FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ............... to ...............
Commission file number 1-649
READING COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 23-6000773
(State of incorporation) (I.R.S. Employer
Identification No.)
One Penn Square West
30 South Fifteenth Street, Suite 1300
Philadelphia, Pennsylvania 19102-4813
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 215-569-3344
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
There were 4,962,339 shares of Class A Common Stock and 10,888 shares
of Common Stock outstanding as of May 10, 1996.
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INDEX
READING COMPANY AND SUBSIDIARIES
PART I. - FINANCIAL INFORMATION
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PAGE
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- March 31, 1996
(Unaudited) and December 31, 1995..................................................... 3-4
Condensed Consolidated Statements of Operations -- Three Months
Ended March 31, 1996 and 1995 (Unaudited)............................................. 5
Condensed Consolidated Statements of Cash Flows -- Three Months
Ended March 31, 1996 and 1995 (Unaudited)............................................. 6
Notes to Condensed Consolidated Financial Statements (Unaudited)......................... 7-17
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18-20
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................................................... 21
Signatures........................................................................................ 22
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PART I - Financial Information
Item 1. Financial Statements
Reading Company and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except shares and per share amounts)
(Unaudited)
March 31, December 31,
1996 1995*
---------- ---------
ASSETS
Current assets
Cash and cash equivalents $32,045 $44,147
Available-for-sale securities 42 42
Amounts receivable 642 624
Due from affiliates 277 1,040
Restricted cash 360 360
Inventories 86 112
Prepayments and other current assets 437 498
Due from insurance companies 92 87
------- -------
Total current assets 33,981 46,910
------- -------
Investment in Australian theater
developments 13,306 640
Other investments 5,278 1,771
Restricted cash 273 362
Real estate held for sale or development 1,108 1,110
Property and equipment:
Buildings 733 733
Capitalized premises lease 538 538
Leasehold improvements 5,165 5,095
Equipment 3,753 3,787
Construction-in-progress 272 236
------- -------
10,461 10,389
Less: Accumulated depreciation 1,323 1,176
------- -------
9,138 9,213
Intangible assets:
Beneficial leases - net of accumulated
amortization of $1,599 in 1996 and
$1,370 in 1995 15,309 15,538
------- -------
44,412 28,634
------- -------
$78,393 $75,544
======= =======
* The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
See Notes to Condensed Consolidated Financial Statements.
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Reading Company and Subsidiaries
Consolidated Balance Sheets (continued)
(in thousands, except shares and per share amounts)
(Unaudited)
March 31, December 31,
1996 1995*
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $2,042 $2,279
Accrued compensation 216 222
Accrued taxes and other 480 528
Film rent payable 323 299
Other liabilities 998 916
------ ------
Total current liabilities 4,059 4,244
------ ------
Capitalized lease, less current portion 520 521
Note payable to affiliate 3,325 0
Other liabilities 2,019 2,067
------ ------
Total long term liabilities 5,864 2,588
------ ------
Commitments and contingencies (See Note 10)
Shareholders' equity
Preferred stock, par value $1.00 per share:
Authorized -- 5,000,000 shares
Common stock, par value $.01 per share:
Authorized -- 10,000,000 shares
Issued 1996 -- 10,958 shares; 1995 --
11,530 shares 1 1
Class A common stock, par value $.01 per share:
Authorized -- 15,000,000 shares
Issued 1996 -- 5,145,733 shares; 1994 --
5,145,161 shares 51 51
Other capital 56,321 56,257
Retained earnings 14,698 15,035
Foreign currency translation adjustment 22 (10)
Class A common stock in treasury, at cost:
1996 -- 183,464 shares; 1995 -- 183,397 (2,623) (2,622)
------ ------
Total shareholders' equity 68,470 68,712
------ ------
$78,393 $75,544
======= =======
* The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See Notes to Condensed Consolidated Financial Statements.
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Reading Company and Subsidiaries
Consolidated Statements of Operations
(in thousands, except shares and per share amounts)
Three Months Ended
March 31,
--------------------
1996 1995
--------- ------
REVENUES:
Theater:
Admissions $2,776 $2,262
Concessions 1,021 809
Advertising and other 214 134
Real estate 74 68
Interest and dividends 585 508
Other 15 27
--------- ---------
4,685 3,808
--------- ---------
EXPENSES:
Theater costs 2,970 2,329
Theater concession costs 168 140
Depreciation and amortization 386 336
General and administrative 1,170 941
Equity loss from Australian theater
developments 254 0
--------- ---------
4,948 3,746
--------- ---------
Income (loss) before income taxes (263) 62
Income tax provision 10 141
--------- ---------
Net income (loss) ($273) ($79)
========= =========
Per share information:
Net income (loss) ($0.05) ($0.02)
========= =========
Average shares outstanding 4,973,259 4,973,429
========= =========
See Notes to Condensed Consolidated Financial Statements.
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Reading Company and Subsidiaries
Condensed Consolidated Statement of Cash Flows (Unaudited)
(in thousands)
Three Months Ended
March 31,
--------------------
1996 1995
------- ------
OPERATING ACTIVITIES
Net loss ($273) ($79)
Adjustments to reconcile net loss to
net cash provided from operating activities:
Depreciation 147 109
Amortization 239 227
Deferred rent expense 41 41
Equity loss from Australian theater
developments 254 0
Deferred income tax expense 0 132
Changes in operating assets and liabilities:
Increase in amounts receivable (18) (28)
Decrease in inventories 26 11
Decrease in prepaids and other current
assets 61 76
Increase (decrease) in insurance proceeds
receivable (5) 369
Decrease in accounts payable and accrued
expenses (291) (473)
Increase (decrease) in film rent payable 24 (221)
Decrease in other liabilities (7) (93)
Other, net 45 3
------- -------
Net cash provided from operating activities 243 74
------- -------
INVESTING ACTIVITIES
Purchase of property and equipment (73) (104)
Investment in Australian theater developments
(See Note 5) (12,888) 0
Purchase of Citadel preferred stock option
(See Note 4) (50) 0
Net proceeds from real estate joint venture
investments 0 185
Decrease in restricted cash 89 0
Purchases of available-for-sale securities (42) (283)
Sales and maturities of available-for-sale
securities 42 12,250
Decrease in due from affiliate 763 0
------- -------
Net cash (used for) provided from investing
activities (12,159) 12,048
------- -------
FINANCING ACTIVITIES
Payments of debt financing costs (185) 0
Purchase of treasury stock (1) 0
------- -------
Net cash used for financing activities (186) 0
------- -------
(Decrease) increase in cash and cash
equivalents (12,102) 12,122
Cash and cash equivalents at beginning
of year 44,147 9,413
------- -------
Cash and cash equivalents at end of period $32,045 $21,535
======= =======
See Notes to Condensed Consolidated Financial Statements.
-6-
<PAGE>
Reading Company and Subsidiaries
Notes to Condensed Financial Statements
March 31, 1996
(amounts in tables in thousands)
NOTE 1 -- OWNERSHIP AND BASIS OF PRESENTATION
Reading Company (the "Company") has operated motion picture exhibition
theaters in leased locations in the Commonwealth of Puerto Rico since the
acquisition of Theater Acquisitions of Puerto Rico, Inc. ("TAPR") in 1994. In
November 1995, the Company and Craig Corporation ("Craig"), the owner of
approximately 49.3% of the Company's capital stock, formed Reading International
Cinemas LLC ("Reading International"), a limited liability company owned equally
by the Company and Craig which has initiated theater development activities in
Australia. The Company's remaining real estate activities include the managed
sale of certain of its real properties, the possible future development of
certain center city Philadelphia properties and participation in two real estate
joint ventures.
The condensed consolidated financial statements of Reading Company and
Subsidiaries ("the Company") include the accounts of Reading Company and its
majority-owned subsidiaries. Significant intercompany transactions and accounts
have been eliminated. Certain amounts in previously issued financial statements
have been reclassified to conform with current classifications.
TAPR was acquired as of July 1, 1994 and the results of TAPR have been
consolidated with the Company's operating results since that date (See Note 3).
On December 31, 1994, TAPR was merged into its parent corporation, Reading
Cinemas of Puerto Rico, Inc. ("RCPR") with RCPR the surviving corporation and
the operating name changed to Cine Vista (unless otherwise required by the
context, TAPR, RCPR, and Cine Vista may be used interchangeably herein).
The financial statements have been prepared in accordance with
generally accepted accounting principles for interim information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments of a recurring nature considered necessary for a
fair presentation of the results for the interim periods presented have been
included. Operating results for the three months ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Consolidated Statement of Cash Flows: For purposes of the
Balance Sheet and Statement of Cash Flows, the Company considers all highly
liquid investments with maturities of three months or less at the time of
acquisition to be cash equivalents. Cash equivalents are stated at cost plus
accrued interest, which approximates market value, and consist principally of
federal agency securities and short-term money market instruments.
Available-for-Sale Securities: Management classifies government
securities held by the Company with maturities in excess of three months at the
time of purchase as available-for-sale as such investments together with "Cash
and cash equivalents" are expected to be used to fund expansion of theater
operations, acquisition or other development activities.
-7-
<PAGE>
Reading Company and Subsidiaries
Notes to Condensed Financial Statements
March 31, 1996
(amounts in tables in thousands)
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Inventories: Inventories are comprised of confection goods used in
Cine Vista's operations and are stated at the lower of cost (first-in,
first-out method) or net realizable value.
Loss Per Share: Loss per share (Common Stock and Class A Common Stock)
is calculated by dividing net income (loss) by the aggregate of the weighted
average shares outstanding during the period and the dilutive effect, if any, of
common stock equivalents that are outstanding. There were 367,232 and 374,732
Class A Common shares issuable under stock option plans on March 31, 1996 and
1995, respectively. These options were anti-dilutive and were therefore excluded
from the per share calculation.
Property and Equipment: Property and equipment is carried at cost.
Depreciation of buildings, capitalized premises lease, leasehold improvements
and equipment is recorded on a straight line basis over the estimated lives of
the assets or, if the assets are leased, the remaining lease term (inclusive of
options, if likely to be exercised), whichever is shorter. The estimated useful
lives are generally as follows:
Building and Improvements 40 years
Equipment 15 years
Furniture and Fixtures 7 years
Leasehold Improvements 20 years
Intangible Assets: Intangible assets are comprised of beneficial
theater leases used in Cine Vista's operations. The amount of the TAPR purchase
price ascribed to the beneficial leases was determined by an independent
appraiser by computing the present value of the excess of market rental rates
over the rental rates in effect under TAPR's leases at the time of the Company's
acquisition of TAPR and allocating such amount as a component of the purchase
price of TAPR. The beneficial leases are amortized on a straight-line basis over
the remaining term of the underlying leases which approximates 18 years.
Translation of Non-U.S. Currency Amounts: The financial statements
and transactions of Reading International's (See Note 5) Australian
operations are maintained in their functional currency (Australian dollars) and
translated into U.S. dollars in accordance with SFAS No. 52 "Foreign Currency
Translation". Assets and liabilities are translated at exchange rates in effect
at the balance sheet date and shareholders' equity is translated at historical
exchange rates. Revenues and expenses are translated at the average exchange
rate for the period. Translation adjustments are reported as a separate
component of shareholders' equity.
Reclassifications: Certain amounts in previously issued financial
statements have been reclassified to conform with the current presentation.
NOTE 3 -- ACQUISITION OF CINE VISTA
Effective July 1, 1994, the Company acquired TAPR from Theater
Acquisitions, LP ("TALP") for an aggregate cash purchase price of approximately
$22,700,000, inclusive of acquisition costs of $323,000. Cine Vista operates
motion picture exhibition theaters in seven leased locations with a total of 44
screens in the Commonwealth
-8-
<PAGE>
Reading Company and Subsidiaries
Notes to Condensed Financial Statements
March 31, 1996
(amounts in tables in thousands)
of Puerto Rico. At the time of its acquisition TAPR operated 36 screens in six
leased locations. The acquisition was accounted for using the purchase method
and TAPR's operating results since July 1, 1994 have been consolidated with the
operating results of the Company.
The purchase price was subject to the satisfaction of certain
contingencies in accordance with the provisions of a purchase agreement by and
among TAPR, TALP and the Company dated July 1, 1994 (the "Purchase Agreement").
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. Accordingly, $1 million of the purchase price was escrowed and was
payable over 36 months provided the landlord did not cancel the lease during
such period or assert other claims relating to the lease, in which case the
escrow is available for set off. The landlord has asserted certain claims
relating to the computation of the rent and the Company and TALP therefore
amended the terms under which the payments are made from the escrow. Under
amended terms, payments of $30,000 are paid monthly to TALP. This escrow, which
is invested in short term treasury securities, has been classified as
"Restricted cash." At March 31, 1996, $617,000 was due to TALP under this
arrangement and has been classified as an "Other liability" (See Note 10).
NOTE 4 -- INVESTMENTS
On November 8, 1995, the Company acquired from a major bank, for
$1,285,000, a judgement encumbering, among other things, a controlling interest
in a company which has as its principal asset a Manhattan multiplex theater. The
judgement has been acquired as part of the Company'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 of or at least a
controlling interest in this theater. The Company also has acquired options to
purchase shares representing 5/13ths of the voting power of the company that
owns the multiplex theater and to obtain certain other creditor claims against
that company. No assurance can be given that the Company's plan to acquire the
theater will ultimately prove successful.
On March 29, 1996, the Company purchased from Craig 1,564,473 shares of
the common stock of Citadel Holding Corporation, ("Citadel" and the "Citadel
Common Stock", respectively) for an aggregate purchase price of $3,324,505,
representing slightly less than $2.125 per share and ownership of approximately
26% of Citadel Common Stock. The closing price of Citadel Common Stock on the
American Stock Exchange on March 28, 1996 was $2.25 per share. The Company paid
Craig for the Citadel Common Stock with a five year unsecured promissory note
which provides for the payment of interest at a rate equal to LIBOR plus 2.25%.
The note is recorded on the Condensed Consolidated Balance Sheet at March 31,
1996 as "Note payable to affiliate". The Company accounts for its investment in
the Citadel Common Stock by the equity method.
The Company also acquired from Craig (for $50,000) a one year option to
acquire, at fair market value, as determined by an investment banker selected by
the parties, 1,329,114 shares of the 3% Cumulative Voting Convertible Preferred
Stock, stated value $3.95 per share, of Citadel and an option to acquire a
warrant to acquire 666,000 shares of Citadel Common Stock.
Management believes that the March 31, 1996 carrying amounts of the
above-mentioned investments and the Company's other investments totalling
$618,000, approximate fair value.
-9-
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Reading Company and Subsidiaries
Notes to Condensed Financial Statements
March 31, 1996
(amounts in tables in thousands)
NOTE 5 -- EQUITY INVESTMENT/ACQUISITION ACTIVITIES
In November 1995, the Company and Craig formed Reading International to
develop and operate multiplex cinemas in Australia and other markets. A wholly
owned subsidiary of Reading International has retained the services of several
executive employees in Australia who provide services with respect to such
Australian operations on a full time or substantially full time basis. Reading
International is equally owned by the Company and Craig.
On March 29, 1996, the Company and Craig entered into a capital funding
agreement (the "Capital Funding Agreement") with respect to Reading
International pursuant to which they agreed to increase the capital committed by
the Company and Craig to Reading International from $10 million to approximately
$103 million through a combination of cash contributions and secured capital
funding undertakings. Under the terms of the Capital Funding Agreement, the
Company and Craig each immediately contributed to Reading International
$12,500,000 in cash, for an aggregate $25,000,000. In addition, the Company and
Craig have undertaken to contribute up to an additional $37,500,000 each, for an
aggregate future commitment of $75,000,000 on an as needed basis. The
commitments of the Company and Craig are secured by various assets of the two
parties. The collateral pledged by Craig was reviewed by an independent
committee of the Company's Board of Directors comprised of outside directors who
are unaffiliated with Craig, and found to be adequate to secure Craig's
commitment under the Capital Funding Agreement. The Company pledged its interest
in Cine Vista and government agency securities. The Company may substitute
collateral for the Funding Commitment provided that the fair market value of the
collateral substituted is equal to at least 125% of the Funding Commitment or,
in the case of government or government agency securities, equal to 100% of the
Funding Commitment. The Company is also negotiating to acquire a theater in
Manhattan (See Note 4) and Cine Vista has two new theaters under development and
is seeking additional theater sites in Puerto Rico.
The Company accounts for its investment in Reading International and
its foreign subsidiaries by the equity method. Summarized financial information
for Reading International as of March 31, 1996 is as follows:
Current assets $ 25,285
Noncurrent assets 5,087
---------
Total assets $ 30,372
=========
Current liabilities $ 3,761
Shareholders' equity 26,611
----------
Total liabilities and shareholder's equity $ 30,372
==========
Reading International's net loss for the three months ended March 31,
1996 was $508,000, consisting primarily of general and administrative expenses
and development costs incurred with respect to its theater development
activities. The Company's share of the loss from Reading International was
$254,000, which is included in the Consolidated Statement of Operations.
-10-
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Reading Company and Subsidiaries
Notes to Condensed Financial Statements
March 31, 1996
(amounts in tables in thousands)
As of March 31, 1996, advances and contributions amounting to
approximately $27,856,000 have been made to Reading International by Reading and
Craig inclusive of $237,000 advanced on behalf of Craig by the Company and which
is included in "Due from affiliates" on the Company's Consolidated Balance Sheet
at March 31, 1996. Craig Corporation repaid the $237,000 advance in April 1996.
Reading International's noncurrent assets at March 31, 1996 are comprised
principally of $4,897,000 related to the purchase of land and development costs
and $189,000 of refundable property deposits. A land purchase was made pursuant
to a real estate purchase contract with the seller which provided for
installment payments, including $3,306,000 due on December 20, 1996 which amount
is included in current liabilities on Reading International's balance sheet at
March 31, 1996. Reading International is also in negotiation with several
developers and landlords with respect to other potential locations.
NOTE 6 -- LEASES
Cine Vista conducts all of its operations in leased premises. The
leases relate to motion picture theaters with remaining terms of approximately 7
to 26.5 years with certain leases containing options to extend the leases for up
to an additional 30 years. The minimum remaining lease term, inclusive of any
renewal options, for any of Cine Vista's theaters is approximately 17.25 years.
Cine Vista also leases office, warehouse space and various equipment. Certain
theater leases provide for contingent rentals based upon a specified percentage
of theater revenues with a guaranteed minimum. Performance under one lease has
been guaranteed by the Company. Substantially all of the leases require the
payment of property taxes, insurance and other costs applicable to the property.
With the exception of one capital lease, all leases are accounted for as
operating leases. Cine Vista determines annual base rent expense by amortizing
total minimum lease obligations on a straight-line basis over the lease terms.
Cine Vista's future minimum lease payments, by year and in the
aggregate, under noncancellable operating leases and the capital lease consist
of the following at March 31:
Capital Operating
Lease Leases
--------- ---------
1997 $ 95 $ 1,321
1998 95 1,303
1999 95 1,399
2000 95 1,401
2001 95 1,401
Thereafter $ 1,235 $ 14,192
-------- --------
Total net minimum lease payments $ 1,710 $ 21,017
========
Less amount representing interest (1,186)
-------
Present value of net minimum lease payments
under capital lease $ 524
=======
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Reading Company and Subsidiaries
Notes to Condensed Financial Statements
March 31, 1996
(amounts in tables in thousands)
In June 1995, Cine Vista entered into a lease agreement for a new
six-plex motion picture theater. The lease provides for a 20-year term with an
average annual base rent of approximately $185,000 with options to extend the
lease up to an additional 10 years. The lease also provides for contingent
rentals based upon a specified percentage of theater revenues with a guaranteed
minimum and requires the payment of property taxes, insurance and other costs
applicable to the property. The lease will be effective after completion of
construction of the new theater. Cine Vista is responsible for certain
construction costs of the theater which are presently estimated to total $1.2
million. Completion of construction and commencement of theater operations is
scheduled to occur in 1996.
NOTE 7 -- REAL ESTATE HELD FOR SALE OR DEVELOPMENT
"Real estate held for sale or development" at March 31, 1996 is carried
at the lower of cost or estimated net realizable value and is classified as a
noncurrent asset due to the inherent difficulty in estimating the timing of
future sales. The Company is exploring development and sale options for its
center city Philadelphia properties which are adjacent to the Pennsylvania
Convention Center site and is actively seeking buyers for its properties located
outside center city Philadelphia.
NOTE 8 -- OTHER LIABILITIES
Other liabilities consisted of the following:
March 31, December 31,
1996 1995
-------- --------
Reserve for guarantee obligations of
SWS Industries, Inc. (See Note 10) $ 406 $ 406
Obligations related to past railroad operations
and environmental issues (See Note 10) 1,249 1,251
Cine Vista deferred purchase price (See Note 3) 617 707
Minimum rent obligations 288 247
Other 457 372
------ ------
3,017 2,983
Less estimated current portion (998) (916)
------ ------
$2,019 $2,067
====== ======
NOTE 9 -- INCOME TAXES
The Company accounts for income taxes under SFAS No. 109 "Accounting
for Income Taxes". Under SFAS No. 109, an income tax provision is recorded in
the statement of operations using the enacted federal rates. Effective December
31, 1981, after approval by its shareholders, the Company eliminated its
accumulated deficit by a charge to "Other capital." This quasi-reorganization
did not require the restatement of any assets or liabilities or any other
modification of capital accounts. Tax benefits realized from the carryforwards
of pre-quasi-reorganization losses have been included in the determination of
net income and then reclassified from "Retained
-12-
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Reading Company and Subsidiaries
Notes to Condensed Financial Statements
March 31, 1996
(amounts in tables in thousands)
earnings" to "Other capital". Had such tax benefits been excluded from net
income, the Company would have reported a net loss of $337,000 or $.07 per share
for the three months ended March 31, 1996.
At December 31, 1995, net operating loss carryforwards totalled $162.7
million of which $123.1 million expires at the end of 1996 unless utilized prior
thereto and $39.6 million will expire in various amounts between 1997 and 2009
unless utilized prior thereto.
Carryforwards and temporary differences which give rise to the deferred
tax asset are as follows:
March 31, December 31,
1996 1995
--------- ---------
Net operating loss carryforwards $55,255 $55,325
Reserves 1,004 1,004
Other, net 242 242
--------- ---------
Gross deferred asset 56,501 56,571
Valuation allowance (56,501) (56,571)
--------- ---------
Net deferred asset $ 0 $ 0
========= =========
Based on an analysis of the likelihood of realizing the Company's gross
deferred tax assets (taking into consideration applicable statutory carryforward
periods), the Company concluded that under SFAS No. 109, a valuation allowance
for the entire asset was necessary.
The Company is required to pay federal alternative minimum tax ("AMT").
AMT is calculated separately from the regular federal income tax and is based on
a flat rate applied to a broader tax base. Amounts payable thereunder cannot be
totally eliminated through the application of net operating loss carryforwards.
The Company recorded AMT expense of $10,000 and $9,000 in the three months ended
March 31, 1996 and 1995, respectively. Upon adoption of SFAS No. 109 in 1993, a
deferred tax asset of $132,000 was recorded for the tax benefits which were
determined by management to be more likely than not to be realized from the
Company's net operating loss carryforwards. The Company recorded a $132,000 tax
provision in the Condensed Consolidated Statement of Operations for the three
months ended March 31, 1995 related to the realization of such tax benefits in
that period.
NOTE 10-- COMMITMENTS AND CONTINGENCIES
SWS Industries, Inc.
The Company sold a subsidiary, SWS Industries, Inc. ("SWS") in 1987.
SWS subsequently filed for bankruptcy in 1988. Under the terms of the SWS sales
agreement, the Company remained liable as guarantor on various performance bonds
issued on behalf of SWS. The Company's liability under the performance bond
guarantees has been reduced as the related contracts have been completed or
settled. Completion activities will continue into 1996. Management believes the
reserve at March 31, 1996 is adequate for the remaining obligations of the
Company.
-13-
<PAGE>
Reading Company and Subsidiaries
Notes to Condensed Financial Statements
March 31, 1996
(amounts in tables in thousands)
Cine Vista
A landlord of Cine Vista has alleged that Cine Vista underpaid rent by
approximately $500,000 for the thirty-three month period ended March 31, 1996.
The Company is contesting the landlord's claim and believes the claim to be
without merit. If the landlord were to prevail in its assertion, the Company is
indemnified by TALP for the amount due at June 30, 1994 ($186,000) and the
Company believes it would be entitled to a reduction in the purchase price of
TAPR relating not only to the 21 months ended March 31, 1996 but also relating
to the 17.25 future years under the lease. Such purchase price reduction would
be funded, in part, from the proceeds of the TAPR purchase escrow (See Note 3).
Historical Railroad Operations
The Company is a defendant in various personal injury legal actions
relating to its railroad operations prior to reorganization and has insurance
coverage relating to such actions. In accordance with the provisions of a 1990
settlement agreement (the "Settlement Agreement") with its insurance carriers,
the Company receives quarterly reimbursement for certain personal injury legal
actions. At March 31, 1996, $92,000 was reimbursable to the Company for amounts
expended in defense and settlement of such actions. This amount has been
classified as "Due from insurance companies." Three participants in the
insurance settlement are insolvent. Unreimbursed claims insured by these
insolvent companies totaled $62,000 from 1992 through March 31, 1996. The
Company believes that it may be entitled to reimbursement of such amounts from
the other parties to the agreement and may request an arbitration hearing on
such matters. Based upon the backlog of pending personal injury cases and the
Company's experience in settling such cases, the Company has established a
reserve of $146,000 reflecting the potential effect of such insolvencies on
future insurance reimbursement if no recovery is received from either the
insolvent carriers or the other parties to the Settlement Agreement. The reserve
associated with such insolvencies may increase if additional claims are filed;
however, the Company does not believe that such amount will be material.
Environmental
The Company and a wholly-owned subsidiary, Reading Transportation
Company ("RTC"), have each been advised by the Environmental Protection Agency
("EPA") that they are potentially responsible parties ("PRPs") under
environmental laws including Federal Superfund legislation ("Superfund") for a
site located in Douglassville, Pennsylvania. The EPA issued an Administrative
Order under Superfund against 34 PRPs requiring, among other things, that the
named parties be required to incinerate materials at the site pursuant to a 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 of approximately $22 million.
Reading and RTC have each been named in a third-party action instituted by the
majority of the 36 PRPs sued by the United States. The actions instituted
against the Company and approximately 300 PRPs seek to have the parties
contribute to reimbursement for past costs and any costs associated with further
remediation at the site.
During 1994, based upon the Company's and counsel's evaluation of
possible outcomes in the matter, the Company increased its "Provision for
environmental matters" by $1,200,000. 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 the Company's amended plan
of reorganization on December 31, 1980. The United States Department of Justice
and
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<PAGE>
Reading Company and Subsidiaries
Notes to Condensed Financial Statements
March 31, 1996
(amounts in tables in thousands)
a named defendant in the above described Administrative Order have filed appeals
of the decision. The judge's decision did not affect the potential liability of
RTC for the site. RTC has no assets and therefore cannot fund a settlement or
judgement relating to this matter and the Company believes that the potential
liability of RTC, if any, is not in excess of $300,000. Based upon the appeal
and possible alternate attempts by the PRPs to obtain Reading's participation in
funding for the site as well as the existence of the other environmental matters
set forth below, the Company has not reduced its "Provision for environmental
matters."
The Company is a party to a consent decree relating to a Superfund site
located on land owned by the Company. Apart from future operation and
maintenance expenses ("O&M"), remediation is complete. During 1994, the Company
paid approximately $106,000 as its estimated share of ten years of O&M and
charged such amount to "Provisions for environmental matters" expense. The
Company believes that the amounts expended to date will be adequate to fund O&M
at the site. If additional amounts are required, such amounts would not be
material.
During 1995, the Company settled an action seeking the recovery of
$3,800,000 of alleged environmental cleanup costs from five defendants under
various provisions of New Jersey law for $235,000 which approximates the amount
previously accrued by the Company to provide for its share of the liability.
In 1991, the Company filed a lawsuit against the Southeastern
Pennsylvania Transportation Authority ("SEPTA"), Conrail, the City of
Philadelphia, and other parties which sought to recover costs expended by the
Company in conjunction with the cleanup of polychlorinated biphenyls ("PCBs") in
the Reading Terminal Train Shed and a portion of the viaduct south of Vine
Street. In January 1996, the Company and several parties agreed to settle this
litigation by providing for the Company to receive payments totalling $2.35
million which amount the Company anticipates receiving in 1996. The parties to
the settlement also agreed to pay an amount ranging from 52% to 55% of certain
future costs the Company may incur in cleaning environmental contamination on
one of its other properties, the Viaduct which the company believes may be
contaminated by PCBs resulting from former railroad operations on that property
conducted by, or on behalf of the Reading Railroad, Conrail, the City of
Philadelphia or the SEPTA. The Company has advised the Environmental Protection
Agency of the potential contamination. The Company has not determined the scope
and extent of any such PCB contamination. However, the Company has been advised
by counsel that, given the lack of regulatory attention to the Viaduct in the
eleven years which have elapsed since EPA was notified of the likelihood of
contamination, it is unlikely that the Company will be required to decontaminate
the Viaduct or incur costs related thereto.
Prior to the Company's reorganization, the Company had extensive
railroad and related operations. Such operations could have contributed to
environmental contamination of properties now owned by the Company, previously
sold or leased by the Company, or to which the Company, prior to its
reorganization, sent waste. The ultimate extent of liabilities, if any, with
respect to such matters, as well as the timing of cash disbursements, if any,
cannot be determined. However, management is of the opinion that while the
ultimate liability resulting from such matters could have a material effect upon
the results of operations in a given year, they will not have a material adverse
effect upon the Company's financial position or liquidity.
-15-
<PAGE>
Reading Company and Subsidiaries
Notes to Condensed Financial Statements
March 31, 1996
(amounts in tables in thousands)
The following is an analysis of the Company's accrual for
environmental claims:
Balance at January 1, 1994 $ 336
Provisions 1,306
Payments (133)
-----------
Balance at December 31, 1994 1,509
Provisions 0
Payments (248)
-----------
Balance at December 31, 1995 $ 1,261
Provisions 0
Payments (2)
-----------
Balance at March 31, 1996 $ 1,259
===========
NOTE 11 -- RELATED PARTY TRANSACTIONS
In 1994, 1995 and 1996, the Company's Board of Directors voted to waive
the transfer restrictions imposed by the provisions of the Company's Class A
Common Stock to the extent necessary to permit James J. Cotter, Chairman of the
Board of Directors of the Company and Craig to acquire additional shares of the
Company's Class A Common Stock. The transfer provisions prohibit a party from
acquiring more than 4.75% of the Company's outstanding capital stock without the
permission of the Company's Board of Directors and are intended to assure the
continuing availability of the Company's tax loss carryforwards by precluding a
change in control which could limit the value of the carryforwards. Craig
currently owns approximately 49.3% of the Company's outstanding capital stock
and has been granted approval to acquire up to 55%. Prior to granting the waiver
of the restrictions, the Board of Directors had determined that acquisition of
the shares by Mr. Cotter and Craig would not affect the continuing availability
of the Company's tax loss carryforwards.
The Company is presently negotiating to acquire a multiplex theater
located in New York City (See Note 4). The theater will be owned jointly by City
Cinemas, a Manhattan-based theater operator (or its affiliates) and the Company.
It is anticipated that City Cinemas, owned in part by James J. Cotter, the
Company's Chairman, will operate the theater pursuant to a management agreement.
The terms of that management agreement have not yet been negotiated. Robert F.
Smerling, President of Cine Vista, also serves as President of City Cinemas.
On March 29, 1996, the Company purchased from Craig 1,564,473 shares of
Citadel Common Stock and acquired an option to acquire 1,329,114 shares of
Citadel's 3% Cumulative Voting Preferred Stock and a warrant to acquire 666,000
shares of Citadel Common Stock. The purchase of Citadel common Stock was paid by
the issuance of a five year unsecured $3,324,505 promissory note payable to
Craig. An independent committee comprised of outside directors not affiliated
with Craig reviewed negotiated and approved the provisions of the Citadel Stock
Purchase Agreement and the Option Agreement. (See Note 4 and Note 12.)
In November 1995, the Company and Craig formed Reading International to
develop and operate multiplex cinemas in Australia and other markets. On March
29, the Company and Craig entered into a Capital Funding
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<PAGE>
Reading Company and Subsidiaries
Notes to Condensed Financial Statements
March 31, 1996
(amounts in tables in thousands)
Agreement pursuant to each of the parties contributed $12,500,000 and pledged to
contribute an additional $37,500,000 each to Reading International. The Company
and Craig each pledged various assets as security for the additional capital
commitments. An independent committee comprised of outside directors not
affiliated with Craig reviewed and determined that the collateral pledged by
Craig as security for its funding commitment was adequate. (See Note 5.)
NOTE 12 -- LONG-TERM DEBT
In December 1995, Cine Vista entered into a $15 million eight year
revolving credit agreement (the "Credit Agreement") with a bank. Under terms of
the Credit Agreement, Cine Vista may borrow up to $15 million to repay Cine
Vista acquisition loans, which loans are payable to a wholly-owned subsidiary of
the Company (the "Subsidiary Loans"), and fund certain new theater development
expenditures (the "Development Expenditures"). During the initial 30 months of
the eight-year term, Cine Vista may borrow and repay amounts outstanding under
the Credit Agreement. Amounts outstanding at the end of the 27 month period are
payable in increasing quarterly installments over the balance of the loan term.
At March 31, 1996, no amounts were outstanding under this agreement.
As security for the loan, Cine Vista has pledged substantially all of
its assets. In addition, the stock of Cine Vista's parent company has been
pledged as security for the loan. In conjunction with the loan, the Company has
also agreed to subordinate to the lender its right to payment of the Subsidiary
Loans as well as certain other fees payable by Cine Vista to the Company under
certain circumstances. In addition, the Company has agreed to contribute funds
to Cine Vista in the event that estimated unpaid Development Expenditures exceed
the amount of funds available to Cine Vista under the Credit Agreement.
The provisions of the Credit Agreement require Cine Vista to maintain a
minimal level of net worth and other financial ratios, restrict the payment of
dividends, and limit additional borrowings and capital expenditures. Borrowings
under the Credit Agreement accrue interest at LIBOR (the London Interbank
Offered Rate) plus 2.25%, the cost of Section 936 deposits (deposits held by
lenders in Puerto Rico which are qualified under Section 936 of the Internal
Revenue Code) to the lender (currently 5.17%) plus 2.25%, or the base rate plus
1/2 of 1%, at Cine Vista's election. In accordance with the provisions of the
Credit Agreement, Cine Vista is required to pay a commitment fee on the unused
commitment equal to 1/2 of 1%.
The Company paid Craig for the Citadel Common Stock with a five year
unsecured promissory note which provides for payment of interest at a rate equal
to LIBOR plus 2.25% (See Note 4). This promissory note is recorded on the
Condensed Consolidated Balance Sheets as "Note payable to affiliate" at March
31, 1996.
-17-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations:
Due to the nature of the Company's historical business activities,
revenues and earnings have varied significantly reflecting the results of real
estate and other asset sales as well as the amount and timing of development
activities. In addition, Reading International is acquiring properties and
entering into leases for sites in Australia which it will develop into motion
picture theaters. Until the theaters have been constructed and are placed in
operation, Reading International will have no material revenues and can be
expected to generate losses. Accordingly, period-to-period comparisons of
operating results will not be indicative of future financial results. Cine
Vista's business is seasonal and the results of Cine Vista included in the
three-month period ended March 31, 1996 may not be indicative of Cine Vista's
annual operating results.
Revenues in the three-month period ended March 31, 1996 increased
$877,000 to $4,685,000 from $3,808,000 in the corresponding three-month period
last year. The increase was due primarily to a 25.2% increase in theater
revenues recorded by Cine Vista.
"Theater costs", "Theater concession costs" and "Depreciation and
amortization" reflect the direct theater costs of Cine Vista's operations. These
costs increased $719,000 from $2,805,000 in the quarter ending March 31, 1995 to
$3,524,000 in this year's first quarter due primarily to increased costs
associated with higher revenues. Significant increases in the current quarter
include, a $301,000 increase in film rent (a 3.3% increase as a percentage of
box office revenues), an increase in concession costs of $28,000 (which cost
decreased approximately 1% as a percentage of concession revenues), an $87,000
increase in contingent rent under facility leases and increased wage and salary
expense (which amount remained constant as a percentage of sales).
"General and administrative" expenses increased $229,000 from $941,000
in the corresponding three-month period last year due to higher professional
fees resulting from acquisition activities. (See Note 4.)
"Equity loss from investment in Australian theater developments"
reflects the Company's 50% share of the initial general and administrative
expenses in Australia and noncapitalized development expenditures relating to
new theater site analysis and selection (See Note 5). The Company does not
anticipate material revenues from Reading International during the next 15
months and therefore anticipates continuing losses during such period as new
theaters are developed and operations initiated. The investment in and operating
results of Reading International are reported under the equity method.
The Company recorded AMT expense of $10,000 and $9,000 in the three
months ended March 31, 1996 and 1995, respectively. Upon adoption of SFAS No.
109 in 1993, a deferred tax asset of $132,000 was recorded for the tax benefits
which were determined by management to be more likely than not to be realized
from the Company's net operating loss carryforwards. The Company recorded a
$132,000 tax provision in the Condensed Consolidated Statement of Operations for
the three months ended March 31, 1995 related to the realization of such tax
benefits in that period.
The Company recorded a net loss of $273,000 and $79,000 for the three
months ended March 31, 1996 and 1995, respectively.
Liquidity and Capital Resources:
The Company's existing financial resources are sufficient to fund the
Company's existing operations, obligations and the present development plans of
Cine Vista and Reading International. In November 1995, the Company and Craig
formed Reading International in order to make available additional capital and
liquidity to
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<PAGE>
develop other theater opportunities in Australia. Reading International is
actively seeking properties to develop in Australia and has acquired two sites
and has made deposits for several other real property purchases or leases. On
March 29, 1996, the Company and Craig entered into a Capital Funding Agreement
with respect to Reading International pursuant to which they agreed to increase
the capital committed by the Company and Craig to Reading International from $10
million to approximately $103 million through a combination of cash
contributions and secured capital funding undertakings (See Note 5). The Company
and Craig each immediately contributed to Reading International $12,500,000 in
cash and have undertaken to contribute up to an additional $37,500,000 on an as
needed basis (the "Funding Commitment"). To secure the Funding Commitment, the
Company pledged its interest in Cine Vista and certain government securities and
Craig pledged its interest in Stater Brothers Holdings, Inc. The Company may
substitute collateral for the Funding Commitment provided that the fair market
value of the collateral substituted is equal to at least 125% of the unfunded
Funding Commitment or, in the case of government or government agency
securities, equal to 100% of the unfunded portion of the Funding Commitment. The
Company is also negotiating to acquire a theater in Manhattan (See Note 4) and
Cine Vista has two new theaters under development and is seeking additional
theater sites in Puerto Rico.
Cine Vista entered into a revolving credit agreement in December 1995
(the "Credit Agreement"). In accordance with the terms of the Credit Agreement,
Cine Vista may borrow up to $15,000,000 to repay certain loans payable to a
wholly-owned subsidiary of the Company and fund certain new theater development
expenditures (See Note 12). No amounts are presently outstanding under the
Credit Agreement. The Company may use funds available under the Credit Agreement
to fund its other theater development activities provided that a portion of such
funds are utilized to fund certain Cine Vista development projects.
On March 29, 1996, the Company purchased from Craig 1,564,473 shares of
Citadel Common Stock for an aggregate purchase price of $3,324,505 (See Note 4).
The Company paid Craig for the Citadel Common Stock with a five year unsecured
promissory note which provides for the payment of interest at a rate equal to
LIBOR plus 2.25%. The Company also acquired from Craig (for $50,000) a one year
option to acquire, at fair market value, as determined by an investment banker
selected by the parties, 1,329,114 shares of the 3% Cumulative Voting
Convertible Preferred Stock, stated value $3.95 per share of Citadel and an
option to acquire a warrant to acquire 666,000 shares of Citadel Common Stock.
If the Company elects to exercise the option to acquire the Citadel Preferred
Stock, the Company may pay for the acquisition with the issuance of a note with
the same terms as the note issued in payment of the Citadel Common Stock.
The Company purchased the Citadel Common Stock and acquired the options
as it believes that the price and terms at which such shares were offered
presented an attractive opportunity for the Company and Citadel's real estate
business and expertise complements and reflects the Company's involvement in and
commitment to the land-based entertainment business. The options were acquired
in order to provide the Company with the ability to acquire a controlling
interest in Citadel, if the Company were to elect to do so. The Company may,
from time to time, elect to acquire additional shares of Citadel Common Stock,
although the Company has not acquired any additional shares since the
acquisition from Craig.
In January 1996, the Company and several parties agreed to settle
litigation whereby the Company sought to recover certain environmental cleanup
costs previously expended by the Company on properties it formerly owned. The
agreement provides for the Company to receive payments totalling $2.35 million
to recover these costs, which amount the Company anticipates receiving in 1996.
The parties to the settlement also agreed to pay an amount ranging from 52% to
55% of certain future costs, if any, the Company may incur in cleaning
environmental contamination on the Viaduct (See Note 10).
Prior to the Company's reorganization, the Company had extensive
railroad and related operations. Such operations may have contributed to
environmental contamination of properties now owned by the Company, previously
sold by the Company, or to which the Company, prior to its reorganization, sent
waste. The ultimate extent of liabilities, if any, with respect to such matters,
as well as the timing of cash disbursements, if any, cannot be determined.
However, management is of the opinion, based on the information currently known,
that while the
-19-
<PAGE>
ultimate liability resulting from such matters could have a material effect upon
the results of operations in a given year, they will not have a material adverse
effect upon the Company's financial position or liquidity.
"Cash and cash equivalents" together with "Available-for-sale
securities" decreased $12,102,000 from $44,189,000 at December 31, 1995 to
$32,087,000 at March 31, 1996 due primarily to $12,888,000 in capital
contributions to Reading International (See Note 5) and a decrease in "Accounts
payable and accrued expenses" of $291,000. While not necessarily indicative of
cash flows determined under generally accepted accounting principles, Cine
Vista's operating cash flow (income before depreciation and amortization)
totaled $584,000 in the quarter ending March 31, 1996 versus $522,000 in the
quarter ending March 31, 1995. In addition to Cine Vista's operating cash flow,
other significant sources of liquid funds during this period included "Interest
and dividends" revenue of $585,000 and a decrease in due from affiliate of
$763,000 (related to the paydown by Craig of amounts funded by the Company on
Craig's behalf for Reading International).
Principal sources of liquid funds in the prior year three-month
period included $522,000 from Cine Vista's operating cash flow, $508,000 in
"Interest and dividends" revenue and a decrease in insurance proceeds receivable
of $369,000. In addition to operating expenses, the principal uses of liquid
funds for the three months ended March 31, 1995, included a decrease in
"Accounts payable and accrued expenses" of $473,000 (due to a pay-down of an
annual insurance contract) and a decrease in "Film rent payable" of $221,000 due
to timing
-20-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three month
period ended March 31, 1996.
-21-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
READING COMPANY, REGISTRANT
Date: May 14, 1996 By: /s/ James A. Wunderle
-------------------------- ------------------------------
James A. Wunderle
Executive Vice President,
Chief Operating Officer
and Treasurer
(Duly Authorized Officer and
Principal Financial Officer)
Date: May 14, 1996 By: /s/ Eileen M. Mahady
------------------------- ------------------------------
Eileen M. Mahady
Controller
(Principal Accounting Officer)
-22-
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