred Stock (the "Preferred Stock") of Citadel, for conversion
into common stock of Citadel pursuant to Section 7 of the Certificate of
Designation of the Preferred Stock. Craig further agrees to obtain from any
transferee of any shares of Preferred Stock an undertaking to the same effect as
this and the preceding sentence. Effective as of the Effective Date (as defined
below), Craig will enter into an agreement with Citadel to the effect of this
Section 2.1.
ARTICLE THREE
REPRESENTATIONS AND WARRANTIES
3.1 Mutual Representations and Warranties. Each party hereby
-------------------------------------
represents and warrants to the others as follows:
(a) Each party that is a corporation is a corporation duly
incorporated, validly existing and in good standing under the laws of its state
of incorporation and is duly qualified and authorized to do business in the
State of California. Each party that is a partnership is a partnership duly
formed, validly existing and in good standing as a partnership under the laws of
its state of organization. Each party that is a trust is a trust duly created,
and validly existing as a trust under the laws of the state under which it was
created.
3
<PAGE>
(b) It has full power and authority to enter into this Agreement and
to consummate the transactions contemplated hereby. This Agreement is its or
his (as applicable) valid and binding agreement, enforceable against it or him
in accordance with its terms (as to Craig, its representation in this sentence
is limited solely to Section 1.5 until the Effective Date, at which time this
representation shall apply to the entire Agreement).
(c) Neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate, result in a
breach of any of the terms or provisions of, constitute a default (or any event
that, with the giving of notice or the passage of time or both would constitute
a default) under, accelerate any obligations under, or conflict with, (i) its
charter or bylaws (or other organizational documents), if applicable, or any
agreement, indenture or other instrument to which it is party or by which it or
its properties are bound, (ii) any judgment, decree, order or award of any
court, governmental body or arbitrator to which it is subject, or (iii) any law,
rule or regulation applicable to it.
(d) It or he (as applicable) has carefully read the entirety of this
Agreement, knows and understands the contents hereof, and enters into this
Agreement in good faith, freely and voluntarily without undue influence,
coercion, fraud or duress.
(e) It or he (as applicable) has not sold, assigned, pledged,
hypothecated or otherwise transferred any of its or his interests in the
Actions, or either of the Actions, or any claim released hereby, to any other
person or entity.
3.2 Bring-Down and Survival of Representations and Warranties. All
---------------------------------------------------------
representations, warranties and agreements of each party hereto shall be deemed
to have been given again on and as of the Closing Date with the same force and
effect as if made on and as of the Closing Date and shall survive the Closing.
ARTICLE FOUR
OTHER AGREEMENTS
4.1 Further Assurances. Each party hereto shall promptly execute and
------------------
deliver such further agreements and instruments, and take such further actions,
as the other party may reasonably request in order to carry out the purpose and
intent of this Agreement.
ARTICLE FIVE
MISCELLANEOUS
5.1 Notices. All notices, requests, demands and other communications
-------
hereunder shall be in writing and shall be deemed given if delivered personally
or by facsimile transmission (with subsequent letter confirmation by mail) or
two days after being mailed by certified or registered mail, postage prepaid,
return receipt requested, to the parties, their successors in interest or their
assignees at the following addresses, or at such other addresses as the parties
may designate by written notice in the manner aforesaid:
If to the Dillon Parties: 21 East State Street, Suite 1410
Columbus, Ohio 43215-4228
Telecopy: (614) 222-4224
Attention: Roderick H. Dillon, Jr.
4
<PAGE>
If to Craig: Craig Corporation
550 S. Hope St.
Los Angeles, California 90071
Telecopy: (213) 239-0555
Attention: President
5.2 Assignability and Parties in Interest. This Agreement shall not
-------------------------------------
be assignable by any of the parties. This Agreement shall inure to the benefit
of and be binding upon the parties and their respective permitted successors and
assigns.
5.3 Governing Law. This Agreement shall be governed by, and
-------------
construed and enforced in accordance with, the internal substantive law, and not
the law pertaining to conflicts or choice of law, of the State of California.
5.4 Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
5.5 Complete Agreement. This Agreement is an integrated agreement
------------------
containing the entire agreement among the parties with respect to the subject
matter hereof and shall supersede all previous oral and written and all
contemporaneous oral negotiations, commitments and understandings.
5.6 Modifications, Amendments and Waivers. This Agreement may be
-------------------------------------
modified, amended or otherwise supplemented only by a writing signed by the
party against whom it is sought to be enforced. No waiver of any right or power
hereunder shall be deemed effective unless and until a writing waiving such
right or power is executed by the party waiving such right or power.
5.7 No Third Party Beneficiaries. Except as expressly provided in
----------------------------
Sections 1.1 and 1.2 hereof, there are no third party beneficiaries under this
Agreement or intended by any party hereto.
5.8 Expenses. Each party hereto shall bear its own costs and
--------
expenses, including, without limitation, attorneys' fees, incurred in connection
with the Delaware Action and this Agreement.
5.9 Contract Interpretation; Construction of Agreement.
--------------------------------------------------
(a) The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Article, section, party and recital references are to this
Agreement unless otherwise stated.
(b) None of the parties hereto, nor their respective counsel, shall be
deemed the drafter of this Agreement for purposes of construing the provisions
of this Agreement, and all language in all parts of this Agreement shall be
construed in accordance with its fair meaning, and not strictly for or against
any party.
5.10 Effectiveness of Agreement. The "Effective Date" shall be the
--------------------------
later to occur of (i) the date on which Citadel notifies Dillon in writing that
Citadel's Board of Directors has approved the Stock Exchange and Settlement
Agreement of even date herewith among Citadel and the Dillon Parties or (ii) the
date on which Craig notifies Dillon in writing
5
<PAGE>
that Craig's Board of Directors has approved this Agreement; provided, however,
that if the Effective Date does not occur on or before April 13, 1995, then this
Agreement shall automatically terminate at 11:59 p.m., Los Angeles time, on
April 13, 1995 and shall thereafter have no legal force or effect whatsoever.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first above written.
CRAIG CORPORATION, DILLON INVESTORS, L.P.,
A DELAWARE CORPORATION A DELAWARE PARTNERSHIP
By: /s/ S. Craig Tompkins By: /s/ Roderick H. Dillon, Jr.
______________________________ ________________________________
Title: President Title: General Partner
RODERICK H. DILLON, JR. FOUNDATION,
AN OHIO TRUST
By: /s/ Roderick H. Dillon, Jr.
________________________________
Title: Trustee
_____________________________
RODERICK H. DILLON, JR.-IRA
By: /s/ Roderick H. Dillon, Jr.
---------------------------------
Roderick H. Dillon, Jr.
/s/ Roderick H. Dillon, Jr.
---------------------------------
Roderick H. Dillon, Jr.
6
<PAGE>
Exhibit 22
CRAIG CORPORATION
Subsidiaries of the Registrant
Craig Management, Inc., a California corporation, wholly owned by
Registrant.
Dimension Specialty Company, a Delaware corporation, owned by
Registrant.
James J. Cotter Company & Associates, Inc., a California
corporation, wholly owned by Registrant.
Stater Bros. Holdings Inc., a Delaware corporation, 50% owned by
Registrant.
Reading Company, a Pennsylvania corporation, 49% owned by Registrant.
Citadel Holding Corporation, a Delaware corporation, 39.4% voting
ownership by Registrant
Reading Cinema International LLC, a Delaware limited liability
Company, 50% owned by Registrant
The subsidiaries omitted from the foregoing list do not, considered in the
aggregate, constitute a significant subsidiary.
64
<PAGE>
Exhibit 24
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No.33-36233), pertaining to the 1984 Stock Option Plan of Craig Corporation
and in the related Prospectus, of our report dated January 11, 1996, with
respect to the consolidated financial statements of Craig Corporation included
in the Annual Report (Form 10-K) for the year end September 30, 1995.
ERNST & YOUNG LLP
Los Angeles, California
January 11, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1995 SEP-30-1994
<PERIOD-START> OCT-01-1994 OCT-01-1993
<PERIOD-END> SEP-30-1995 SEP-30-1994
<CASH> 21,059 21,205
<SECURITIES> 0 0
<RECEIVABLES> 323 150
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 21,382 21,355
<PP&E> 0 0
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<TOTAL-ASSETS> 84,669 80,027
<CURRENT-LIABILITIES> 692 403
<BONDS> 0 0
0 0
0 0
<COMMON> 1,377 1,377
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<TOTAL-LIABILITY-AND-EQUITY> 84,669 80,027
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<TOTAL-REVENUES> 7,338 13,591
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<INCOME-PRETAX> 5,108 2,040
<INCOME-TAX> 1,650 1,010
<INCOME-CONTINUING> 3,458 1,030
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<EPS-PRIMARY> 0.58 0.22
<EPS-DILUTED> 0 0
</TABLE>
<PAGE>
EXHIBIT 28
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Report of Independent Auditors................................. F-2
Consolidated Balance Sheets at September 26, 1993,
September 25, 1994 and September 24, 1995................... F-3
Fiscal years ended September 26, 1993, September 25, 1994 and
September 24, 1995:
Consolidated Statements of Income.......................... F-5
Consolidated Statements of Cash Flows...................... F-6
Consolidated Statements of Stockholders' Equity............ F-8
Notes to Consolidated Financial Statements..................... F-9
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Stater Bros. Holdings Inc.
We have audited the accompanying consolidated balance sheets of Stater
Bros. Holdings Inc. and subsidiaries as of September 26, 1993, September 25,
1994 and September 24, 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the 52-week periods then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Stater Bros. Holdings Inc. and subsidiaries as of September 26, 1993,
September 25, 1994 and September 24, 1995, and the consolidated results of their
operations and their cash flows for each of the 52-week periods then ended, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Riverside, California
November 17, 1995
F-2
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
<TABLE>
<CAPTION>
SEPT. 26, SEPT. 25, SEPT. 24,
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents....................... $ 1,548 $ 21,289 $ 26,308
Receivables..................................... 16,306 16,503 15,877
Inventories..................................... 99,374 103,655 107,146
Prepaid expenses................................ 3,631 3,421 3,591
Deferred income taxes........................... 5,061 3,276 2,792
Properties held for sale........................ 2,090 2,964 2,933
-------- -------- --------
Total current assets.............................. 128,010 151,108 158,647
Investment in unconsolidated affiliate............ 10,822 10,230 9,250
Investment in stock............................... 4,000 - -
Property and equipment
Land............................................ 20,574 20,678 20,653
Buildings and improvements...................... 84,538 92,808 96,653
Store fixtures and equipment.................... 53,467 61,208 68,338
Property subject to capital leases.............. 14,678 14,368 14,368
-------- -------- --------
173,257 189,062 200,012
Less accumulated depreciation and amortization.. 64,289 72,902 81,385
-------- -------- --------
108,968 116,160 118,627
Deferred income taxes............................. 1,891 5,351 4,975
Deferred debt issuance costs, net................. 1,746 7,630 6,423
Lease guarantee escrow............................ 3,481 4,446 5,584
Other assets...................................... 5,566 11,564 10,576
-------- -------- --------
Total assets...................................... $264,484 $306,489 $314,082
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPT. 26, SEPT. 25, SEPT. 24,
1993 1994 1995
--------- ---------- ----------
<S> <C> <C> <C>
Current Liabilities
Notes payable....................................... $ 9,000 $ - $ -
Accounts payable.................................... 56,036 63,538 67,604
Accrued payroll and related expenses................ 17,130 21,289 22,289
Other accrued liabilities........................... 22,971 23,704 22,653
Current portion of long-term debt................... 164 - -
Current portion of capital lease obligations........ 1,113 1,155 1,087
-------- -------- --------
Total current liabilities............................. 106,414 109,686 113,633
Long-term debt, less current portion.................. 87,576 165,000 165,000
Capital lease obligations, less current portion....... 10,456 9,187 8,099
Long-term portion of self-insurance reserves.......... 15,736 15,765 13,772
Stockholders' equity
Series A Preferred Stock, $25 stated value:
Authorized shares - 250,000
Issued and outstanding shares - 144,000 in 1993,
0 in 1994 and 1995............................... 3,600 - -
Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares - 100,000 in 1993,
50,000 in 1994 and 1995.......................... 1 1 1
Class A Common Stock, $.01 par value:
Authorized shares - 100,000
Issued and outstanding shares - 0 in 1993,
50,000 in 1994 and 1995.......................... - 1 1
Additional paid-in capital.......................... 12,715 12,715 12,715
Retained earnings................................... 27,986 8,784 15,511
Less option to acquire stock........................ - (14,650) (14,650)
-------- -------- --------
Total stockholders' equity............................ 44,302 6,851 13,578
-------- -------- --------
Total liabilities and stockholders' equity............ $264,484 $306,489 $314,082
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------
SEPT. 26, SEPT. 25, SEPT. 24,
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Sales...................................................... $1,526,002 $1,539,717 $1,579,895
Cost of goods sold......................................... 1,195,399 1,199,794 1,227,355
---------- ---------- ----------
Gross profit............................................... 330,603 339,923 352,540
Operating expenses
Selling, general and administrative expenses............. 300,826 297,474 308,332
Depreciation and amortization............................ 9,910 11,656 11,756
Consulting fees.......................................... - 830 1,500
---------- ---------- ----------
Total operating expenses................................... 310,736 309,960 321,588
---------- ---------- ----------
Operating profit........................................... 19,867 29,963 30,952
Interest income............................................ 171 384 952
Interest expense........................................... (10,292) (15,501) (20,076)
Equity in earnings (loss) from unconsolidated affiliate.... 107 (592) (980)
Other income - net......................................... 265 391 97
---------- ---------- ----------
Income before income taxes and the cumulative effect of a
change in accounting for income taxes and extraordinary
loss.................................................... 10,118 14,645 10,945
Income taxes............................................... 4,426 5,856 4,218
---------- ---------- ----------
Income before cumulative effect of a change in accounting
for income taxes and extraordinary loss.................. 5,692 8,789 6,727
Cumulative effect of a change in accounting for income
taxes.................................................... - 372 -
---------- ---------- ----------
Income before extraordinary loss........................... 5,692 9,161 6,727
Extraordinary loss from early extinguishment of debt
($13,856 less tax effect of $5,820)...................... - (8,036) -
---------- ---------- ----------
Net income................................................. 5,692 1,125 6,727
Less preferred dividends................................. 323 327 -
---------- ---------- ----------
Net income available to common shareholders................ $ 5,369 $ 798 $ 6,727
========== ========== ==========
Earnings per common share:
Before cumulative effect of a change in accounting for
income taxes and extraordinary loss..................... $53.69 $84.62 $67.27
Cumulative effect of a change in accounting for income
taxes................................................... - 3.72 -
Extraordinary loss....................................... - (80.36) -
------ ------ ------
Earnings per common share.................................. $53.69 $7.98 $67.27
====== ===== ======
Average common shares outstanding.......................... 100,000 100,000 100,000
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------
SEPT. 26, SEPT. 25, SEPT. 24,
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income....................................................... $ 5,692 $ 1,125 $ 6,727
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of a change in accounting for
income taxes.................................................. - (372) -
Extraordinary loss related to early extinguishment
of debt....................................................... - 13,856 -
Depreciation and amortization.................................. 9,910 11,656 11,756
Deferred income taxes.......................................... 129 (1,303) 860
(Gain) on disposals of assets.................................. (265) (391) (97)
Net undistributed (earnings) loss in unconsolidated affiliate.. (107) 592 980
Changes in operating assets and liabilities:
(Increase) decrease in receivables............................ 302 (197) 626
(Increase) decrease in inventories............................ (612) (4,281) (3,491)
(Increase) decrease in prepaid expenses....................... 32 210 (170)
(Increase) decrease in other assets........................... (50) (14,695) (359)
Increase (decrease) in accounts payable....................... (5,719) 7,502 4,066
Increase (decrease) in accrued liabilities and long-term
portion of self-insurance reserves............................ 152 4,921 (2,044)
------- -------- -------
Net cash provided by operating activities........................ 9,464 18,623 18,854
------- -------- -------
FINANCING ACTIVITIES:
Proceeds from notes payable...................................... 5,000 - -
Proceeds from long-term debt..................................... - 165,000 -
Payment on notes payable......................................... - (9,000) -
Redemption of preferred stock.................................... - (3,600) -
Premiums paid on early retirement of debt........................ - (12,893) -
Principal payments on long-term debt and capital
lease obligations............................................... (1,558) (88,967) (1,156)
Dividends paid on preferred stock................................ (323) (327) -
Dividends paid on common stock................................... - (20,000) -
Option to acquire stock.......................................... - (14,650) -
------- -------- -------
Net cash provided by (used in) financing activities.............. $ 3,119 $ 15,563 $(1,156)
------- -------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------
SEPT. 26, SEPT. 25, SEPT. 24,
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Purchase of property and equipment........................... $(17,178) $(19,409) $(13,178)
Proceeds from sale of property and equipment and properties
held for sale............................................... 530 964 499
Decrease in investment in stock.............................. - 4,000 -
-------- -------- --------
Net cash (used in) investing activities...................... (16,648) (14,445) (12,679)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents......... (4,065) 19,741 5,019
Cash and cash equivalents at beginning of period............. 5,613 1,548 21,289
-------- -------- --------
Cash and cash equivalents at end of period................... $ 1,548 $ 21,289 $ 26,308
======== ======== ========
Interest paid................................................ $ 10,931 $ 17,120 $ 19,537
Income taxes paid............................................ $ 2,174 $ 1,753 $ 4,633
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
STATER BROS. HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
OPTION
SERIES A CLASS A ADDITIONAL TO
PREFERRED COMMON COMMON PAID-IN RETAINED ACQUIRE
STOCK STOCK STOCK CAPITAL EARNINGS STOCK
--------- ------ ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances at September 27, 1992........... $ 1,600 $ 1 $ - $ 12,715 $ 22,617 $ -
Issuance of 80,000 shares of Series A
Preferred Stock...................... 2,000 - - - - -
Net income for 52 weeks ended
September 26, 1993................... - - - - 5,692 -
Preferred stock dividends paid......... - - - - (323) -
--------- ------ ------- ---------- -------- --------
Balances at September 26, 1993........... 3,600 1 - 12,715 27,986 -
Preferred stock redeemed............... (3,600) - - - - -
Common Stock exchanged for Class A
Common Stock......................... - - 1 - - -
Option to acquire stock................ - - - - - (14,650)
Net income for 52 weeks ended
September 25, 1994................... - - - - 1,125 -
Preferred stock dividends paid......... - - - - (327) -
Common stock dividends paid............ - - - - (20,000) -
--------- ------ ------- ---------- -------- --------
Balances at September 25, 1994........... - 1 1 12,715 8,784 (14,650)
Net income for 52 weeks ended
September 24, 1995................... - - - - 6,727 -
--------- ------ ------- ---------- -------- --------
Balances at September 24, 1995........... $ - $ 1 $ 1 $ 12,715 $ 15,511 $(14,650)
========= ====== ======= ========== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 24, 1995
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Stater Bros. Holdings Inc. (the "Company") is engaged primarily in the
operation of retail supermarkets. As of September 24, 1995, the Company
operated 110 retail food supermarkets under the name "Stater Bros." The
Company's supermarkets are located principally in the "Inland Empire" area of
Southern California - San Bernardino, Riverside and the eastern portions of Los
Angeles, Orange and Kern counties. The Company and its predecessor companies
have operated retail grocery stores under the "Stater Bros." name in the Inland
Empire since 1936.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Stater Bros. Markets ("Markets") and Stater Bros.
Development, Inc. All significant inter-company transactions have been
eliminated in consolidation.
Fiscal Year
The Company's fiscal year ends on the last Sunday in September. The fiscal
years ended September 26, 1993, September 25, 1994 and September 24, 1995 were
52-week years.
Cash and Cash Equivalents
Cash and cash equivalents are reflected at cost, which approximates their
fair value, and consist primarily of overnight repurchase agreements,
certificates of deposit and money market funds with maturities of less than
three months when purchased.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Accounts Receivable
Accounts receivable represents amounts expected to be received during the
next operating cycle of the Company. The carrying amount reported in the
balance sheet for accounts receivable approximates their fair value.
Properties Held for Sale
Properties expected to be sold within one year are classified as current
assets and are stated at the lower of cost or estimated net realizable value and
consist of land, buildings and equipment.
Deferred Debt Issuance Costs
Direct costs incurred as a result of financing transactions are capitalized
and amortized to interest expense over the terms of the applicable debt
agreements.
Self-insurance Reserves
The Company provides reserves, subject to certain retention levels, for
workers' compensation, general and automobile liability claims. Consulting
actuaries assist the Company in developing reserve estimates for its self-
insured liabilities. Such reserves are discounted using an 8% rate. The
Company is self-insured, subject to certain retention levels, for healthcare
costs of eligible non-bargaining unit employees. Such healthcare reserves are
not discounted.
F-9
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTD.)
Property and Equipment
Property and equipment are stated at cost and are depreciated or amortized,
principally on the straight-line method over the estimated useful lives of the
assets, and for capitalized leases over the lesser of the initial term of the
leases or the economic life of the asset.
The average economic lives are as follows:
<TABLE>
<CAPTION>
Range Most Prevalent
------------- ----------------
<S> <C> <C>
Buildings and improvements............. 8 - 30 Years 25 Years
Store furniture and equipment.......... 3 - 10 Years 5 Years
Property subject to capital leases..... Life of Lease 25 Years
</TABLE>
Income Taxes
The Company provides for deferred income taxes as timing differences arise
between income and expenses recorded for financial and income tax reporting
purposes.
Cost of Goods Sold
Costs of goods sold include certain warehousing, transportation and
distribution costs.
Reclassifications
Certain amounts in the prior periods have been reclassified to conform to the
current period financial statement presentation.
NOTE 2 - DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
Sept. 26, Sept. 25, Sept. 24,
1993 1994 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
11% senior notes payable, due March 1, 2001...... $ - $165,000 $165,000
9.8% senior notes payable, due
December 1, 2001.............................. 75,500 - -
Note payable to bank, 11.00% effective interest
rate, secured by real property, with
monthly principal payments of $5,000,
due August 1, 1995............................ 7,189 - -
Note payable to bank, 11.07% effective interest
rate, secured by real property, with
quarterly principal payments of $4,000,
due April 1, 1996............................. 2,438 - -
Note payable to bank, 9.99% effective interest
rate, secured by real property, with
quarterly principal payments of $5,000,
due February 1, 1997.......................... 2,254 - -
Other notes...................................... 359 - -
-------- -------- --------
Total Debt.................................... 87,740 165,000 165,000
Less current portion............................. 164 - -
-------- -------- --------
Long-term debt................................... $ 87,576 $165,000 $165,000
======== ======== ========
</TABLE>
F-10
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - DEBT (CONTD.)
As of September 24, 1995, no principal payments were due in the next five
years.
Interest on the 11.0% Senior Notes is payable semi-annually on September 1
and March 1. The 11.0% Senior Notes are due March 1, 2001.
The 9.8% Senior Notes payable, due December 1, 2001 and the notes payable to
banks, were redeemed by the Company on March 8, 1994, including a prepayment
premium of $13.9 million.
Interest capitalized during fiscal years 1993, 1994 and 1995 amounted to
$417,000, $437,000 and $50,000, respectively. Interest expense incurred, before
the effect of capitalized interest, during 1993, 1994 and 1995 amounted to
$10,709,000, $15,938,000 and $20,126,000, respectively.
The fair value of the Company's long-term debt, based on the quoted market
rates on the last trading day prior to year end, was approximately $166.7
million.
The Company had no short-term borrowings outstanding at year end 1995 and
1994 compared to $9,000,000 in 1993. The average daily amount of short-term
borrowings was $10,563,000, $5,420,000 and $129,000 in 1993, 1994 and 1995,
respectively. The weighted average interest rates were 4.98%, 4.40% and 9.68% in
1993, 1994 and 1995, respectively.
The Company is subject to certain covenants associated with its 11% Senior
Notes due 2001. As of September 24, 1995, the Company was in compliance with all
such covenants.
NOTE 3 - UNCONSOLIDATED AFFILIATE
The Company owns 49.6% of Santee Dairies, Inc. ("Santee"), an operator of a
fluid milk processing plant located in Los Angeles, California, and is not the
controlling stockholder. Accordingly, the Company accounts for its investment in
Santee using the equity method and recognized earnings of $107,000 during 1993
and recognized losses of $592,000 and $980,000 during 1994 and 1995,
respectively. The Company is a significant customer of Santee which supplies the
Company with a substantial portion of its fluid milk and dairy products.
NOTE 4 - BANK FACILITIES
Stater Bros. Markets and Bank of America National Trust and Savings
Association (the "Bank") have entered into a credit agreement (as amended)
whereby the Bank provides Stater Bros. Markets with a revolving operating line
of credit (the "Operating Facility") with a maximum availability of $11.0
million and a revolving letter of credit facility (the "LC Facility") with a
maximum availability of $28.0 million (collectively, the "Bank Facilities"). The
Bank Facilities will expire on June 1, 1996. The Company intends to renew or
replace the Bank Facilities on or before June 1, 1996. Interest on the
outstanding principal balance on the Operating Facility is payable monthly at
either the Bank's reference rate plus one percent per annum or a fixed rate of
interest. Borrowings under the Bank Facilities are unsecured general obligations
of Stater Bros. Markets and are guaranteed by Stater Bros. Development, Inc. The
Bank Facilities contain customary cross-default provisions with respect to the
Company's 11% Senior Notes due 2001.
F-11
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - BANK FACILITIES (CONTD.)
The Bank Facilities also contain certain financial and other covenants
applicable to Stater Bros. Markets, including without limitation, requirements
to (i) maintain a minimum current ratio of at least 1.20:1; (ii) maintain
minimum tangible net worth plus debt subordinated to the Bank (as defined) of at
least $134.0 million; (iii) maintain a ratio of total liabilities to tangible
net worth plus debt subordinated to the Bank of not in excess of 1.30:1; (iv)
maintain a minimum fixed charge coverage ratio (as defined) of at least 1.10:1
for each consecutive four fiscal quarters beginning with the four fiscal
quarters ending on Stater Bros. Markets' 1995 fiscal year end; (v) limit the
sale of assets; (vi) prohibit additional indebtedness except for normal trade
credit and indebtedness secured only by real property constructed or acquired
within the prior twelve months; (vii) prohibit additional liens except for liens
for indebtedness secured by real property pursuant to clause (v); (viii)
prohibit the acquisition of other business entities; (ix) restrict the payment
of dividends (as discussed below); (x) prohibit changes of ownership; (xi)
prohibit the liquidation, consolidation or merger of the business; and (xii)
repay all advances outstanding under the Operating Facility and not draw any new
advances for at least 5 calendar days each month. As of September 24, 1995, for
purposes of the Bank Facilities, Stater Bros. Markets was in compliance with all
restrictive convenants and had (i) a current ratio of 1.40:1, (ii) tangible net
worth and debt subordinated to the Bank of $176.4 million; (iii) a ratio of
total liabilities to tangible net worth and debt subordinated to the Bank of
0.76:1 and (iv) a fixed charge coverage ratio (as defined in the Bank
Facilities) of 1.30:1. If for any reason Stater Bros. Markets is unable to
comply with the terms of the Bank Facilities, including the covenants contained
therein, such noncompliance would result in an event of default under the Bank
Facilities, and could result in acceleration of the payment of indebtedness then
outstanding under Bank Facilities or, in certain situations, the prohibition of
the payment of dividends to the Company. In addition, no amendment, waiver or
supplement may be made to the Indenture without the prior written consent of the
Bank if such amendment, waiver or supplement adversely affects the rights of the
Bank as lender to Stater Bros. Markets.
The financial and operational covenants contained in the Bank Facilities
significantly limit Stater Bros. Markets' ability to pay dividends and make
loans or advances to the Company, the primary source of anticipated cash for the
Company, and could limit the Company's ability to respond to changing business
and economic conditions, and to finance future operations or capital needs
including the Company's ability to achieve its plans to remodel and expand
existing supermarkets and open new supermarkets.
F-12
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - LEASES
The Company leases the majority of its retail stores, offices, warehouses and
distribution facilities. Certain leases provide for additional rents based on
sales. Primary lease terms range from 10 to 99 years and substantially all
leases provide for renewal options.
A portion of the Company's lease obligations are guaranteed by Petrolane
Incorporated ("Petrolane") (see Note 6). The leases guaranteed by Petrolane had
initial terms of 20 years and expire in the year 2003. Lease payments for the
properties subject to the Petrolane guarantees are approximately $10.0 million
per year. Under the terms of the agreement related to the Company's acquisition
of Stater Bros. Markets from Petrolane in 1983, as amended in 1985, Stater Bros.
Markets is required to make annual deposits into an escrow account. The amount
of each annual deposit is to be based on (a) a percentage of sales of 20
supermarkets, as specified in the agreement, to the extent they exceed a defined
base; and (b) a percentage of rents adjusted for increases in the Consumer Price
Index for certain rental property, including the Company's office and warehouse
complex. The Company deposited $765,000, $844,000 and $861,000 into the escrow
account in 1993, 1994 and 1995, respectively.
Upon termination of the leases, or the termination of the Petrolane lease
guarantees, all amounts deposited into the escrow account, plus interest
thereon, less any amounts disbursed, will be returned to the Company. At
September 24, 1995, the escrow account had a cumulative balance of $5,584,000,
compared to $4,446,000 and $3,481,000 as of September 25, 1994 and September 26,
1993, respectively.
Petrolane, or its successor, has the right to cause the escrow holder to
disburse funds from the amounts held in the escrow account any amounts which
Petrolane or its successor may be required to pay as guarantor of the lease
obligations of Stater Bros. Markets.
Following is a summary of future minimum lease payments as of September 24,
1995:
<TABLE>
<CAPTION>
Operating
Leases
Capital Minimum
Fiscal Year Leases Payment
----------- ------- ---------
(In thousands)
<S> <C> <C>
1996..................................... $ 1,844 $ 18,113
1997..................................... 1,844 16,496
1998..................................... 1,814 15,499
1999..................................... 1,760 15,342
2000..................................... 1,693 14,471
Thereafter............................... 3,418 52,827
------- --------
Total minimum lease payments............. 12,373 $132,748
========
Less amounts representing interest....... 3,187
-------
Present value of minimum lease payments.. 9,186
Less current portion..................... 1,087
-------
Long-term portion........................ $ 8,099
=======
</TABLE>
F-13
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - LEASES (CONTD.)
Rental expense and sublease income were as follows:
<TABLE>
<CAPTION>
52 Weeks Ended
----------------------------------------------
Sept. 26, 1993 Sept. 25, 1994 Sept. 24, 1995
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Minimum rentals......... $ 20,919 $ 19,708 $ 17,906
Rentals based on sales.. $ 4,517 $ 4,432 $ 5,179
Sublease income......... $ 984 $ 1,066 $ 1,018
</TABLE>
Aggregate sublease income to be received subsequent to September 24, 1995 is
approximately $5,482,000.
NOTE 6 - PREFERRED STOCK
Stater Bros. Markets has issued and outstanding 10 shares of its $11.00
Cumulative Redeemable Preferred Stock due in 2003 for $1,000 plus accrued and
unpaid dividends. Dividends are accrued at the rate of $11.00 per share per
annum. The preferred stock was issued in conjunction with a guarantee of Stater
Bros. Markets lease obligations by Petrolane Incorporated (see Note 5). For as
long as the $11.00 Cumulative Redeemable Preferred Stock remains outstanding,
Stater Bros. Markets is subject to certain covenants. The most restrictive
covenant limits the amount of dividends that may be paid to its stockholders to
amounts that may be legally paid under applicable state laws. At September 24,
1995, accumulated earnings available for dividend distributions were
approximately $165.0 million. In the event of non-compliance by Stater Bros.
Markets, the holders of the preferred stock may elect the Board of Directors of
Stater Bros. Markets. At September 24, 1995, Stater Bros. Markets was in
compliance with these covenants.
In September 1993 and September 1992, the Company exchanged $2.0 million and
$1.6 million of notes payable to stockholders for 80,000 and 64,000 shares,
respectively, of the Company's Series A Preferred Stock. As part of the
Recapitalization Transaction (see Note 8), all of the outstanding Series A
Preferred Stock was redeemed on March 8, 1994.
NOTE 7 - INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
52 Weeks Ended
------------------------------------------------
Sept. 26, 1993 Sept. 25, 1994 Sept. 24, 1995
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Current
Federal.. $ 4,019 $ 5,493 $ 2,991
State.... 1,030 1,563 944
--------- --------- ---------
5,049 7,056 3,935
--------- --------- ---------
Deferred
Federal.. (616) (976) 213
State.... (7) (224) 70
--------- --------- ---------
(623) (1,200) 283
--------- --------- ---------
$ 4,426 $ 5,856 $ 4,218
========= ========= =========
</TABLE>
F-14
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - INCOME TAXES (CONTD.)
The current portion of Federal and State income taxes for fiscal year ended
September 25, 1994 does not include the tax benefits associated with the
extraordinary loss from the early extinguishment of debt. Such Federal and State
tax benefits in 1994 amounted to $4,850,000 and $970,000.
A reconciliation of the provision for income taxes to amounts computed at the
federal statutory rate is as follows:
<TABLE>
<CAPTION>
52 Weeks Ended
------------------------------------------------
Sept. 26, 1993 Sept. 25, 1994 Sept. 24, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Statutory federal income tax rate.. 34.0% 34.3% 35.0%
State franchise tax rate, net of
federal income tax benefit....... 6.1 6.1 6.1
Other.............................. 3.6 (.4) (2.6)
---- ---- ----
43.7% 40.0% 38.5%
===== ====== =====
</TABLE>
Deferred income taxes resulted from timing differences in recognizing revenue
and expense for tax and financial statement purposes. The sources of these
timing differences and the income tax (benefit) of each were as follows:
<TABLE>
<CAPTION>
52 Weeks Ended
------------------------------------------------
Sept. 26, 1993 Sept. 25, 1994 Sept. 24, 1995
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Accrued liabilities............... $ (445) $ (1,057) $ 366
California franchise tax.......... (45) 307 (258)
Uniform capitalization............ 9 (20) 18
Depreciation...................... (404) (154) 542
Other, net........................ 262 (276) (385)
--------- --------- --------
$ (623) $ (1,200) $ 283
========== ========== =========
</TABLE>
The Company adopted Statement of Financial Accounting Standard No. 109
"Accounting for Income Taxes" (SFAS No. 109) effective at the beginning of
fiscal 1994. Adoption of this statement in fiscal 1994 resulted in a gain of
$372,000 from the cumulative effect of a change in accounting principle and a
corresponding increase to deferred income taxes benefit of $372,000.
F-15
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - INCOME TAXES (CONTD.)
SFAS No. 109 provides that income taxes are accounted for using the liability
method. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Prior to the adoption of
SFAS No. 109, income tax expense was determined using the deferred method.
Deferred tax assets and liabilities were based on items of income and expense
that were reported in different years in the financial statements and tax
returns and were measured at the tax rate in effect in the year the differences
originated.
Components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
Sept. 25, 1994 Sept. 24, 1995
-------------- --------------
(In thousands)
<S> <C> <C>
Deferred income tax assets:
--------------------------
Property and equipment $ 2,117 $ 1,542
Self-insurance reserves 5,727 4,313
Accrued payroll and related liabilities 2,022 2,218
Inventories 1,200 1,140
------- -------
Total deferred income tax assets 11,066 9,213
Deferred income tax liabilities:
-------------------------------
Investment in dairy (1,046) (630)
Other (1,393) (816)
------- -------
Total deferred income tax liabilities (2,439) (1,446)
------- -------
Net deferred income tax assets $ 8,627 $ 7,767
======= =======
</TABLE>
Although there can be no assurances as to future taxable income of the
Company, the Company believes that its expectations of future taxable income,
when combined with the income taxes paid in prior years, will be adequate to
realize the deferred income tax assets.
NOTE 8 - RELATED PARTY TRANSACTIONS
Investment in Stock
During 1989, the Company acquired 311,404 shares of Common Stock of Craig
Corporation (the "Craig Common Stock") for $4.0 million. Craig Corporation
("Craig") is a stockholder of the Company. The Company had the right to require
Craig to purchase the Craig Common Stock for $4.0 million in May 1994. In 1993,
the Company entered into a series of separate agreements (the
"Recapitalization") with Craig (see Note 12). Upon the earlier of the completion
of the Recapitalization Transaction or March 31, 1994, subject to applicable
California law governing distributions to shareholders, the Company was
obligated to sell, transfer and assign the Common Stock of Craig to Craig in
exchange for Craig's agreement not to exercise its rights under, or be entitled
to certain benefits of the Agreement of Stockholders of Stater Bros. Holdings
Inc. dated as of May 10, 1989, as amended effective September 3, 1993 and to
stand still during the time period from October 1, 1993 to the earlier of the
completion of the Recapitalization or March 31, 1994 in order to allow the
Company time to complete the Recapitalization. The Company transferred the
311,404 shares of Common Stock of Craig to Craig in August 1994.
F-16
<PAGE>
Consulting Agreements and Covenant Not to Compete
Since January 1, 1989, the Company has entered into various consulting
agreements (the "Agreements") with its stockholders, La Cadena Investments, a
California general
F-17
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - RELATED PARTY TRANSACTIONS (CONTD.)
Consulting Agreements and Covenant Not to Compete (contd.)
partnership, and Craig, that required La Cadena and Craig to provide
consultation and advice to the Company in connection with general business,
financial, management consulting, real estate acquisition and development, and
product diversification matters (collectively the "Consulting Services"). All
fees payable under the Agreements were subject to and subordinate to provisions
of the Company's credit agreements. The Agreements entered into in February 1992
provided for the stockholders to continue to render consulting services through
fiscal 1993 and terminated on September 26, 1993. Throughout fiscal 1993, the
stockholders were negotiating with each other and the Company with respect to
the Recapitalization Transaction (see Note 12). During fiscal 1993, consulting
services rendered pursuant to these Agreements were de minimis and, accordingly,
it was determined that no fees were payable under the terms of the Agreements
for the fiscal year ended September 26, 1993. Pursuant to a Consulting Agreement
dated as of September 3, 1993 (the "Consulting Agreement"), which became
effective and commenced as of the Recapitalization Closing, Craig will render
consulting services to the Company for a five-year period and Craig has agreed
not to engage in any business that competes with the Company in any of the five
counties in which the Company operates until the end of the five-year period of
the Consulting Agreement. In consideration for such consulting services, the
Company will pay Craig $1.5 million per year thereafter, payable quarterly
during the term of the Consulting Agreement. Expenses of $.8 million and $1.5
million were incurred under the various consulting agreements in 1994 and 1995,
respectively. Additionally, at the Recapitalization Closing, the Company paid
Craig $5.0 million which is amortized to earnings over the five-year term of the
covenant not to compete included in the Consulting Agreement.
NOTE 9 - RETIREMENT PLANS
Pension Plan
The Company has a noncontributory defined benefit pension plan covering
substantially all non-union employees. The plan provides for benefits based on
an employee's compensation during the three years before retirement. The
Company's funding policy for this plan is to contribute annually at a rate that
is intended to provide sufficient assets to meet future benefit payment
requirements.
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
52 Weeks Ended
------------------------------------------------
Sept. 26, 1993 Sept. 25, 1994 Sept. 24, 1995
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned during
the period.............................. $ 689 $ 653 $ 619
Interest cost on projected benefit
obligation.............................. 701 762 862
Actual return on assets.................. (444) 240 (735)
Net amortization and deferral............ 53 (808) 200
-------- -------- --------
Net periodic pension cost $ 999 $ 847 $ 946
======== ======== ========
Assumptions used for accounting were:
Discount rate............................ 8.0% 8.0% 8.0%
Rate of increase in compensation levels.. 5.0% 5.0% 5.0%
Expected long-term rate of return on
assets.................................. 9.0% 9.0% 9.0%
</TABLE>
F-18
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - RETIREMENT PLANS (CONTD.)
Pension Plan (contd.)
The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheet at:
<TABLE>
<CAPTION>
Sept. 26, 1993 Sept. 25, 1994 Sept. 24, 1995
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation....................... $ 6,485 $ 7,551 $ 9,400
========== ========== ==========
Accumulated benefit obligation.................. $ 6,687 $ 7,803 $ 9,717
========== ========== ==========
Projected benefit obligation..................... $ (9,435) $ (10,845) $ (13,484)
Plan assets at fair value,
primarily notes and bonds....................... 6,746 6,821 8,138
---------- ---------- ----------
Projected benefit obligation in
excess of plan assets........................... (2,689) (4,024) (5,346)
Unrecognized net loss............................ 1,254 2,227 3,407
Unrecognized prior service cost.................. 32 29 (76)
Unrecognized net obligations established
October 1, 1987................................. 297 270 243
---------- ---------- ----------
Pension (liability) recognized in the
balance sheet................................... $ (1,106) $ (1,498) $ (1,772)
========== ========== ==========
</TABLE>
Expenses recognized for this retirement plan were $1,617,000, $1,085,000 and
$967,000 in 1993, 1994 and 1995, respectively.
Profit Sharing Plan
The Company has a noncontributory defined contribution profit sharing plan
covering substantially all non-union employees. Union employees may participate
if their collective bargaining agreement specifically provides for their
inclusion. The Company may contribute up to 7.5% of total compensation paid or
accrued during the year to each plan participant subject to limitations imposed
by the Internal Revenue Code. The Company recognized expenses for this plan in
the amount of $277,000, $320,000 and $357,000 in 1993, 1994 and 1995,
respectively.
Multi-Employer Plans
The Company also contributes to multi-employer defined benefit retirement
plans in accordance with the provisions of the various labor agreements that
govern the plans. Contributions to these plans are generally based on the number
of hours worked. Information for these plans as to vested and non-vested
accumulated benefits and net assets available for benefits is not available.
F-19
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - RETIREMENT PLANS (CONTD.)
Multi-Employer Plans (contd.)
The Company's expense for these retirement and health and welfare plans
consisted of the following:
<TABLE>
<CAPTION>
52 Weeks Ended
----------------------------------------------
Sept. 26, 1993 Sept. 25, 1994 Sept. 24, 1995
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Multi-Employer Pension Plans....... $ 4,367 $ 7,234 $ 5,688
Multi-Employer Health and Welfare.. 35,568 20,901 36,320
-------- -------- --------
Total Multi-Employer Benefits...... $ 39,935 $ 28,135 $ 42,008
======== ======== ========
</TABLE>
In conjunction with a three-year collective bargaining agreement entered into
in 1993, the Company received a $13.7 million credit which was applied against
employer contributions to multi-employer health and welfare benefit plans which
was recovered monthly during fiscal 1994. The Company received an additional
$0.8 million credit applied against employer contributions during the fourth
quarter of fiscal 1995.
NOTE 10 - LABOR RELATIONS
The Company entered into a four-year collective bargaining agreement with the
retail clerks and meat cutters collective bargaining units in October 1995 and
entered into a four-year collective bargaining agreement in September 1994 with
the teamsters collective bargaining units.
NOTE 11 - LITIGATION MATTERS
In the ordinary course of its business, the Company is party to various legal
actions which the Company believes are incidental to the operation of the
business of the Company and its subsidiaries. The Company has recorded reserves
for loss contingencies based on the specific circumstances of each case. Such
reserves are recorded when the occurrence of loss is probable and can be
reasonably estimated. The Company believes that the outcome of such legal
proceedings to which the Company is currently a party will not have a material
adverse effect upon its results of operations or its consolidated financial
condition.
On May 2, 1993, the Company was named as a defendant along with all of the
other major supermarket chains located in the Los Angeles County area in a class
action complaint filed in the California Superior Court in Los Angeles,
California, alleging among other things that the milk pricing policies of each
of the defendants violate certain antitrust laws and regulations under
California law. In this class action lawsuit, Barela et al. v. Ralphs Grocery
Co. et al., plaintiffs seek unspecified damages. The principal allegations of
the complaint are that milk prices of the defendants operating in the Los
Angeles County area are higher than milk prices for the same products in the San
Francisco Bay area and that the prices for such products in Los Angeles County
are higher than the prices charged in Riverside and San Bernardino counties.
Because the Company does not conduct business in the San Francisco Bay area and
its prices for milk are
F-20
<PAGE>
generally consistent throughout all of its supermarkets in the Los Angeles
County area and Riverside and San Bernardino counties, the Company believes the
F-21
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - LITIGATION MATTERS (CONTD.)
claim is without merit with respect to the Company and the Company intends to
vigorously defend such litigation. The Company believes that the ultimate
outcome of this litigation will not have a material adverse effect on the
Company's results of operations or its consolidated financial condition.
NOTE 12 - RECAPITALIZATION TRANSACTION
Since January 1988, the equity of the Company has been beneficially owned
equally by Craig Corporation and by La Cadena Investments ("La Cadena"), a
California general partnership consisting of three senior officers of the
Company including Mr. Brown, Chairman of the Board, President and Chief
Executive Officer of the Company. Pursuant to the Recapitalization Transaction
entered into as of September 3, 1993, as amended, among the Company, La Cadena
and Craig (and an affiliate of Craig), simultaneously with the closing of the
offering of $165 million of 11% Senior Notes, (the "Notes") on March 8, 1994, La
Cadena acquired effective voting control of the Company, and the Company made
certain cash payments and distributions to Craig or into escrow for the benefit
of Craig, totaling approximately $41.8 million in the aggregate, including the
purchase of an option to purchase Craig's equity interest in the Company. In
addition, the Company redeemed its 9.8% Senior Notes due 2001 and repaid certain
other outstanding indebtedness. Such transactions with the Company, La Cadena
and Craig and repayment of debt are collectively referred to as the
"Recapitalization" or the "Recapitalization Transaction".
The following paragraphs describe the Recapitalization, all of which were
completed on or before March 8, 1994 (the "Recapitalization Closing"), except
for those transactions described below as occurring after such time.
RECLASSIFICATION OF COMMON STOCK
The Company amended its Certificate of Incorporation to provide for two
classes of common stock designated "Common Stock" and "Class A Common Stock",
and two series of preferred stock designated "Series A Preferred Stock" and
"Series B Preferred Stock". The existing shares of outstanding common stock
were classified as Common Stock, and at the Recapitalization Closing, holders of
such stock were afforded the right to exchange all such shares into a like
number of shares of Class A Common Stock. At the Recapitalization Closing,
La Cadena exchanged its shares of Common Stock for shares of Class A Common
Stock and Craig retained its shares of Common Stock (subject to the Company's
right to convert such shares of Common Stock into shares of Series B Preferred
Stock, and subject to the Company's option to acquire such shares of Common
Stock or, subsequent to such conversion, Series B Preferred Stock, as described
below).
F-22
<PAGE>
Following the Recapitalization Closing, the rights of holders of the Common
Stock and Class A Common Stock are identical except with respect to voting. For
a period of five years following the Recapitalization Closing, each share of
Class A Common Stock is entitled to 1.1 votes and each share of Common Stock is
entitled to one vote, giving La Cadena approximately 52% and Craig approximately
48% of the total voting power of the Company. Holders of the Common Stock are
entitled to elect one director of the Company during such five-year period. At
the end of the five-year period, each share of Common Stock and each share of
Class A Common Stock will be entitled to one vote.
F-23
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DIVIDEND ON COMMON STOCK
The Board of Directors of the Company declared a dividend of $400 per share
of Common Stock, payable to holders of record at the close of business on the
day following the Recapitalization Closing. As a result of the amendment of the
Company's Certificate of Incorporation and the exchange by La Cadena of its
shares of Common Stock into Class A Common Stock, the aggregate amount of the
dividends paid on the Common Stock was $20.0 million, and the entire dividend
amount was paid to Craig.
RIGHT TO CONVERT COMMON STOCK INTO SERIES B PREFERRED STOCK
Pursuant to the Option Agreement dated as of September 3, 1993, between the
Company and Craig, as amended (the "Option Agreement"), the Company has the
right, at its option, for a period of two years from the Recapitalization
Closing (March 8, 1994), to convert the Common Stock into 693,650 shares of
Series B Preferred Stock. Holders of the Series B Preferred Stock will have the
right to elect one director of the Company. In addition, as long as all the
shares of Series B Preferred Stock are beneficially owned by Craig, the holder
of the Series B Preferred Stock will have the right to vote as a single class
with holders of all other voting stock of the Company, and the voting power of
the Series B Preferred Stock will equal 20% of the total voting power of such
combined class. In the event dividends on the Series B Preferred Stock in
respect of any two or more quarterly dividend periods shall be and remain
unpaid, so long as the majority of the shares of Series B Preferred Stock are
beneficially owned by Craig, the holders of the Series B Preferred Stock will
have the right to elect a majority of the Company's directors. In the event
Craig ceases to be the beneficial owner of a majority of the Series B Preferred
Stock, the right of the holders of the Series B Preferred Stock to elect one
director will be suspended, and if dividends on the Series B Preferred Stock in
respect of any two or more quarterly dividend periods shall be and remain
unpaid, the holders of the Series B Preferred Stock will have the right to elect
only two directors of the Company. In addition, the Option Agreement prohibits
the Company and its Subsidiaries from issuing or selling any shares of their
capital stock to any person or entity, unless and until the Common Stock is
converted into Series B Preferred Stock.
Dividends on the Series B Preferred Stock, if issued, will commence to accrue
on the second anniversary of the Recapitalization Closing (the "Accrual Date"),
at the rate of 10.5% per annum for the first 78 months following the Accrual
Date. Commencing with the 79th month following the Accrual Date, the dividend
rate will increase to 12% per annum, and will further increase each twelfth
month thereafter by 100 basis points per year, to a maximum rate of 15% per
annum.
OPTION TO ACQUIRE COMMON STOCK OR SERIES B PREFERRED STOCK
F-24
<PAGE>
Pursuant to the Option Agreement, the Company has the option to purchase all,
but not less than all, shares of the Common Stock held by Craig immediately
after the Recapitalization Closing for a purchase price, in cash, of $60.0
million plus an adjustment factor equal to 8.833% per annum from the time of the
Recapitalization Closing, compounded annually. The option may be exercised with
respect to such Common Stock at any time prior to the second anniversary of the
Recapitalization Closing. At such time, if the Company has not exercised its
right to convert such Common Stock into Series B Preferred Stock, the option
will expire. If the Company shall have exercised its right to convert such
Common Stock into Series B Preferred Stock, the option will remain in effect
until the twelfth anniversary of the Recapitalization Closing and will entitle
the Company to purchase all, but not less than all, such shares of the Series B
Preferred Stock. With respect to the Series B Preferred Stock, the exercise
price of the option will be $69.4 million to be paid to Craig. Of the $14.7
million option price, $2.7 million was paid to Craig at the Recapitalization
Closing. Payment of the
F-25
<PAGE>
STATER BROS. HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OPTION TO ACQUIRE COMMON STOCK OR SERIES B PREFERRED STOCK (CONTD.)
remaining $12.0 million (the "Deferred Portion") was deposited into an escrow
account for the benefit of Craig, and was paid to Craig on August 23, 1994.
Pursuant to the Option Agreement, holders of Series B Preferred Stock are
entitled to certain registration rights. In addition, holders of Series B
Preferred Stock have the right to require the redemption of all, but not less
than all, the Series B Preferred Stock owned by such holder in the event of
certain changes of control of the Company or in the event Jack H. Brown shall
cease to be the Chief Executive Officer of the Company, other than by reason of
death, disability or retirement in accordance with the Company's normal
retirement policies.
The Option Agreement also prohibits the Company and its subsidiaries from
issuing or selling any shares of their capital stock to any person or entity,
unless and until the Common Stock is converted into Series B Preferred Stock.
CONSULTING AGREEMENT AND COVENANT NOT TO COMPETE
Pursuant to the Consulting Agreement dated as of September 3, 1993 (the
"Consulting Agreement"), effective and commencing as of the Recapitalization
Closing, Craig will render consulting services to the Company for a five-year
period. In consideration for such consulting services, the Company will pay
Craig $1.5 million per year, payable quarterly during the term of the Consulting
Agreement. The Company will have the right to terminate its obligations under
the Consulting Agreement in the event it exercises its option to purchase the
Common Stock or Series B Preferred Stock owned by Craig. Additionally, at the
Recapitalization Closing, and in accordance with the terms of the Consulting
Agreement, Craig has agreed not to engage in any business that competes with the
Company in any of the five counties in which the Company operates until the end
of the five-year period of the Consulting Agreement. The Company paid Craig
$5.0 million at the Recapitalization Closing which is amortized to earnings over
the five-year term of the covenant not to compete included in the Consulting
Agreement.
REDEMPTION OF SERIES A PREFERRED STOCK AND PAYMENT OF INTEREST ON STOCKHOLDER
NOTES
Pursuant to the Option Agreement, at the Recapitalization Closing, the
Company purchased from Craig 72,000 shares of the Company's Series A Preferred
Stock, currently held by Craig, for a total purchase price of $1.8 million plus
accrued and unpaid dividends and paid approximately $79,000 to Craig as payment
of all unpaid interest owing to Craig on a stockholder note. In addition, the
Company purchased from La Cadena 72,000 shares of the Company's Series A
Preferred Stock, currently held by La Cadena, for a total purchase price of $1.8
million, plus accrued and unpaid dividends and paid approximately $79,000 to La
Cadena
F-26
<PAGE>
as payment of all unpaid interest owing to La Cadena on a stockholder note. In
September 1993 and September 1992, the Company issued 40,000 shares and 32,000
shares, respectively, of the Company's Series A Preferred Stock to each of Craig
and La Cadena in payment of all principal owing on such shareholder notes.
TRANSFER OF CRAIG COMMON STOCK
Pursuant to the Second Amended and Restated Stock Agreement dated as of
January 12, 1994, (the "Craig Stock Agreement"), among the Company, Craig, La
Cadena and James J. Cotter, in consideration for a standstill agreement by
Craig, the Company agreed to transfer to Craig 311,404 shares of Craig's common
stock owned by the Company at such time following the Recapitalization Closing
as the Company determined it was legally entitled to do so under applicable law
governing distributions to shareholders. Such agreement resulted in a pre-
tax
F-27
