-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UVGvFobuQfqRDDgMT1/c/hoEKBchby1OJia5KIeAgdfBKfq8gsnHHL1jpa+lnajR ZQyyh8owjcN1UPV43kbd+g== 0001021408-00-001503.txt : 20000417 0001021408-00-001503.hdr.sgml : 20000417 ACCESSION NUMBER: 0001021408-00-001503 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: READING ENTERTAINMENT INC CENTRAL INDEX KEY: 0001023993 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE THEATERS [7830] IRS NUMBER: 232859312 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14504 FILM NUMBER: 601953 BUSINESS ADDRESS: STREET 1: ONE PENN SQ WEST STREET 2: 30 S 15TH ST STE 1300 CITY: PHILADELPHIA STATE: PA ZIP: 19102-4813 BUSINESS PHONE: 2155693344 MAIL ADDRESS: STREET 1: ONE PENN SQ WEST STREET 2: 30 S 15TH ST STE 1300 CITY: PHILADELPHIA STATE: PA ZIP: 19102-4813 10-K 1 READING ENTERTAINMENT, INC. FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ............... to ............... Commission file number 333-13413 Reading Entertainment, Inc. (Exact name of registrant as specified in its charter) Nevada 23-2859312 (State of incorporation) (I.R.S. Employer Identification No.) 30 South Fifteenth Street Suite 1300 Philadelphia, Pennsylvania 19102 (Address of principal executive offices) (Zip Code) Registrant's telephone number: 215.569.3344 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.001 Par Value Philadelphia Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 Par Value Title of class Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] As of March 23, 2000, there were 7,449,364 shares of Common Stock outstanding. The aggregate market value of voting stock held by nonaffiliates of the Registrant was approximately $9,680,429. Documents Incorporated By Reference: The information required by Part III is incorporated by reference to the definitive proxy statement for the 2000 Annual Meeting of Shareholders of Reading Entertainment, Inc. PART I Item 1. Business General Reading Entertainment, Inc., a Nevada corporation ("REI" and collectively with its various subsidiaries and predecessors, the "Company" or "Reading"), was formed in 1999 in a reorganization of the Company under a Nevada holding company. Initially organized in 1833, the Company has been doing business in the United States for over 165 years. Currently, operating 182 screens in twenty-seven multiplex cinema complexes, located principally overseas, and owning approximately 1.85 million square feet of land capable of supporting approximately 0.75 million square feet of development in Australia and New Zealand, the Company is principally in two lines of business (i) the development and operation of multiplex cinemas in Australia, New Zealand, Puerto Rico and the United States and (ii) the development and operation of cinema based entertainment centers in Australia and New Zealand. Prior to 1976, the Company was principally in the transportation business, owning and operating the Reading Railroad. Following the disposition of substantially all of its rolling stock and active rail lines in 1976, the Company pursued a number of endeavors including the development of One Reading Center (a 600,000 square foot office complex located in Philadelphia) and initiated the activities which led to the development of the Pennsylvania Convention Center on land originally utilized by the Company for railroad purposes. Since 1976, the Company has reduced its railroad real estate holdings from approximately 700 parcels and rights-of-way to approximately fifteen. In 1993, following the sale of its last major railroad real estate asset -- the historic Reading Terminal Headhouse in downtown Philadelphia -- the Company entered the "Beyond the Home" or real estate based segment of the entertainment industry. Since that date, the Company has acquired and updated a chain of multiplex cinemas in Puerto Rico ("CineVista") featuring conventional film product; acquired or developed certain multiplex cinemas in the United States featuring principally art, specialty and sophisticated or upper-end conventional film product ("Angelika Cinemas") and/or conventional film product ("Reading Cinemas"); and developed a chain of cinemas currently comprising seventy-one screens in Australia featuring conventional film product ("Reading Cinemas") and a 50% interest in a thirteen screen cinema chain in New Zealand ("Berkley Cinemas"). In 1999, the Company grew from 96 to 174 screens, most of the new screens coming on line in the fourth quarter of that year. At December 31, 1999, the Company had under development or agreements to lease, acquire or manage, cinemas representing approximately thirty-two additional screens. The Company anticipates adding twenty-six of these screens in 2000, including an Australian location with eight screens which commenced operations in March 2000. In Australia and New Zealand, the Company is also in the business of developing entertainment centers, typically consisting of a multiplex cinema, complementary restaurant and retail uses, and convenient parking, all located on land owned or controlled by the Company. Reading opened the cinema portion of its first entertainment center in Perth in December 1999 (the entertainment retail space is expected to be placed in operation in mid-2000), and anticipates opening a second and substantially larger entertainment center in a suburb of Auburn, Sydney in the third quarter of 2000. The Company, where feasible, prefers to own the land on which it constructs its cinemas. In the United States and Puerto Rico, a variety of factors (including land acquisition costs, the proliferation of suburban multiplex cinemas and competition from existing developers and shopping center owners) have caused the Company to rely on leasehold sites in established urban areas or suburban malls. However, an ownership-oriented approach is being pursued in urban centers in Australia and New Zealand. This means that many of the Company's projects in Australia and New Zealand are more capital intensive, have longer lead times, entail greater development risks and have initially lower cash returns than the more leveraged development of cinemas in leased facilities in established malls. However, the Company believes that these risks are more than offset by the greater control and flexibility that the ownership of such sites provides to the Company and by the opportunity given to the Company to participate in the enhancement to the value of such land likely to result from the consumer traffic generated by a successful cinema operation. To date, the Company has acquired (directly or through joint venture or tenant-in-common investments), or has the contract right to acquire, six sites in Australia and New Zealand which it believes are suitable for development or redevelopment as entertainment centers. During 1999 the Company acquired 100% ownership of an entertainment site in Wellington, New Zealand. Prior thereto, the Company held a 50% interest in such site. These sites (which include the entertainment center to be opened 1 in Sydney later this year) represent approximately 1.85 million square feet of land area with the potential to support nearly 0.75 million square feet of improvements. The Company has elected to focus its future cinema exhibition activities in Australia and New Zealand. The Company believes that, given its finite capital resources, the scope and extent of its current activities, its investments and commitments in Australia and New Zealand, and the opportunities available to it in Australia and New Zealand, that it is in the best interests of the Company and its stockholders to concentrate on Australia and New Zealand and to reduce development undertakings relating to its domestic cinema assets and, over time to reduce the position of the Company's assets directly invested in the domestic cinema exhibition business. Accordingly, the Company has sold to a third party a 50% membership interest in the Angelika Film Center LLC ("AFC"), has granted to that same third party certain options to acquire the Company's remaining 33.33% membership interest in AFC and to acquire the remainder of the Company's US based cinema assets (including its rights with respect to the City Cinemas Transaction), is in negotiations with its affiliate, Citadel Holding Corporation ("CHC and collectively with its predecessors and consolidated subsidiaries "Citadel") to transfer to Citadel, subject to such option, the Company's rights with respect to both the City Cinemas Transaction and the OBI Transaction, and is in negotiations with a third party to sell its interest in the Royal George Theatre ("RGT") in Chicago. The only domestic cinema development contemplated for 2000 is the development of an eight screen cinema in Dallas, which will feature art and upper end film product. The Company currently has the right under an agreement with Messrs. James J. Cotter (Chairman of the Company's Board of Directors) and Michael Forman (a major shareholder in Craig Corporation ("CC"and collectively with its wholly owned subsidiaries "Craig"), which corporation owns 78% of the Company's voting stock) and certain of their affiliates (collectively referred to as "Sutton Hill") a) to lease, with option to purchase, the Cinemas I, II and III, the Murray Hill, the Sutton, and the Village East Cinemas, and to manage the Angelika Film Center located in the Soho section (the "NY Angelika"), the Gotham, the 56/th/ Street Playhouse, and the 86/th/ Street Theatre, all of which are located in Manhattan, and which are operated collectively as the City Cinemas Chain, b) to purchase the 1/6th interest in the NY Angelika not already owned by the Company and c) to acquire, through a stock merger (the "OBI Transaction"), the assets and business of Off Broadway Investments, Inc.("OBI"), which assets currently consist of the Minetta Lane, Orpheum and Union Square theaters in Manhattan (the "Off Broadway Theatres"). The acquisition of the cinema leases, cinema interest and the related management rights is collectively referred to as the "City Cinemas Transaction". On April 5, 2000, the Company sold a 50% membership interest in the Angelika Film Center LLC (the ("AFC") to National Auto Credit, Inc ("NAC"). AFC is the owner of the NY Angelika. The 50% membership interest (the "Angelika Interest") was conveyed in exchange for 8,999,900 shares of the common stock of NAC, representing approximately 26% of the outstanding common stock of that company (calculated after the issuance of such shares), and 100 shares of the Series A Preferred Stock of NAC, representing 100% of such class. NAC common stock, which is traded in the over-the-counter market, closed April 10, 2000 at $1 5/64. The Series A Preferred Stock has a liquidation preference of $1.50 per share, is convertible into the common stock of NAC on a share for shares basis, is entitled to a dividend preference equal to any dividends declared on the NAC common stock (determined on a per share basis), and enjoys certain special voting rights. As a consequence of that transfer, (a) AFC is now owned 50% by NAC, 33.33% by the Company and 16.67% by Sutton Hill and (b) the Company and its affiliates own approximately 29% of the outstanding common stock of NAC. NAC is a publicly traded company whose shares are traded in the over-the- counter market. Historically, NAC has been in the business of originating, purchasing and servicing sub-prime loans secured by second hand automobiles. However, in recent periods, NAC has sold substantially all of its inventory of loans, substantially reduced its work force and, in essence, reduced its assets to cash and real estate. The Company is advised by NAC that it is considering investments in several industries, one of them being domestic cinema exhibition, and that the acquisition of the AFC Interest constituted a possible first step in what may be a substantially larger commitment to that industry. Accordingly, the Company has also granted to NAC two separate and independent options to acquire additional US cinema assets of the Company. Under the first option (the "AFC Option"), NAC has the right to acquire the remaining 33.33% membership interest in AFC owned by the Company in exchange for an additional 6 million shares of NAC common stock, to the extent that authorized but unissued shares of NAC common stock are available for such purpose. To the extent that NAC has less than 6 million shares available for such purpose, NAC has the right to substitute cash for such shares (at the rate of $1.50 per share) to the extent necessary to make up for any such shortfall. The AFC Option can be exercised through 2 May 20, 2000. Following the exercise of the AFC Option, the remaining 16.67% membership interest in AFC would continue to be owned by Sutton Hill, and the cinema would continue to be managed as a part of the City Cinemas Chain. Under the second option (the "City Cinemas Option"), NAC has the right to acquire the remainder of Reading's domestic assets for cash (including the Company's rights to the City Cinemas Transaction, and, if NAC has not previously exercised the AFC Option, the Company's remaining interest in AFC). The City Cinemas Option can be exercised through June 5, 2000. The Company has received $500,000 in consideration of the grant of the City Cinemas Option. NAC has the right to extend the option for two thirty day periods, by payment of an additional $100,000 for each such thirty day extension period. If NAC exercises the City Cinemas Option, it is required to give to Citadel a right to participate in the transaction on a 50/50 basis. The decision whether or not to proceed with either of the options described above rests with NAC and not with the Company or Citadel. Such transactions are also subject to Hart Scott Rodino review and clearance. Accordingly, no assurances can be given that any further transactions will be effected between the companies. The Company is also in negotiations with Citadel to assign to it the Company's rights to the City Cinemas Transaction and the OBI Transaction. The negotiations with respect to the acquisition of the City Cinemas Chain are, of course, subject to a determination by NAC not to exercise its rights under its City Cinemas Option. Citadel has advised the Company that it is interested in taking over the Company's position under these agreements, if certain modifications to the transaction can be negotiated, and has delegated to a committee comprised entirely of independent directors authority to review the transactions and to negotiate such modifications directly with Sutton Hill. While no assurances can be given, the Company, based upon conversations with representatives of Citadel and Sutton Hill, is optimistic that a transaction can be worked out which would be attractive to the Company, Citadel and Sutton Hill. It is contemplated that, if Citadel consummates a transaction with Sutton Hill, the Company will receive at the closing the $1 million deposit made by the Company under its agreement with Sutton Hill. The Company has also advised Citadel that, if Citadel consummates a transaction with Sutton Hill, the Company will give Citadel a first right of negotiation to acquire the remaining domestic cinema assets of the Company, including the Dallas cinema currently under development. If NAC exercises its City Cinemas Option, the Company anticipates that Citadel will seriously consider taking a 50% interest in that transaction. Also, in such case, the Company believes that Citadel may still elect to proceed with the OBI Transaction, which has not been offered to NAC. The Company has taken writedowns in the amount of $31,330,000 with respect to its Puerto Rico operations in 1999. In the third quarter of 1999 the Company wrote off the entire carrying value of the Company's eight screen cinema at the Plaza Las Americas Cinema (the "Plaza Cinema") $14,022,000 upon the determination by the owners of the Plaza Las Americas in San Juan not to honor what the Company believes to have been a contractually binding obligation to lease to the Company a new state-of-the-art cinema complex at the Plaza Las Americas. The Plaza Las Americas is the largest shopping center in Puerto Rico. The Company currently leases an older eight screen cinema at another location at the Plaza. The determination of the Plaza's owners to instead lease the new facility in the Plaza to the Company's principal competitor in Puerto Rico has eliminated the value of the Company's existing cinema in that shopping center, and will likely materially adversely effect the value of the remainder of the CineVista circuit. In the fourth quarter the Company reduced the carrying value of CineVista to its estimated net realizable value based upon the Company's decision to exit the Puerto Rico market recording an additional Impairment loss of $17,308,000. The Company is currently reviewing its options with respect to Puerto Rico. Among those options may be litigation against the Plaza for breach of contract and against the Company's principal competitor in Puerto Rico who already controls over 80% of the box office in Puerto Rico) for violation of various antitrust and unfair competition laws. Given the difficulties inherent in this type of litigation, no assurance of success can be given. The Company intends to endeavor to sell its Puerto Rico circuit, in order to free up further assets for deployment in Australia and New Zealand. No assurances can be given that these endeavors will be successful. In addition to its principal cinema and entertainment center development activities, the Company continues to wind up its historic railroad related activities, including the sale or other exploitation of its residual real estate interests, and to lease equipment to third parties. The Company also owns a fifty acre property assemblage located in the greater Melbourne, Australia area. Originally acquired in 1996 as a potential entertainment site, the property is held for non cinema development. The Company believes this site to be the largest site available for development in the greater 3 Melbourne metropolitan area, and to have a value substantially in excess of its book value. The Company is reviewing its alternatives with respect to this site. In recognition of the significant amount of capital required to compete in the cinema exhibition and real estate development businesses, and in furtherance of its plan to focus on the development of cinemas and cinema based entertainment centers, on October 15, 1996, the Company reorganized under a Delaware holding company (the "96 Reorganization") and completed a private placement of common and preferred stock which increased shareholders' equity from approximately $69 million to approximately $156 million (the "Stock Transactions"). In March 2000, the Company completed an Australian dollar credit facility which provides for initial funding of up to $15 million and, under certain circumstances, up to $47.8 million, to provide funding for the construction of additional entertainment centers in Australia. At December 31, 1999, the Company had assets valued for balance sheet purposes at approximately $138.5 million and no long term indebtedness. Over the past thirty months the Company has liquidated the assets received in the Stock Transactions and reinvested the proceeds together with its other cash assets, in the development of cinemas and entertainment centers and the acquisition of land held for the development of cinemas and entertainment centers. Accordingly, at December 31, 1999, the Company held property and equipment and property held for development with a net book value of approximately $89.5 million. The Company also owns approximately 31.7% of Citadel. Citadel is principally in the business of owning and operating commercial and agricultural real estate and providing real estate consulting services to Reading. Citadel also owns 70,000 shares, representing all of the outstanding shares, of the Company's Series A Voting Cumulative Convertible Redeemable Preferred Stock (the "Series A Preferred Stock"). Citadel is a publicly reporting and trading company, whose common stock is traded on the American Stock Exchange. Citadel's net earnings during 1999 were $9,487,000. The Company's share of such earnings was $2,799,000 which amount is included in the Consolidated Statement of Operations for the year ended December 31, 1999 as Equity in earnings of affiliate. In December 1997, Citadel capitalized Big 4 Ranch, Inc. ("BRI"), a wholly- owned subsidiary, with a cash contribution of $1.2 million and distributed 100% of the shares of BRI to Citadel's common shareholders. BRI , Citadel and Visalia, LLC (a limited liability company controlled by James J. Cotter, Chairman of the Company, and owned by Mr. Cotter and certain members of his family) are general partners to three general partnerships (the "Agricultural Partnerships") which also in December 1997 acquired an approximately 1,580 acre agricultural property for approximately $7.6 million. The Agricultural Partnerships are owned 40%, 40%, and 20% by Citadel, BRI and Visalia, respectively. Through its equity interests in Citadel and BRI, the Company owns approximately 26% of the Agricultural Partnerships. The partnership structure was developed to comply with certain federal water laws which limit the amount of acreage irrigated by federal water that can be owned by any one entity. In 1998, the Agricultural Partnerships' citrus crop was lost due to a freeze. BRI's net loss (excluding the indirect share of such losses recorded by Citadel) was $1,090,000. The Company's share of such loss was $346,000. As a consequence of the freeze, BRI had virtually no revenues in 1999, and reported an additional net loss of $322,000. As a result of the loss in 1998 the Company's investment in BRI has been reduced to $0. Therefore the Company did not make provision for BRI's 1999 loss in its Consolidated Statement of Operations. The Company has no obligations to fund BRI's operating losses. Shares of REI's common stock, par value $.001 per share (the "Common Stock"), are quoted on the Nasdaq National Market ("NNM") and trade on the Philadelphia Stock Exchange ("PHLX") under the symbols RDGE and RDGE, respectively. The Company has filed an application with the Securities and Exchange Commission ("SEC") to withdraw its listing from PHLX and anticipates it acceptance on or about April 21, 2000. Description of Business - ----------------------- The Company is primarily engaged in the development in Australia and New Zealand of cinema based entertainment centers and in the multiplex cinema exhibition business (focusing on the market for multiplex complexes featuring principally commercial film in, Australia and New Zealand and Puerto Rico, and featuring art, specialty and more sophisticated upper-end film product as well as commercial film product in the United States). While exceptions may be made from time to time with respect to certain well-situated cinemas with proven or projected draw as art and specialty houses, it is the Company's general intention to develop or acquire state-of-the-art multiplex venues. With respect to new cinema construction, it is the Company's intention to concentrate primarily upon a stadium seating format, and to feature wall-to-wall screens with state-of-the-art projection and sound. The Company's 4 entertainment centers will typically be centered around a multiplex cinema, and feature complementary retail and restaurant facilities and convenient parking all on land owned or controlled by the Company. Where possible, the Company prefers to own rather than lease properties. In the future, the Company intends to focus on the cinema and entertainment center market in Australia and New Zealand and to de-emphasize and ultimately to phase-out the domestic and Puerto Rican cinema markets. Reading Cinemas (Australia and New Zealand) - ------------------------------------------- The Company currently operates ten cinemas, consisting of seventy-one screens, in Australia and holds a 50% joint venture interest in three cinemas, consisting of thirteen screens in New Zealand. The Company anticipates that it will open an additional cinema, consisting of ten screens in Australia, during the remainder of 2000. The Company commenced activities in Australia in mid-1995, and conducts business in Australia through its wholly-owned affiliate, Reading Entertainment Australia Pty. Limited ("REA" and, collectively with its various subsidiaries, "Reading Australia"). Reading Australia is currently engaged in the development and operation of multiplex cinemas featuring conventional film product and the development of entertainment centers in Australia and New Zealand. Reading Australia's seventy-one screens are located in seven leased, one managed and two owned locations. The Company commenced operations in New Zealand in 1997 and conducts operations in New Zealand through its wholly-owned affiliate, Reading New Zealand Limited (collectively with its various subsidiaries, "Reading New Zealand"). At the present time, all of the Company's cinema interests are held through a 50/50 joint venture with an experienced cinema operator. The joint venture currently operates three cinemas representing thirteen screens at two owned and one leased facility. Reading Australia and Reading New Zealand are also engaged in the development of entertainment centers which will typically consist of a multiplex cinema, complementary restaurant and retail facilities, and convenient parking, all on land owned or controlled by the Company. In December 1999, the Company opened the cinema portion of its first entertainment center in Australia. Located in Perth, the entertainment center includes a ten screen cinema and upon completion, approximately 17,000 square feet of retail space. The Company anticipates opening a second and substantially larger entertainment center in the third quarter of this year. That entertainment center, located in Sydney near the site of the Olympic Village, includes a ten screen cinema and approximately 60,000 square feet of retail space. At the present time, Reading Australia owns or has development rights to own an additional three locations which it intends to use for entertainment center purposes. None of the properties under development currently produce material cash flow. Reading Australia also owns a 50% joint venture interest in an existing shopping center located on leased land in the Melbourne area of Victoria, which it acquired in anticipation of redevelopment as an entertainment center (the "Whitehorse Center"). In December 1998, that joint venture entered into an agreement to acquire the land underlying that center. The Company's joint venture partner has not proved to be the source of financial strength that was anticipated by the Company at the time it entered into the joint venture. Accordingly, the Company has advised its joint venture partner of its desire to sell the shopping center and the rights of the joint venture to acquire the land underlying the shopping center. While certain disputes exist between the Company and its joint venture partner, the joint venture has retained a broker to market the property and the Company's interest has been classified as Held for sale in the Company's Consolidated Balance Sheet at December 31, 1999. While the Company remains interested in building a cinema at the shopping center, assuming that commercially reasonable terms can be negotiated with the purchaser of the center, no assurances can be given that the Company will be successful in developing a multiplex facility at that site. Accordingly, the Company no longer considers the Whitehorse Center to be a potential entertainment location. Reading New Zealand owns a 115,000 square foot site located in downtown Wellington, the capital and second largest city in New Zealand, and an 327,000 square foot, nine-story parking facility located adjacent to that property. Reading New Zealand has also purchased a 678,000 square foot site in a developing suburb of Auckland. The Company currently intends to develop these properties as entertainment centers. 5 The six potential entertainment center sites described above (calculated exclusive of the Whitehorse Center) include the potential for the development of over sixty-four screens. All of the projects hold government approvals (if required) for development as entertainment centers. Summarized below are the entertainment center projects currently open or under development by Reading Australia and Reading New Zealand:
Land Size Approximate Approximate Estimated Development in Square Purchase Cinema Size in Size in Square Footage Site Footage Price Square Feet of Improvements - ------ ----------- ------------ --------------- ------------------------- Australia Auburn, NSW 522,720 $6,800,000 60,000 210,000 Frankston, Victoria 227,750 N/A/1/ 64,000 94,000 Moonee Ponds, Victoria 129,949 $4,200,000 54,000 103,000 Newmarket, Queensland 172,160 $4,500,000 49,000 161,000 New Zealand Wellington/2/ 115,000 $3,300,000 77,000 133,000 Takanini 678,132 $3,200,000 41,000 56,000
In addition to the above, the Company has accumulated, as the consequence of three separate acquisitions, a fifty acre site in Burwood, Victoria. This site was originally acquired for development of a megaplex cinema. However, such use is currently prohibited as a consequence of an adverse land use determination, which negated certain permits for the construction of cinemas on the site which were in place at the time the properties were acquired by Reading Australia. Due to the size of the accumulation and its location at the demographic center of the greater Melbourne metropolitan area, the Company believes that the accumulation has value substantially over and above its original purchase price and is currently reviewing its options as to potential development alternatives for the site. Two of the Company's cinemas, consisting of eleven screens, and located in country towns, are owned by Australia Country Cinemas Pty Limited ("ACC"), a company owned 75% by Reading Australia and 25% by a company owned by an individual familiar with the market for cinemas in country towns. ACC has a limited right of first refusal to develop any cinema sites identified by Reading Australia or such individual which are located in country towns. One of the Company's cinemas, a five screen facility in Melbourne, is owned by a joint venture in which the Company has a 66.6% interest. Reading New Zealand has a 50% joint venture interest in a five screen multiplex cinema located in Whangaparoa, New Zealand, a four screen multiplex cinema located in Mission Bay, New Zealand, and a four screen cinema located in Takapuna. Reading New Zealand's partner in these ventures is an experienced cinema owner and operator. Two of the joint venture cinemas are fee properties and the third is leased. At the present time the Company's activities in Australia and New Zealand are in large part in the nature of speculative real estate development. While, in each case, the Company is its own anchor tenant, the success of the real estate aspects of the Company's business will depend upon a number of variables and are subject to a number of risks, some of which are outside of the Company's control. These variables and risks include, without limitation: . construction risks, such as weather, unknown and unknowable site conditions, and the availability and cost of materials and labor; - ---------------- /1/ Under the applicable development agreement, Reading Australia is required to make certain infrastructure improvements which are estimated to cost approximately $4,000,000 in consideration of a grant to the underlying land. /2/ Does not include adjacent parking garage owned by Reading New Zealand. 6 . leasing risk with respect to ancillary space being constructed in connection with the entertainment centers -- in certain cases such ancillary space constitutes a substantial portion of the net leasable area of a particular entertainment center and there is not presently any established Australian and New Zealand markets for entertainment center space; . political risk, such as the possible change in mid-stream of existing zoning or development laws to accommodate competitive interests at Burwood; and . financing risks, such as the risk of investing U.S. dollars in Australia during times of currency exchange rate instability, and the difficulties of acquiring construction finance while the great majority of the Company's projects are developmental in nature. In light of these risks, no assurances can be given that the Company will be able to accomplish its business objectives in Australia and/or New Zealand. Furthermore, even if those objectives are eventually achieved, the realization of these objectives may require a longer period of time and a greater level of developmental costs than currently anticipated by the Company. Reading Australia's cinemas are managed by employees of the Company. Reading New Zealand's cinemas are operated by a joint venture partner. Australia - --------- Australia is a self-governing and fully independent member of the Commonwealth of Nations. The constitution resembles that of the United States in that it creates a federal form of government, under which the powers of the central government are specified and all residual powers are left to the states. The country is organized into five mainland states (New South Wales, Queensland, South Australia, Victoria and Western Australia), one island state (Tasmania) and two territories (Australian Capital Territory and the Northern Territory). The ceremonial supreme executive is the British monarch, represented by the governor-general and in each of the six states by a governor. These officials are appointed by the British monarch, but appointments are nearly always recommended by the Australian governments. True executive power rests with the prime minister, the leader of the majority party in the House of Representatives. The legislature is bicameral, with a Senate and a House of Representatives, and the ministers are appointed by the prime minister from the membership of the House and the Senate. The organization of the state government is similar to that of the central government. Each state has an appointed governor, an elected premier and a legislature. Although Australia is the sixth largest country in the world in land mass, it only has a population of approximately 19.2 million people. This population is concentrated in a few coastal urban areas, with approximately 4 million in the greater Sydney area, 3.4 million in the greater Melbourne area, 1.7 million in the Brisbane area, 1.1 million in Adelaide and 1.4 million in Perth. Australia is one of the richest countries in the world in terms of natural resources per capita and one of the most economically developed countries in the world, although vast areas of the interior, known as "the Outback," remain all but uninhabited. The principal language is English, and the largest part of the population traces its origin to Britain and Europe, although an increasing portion of the population has immigrated from the Far East. Australian taste in film has historically been similar to that of American audiences. Internal trade is dominated by the two most populous states, New South Wales (mainly Sydney) and Victoria (mainly Melbourne). Together these two states account for a majority of all wholesale trade and approximately 75% of all retail sales. At the present time, Australia's principal trading partners are the United States and Japan. Australia does not restrict the flow of currency into the country from the U.S. or out of Australia to the United States. Also, subject to certain review procedures, U.S. companies are typically permitted to operate businesses and to own real estate. On July 1, 2000, Australia will implement a goods and services tax ("GST") on all goods and services at a consistent rate of 10%. The Company currently believes that GST rules will allow it to pass 100% of such taxes through to the ultimate consumers of its goods and services, subject to market pricing restraints. 7 New Zealand - ----------- New Zealand is a self governing member of the Commonwealth of Nations. It is comprised of two large islands, and numerous small islands, with a total land area of approximately 104,500 square miles. The country has a population of approximately 3.6 million people, most of whom are of European descent and the principal language is English. Wellington, with a population of approximately 350,000, is the capital and Auckland, with a population of approximately one million, the largest city. Most of the population lives in urban areas. New Zealand is a prosperous country with a high standard of social services. The national economy is largely dependent upon the export of raw and processed foods, timber and wool. Principally a trading nation, New Zealand exports about 30% of its gross national product. In the past (particularly before the United Kingdom entered the Common Market in 1973), New Zealand's marketing focused on a small number of countries, principally the United Kingdom. Currently, only approximately 7% of New Zealand's trade is with the United Kingdom, with Japan and Australia being its principal trading partners. While no country currently accounts for more than 20% of its exports, its economy remains sensitive to fluctuations and demand for its principal exports. Like Australia, New Zealand has a largely ceremonial governor-general, appointed by the Queen of England. However, the executive branch is run by a prime minister -- typically the leader of the majority party in Parliament --and appointed ministers (typically chosen from the members of Parliament). The Parliament is elected by universal adult suffrage using a mixed member proportional system. Under this system, each voter casts two votes at the federal level, one for a local representative and one for a party. Fifty percent of the 120 seats in Parliament are determined by the direct election of local representatives, and the remaining fifty percent are elected based upon the number of votes garnered by the parties. The Prime Minister and his cabinet serve so long as they retain the confidence of the Parliament. With the exception of special excise taxes on tobacco, liquor, petroleum products and motor vehicles the only general sales tax is a GST imposed on all such services at the consistent rate of 12.5%. In effect, by a series of refunds, GST is only paid by the end-user of the goods or services in question. Resident companies pay income tax at a rate of 33%, however, dividend imputation credits generally prevent double taxation of company profits. There are no restrictions on repatriation of capital or profits, but some payments to overseas parties are subject to withholding tax. There is no capital gains tax, and there are tax treaties with many countries, including the United States. The laws for monitoring and approving significant overseas investment into New Zealand reflect the country's generally receptive attitude towards such investment and the generally facilitating nature of the country's foreign investment policies. One hundred percent overseas ownership can be approved in nearly all industry sectors, including motion picture exhibition and distribution. A review process is also applicable to certain land transactions and the purchase of businesses or assets having a value of NZ$l0,000 or more. Licensing/Pricing: Films are licensed under agreements with major film ----------------- distributors and several local distributors who distribute specialized films. Film exhibitors are provided with an opportunity to view films prior to negotiating with the film distributor the commercial terms applicable to its release. Films are licensed on a film-by-film, theater-by-theater basis. Reading Australia and Reading New Zealand license films from all film distributors as appropriate to each location. Generally, film payment terms are based upon various formulas which provide for payments based upon a specified percentage of box office receipts. Competition: The principal exhibitors in Australia and New Zealand include ----------- Village Roadshow Limited ("Village") with approximately 419 screens in Australia and 85 in New Zealand, Greater Union and affiliates with approximately 328 screens in Australia and Hoyts Cinemas ("Hoyts") with approximately 242 screens in Australia and 92 in New Zealand. Independents, as a group, operate approximately 560 screens in Australia and 130 in New Zealand. The film exhibition business in Australia and New Zealand is concentrated and, to a certain extent, vertically integrated. Greater Union is the owner of Birch Carroll & Coyle and a part owner of Village. All new multiplex cinema projects announced by Village are being jointly developed by Greater Union, Village, and Warner Bros. Hoyts has announced plans to add approximately 168 new multiplex screens in Australia by 2003 with 61 currently under construction. 8 These companies have substantial capital resources. Village had a publicly reported consolidated net worth of approximately A$900 million at June 30, 1999. The Greater Union organization does not separately publish financial reports, but its parent, Amalgamated Holdings, had a publicly reported consolidated net worth of approximately A$300 million at June 30, 1999. Hoyts Cinemas does not separately publish financial reports as it has been acquired by a major Australian media and entertainment company, Consolidated Press Holdings. The industry is somewhat vertically integrated in that Village also serves as a distributor of film in Australia and New Zealand for Warner Bros. and New Line. Films produced or distributed by the majority of the local international independent producers are also distributed by Roadshow Film Distributors. Roadshow Film Distributors is owned equally by Village and Greater Union. In the view of the Company, the principal competitive restraint on the development of its business in Australia and New Zealand is the availability of sites. The Company's principal competitors and certain major commercial landlords are currently attempting to use the historical course of land use development in Australia to prevent the construction of freestanding cinemas in new entertainment oriented complexes, particularly where those complexes are located outside of an established central business district or shopping center development. Competitors or shopping center landlords typically contest the suitability of the Company's projects, resulting in appeals to applicable land tribunals and delays in development. In the case of the Company's fifty acre site at Burwood, the Minister for Planning and Local Government preempted local zoning authorities to prohibit the Company's intended development of a twenty- five screen cinema complex, which would have competed with complexes owned by the principal theater operators in Australia and located in shopping centers owned by some of the principal retail landlords in Australia. As reported in a recent documentary news presentation by the Australian television Network Nine, this decision by the minister followed a record breaking cash contribution by Village Roadshow to that minister's political party. According to other published reports, the amount of that contribution was in the range of A$800,000. In light of recently published revelations about the extent to which major shopping center interests such as Westfields and major film exhibition companies, such as Village, have been willing to go to block competitive developments, the Company is hopeful that the use of these types of tactics will be reduced in Australia. Recently, for example, all opposition to the Company's project at Whitehorse Plaza, Box Hill was dropped. However, it is clear that the opposition of entrenched interests such as Westfields and Village have substantially delayed and otherwise adversely effected the Company's endeavors to become the largest independent cinema exhibitor in Australia and New Zealand. The Company generally has not encountered problems in obtaining access to first run film product in Australia or New Zealand. However, the Company has encountered some difficulty where it has attempted to take on the established competitors in the central business district of Sydney. As the theatre involved is one managed, as opposed to leased or owned, by the Company, this difficulty has not been material to the business or operations of the Company. However, the Company has retained counsel experienced in trade practice matters, and intends to vigorously contest the current division of product by the majors in the downtown Sydney market. In New Zealand, Village and Hoyts have announced a merger, which would result in a new entity controlling over 80% of the cinema box office in New Zealand. That merger is being opposed by the New Zealand Commerce Commission, the government agency responsible for the enforcement of New Zealand's anti- trust laws. The Commerce Commission has sued to prevent the merger, and it is anticipated that that case will go to trial later this year. While no assurances can be given, representatives of the Commerce Commission have advised the Company that the Commission is confident that it will be able to prevent the merger. Currency Risk: Generally speaking, the Company does not engage in ------------- currency hedging. The Company presently intends, to the fullest extent possible, to operate each of its Australian and New Zealand operations on a self funding basis. The book value, stated in US dollars, of the Company's net assets in Australia, New Zealand, and in the United States and Puerto Rico combined (US dollars being the currency of Puerto Rico as well as that of the United States), are as follows: 9
Net Assets/1/ --------------- Reading Australia $ 66,445,000 Reading New Zealand 14,007,000 CineVista - Domestic/2/ 29,231,000 ---------------- $ 109,683,000/3/ ================
The Company believes that its asset base in Australia should provide a sufficient capital base to support the borrowings needed to complete the cinema and entertainment center projects contemplated for at least 2000. The Company has put into place an Australia credit facility sufficient to permit the build- out of its Auburn project in Sydney. That project is scheduled for completion in the third quarter of this year. Subject to the syndication of the credit facility, that credit facility will also provide the funds required by the Company to complete the construction of at least one additional entertainment center and one additional cinema complex in Australia. With respect to New Zealand, the Company likewise believes that its assets in New Zealand should provide a sufficient capital base to support the borrowings needed to complete the currently contemplated entertainment center in downtown Wellington and, possibly, its suburban Auckland Project. The Company is in discussion with several New Zealand based lenders with regard to a New Zealand credit facility sufficient to cover all of the costs of developing the downtown Wellington site. It is currently contemplated that the Wellington project will break ground in the second quarter of this year, depending upon the pace of the Company's pre-leasing activities. At the present time, the Australian and New Zealand dollars are trading at the lower end of their historic range vis a vis the U.S. dollar. Set forth below is a chart of the exchange ratios between these three currencies over the past twenty-five years. [THE FOLLOWING TABLE IS SUBSTITUTED FOR THE GRAPH USED IN THE ORIGINAL DOCUMENT]
Date $US/AUS$ $US/NZ$ Date $US/AUS$ $US/NZ$ ------------------------ ------------------------ 1975 $1.2545 $1.0385 1987 $0.7220 $0.6602 1976 $1.0890 $0.9450 1988 $0.8535 $0.6290 1977 $1.1380 $1.0160 1989 $0.7893 $0.5937 1978 $1.1500 $1.0640 1990 $0.7720 $0.5865 1979 $1.1057 $0.9830 1991 $0.7593 $0.5403 1980 $1.1814 $0.9618 1992 $0.6890 $0.5135 1981 $1.1280 $0.8230 1993 $0.6783 $0.5590 1982 $0.9800 $0.7325 1994 $0.7753 $0.6402 1983 $0.8965 $0.6545 1995 $0.7432 $0.6537 1984 $0.8250 $0.4755 1996 $0.7944 $0.7065 1985 $0.6818 $0.5005 1997 $0.6515 $0.5803 1986 $0.6653 $0.5305 1998 $0.6123 $0.5270 1999 $0.6560 $0.5234
_______________ /1/ Assets less third party liabilities and minority interests. Liabilities do not include redeemable preferred stock. /2/ Includes corporate assets, Domestic Cinemas, the Company's remaining domestic real estate properties and the Company's investment in Citadel. /3/ Liabilities do not include Series A Preferred Stock. 10 Seasonality: Major films are generally released to coincide with the ----------- school holiday trading periods, particularly the summer holidays. Accordingly, Reading Australia and Reading New Zealand record greater revenues and earnings during the first half of the calendar year. Employees: Reading Australia has twenty-three full time executive and --------- administrative employees and approximately 350 theater employees. Reading New Zealand currently has no employees. The Company believes its relations with its employees to be good. Puerto Rico (CineVista) - ----------------------- Acquired in 1994, CineVista currently operates fifty-six screens in eight leased facilities in Puerto Rico. During 1999, the Company opened a new twelve screen complex at the Plaza Carolina, a regional shopping center in the San Juan area. The Company does not presently anticipate further expansion of this circuit, and would like to exit this market if a suitable buyer can be found. In Puerto Rico, the Company has determined to concentrate on multiplex cinemas located on leasehold properties, and the exhibition of conventional film product. Generally speaking, the Company's current and future developments are being constructed in existing malls with proven foot traffic and self-contained parking. All of CineVista's theaters are modern multiscreen facilities. Puerto Rico is a self-governing Commonwealth of the United States with a population of approximately 3.8 million people. Puerto Rico exercises control over internal affairs similar to states of the U.S.; however, the relationship with the United States Federal Government is different than that of a state. Residents of Puerto Rico are citizens of the United States, but do not vote in national elections and, with certain exceptions, do not pay federal income taxes. Income taxes are paid instead under a system established by the Commonwealth. The United States mainland is Puerto Rico's largest trading partner. During the last five years, Puerto Rico has undergone significant retail shopping center development. During this period, the number of multiplex theaters has increased substantially. The Company's principal competitor, Caribbean Cinemas, a privately-owned company, has opened six complexes adding approximately eighty-two screens since the beginning of 1996, and is believed to have at least thirty screens at three locations under development. These new screens have adversely affected the Company's current operations, reducing the Company's market share from approximately 34% in 1995 to approximately 20% percent in 1999. The Company believes that the Puerto Rico market is substantially built out, and that there will be few if any opportunities in the near to medium term that would be attractive to the Company. CineVista derives approximately 70% of its revenues from box office receipts. Ticket prices vary by location, and provide for reduced rates for senior citizens and children. Box office receipts are reported net of a 10% excise tax imposed by Puerto Rico. Show times and features are placed in advertisements in local newspapers with the costs of such advertisements paid by CineVista. Film distributors may supplementally advertise certain feature films with the costs generally paid by distributors. Concession sales account for approximately 25% of total revenues. Concession products primarily include popcorn, candy and soda. CineVista has implemented training programs and incentive programs and experiments with product mix changes with the objective of increasing the amount and frequency of concession purchases by theater patrons. Screen advertising revenues contribute approximately 5% of total revenues. CineVista has agreements with a major softdrink bottler and an independent advertising production company to show advertisements on theater screens prior to feature film showings. Other sources of revenue include revenues from theater rentals for meetings, conferences, special film exhibitions and vending machine receipts or rentals. Licensing/Pricing: Films are licensed under agreements with major film ----------------- distributors and several local distributors specializing in films of special interest to residents of Puerto Rico. Puerto Rico regulations generally require that film exhibitors be provided with an opportunity to view films prior to submitting bids, that film distributors provide advance notice of films which will be provided to the market, and are generally designed to preclude anticompetitive 11 practices. Films are licensed on a film-by-film, theater-by-theater basis. Generally, film payment terms provide for payment to film distributors under various formulas which provide for payments based upon a percentage of gross box office receipts. CineVista licenses film from substantially all of the major United States studios and is not dependent upon any one film distributor for all of its product. However, in the event the Company was unable to license film from a major studio, such lack of supply could have a material effect upon CineVista's business. CineVista believes that the popularity of the Puerto Rico exhibition market and Puerto Rico rules governing film licensing make such a situation unlikely. In 1999, films licensed from CineVista's nine largest film suppliers accounted for approximately 90% of CineVista's box office revenues. Competition: The Company believes there are approximately thirty-one ----------- first-run movie theaters in daily operation with approximately 220 screens in Puerto Rico. Based upon number of screens, box office revenues and number of theaters, CineVista is the second largest exhibitor in Puerto Rico, with the two largest exhibitors accounting for over 99% of the box office revenues recorded in 1999, measured by theaters in daily operation. Competition among the theater exhibitors exists not only for theater patrons within certain geographic areas, but also for the licensing of films and the development of new theater sites. The number of sites suitable for multiplex cinemas is limited. CineVista's principal competitor is expected to continue to open theaters competitive with those of CineVista's. Since the beginning of 1996, the Company's principal competitor has opened four complexes in the San Juan metropolitan area, adding sixty-four screens, all of which are competitive with the Company's theaters, and which have attracted business that would otherwise have gone to theaters owned by CineVista. This competitor has at least one additional competitive theater under development which is expected to add thirteen screens to the San Juan market. Since 1994, this competitor's share of the Puerto Rico box office has increased from 48% to 80%. In Puerto Rico, the Company's strategy has been to build generally higher quality cinemas, with larger seats, more leg room and better sound than those constructed by its principal competitor, and to seek out and build in either well established retail centers with adequate parking on-site or in connection with the development of new retail centers being developed by experienced and well financed developers. The Company's principal competitor appears to have adopted a strategy of market dominance, building cinemas in areas which are, in the view of the Company, already overscreened, and offering rents which, again in the view of the Company, do not provide for an adequate return on capital for the cinema operator. In 1999, the owner of the Plaza Las Americas and this competitor entered into a lease with respect to the development of a new state-of-the-art cinema complex in that shopping center. With the opening of this new cinema in late 2000 or early 2001, it is likely that this Competitor's market shares in Puerto Rico will increase significantly from the 80% share realized in 1999. The Company believes that this action was in violation of agreements reached between it and the owner of the Plaza, and was an exercise of monopoly power by the Plaza and this competitor. The Company presently intends to pursue these claims as this action on the part of the Plaza and this competitor has eliminated value of the Company's existing eight screen cinema at the Plaza. In 1999, the Plaza cinema complex accounted for approximately 42% of the gross box office revenues of CinaVista. Seasonality: Most major films are released to coincide with the summer ----------- months, when schools are closed or the winter holiday seasons. Accordingly, CineVista has historically recorded greater revenues and earnings during the second half of the calendar year, except during 1998 when first half revenues were unseasonably high due to the strong box office performance of "Titanic." Employees: CineVista has approximately 180 employees in Puerto Rico, --------- twelve of whom are employed under the terms of a collective bargaining agreement. The collective bargaining agreement expires in May 2000. The Company believes its relations with its employees in Puerto Rico to be good. Domestic Cinemas - ---------------- The Company has focused its domestic cinema activities on the art and specialty film exhibition market, and the selective acquisition and/or development of conventional commercial cinemas. At December 31, 1999, the Company 12 operated six domestic cinemas with forty-two screens. The Company has entered into agreements to lease or manage an additional eight domestic locations with a total of thirty screens. However, in light of the Company's decision to concentrate its future activities on the Australian and New Zealand markets, the Company has entered into negotiations with Citadel to permit Citadel to take advantage of the Company's rights with respect to seven of these cinemas, representing twenty-two screens. If Citadel acquires these cinema interests, then the Company has agreed to give to Citadel a right of first negotiation with respect to the acquisition by Citadel of the remainder of the Company's domestic cinema assets. The Company's first domestic art theater was acquired in August 1996. This cinema, the NY Angelika, is a six screen multiplex theater located in the Soho district of New York City, and was acquired by the Company and Sutton Hill through a newly formed limited liability company, AFC. The Company contributed 83.3% of the capital of AFC and Sutton Hill contributed the remaining 16.7%. The theater is held under a long term lease with a remaining term of approximately twenty-six years. On April 5, 2000, the Company sold a 50% membership interest in AFC to National Auto Credit, Inc. ("NAC") for 8,999,900 shares of NAC common stock, representing approximately 26% of the outstanding NAC common stock (calculated after the issuance of such shares), and 100 shares of NAC Series A Preferred Stock, representing 100% of the authorized shares of such class. NAC common shares closed April 10, 2000 at $1 5/64. The transaction is described in greater detail above under Item 1. Business, General. In 1997 the Company opened an eight screen, 31,700 square foot art and specialty cinema and cafe facility at the Bayou Place entertainment center in Houston, Texas and acquired an existing five screen, 18,100 square foot facility in Minneapolis, the former featuring art and speciality film product and the later commercial film product. In 1998, the Company commenced operation of a three screen, 18,000 square foot facility in Sacramento, California. In 1999, the Company opened a new 46,000 square foot twelve screen complex in Manville, New Jersey for the exhibition of conventional film product and leased a 27,400 square foot eight screen complex in Buffalo, New York for use as an art cinema. City Cinemas Corporation ("City Cinemas"), an affiliate of Sutton Hill, manages AFC and the Company's Minneapolis and Houston cinemas. The Company manages directly its Sacramento, Manville and Buffalo operations. Licensing/Pricing: Art and specialty films are available from many sources ----------------- ranging from the divisions of the larger film distributors specializing in the distribution of specialty films to individuals that have acquired domestic rights to one film. Generally, film payment terms are based upon an agreed upon percentage of box office receipts. Competition: In most markets, art and specialty film is generally ----------- exhibited at older independently owned one and two screen theater complexes. Few such independent exhibitors operate cinemas in more than one metropolitan area. The Company believes that the exhibition of first run art and specialty films has historically been and in significant part continues to be a niche business, in some ways distinct from the business of exhibiting bigger budget wide release films. At the present time there exists one national chain specializing in art and specialty film which circuit operates approximately 150 screens in approximately fifty locations, principally in California and Washington. Many larger cities have smaller chains which operate one to five locations. One major commercial cinema circuit has formed a joint venture which is developing cinemas specializing in the exhibition of independent film. The cinema industry is currently in a state of significant change, as illustrated by the significant number of multiplex and megaplex theaters which have been constructed or announced in recent periods. This proliferation of screens has increased the appetite of the conventional multiplex operators for art and specialty product, bringing them into direct competition with art and specialty cinema operators. Often, these conventional multiplex operators are able to offer better facilities and better terms than are the smaller, less well capitalized art and specialty operators. The availability of screens on a national scale from the larger conventional multiplex operators has also effected release patterns. Popular art and specialty films such as "Shakespeare in Love" and "The Blair Witch Project" which might have had significant exclusive or near exclusive runs in the art cinemas, are now offered in general release immediately upon establishing themselves as potentially high grossing films. Other films, such as "Cider House Rules" and "The Talented Mr. Ripley," have gone immediately into general release, with 1,600 to 2,000 copies of these films being offered for initial release, as opposed to the between 800 to 1,000 copies which would typically be prepared for an art film release. Due to the relatively small scale of the Company's US operations and the geographical dispersion of its domestic cinemas, the Company may have difficulty securing certain film product due to competitive pressures of larger 13 domestic cinema chains or more regionally concentrated exhibitors, and faces competition for sites from much larger and better known competitors. Seasonality: The exhibition of art and specialty film, while still ----------- somewhat seasonal in nature, is less so than the film exhibition business generally. Art and specialty films tend to be released more evenly over the course of the year and, if successful, to enjoy a longer run than wide release films. The popularity of art and specialty film has increased significantly in recent years, grossing domestically approximately $112,000,000, $244,000,000, $372,000,000, $355,000,000, $500,000,000, $525,000,000, $545,000,000 and approximately $550,000,000 in 1992 through 1999, respectively (based upon management estimates). Employees: At December 31, 1999 approximately 275 cinema employees were --------- employed by City Cinemas to operate the Company's domestic cinemas including forty employees employed under the terms of two collective bargaining agreements one of which expires in December 2001 and the other of which has been extended on a month-to-month basis for two years. The Company has approximately seventy- five direct cinema employees, approximately forty employees at RGT and eighteen executive and administrative staff which, while located in the Unites States, provide service with respect to all of the Company's operations. The Company believes its relationship with its employees to be good. Financial Information Relating to Industry Segments and Foreign and Domestic - ---------------------------------------------------------------------------- Operations - ---------- See Note 3 to the Consolidated Financial Statements contained elsewhere herein. The 96 Reorganization and Stock Transactions - -------------------------------------------- In October 1996, the Company reorganized under a new Delaware holding company, Reading Entertainment, Inc., a Delaware corporation ("Reading Delaware") (the "96 Reorganization"). In the 96 Reorganization, each outstanding share of Reading common stock was, in effect, converted into a share of Reading Delaware common stock. Following the 96 Reorganization, the law of Delaware controlled the internal corporate affairs of the Company. Prior to the 96 Reorganization, the law of Pennsylvania controlled such matters. In December 1999, the Company reorganized under a new Nevada holding company, the current Reading Entertainment, Inc., a Nevada corporation. Accordingly, the internal corporate affairs of the Company are now controlled by the law of Nevada. Immediately after the 96 Reorganization, Reading Delaware issued common stock and preferred stock in exchange for cash and other assets valued at approximately $93.4 million increasing shareholder's equity from approximately $69 million to approximately $156 million (the "Stock Transactions"). In the Stock Transactions, Reading Delaware issued to Citadel 70,000 shares of Series A Voting Cumulative Preferred Stock (the "Series A Preferred Stock"), and granted to Citadel the option to sell its assets to the Company on certain terms, in exchange for $7 million in cash. Reading Delaware issued to Craig Corporation 550,000 shares of Series B Voting Cumulative Preferred Stock (the "Series B Preferred Stock") and 2,476,140 shares of Common Stock in exchange for 693,650 shares of Stater Bros. Preferred Stock, the 50% membership interest in Reading International Cinemas LLC ("RIC") not previously owned by the Company, and 1,329,114 shares of Citadel Preferred Stock. The Citadel Preferred Stock was redeemed by Citadel in December 1996 for approximately $6.2 million. The Stater Bros. Preferred Stock was repurchased by Stater Bros. in the third quarter of 1997 for approximately $73.9 million. The option right granted to Citadel to sell its assets to the Company is set forth in an Asset Put and Registration Rights Agreement. Under this Agreement, Citadel has the right (the "Asset Put Option"), exercisable at any time until thirty days after REI files this Annual Report on Form 10-K to require REI to acquire substantially all of Citadel's assets, and assume related liabilities (such as mortgages), in exchange for shares of REI Common Stock. In exchange for up to $20 million in aggregate appraised value of Citadel assets, REI is obligated to deliver to Citadel that number of shares of REI Common Stock determined by dividing the value of the Citadel assets by $12.25. If the appraised value of the Citadel assets is in excess of $20 million, REI is obligated to pay for the excess over $20 million by issuing Common Stock at the then fair market value of such stock. REI is not obligated to acquire more than $30 million of assets. On March 22, 2000, REI common stock closed at $4.1875 per share. The Company has been advised that Citadel does not intend to exercise the Asset Put Option. 14 The Series A and Series B Preferred Stock (collectively, the "Convertible Preferred Stock") have stated values of $7 million and $55 million, respectively. Holders of each series of the Convertible Preferred Stock are entitled to cast 9.64 votes per share, voting together with the holders of the Common Stock and the other series of Convertible Preferred Stock, on any matters presented to shareholders of REI. Each share of Series A Preferred Stock is convertible into shares of Common Stock at a conversion price of $11.50, and each share of Series B Preferred Stock is convertible into shares of Common Stock at a conversion price of $12.25, each subject to adjustment under certain circumstances. The shares of Series A Preferred Stock may also be converted after a change in control. REI has the right to require conversion of the Series A Preferred Stock if the average market price of the Common Stock over a 180-calendar day period exceeds $15.525. REI granted certain registration rights to Citadel with respect to the shares of Common Stock, issuable on conversion of the Series A Preferred Stock and the Asset Put Option. Citadel has the right during the ninety day period beginning October 15, 2001, or in the event of a change of control of the Company, to require the Company to repurchase the Series A Preferred Stock at its stated value plus accrued and unpaid dividends plus, in the case of a change of control, a premium. In addition, if REI fails to pay dividends on the Series A Preferred Stock for four quarters, Citadel may require REI to repurchase the Series A Preferred Stock. Also, REI has certain rights to redeem the Convertible Preferred Stock at its option. Due to the redemption provisions, the Series A Preferred Stock is not included as a component of Shareholders' Equity in the Consolidated Balance Sheet and is separately categorized as "Preferred Stock." Item 2. Properties Executive and Administrative Offices - ------------------------------------ The Company leases approximately 25,000 square feet of office space in Philadelphia, Manhattan and Los Angeles in the United States, Melbourne and Sydney, in Australia and in San Juan, Puerto Rico. The space is typically held under lease having remaining terms of less than three years. Entertainment Properties - ------------------------ Leasehold Interests ------------------- The Company currently leases approximately 600,000 square feet of completed theater space in Australia, the United States, and Puerto Rico as follows:
Aggregate Approximate Square Range of Terms Footage (including renewals) ------- -------------------- Australia 233,000 29-40 years United States 160,000 10-40 years Puerto Rico 204,000 13-40 years
In addition, the Company has signed leases or agreements to lease with respect to additional to-be-built theater space of approximately 88,000 square feet in Australia and 30,000 square feet in the U.S. Fee Interests ------------- In Australia, the Company currently owns approximately, 930,000 square feet of land at five locations. Substantially all of this land is located in the urban areas of Brisbane, Melbourne and Sydney as well as the fifty acre Burwood site. In New Zealand, the Company owns a 115,000 square foot site and an adjacent 372,000 square foot nine story parking structure in the heart of Wellington (the capital of New Zealand) and a 678,100 square foot parcel in Takanini 15 (a suburb of Auckland), both of which it intends to develop as entertainment centers, subject to obtaining the necessary land use approvals. In the United States, the Company owns the fee interest in the Royal George Theatre, a 30,000 square foot, four auditorium live theater office and restaurant complex located in Chicago, Illinois. Also, the Company has an Agreement in Principle to acquire (i) the fee interests in the Minetta Lane and Orpheum Theatres in Manhattan, New York and (ii) the option to acquire the fee interests underlying the Sutton and Murray Hill Cinemas also in Manhattan. The Company anticipates selling the Royal George Theatre in 2000 and is currently in negotiation with Citadel to convey to Citadel its interest in the Agreement in Principle. Joint Venture Interests ----------------------- Reading Australia owns a 50% joint venture interest in the Whitehorse Center shopping center located on leased land in the Melbourne area of Victoria a 66% joint venture interest in a leased five screen multiplex cinema in Melbourne and a 75% interest in a venture which leases two cinemas with eleven screens. In December 1998, the shopping center joint venture entered into an agreement giving to it the right, subject to certain conditions, to acquire the land underlying the shopping center property. The joint venture's rights to acquire such fee interest is subject to the completion of certain improvements to that shopping center. Certain disputes have arisen with the Company's joint venture partner with respect to the development of the shopping center, and the joint venture has retained a broker to market the property. In New Zealand, the Company has 50% tenant in common interests in three pieces of real property, totaling approximately 87,100 square feet. Two of these parcels are improved with cinema/restaurant complexes. The third is improved with a new multiplex cinemas. Non-Entertainment Properties - ---------------------------- Center City Philadelphia Properties ----------------------------------- The Company's properties in center city Philadelphia, all of which are owned in fee, consist of several parcels of land aggregating approximately .67 acres located near or adjacent to the site of the Convention Center which are currently leased to a parking lot operator; the Viaduct north of Vine Street to Fairmount Avenue and adjacent parcels, comprising approximately 6.75 acres; and properties owned by certain partnerships described below in which the Company has interests. Domestic Partnership Properties ------------------------------- S.R. Developers: A subsidiary of the Company is a general partner in S.R. Developers, a partnership which owns one property in center city Philadelphia. Parametric Garage Associates: A subsidiary of the Company is a general partner in Parametric Garage Associates, a partnership which owns the 750-car Gallery II Parking Garage (the "Garage"). The Garage is adjacent to the Pennsylvania Convention Center Complex. The Company has primary responsibility for the leasing and management of 19,000 gross rentable square feet of retail space on the ground level of the Garage. The Company does not believe that its general partnership interest has any value. Other Domestic Non-Entertainment Real Estate -------------------------------------------- When the Company's railroad assets were conveyed to Conrail, the Company retained fee ownership of approximately 700 parcels and rights-of-way located throughout Pennsylvania, Delaware, and New Jersey. Approximately fifteen parcels and rights-of-way located outside of center city Philadelphia are still owned by the Company. The parcels consist primarily of vacant land and buildings, some of which are leased. Reading Australia ----------------- In December 1995, Reading Australia acquired a fifty acre site in Burwood, a suburban area outside of Melbourne. Reading Australia had intended to build a multiplex theater on this site but the Minister for Planning and 16 Local Government has intervened to negate certain permits which were in place at the time the land was acquired. The Company believes that the site has value as an assemblage for other uses, even if it is unable to develop the site as a theater. Item 3. Legal Proceedings Certain Shareholder Litigation - ------------------------------ In September 1996, the holder of fifty shares of Common Stock commenced a purported class action on behalf of the Company's minority shareholders owning Reading Company Class A Common Stock in the Philadelphia County Court of Common Pleas relating to the 96 Reorganization and Stock Transactions. The complaint in the action (the "Complaint") named the Company, Craig, two former directors of the Company and all of the then current directors of the Company (other than Gregory R. Brundage and Robert F. Smerling) as defendants. The Complaint alleged, among other things, that the Independent Committee (set up to review the transactions), and the current and former directors of the Company breached their fiduciary duty to the minority shareholders in the review and negotiation of the 96 Reorganization and Stock Transactions and that none of the directors of the Company were independent and that they all were controlled by James J. Cotter, Craig or those controlled by them. The Complaint also alleged, in part, that the defendants failed to disclose the full future earnings potential of the Company and that Craig would benefit unjustly by having its credit rating upgraded and its balance sheet bolstered and that the value of the minority shareholders' interest in the Company was diluted by the transactions. In November 1996, plaintiffs filed an Amended Complaint against all of the Company's directors at that time, its two former directors and Craig. The Amended Complaint does not name the Company as a defendant. The Amended Complaint essentially restated all of the allegations contained in the Complaint and contended that the named defendant directors and Craig breached their fiduciary duties to the alleged class. The Amended Complaint sought unspecified damages on behalf of the alleged class and attorneys' and experts' fees. On December 9, 1997, the Court certified the case as a Class Action and approved the plaintiff as Class Representative. On April 24, 1997, plaintiff filed a purported derivative action against the same defendants. This action included claims substantially similar to those asserted in the class action and also alleged waste of tax benefits relating to the Company's historic railroad operating losses. The Company moved to dismiss this case for failure by the plaintiff to comply with the mandated procedures for bringing such an action. On January 23, 1998, the Court dismissed the derivative action. The dismissal of the derivative action does not affect the class action case, nor does it preclude reassertion to the claims contained in the derivative action. On September 28, 1998, the defendants filed a motion for summary judgment. In February 2000 the Court granted summary judgment against the Plaintiff and in favor of all of the defendant directors. Craig was not dismissed, however, the Court has agreed to reconsider Craig's motion in light of its decision to dismiss the claims against all of the defendant directors. The plaintiff has not elected to seek any rehearing or interlocutory appeal of the Trial Court's decision to dismiss the defendant directors. Accordingly, management believes that the Company has no liability relating to the matter. Redevelopment Authority of the City of Philadelphia v. Reading -------------------------------------------------------------- On December 12, 1997, the Redevelopment Authority filed an action in the Philadelphia Court of Common Pleas which relates to the 1993 sale of the Headhouse property by Reading to the Authority. Plaintiff has alleged discovery of various contaminants -- asbestos, PCB's lead paint -- and alleges past and future clean-up costs in excess of $1,000,000. The action is based upon theories of contract and state environmental law. The Company has denied liability and intends to vigorously defend. It is the Company's opinion that the Authority's claim is meritless in that the Company adequately disclosed the condition of the property and expressly limited its representations made in connection with the sale. 17 Other Claims ------------ The Company is not a party to any other pending legal proceedings or environmental action which management believes could have a material adverse effect on its financial position. While the City of Philadelphia has asserted that the Company's share of any environmental clean up costs related to its North Viaduct Property would be in the range of $3.5 million, the Company does not believe that it has any current obligation to commence such remediation and believes such estimate to be inaccurate. Item 4. Submission of Matters to a Vote of Security Holders. At the Company's 1999 Annual Meeting of Shareholders held on December 17, 1999, shareholders (i) elected six directors and (ii) approve the merger agreement between Reading Entertainment, Inc. (Delaware) and Reading Entertainment, Inc. (Nevada). The results of the votes were as follows: (i) Election of Directors
For Withheld ---------- -------- James J. Cotter 12,931,818 145,663 Scott A. Braly 12,930,484 146,997 Robert F. Loeffler 12,930,479 147,002 Kenneth S. McCormick 12,930,484 146,997 Robert F. Smerling 12,931,984 145,497 S. Craig Tompkins 12,931,818 145,663
(ii) Approval of merger agreement For: 12,108,200 Against: 115,576 Abstain: 6,061 EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------ The names of the executive officers and significant employees of the Company, other than the nominees for director, together with certain information regarding them, are as follows:
Name Age Position --------------------- --- -------------------------------------------------- James J. Cotter 62 Chairman of the Board of Directors S. Craig Tompkins 49 Vice Chairman and Director Robert F. Smerling 65 President and Director Eugene Cheah 32 Financial Controller, Australia and New Zealand Ellen M. Cotter 33 Vice President, Business Affairs Charles S. Groshon 46 Vice President, Finance David Lawson 41 Director of Real Estate Development, Australia and New Zealand Andrzej Matyczynski 47 Chief Administrative Officer Neil Pentecost 42 Chief Operating Officer, Australia and New Zealand James A. Wunderle 48 Executive Vice President, Chief Financial Officer and Treasurer
Mr. Cotter has been Chairman of the Board of Directors since December 1991, Chairman of the Company's Executive Committee since March 1993 and a director since September 1990. Mr. Cotter has been Chairman of the Board of Craig since 1988 and a director since 1985. Mr. Cotter has been Chairman of the Board and a director of 18 Citadel since 1991 and the Chief Executive Officer of Citadel since August 1999. Mr. Cotter is Chairman of the Board and a director of Citadel Agricultural, Inc. ("CAI"), a wholly-owned subsidiary of Citadel's, a member of the Management Committee of each of the three agricultural partnerships which constitute the principal assets of CAI (the "Agricultural Partnerships") and Chairman of the Board and a member of the Management Committee of Big 4 Farming LLC ("Farming"), a farm management company, 80% owned by Citadel and formed to manage the properties owned by the Agricultural Partnerships. Also, Mr. Cotter has served since December 1997 as the Managing Director of Visalia LLC ("Visalia"), which holds a 20% interest in each of the Agricultural Partnerships and a 20% interest in Farming. Mr. Cotter has been a director and Chief Executive Officer of Townhouse Cinemas Corporation (motion picture exhibition) since 1987 and has been the Executive Vice President and a director of the Decurion Corporation (real estate and motion picture exhibition) and of Pacific Theaters, Inc. (motion picture exhibition), a wholly-owned subsidiary of Decurion, since 1969. Mr. Cotter is the general partner of a limited partnership which is, in turn, the general partner of Hecco Ventures, a California general partnership engaged in the business of investing in securities, and the holdings of which include shares representing approximately 16.8% of the voting power of Craig. Mr. Cotter was a director of Stater Bros. Holdings Inc. and its predecessors from 1987 until September 1997. Mr. Tompkins has been Vice Chairman since January 1997. Mr. Tompkins has been a director of the Company since March 1994 and was President of the Company from March 1994 through December 1996. Mr. Tompkins is also President and a director of Craig and has served in such positions since March 1, 1994. Prior thereto, Mr. Tompkins was a partner in the law firm of Gibson, Dunn & Crutcher. Mr. Tompkins has been a director of Citadel since May 1994 and a director of G&L Realty Corp., a New York Stock Exchange listed REIT (Real Estate Investment Trust), since December 1994 and currently serves as Chairman of the Audit Committee and Chairman of the Strategic Planning Committee of that company. Since July 1994, Mr. Tompkins has been the Vice Chairman of Citadel, and currently serves as that company's Secretary/Treasurer. From August 1994 until November 18, 1999 Mr. Tompkins served as the Principal Accounting Officer for Citadel. Mr. Tompkins is also President and a director of CAI, a member of the Management Committee of each of the Agricultural Partnerships and of Farming, and serves, for administrative convenience, as an Assistant Secretary of Visalia and Big 4 Ranch, Inc. ("BRI"), a partner with CAI and Visalia in each of the Agricultural Partnerships. Mr. Smerling has been a director since September 1997 and President of the Company since January 1997. Mr. Smerling has served as President of the Company's various domestic and Puerto Rican exhibition subsidiaries since 1994. Mr. Smerling served as President of Loews Theater Management Corporation from May 1990 until November 1993. Mr. Smerling also serves as President and Chief Executive Officer of City Cinemas Corporation ("City Cinemas"), a motion picture exhibitor located in New York City. City Cinemas is an affiliate of James J. Cotter and has entered into an Executive Sharing Agreement with the Company with respect to the services of Mr. Smerling. Mr. Cheah has been the Financial Controller of Reading Entertainment Australia since August 1998. Mr. Cheah served as the Planning and Projects Manager (Retail Strategy and Projects) for Myer Grace Bros. from 1996 to 1998, and as Project Accounting Manager (Property Development) for Coles Myer Properties from 1992-1995. Prior thereto, he was a Senior Accountant (Business Services) with Price Waterhouse. Ms. Cotter has been the Vice President, Business Affairs of the Company since March 1998 and has served as the Acting President of Reading Australia since August 1999. Ms. Cotter served as the Vice President - Business Affairs of Craig from August 1996 to March 1998 and has served as the Secretary/Treasurer of Citadel Agriculture, Inc. since December 1997. From October 1992 through July 1996, Ms. Cotter was an attorney specializing in corporate law with White & Case, a New York law firm. Ms. Cotter is the daughter of James J. Cotter. Ms. Cotter is a member of Visalia and a limited partner in James J. Cotter, Ltd. (Mr. Cotter is the general partner), which is a general partner of Hecco Ventures, a privately held investment partnership. Mr. Groshon has been a Vice President of the Company since December 1988. Mr. Lawson has been the Director of Real Estate Development for Australia and New Zealand since December 1998 and since May 1999 has served as a director of the Company's principal Australian operating company, Reading Entertainment Australia Pty Limited. Prior to joining the Company, Mr. Lawson served as the Asset General Manager responsible for New South Wales for Westfield from 1996 to 1998, and as the General Manager (Retail Property Development) for Coles Myer from 1994 to 1995. 19 Mr. Matyczynski became the Chief Administrative Officer of the Company on November 15, 1999. On that date, Mr. Matyczynski also became the Chief Financial Officer of the Company's parent, Craig Corporation, and the Chief Financial Officer of its affiliate, Citadel Holding Corporation. Prior to joining the Company, Mr. Matyczynski was the Finance Director of Beckman Coulter, Inc. Mr. Matyczynski was associated with Beckman Coulter and its predecessors for more than twenty years and also served as a director for certain Beckman Coulter subsidiaries. Mr. Pentecost has been the Chief Operating Officer for Australia and New Zealand since August 1999 and a director of Reading Entertainment Australia since September 1999. Prior to joining the Company, Mr. Pentecost was with Hoyts, where he served in a number of positions, most recently serving as Operations and Services Manager (National). Mr. Pentecost joined Hoyts in 1995. Prior thereto, Mr. Pentecost served as the Director of Retail Services (Operations) for KFC in Australia. Mr. Wunderle has been Chief Financial Officer since January 1987 and Executive Vice President, and Chief Financial Officer since December 1988. He has been Treasurer since March 1986. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Common Stock Summary -------------------- The following table sets forth the high and low prices of REI common stock as reported on the NNM. REI common stock also trades on the Philadelphia Stock Exchange. The Company has filed an application with the SEC to withdraw its listing from PHLX and anticipates its acceptance on or about April 21, 2000.
1999 ------------------------------------------------------ Quarter 1st 2nd 3rd 4th -------- ------------------------------------------------------ High 8 1/8 8 3/8 7 9/16 6 1/8 Low 7 6 5/8 5 3/4 5 1998 ------------------------------------------------------ Quarter 1st 2nd 3rd 4th -------- ------------------------------------------------------ High 13 3/4 15 13 9 1/8 Low 11 3/4 11 1/2 8 7
On March 23, 2000, the high, low and closing prices for REI common stock on the NNM were, $4.25, $4.125, and $4.25, respectively. On March 23, 2000, there were approximately 1,000 shareholders of record of REI common stock, which amount does not include individual participants in security position listings. REI has not paid any dividends on the common stock. The Company's Board of Directors does not intend to authorize payment of dividends on the common stock in the foreseeable future. Holders of the Convertible Preferred Stock are entitled to receive quarterly cumulative dividends at the annual rate of $6.50 per share of Series A Preferred Stock and $6.50 per share of Series B Preferred Stock, in each case before any dividends (other than dividends payable in common stock) are paid to the holders of the common stock. All of the Series A Preferred Stock is owned by Citadel and all of the Series B Preferred Stock is owned by Craig. No dividends were paid on the Series B Preferred Stock in 1999. On October 15, 1996, REI issued the Convertible Preferred Stock to Craig and Citadel. See Item 1. Business - The 96 Reorganization and Stock Transactions. The Convertible Preferred Stock was offered and sold pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933 as a non-public offering to a limited number of persons. 20 Item 6. Selected Financial Data The following table sets forth certain historical consolidated financial information for the Company. This table is based on, and should be read in conjunction with, the Consolidated Financial Statements included elsewhere herein and the related notes thereto. (In thousands except per share information)
Year Ended December 31, 1999/1/ 1998/2/ 1997/3/ 1996/4/ 1995 - --------------------------------------------------------------------------------------------- Revenues $ 40,319 $ 38,448 $ 36,288 $ 22,944 $17,632 Net (loss) income applicable to common shareholders ($45,517) ($6,728) ($1,354) $ 6,092 $ 2,351 ============================================================================================= Earnings per share information: Basic (loss) earnings per share ($6.11) ($.90) ($0.18) $ 1.11 $ 0.47 ============================================================================================= Diluted (loss) earnings per share ($6.11) ($.90) ($0.18) $ 1.02 $ 0.47 ============================================================================================= - --------------------------------------------------------------------------------------------- December 31, 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------- Total assets $ 138,496 $172,287 $178,012 $181,754 $75,544 Redeemable preferred stock 7,000 7,000 7,000 7,000 -0- Shareholders' equity $ 102,683 $142,372 $150,485 $155,954 $68,712 =============================================================================================
/1/ Includes the results of nine new cinemas (four of which opened in the fourth quarter of the year) and one live theater which commenced operations during the year. /2/ Includes the results of three new cinemas which were opened during the year. /3/ Includes the results of five new cinemas which opened during the year. /4/ Includes the results of Citadel from March 30, 1996, the acquisition of the NY Angelika from August 28, 1996, and the Stock Transactions from October 16, 1996. 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction: - ------------- The Company is principally in the business of developing and operating multiplex cinemas in Australia, New Zealand, the United States and Puerto Rico, and in developing cinema based entertainment centers in Australia and New Zealand. During 1998 and 1999, the Company has invested substantially all of its liquid assets in cinemas and in land held for development as entertainment centers, principally in the Australian and New Zealand markets. In 1998 and 1999, the Company opened or acquired, directly or indirectly through joint ventures, twenty-nine (after consideration of six closed screens) and seventy- eight screens, respectively. Currently, the Company has, directly or through joint ventures, seventy-one screens in ten cinema complexes in Australia, thirteen screens in three cinema complexes in New Zealand, fifty-six screens in eight cinema complexes in Puerto Rico and forty-two screens in six cinema complexes in the United States. Since most of the screens added in 1999 were opened late in the year, neither their revenues or expenses are fully reflected in the Company's 1999 results of operations. Also, it is anticipated that the costs of operation for these new cinemas will be higher during their initial periods of operation than on a normalized basis, due to the higher staffing and advertising costs typically associated with a new cinema. Going forward, the Company has determined to focus its efforts on the Australian and New Zealand markets. The Company opened an eight screen complex in Australia in March 2000 and anticipates opening an additional ten screen complex in Australia in the third quarter of 2000. At the present time, the Company has no plans to expand its Puerto Rican circuit and plans to open only a single additional cinema in the United States in 2000. Ultimately, the Company intends to phase out of the exhibition business domestically and in Puerto Rico. In April 2000, the Company sold a 50% interest in the NY Angelika to National Auto Credit, Inc. and granted NAC options to (i) acquire the Company's remaining 33.3% interest in the NY Angelika and (ii) to acquire the Company's remaining Domestic Cinemas and the Company's rights under the Agreement in Principle to the City Cinemas Transaction. Citadel is also in discussions with the Company concerning the OBI Transaction and the City Cinemas Transaction. (See Item 1. Business, General). Generally speaking, the film exhibition industry in the United States and Puerto Rico has suffered from the overbuilding of multiplex cinemas. Fortunately, overbuilding is not currently, in the view of the Company, a problem in Australia or New Zealand. In 1999, the Company took writedowns of approximately $34.3 million. Of this, approximately $31,466,000 relates to the impairment of the Company's domestic and Puerto Rican cinema assets. The impairment relating to Puerto Rico ($31,330,000) was the result of the opening and anticipated opening of competitive cinemas by the dominant exhibitor in that market, including a new thirteen screen cinema to be opened at the Plaza Las Americas Mall, in direct competition to an eightplex cinema currently operated by the Company in that same shopping center and the Company's subsequent decision to exit the Puerto Rico cinema market. The writedown with respect to the Company's domestic cinema operations relates to the impairment of two domestic cinemas, which fell victim to overbuilding by competitors. In addition, the Company reduced its estimate of the residual value of certain computer equipment held for lease by the Company resulting in an Impairment loss of $2.125 million. The Company is currently in the process of consolidating its general and administrative functions in Los Angeles and closing its executive headquarters in Philadelphia. The executive offices of the Company's affiliates, Craig and Citadel, are also located in Los Angeles, and it is anticipated that certain economies can be achieved if the general and administrative functions of these three companies are consolidated. Accordingly, on a going forward basis, the domestic general and administrative functions of the Company, Craig and Citadel will be performed principally by employees of Craig. The cost of such functions will be shared on an appropriate basis between the Company, Craig and Citadel. As the relative demands of the Company, Craig and Citadel will likely vary from year to year, it is currently expected that this allocation will be reviewed by the participants on a periodic basis, as appropriate from time to time. 22 Results of Operations Due to the nature of the Company's development and acquisition activities and the timing associated with the results of such activities, the timing of new cinema openings and acquisitions and the long term nature of the Company's real estate development activities, historical revenues and earnings have varied significantly. None of the Company's entertainment center developments have commenced full operations and several are in the early stage of development. Accordingly, General and administrative expenses related to such real estate development activities have not been supported by operating income. The cinema at one of the Company's six entertainment center projects was placed in service in December 1999, however, the entertainment related retail space is not expected to be placed in operation until mid-2000. A second entertainment center project which includes a ten screen cinema, commenced construction during 1999 and is expected to begin operations in the third quarter of 2000. During 1999, the Company opened nine new cinemas with a total of seventy-eight screens, four of which cinemas (representing forty-four screens) commenced operation in December 1999. Due to the varying pace of development activities and the timing of new cinema openings, management believes that historical financial results are not necessarily indicative of future operating results. The following summarizes cinema activity for the three years ended December 31, 1999 and anticipated 2000 additions:
Total Total Cinemas Screens Location ----------------------------------------------------------------------------- Reading Australia ----------------- 1997 1 6 Townsville July 2 10 Bundaberg November 3 16 Mandurah 1998 November 4 21 Market City 1999 May 5 26 Dubbo September 6 31 Elsternwick December/1/ 9 63 Belmont, Redbank, Harbour Town 2000 (Projected) First Quarter 10 71 Warn Ponds Third Quarter/1/ 11 81 Sydney Reading New Zealand/2/ ---------------------- 1998 June 2 9 Mission Bay, Whangaparoa 1999 August 3 13 Takapuna -----------------------------------------------------------------------------
- ------------------------ /1/ Includes ten screen cinema located in an entertainment center. /2/ New Zealand cinemas are 50% owned by the Company. 23
Total Total Cinemas Screens Location ---------------------------------------------------------------------------- CineVista --------- 1997 7 44 March 8 50 Mayaguez May/1/ 8 48 Homigueros 1998 February/1/ 7 44 Homigueros February/2/ 7 42 San Juan June/1/ 8 50 Homigueros September/2/ 7 44 Bayamon 1999 December 8 56 Carolina Domestic Cinemas ---------------- 1997 1 6 Manhattan, New York December 2 14 Houston, Texas December 3 19 Minneapolis, Minnesota 1998 November 4 22 Sacramento, California 1999 May 5 34 Manville, New Jersey July 6 42 Buffalo, New York 2000/4/ (Projected) Fourth Quarter 7 50 Dallas, Texas ----------------------------------------------------------------------------
In March 1999, the Company also acquired the Royal George Theatre ("RGT"), a four stage live theater located in Chicago. The Company is presently in negotiation with a third party to sell this live theater complex. - ------------------ /1/ CineVista replaced an existing six screen cinema in Homigueros with a newly constructed 8 screen cinema which opened in June 1998. In order to accommodate the construction of the new cinema, two screens were closed at this location in May 1997. The remaining four screens were closed in January 1998. /2/ Two screens were closed at this San Juan location where CineVista continues to operate eight screens. /3/ A location in Bayamon was damaged by hurricane Georges. In the fourth quarter of 1998 CineVista determined that it would not reopen this six screen cinema. /4/ Does not include possible acquisition of City Cinemas Circuit. 24 Revenue - ------- Theater Revenue is comprised of Admissions, Concessions and Advertising, and other revenues from the Company's cinema operations and totaled the amounts set forth below in each of the three years ended December 31, 1999, inclusive of minority interests where applicable. Reading New Zealand's cinema operations are conducted through a 50% owned joint venture the results of which are reflected in the Company's Consolidated Statement of Operations under the equity method (See "Equity in Earnings of Affiliates"). Accordingly, Reading New Zealand's cinema results are not included in Theater Revenue.
1999 1998 1997 ----------- ----------- ----------- Cine Vista $12,974,000 $16,210,000 $15,186,000 Domestic Cinemas/1/ 15,504,000 11,134,000 7,978,000 Australia 9,333,000 6,212,000 3,820,000 ----------- ----------- ----------- $37,811,000 $33,556,000 $26,984,000 =========== =========== ===========
CineVista's Theater Revenues decreased approximately $3,236,000 or 20% to ---------------------------- $12,974,000 in 1999 from $16,210,000 in 1998, primarily due to deteriorating market conditions as competing cinemas opened or completed a full year of operations. In the San Juan market area, CineVista's Theater Revenues decreased $1,461,000 from the prior year as twenty-seven new competing screens opened between December 31, 1998 and December 31, 1999. In addition, 1998 Theater Revenues included $459,000 in revenues from a San Juan six screen cinema which was destroyed by a hurricane in September 1998. In the Cayey and Mayaguez markets, CineVista recorded Theater Revenue decreases of $389,000 and $590,000, respectively, as new competing screens captured market share. CineVista opened a new twelve screen cinema in December 1999. CineVista has no new cinemas under development. CineVista's Theater Revenues increased approximately $1,024,000 or 6.7% to $16,210,000 in 1998 from $15,186,000 in 1997, primarily as a result of more favorable film product in the first quarter of 1998. The increase in Theater Revenues is net of a decrease of approximately $279,000 resulting from the closing of eight screens in 1997 and 1998, offset in part by increased revenues associated with a full year of operations from a six screen cinema open in March 1997 and an eight screen cinema which opened in June 1998. Domestic Cinemas Theater Revenues increased $4,370,000 or 39.4% to --------------------------------- $15,504,000 in 1999 from 1998 primarily as a result of the inclusion of a three screen cinema which opened in November 1998, a new twelve screen cinema which opened in May 1999, a new eight screen cinema which opened in July 1999 and the inclusion of $1,161,000 in Theater Revenues from the RGT in the current period. The Company has one eight screen Domestic Cinema under development which is expected to open in late 2000. Domestic Cinemas Theater Revenues increased approximately $3,156,000 to $11,134,000 in 1998 from $7,978,000 in 1997 due in part to new cinema openings. The Company opened a new eight screen, 31,700 square foot cinema and cafe complex in Houston, Texas and acquired a five screen cinema located in Minneapolis, Minnesota in December 1997. The Company also acquired the lease on an existing three screen cinema in Sacramento, California in November 1998. Theater Revenues from the three screen Sacramento cinema were not material in 1998. Reading Australia's Theater Revenues increased $3,121,000 or 50% in 1999 ------------------------------------ from $6,212,000 in 1998 to $9,333,000 as a result of a 5.6% increase in Theater Revenues in cinemas which were open for twelve months in each year and the contribution of new screens opened during the year. During 1999, Reading Australia commenced operations of five new cinemas with a total forty-two screens. Most of these new cinemas were placed in operation late in the year and are expected to significantly increase Reading Australia's Theater Revenues in 2000 as a full year of operations is recorded. Reading Australia anticipates opening two new cinemas in 2000 with a total of eighteen screens (an eight screen cinema opened in March 2000) as well as the retail components of two entertainment center retail projects. Theater Revenues from Australian operations increased $2,392,000 or 62.6% to $6,212,000 in 1998 from $3,820,000 in 1997. The increase from the prior year includes the effect of a full year of operation of a four screen - ----------------------- /1/ Includes $1,161,000 from the Royal George Theater in 1999, which live theater is Held for sale. 25 cinema located which was purchased in July 1997 for approximately $1,600,000 and a six screen cinema which opened in November 1997. Reading Australia's first cinema, a six screen facility, was open throughout each of the respective periods. In November 1998, the Company opened a five screen cinema in Sydney, Australia which it operates under a management contract; Theater Revenues from this cinema were not material in 1998. Real Estate Revenues include rental income and the net proceeds of sales of -------------------- the Company's domestic real estate. Reading Australia did not have material revenues relating to real estate and entertainment center development activities in any of the three years ended December 31, 1999. Reading New Zealand recorded $297,000 in Real Estate Revenues in 1999 primarily from rental income on a parking garage which was acquired in 1999. Reading Australia anticipates recording Real Estate revenues in 2000 as two entertainment centers commence rental operations in 2000. Real estate revenues were $677,000, $373,000 and $180,000 in 1999, 1998, and 1997, respectively. Gains on sale of domestic real estate were not material in any of the three years ended December 31, 1999, 1998, and 1997. The Company has approximately 15 parcels and rights-of-way remaining from its historic railroad operations, many of which are of limited marketability. Future domestic real estate revenues with respect to these historic properties may increase as larger properties are sold. However, management believes that most of the properties held for sale will be liquidated within the next one to two years. Earnings from Stater preferred stock investment during 1997 the Company ----------------------------------------------- recorded $5,877,000 as Earnings from Stater preferred stock investment as a result of Reading Australia's sale of its holdings of Stater Bros. Holdings Series B Preferred Stock (the "Stater Preferred Stock"). In addition to income of $4,490,000 from accrued dividends on the Stater Preferred Stock, the Company recorded a gain of $1,387,000 reflecting the difference between the stated value of the Stater Preferred Stock ($69,365,000) and the carrying value thereof of $67,978,000 (98% of stated value). "Interest and dividend" revenues (exclusive of those from the Stater ------------------------------- Preferred Stock) were as follows in each of the three years ended December 31, 1999, 1998, and 1997:
1999 1998 1997 ------------ ---------- ---------- $1,831,000 $4,519,000 $3,247,000
Interest and dividend revenues decreased $2,688,000 primarily due to decreasing investable balances as "Cash and cash equivalents" decreased from $58,593,000 at December 31, 1998 to $13,277,000 at December 31, 1999 as the Company's funds were deployed in its real estate and cinema development projects. Interest and dividend revenues increased $1,272,000 or 39.2% in 1998 primarily as a result of the investment of the proceeds, $73,915,000, received from the redemption of the Stater Preferred Stock in money market investments in the third quarter of 1997. "Interest and dividend" income will continue to decrease as the Company's balance of liquid funds are deployed in cinema and entertainment center development projects during 2000. Expenses - -------- "Theater costs", "Theater concession costs", and "Depreciation and amortization" (collectively "Theater Operating Expenses") reflect the direct theater expenses associated with the Company's cinema operations and totaled the amounts set forth below in each of the three years ended December 31, 1999, inclusive of minority interest where applicable.
1999 1998 1997 ----------- ----------- ----------- Cine Vista $13,326,000 $14,897,000 $14,490,000 Domestic Cinemas/1/ 13,319,000 9,475,000 5,989,000 Australia 8,753,000 5,286,000 3,664,000 ------------- ----------- ----------- $35,398,000 $29,658,000 $24,143,000 ============= =========== ===========
/1/ Includes $782,000 in RGT Theater Operating Expenses. 26 CineVista's Theater Operating Expenses decreased $1,571,000 or 10.6% -------------------------------------- between 1999 and 1998 as primarily as a result of a reduction in expenses which vary directly as a percentage of Theater Revenues, including film rent and cost of concessions which decreased approximately 1.4% as a percentage of Theater Revenues in 1999 from 1998 levels due to the reduction in Theater Revenues in 1999. Other theater operating expenses decreased approximately $229,000 primarily due to decreased labor costs which decrease was partially offset by a $167,000 increase in Deprecation and amortization expense resulting from the inclusion of a full year of operation of a new eight screen cinema in 1999 offset partially as a result of a reduction in Amortization expense as the Beneficial leases were written off during 1999 (See Asset impairment charge below). CineVista Theater Operating Expenses increased approximately $407,000 or 2.8% to $14,897,000 in 1998 from $14,490,000 in 1997 due primarily to increases in expense items which vary in proportion to Theater Revenues, offset by a net decrease in Theater Operating Expenses of $1,283,000 from the closing of eight screens during the period offset by the effect of opening eight screens in June 1998. Domestic Cinema Operating Expenses increased $3,844,000 in 1999 from ---------------------------------- $9,475,000 in 1998 to $13,319,000 due primarily to the increased number of locations and screens in 1999 and the operations of the RGT (acquired in March 1999) in the current period. Theater Operating Expenses as a percentage of Theater Revenues increased by approximately 1%. Operating margins should improve as a full year of operations are recorded and results no longer include initial non-recurring start up expenses. Domestic Cinemas Theater Operating Expenses increased approximately $3,486,000 or 58.2% to $9,475,000 in 1998 from $5,989,000 in 1997 primarily as a result of the inclusion of a full year of operations of the Houston Angelika and the St. Anthony and startup costs associated with the Tower Theater from November through year end. Reading Australia's Theater Operating Expenses increased $3,467,000 in 1999 ---------------------------------------------- from $5,286,000 in 1998. Operating Expenses as a percentage of Theater Revenues increased from 85.1% to 93.8% due primarily to the inclusion of an additional $420,000 in start up expenses in 1999 due to the opening of new locations. Operating margins are expected to improve as the new cinemas commence full operations. Theater Operating Expenses from Australian operations increased $1,622,000 to $5,286,000 in 1998 from $3,664,000 in 1997. The increase is primarily due to the inclusion of a full year of operations from the Bundaberg and Mandurah Cinemas. Theater Operating Expenses as a percentage of Theater Revenues remained constant throughout the period. "General and administrative" expense, without consideration of intercompany ----------------------------------- management fees, were as follows in each of the years presented:
1999 1998 1997 ------------- ------------- ----------- CineVista $ 910,000 $ 1,292,000 $ 767,000 Domestic Cinemas 618,000* 597,000 645,000 Australia** 4,074,000 3,739,000 3,714,000 New Zealand*** 455,000 176,000 -0- Other 6,397,000 4,453,000 4,611,000 ------------- ------------- ----------- Total $12,456,000 $10,257,000 $9,737,000 ============= ============= ===========
* Includes $80,000 relating to live theater operations. ** $3,102,000 and $3,021,000 of such amounts relates to Reading Australia's real estate development segment in 1999 and 1998, respectively. *** All amounts relate to Reading New Zealand's real estate development segment. 27 CineVista's General and administrative expense decreased $382,000 from ---------------------------------------------- $1,292,000 in 1998 to $910,000 in 1999, due primarily to the elimination of $413,000 in charges relating to the closing of ten screens during 1998 (described below) offset in part by the write-off of $121,000 in capitalized development costs in 1999 and increased professional fees of $160,000 in 1999. CineVista's "General and administrative" expenses increased approximately $525,000 or 68.4% to $1,292,000 in 1998 from $767,000 in 1997, primarily as a result of $413,000 of charges related to the closing of four screens in the first quarter of 1998, and a charge relating to the Company's election not to rebuild a six screen cinema in the fourth quarter of 1998 which had been damaged by Hurricane Georges. The first quarter charge was comprised of a $395,000 loss on leasehold improvements, net of a reversal of a $230,000 provision for deferred rent. The fourth quarter charge was comprised of a $336,000 loss on leasehold improvements net of a $88,000 gain on the cancellation of a capital lease obligation. Domestic Cinemas General and administrative expense remained unchanged --------------------------------------------------- between 1999 and 1998. Domestic Cinemas General and administrative expense in 1999 includes $80,000 of General and administrative expenses associated with the RGT. "General and administrative" expenses associated with the Domestic Cinemas include $448,000, $488,000, and $370,000 in 1999, 1998, and 1997, respectively, of management fees paid to City Cinemas with respect to the management of the Domestic Cinemas. (See Note 3 to the Consolidated Financial Statements contained elsewhere herein.) Reading Australia's General and administrative expense increased $335,000 ------------------------------------------------------ in 1999 from $3,739,000 as Reading Australia expended its cinema and entertainment development and operating activities. Significant components of the increase include a $180,000 increase in property carrying costs and a $140,000 increase in write-offs of capitalized project costs. General and Administrative expenses from Australian operations of $3,739,000 in 1998 were comparable to $3,714,000 in 1997, as decreased write- offs of capitalized project costs related to project abandonments totaled $755,000. The decrease was in part offset by increased payroll costs, professional fees, office expenses, and carrying costs of land held for development, associated with Reading Australia's continued expansion of cinema operations and development activities. Reading New Zealand's General and administrative expense increased from -------------------------------------------------------- $176,000 in 1998 to $455,000 in 1999 as the Company's expanding real estate development activities in 1999, and the inclusion of a full year of activities in 1999 versus seven months in 1998. Substantially all such expenses are comprised of professional fees (legal and accounting) which are not direct project expenses. Other General and administrative expense increased $1,944,000 from ---------------------------------------- $4,453,000 in 1998 to $6,397,000 in 1999. Significant components of the increase include, an increase in General and administrative expenses allocated to the Company of approximately $580,000, the write-off of $500,000 of expenses relating to the acquisition of City Cinemas and Off Broadway Investments which were charged to expense in 1999, a $300,000 increase in professional fees, and an increase in salary and wages of approximately $300,000. During the fourth quarter of 1999, the Company's Board of Directors reviewed the allocations as between the Company and Craig of the costs and expenses of Messrs. Cotter and Tompkins, and certain administrative personnel of Craig who perform services for the Company. As a result of the review, the Company reimbursed Craig $580,000 with respect to such costs and expenses. Other "General and Administrative" expenses decreased $158,000 or 3.4% to $4,453,000 in 1998 from $4,611,000 in 1997, primarily from the inclusion in 1997 of bonus expense of $475,000 for a bonus paid to the Company's Chairman and a $110,000 investment banking fee paid to the Company's former Corporate Secretary, offset by an increase in 1998 in non-capitalized development costs associated with its Domestic Cinema development activities of approximately $140,000 and an increase in travel expenses of approximately $149,000 related to increased Domestic Cinema development activities. Asset Impairment and Restructuring Charges - ------------------------------------------ During 1999, the Company recorded an Asset Impairment charge of $34,294,000, of which $31,330,000 related to the Company's investment in CineVista, $703,000 to certain Pennsylvania real estate, $136,000 relating to two 28 Domestic Cinemas and the balance, $2,125,000, to a 1996 investment in leased computer equipment. (See Note 5 to the Consolidated Financial Statements Continued elsewhere herein.) The Company also recorded a Restructuring Charge of $889,000 upon the adoption of a plan by the Company's Board of Directors to relocate the Company's corporate headquarters from Philadelphia to Los Angeles. During 1999 the Company recorded an Asset impairment charge of $31,330,000 relating to CineVista. During the third quarter of 1999 the Company recorded an Asset impairment loss of $14,022,000 relating to CineVista. At that time, the Company wrote off the entire carrying value of the Plaza Cinemas, after a determination by the owners of the Plaza Las Americas Mall (the "Mall") to award a lease for a new cinema in the Mall to CineVista's principal competitor. In the fourth quarter of 1999, the Company determined that it would commence efforts to exit the Puerto Rico cinema market and wrote down the value of the CineVista circuit to its estimated net realizable value resulting in an additional Asset impairment loss of $17,308,000. During 1999, the Company was advised by the partnership which manages the Company's portfolio of leased equipment that the market for used computer equipment had deteriorated as a result of Year 2000 created oversupply of used computer equipment. In addition, a decision by a large lessee to upgrade certain computer equipment, including equipment leased from the Company's leasing portfolio, is also anticipated to have an effect upon the future value of the portfolio. Based upon discussions with computer equipment vendors, the Company determined that the estimated residual value of the equipment should be reduced to zero and wrote off the entire carrying value, $2,125,000, in 1999. The Company wrote off the carrying value of two of its domestic cinemas, $136,000 (which amount is net of payments due from a landlord of $100,000), in 1999. In addition, after a review of the estimated market value of certain domestic real estate held for sale the Company recorded a $203,000 impairment charge related to such real estate. In addition, in conjunction with a proposal to the City of Philadelphia (the "City") for the possible disposition of the environmentally impaired North Viaduct property in return for a cash payment from the Company to the City, the Company increased its environmental reserve by $500,000 from $1,256,000 to $1,756,000. During the fourth quarter of 1999, the Company adopted a plan and commenced steps to relocate the Company's headquarters from Philadelphia to Los Angeles and recorded a "Restructuring Charge" of $889,000 in 1999. The Restructuring Charge includes a provision for a lease termination charges, duplicate office and employee expenditures and employee severance obligations. Equity in Earnings of Affiliates - -------------------------------- "Equity in earnings of affiliates" include earnings from the Company's investment in Citadel, BRI, the Whitehorse Property Group ("WPG") and two New Zealand joint ventures (the "NZ JV's") in 1998, and one in 1999. The investment in WPG and the NZ JV's were made in the fourth quarter of 1997 and second quarter of 1998, respectively. Equity in earnings of affiliates in 1999 totaled $2,539,000 and included $2,799,000 from the Company's 31.7% interest in Citadel, $21,000 in income from the NZ JV's offset by a $172,000 loss from the Company's investment in WPG and a $109,000 loss from Love, Janis LLC. BRI recorded a loss of $322,000 in 1999, however the Company did not record any portion of such loss as Equity in earnings of affiliate since the carrying value of such investment was reduced to $0 in 1998 in the Company's Consolidated Balance Sheet. Citadel's income of $9,487,000 in 1999 includes a $13,337,000 gain from the sale of one of two rental office properties held by Citadel. Equity in earnings of affiliate were $1,070,000 and $298,000 in 1998 and 1997, respectively. The earnings of $1,070,000 recorded in 1998 was comprised primarily of $1,390,000 earnings realized from the Company's share of Citadel's net income for the year, $5,688,000, offset by a $346,000 loss representing the Company's share of BRI's net loss for the year and a reduction of the Company's carrying value of its investment in BRI to $0 at December 31, 1998. In 1998, Citadel's earnings included an income tax benefit of approximately $4,828,000 resulting principally from a reversal of previously reserved deferred tax assets offset in part by a $990,000 loss representing Citadel's share of the loss of certain agricultural partnerships which were accounted for under the equity method (See Item 13 contained elsewhere herein). In 1997 Citadel's net income totaled $1,575,000 and the Company realized Equity in earnings of affiliates of $298,000. The Company's share in the results of WPG and BRI were not material in 1997. In early 2000, Reading Australia and its joint venture partner in WPG agreed to sell the shopping center and are actively seeking buyers. No assurances can be made that the shopping center can or will be sold at a price acceptable 29 to the Company and the Company's joint venture partner. The Company believes that the estimated net realizable value from the sale of WPG and repayment of a loan due to the Company from the joint venture partner, is approximately equal to the carrying value of such assets $2,847,000, which amount has been classified as "Property held for sale" in the Company's consolidated balance sheet at December 31, 1999. Other Income (Expense) - ---------------------- Other income (expense) totaled $721,000, ($642,000) and $1,531,000 in the three years ended December 31, 1999, 1998, and 1997, respectively. Other income in 1999 include a $604,000 gain from an insurance settlement for damage incurred by CineVista from a 1998 hurricane. CineVista continues to have a business interruption claim and additional property damage claims pending which will result in additional Other income if favorably decided. Other expense in 1998 is primarily comprised of losses on foreign currency derivative contracts. (See "Currency Transactions" below.) The Company does not presently have any foreign currency derivative contracts in effect. In 1997 Other income included $615,000 which REI received from Stater in return for REI's one-year non-compete agreement, $260,000 from a third party as reimbursement of certain acquisition related expenditures which were expensed by the Company in prior periods, $490,000 of income realized upon settlement of certain litigation relating to a discontinued subsidiary's operations, a $220,000 gain from currency transactions net of miscellaneous expenses of $54,000. Minority Interest - ----------------- Minority interest in income of $322,000 in 1999 includes a 16.67% minority interest in a domestic cinema and a 25% interest in two of Reading Australia's cinemas. Minority interest in income of $343,000 in 1998 included a provision for $306,000 representing a 16.67% minority interest in one of the Company's Domestic cinema's income and a provision for $37,000 representing a 25% minority interest in one of the Company's Australian cinema's income. Minority interest in income of $196,000 in 1997 includes a provision for $238,000 for the 16.67% minority interest in the above-referenced Domestic Cinema's income less $42,000 representing the 25% minority interest in the above-referenced Australian cinema's loss. Income Tax Provision - -------------------- Income tax expense in 1999 of $923,000, $986,000 in 1998 and $1,067,000 in 1997 primarily reflect accruals for foreign withholding taxes which will be paid if certain intercompany loans are repaid, in addition to tax amounts for federal alternative minimum tax ("AMT") and state income and franchise taxes. Net (Loss) Income - ----------------- As a result of the above Net (loss) income totaled ($41,182,000), ($2,406,000), and $2,955,000 in 1999, 1998 and 1997, respectively. Net (Loss) Income Applicable to Common Shareholders - --------------------------------------------------- Net (loss) income applicable to common stockholders has been reduced by the 6.5% per annum dividend on the $62,000,000 of Convertible Preferred Stock outstanding since October 15, 1996 and amortization of the asset put option since. Currency Transactions - --------------------- During the fourth quarter of 1997, the Company entered into several foreign currency swaps and a currency forward position with a major bank. The agreements provided for the Company to receive $12,363,800 US dollars ("USD") in return for the delivery of $18,659,300 Australian dollars ("AUD") in January 1998. The value of the contracts at December 31, 1997 was established by computing the difference between the contractual exchange rates of 30 the swap and forward positions (AUD/USD) and the exchange rates in effect at December 31, 1997 and an unrealized gain of $220,000 was recorded in 1997 from these transactions which gain has been included in "Other income." During the first quarter of 1998, the currency positions and extensions thereof matured and the Company recorded a loss which totaled approximately $670,000. Liquidity and Capital Resources Since the Company determined to become principally involved in the Beyond the Home or real estate based segment of the entertainment industry in 1993, it has funded its development activities principally from cash derived from the disposition of its historic railroad assets and other operating interests. In 1996, in view of the substantial capital resources required to take advantage of the opportunities available to it in this industry, the Company acquired assets with a gross book value of $93,422,000 from a private placement of its equity securities. This increased the Company's shareholders equity by approximately $86,000,000. With the exception of a 50% interest in Reading Australia, all of the acquired assets were converted to liquid funds by September 1997. As a consequence of the Company's business plan for Australia and New Zealand, the Company is carrying significantly more land (undeveloped land is classified as "Property held for development" in the Company's Consolidated Balance Sheet) than might be the case with a more mature cinema company. The acquisition of these properties has required the commitment of significant sums. Since most of the acquired properties are not currently income producing, the financing of such assets is more difficult and more expensive than would be the financing of cash flowing assets. In late 1999 the Company determined that it would be in the best interest of the Company and its shareholders to concentrate on Australia and New Zealand real estate and cinema development activities on properties now owned by the Company. Accordingly, in April 2000 the Company sold NAC a 50% interest in the AFC and granted NAC two options to acquire the remaining Domestic Cinema assets of the Company. (See Item 1. Business, General). In addition, the Company may assign its rights to the City Cinemas Transaction to Citadel if such rights are not acquired by NAC. Citadel is also considering the acquisition of the Company's rights to the OBI Transaction. (See Item 1. Business, General and Note 2 to the Consolidated Financial Statements contained elsewhere herein.) In recognition of the decision to deploy for the funds in Australia and New Zealand, the Company commenced efforts to sell the Royal George Theatre, a live theater which was to have been operated in conjunction with the three live theaters to have been acquired in the OBI Transaction. The Company has also determined that it will exit the Puerto Rico cinema market and has no additional cinemas under development in that market. The Company presently has only one Domestic Cinema under development and may ultimately sell its existing Domestic Cinemas to NAC or Citadel. At December 31, 1999, the Company had $4,500,000 of bank debt outstanding, $3,000,000 under CineVista's line of credit and $1,500,000 under a property term loan in New Zealand (See Note 10 to the Consolidated Financial Statements included elsewhere herein.) In March 2000, Reading Australia entered into a $16,350,000 line of credit (the "Australian Line of Credit") which line of credit may, if additional bank participants are secured, be increased to $49,000,000 (the "Increased Commitment"). The Australian Bank Loan will provide Reading Australia with adequate funds to complete, in 2000, an entertainment center development currently under construction in Sydney, and if the Increased Commitment is secured, to complete a second planned entertainment center project in the Melbourne area during 2001. All amounts outstanding under CineVista's line of credit are due on December 31, 2000, as are amounts outstanding under the New Zealand loan and Australian Bank Loan if the Increased Commitment is not secured (in which case the Australian Bank Loan matures in December 2003). In addition to deficit working capital at December 31, 1999, of approximately $4,000,000 (including maturing bank debt of $4,500,000), the Company has committed development expenditures relating to cinema and entertainment development projects of approximately $50,000,000, $25,000,000 of which are expected to be funded in 2000 and $25,000,000 to be funded thereafter (not including potential obligations relating to the City Cinemas Transaction and the OBI Transaction or the rights of the Company's affiliate, Citadel, as the holder of the $7,000,000 of Series A Preferred Stock to require redemption of such stock during a ninety day period commencing October 15, 2001 (see Note 15)), which amounts are expected to be funded in part by an Australian dollar line of credit (the "Australian Line of Credit"). The Company does not anticipate incurring additional development commitments in New Zealand or Australia 31 until additional financing is secured. CineVista is in violation of certain of the loan covenants in its line of credit and is seeking a waiver of such violations from the lender. If a waiver is not received, CineVista will be in default of the terms of the line of credit and the lender could demand immediate repayment of amounts due thereunder, which amounts totaled $3,000,000 on December 31, 1999, and $4,250,000 on April 12, 2000. No assurances can be made that the lender will waive the covenant violations. In April 2000, the Company received a commitment for an eighteen month $7 million line of credit secured by a pledge of certain Domestic Cinema assets and the Company's interest in Citadel (the "Domestic Line of Credit"). However, as a result of the sale of AFC Interest to NAC (see Note 19), the terms of the loan commitment will have to be renegotiated. No assurances can be made that the lender will be willing to fund the Company under revised terms satisfactory to the Company. Proceeds of the Domestic Line of Credit were expected to be used to pay a portion of the accumulated dividends under the Series B Preferred Stock (during 1999 REI did not pay $3,575,000 in dividends on the Series B Preferred Stock, all of which is held by Craig), pay purchase money debt of $1,180,000 due in May 2000 from the purchase of the RGT and fund the development cost of one additional Domestic Cinema. The Company anticipates acquiring additional financing to fund its development obligations which are due in 2001. In New Zealand the Company has a $2,800,000 property purchase mortgage and a $1,500,000 bank loan due in 2000. Reading New Zealand is presently evaluating a bank proposal to refinance both of these obligations and provide construction funding for an entertainment center in Wellington. The Company does not anticipate commencement of construction of new projects until financing has been arranged and may be required to arrange alternative financing, sell assets, or bring in joint venture partners with respect to certain of its projects if the Domestic Line of Credit cannot be restructured, the covenant violation waivers are not received from CineVista's lender and NAC or Citadel does not acquire the Company's remaining Domestic Cinemas. Commitments and Contingencies - ----------------------------- NAC has been granted on option to acquire the Company's rights to the City Cinemas Transaction. Citadel has expressed an interest in acquiring the Company's rights to the City Cinemas Transaction (if not acquired by NAC) and the OBI Transaction. If assignment of the City Cinemas Transaction is not completed, and if the Company elects to effect the transaction, the Company will be obligated to fund $32,500,000 in credit lines eighteen months from closing of the City Cinemas Transaction. Further, if the OBI Transaction is not effected through a stock purchase and the Company were to undertake the transaction, under certain circumstances, the Company could be required to fund approximately $9,900,000 at closing. The Company currently believes, based upon discussions with NAC, Citadel and representatives of City Cinemas, that the assignment will be completed and that the Company will have no further obligations with respect to these transactions. Reading Australia has guaranteed repayment of $4,200,000 of bank debt and other obligations of a joint venture. (See Note 10 to the Consolidated Financial Statements contained elsewhere herein.) The Company's 1996 tax return is under review by the Internal Revenue Service (the "Service"). While the Company believes its reporting position in such period to be reasonable and the Service has not alleged any deficiencies, no assurances can be made that the Company's tax reporting position will be upheld. At December 31, 1999, the Company had book assets of $138,496,000 and short term bank debt of approximately $4,500,000. These assets include approximately $31,624,000 in undeveloped land, which the Company believes to be relatively liquid. While no assurances can be given, the Company believes that it will be able to complete its build-out commitments for the year 2000. These build-out commitments include the completion of the Company's Auburn entertainment center in Australia, the build-out of certain tenant improvements at its rental facilities in Australia, and the build-out of a Domestic Cinema in Dallas, Texas. In the event that funding cannot be secured, the Company may seek joint partners for its entertainment center projects, and/or reduce its inventory of land. The Company is currently actively marketing the Royal George Theatre, and the joint venture which owns the Whitehorse Shopping Center is actively marketing its interests in that retail complex. The following summarizes the major sources and uses of cash funds in each of the three years ended December 31, 1999, 1998 and 1997: 32 1999: Cash and cash equivalent decreased $45,316,000 in 1999 from $58,593,000 - ---- in 1998 to $13,277,000 at December 31, 1999. Working capital decreased $49,293,000 from $45,378,000 at December 31, 1998 to a deficit of $3,915,000 at December 31,1999. While not necessarily indicative of results of operations determined under generally accepted accounting principles, CineVista's, the Domestic Cinemas' and Reading Australia's (net of minority interests of $322,000) operating cash flow (income before depreciation and amortization, corporate charges and asset impairment and restructuring charges) totaled $312,000 in 1999. Other sources of liquid funds in 1999 include $1,831,000 in Interest and dividend income, a net increase in short term debt of $4,639,000, and "Real Estate" revenue of $677,000. In addition to the payment of operating expenses, the principal use of cash funds included the payment of $455,000 of dividends on the Company's Series A Convertible Preferred Stock, purchases of property and equipment of $37,139,000 ($24,063,000 which related to Reading Australia, $5,623,000 which related to CineVista, and $7,453,000 relating to the Domestic Cinemas), the investment of $1,739,000 in Property held for development of ($1,642,000 relates to Reading New Zealand and $97,000 relates to Reading Australia), the payment of $7,938,000 in purchase commitments related to New Zealand real estate development and increases in current liabilities of $3,350,000. 1998: Unrestricted cash and cash equivalent decreased $34,247,000 in 1998 from - ---- $92,840,000 in 1997 to $58,593,000 at December 31, 1998. Working capital decreased $41,748,000 from $87,126,000 at December 31, 1997 to $45,378,000 at December 31,1998. While not necessarily indicative of results of operations determined under generally accepted accounting principles, CineVista's, the Domestic cinemas' and Reading Australia's (net of minority interest of $343,000) operating cash flow (income before depreciation and amortization and corporate charges) totaled $177,000 in 1998. Other sources of liquid funds in 1998 include $4,519,000 in Interest and dividend income, a net increase in purchase commitments of $4,550,000, and Real Estate revenue of $373,000. In addition to the payment of operating expenses, the principal use of cash funds included the payment of $4,030,000 of dividends on the Company's Convertible Preferred Stock, purchases of property and equipment of $11,078,000 ($1,772,000 which related to Reading Australia, $7,106,000 which related to CineVista, and $2,200,000 relating to the Domestic Cinemas), the investment of $12,445,000 in property held for development of ($2,645,000 relates to Reading New Zealand and $9,800,000 relates to Reading Australia), the payment of $1,370,000 relating to the acquisition of the Royal George Theatre, the payment of $1,272,000 relating to a deposit and other costs associated with the Cinema Transaction and the Theater Transaction, the investment of $4,290,000 by Reading New Zealand in two joint ventures including a loan of $587,000 to a joint venture partner with respect to property on which Reading New Zealand intends to develop an entertainment center, and investments in common stock of $2,211,000 (See Note 4 to the Consolidated Financial statements contained elsewhere herein). 1997: Unrestricted cash and cash equivalent increased $44,160,000 in 1997 from - ---- $48,680,000 in 1996 to $92,840,000 at December 31, 1997. Working capital increased $43,790,000 from $43,336,000 at December 31, 1996 to $87,126,000 at December 31, 1997. The principal source of liquid funds in 1997 was the $73,915,000 in proceeds from the redemption of the Stater Preferred Stock investment. While not necessarily indicative of results of operations determined under generally accepted accounting principles, CineVista's, the Domestic Cinemas' and Reading Australia's (net of minority interest of $196,000) operating cash flow (income before depreciation and amortization and corporate charges) totaled $7,672,000 in 1997. Other sources of liquid funds in 1997 include $2,360,000 in payment of a 1996 litigation settlement, $3,247,000 in "Interest and dividend" income and cash of $875,000 from "Other income." In addition to the payment of operating expenses the principal use of cash funds included the payment of $4,030,000 of dividends on the Company's Convertible Preferred Stock, and purchases of property and equipment of $20,116,000 ($11,743,000 which relates to Reading Australia, $4,079,000 relating to CineVista and $4,294,000 relating to the Domestic Cinemas), and the investment of $3,871,000 by Reading Australia in a joint venture and a loan to the joint venture partner with respect to property on which Reading Australia intends to develop a multiplex cinema. (See Note 4 to the Consolidated Financial Statements contained elsewhere herein.) 33 Effects on Inflation The Company does not believe that inflation has a material effect upon its existing operations. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for derivative Instruments and Hedging Activities," ("SFAS 133"). SFAS 133 is effective for fiscal years beginning after June 15, 2000 and requires all derivatives to be recorded on the balance sheet at fair value as either assets or liabilities depending on the rights or obligations under the contract. SFAS 133 also establishes new accounting methodologies for the following three classifications of hedges: fair value, cash flow and net investment in foreign operations. Management believes the adoption of SFAS 133 will not have a material impact on the Company's financial position or results of operations. Forward-Looking Statements From time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing, including those contained herein. Such forward-looking statements may be included in, without limitation, reports to stockholders, press releases, oral statements made with the approval of an authorized executive officer of the Company and filings with the Securities and Exchange Commission. The words or phrases "anticipates," "expects," "will continue," "estimates," "projects," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The results contemplated by the Company's forward-looking statements are subject to certain risks, trends, and uncertainties that could cause actual results to vary materially from anticipated results, including without limitation, delays in obtaining leases and permits for new multiplex locations, construction risks and delays, the lack of strong film product, the impact of competition, market and other risks associated with the Company's investment activities and other factors described herein. Item 7A. Quantitative and Qualitative Disclosure about Market Risk The financial performance and results of operations of the Company may be affected by changes in interest rates and currency exchange rates. Historically the Company maintained most of its cash and cash equivalent balances in Eurodollar time deposits (US dollar denominated deposits in banks located outside of the United States) and short-term money market instruments with original maturities of six months or less. Eurodollar time deposits are not readily marketable and therefore are not subject to price risk due to changes in interest rates, although the Company may lose the ability to realize the benefit of increased interest income if interest rates were to rise. Other money market investments are subject to price risk and will decline in value if interest rates increase. Due to the short-term nature of such investments and the small amount of the Company's cash and cash equivalents invested in such instruments, a change of 1% in short-term interest rates would not have a material effect on the Company's financial condition. The Company anticipates expenditure of its remaining cash balances during 2000. Thereafter, the Company anticipates funding its commitments with borrowed funds and cash flow. The Company may, from time to time, elect to fix interest rates on borrowed funds, however, no decision has been made at this time. Approximately 61% and 13% of the company's net assets (assets less liabilities) were invested in assets denominated in Australian dollars (Reading Australia) and New Zealand dollars (Reading New Zealand), respectively, at December 31, 1999 compared to 22% and 4% at December 31, 1998. The Company anticipates expenditure of its remaining cash balances in 2000 in furtherance of its development activities and has therefore converted portions of its cash funds to Australian and New Zealand dollars. At December 31, 1999, $9,770,000 of the Company's $13,277,000 in Cash and cash equivalents was invested in Australian and New Zealand dollars compared to $1,272,000 of the $58,593,000 in Cash and cash equivalents for the prior year. Upon the expenditure of the remaining cash balances, it is expected that funding for development expenditures will be secured through bank borrowing. Such borrowing will 34 be originated in the same currencies as the expenditures. Accordingly, unless the Company elects to hedge its foreign exchange exposure, approximately 74% of the Company's net assets (based upon the amount at December 31, 1999) will continue to be invested in assets subject to exchange fluctuations between the US and Australian and New Zealand dollars. At December 31, 1998 approximately 26% of the Company's net assets were invested in assets subject to currency fluctuations. The Company has no current plan to hedge such exposure. During 1999, the company recognized an unrealized foreign currency translation gain of approximately $1,948,000 (included as a component of comprehensive income in the Consolidated Statement of Shareholders' Equity contained elsewhere herein) compared to an unrealized loss of $1,677,000 during 1998. The unrealized gain recognized in 1999 related primarily to an increase in the value of the Australian and New Zealand dollars relative to the U.S. dollar of approximately 6.7% and 1.3% between December 31, 1998 and December 31, 1999, respectively, and the corresponding effect upon the carrying value of Reading Australia's and Reading New Zealand's assets. The unrealized loss during 1998 related primarily to a decrease in the value of the Australian dollar relative to the U.S. dollar of approximately 5.7% between December 31, 1997 and December 31, 1998, and the corresponding effect upon the carrying value of Reading Australia's assets. Since foreign dollar income is minimal as most of the Company's projects are under development, the impact upon income from operations of fluctuations in the relative value of the U.S., the Australian and New Zealand dollars was not material in 1999, 1998 or 1997. Item 8. Financial Statements and Supplementary Data The information required by this item is incorporated by reference to pages F-1 through F-31. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant The information required by this item, to the extent that it relates to directors of the Company, is incorporated by reference to the Company's proxy statement with respect to its 2000 Annual Meeting of Shareholders and, to the extent that it relates to executive officers, appears in Part I hereof. Item 11. Executive Compensation The information required by this item is incorporated by reference to the Company's proxy statement with respect to its 2000 Annual Meeting of Shareholders. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is incorporated by reference to the Company's proxy statement with respect to its 2000 Annual Meeting of Shareholders. Item 13. Certain Relationships and Related Transactions Management and Ownership Overlaps: - --------------------------------- There are significant cross ownerships between the Company, Craig, Citadel and BRI as follows: 35 Craig a publicly traded company listed on the New York Stock Exchange owns Common Stock and the Series B Preferred Stock comprising approximately 78% of the voting interest in REI and, assuming conversion of the Series B Preferred Stock approximately 81% of the equity interest REI. Craig and Reading each own stock in Citadel, a public traded company listed on the American Stock Exchange. The Company currently owns approximately 31.7% of the voting interests in Citadel. Craig currently owns approximately 17.3% of the voting interests of Citadel directly, and on a consolidated basis with the Company, approximately 49%. In addition, Citadel owns 70,000 shares of the Series A Preferred Stock of REI, a 5% voting interest and, assuming conversion of the Series B Preferred Stock into Common Stock, approximately a 7.6 % equity interest in the Company. Citadel also has the Asset Put Option to put its assets to REI in exchange for Common Stock. However, that option lapses 30 days after the filing of this Report on Form 10K, and Citadel has advised the Company that it does not intend to exercise this option. BRI is a publicly held company, but is not listed on any exchange. Its sole asset is a 40% interest in the Agricultural Partnerships, formed to hold approximately 1,580 acres of agricultural land in Kern County, California. The remaining 60% interests are held 40% by Citadel and 20% by Visalia, a limited liability company owned by James J. Cotter and certain members of his family. The Company currently owns approximately 33.4% of the equity interest in BRI. Craig currently owns approximately 16.4% of the equity interest in BRI and, on a consolidated basis with the Company, approximately 49.8% of such equity interest. In addition, Cecelia Packing (a company owned by Mr. Cotter, "Cecelia") and a trust for the benefit of one of Mr. Tompkins' children own additional shares in BRI representing, when aggregated with the shares held by the Company and Craig, more than a majority of the outstanding shares of BRI. Farming was formed to provide farming services to the Agricultural Partnerships and is owned 80% by Citadel and 20% by Visalia. The Company, as a consequence of its ownership of both Citadel common stock and BRI common stock, owns approximately 26% of the Agricultural Partnerships. There are also substantial management overlaps between these companies, as follows: James J. Cotter, the principal stockholder of Craig, is the Chairman of the Board of Directors of each of the Company, CC and CHC, and the Chief Executive Officer of CHC. Mr. Cotter also serves as a managing director of each of the Agricultural Partnerships and of Farming and is the managing member of Visalia LLC. S. Craig Tompkins, the Vice Chairman of the Board of Directors of the Company is also a director and the President of CC and the Vice Chairman of the Board and Secretary of CHC. Mr. Tompkins also serves as the President of Citadel Agriculture Inc., a wholly owned subsidiary of CHC, and as a managing director of each of the Agricultural Partnerships and Farming, and serves for administrative convenience, as the assistant secretary of BRI and Visalia. Andrzej Matyczynski, the Chief Administrative Officer of the Company is also the Chief Financial Officer of each of CC and CHC. Ellen Cotter, Vice President of Business Affairs of the Company and Acting President of Reading Australia is a member of Visalia and the daughter of James J. Cotter. Robert Loeffler, a member of the Board of Directors of the Company, and the Chairman of the Audit Committee of the Company, also serves as a director and as the Chairman of the Audit Committee of each CC and CHC. The Company, Craig and Citadel are currently working on a plan to centralize all administrative functions for the three companies in Los Angeles. Upon consummation of this centralization, it is contemplated that all general and administrative personnel will be employees of Craig, and that the costs of such personnel will be allocated between the three companies on an appropriate basis, taking into account the amount of time spent by such personnel on the business and affairs of the three companies. Following a review of the time spent by Messrs. Cotter and Tompkins and certain administrative employees of Craig, the Board of Directors of the Company determined it appropriate to reimburse Craig in the amount of $580,000 with respect to services performed by these individuals and administrative employees for the benefit of the Company. There was no similar reimbursement with respect to 1998. In both 1998 and 1999 Messrs. 36 Cotter and Tompkins received directly from the Company $150,000 in directors fees and $180,000 as compensation, respectively. Also in 1998 and 1999, the Company paid Citadel $410,000 and $185,000, respectively, for real estate consulting services provided by that company. BRI and the Agricultural Partnerships - ------------------------------------- The Agricultural Partnerships use Farming to farm their properties. Farming receives in consideration of its services reimbursement of its costs plus 5% of the net revenues of the farming operations after picking, packing and hauling. Farming, in turn, contracts with Cecelia for certain bookkeeping and administrative services, for which it pays a fee of $6,000 per month. Cecelia also packs fruit for the Agricultural Partnerships. The acquisition of the properties owned by the Agricultural Partnerships was financed by a ten year purchase money mortgage in the amount of $4.05 million, a line of credit from Citadel and pro-rata contributions from the partners. In December 1998, the Partnerships suffered a freeze which destroyed the 1998-1999 crop. The Agricultural Partnerships have no funds to repay the line of credit from Citadel or fund the costs associated with production of a 1999-2000 crop and complete the anticipated capital improvements other than to call upon the partners for funding. BRI has no funds or resources with which to provide such funding, other than to call upon its separate line of credit from Citadel. Since January 1, 1999, Citadel and Visalia have provided the funding required by the Agricultural Partnerships on an 80/20 basis, but no assurances can be given that Citadel and Visalia will continue to provide such funding. As of December 31, 1999, Citadel and Visalia had advanced $1,227,000 and $334,000, respectively, to the Agricultural Partnerships. The Board of Directors and executive officers of BRI are comprised of three Craig directors, including Margaret Cotter, James Cotter's daughter and a member of Visalia. City Cinema and OBI Transactions - -------------------------------- The Angelika Film Center ("NY Angelika") is owned jointly by the Company and Sutton Hill, a partnership affiliated with City Cinemas, a Manhattan based cinema operator owned in equal parts by James J. Cotter and Michael Forman. City Cinemas manages the NY Angelika and two other cinemas operated by the Company pursuant to management agreements. Robert F. Smerling, President of the Company, and Neil Sefferman, Vice President - Film of the Company, also serve in the same positions with City Cinemas. In December 1998, the Company and Sutton Hill entered into an Agreement in Principle to lease and operate four cinemas and manage three other cinemas all of which are located in Manhattan and which together constitute the City Cinemas circuit. In addition the Agreement in Principle provides for the acquisition by the Company of three live "Off Broadway" theaters also located in Manhattan. The Conflicts Committee of the Board of Directors (the "Conflicts Committee"), comprised entirely of directors independent of Messrs. Cotter and Forman, reviewed and negotiated the transaction. Consummation of the transaction is contingent upon, among other things, receipt of fairness opinions relating to the transactions and approval of REI's shareholders of the issuance of Common Stock for the acquisition of the "Off Broadway Theaters." Consistent with its determination to reduce its operations in the United States, the Company is currently in negotiations with Citadel and Sutton Hill regarding the assumption of the Company's rights and obligations under the Agreement in Principle. Based upon discussions with Citadel and with representatives of Sutton Hill, the Company believes that Citadel will likely assume such rights and obligations. The Company has advised Citadel that if it completes the City Cinemas Circuit and the "Off Broadway" theaters it will give to Citadel a right of first negotiation to acquire the remainder of the Company's domestic cinema assets It is anticipated that the Manhattan "Off Broadway" theaters, as well as another live theater owned by the Company will be booked and managed by Union Square Management, Inc., a live theater management company specializing in the booking and management of "Off Broadway" style live theaters. Margaret Cotter, daughter of Mr. James J. Cotter, is a Senior Vice President with Union Square Management, Inc. In December 1998 the Company agreed to guarantee a $100,000 bank loan to the principal shareholder of Union Square Management, Inc. The 96 Reorganization and Stock Transactions - -------------------------------------------- The Stock Transactions (See Item 1. Business) involved the issuance of Common Stock and Series B Preferred Stock to Craig in return for certain assets owned by Craig. The Company is a subsidiary of Craig. At the time that the 37 negotiations which led to the Stock Transactions were initiated, Craig owned 51% of the Company's voting securities and the Chairman and President of the Company (both of whom are also directors of Craig and the Company) served in the same positions at Craig. The Company's Board of Directors therefore established an Independent Committee of the Board of Directors comprised of directors with no affiliation with Craig or Citadel (other than the Company's ownership in Citadel) to negotiate the terms of the proposed transaction with Craig and Citadel, to review the fairness of any consideration to be received or paid by the Company and the other terms of any such transaction and to make a recommendation to the Board of Directors concerning such transaction. Management Agreement: - --------------------- The Houston Angelika, the St. Anthony and the NY Angelika are managed by City Cinemas pursuant to management agreements. The management agreements for the St. Anthony and the Houston Angelika provide for City Cinemas to receive a fee equal to 2.5% of revenues. The NY Angelika management agreement provides for the payment of a minimum fee of $125,000 plus an incentive fee equal to 50% of annual cash flow (as defined) over prescribed levels provided, however, that the maximum annual aggregate fee cannot exceed 5% of the NY Angelika's revenues. Loans to Officers: - ------------------ In 1997 the Company loaned Robert Smerling, President, $70,000. The non- interest bearing loan is payable upon demand. 38 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements PAGE ---- Consolidated Balance Sheets as of December 31, 1999 and December 31, 1998. F-1 -- F-2 Consolidated Statements of Operations for the years ended December 31, 1999, F-3 December 31, 1998 and December 31, 1997. Consolidated Statements of Cash Flows for the years ended December 31, 1999, F-4 December 31, 1998 and December 31, 1997. Consolidated Statements of Shareholders' Equity for the years ended F-5 December 31, 1999, December 31, 1998 and December 31, 1997. Notes to Consolidated Financial Statements. F-6 -- F-31 Report of Independent Auditors - Deloitte & Touche LLP. F-32 Report of Independent Auditors - Ernst & Young, LLP. F-33
All schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the related instructions or are not applicable and therefore have been omitted. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 2.1 Agreement and Plan of Merger Among Reading Company, Reading Entertainment, Inc., and Reading Merger Co. (Incorporated by reference to Exhibit A to the Proxy Statement/Prospectus included in Reading Entertainment, Inc.'s Registration Statement on Form S-4, File No. 333-13413.) 2.2 Agreement and Plan of Merger between Reading Entertainment, Inc. (a Delaware corporation) and Reading Entertainment, Inc. (a Nevada corporation) dated November 19, 1999. (Incorporated by reference to Exhibit C to the Definitive Proxy Statement on Schedule 14A of Reading Entertainment, Inc. dated November 22, 1999.) 3(i) Articles of Incorporation of Reading Entertainment, Inc. 3(ii) By-laws of Reading Entertainment, Inc. 4.1 Certificate of Designation of Reading Entertainment, Inc. setting forth the voting powers, designations, preferences, limitations, restrictions and relative rights of Series A Voting Cumulative Convertible Preferred Stock and Series B Voting Cumulative Preferred Stock. (Incorporated by reference to Exhibit A-2 to the Definitive Proxy Statement on Schedule 14A of Reading Entertainment, Inc. dated November 22, 1999.) 39 10.1* Reading Company 1992 Nonqualified Stock Option Plan, as amended. (Incorporated by reference to Exhibit 10.1 to Reading Entertainment, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.) 10.2* Non-Qualified Stock Option Agreement dated April 18, 1997 by and between Reading Entertainment, Inc. and James J. Cotter. (Incorporated by reference to Exhibit 10.1 to Reading Entertainment, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.) 10.3* Reading Entertainment, Inc. 1997 Equity Incentive Plan. (Incorporated by reference to Exhibit A to Reading Entertainment, Inc.'s Definitive Proxy Statement on Schedule 14A as filed with the Securities and Exchange Commission on August 21, 1997.) 10.4* Master Management Agreement between Angelika Holding, Inc. and City Cinemas Corporation dated November 26, 1997. (Incorporated by reference to Exhibit 10.29 to Reading Entertainment, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997.) 10.5 Agreement by and among Public Transport Corporation, Reading Properties Pty Ltd, and Mackie Group Pty Ltd for development at the Frankston Railway Station dated May 28, 1998. (Incorporated by reference to Exhibit 10.1 to Reading Entertainment, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.) 10.6 Agreement in Principle between Reading Entertainment, Inc. and City Cinemas dated December 2, 1998. (Incorporated by reference to Exhibit 10.23 to Reading Entertainment, Inc.'s Annual Report of Form 10-K for the year ended December 31, 1998.) 10.7* Employment Agreement by and between Craig Corporation and Andrejz Matyczynski. 10.8 Letter agreement dated April 5, 2000, by and between National Auto Credit, Inc. and Reading Entertainment, Inc. and FA, Inc. to acquire additional one-third membership interest in Angelika Film Centers, LLC. 10.9 Letter agreement dated April 5, 2000, by and between National Auto Credit, Inc. and Reading Entertainment, Inc. to acquire the remaining domestic cinema assets of Reading Entertainment, Inc. 10.10 Purchase agreement dated as of April 5, 2000, among National Auto Credit, Inc., National Cinemas, Inc., FA. Inc., and Reading Entertainment, Inc. 21 (i) List of Subsidiaries of Reading Entertainment, Inc. 23.1 Consent of Independent Auditors - Deloitte & Touche LLP. 23.2 Consent of Independent Auditors - Ernst & Young, LLP. 27 Financial Data Schedule for the year ended December 31, 1999. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the reporting period. (c) See item 14(a)(3) above. (d)(1) Not applicable. (d)(2) Not applicable. (d)(3) Not applicable. * These exhibits constitute the executive compensation plans and arrangements of the Company. 40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized. READING ENTERTAINMENT, INC. By: /s/ Robert F. Smerling --------------------------------------------- Robert F. Smerling, President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date --------- ----- ---- /s/ James J. Cotter April 13, 2000 - --------------------------- ---------------- James J. Cotter Chairman and Director (Principal Executive Officer) /s/ S. Craig Tompkins April 13, 2000 - --------------------------- ---------------- S. Craig Tompkins Vice Chairman and Director /s/ James A. Wunderle April 13, 2000 - --------------------------- ---------------- James A. Wunderle Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer, Principal Accounting Officer) /s/ Scott A. Braly April 13, 2000 - --------------------------- ---------------- Scott A. Braly Director /s/ Robert M. Loeffler April 13, 2000 - --------------------------- ---------------- Robert M. Loeffler Director /s/ Kenneth S. McCormick April 13, 2000 - --------------------------- ---------------- Kenneth S. McCormick Director
Reading Entertainment, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands, except share and per share amounts)
- ----------------------------------------------------------------------------------------------------------------------------- December 31, December 31, 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents $ 13,277 $ 58,593 Amounts receivable 409 575 Restricted cash 948 904 Inventories 316 236 Prepayments and other current assets 931 532 - ----------------------------------------------------------------------------------------------------------------------------- Total current assets 15,881 60,840 - ----------------------------------------------------------------------------------------------------------------------------- Due from affiliate 1,000 1,000 Investments in unconsolidated affiliates 13,098 13,345 Net investment in leased equipment - 2,125 Property held for sale 5,740 - Property held for development 31,624 32,949 Property and equipment - net 57,854 32,534 Note receivable from joint venture partners 1,549 2,357 Other assets 1,775 3,729 Intangible assets: Beneficial leases - net of accumulated amortization of $4,111 in 1998 - 12,797 Cost in excess of assets acquired - net of accumulated amortization of $2,062 in 1999 and $1,426 in 1998 9,975 10,611 - ----------------------------------------------------------------------------------------------------------------------------- 121,615 111,447 - ----------------------------------------------------------------------------------------------------------------------------- Total assets $138,496 $172,287 =============================================================================================================================
See Notes to Consolidated Financial Statements. F-1 Reading Entertainment, Inc. and Subsidiaries Consolidated Balance Sheets (continued) (in thousands, except share and per share amounts)
- ----------------------------------------------------------------------------------------------------------------------------- December 31, December 31, 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 3,131 $ 3,031 Accrued taxes 631 418 Accrued property costs and other 4,355 1,734 Film rent payable 1,718 1,347 Notes payable and short-term debt 8,617 743 Purchase commitments - 8,066 Other liabilities 497 123 Accrued restructuring costs 847 - - ----------------------------------------------------------------------------------------------------------------------------- Total current liabilities 19,796 15,462 - ----------------------------------------------------------------------------------------------------------------------------- Notes payable 1,035 920 Other liabilities 5,918 4,606 - ----------------------------------------------------------------------------------------------------------------------------- Total long term liabilities 6,953 5,526 - ----------------------------------------------------------------------------------------------------------------------------- Minority interests 2,064 1,927 Reading Entertainment Convertible Redeemable Series A Preferred Stock, par value $.001 7,000 7,000 per share, stated value $7,000; Authorized, issued and outstanding - 70,000 shares Shareholders' Equity Reading Entertainment Series B Preferred Stock, par value $.001 per share, stated value $55,000; Authorized, issued and outstanding - 550,000 shares 1 1 Reading Entertainment preferred stock, par value $.001 per share: Authorized -9,380,000 shares: None issued - - Reading Entertainment common stock, par value $.001 per share: Authorized -25,000,000 shares: Issued and outstanding -7,449,364 shares 7 7 Other capital 138,637 138,637 Accumulated (deficit) retained earnings (31,910) 9,727 Accumulated other comprehensive (loss) (4,052) (6,000) - ----------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 102,683 142,372 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders equity $138,496 $172,287 =============================================================================================================================
See Notes to Condensed Consolidated Financial Statements. F-2 Reading Entertainment, Inc. and Subsidiaries Consolidated Statements of Operations (in thousands, except shares and per share amounts)
Year Ended December 31, - --------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- REVENUES: Theater: Admissions $ 27,604 $ 24,792 $ 19,978 Concessions 8,450 7,625 6,078 Advertising and other 1,757 1,139 928 Real estate 677 373 180 Earnings from Stater preferred stock investment - - 5,877 Interest and dividends 1,831 4,519 3,247 - --------------------------------------------------------------------------------------------------------------------- 40,319 38,448 36,288 - --------------------------------------------------------------------------------------------------------------------- EXPENSES: Theater costs 29,644 24,370 20,081 Theater concession costs 1,930 1,653 1,296 Depreciation and amortization 3,923 3,673 2,785 General and administrative 12,456 10,257 9,737 Asset impairment and restructuring charges 35,183 - - - --------------------------------------------------------------------------------------------------------------------- 83,136 39,953 33,899 - --------------------------------------------------------------------------------------------------------------------- (Loss) income from operations (42,817) (1,505) 2,389 Equity in earnings of affiliates 2,539 1,070 298 Other (expense) income, net 721 (642) 1,531 Interest expense 380 - - - --------------------------------------------------------------------------------------------------------------------- (Loss) income before minority interests and income taxes (39,937) (1,077) 4,218 Minority interests 322 343 196 - --------------------------------------------------------------------------------------------------------------------- (Loss) income before income taxes (40,259) (1,420) 4,022 Income taxes 923 986 1,067 - --------------------------------------------------------------------------------------------------------------------- Net (loss) income (41,182) (2,406) 2,955 Less: Preferred stock dividends and amortization of asset put option (4,335) (4,322) (4,309) - --------------------------------------------------------------------------------------------------------------------- Net (loss) applicable to common shareholders ($45,517) ($6,728) ($1,354) ===================================================================================================================== Basic and diluted loss per share ($6.11) ($0.90) ($0.18) =====================================================================================================================
See Notes to Consolidated Financial Statements. F-3 Reading Entertainment, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands)
Year Ended December 31, - --------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net (loss) income ($41,182) ($2,406) $ 2,955 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation 2,544 2,084 1,240 Amortization 1,379 1,589 1,545 Deferred rent expense 395 217 406 Write off of capitalized development costs 385 542 1,308 Loss (gain) on disposal of assets 273 634 (15) Asset impairment and restructuring charges 35,183 - - Equity in income of affiliates (2,539) (1,070) (298) Minority interests 322 343 196 Preferred stock redemption premium - - (5,877) Changes in operating assets and liabilities: Decrease in amounts receivable 292 636 1,854 Increase in inventories (65) (45) (50) (Increase) decrease in prepayments and other current assets (424) 742 858 Increase (decrease) in accounts payable and accrued expenses 1,525 (644) (3,347) Increase (decrease) in film rent payable 357 (284) 545 Increase (decrease) in other liabilities (19) (321) 654 Other, net 595 - (10) - --------------------------------------------------------------------------------------------------------------------- Net cash used in (provided by) operating activities (979) 2,017 1,964 - --------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of property held for development (1,739) (12,445) (5,106) Purchase of property and equipment, net (37,179) (11,078) (14,760) Decrease in purchase committment (7,938) (3,397) - Decrease (increase) in restricted cash 44 3,664 (1,421) Investment in joint ventures (164) (2,601) (1,850) Loans to joint venture partners (111) (594) (2,021) Investment in Citadel common stock - (2,211) - Investment in Royal George Theatre (105) (1,369) - Investment in New York Live Theaters and City Cinemas - (1,332) - Proceeds from redemption of Stater Preferred Stock investment - - 73,915 Purchase of Domestic Cinema - - (229) Increase in long term deposits - - (76) - --------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (47,192) (31,363) 48,452 - --------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from short-term debt 4,639 601 - Payments of equity issuance costs - - (366) Minority interest distributions (470) (417) (371) Decrease in notes payable (739) (766) (1,500) Payment of preferred stock dividends (455) (4,030) (4,030) Proceeds from minority partner of Australian joint venture 278 - 93 Proceeds from Angelika, Houston landlord - - 280 - --------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 3,253 (4,612) (5,894 - --------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (398) (289) (362) - --------------------------------------------------------------------------------------------------------------------- (Decrease) increase in cash and cash equivalents (45,316) (34,247) 44,160 Cash and cash equivalents at beginning of year 58,593 92,840 48,680 - --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 13,277 $ 58,593 $ 92,840 =====================================================================================================================
See Notes to Consolidated Financial Statements. F-4 Reading Entertainment, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity Years ended December 31, 1999, 1998, 1997 (in thousands, except shares)
Common Stock Series B Preferred Stock Other ------------------------------------------------------------- Shares Amount Shares Amount Capital - ------------------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 1997 7,449,364 $7 550,000 $1 $138,594 Net income (including comprehensive loss) Issuance costs of Stock Transactions 43 Reading Entertainment Series A and B preferred dividends declared - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1997 7,449,364 7 550,000 1 138,637 Net loss (including comprehensive loss) Reading Entertainment Series A and B preferred dividends declared - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1998 7,449,364 7 550,000 1 138,637 Net loss (including comprehensive income) Reading Entertainment Series A preferred dividends declared - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1999 7,449,364 $7 550,000 $1 $138,637 ==================================================================================================================================== Accumulated (deficit) Accumulated Total retained Comprehensive Shareholder's earnings Income (Loss) Equity - ------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1997 $17,238 $ 114 $155,954 Net income (including comprehensive loss) 2,955 (4,437) (1,482) Issuance costs of Stock Transactions 43 Reading Entertainment Series A and B preferred dividends declared (4,030)/1/ (4,030) - ------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 16,163 (4,323) 150,485 Net loss (including comprehensive loss) (2,406) (1,677) (4,083) Reading Entertainment Series A and B preferred dividends declared (4,030)/1/ (4,030) - ------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 9,727 (6,000) 142,372 Net loss (including comprehensive income) (41,182) 1,948 (39,234) Reading Entertainment Series A preferred dividends declared (455)/2/ (455) - ------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 ($31,910) ($4,052) $102,683 ===================================================================================================================
(1) Represents dividends per share of $6.50 for Reading Entertainment Series A Preferred Stock and dividends per share of $6.50 for Reading Entertainment Series B Preferred Stock. (2) Represents dividends per share of $6.50 for Reading Entertainment Series A Preferred Stock See Notes to Consolidated Financial Statements. F-5 Reading Entertainment, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity Years ended December 31, 1999, 1998, 1997 (in thousands, except shares)
Common Stock Series B Preferred Stock Other ------------------------------------------------- Shares Amount Shares Amount Capital - --------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1997 7,449,364 $7 550,000 $1 $138,594 Net income Foreign currency translation adjustments Comprehensive Income Issuance costs of Stock Transactions 43 Reading Entertainment Series A and B preferred dividends declared - --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 7,449,364 7 550,000 1 138,637 Net loss Foreign currency translation adjustments Comprehensive Income Reading Entertainment Series A and B preferred dividends declared - --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 7,449,364 7 550,000 1 138,637 Net loss Foreign currency translation adjustments Comprehensive Income Reading Entertainment Series A preferred dividends declared - --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 7,449,364 $7 550,000 $1 $138,637 ===================================================================================================================== Accumulated Accumulated (deficit) or Other Total retained Comprehensive Shareholder's earnings Income (Loss) Equity - --------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1997 $ 17,238 $ 114 $155,954 Net income 2,955 2,955 Foreign currency translation adjustments (4,437) (4,437) ------------ Comprehensive Income (1,482) ------------ Issuance costs of Stock Transactions 43 Reading Entertainment Series A and B preferred dividends declared (4,030) /(1)/ (4,030) - --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 16,163 (4,323) 150,485 Net loss (2,406) (2,406) Foreign currency translation adjustments (1,677) (1,677) ------------ Comprehensive Income (4,083) ------------ Reading Entertainment Series A and B preferred dividends declared (4,030) /(1)/ (4,030) - --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 9,727 (6,000) 142,372 Net loss (41,182) (41,182) Foreign currency translation adjustments 1,948 1,948 ------------ Comprehensive Income (39,234) ------------ Reading Entertainment Series A preferred dividends declared (455) /(2)/ (455) - --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 ($31,910) ($4,052) $102,683 =====================================================================================================================
(1) Represents dividends per share of $6.50 for Reading Entertainment Series A Preferred Stock and dividends per share of $6.50 for Reading Entertainment Series B Preferred Stock. (2) Represents dividends per share of $6.50 for Reading Entertainment Series A Preferred Stock See Notes to Consolidated Financial Statements. F-5 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1999 (amounts in tables in thousands, except shares and per share data) In December 1999, Reading Entertainment Inc., a Delaware corporation, was merged into a newly formed wholly-owned subsidiary, Reading Entertainment, Inc., a Nevada corporation. The purpose of the merger was to change the domicile of the corporation from Delaware to Nevada. The Nevada corporation was the surviving corporation and the corporation's operations, assets, liabilities and capitalization were not changed as a result of the merger. As used herein "REI" or "Reading Entertainment" shall refer to either the Delaware or Nevada corporation and REI, together with its subsidiaries and predecessors as, "Reading" or the "Company." The Company is in the business of developing and operating multiplex cinemas and developing, and eventually operating, entertainment centers in Australia and New Zealand. The Company also operates cinemas in Puerto Rico and the United States. Reading's cinemas are owned through various subsidiaries and operate under the Angelika Film Centers and Reading Cinemas names in the mainland United States (the "Domestic Cinemas"); through Reading Cinemas of Puerto Rico, Inc., a wholly-owned subsidiary, under the CineVista name in Puerto Rico ("CineVista" or the "Puerto Rico Circuit"); through Reading Entertainment Australia Pty. Limited (collectively with its subsidiaries referred to herein as "Reading Australia") under the Reading Cinemas name in Australia (the "Australia Circuit"); and through a 50/50 joint venture in New Zealand under the Berkeley Cinemas name. The Company's entertainment center development activities in Australia and New Zealand are conducted through Reading Australia and through affiliates of Reading New Zealand Ltd. (collectively referred to herein as "Reading New Zealand"), respectively. The Company operates in two business segments, cinema operations and real estate development. (See Note 3.) The Company is also a participant in two real estate joint ventures in Philadelphia, Pennsylvania and holds certain property for sale located in Philadelphia and Australia and owns certain equipment which it leases to third parties. NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation: The consolidated financial statements of Reading Entertainment and subsidiaries include the accounts of REI and its majority- owned subsidiaries, after elimination of all significant intercompany transactions, accounts and profits. The Company's investments in 20% to 50%- owned companies, in which it has the ability to exercise significant influence over operating and financial policies, are accounted for on the equity method. Investments in other companies are carried at cost. Accounting Principles: The consolidated financial statements of Reading Entertainment, Inc. have been prepared in accordance with generally accepted accounting principles in the United States of America. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes: Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Cash Equivalents: The Company considers all highly liquid investments with original maturities of three months or less at the time of acquisition to be cash equivalents. Cash equivalents are stated at cost plus accrued interest, which approximates fair market value, and consist principally of Eurodollar time deposits, interest-bearing bank deposits, federal agency securities and other short-term money market instruments. F-6 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) Inventories: Inventories are comprised of confection goods used in theater operations and are stated at the lower of cost (first-in, first-out method) or net realizable value. Property held for development: Property held for development consists of land (including land acquisition costs) acquired for the potential development of multiplex cinemas and/or entertainment centers and held either for such purposes or for other development purposes. Property held for development is carried at cost and, at the time that construction of the related multiplex cinema and/or entertainment center commences, is transferred to Property and equipment and accounted for as Construction-in-progress. Property and Equipment: Property and equipment are carried at cost. Depreciation of buildings, leasehold improvements and equipment are recorded on a straight-line basis over the estimated useful lives of the assets or, if the assets are leased, the remaining lease term (inclusive of renewal options, if likely to be exercised), whichever is shorter. The estimated useful lives are generally as follows: Building and Improvements 20-40 years Equipment 3-15 years Furniture and Fixtures 3-7 years Leasehold Improvements 10-20 years Construction in Progress and Property Development Costs: Construction in progress and property development costs are comprised of direct costs associated with the development of potential cinemas (whether for purchase or lease) or entertainment center locations. Startup costs and other costs not directly related to the acquisition of long term assets are expensed as incurred. Amounts are carried at cost unless management decides that a particular location will not be pursued to completion or if the costs are no longer relevant to the proposed project. If such a judgement is made, previously capitalized costs which are no longer of value are written off. Intangible Assets: Intangible assets are comprised of acquired beneficial cinema leases used in CineVista's operations (in 1998), and cost in excess of net assets acquired in the acquisition of the Angelika Film Center, a six-screen cinema located in the Soho area of Manhattan (the "NY Angelika") and the acquisition of a five-screen cinema located in Minneapolis, Minnesota (the "St. Anthony"). The amount of the purchase price of the NY Angelika assets in excess of the appraised value of the assets acquired is being amortized on a straight-line basis over a period of 20 years. The fair value of the NY Angelika assets was determined by an independent appraiser. The purchase price of the St. Anthony is being amortized on a straight-line basis over the remaining life of the lease term which approximates four years. The amount of the CineVista purchase price ascribed to the beneficial leases was determined by an independent appraiser computing the present value of the excess of market rental rates over the rental rates in effect under CineVista's leases at the time of the Company's acquisition of CineVista and allocating such amount as a component of the purchase price of CineVista. The beneficial leases were amortized on a straight-line basis over a period of 19.5 years. The remaining beneficial leases were written off in 1999 in conjunction with asset impairment charges recorded in 1999 (See Note 5). F-7 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) Advertising Costs: The Company expenses the costs of advertising as incurred. Advertising expense was $1,518,000, $1,005,000 and $670,000 for the years ended December 31, 1999, 1998, and 1997 respectively. Impairment of Long Lived Assets: The Company reviews long-lived assets, including intangibles, for impairment if events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. If the sum of the estimated future cash flows, undiscounted and without interest charges, is less than the carrying amount of the asset, an impairment loss is recognized on the amount by which the carrying value of the asset exceeds its estimated fair value. The fair value of assets is determined as either the expected selling price less selling costs or the present value of the estimated future cash flows. (See Note 5.) Translation of Non-U.S. Currency Amounts: The financial statements and transactions of Reading Australia's and Reading New Zealand's cinema and real estate operations are maintained in their functional currency (Australian and New Zealand dollars, respectively) and translated into U.S. dollars in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation." Assets and liabilities of such operations are denominated in their functional currency and translated at exchange rates in effect at the balance sheet date. Revenues and expenses are translated at the average exchange rate for the period. Translation adjustments are reported as "Accumulated other comprehensive income," a component of Shareholders equity. Loss Per Share: Net loss applicable to common stock shareholders reflects the reduction for dividends declared or accumulated on the Company's Series A Voting Cumulative Convertible Redeemable Preferred Stock (the "Series A Preferred Stock"), and Series B Voting Cumulative Convertible Preferred Stock (the "Series B Preferred Stock") (collectively, the "Convertible Preferred Stock") and for amortization of the value of an estimate of an asset put option (the "Asset Put Option") had one been recorded. (See Note 15.) Basic loss per share (Reading Entertainment common stock (the "Common Stock")) is calculated using the weighted average number of shares outstanding during the periods presented. The weighted average number of shares used in the computation of basic loss per share were 7,449,364 in 1999, 1998 and 1997. Diluted income (loss) per share is calculated by dividing net income (loss) by the weighted average common shares outstanding for the period plus the dilutive effect of stock options, convertible securities and the Asset Put Option. Stock-Based Compensation: The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Under APB 25, compensation cost is recognized over the vesting period based on the difference, if any, on the date of grant between the fair value of the Company's stock and the amount an employee must pay to acquire the stock. Recent Accounting Pronouncements: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.133, "Accounting for Derivative Instruments and Hedging Activities,"("SFAS 133"). SFAS 133 is effective for fiscal years beginning after June 15, 2000 and requires all derivatives to be recorded on the balance sheet at fair value as either assets or liabilities depending on the rights or obligations under the contract. SFAS 133 also establishes new accounting methodologies for the following three classifications of hedges: fair value, cash flow and net investment in foreign operations. Management believes the adoption of SFAS 133 will not have a material impact on the Company's financial position or results of operations. F-8 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) Reclassification: Certain amounts in previously issued financial statements have been reclassified to conform with the current presentation. NOTE 2 -- RELATED PARTY TRANSACTIONS Management and Ownership Overlaps: - --------------------------------- There are significant cross ownerships between the Company, Craig Corporation, Citadel Holding Corporation and Big 4 Ranch, Inc., as follows: Craig Corporation ("CC" and collectively with its predecessors and wholly- owned subsidiaries "Craig"), a publicly traded company listed on the New York Stock Exchange, owns Common Stock and Convertible Preferred Stock comprising approximately 78% of the voting interest in REI and, assuming conversion of the Convertible Preferred Stock, approximately 81% of the equity interest REI. Craig and Reading each own stock in Citadel Holding Corporation, a publicly traded company listed on the American Stock Exchange ("CHC" and collectively with its consolidated subsidiaries "Citadel"). The Company currently owns approximately 31.7% of the voting interests in CHC. Craig owns approximately 17.3% of the voting interests of CHC directly, and on a consolidated basis with the Company, approximately 49%. In addition, Citadel owns 70,000 shares of the Series A Preferred Stock of REI, a 5% voting interest and, assuming conversion of the Convertible Preferred Stock into Common Stock, approximately a 7.6% equity interest in the Company. Citadel also has the Asset Put Option to put its assets to REI in exchange for Common Stock. However, that option lapses 30 days after the filing of this Report on Form 10K, and Citadel has advised the Company that it does not intend to exercise this option. Big 4 Ranch, Inc. ("BRI") is a publicly held company, but is not listed on any exchange. Its sole asset is a 40% interest in three agricultural partnerships (the "Agricultural Partnerships"), formed to hold approximately 1,580 acres of agricultural land in Kern County, California. The remaining 60% interests are held 40% by Citadel and 20% by Visalia, LLC., a limited liability company owned by James J. Cotter and certain members of his family ("Visalia"). The Company currently owns approximately 33.4% of the equity interest in BRI. Craig currently owns approximately 16.4% of the equity interest in BRI and, on a consolidated basis with the Company, approximately 49.8% of such equity interest. In addition, Cecelia Packing (a company owned by Mr. Cotter, "Cecelia") and a trust for the benefit of one of Mr. Tompkins' children own additional shares in BRI representing, when aggregated with the shares held by the Company and Craig, more than a majority of the outstanding shares of BRI. Big 4 Farming, LLC. (Farming") was formed to provide farming services to the Agricultural Partnerships and is owned 80% by Citadel and 20% by Visalia. The Company, as a consequence of its ownership of both CHC common stock and BRI common stock, owns approximately 26% of the Agricultural Partnerships. There are also substantial management overlaps between these companies, as follows: James J. Cotter, the principal stockholder of Craig, is the Chairman of the Board of Directors of each of the Company, CC and CHC, and the Chief Executive Officer of Citadel. Mr. Cotter also serves as a managing director of each of the Agricultural Partnerships and of Farming and is the managing member of Visalia LLC. F-9 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) S. Craig Tompkins, the Vice Chairman of the Board of Directors of the Company is also a director and the President of CC and the Vice Chairman of the Board and Secretary of CHC. Mr. Tompkins also serves as the President of Citadel Agriculture Inc., a wholly-owned subsidiary of CHC, and as a managing director of each of the Agricultural Partnerships and Farming, and serves for administrative convenience, as the assistant secretary of BRI and Visalia. Andrzej Matyczynski, the Chief Administrative Officer of the Company is also the Chief Financial Officer of Craig and Citadel. Ellen Cotter, Vice President of Business Affairs of the Company and Acting President of Reading Australia is a member of Visalia and is the daughter of James J. Cotter. Robert Loeffler, a member of the Board of Directors of the Company, and the Chairman of the Audit Committee of the Company, also serves as a director and as the Chairman of the Audit Committee of CC and CHC. The Company, Craig and Citadel are currently working on a plan to centralize all administrative functions for the three companies in Los Angeles. Upon consummation of this centralization, it is contemplated that all general and administrative personnel will be employees of Craig, and that the costs of such personnel will be allocated between the three companies on an appropriate basis, taking into account the amount of time spent by such personnel on the business and affairs of the three companies. Following a review of the time spent by Messrs. Cotter and Tompkins and certain administrative employees of Craig, the Board of Directors of the Company determined it appropriate to reimburse Craig in the amount of $580,000 with respect to services performed by these individuals and administrative employees for the benefit of the Company. There was no similar reimbursement with respect to 1998. In both 1998 and 1999 Messrs. Cotter and Tompkins received directly from the Company $150,000 in directors fees and $180,000 as compensation, respectively. Also in 1998 and 1999, the Company paid Citadel $410,000 and $185,000, respectively, for real estate consulting services provided by that company. BRI and the Agricultural Partnerships - ------------------------------------- The Agricultural Partnerships use Farming to farm their properties. Farming receives in consideration of its services reimbursement of its costs plus 5% of the net revenues of the farming operations after picking, packing and hauling. Farming, in turn, contracts with Cecelia for certain bookkeeping and administrative services, for which it pays a fee of $6,000 per month. Cecelia also packs fruit for the Agricultural Partnerships. The acquisition of the properties owned by the Agricultural Partnerships was financed by a ten year purchase money mortgage in the amount of $4.05 million, a line of credit from Citadel and pro-rata contributions from the partners. In December 1998 the Partnerships suffered a freeze which destroyed the 1998-1999 crop. The Agricultural Partnerships have no funds to repay the line of credit from Citadel or fund the costs associated with production of a 1999-2000 crop and complete the anticipated capital improvements other than to call upon the partners for funding. BRI has no funds or resources with which to provide such funding, other than to call upon its separate line of credit from Citadel. Since January 1, 1999, Citadel and Visalia have provided the funding required by the Agricultural Partnerships on an 80/20 basis, but no assurances can be given that Citadel and Visalia will continue to provide such funding. As of December 31, 1999, Citadel and Visalia had advanced $1,227,000 and $334,000,respectively, to the Agricultural Partnerships. The Board of Directors and executive officers of BRI are comprised of three Craig directors, including Margaret Cotter, James Cotter's daughter and a member of Visalia. F-10 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) City Cinema and OBI Transactions - -------------------------------- The Angelika Film Center LLC ("AFC") is owned jointly by the Company and Sutton Hill Associates ("Sutton Hill"), a partnership affiliated with City Cinemas, a Manhattan based cinema operator owned in equal parts by James J. Cotter and Michael Forman. City Cinemas manages the AFC and two other cinemas operated by the Company pursuant to management agreements. Robert F. Smerling, President of the Company, and Neil Sefferman, Vice President - Film of the Company, also serve in the same positions with City Cinemas. In December 1998 the Company and Sutton Hill entered into an Agreement in Principle to lease and operate four cinemas and manage three other cinemas all of which are located in Manhattan and which together constitute the City Cinemas circuit (the "City Cinemas Transaction"). In addition the Agreement in Principle provides for the acquisition by the Company of three live "Off Broadway" theaters also located in Manhattan (the "OBI Transaction"). The Conflicts Committee of the Board of Directors (the "Conflicts Committee"), comprised entirely of directors independent of Messrs. Cotter and Forman, reviewed and negotiated the transaction. Consummation of the transaction is contingent upon, among other things, receipt of fairness opinions relating to the transactions and approval of REI's shareholders of the issuance of Common Stock for the OBI Transaction. Consistent with its determination to reduce its operations in the United States, the Company is currently in negotiations with Citadel and Sutton Hill regarding the assumption of the Company's rights and obligations under the Agreement in Principle as it relates to the OBI Transaction and, if not consummated by National Auto Credit, Inc. ("NAC") (see Note 19), the City Cinemas Transaction. Based upon discussions with Citadel and with representatives of Sutton Hill, the Company believes that Citadel will likely assume such rights and obligations under such circumstances. It is anticipated that the Manhattan "Off Broadway" theaters, as well as another live theater owned by the Company will be booked and managed by Union Square Management, Inc., a live theater management company specializing in the booking and management of "Off Broadway" style live theaters if the OBI Transaction is consummated by the Company. Margaret Cotter, daughter of Mr. James J. Cotter, is a Senior Vice President with Union Square Management, Inc. In December 1998 the Company agreed to guarantee a $100,000 bank loan to the principal shareholder of Union Square Management, Inc. Management Agreement: - --------------------- The Houston Angelika, the St. Anthony and the NY Angelika are managed by City Cinemas pursuant to management agreements. The management agreements for the St. Anthony and the Houston Angelika provide for City Cinemas to receive a fee equal to 2.5% of revenues. The NY Angelika management agreement provides for the payment of a minimum fee of $125,000 plus an incentive fee equal to 50% of annual cash flow (as defined) over prescribed levels provided, however, that the maximum annual aggregate fee cannot exceed 5% of the NY Angelika's revenues. The Company paid City Cinemas $449,000, $488,000 and $370,000 pursuant to these management agreements in 1999, 1998 and 1997, respectively. Loans to Officers: - ------------------ In 1997 the Company loaned Robert Smerling, President, $70,000. The non- interest bearing loan is payable upon demand. F-11 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) NOTE 3 -- BUSINESS SEGMENTS AND GEOGRAPHIC AREA INFORMATION The Company operates multiplex cinemas in the United States, Puerto Rico, Australia and New Zealand and is developing cinemas and cinema based entertainment centers in Australia and New Zealand. The Company operates in two business segments, cinema development and operations, and real estate development (entertainment center development activities). The Company evaluates performance and allocates resources based on several factors, of which the primary financial measure is operating income (loss) from operations. Accounting policies of the business segments are the same as those described in the summary of significant accounting polices. (See Note 1.) Business segment assets are the owned or allocated assets used in each geographic or functional area. The corporate component of income (loss) from operations includes corporate general and administrative expenses, interest and dividends, and other income. Corporate assets consist of corporate cash, property and equipment, certain intangibles and the Company's investment in Citadel. F-12 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) The following sets forth certain information concerning the Company's two segments, real estate development (which amounts do not include domestic real estate revenues) and cinema operations:
Real Estate Cinema Corporate and 1999 Development/1/,/2/ Operations/3/ Eliminations/4/ Consolidated - ---- ------------------ ----------------- ----------------- -------------- Revenues $ 297 $ 37,811 $ 2,211 $ 40,319 Operating (loss) Income (3,389) (31,503) (7,925) (42,817) Identifiable assets 61,962 50,969 25,565 138,496 Depreciation and Amortization 128 3,773 22 3,923 Capital expenditures/5/6/ 9,569 29,547 15 39,131
Real Estate Cinema Corporate and 1998 Development/1/,/2/ Operations/3/ Eliminations/4/ Consolidated - ---- ------------------ ----------------- ----------------- -------------- Revenues $ 0 $33,556 $ 4,892 $ 38,448 Operating (loss) Income (3,197) 1,307 385 (1,505) Identifiable assets 42,125 57,247 72,915 172,287 Depreciation and Amortization 0 3,598 75 3,673 Capital expenditures 12,445 11,011 67 23,523
Real Estate Cinema Corporate and 1997 Development/1/,/2/ Operations/3/ Eliminations/4/ Consolidated - ---- ------------------ ----------------- ----------------- -------------- Revenues $ 0 $26,984 $ 9,304 $ 36,288 Operating (loss) Income (3,198) 916 4,671 2,389 Identifiable assets 18,910 53,525 105,577 178,012 Depreciation and Amortization 0 2,735 50 2,785 Capital expenditures/5/ 7,586 12,213 67 19,866
_____________________ /1/ Real estate capital expenditures are net of "Purchase commitments" of $8,066,000 and $3,516,000 in 1998 and 1997, respectively. /2/ Includes investments in unconsolidated affiliates of $2,847,000, $3,608,000 and $1,608,000 at December 31, 1999, 1998 and 1997, respectively. /3/ Includes investments in unconsolidated affiliates of $2,139,951, $1,578,000 and $0 at December 31, 1999, 1998 and 1997, respectively. /4/ Includes investments in unconsolidated affiliates of $10,958,000, $8,159,000 and $4,903,000 at December 31, 1999, 1998 and 1997, respectively. /5/ Includes purchases of property held for development of $31,623,000, $12,445,000 and $7,382,000 at December 31, 1999, 1998 and 1997 respectively. /6/ Capital expenditures have not been reduced by proceeds of $213,000 received from disposals during 1999. F-13 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) The following table indicates the relative amounts of revenues from operations and property, plant and equipment of the Company by geographic area during the three-year period ended December 31, 1999. The Company has no export revenues.
1999 1998 1997 ------- ------- ------- Revenues: Puerto Rico..................... $12,974 $16,210 $15,186 Mainland United States.......... 15,504 11,134 8,158 Australia....................... 9,333 6,212 3,820 Property, plant and equipment: Puerto Rico..................... 3,006 18,389 13,391 Mainland United States/1/....... 17,681 8,125 6,372 Australia/2/.................... 56,831 29,420 20,549 New Zealand/3/.................. 14,853 9,549 0
NOTE 4 -- ACQUISITION AND DEVELOPMENT ACTIVITIES Live Theater Acquisition ------------------------ On March 18, 1999, the Company acquired a four auditorium live theater complex in Chicago which operates under the name "The Royal George Theatre" (the "RGT") for approximately $2,800,000 of which $1,180,000 of the purchase price was financed with a purchase money mortgage due in May 2000. The balance of the purchase price was paid in cash. Domestic Cinema Activity ------------------------ The Company acquired the six screen NY Angelika in August 1996. Since then the Company has acquired or built five cinemas increasing the domestic screen count to forty-two. All domestic cinemas are leased. New York Acquisition - In December 1998, the Company entered into an Agreement in Principle with Sutton Hill (See Note 3) to lease and operate the cinemas constituting the City Cinemas Circuit located in Manhattan and to acquire three live "Off Broadway" theaters also located in Manhattan. Pursuant to the Cinemas Transaction, the Company was to also acquire the 16.7% interest in the AFC not already owned by it and certain management rights with respect to three other cinemas located in Manhattan. In April 2000, the Company sold NAC a 50% interest in the AFC (See Note 19) and options to acquire the Company's rights to the City Cinemas Transaction. - --------------- /1/ Includes property held for sale of $2,893,000 at December 31, 1999. /2/ Includes property held for development of $23,702,000, $23,400,000 and $14,714,000 at December 31, 1999, 1998 and 1997, respectively. /3/ Includes property held for development of $7,922,000 and $9,549,000 at December 31, 1999 and 1998, respectively. F-14 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) The Company has offered Citadel the opportunity to take over its position under the OBI Transaction and the City Cinemas Transaction under certain circumstances (See Notes 3 and 19). Citadel has advised the Company that it is interested in taking over the Company's position under these agreements, if certain modifications to the transactions can be negotiated, and has delegated authority to review the transactions and to negotiate such modifications directly with Sutton Hill to a committee comprised of independent directors. It is contemplated that, if NAC or Citadel consummates a transaction with Sutton Hill, the Company will receive at the closing the $1,000,000 deposit made by the Company under its agreement with Sutton Hill. In connection with the cinema transaction, the Company made a deposit of $1,000,000 to Sutton Hill. Such deposit has been recorded as "Due from affiliate" in the Consolidated Balance Sheets at December 31, 1999 and 1998. Reading Australia ----------------- In 1995, the Company commenced cinema development activities in Australia. Since formation, Reading Australia has opened ten cinemas (inclusive of one entertainment center, the cinema portion of which opened in December 1999), seven in leased facilities, two in owned facilities and one at a managed facility, with a total of 71 screens (including an eight screen cinema which opened in March 2000). In 2000, Reading Australia also anticipates opening an entertainment center with a ten screen cinema as well as the entertainment center portion of a recently completed facility. Reading Australia has acquired rights to, or fee interests in, land on which it intends to develop an additional two entertainment centers. Puerto Rico ----------- The Company acquired CineVista effective in 1994. Since that time the Company has opened four new cinemas with a total of thirty-four screens. CineVista opened a new twelve screen cinema in December 1999 and an eight-screen cinema in June 1998 which replaced a six-screen cinema at the same location. New Zealand ----------- During 1998, Reading New Zealand Limited (together with its subsidiaries, "Reading New Zealand") entered into two 50/50 joint ventures, one of which currently operates thirteen screens in three locations. The second joint venture owned a parcel of land in Wellington on which the Company intends to develop an entertainment center featuring a twelve screen multiplex cinema. In July 1999 Reading New Zealand acquired 100% ownership of the property. In addition, in 1998 Reading New Zealand acquired ownership of a property adjacent to the development site and a multiple story parking garage. Also in 1998, Reading New Zealand acquired a fifteen acre site in a suburb of Auckland on which it intends to develop a cinema and an entertainment center. NOTE 5 -- ASSET IMPAIRMENT AND RESTRUCTURING CHARGES During 1999, the Company recorded an Asset impairment charge of $34,294,000. Of this amount, $31,330,000 related to the Company's investment in CineVista, $703,000 to certain Philadelphia real estate, $136,000 to two domestic cinemas and the balance, $2,125,000, to a 1996 investment in leased computer equipment. (See Note 7.) The F-15 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) Company also recorded a Restructuring charge of $889,000 during the fourth quarter of 1999 upon the adoption of a plan to relocate the Company's corporate headquarters from Philadelphia to Los Angeles. During the third quarter of 1999 CineVista recorded an Asset impairment charge of $14,022,000 after CineVista wrote off the entire carrying value of the eight screen cinema it operates at the Plaza Las Americas Mall (the "Plaza Cinema"). Prior thereto, CineVista believed it had reached agreement with the landlord as to the terms of the lease with respect to the opening of a new ten screen cinema at a second location in the Mall. However, CineVista was advised by the landlord that the landlord had entered into a lease for the new cinema complex with a third party. In light of the anticipated adverse change in the Plaza Cinemas' business prospects upon the opening of a competing state-of-the art cinema in the same mall, the Company evaluated the recoverability of its investment in the Plaza Cinema and determined that the entire carrying value of the Plaza Cinemas, $13,884,000 ($11,838,000 "Beneficial lease", $1,438,000 "Leasehold improvements" and $1,009,000 "Machinery and equipment" net of certain related liabilities of $401,000) was impaired and should be written off. Also in the third quarter of 1999, CineVista determined to close a four screen leased cinema and recorded an Asset impairment charge of $138,000 equal to the difference of the carrying value of the cinema and the appraised value of the leasehold interest. During the fourth quarter of 1999 the Company decided it should initiate efforts to exit the Puerto Rico market and therefore wrote down the carrying value of CineVista to its estimated net realizable value resulting in an additional Asset impairment charge of $17,308,000. The estimated net realizable value of CineVista was determined by computing the net present value of CineVista's estimated future cash flows. The discount rate utilized was determined based upon an analysis of comparable sale transactions. In conjunction with the Asset impairment charge, the Company wrote off the remaining Beneficial lease, $273,000, and created a $17,034,000 Asset impairment reserve which is a component of Property and equipment. (See Note 8.) In the fourth quarter of 1999, the Company was advised by the partnership which manages the Company's portfolio of leased equipment that the market for used computer equipment had deteriorated as a result of Year 2000 created oversupply of used computer equipment. In addition, a decision by a large lessee under one of the "User Leases" (as defined in Note 7) to upgrade certain computer equipment, including equipment leased from the Company, is also anticipated to have an effect upon the estimated residual value of the portfolio. Based upon discussions with computer equipment vendors, the Company determined that the estimated residual value of the equipment should be reduced to $0 and wrote off the entire carrying value, $2,125,000, in the fourth quarter of 1999. The Company wrote off the entire carrying value of two of its domestic cinemas, $136,000 (which amount is net of $100,000 which is to be paid to the Company by a landlord), in the fourth quarter of 1999. In addition, after a review of the estimated market value of certain domestic real estate held for sale, the Company recorded a $203,000 impairment charge related to such real estate. In addition, in conjunction with a proposal to the City of Philadelphia for the possible disposition of the environmentally impaired North Viaduct property in return for a cash payment from the Company to the City, the Company increased its environmental reserve by $500,000, from $1,256,000 to $1,756,000. (See Note 13). During the fourth quarter of 1999, the Company adopted a plan and commenced steps to relocate the Company's headquarters from Philadelphia to Los Angeles and recorded a Restructuring charge of $889,000 in 1999. The Restructuring charge includes a provision for lease termination charges, duplicate office and employee expenditures and employee severance obligations. F-16 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) NOTE 6 -- PROPERTY HELD FOR SALE Whitehorse Property Group ------------------------- In November 1997, Reading Australia acquired a 50% interest from Burstone Victoria Pty. Ltd. ("Burstone") in the Whitehorse Property Group Unit Trust ("WPG") for approximately $1,600,000. WPG owns a shopping center located near Melbourne, Australia located on land leased pursuant to a long-term lease (the "Land Lease"). In early 2000, Reading Australia and Burstone agreed to sell the shopping center and are actively seeking buyers. No assurances can be made that the shopping center can or will be sold at a price acceptable to the Company and Burstone. The Company believes that the estimated net realizable value from the sale of WPG and repayment of the partner loan described below, is approximately equal to the carrying value of such assets $2,847,000, which amount has been classified as Property held for sale in the Company's consolidated balance sheet at December 31, 1999. WPG incurred a net loss of approximately $194,000 during 1999 as compared to net earnings of $50,000 in 1998. The Company recorded a loss of $172,000 in 1999 and income of $25,000 in 1998 which are included in Equity in earnings of affiliates. During 1999 the Company recognized 100% of WPG's loss in excess of WPG's retained earnings to prevent the aggregate carrying value of WPG from exceeding WPG's total net asset value. WPG's assets and liabilities totaled $11,100,000 and $8,200,000, at December 31, 1999. The Company has guaranteed the repayment of 50% of a secured bank loan which is owed by WPG and deferred rent and related charges pursuant to the Land Lease. The principal outstanding on the loan totaled approximately $3,700,000 and the deferred rent totaled $500,000 at December 31,1999, resulting in a guarantee by the Company of approximately $4,200,000. The bank loan originally was due in June 1999. The lender has agreed to extend the maturity of the loan on a month to month basis pending a sale of WPG. No assurances can be made that the bank loan will continue to be available to WPG. Royal George Theatre -------------------- In early 2000, in order to maximize capital available for the Reading Australia's and Reading New Zealand's development activities, the Company determined that it would sell the RGT. Accordingly, $2,893,000, the Company's net carrying value of the RGT, which the Company believes is less than the estimated net realizable value (based upon an appraisal of the property), has been classified as Property held for sale in the Consolidated Balance Sheet at December 31, 1999. The Company recognized revenues of $1,165,000 and Income before taxes and interest of $303,000 from the RGT in 1999. NOTE 7 -- INVESTMENTS Citadel Holding Corporation --------------------------- In 1996, the Company acquired 1,564,473 shares of Citadel common stock from Craig representing an interest of approximately 26.1%. In 1997, Citadel issued 666,000 common shares pursuant to the exercise of warrants which reduced the Company's ownership to approximately 23.5%. In September 1998 the Company acquired an additional 549,200 shares of Citadel common stock at a price of $3.875 per share. After giving effect to this transaction, the Company owns 2,113,673 shares of common stock of Citadel representing an ownership interest of approximately 31.7%. The Company accounts for its investment in the Citadel common stock by the equity method. Citadel's net earnings in 1999 were $9,487,000 and the Company has recorded its share of such earnings, $2,799,000, in the Consolidated Statement of Operations as Equity in earnings of affiliate. The carrying value of the Company's investment F-17 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) at December 31, 1999 of $10,958,000 is included in Investments in unconsolidated affiliates in the Consolidated Balance Sheet and is less than the Company's underlying equity in the net assets of Citadel plus a $1,998,000 loan receivable from Craig held by Citadel which amount is deducted from Citadel's Shareholders equity for financial reporting purposes as disclosed in Citadel's December 31, 1999 Annual Report on Form 10-K. The closing price of Citadel's common stock on the American Stock Exchange at December 31, 1999 was $3 7/16 per share. Citadel's assets and liabilities totaled $47,206,000 and $13,723,000, respectively, as of December 31, 1999. Big 4 Ranch, Inc. ---------------- In December 1997, Citadel capitalized a wholly owned subsidiary, BRI, with a cash contribution of $1,200,000 and distributed 100% of the shares of BRI to Citadel's common shareholders. The Company received 1,564,473 shares or 23.4% of BRI. In September 1998, the Company acquired 661,700 additional shares increasing its interest to 2,226,173 shares of common stock of BRI, an ownership interest of approximately 33.4%. The carrying value of the Company's interest in BRI was reduced to $0 in 1998. Accordingly, the Company did not recognize any share of BRI's $322,000 net loss in 1999. The Company recorded its share of BRI's 1998 net loss of $346,000 in the Consolidated Statement of Operations as Equity in earning of affiliates in 1998. BRI had negative assets at December 31, 1999. The Company has no obligation to fund BRI's operating losses. New Zealand Joint Ventures -------------------------- During the second quarter of 1998, Reading New Zealand entered into a 50/50 joint venture, with a cinema operator in New Zealand (the "NZ JV"). At December 31, 1999, the Company's aggregate investment in the joint venture totaled $2,100,000. This amount is reflected in the December 31, 1999 Consolidated Balance Sheet under Investments in unconsolidated affiliates. In connection with the joint venture, the Company has made a loan to the joint venture of $1,200,000 in order to finance a portion of the acquisition price of two multiplex cinemas and the underlying property acquisition and construction costs of a cinema which the joint venture developed. Net Investment in Leased Equipment ---------------------------------- During 1996, a wholly-owned subsidiary of the Company purchased computer equipment for $40,934,000, which equipment was leased to various retail companies (the "User Leases"). Concurrent with the purchase of the equipment, the Company leased the equipment back to the seller, subject to the User Leases, for a period of five years (the "Wrap Lease"). The Company's investment in the equipment was funded through a cash payment of $1,944,000 and the issuance of a nonrecourse promissory note (the "Promissory Note") in the amount of $38,990,000. Payments due under the Wrap Lease were subsequently sold to a third party in return for a $32,000 payment and assumption by the purchaser of all obligations under the Promissory Note. The Company has retained all rights and interest in the equipment subject to the User Leases and the Wrap Lease. Therefore, the Company has rights to the residual value of the equipment upon conclusion of the Wrap Lease (which term exceeds the term of the User Leases). The residual interest was reflected at its net cost, $2,125,000, in the Consolidated Balance Sheet at December 31, 1998 as "Net investment in leased equipment." In 1999 the Company determined that the asset was impaired and wrote off the total carrying value of the equipment, $2,125,000, in conjunction with an Asset impairment charge. (See Note 5.) Love Janis, LLC --------------- During the third quarter of 1999, the Company invested $109,000 to acquire a 25% interest in a live theater production of the play Love, Janis which played in the RGT. The play ran from August through November 1999 and F-18 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) was closed. The Company wrote off the investment of $109,000 in Love Janis LLC and included such loss in Equity in earnings of affiliates for the year ended December 31, 1999. James J. Cotter and Michael Forman (see Note 2) were investors in Love Janis LLC. NOTE 8 -- PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
December 31, 1999 1998 -------- -------- Land* $ 3,015 $ 378 Buildings 13,258 1,858 Leasehold improvements 29,539 20,522 Equipment 24,200 8,792 Construction-in-progress and property development costs 11,137 5,714 -------- -------- 81,149 37,264 Less: Accumulated depreciation (6,261) (4,730) Provision for Asset Impairment of CineVista (17,034) 0 -------- -------- $ 57,854 $32,534 ======== ========
*Includes land associated with owned cinema properties. Does not include land held for development, which is included in "Property held for development" in the Consolidated Balance Sheets. NOTE 9 -- LEASE AGREEMENTS AND COMMITMENTS The Company determines annual base rent expense by amortizing total minimum lease obligations on a straight-line basis over the lease terms. Base rent expense under operating leases totaled $5,274,000, $4,670,000 and $4,184,000 in 1999, 1998 and 1997, respectively. In 1999, 1998 and 1997, contingent rental expense under operating leases totaled $336,000, $134,000 and $25,000, respectively. CineVista and the Domestic Cinemas conduct their operations in leased premises. Seven of Reading Australia's nine operating multiplexes are in leased facilities. The Company's cinema leases have remaining terms inclusive of options of 10 to 40 years. Certain of the Company's cinema leases provide for contingent rentals based upon a specified percentage of theater revenues with a guaranteed minimum. Substantially all of the leases require the payment of property taxes, insurance and other costs applicable to the property. The Company also leases office space, warehouse space and equipment under noncancellable operating leases. All leases are accounted for as operating leases. F-19 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) Future minimum lease payments by year and in the aggregate, under noncancellable operating leases consist of the following at December 31, 1999. The Company has no leases which require capitalization.
Operating Leases ----------- 2000.............................. $ 6,511 2001.............................. 6,853 2002.............................. 6,808 2003.............................. 6,143 2004.............................. 6,229 Thereafter........................ 92,563 ---------- Total net minimum lease payments $125,107 ==========
In addition to deficit working capital at December 31, 1999 of approximately $4,000,000 (including maturing bank debt of $4,500,000), the Company has committed development expenditures relating to cinema and entertainment development projects of approximately $50,000,000, $25,000,000 of which are expected to be funded in 2000 and $25,000,000 to be funded thereafter (not including potential obligations relating to the City Cinemas Transaction and the OBI Transaction or the rights of the Company's affiliate, Citadel, as the holder of the $7,000,000 of Series A Preferred Stock to require redemption of such stock during a ninety day period commencing October 15, 2001 (see Note 15)), which amounts are expected to be funded in part by an Australian dollar line of credit (the "Australian Line of Credit"). The Company does not anticipate incurring additional development commitments in New Zealand or Australia until additional financing is secured. CineVista is in violation of certain of the loan covenants in its line of credit and is seeking a waiver of such violations from the lender. If a waiver is not received, CineVista will be in default of the terms of the line of credit and the lender could demand immediate repayment of amounts due thereunder, which amounts totaled $3,000,000 on December 31, 1999, and $4,250,000 on April 12, 2000. No assurances can be made that the lender will waive the covenant violations. In April 2000, the Company received a commitment for an eighteen month $7 million line of credit secured by a pledge of certain Domestic Cinema assets and the Company's interest in Citadel (the "Domestic Line of Credit"). However, as a result of the sale of AFC Interest to NAC (see Note 19), the terms of the loan commitment will have to be renegotiated. No assurances can be made that the lender will be willing to fund the Company under revised terms satisfactory to the Company. Proceeds of the Domestic Line of Credit were expected to be used to pay a portion of the accumulated dividends under the Series B Preferred Stock (during 1999 REI did not pay $3,575,000 in dividends on the Series B Preferred Stock, all of which is held by Craig), pay purchase money debt of $1,180,000 due in May 2000 from the purchase of the RGT and fund the development cost of one additional Domestic Cinema. The Company anticipates acquiring additional financing to fund its development obligations which are due in 2001. In New Zealand the Company has a $2,800,000 property purchase mortgage and a $1,500,000 bank loan due in 2000. Reading New Zealand is presently evaluating a bank proposal to refinance both of these obligations and provide construction funding for an entertainment center in Wellington. The Company does not anticipate commencement of construction of new projects until financing has been arranged and may be required to arrange alternative financing, sell assets, or bring in joint venture partners with respect to certain of its projects if the Domestic Line of Credit cannot be restructured, the covenant violation waivers are not received from CineVista's lender and NAC or Citadel does not acquire the Company's remaining Domestic Cinemas. The OBI Transaction contemplates the acquisition of certain live theater assets, in exchange for stock. However, under certain circumstances, the Company could be required to fund the OBI Transaction with a cash payment of approximately $9,900,000. Citadel is presently considering the acquisition of the Company's rights to the OBI F-20 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) Transaction and accordingly, the Company believes it unlikely that the transaction will be consummated by the Company. Under the terms of the joint venture agreement with WPG (see Note 5), the Company has guaranteed approximately $3,700,000 of WPG's debt and Land Lease obligations. The City of Philadelphia (the "City") has asserted that the Company's North Viaduct property requires environmental decontamination and that the Company's share of any such remediation cost will aggregate approximately $3,500,000. The Company presently is in discussions with the City involving a possible conveyance of the property and believes that reserves related to the North Viaduct are adequate. (See Note 5.) The Company's 1996 tax return is under review by the Internal Revenue Service (the "Service"). While the Company believes its reporting position in such period to be reasonable and the Service has not alleged any deficiencies, no assurances can be made that the Company's tax reporting position will be upheld. NOTE 10 -- BANK CREDIT FACILITIES CineVista has a $5 million line of credit (the Line of Credit") which expires December 31, 2000. Under the terms of the Line of Credit, CineVista may borrow up to $5,000,000 until June 30, 2000, $4,650,000 through September 30 and $4,300,000 until December 31, 2000, when all amounts outstanding under the Line of Credit are due and payable. As security for the loan, CineVista has pledged substantially all of its assets. At December 31, 1999, $3,000,000 was outstanding under the Line of Credit. The provisions of the Line of Credit require CineVista to maintain a minimal level of net worth and other financial ratios, restrict the payment of dividends, and limit additional borrowing and capital expenditures. Borrowings thereunder accrue interest at LIBOR (the London Interbank Offered Rate) plus 2.25%, or the base rate plus 1/2 of 1%, at CineVista's election. In accordance with the provisions of the Line of Credit, CineVista is required to pay a commitment fee on the unused commitment equal to 1/2 of 1%. CineVista is in violation of certain of the loan covenants in the Line of Credit and is seeking a waiver of such violations from the lender. If a waiver is not received, CineVista will be in default of the terms of the Line of Credit and the lender could demand immediate repayment of amounts due under the Line of Credit, which amounts totaled $4,250,000 on April 12, 2000. No assurances can be made that the lender will waive the covenant violations. In March 2000, Reading Australia entered into the Australian Line of Credit with a major bank which provides for borrowings of up to approximately $15,000,000 ($16,350,000 less an interest reserve of $1,350,000) for the construction of an entertainment center and cinema in Sydney. The Australian Line of Credit contemplates an increase in the commitment amount to approximately $49,000,000 (the "Expanded Commitment") if additional banks elect to participate in the credit agreement. Under the Expanded Commitment, the term of the credit facility will be extended from December 31, 2000 to December 31, 2003 providing funding for the construction of a proposed entertainment center in Melbourne. No assurances can be made that additional participants will be found. The Australian Line of Credit Agreement is secured by a pledge of substantially all of Reading Australia's assets and those of its 100% owned subsidiaries and requires Reading Australia to maintain various financial covenants, restricts dividends and limits additional borrowings. Reading Australia is required to pay a commitment fee of .60% on the commitment amount. In April 2000, the Company received a commitment for the Domestic Line of Credit, an eighteen month $7,000,000 million line of credit secured by a pledge of certain Domestic Cinema assets and the Company's interest in Citadel. However, also in April 2000, the Company sold a portion of its interest in the AFC (See Note 19). Such F-21 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) interest was to be included as collateral for the Domestic Line of Credit and the terms of such commitment will therefore have to be renegotiated. No assurances can be given that the lender will agree to terms satisfactory to the Company. Reading New Zealand has a term loan in the amount of approximately $1,500,000 secured by a property in Wellington. The term loan matures in December 2000 and the Company is presently evaluating several proposals for refinancing such debt. NOTE 11 -- STOCK OPTION PLANS As of December 31, 1999, the Company had options outstanding under two stock option plans: the 1992 Non-qualified Stock Option Plan (the "1992 Plan") (amended in 1997) and the 1997 Equity Incentive Plan (the "1997 Plan"). Each plan was approved by shareholders in its year of adoption. The 1992 Plan reserves 500,000 shares for grant and the 1997 Plan reserves 200,000 shares for grant. The exercise price, term and other conditions applicable to each grant of options under the Company's two plans are generally determined at the time of grant by the Compensation Committee of the Board of Directors and may vary with each option grant. Generally, options granted under both plans vest on the anniversary of the date of grant in four equal, annual installments, have exercise prices equal to or greater than 100% of the fair market value of the underlying shares on the date of grant and expire ten years from the date of grant. Shareholders of the Company approved a grant of options on September 16, 1997 to James J. Cotter, Chairman of the Board of Directors of the Company (the "Cotter Options"). The Cotter Options are divided into three groups: options to purchase up to 110,000 shares of Common Stock, which become exercisable in four equal installments commencing one year from the date of grant (the "Basic Options"); options to purchase up to 260,000 shares of Common Stock, which become exercisable over a similar vesting schedule, but only in proportion to the number of shares of Convertible Preferred Stock which are converted into Common Stock (the "Convertible Preferred Options"); and options to purchase up to 90,000 shares of Common Stock, which become exercisable over a similar vesting schedule, but only in proportion to the number of shares of Common Stock which are issued pursuant to the Asset Put Option (the "Asset Put Options"). (See Note15.) All shares granted under the Cotter Options have an exercise price of $12.80 per share. Changes in the number of option shares available under the Plans are summarized as follows:
1999 1998 1997 --------------------------- ----------------------------- --------------------------- Weighted Average Weighted Average Weighted Average 1982 Plan: Options Exercise Price Options Exercise Price Options Exercise Price - --------- --------------------------- ----------------------------- --------------------------- Outstanding at beginning of year 5,000 $12.50 Canceled (5,000) $12.50 Expired 0 --------------------------- Outstanding at end of period 0 0 ---------------------------
F-22 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data)
1999 1998 1997 --------------------------- ----------------------------- --------------------------- Weighted Average Weighted Average Weighted Average Options Exercise Price Options Exercise Price Options Exercise Price --------------------------- ----------------------------- --------------------------- 1992 Plan: - --------- Outstanding at beginning of year 360,232 $13.76 360,232 $13.76 342,732 $14.00 Canceled/1/ (15,000) $12.80 0 (55,000) $14.00 Granted/1/ 70,000 $ 6.34 0 72,500 $12.81 --------------------------- ----------------------------- --------------------------- Outstanding at the end of year 415,232 $12.54 360,232 $13.76 360,232 $13.76 --------------------------- ----------------------------- --------------------------- 1997 Plan: - --------- Outstanding at beginning of year 147,000 $12.82 152,000 $12.82 Canceled (20,000) $12.88 (5,000) $12.80 Granted 0 0 152,000 $12.82 --------------------------- ----------------------------- --------------------------- Outstanding at the end of year 127,000 $12.81 147,000 $12.82 152,000 $12.82 --------------------------- ----------------------------- --------------------------- Cotter Option/2/: - ---------------- Outstanding at beginning of year 110,000 $12.80 110,000 $12.80 Canceled 0 0 Granted 0 0 110,000 $12.80 --------------------------- ----------------------------- --------------------------- Outstanding at the end of year 110,000 $12.80 110,000 $12.80 110,000 $12.80 --------------------------- ----------------------------- --------------------------- Total - ----- Outstanding at Year End 637,232 $12.64 617,232 $13.37 622,232 $13.36 =========================== ============================= =========================== Exercisable at Year End 453,357 $13.42 386,732 $13.70 310,232 $13.91 =========================== ============================= ===========================
The weighted-average remaining contractual life of all options outstanding at December 31, 1999 was 4.79 years. The Company applies Accounting Principles Board Opinion No. 25, the intrinsic value method, in accounting for the compensation expense of its stock option plans. Under the intrinsic value method, no compensation expense is recognized for stock option awards granted at or above fair market value. Effective January 1, 1996, SFAS No. 123, "Accounting for Stock-Based Compensation", encouraged adoption of a fair value based method for valuing the cost of stock option grants. SFAS No. 123 allows companies to continue to employ APB No. 25, but requires disclosure of pro forma net income and earnings per share information reflecting the fair value approach to valuing stock options and the corresponding increase in compensation expense in each of the years that a company grants stock options. The Company granted options in 1999 and 1997; no options were granted in 1998. In computing the pro forma effect of the grants of stock options granted in 1997, all options granted under the 1997 Plan and 1992 Plan in 1997, modifications to options previously granted under the 1992 Plan, the Basic Options and the Asset Put Options have been included. The fair value of these options was estimated at the respective dates of grant using a Black-Scholes option pricing model employing the weighted average assumptions in the following table: - --------------------- /1/ Includes 22,500 options which were amended to reduce the exercise price from $14.00 per share to $12.80 per share. /2/ Does not include the Asset Put Options or the Convertible Preferred Stock Options since the conditions precedent to the granting of such options have not occurred. F-23 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data)
1999 1998 1997 -------- ------- -------- Stock Option Exercise Price $ 6.34 n/a $ 12.81 Risk Free Interest Rate 5.61% n/a 6.71% Expected Dividend Yield 0.00% n/a 0.00% Expected Option Life 5 n/a 5 Expected Volatility 25.01% n/a 22.31% Fair Value of Options $ 2.11 n/a $ 1.79
The pro forma effect of the issuance of these options would have been to increase the "Net loss applicable to common shareholders" by $164,000 ($.02 per share), $258,000 ($.03 per share) and $264,000 ($.04 per share) to $45,681,000 ($6.13 per share), $6,986,000 ($.94 per share) and $1,618,000 ($.22 per share) in 1999, 1998 and 1997, respectively. The pro forma adjustments may not be representative of future disclosures because the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years. Further, SFAS 123 requires assumptions by management regarding the likelihood of events on which the vesting of contingent options are predicated. NOTE 12 -- INCOME TAXES
Year Ended December 31, ------------------------------- 1999 1998 1997 ---------- ---------- ---------- Income (loss) before income taxes consists of the following components: United States ($215) $ 4,917 $ 7,349 Foreign (40,044) (6,337) (3,327) ---------- ---------- ---------- Total ($40,259) ($1,420) $ 4,022 ========== ========== ==========
Significant components of the provisions for income taxes attributable to operations are as follows:
Year Ended December 31, --------------------------- 1999 1998 1997 ------- -------- -------- Income taxes (benefit): Current: United States $ 0 $ 122 $ 146 Foreign 817 786 698 State and local 106 78 223 ------- -------- -------- Total 923 986 1,067 Increase (decrease) in valuation allowance from net operating loss carryforwards 0 0 0 ------- -------- -------- Total income taxes (benefit) $ 923 $ 986 $1,067 ======= ======== ========
Reconciliation of income taxes at United States statutory rates to income taxes as reported are as follows: F-24 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data)
Year Ended December 31, -------------------------------- 1999 1998 1997 --------- --------- --------- Tax provision (benefit) at U.S. statutory rates ($13,688) ($483) $ 1,367 Foreign and U.S. losses not currently benefitted 13,688 605 1,124 Foreign withholding taxes 817 786 698 State income taxes 106 78 223 Use of net operating loss carryforwards 0 0 (2,344) --------- --------- --------- Total income taxes (benefit) $ 923 $ 986 $ 1,067 --------- --------- ---------
Carryforwards and temporary differences which give rise to the deferred tax asset at December 31 are as follows:
1999 1998 ---------- ---------- Net operating loss carryforwards......... $ 20,715 $ 16,314 Alternative minimum taxes................ 3,189 3,189 Wrap Lease rental sale................... 6,981 8,485 Reserves and other, net.................. 16,314 1,578 --------- ---------- Gross deferred asset..................... 47,119 29,566 Valuation allowance...................... (47,199) (29,566) --------- ---------- Net deferred asset....................... $ 0 $ 0 ========= ==========
Based on an analysis of the likelihood of realizing the Company's gross deferred tax asset (taking into consideration applicable statutory carryforward periods), the Company concluded that under SFAS No. 109, a valuation allowance for the entire amount was necessary at December 31, 1999. The Company's federal tax net operating loss carryforwards expire as follows:
Year Amount ---- --------- 2000 $16,196 2002 7,382 2003 589 2007 1,443 2008 1,155 2009 32 2018 311 2019 2,100 --------- $29,208 =========
In addition to the federal net operating loss carryforwards, the Company has Federal Alternative Minium Tax ("AMT") credits of $3,189,000, which can be carried forward indefinitely. Also, the Company has foreign net operating loss carryforwards of $27,639,000, $14,102,000 in Puerto Rico which expire between 2002 and 2006 unless utilized prior thereto. F-25 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) The Company paid $88,000, $192,000 and $2,405,000 in income taxes in 1999, 1998 and 1997, respectively. The Company is subject to regular federal income tax; however, due to its net operating loss carryforwards, the Company is only required to pay AMT. AMT is calculated separately from the regular federal income tax and is based on a flat rate applied to a broader tax base. Amounts payable thereunder cannot be totally eliminated through the application of net operating loss carryforwards. The Company's 1996 tax return is under review by the Internal Revenue Service (the "Service"). While the Company believes its reporting position in such period to be reasonable and the Service has not alleged any deficiencies, no assurances can be made that the Company's tax reporting position will be upheld. NOTE 13 -- LEGAL PROCEEDINGS Certain Shareholder Litigation - ------------------------------ In September 1996, the holder of 50 shares of Common Stock commenced a purported class action on behalf of the Company's minority shareholders owning Reading Company Class A Common Stock in the Philadelphia County Court of Common Pleas relating to the Reorganization and Stock Transactions. The complaint in the action (the "Complaint") named the Company, Craig, two former directors of the Company and all of the then current directors of the Company (other than Gregory R. Brundage and Robert F. Smerling) as defendants. The Complaint alleged, among other things, that the Independent Committee (set up to review the transactions), and the current and former directors of the Company breached their fiduciary duty to the minority shareholders in the review and negotiation of the 96 Reorganization and Stock Transactions and that none of the directors of the Company were independent and that they all were controlled by James J. Cotter, Craig or those controlled by them. The Complaint also alleged, in part, that the defendants failed to disclose the full future earnings potential of the Company and that Craig would benefit unjustly by having its credit rating upgraded and its balance sheet bolstered and that the value of the minority shareholders' interest in the Company was diluted by the transactions. In November 1996, plaintiffs filed an Amended Complaint against all of the Company's present directors, its two former directors and Craig. The Amended Complaint does not name the Company as a defendant. The Amended Complaint essentially restates all of the allegations contained in the Complaint and contends that the named defendant directors and Craig breached their fiduciary duties to the alleged class. The Amended Complaint seeks unspecified damages on behalf of the alleged class and attorneys' and experts' fees. On December 9, 1997, the Court certified the case as a Class Action and approved the plaintiff as Class Representative. On April 24, 1997, plaintiff filed a purported derivative action against the same defendants. This action included claims substantially similar to those asserted in the class action and also alleged waste of tax benefits relating to the Company's historic railroad operating losses. The Company moved to dismiss this case for failure by the plaintiff to comply with the mandated procedures for bringing such an action. On January 23, 1998, the Court dismissed the derivative action. The dismissal of the derivative action does not affect the class action case, nor does it preclude reassertion to the claims contained in the derivative action. On September 28, 1998, the defendants filed a motion for summary judgment. In February 2000 the court granted summary judgment against the Plaintiff and in favor of all of the defendant directors. Craig was not dismissed, however, the Court has agreed to reconsider Craig's motion in light of its decision to dismiss the claims against all of F-26 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) the defendant directors. The plaintiff has not elected to seek any rehearing or interlocutory appeal of the trial court's decision to dismiss the defendant directors. Accordingly, management does not believe that the Company has any liability related to this matter. Redevelopment Authority of the City of Philadelphia v. Reading -------------------------------------------------------------- On December 12, 1997, the Redevelopment Authority filed an action in the Philadelphia Court of Common Pleas which relates to the 1993 sale of the Headhouse property by Reading to the Authority. Plaintiff has alleged discovery of various contaminants -- asbestos, PCB's, lead paint -- and alleges past and future clean-up costs in excess of $1,000,000. The action is based upon theories of contract and state environmental law. The Company has denied liability and intends to vigorously defend. It is the Company's opinion that the Authority's claim is meritless in that the Company adequately disclosed the condition of the property and expressly limited its representations made in connection with the sale. Other Claims ------------ The Company is not a party to any other pending legal proceedings or environmental action which management believes could have a material adverse effect on its financial position. While the City of Philadelphia has asserted that the Company's share of any environmental clean-up costs related to its North Viaduct Property would be in the range of $3,500,000, the Company does not believe that it has any current obligation to commence such remediation and believes the estimate to be inaccurate. NOTE 14 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarterly financial information for 1999 and 1998 is summarized below:
1999: First Second Third Fourth Quarter Quarter Quarter Quarter -------- -------- -------- -------- Revenues $ 8,256 $ 9,974 $ 11,716 $ 10,373 Net loss applicable to common shareholders (2,540) (815) (16,411) (25,751) ======== ======== ======== ======== Basic and Diluted loss per share: ($0.34) ($0.11) ($2.20) ($3.46) ======== ======== ======== ========
1998: First Second Third Fourth Quarter Quarter Quarter Quarter -------- -------- -------- -------- Revenues $10,073 $ 9,713 $ 9,916 $ 8,746 Net loss applicable to common shareholders (1,436) (1,266) (1,941) (2,085) ======== ======== ======== ======== Basic and Diluted loss per share: ($.19) ($.17) ($.26) ($.28) ======== ======== ======== ========
F-27 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) 1999: - ---- First quarter revenues decreased from those recorded in the prior year's first quarter due to the significant contribution the Company received from the movie Titanic in 1998's first quarter. Third quarter results include a $14,022,000 Asset impairment charge and a full quarter of operating results of two new cinemas opened in May. Fourth quarter results include an Asset impairment charge of $20,272,000, a Restructuring charge of $889,000 and an additional allocation of expenses charged to the Company by Craig of approximately $580,000, and a full quarter of results of a new cinema which opened in September. 1998: - ---- The first quarter loss applicable to common shareholders reflects a charge of $165,000 relating to the closing of four screens at a CineVista location. The results of the third quarter included a loss of $114,000 representing the Company's share in losses of unconsolidated affiliates. In the fourth quarter 1998, the Company closed a CineVista cinema as a result of damage sustained from Hurricane Georges and recorded a write-off of $248,500 related to abandoned assets. Further, in the fourth quarter, the Company recorded a charge of $332,000 for previously capitalized project costs related to Australian development activities. Additionally, in the fourth quarter, the Company recorded income of $1,074,000 representing the Company's share of earnings in unconsolidated affiliates. NOTE 15 -- CAPITALIZATION Common Stock - ------------ Common Stock (par value $.001) is traded on the Nasdaq National Market system under the symbol RDGE and the Philadelphia Stock Exchange under the symbol RDG. The Articles of Incorporation include restrictions on the transfer of Common Stock which are intended to reduce the risk that an "ownership change" within the meaning of Section 382(g) of the Internal Revenue Code of 1986, as amended, will occur, which change could reduce the amount of federal tax net loss carryforwards available to offset taxable income. The restrictions provide that any attempted sale, transfer, assignment or other disposition of any shares of Common Stock to any person or group who, prior to the transfer owns (within the meaning of the Code and such regulations) shares of Common Stock or any other securities of REI which are considered "stock" for purposes of Section 382, having a fair market value equal to or greater than 4.75% of the value of all outstanding shares of REI "stock" shall be void ab initio, unless the Board of Directors of the Company shall have given its prior written approval. The transfer restrictions will continue until January 1, 2003 (unless earlier terminated by the Company's Board of Directors). Reading Entertainment Series A and Series B Cumulative Convertible Preferred - ---------------------------------------------------------------------------- Stock - ----- Holders of the Convertible Preferred Stock are entitled to receive quarterly cumulative dividends at the annual rate of $6.50 per share. In the event of a liquidation of the Company, the holders of the Convertible Preferred Stock will be entitled to receive the stated value of $100 per share plus accrued and unpaid dividends before any payment is made to the holders of the Common Stock. The Series B Preferred Stock ranks junior to the Series A Preferred Stock in rights to dividend distributions and distributions in liquidation. All of the Series A Preferred Stock is held by Citadel and all of the Series B Preferred Stock is held by Craig. F-28 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) No dividends were declared or paid on the Series B Preferred Stock, all of which is owned by Craig, during 1999. All dividends dues on the Series A Preferred Stock, all of which is held by Citadel, were paid during 1999. Accumulated dividends related to the Series B Preferred Stock totaled $3,575,000 at December 31, 1999. Holders of the Convertible Preferred Stock are entitled to cast 9.64 votes per share. In the event that dividends are not paid on either series of the Convertible Preferred Stock for six consecutive quarters, the holders of such series of the Convertible Preferred Stock will be entitled to elect one director. Each share of Series A Preferred Stock is convertible into shares of Common Stock at a conversion price of $11.50 per share and each share of Series B Preferred Stock is convertible into shares of Common Stock at a price of $12.25 per share, at any time after April 15, 1998. The shares of Series A Preferred Stock are convertible prior to April 15, 1998 in the event that a change in control of the Company occurs. The Company also has the right to require conversion of the Series A Preferred Stock in the event that the average market price of the Common Stock over a 180-day period exceeds 135% of the conversion price of the Series A Preferred Stock. The Series B Preferred Stock has no mandatory conversion provisions. Citadel has certain registration rights with respect to the shares of the Common Stock to be received upon the conversion of the Series A Preferred Stock or the exercise of the Asset Put Option. The Company may, at its option, redeem the Series A Preferred Stock at any time after October 15, 2001, in whole or in part, at a redemption price equal to a percentage of the stated value (initially 108%, declining 2% per annum until the percentage equals 100%) plus accrued and unpaid dividends to the date of redemption. The holders of a majority of the Series A Preferred Stock have the right to require REI to repurchase the Series A Preferred Stock at the stated value plus accrued and unpaid dividends for a 90-day period beginning October 15, 2001. In addition, the holders of the Series A Preferred Stock may require the Company to repurchase the shares at the stated value plus accrued and unpaid dividends in the event that the Company fails to pay dividends on the Series A Preferred Stock in any four quarterly periods. In the event of a change in control of the Company, the holders of a majority of the Series A Preferred Stock may require redemption at a premium. The Series A Preferred Stock has not been included as Shareholders' Equity in the Company's Consolidated Balance Sheet due to the mandatory redemption provisions. No dividends were declared or paid on the Series B Preferred Stock during 1999. NOTE 16 -- FINANCIAL INSTRUMENTS During the fourth quarter of 1997, the Company entered into several foreign currency swaps and a currency forward position with a major bank. The agreements provided for the Company to receive $12,363,800 U.S. dollars ("USD") in return for the delivery of $18,659,300 Australian dollars ("AUD") in January 1998. The value of the contracts at December 31, 1997 was established by computing the difference between the contractual exchange rates of the swap and forward positions (AUD/USD) and the exchange rates in effect at December 31, 1997 and an unrealized gain of $220,000 was recorded in 1997 from these transactions which gain has been included in "Other income." During the first quarter of 1998, the currency positions and extensions thereof matured and the Company incurred a loss of approximately $670,000 which has been included in the Consolidated Statement of Operations as a component of "Other Expense." The Company does not presently have any foreign currency positions and did not take any positions during 1998 and 1999. F-29 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) NOTE 17 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION During fiscal years 1999, 1998 and 1997, interest paid amounted to $371,000, $70,000 and $60,000 respectively. Income taxes paid during fiscal years 1999, 1998 and 1997 amounted to $96,000, $192,000 and $2,405,000, respectively. Non-cash investing activities during 1999 consisted of obtaining a seller provided purchase money mortgage of $1,180,000 and assuming liabilities of $308,000 relating to the acquisition of the RGT and the assumption of a $2,816,000 mortgage on property purchased and held for development. NOTE 18 -- COMPREHENSIVE INCOME As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes rules for the reporting and presentation of comprehensive income and its components. SFAS 130 requires the Company to classify foreign currency translation adjustments which, prior to adoption, were reported separately in shareholders' equity to be included in comprehensive income. The following sets forth the Company's comprehensive (loss) income for the three years ended December 31, 1999:
1999 1998 1997 -------- -------- ------- Net (loss) income $(41,182) $(2,406) $ 2,955 Other comprehensive income (loss), net of tax 1,948 (1,677) (4,437) -------- ------- ------- Comprehensive (loss) $(39,234) $(4,083) $(1,482) ======== ======= =======
NOTE 19 -- SUBSEQUENT EVENT On April 5, 2000, the Company sold a 50% interest in the AFC to National Auto Credit, Inc. AFC is the owner of the NY Angelika. The 50% membership interest (the "Angelika Interest") was conveyed in exchange for 8,999,900 shares of the common stock of NAC, representing approximately 26% of the outstanding common stock of that company (calculated after the issuance of such shares), and 100 shares of the Series A Preferred Stock of NAC, representing 100% of such class. The Series A Preferred Stock has a liquidation preference of $1.50 per share, is convertible into the common stock of NAC on a share for shares basis, is entitled to a dividend preference equal to any dividends declared on the NAC common stock (determined on a per share basis), and enjoys certain special voting rights. As a consequence of that transfer, (a) AFC is now owned 50% by NAC, 33.3% by the Company and 16.7% by Sutton Hill and (b) the Company and its affiliates own approximately 29% of the outstanding common stock of NAC. NAC Common Stock closed on April 10, 2000 at $1 5/64. NAC is a publicly traded company whose shares are traded in the over-the- counter market. Historically, NAC has been in the business of originating, purchasing and servicing sub-prime loans secured by second hand automobiles. F-30 Reading Entertainment, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1999 (amounts in tables in thousands, except shares and per share data) However, in recent periods, NAC has sold substantially all of its inventory of loans, substantially reduced its work force and, in essence, reduced its assets to cash and real estate. The Company is advised by NAC that it is considering investments in several industries, one of them being domestic cinema exhibition, and that the acquisition of the AFC Interest constituted a possible first step in what may be a substantially larger commitment to that industry. Accordingly, the Company has also granted to NAC two separate and independent options to acquire additional US cinema assets of the Company. Under the first option (the "AFC Option"), NAC has the right to acquire the remaining 33.3% membership interest in AFC owned by the Company in exchange for an additional 6 million shares of NAC common stock, to the extent that authorized but unissued shares of NAC common stock are available for such purpose. To the extent that NAC has less than 6 million shares available for such purpose, NAC has the right to substitute cash for such shares (at the rate of $1.50 per share) to the extent necessary to make up for any such shortfall. The AFC Option can be exercised through May 20, 2000. Following the exercise of the AFC Option, the remaining 16.7% membership interest in AFC would continue to be owned by Sutton Hill, and the cinema would continue to be managed as a part of the City Cinemas Chain. Under the second option (the "City Cinemas Option"), NAC has the right to acquire the remainder of Reading's domestic assets for cash (including the Company's rights to the City Cinemas Transaction, and, if NAC has not previously exercised the AFC Option, the Company's remaining interest in AFC). The City Cinemas Option can be exercised through June 5, 2000. The Company has received $500,000 in consideration of the grant of the City Cinemas Option. NAC has the right to extend the option for two thirty day periods, by payment of an additional $100,000 for each such thirty-day extension period. If NAC exercises the City Cinemas Option, it is required to give to Citadel a right to participate in the transaction on a 50/50 basis. The decision whether or not to proceed with either of the options described above rests with NAC and not with the Company or Citadel. Such transactions are also subject to Hart Scott Rodino review and clearance. Accordingly, no assurances can be given that any further transactions will be effected between the companies. F-31 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Reading Entertainment, Inc. We have audited the accompanying consolidated balance sheet of Reading Entertainment, Inc. and subsidiaries as of December 31, 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended December 31, 1999. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Reading Entertainment, Inc. and subsidiaries at December 31, 1999, and the results of their operations and their cash flows for the year ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Los Angeles, California April 11, 2000 Report of Independent Auditors The Board of Directors and Shareholders Reading Entertainment, Inc. We have audited the accompanying consolidated balance sheet of Reading Entertainment, Inc. and subsidiaries as of December 31, 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Reading Entertainment, Inc. and subsidiaries at December 31, 1998, and the consolidated results of their operations and its cash flows for each of the two years in the period ended December 31, 1998, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Philadelphia, Pennsylvania March 18, 1999 EX-3.I 2 ARTICLES OF INCORPORATION EXHIBIT 3(I) ARTICLES OF INCORPORATION OF READING ENTERTAINMENT, INC. A NEVADA CORPORATION I, the Undersigned, being the original incorporator herein named, for the purpose of forming a corporation under Chapter 78 of the Nevada Revised Statutes (the "NRS"), to do business both within and without the State of Nevada, do make and file these Articles of Incorporation hereby declaring and certifying that the facts herein stated are true: ARTICLE I Name The name of the corporation is Reading Entertainment, Inc. (the "Corporation"). ARTICLE II Resident Agent and Registered Office The name and address of the Corporation's resident agent for service of process is Kummer Kaempfer Bonner & Renshaw, 3800 Howard Hughes Parkway, Seventh Floor, Las Vegas, Nevada 89109. ARTICLE III Purpose The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the NRS. ARTICLE IV Capital Stock 4.1. Number of Shares Authorized; Par Value. The aggregate number of shares which the Corporation shall have authority to issued is thirty-five million (35,000,000) shares of which ten million (10,000,000) shares with the par value $.001 per share shall be designated "Preferred Stock" and twenty-five million (25,000,000) shares with the par value $.001 per share shall be designated "Common Stock." 4.2. Preferred Stock. The Preferred Stock may be issued at any time from time to time, in any one or more series, and any such series shall be comprised of such number of shares and may have such voting powers, whole or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights and qualifications, limitations and restrictions thereof, including liquidation preferences, as shall be stated and expressed in the resolution or resolutions of the board of directors of the Corporation, the board of directors being hereby expressly vested with such power and authority to the full extent now or hereafter permitted by law. 4.3. Restrictions on Common Stock. No share of Common Stock, or of any other security of the Corporation which is treated as stock for purposes of Section 382 of the Internal Revenue Code of 1986, as amended (the "Code") (the Common Stock and any such other securities being hereinafter referred to as "New Stock"), shall be transferable or assignable in any respect, either of record or beneficially, unless such transfer or assignment is permitted under the following provisions: (a) Until the earliest of January 1, 2003, such date as the Corporation shall no longer have any unutilized federal income tax net operating loss carry forwards (the "Carryforwards") or such date after which Section 382 of the Code is repealed or so substantially modified that in the opinion of counsel to the Corporation the restrictions on transfer described herein are no longer necessary to accomplish their intended purpose: (i) any attempted sale, transfer, assignment or other disposition (including the granting of any option or entering into any agreement for the sale transfer assignment or other disposition), whether voluntary or involuntary, whether of record or beneficially and whether by operation of law or otherwise (a "Transfer"), of any share or shares of the New Stock of the Corporation or of any option, convertible security or other right to purchase or acquire such stock (collectively, "Rights") to any person or entity or group or persons or entities acting in concert (a "Transferee") who or which, directly or indirectly or by application of the constructive ownership rules set forth in Section 382(1)(3) of the Code and the Income Tax Regulations as now in effect or hereinafter promulgated pursuant thereto (the "Regulations"), owns, prior to the Transfer, an aggregate number of shares of the Corporation's outstanding New Stock having a fair market value equal to or greater than four point seven five percent (4.75%) of the fair market value of the total number of shares of the Corporation's outstanding New Stock shall be void ab initio insofar as it purports to transfer ownership to such Transferee, and (ii) any attempted Transfer of any share or shares of the New Stock of the Corporation or of any Rights to any Transferee not described in clause (i) hereof who or which directly, indirectly or by application of the constructive ownership rules in Section 382(1)(3) of the Code and Regulations, would own as a result of the Transfer, or as a result of a subsequent Transfer of any share or shares of the New Stock or Rights, an aggregate number of shares of the Corporation's outstanding New Stock having a fair market value equal to or greater than four point seven five percent (4.75%) of the fair market value or total number of shares of the Corporation's outstanding New Stock shall, as to the number of shares or Rights representing such excess over four point seven five percent (4.75%), be void ab initio insofar as it purports to transfer ownership to such Transferee of any shares of New Stock or Rights. (b) The restrictions contained in paragraph (a) of this Section 4.3 of this Article Fourth have been included herein for the purpose of reducing the risk of occurrence of an "ownership change" as that term is defined in Section 382(g) of the Code and the Regulations that would result in the limitation or elimination of the Corporation's utilization of the Carryforwards. (c) Neither clause (i) or (ii) of paragraph (a) of this Section 4.3 of this Article Fourth shall restrict any Transfer of New Stock of the Corporation or Rights if (i) the prior written approval of the board of directors of the Corporation shall have been obtained with respect to such Transfer and (ii) if so requested by the board of directors of the Corporation, counsel to the Corporation shall have delivered its opinion that such Transfer would not result in an "ownership change" within the meaning of Section 382(g) of the Code and the Regulations that would result in the limitation or elimination or the Corporation's utilization of the Carryforwards. The board of directors shall have the authority, in its sole discretion, to adopt procedures for the orderly and effective administration and implementation of this Section 4.3, and, in deciding whether to approve any proposed Transfer of New Stock or Rights, the Corporation acting through any officer may request all relevant information, as well as an opinion of counsel, in form and substance reasonably satisfactory to the board of directors. No employee or agent of the Corporation shall be permitted to record any attempted or purported Transfer of the New Stock or Rights made in violation of this Article Fourth and no Transferee of the New Stock or Rights effected in violation of this Article Fourth shall be deemed to have acquired ownership of New Stock or Rights for any purpose. Such intended Transferee shall not be entitled to any rights as a stockholder of the Corporation with respect to such New Stock, including, without limitation, the right to vote such New Stock or to receive any distributions in respect thereof, whether as dividends or in liquidation. (d) If the procedures adopted by the board of directors of the Corporation so require, the Corporation's transfer agent for any of the Corporation's securities (the "Transfer Agent") shall not issue any certificates transferring, assigning or disposing of or purporting to transfer assign or otherwise dispose of legal ownership of any shares of New Stock or Rights unless the Transfer Agent receives from the proposed Transferee, in addition to any other information requested by it, a certificate signed under penalty of perjury attesting to the fact that the Transferee is not and will not become as a result of the proposed Transfer, an owner of an aggregate number of shares of the Corporation's outstanding New Stock or Rights having a fair market value equal to or greater than four point seven five percent (4.75%) of the fair value of the total number of shares of the Corporation's outstanding New Stock. If at any time the Transfer Agent receives a request to make a change in record ownership of shares of New Stock or Rights which, if effective, would appear to the Transfer Agent on the basis of information in its possession to constitute a violation of this Article Fourth, then, prior to registering such change in ownership on the books of the Corporation, the Transfer Agent shall notify the Corporation. If the board of directors or an officer designated by the board of directors determines that the proposed change in ownership would violate this Article Fourth, then the Corporation shall so advise the Transfer Agent and the Transfer Agent shall not make such change in ownership on the books of the Corporation and shall return the certificates representing such shares of New Stock or Rights to the holder of record thereof. (e) If, notwithstanding the foregoing prohibition, a Transferee shall, voluntarily or involuntarily, purportedly become or attempt to become the purported owner (the "Purported Owner") of shares of New Stock or Rights, or both, in excess of the limitations set forth above (the shares and Rights, including shares of New Stock issued in respect of Rights, so exceeding such limitations set forth herein shall be referred to herein as the "Excess Shares"), then: (i) The Purported Owner shall not obtain any rights in and to the Excess Shares, and the purported Transfer of the Excess Shares to the Purported Owner shall not be recognized by the Corporation or its Transfer Agent. Until the Excess Shares are transferred to a person whose acquisition thereof will not violate the foregoing limitations (a "Permitted Transferee"), (A) the Excess Shares shall be voted by such person as shall be appointed by the board of directors of the Corporation, which person shall be deemed to have been granted a proxy to vote the Excess Shares, (B) the transferor of the Excess Shares to the Purported Owner (the "Purported Owner's Transferor") shall be deemed to have retained the Excess Shares and shall hold and be entitled to exercise all other rights incident to ownership of such Excess Shares, and (C) if the Excess Shares are Rights, they may not be exercised, converted or exchanged until transferred to, and exercised, converted or exchanged in accordance with their terms by, a Permitted Transferee; provided, however, that notwithstanding the foregoing, in the event shares of New Stock are issued in respect of Rights which are Excess Shares prior to notice to the Corporation or its Transfer Agent that such Rights are Excess Shares, the shares of New Stock so issued shall be deemed to be issued and outstanding shares of New Stock of the Corporation and shall be Excess Shares deemed retained by the Purported Owner's Transferor. Rights issued by the Corporation shall reflect the provisions of the foregoing sentence. All Excess Shares will continue to be issued and outstanding. (ii) If the Transfer Agent obtains possession of a certificate or certificates representing the Excess Shares, the Transfer Agent shall deliver such certificate or certificates to a trustee appointed by the Corporation's board of directors (the "Share Trustee") who shall proceed forthwith to sell or cause the sale of the Excess Shares to a Permitted Transferee. If the Transfer Agent does not have possession of such certificate, upon notice from the Corporation of the existence of Excess Shares and the identity of the Purported Owner, the Share Trustee shall take all lawful action to cause the Purported Owner to deliver or cause delivery of the Excess Shares and any indicia of ownership thereof to the Share Trustee and, upon obtaining possession thereof, the Share Trustee shall proceed forthwith to sell or cause the sale of the Excess Shares to a Permitted Transferee. The Share Trustee shall sell or cause the sale of the Excess Shares in the then existing public market or in such other commercially reasonable fashion as the Corporation shall direct. In performing the duties herein imposed upon it, the Share Trustee shall act at all times as the agent for the Purported Owner's Transferor. (iii) Once the Excess Shares are acquired by a Permitted Transferee, the Permitted Transferee shall have and shall be entitled to exercise all rights incident to the ownership of such Excess Shares. (iv) The proceeds from the sale of the Excess Shares (the "Proceeds") shall be distributed as follows: (A) first, to the Share Trustee to cover its costs and expenses; (B) second, to the Purported Owner, if known, in an amount up to the amount paid by the Purported Owner, if determinable, for the Excess Shares; and (C) third and finally, the remaining Proceeds, if any, shall be distributed to the Purported Owner's Transferor, if known, and if not known, such remaining Proceeds shall be held by the Corporation for the benefit of the Purported Owner's Transferor or such other person as their interests may appear. Notwithstanding anything contained in this Article Fourth to the contrary, the Corporation shall at all times be entitled to make application to any court of equitable jurisdiction within the State of Nevada for an adjudication of the respective rights and interests of any person in and to the Proceeds pursuant to this Article Fourth and applicable law and for leave to pay the Proceeds into such court. (f) Immediately upon the purported acquisition of any Excess Shares, the Purported Owner thereof shall give, or cause to be given, written notice thereof to the Corporation. Each owner of shares of New Stock and Rights shall furnish to the Corporation all information reasonably requested with respect to all shares of New Stock and Rights directly and indirectly owned by such person. (g) Upon a determination by the board of directors of the Corporation that a person has attempted or may attempt to transfer or to acquire Excess Shares, the board of directors may take such action as it deems advisable to refuse to give effect to such Transfer or acquisition on the books and records of the Corporation, including, without limitation, to cause the Transfer Agent to record the Purported Owner's Transferor as the record owner of the Excess Shares, to refuse to issue shares of New Stock upon the purported exercise of Rights which are Excess Shares and to institute proceedings to enjoin or rescind any such Transfer or acquisition. (h) To the extent permitted by the Regulations promulgated under Section 382 of the Code, in determining whether any person has become a Purported Owner of Excess Shares, the Corporation may rely on filings on Schedules 13D and 13G as required by Rule 13d-1 of the Securities Exchange Act of 1934, as amended. (i) If any provision of this Article Fourth or any application of any such provision is determined to be invalid by any federal or state court having jurisdiction over the issues, the validity of the remaining provisions shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court. (j) All certificates representing shares of New Stock shall conspicuously bear the following legend: The shares represented by this certificate are subject to certain restrictions on transfer set forth in Article Fourth of the Corporation's Articles of Incorporation, the full text of which is available at the offices of the Corporation or on request to the Corporation. ANY ATTEMPT TO ACQUIRE STOCK OF THE CORPORATION IN VIOLATION OF SUCH RESTRICTIONS SHALL BE NULL AND VOID AND MAY RESULT IN FINANCIAL LOSS TO THE PERSON OR ENTITY ATTEMPTING SUCH ACQUISITION. ARTICLE V Directors The business and affairs of the Corporation shall be managed by or under the direction of the board of directors, which initially shall consist of one director. Provided that the Corporation has at least one director, the number of directors may at any time or times be increased or decreased as provided in the bylaws; provided, however that the number of directors shall not exceed ten. The name and address of the initial member of the board of directors is as follows:
NAME ADDRESS ---- ------- S. Craig Tompkins c/o Craig Corporation 550 South Hope Street, Suite 1825 Los Angeles, California 90071
ARTICLE VI Bylaws In furtherance and not in limitation of the powers conferred upon the board of directors of the Corporation by the NRS, the board of directors shall have the power to alter, amend, change, add to and repeal, from time to time, the bylaws of the Corporation, subject to the rights of the stockholders entitled to vote with respect thereto to alter, amend, change, add to and repeal the bylaws adopted by the directors of the Corporation. ARTICLE VII Election of Directors Except as may otherwise be provided in the bylaws of the Corporation, the election of directors may be conducted at a meeting of the stockholders, whether telephonic or not, within or without the State of Nevada or by written consent and such election need not be by written ballot. ARTICLE VIII Sale of Assets In furtherance of the powers conferred on the stockholders of the Corporation by the NRS, the stockholders of the Corporation shall have the power to vote on any proposed sale of substantially all of the Corporation's assets. ARTICLE IX Amendment of Articles of Incorporation In the event the board of directors of the Corporation determines that it is in the Corporation's best interest to amend these Articles of Incorporation, the board of directors shall adopt a resolution setting forth the proposed amendment and declaring its advisability and submit the matter to the stockholders entitled to vote thereon for the consideration thereof in accordance with the provisions of the NRS and these Articles of Incorporation. In the resolution setting forth the proposed amendment, the board of directors may insert a provision allowing the board of directors to later abandon the amendment, without concurrence by the stockholders, after the amendment has received stockholder approval but before the amendment is filed with the Nevada Secretary of State. ARTICLE X Incorporator The name and address of the incorporator of the Corporation is Elizabeth A. Savage, Kummer Kaempfer Bonner & Renshaw, 3800 Howard Hughes Parkway, Seventh Floor, Las Vegas, Nevada 89109. ARTICLE XI Acquisitions of Controlling Interest The Corporation elects not to be governed by the provisions of Chapters 78.378 to 78.3793, inclusive, of the NRS pertaining to acquisitions of controlling interest. ARTICLE XII Combinations With Interested Stockholders The Corporation elects not to be governed by the provisions of Chapters 78.411 to 78.444, inclusive, of the NRS pertaining to combinations with interested stockholders. ARTICLE XIII Directors' and Officers' Liability A director or officer of the Corporation shall not be personally liable to this Corporation or its stockholders for damages for breach of fiduciary duty as a director or officer, but this Article shall not eliminate or limit the liability of a director or officer for (i) acts or omissions which involve intentional misconduct, fraud or a knowing violation of law or (ii) the unlawful payment of distributions. Any repeal or modification of this Article by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director or officer of the Corporation for acts or omissions prior to such repeal or modification. ARTICLE XIV Indemnity Every person who was or is a party to, or is threatened to be made a party to, or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he, or a person of whom he is the legal representative, is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, or as its representative in a partnership, joint venture trust or other enterprise, shall be indemnified and held harmless to the fullest extent legally permissible under the laws of the State of Nevada from time to time against all expenses, liability and loss (including attorneys' fees, judgments, fines and amounts paid or to be paid in settlement) reasonably incurred or suffered by him in connection therewith. Such right of indemnification shall be a contract right which may be enforced in any manner desired by such person. The expenses of directors, officers, employees and agent incurred in defending a civil or criminal action, suit or proceeding must be paid by the Corporation as they are incurred and in advance of the final disposition of the action suit or proceeding, upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by the Corporation. Such right of indemnification shall not be exclusive of any other right which such directors, officers, employees or agents may have or hereafter acquire, and, without limiting the generality of such statement, they shall be entitled to their respective rights of indemnification under any bylaw, agreement, vote of stockholders, provision of law, or otherwise, as well as their rights under this Article. Without limiting the application of the foregoing, the board of directors may adopt bylaws from time to time with respect to indemnification, to provide at all times the fullest indemnification permitted under the laws of the State of Nevada, and may cause the Corporation to purchase and maintain insurance on behalf of any person who is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, or as its representative in a partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred in any such capacity or arising out of such status, whether or not the Corporation would have the power to indemnify such person. The indemnification provided in this Article shall continue as to a person who has ceased to be a director, officer, employee, agent, and shall inure to the benefit of the heirs, executors and administrators of such person. In witness whereof, I have hereunto set my hand this 25th day of October, 1999, declaring and certifying that the facts stated hereinabove are true. /s/ Elizabeth A. Savage By: _________________________________ Elizabeth A. Savage, Incorporator CERTIFICATE OF ACCEPTANCE OF APPOINTMENT BY RESIDENT AGENT In the Matter of Reading Entertainment, Inc.: We, Kummer Kaempfer Bonner & Renshaw, do, hereby certify that on the 25th day of October, 1999, we accepted the appointment as Resident Agent of the above-entitled corporation in accordance with Section 78.090 of the Nevada Revised Statutes. Furthermore, that the registered office in this State is located at 3800 Howard Hughes Parkway, Seventh Floor, Las Vegas, Nevada 89109. In witness whereof, I have hereunto set my hand this 25th day of October, 1999. Kummer Kaempfer Bonner & Renshaw /s/ Elizabeth A. Savage By: _________________________________ Elizabeth A. Savage EX-3.II 3 BYLAWS OF READING ENTERTAINMENT EXHIBIT 3(II) BYLAWS OF READING ENTERTAINMENT, INC. A Nevada corporation ARTICLE I Stockholders Section 1 Annual Meeting Annual meetings of the stockholders, commencing with the year 2000, shall be held at such time as may be set by the Board of Directors from time to time, at which the stockholders shall elect by vote a Board of Directors and transact such other business as may properly be brought before the meeting. Section 2 Special Meetings Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Articles of Incorporation, may be called by the Chairman or Vice Chairman of the Board, if any, the Chief Executive Officer, the President or the Secretary, or any three or more members of the Board of Directors by resolution or at the request in writing of stockholders who together own of record shares of stock entitling them to cast a majority of the votes entitled to be cast by the holders of the outstanding stock of all classes entitled to vote at such meeting. Such request shall state the purpose of the proposed meeting. Section 3 Notice of Meetings Written notice of stockholders meetings, stating the place, date and hour thereof, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given by the Chairman or Vice Chairman of the Board, if any, the Chief Executive Officer, the President, any Vice President, the Secretary or an Assistant Secretary, to each stockholder entitled to vote thereat at least ten days but not more than sixty days before the date of the meeting, unless a different period is prescribed by statute. Section 4 Place of Meetings All annual meetings of the stockholders shall be held at the registered office of the Corporation or at such other place within or without the State of Nevada as the directors shall determine. Special meetings of the stockholders may be held at such time and place within or without the State of Nevada as shall be stated in the notice of the meeting, or in a duly executed waiver of notice thereof. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 5 Quorum; Adjourned Meetings The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the Articles of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. Section 6 Voting Except as otherwise provided by statute or the Articles of Incorporation or these Bylaws, and except for the election of directors, at any meeting duly called and held at which a quorum is present, a majority of the votes cast at such meeting upon a given matter by the holders of outstanding shares of stock of all classes of stock of the Corporation entitled to vote thereon who are present in person or by proxy shall decide such matter. At any meeting duly called and held for the election of directors at which a quorum is present, directors shall be elected by a plurality of the votes cast by the holders (acting as such) of shares of stock of the Corporation entitled to elect such directors. Section 7 Proxies At any meeting of the stockholders any stockholder may be represented and vote by a proxy or proxies appointed by an instrument in writing. In the event that any such instrument in writing shall designate two or more persons to act as proxies, a majority of such persons present at the meeting, or, if only one shall be present, then that one shall have and may exercise all of the powers conferred by such written instrument upon all of the persons so designated unless the instrument shall otherwise provide. No proxy or power of attorney to vote shall be used to vote at a meeting of the stockholders unless it shall have been filed with the secretary of the meeting. All questions regarding the qualification of voters, the validity of proxies and the acceptance or rejection of votes shall be decided by the inspectors of election who shall be appointed by the Board of Directors, or if not so appointed, then by the presiding officer of the meeting. Section 8 Action Without Meeting Any action which may be taken by the vote of the stockholders at a meeting may be taken without a meeting if authorized by the written consent of stockholders holding at least a majority of the voting power, unless the provisions of the statutes or of the Articles of Incorporation require a greater proportion of voting power to authorize such action in which case such greater proportion of written consents shall be required. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE II Directors Section 1 Management Of Corporation The business of the Corporation shall be managed by its Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders. Section 2 Number, Tenure, and Qualifications The number of directors which shall constitute the whole board shall be six. The number of directors may from time to time be increased or decreased to not less than one nor more than ten by action of the Board of Directors. The directors shall be elected by the holders of shares entitled to vote thereon at the annual meeting of the stockholders and, except as provided in Section 5 of this Article, each director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders. Section 3 Nomination of Stockholders No stockholder shall be permitted to nominate a candidate for election as a director at any annual meeting unless such stockholder shall provide in writing, not later than one hundred twenty days before the first anniversary of the preceding annual meeting of the stockholders, to the Nominating Committee of the Board of Directors or, in the absence of such committee, to the Secretary of the Corporation, information about such candidate which, were such candidate a nominee of the Board of Directors for whom the Corporation solicited proxies, would be required to be disclosed in the proxy materials pursuant to which such proxies would be solicited as set forth in Items 7-8 of Schedule 14A promulgated by the Securities and Exchange Commission, or any successor provisions. Section 4 Chairman and Vice Chairman of the Board The directors may elect one of their members to be Chairman of the Board of Directors and may elect one of their members to be the Vice Chairman of the Board of Directors. The Chairman and the Vice Chairman shall be subject to the control of and may be removed by the Board of Directors. The Chairman and Vice Chairman shall perform such duties as may from time to time be assigned to them by the Board of Directors. Section 5 Vacancies Vacancies in the Board of Directors, including those caused by an increase in the number of directors, may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and each director so elected shall hold office until his successor is elected at an annual or a special meeting of the stockholders. The holders of no less than two-thirds of the voting power may at any time peremptorily terminate the term of office of all or any of the directors by vote at a meeting called for such purpose or by written consent filed with the Secretary or, in his absence, with any other officer. Such removal shall be effective immediately, even if successors are not elected simultaneously. A vacancy or vacancies in the Board of Directors shall be deemed to exist in case of the death, resignation or removal of any directors, or if the authorized number of directors be increased, or if the stockholders fail at any annual or special meeting of stockholders at which any director or directors are elected to elect the full authorized number of directors to be voted for at that meeting. If the Board of Directors accepts the resignation of a director tendered to take effect at a future time, the Board or the stockholders shall have power to elect a successor to take office when the resignation is to become effective. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of his term of office. Section 6 Annual and Regular Meetings Annual and regular meetings of the Board of Directors shall be held at any place within or without the State of Nevada which has been designated from time to time by resolution of the Board of Directors or by written consent of all members of the Board of Directors. In the absence of such designation, annual and regular meetings shall be held at the registered office of the Corporation. Regular meetings of the Board of Directors may be held without call or notice at such time and at such place as shall from time to time be fixed and determined by the Board of Directors. Section 7 First Meeting The first meeting of each newly elected Board of Directors shall be held immediately following the adjournment of the meeting of stockholders and at the place thereof. No notice of such meeting shall be necessary to the directors in order legally to constitute the meeting, provided a quorum is present. In the event such meeting is not so held, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors. Section 8 Special Meetings Special meetings of the Board of Directors may be called by the Chairman or Vice Chairman of the Board of Directors or the President or any three of the directors then in office. The Secretary, or in his absence any other officer of the Corporation, shall give each director notice of the time and place of the special meetings of the Board of Directors by telecopy or electronic mail at least forty-eight hours before the meeting, or by mail at least two days before the meeting, or by telegram, cable, radiogram or personal service at least two days before the meeting. Unless otherwise stated in the notice thereof, any and all business may be transacted at any meeting without specification of such business in the notice. Section 9 Business of Meetings The transactions of any meeting of the Board of Directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present, and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, or a consent to holding such meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 10 Quorum; Adjourned Meetings A majority of the authorized number of directors shall be necessary to constitute a quorum for the transaction of business, except to adjourn as hereinafter provided. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors, unless a greater number be required by law or by the Articles of Incorporation. Any action of a majority, although not at a regularly called meeting, and the record thereof, if assented to in writing by all of the other members of the Board shall be as valid and effective in all respects as if passed by the Board of Directors in regular meeting. A quorum of the directors may adjourn any directors meeting to meet again at a stated day and hour; provided, however, that in the absence of a quorum, a majority of the directors present at any directors meeting, either regular or special, may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors. Meetings shall be presided over by the Chairman of the Board, if any, or in his absence by the Vice Chairman, or in their absence by the President, or in the absence of all of the foregoing by such other person as the directors may select. The Secretary of the Corporation shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. Notice of the time and place of holding an adjourned meeting need not be given to the absent directors if the time and place are fixed at the meeting adjourned. Section 11 Committees The Board of Directors may, by resolution adopted by a majority of the whole Board, designate one or more committees of the Board of Directors, each committee to consist of at least one or more of the directors of the Corporation which, to the extent provided in the resolution, shall have and may exercise the power of the Board of Directors in the management of the business and affairs of the Corporation and may have power to authorize the seal of the Corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be determined from time to time by the Board of Directors. The members of any such committee present at any meeting and not disqualified from voting may, whether or not they constitute a quorum, unanimously appoint another member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. At meetings of such committees, a majority of the members or alternate members shall constitute a quorum for the transaction of business, and the act of a majority of the members or alternate members at any meeting at which there is a quorum shall be the act of the committee. The committees shall keep regular minutes of their proceedings and report the same to the Board of Directors. Section 12 Action Without Meeting; Telephone Meetings Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if a written consent thereto is signed by all members of the Board of Directors or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee. Nothing contained in these Bylaws shall be deemed to restrict the powers of members of the Board of Directors, or any committee thereof, to participate in a meeting of the Board or committee by means of telephone conference or similar communications equipment whereby all persons participating in the meeting can hear each other. Section 13 Special Compensation The directors may be paid their expenses of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of committees may be allowed like reimbursement and compensation for attending committee meetings. ARTICLE III Notices Section 1 Notice of Meetings Notices of meetings of stockholders shall be in writing and signed by the President or a Vice-President or the Secretary or an Assistant Secretary or by such other person or persons as the directors shall designate. Such notice shall state the purpose or purposes for which the meeting is called and the time and the place, which may be within or without this State, where it is to be held. A copy of such notice shall be either delivered personally to or shall be mailed, postage prepaid, to each stockholder of record entitled to vote at such meeting not less than ten nor more than sixty days before such meeting. If mailed, it shall be directed to a stockholder at his address as it appears upon the records of the Corporation and upon such mailing of any such notice, the service thereof shall be complete and the time of the notice shall begin to run from the date upon which such notice is deposited in the mail for transmission to such stockholder. Personal delivery of any such notice to any officer of a corporation or association, or to any member of a partnership shall constitute delivery of such notice to such corporation, association or partnership. In the event of the transfer of stock after delivery of such notice of and prior to the holding of the meeting it shall not be necessary to deliver or mail notice of the meeting to the transferee. Section 2 Effect of Irregularly Called Meetings Whenever all parties entitled to vote at any meeting, whether of directors or stockholders, consent, either by a writing on the records of the meeting or filed with the Secretary, or by presence at such meeting and oral consent entered on the minutes, or by taking part in the deliberations at such meeting without objection, the doings of such meeting shall be as valid as if had at a meeting regularly called and noticed, and at such meeting any business may be transacted which is not excepted from the written consent or to the consideration of which no objection for want of notice is made at the time, and if any meeting be irregular for want of notice or of such consent, provided a quorum was present at such meeting, the proceedings of said meeting may be ratified and approved and rendered likewise valid and the irregularity or defect therein waived by a writing signed by all parties having the right to vote at such meeting; and such consent or approval of stockholders may be by proxy or attorney, but all such proxies and powers of attorney must be in writing. Presence at any irregularly called meeting either in person or by proxy, will constitute a waiver of any defect with respect to the notices given, and/or the failure to give any notices whatsoever, with respect to such meeting. Section 3 Waiver of Notice Whenever any notice whatever is required to be given under the provisions of the statutes, of the Articles of Incorporation or of these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE IV Officers Section 1 Election The officers of the Corporation shall be chosen by the Board of Directors and shall be a Chief Executive Officer or a President, or both, one or more Vice Presidents, a Treasurer and a Secretary, and such other officers with such titles and duties as the Board of Directors may determine, none of whom need be directors. Any person may hold one or more offices and each officer shall hold office for such term as may be prescribed by the Board of Directors from time to time. Section 2 Chairman of the Board The Chairman of the Board shall preside at meetings of the stockholders and the Board of Directors, and shall see that all orders and resolutions of the Board of Directors are carried into effect. The Chairman of the Board will also serve, unless resolved otherwise by the Board of Directors, as the Chief Executive Officer of the Corporation. Section 3 Vice Chairman of the Board The Vice-Chairman shall, in the absence or disability of the Chairman of the Board, perform the duties and exercise the powers of the Chairman of the Board and shall perform such other duties as the Board of Directors may from time to time prescribe. Section 4 Chief Executive Officer The Chief Executive Officer shall be the head of the Corporation and in the recess of the Board of Directors shall have the general control and management of all the business and affairs of the Corporation. The Chief Executive Officer shall make annual reports and submit the same to the Board of Directors showing the condition and affairs of the corporation. The Chief Executive Officer shall, from time to time, make recommendations to the Board of Directors and any other committee of the Board of Directors deems proper and shall perform such other duties as the Board of Directors may from time to time prescribe. Section 5 President The President shall be the chief operating officer of the Corporation and shall have active management of the business of the Corporation. The President shall execute on behalf of the Corporation all instruments requiring such execution except to the extent the signing and execution thereof shall be expressly designated by the Board of Directors to some other officer or agent of the Corporation. Section 6 Chief Administrative Officer The Chief Administrative Officer will be responsible for the management of the financial control and reporting, treasury, human resources, and public reporting functions of the Corporation. The Chief Administrative Officer shall in addition, perform such other duties and have such other powers as the Chief Executive Officer or the Board of Directors may from time to time prescribe. Section 7 Vice-President The Vice-President shall act under the direction of the President and in the absence or disability of the President shall perform the duties and exercise the powers of the President. The Vice-President shall perform such other duties and have such other powers as the President or the Board of Directors may from time to time prescribe. The Board of Directors may designate one or more Executive Vice-Presidents or may otherwise specify the order of seniority of the Vice-Presidents. The duties and powers of the President shall descend to the Vice-Presidents in such specified order of seniority. Section 8 Secretary The Secretary shall act under the direction of the President. Subject to the direction of the President, the Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record the proceedings. The Secretary shall perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the President or the Board of Directors. Section 9 Assistant Secretaries The Assistant Secretaries shall act under the direction of the President. In order of their seniority, unless otherwise determined by the President or the Board of Directors, they shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary. They shall perform such other duties and have such other powers as the President or the Board of Directors may from time to time prescribe. Section 10 Treasurer The Treasurer shall act under the direction of the President. Subject to the direction of the President, the Treasurer shall have custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the President or the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of such person's office and for the restoration to the Corporation, in case of such person's death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in such person's possession or under such person's control belonging to the Corporation. Section 11 Assistant Treasurers The Assistant Treasurers in the order of their seniority, unless otherwise determined by the President or the Board of Directors, shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer. They shall perform such other duties and have such other powers as the President or the Board of Directors may from time to time prescribe. Section 12 Compensation The salaries and compensation of all officers of the Corporation shall be fixed by the Board of Directors. Section 13 Removal; Resignation The officers of the Corporation shall hold office at the pleasure of the Board of Directors. Any officer elected or appointed by the Board of Directors, or any member of a committee, may be removed at any time, with or without cause, by the Board of Directors by a vote of not less than a majority of the entire Board at any meeting thereof or by written consent. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise shall be filled by the Board of Directors. Any director or officer of the Corporation, or any member of any committee, may resign at any time by giving written notice to the Board of Directors, the Chairman or Vice Chairman of the Board, the Chief Executive Officer, the President, or the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein or, if the time is not specified, then upon receipt thereof. The acceptance of such resignation shall not be necessary to make it effective. Section 14 Vacancies Any vacancy in the office of any officer through death, resignation, removal, disqualification or other cause may be filled at any time by a majority of the directors then in office (even though less than a quorum), the person so chosen shall hold office until his successor shall have been elected and qualified. ARTICLE V Capital Stock Section 1 Certificates Every stockholder shall be entitled to have a certificate signed by the President or a Vice-President and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by such person in the Corporation. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the designations, preferences and relative, participating, optional or other special rights of the various classes of stock or series thereof and the qualifications, limitations or restrictions of such rights, shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such stock. If a certificate is signed (1) by a transfer agent other than the Corporation or its employees or (2) by a registrar other than the Corporation or its employees, the signatures of the officers of the Corporation may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall cease to be such officer before such certificate is issued, such certificate may be issued with the same effect as though the person had not ceased to be such officer. The seal of the Corporation, or a facsimile thereof, may, but need not be, affixed to certificates of stock. Section 2 Surrendered; Lost or Destroyed Certificates The Board of Directors or any transfer agent of the Corporation may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost or destroyed upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors (or any transfer agent of the Corporation authorized to do so by a resolution of the Board of Directors) may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or the owner's legal representative, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed. Section 3 Regulations The Board of Directors shall have the power and authority to make all such rules and regulations and procedures as it may deem expedient concerning the issue, transfer, registration, cancellation and replacement of certificates representing stock of the Corporation. Section 4 Record Date The Board of Directors may fix in advance a date not exceeding sixty days nor less than ten days preceding the date of any meeting of stockholders, or the date for the payment of any distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, or a date in connection with obtaining the consent of stockholders for any purpose, as a record date for the determination of the stockholders entitled to notice of and to vote at any such meeting, and any adjournment thereof, or entitled to receive payment of any such distribution, or to give such consent, and in such case, such stockholders, and only such stockholders as shall be stockholders of record on the date so fixed, shall be entitled to notice of and to vote at such meeting, or any adjournment thereof, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, or to give such consent, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid. Section 5 Registered Owner The Corporation shall be entitled to recognize the person registered on its books as the owner of shares to be the exclusive owner for all purposes including voting and distribution, and the Corporation shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Nevada. ARTICLE VI General Provisions Section 1 Registered Office The registered office of the Corporation shall be in the County of Clark, State of Nevada. The Corporation may also have offices at such other places both within and without the State of Nevada as the Board of Directors may from time to time determine or the business of the Corporation may require. Section 2 Checks; Notes All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 3 Fiscal Year The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. Section 4 Stock of Other Corporations or Other Interests Unless otherwise ordered by the Board of Directors, the Chief Executive Officer, the President, the Secretary, and such other attorneys or agents of the Corporation as may be from time to time authorized by the Board of Directors or the President, shall have full power and authority on behalf of the Corporation to attend and to act an vote in person or by proxy at any meeting of the holders of securities of any corporation or other entity in which the Corporation may own or hold shares or other securities, and at such meetings shall possess and may exercise all the rights and powers incident to the ownership of such shares or other securities which the Corporation, as the owner or holder thereof, might have possessed and exercised if present. The Chief Executive Officer, the President, the Secretary or other such attorneys or agents may also execute and deliver on behalf of the Corporation, powers of attorney, proxies, consents, waivers and other instruments relating to the shares or securities owned or held by the Corporation. Section 5 Corporate Seal The Corporation will have a corporate seal, as may from time to time be determined by resolution of the Board of Directors. If a corporate seal is adopted, it shall have inscribed thereon the name of the Corporation and the words "Corporate Seal" and "Nevada". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. ARTICLE VII Indemnification Section 1 Indemnification Generally As provided in this Article VII, the Corporation shall indemnify each person who was or is made a party or is threatened to be made a party to or is involved in any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (hereinafter a "Proceeding"), by reason of the fact that he or she, or a person of which he or she is the legal representative, is or was a director or officer, or had agreed to serve as a director or officer, of the Corporation or is or was serving or has agreed to serve at the request of the Corporation as a director, officer, employee, or agent of another corporation or of a partnership, joint venture, trust, or other enterprise, including service with respect to employee benefit plans, or by reason of any act alleged to have been taken or omitted in such capacity, whether the basis of such Proceeding is alleged action in an official capacity as a director, officer, employee, or agent or alleged action in any other capacity while serving as a director, officer, employee, or agent, to the maximum extent authorized by the NRS, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all cost, expense, liability, and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties, and amounts paid or to be paid in settlement) reasonably incurred by such person or on his or her behalf in connection with such Proceeding, and such indemnification shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of his or her heirs, executors, and administrators. The right to indemnification conferred in this Article VII shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such Proceeding in advance of its final disposition; provided that, if the NRS so requires, the payment of such expenses incurred by a director or officer in advance of the final disposition of a Proceeding shall be made only upon receipt by the Corporation of an undertaking by or on behalf of such person to repay all amounts so advanced if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article Eight or otherwise and provided that the Corporation shall not be required to advance expenses in connection with a Proceeding (or part thereof) alleging liability under Section 16(b) of the Securities Exchange Act of 1934, as amended (a "16(b) Claim"). The termination of any Proceeding by judgment, order, settlement, or conviction, or upon a plea of nolo contendre or its equivalent, shall not, of itself, create a presumption that the person did not meet any standard of conduct for indemnification imposed by the NRS. The Corporation shall be required to indemnify a person in connection with a Proceeding (or part thereof) initiated by such person only if such Proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. Section 2 Indemnification for Costs, Charges, and Expenses for Successful Party Notwithstanding the other provisions of this Article VII, to the extent that a director or officer of the Corporation has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any Proceeding referred to in Section 1, or in the defense of any claim, issue, or matter therein, he or she shall be indemnified against all costs, charges, any expenses (including attorneys' fees) actually and reasonably incurred by him or her or on his or her behalf in connection therewith. Section 3 Determination of Right to Indemnification Any indemnification under Section 1 or 2 (unless ordered by a court) shall be paid by the Corporation unless a determination is made (a) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit, or proceeding, or (b) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (c) by the stockholders, that indemnification of the director or officer is not proper in the circumstances because he or she has not met the applicable standards of conduct set forth in the NRS. Section 4 Advance of Costs, Charges and Expenses Costs, charges, and expenses (including attorneys' fees) incurred by a person referred to in Section 1 of this Article VII in defending a civil or criminal Proceeding (including investigations by any government agency and all costs, charges, and expenses incurred in preparing for any threatened Proceeding) shall be paid by the Corporation in advance of the final disposition of such Proceeding; provided, however, that the payment of such costs, charges, and expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer) in advance of the final disposition of such Proceeding shall be made only upon receipt of an undertaking by or on behalf of the director or officer to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified by the Corporation as authorized in this Article VII and provided that the Corporation shall not be required to advance expenses in connection with a 16(b) Claim. No security shall be required for such undertaking and such undertaking shall be accepted without reference to the recipient's financial ability to make repayment. The Board of Directors may, in the manner set forth above, and subject to the approval of such director or officer, authorize the Corporation's counsel to represent such person in any Proceeding, whether or not the Corporation is a party to such Proceeding. Section 5 Procedure for Indemnification Any indemnification under Section 1 or advance of costs, charges, and expenses under Section 4 shall be made promptly, and in any event within 60 days, upon the written request of the director or officer directed to the Secretary of the Corporation. The right to indemnification or advances as granted by this Article VII shall be enforceable by the director or officer in any court of competent jurisdiction if the Corporation denies such request, in whole or in part, or if no disposition thereof is made within 60 days. Such person's costs and expenses incurred in connection with successfully establishing his or her right to indemnification or advances, in whole or in part, in any such action shall also be indemnified by the Corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for the advance of costs, charges, and expenses under Section 4 where the required undertaking, if any, has been received by the Corporation) that the claimant has not met the standard of conduct, if any, set forth in the NRS, but, to the extent permitted by applicable law, the burden of proving that such standard of conduct has not been met shall be on the Corporation. To the extent permitted by applicable law, neither the failure of the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct, if any, set forth in the NRS, nor the fact that there has been an actual determination by the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 6 Other Rights; Continuation of Right of Indemnification The indemnification provided by this Article VII shall not be deemed exclusive of any other rights to which a person seeking indemnification may be entitled under any law (common or statutory), agreement, vote of stockholders or disinterested directors, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding office, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the estate, heirs, executors, and administrators of such person. All rights to indemnification under this Article VII shall be deemed to be a contract between the Corporation and each director and officer of the Corporation who serves or served in such capacity at any time while this Article VII is in effect. No amendment or repeal of this Article VII or of any relevant provisions of the NRS or any other applicable laws shall adversely affect or deny to any director or officer any rights to indemnification which such person may have, or change or release any obligations of the Corporation under this Article VII with respect to any costs, charges, expenses (including, attorneys' fees), judgments, fines, and amounts paid in settlement which arise out of a Proceeding based in whole or substantial part on any act, actual or alleged, which takes place before or while this Article VII is in effect. The provisions of this Section 6 shall apply to any such Proceeding whenever commenced, including any such Proceeding commenced after any amendment or repeal of this Article VII. The right to indemnification and advancement of expenses conferred on any person by this Article VII shall not limited the Corporation from providing any other indemnification permitted by law. Section 7 Definitions For purposes of this Article VII: "the Corporation" includes any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence continued, would have had power and authority to indemnify its directors or officers, so that any person who is or was a director or officer of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, shall stand in the same position under the provisions of this Article VII with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued; "other enterprises" includes employee benefit plans, including but not limited to any employee benefit plans of the Corporation; "serving at the request of the Corporation" includes, but is not limited to, any service which imposes duties on, or involves services by, a director or officer of the Corporation with respect to an employee benefit plan, its participants, or beneficiaries, including acting as a fiduciary there; "fines" shall include any penalties and any excise or similar taxes assessed on a person with respect to an employee benefit plan; a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in Section 1; and service as a partner, trustee, or member of management or similar committee of a partnership or joint venture, or as a director, officer, employee, or agent of a corporation which is a partner, trustee, or joint venturer, shall be considered service as a director, officer, employee, or agent of the partnership, joint venture, trust, or other enterprise. Section 8 Saving Clause If this Article VII or any portion hereof shall be invalidated on any ground by a court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director and officer of the Corporation as to costs, charges, expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement with respect to any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, including an action by or in the right of the Corporation, to the full extent permitted by any applicable portion of this Article VII that shall not have been invalidated and to the full extent permitted by applicable law. Section 9 Indemnification of Other Persons If authorized by the Board of Directors, the Corporation may indemnify and advance expenses to any other person whom it has the power to indemnify under the NRS to the fullest extent permitted by such statutes. Section 10 Insurance The Corporation may purchase and maintain insurance, at its expense, to protect itself and any director, officer, employee, or agent of the Corporation or another corporation, partnership, joint venture, trust, or other enterprises against any expense, liability or claim, whether or not the Corporation would have the power to indemnify such person under the NRS. ARTICLE VIII Amendments Section 1 Amendments by Stockholders The Bylaws may be amended by a majority vote of all the stock issued and outstanding and entitled to vote for the election of directors of the stockholders, provided notice of intention to amend shall have been contained in the notice of the meeting. Section 2 Amendments by Board of Directors The Board of Directors by a majority vote of the whole Board of Directors at any meeting may amend these Bylaws, including Bylaws adopted by the stockholders, but the stockholders may from time to time specify particular provisions of the Bylaws which shall not be amended by the Board of Directors. EX-10.7 4 EMPLOYMENT AGREEMENT EXHIBIT 10.7 PERSONAL AND CONFIDENTIAL October 28, 1999 Mr. James J. Cotter Chairman & CEO Craig Corporation This memo will set out the details of the job offer discussed between us in our meetings of October 21 and October 27, 1999. Position Description: CFO Craig Corporation CFO Citadel Holding Corporation CAO Reading Entertainment, Inc. Reporting To: James J. Cotter, Chairman & CEO Main Responsibilities: All financial and administrative functions for the above mentioned three (3) Companies with reporting lines from all finance/accounting Managers in the various subsidiaries. Salary: Base salary $180,000/annum Bonus: Unconditional - 12,0000/annum Conditional - 25% of base salary. In the first year, conditional bonus will be conditioned on the successful transfer of the finance group from Philadelphia to California. Signing Bonus - $40,0000 payable on starting date. Interest Free Loan: $33,000 payable on starting date. This amount will be repaid on the date of my leaving Craig Corporation employment, at which time a $50,000 leaving bonus will be paid to offset the loan. James J. Cotter Craig Corporation October 28, 1999 Page 2 Leaving Bonus: In the event of termination of employment for other than unlawful causes, a 6-month base salary will be paid. Stock Options: 30,000 stock options from Craig Corporation. 30,000 stock options from Citadel Holding Corporation. The above stock options will be deeded to me on the starting date. These 60,000 stock options will vest in the following manner: - 30,000 shares at the end of 12 months from start of employment. - 10,000 shares at the end of 24 months from start of employment. - 10,000 shares at the end of 36 months from start of employment. - 10,000 shares at the end of 48 months from start of employment. Company Car: A company car will be available for this position valued at $1000/month for the total package. 401K Contribution: The Company will contribute a matching amount of 3% of total pay (salary & unconditional and conditional bonus) into the 401K Plan. Vacation: Official vacation of 2 weeks/annum. 3 weeks after 5 years, however, flexibility will be available at the discretion of the Chairman/CEO. Medical: Benefits to be the same as currently being enjoyed under the Beckman Coulter, Inc. Plan for medical, dental and vision and will be reimbursed by the Company. Incidentals: Parking fees will be paid by the Company. Cellular phone and internet connection at home will be paid by the Company. Normal business expenses will be reimbursed. Starting date: ASAP James J. Cotter Craig Corporation October 28, 1999 Page 3 Based on the above, if this is acceptable to you, can you please sign and refax back to me at (714) 508-5726. ACCEPTED: /s/ James J. Cotter ------------------------- James J. Cotter Chairman and CEO Best regards, Andrzej Matyczynski EX-10.8 5 LETTER AGREEMENT DATED APRIL 5, 2000 EXHIBIT 10.8 NATIONAL AUTO CREDIT, INC. LETTERHEAD April 5, 2000 James J. Cotter, Chairman James J. Cotter, Chairman Reading Entertainment, Inc. FA, Inc. One Penn Square West c/o Reading Entertainment, Inc. 30 South Fifteenth Street, Suite 1300 One Penn Square West Philadelphia, PA 19103-4831 30 South Fifteenth Street, Suite 1300 Philadelphia, PA 19103-4831 Re: Acquisition of Additional 1/3 Membership interest in Angelika Film Center, LLC Dear Mr. Cotter: National Auto Credit, Inc. ("National") and its wholly-owned subsidiary, National Cinemas, Inc. ("National Cinemas"), have entered into an agreement (the "Angelika Agreement") with FA, Inc. and Reading Entertainment, Inc. ("RDG" and collectively with its consolidated subsidiaries, "Reading") to acquire a 50% membership interest in Angelika Film Centers, LLC ("AFC"). The purpose of this letter is to set out the terms under which Reading has agreed to grant to National an option to acquire an Additional 1/3 Membership Interest in AFC. A. The Option Grant: For good and valuable consideration, the receipt and ---------------- sufficiency of which is hereby acknowledged, Reading does hereby grant to National that option more specifically described hereinbelow. B. Exercise Option: National will have a period of forty-five (45) days, --------------- through and including May 20, 2000 in which to determine whether or not it wishes to proceed with the acquisition of the 1/3 Membership Interest owned by Reading that is not subject to the Angelika Agreement (the "Subject Interest"), for a purchase price of $9,000,000, on substantially the same terms and conditions set forth in the Angelika Agreement (except as otherwise provided herein). If National determines that it wishes to exercise the option, it will give written notice of that election to Reading within this period. Thereafter, National and Reading will cooperate and work in good faith to complete the definitive documentation necessary to complete the transaction, with an intention to close such transactions within thirty (30) days of the date of such election. Closing shall be subject to compliance with the Hart-Scott-Rodino Antitrust Improvements Act. C. Exclusivity: Reading agrees to deal exclusively with National during the ----------- term of this option, other then its ongoing discussions with Citadel Holding Corporation. D. Form and Payment of the Purchase Price: The purchase price of $9,000,000 -------------------------------------- will be paid in full at the Closing by the issuance of the Common Stock of National, priced at $1.50 per share. In the event that National lacks sufficient authorized and unissued shares to pay the entire purchase price in Common Stock, it will pay the balance in cash by wire transfer of currently available funds. National will grant to Reading registration rights equivalent to the registration rights granted to Reading pursuant to the Angelika Agreement. Sincerely, /s/ David L. Huber David L. Huber Chairman of the Board and Chief Executive Officer ACCEPTED AND AGREED AS OF THIS 5/th/ DAY OF APRIL, 2000 READING ENTERTAINMENT, INC. By: /s/ S. Craig Tompkins ------------------------ Its: Vice Chairman ------------------------ 2 EX-10.9 6 LETTER AGREEMENT (2) DATED APRIL 5, 2000 EXHIBIT 10.9 NATIONAL AUTO CREDIT, INC. LETTERHEAD April 5, 2000 James J. Cotter, Chairman Reading Entertainment, Inc. One Penn Square West 30 South Fifteenth Street, Suite 1300 Philadelphia, PA 19103-4831 Re: Acquisition of Domestic Cinema Assets Dear Mr. Cotter: As we have discussed, National Auto Credit, Inc. ("National") is interested in entering into the motion picture exhibition business in the United States through it wholly-owned subsidiary National Cinemas, Inc. ("National Cinemas"). National and National Cinemas have entered into an agreement (the "Angelika Agreement") with Reading Entertainment, Inc. ("RDG" and collectively with its consolidated subsidiaries, "Reading") to acquire a 50% membership interest in Angelika Film Centers, LLC ("AFC"). The purpose of this letter is to set out the terms under which Reading has agreed to grant to National an option to acquire the remainder of Reading's domestic cinema assets. A. The Option Fee: Promptly following the execution and delivery of this -------------- letter agreement, National will transfer to Reading the sum of $500,000, in consideration of the rights granted by Reading to National pursuant to this letter agreement. B. The Assets Covered: In consideration of the payment of this fee, National ------------------ will have the option, as described hereinbelow, to acquire the following assets: 1. The City Cinemas Rights: These are the rights held by Reading under ----------------------- that certain Agreement in Principle between RDG, James J. Cotter and Michael Forman dated December 2, 1998, a copy of which is appended as Appendix A to this letter (the "City Cinemas Agreement"), other than the right to acquire the 1/6th interest in AFC and the right to acquire by merger Off Broadway, Inc. described in that Agreement in Principle. The purchase price of this asset will be an amount equal to Reading's transaction costs with respect to such transaction (including reimbursement of the $1 million deposit previously made by Reading and which counts as a credit against the option fee specified in the City Cinemas Agreement). 2. The Domestic Cinema Assets: These include the following cinema assets: -------------------------- a) The remaining interest held by Reading in AFC (including the interest being acquired pursuant to the City Cinemas Agreement); b) The Angelika Film Center Houston (Houston, Texas); c) The Reading Mansville 12 (Mansville, New Jersey); d) The St. Anthony Main (Minneapolis, Minnesota); e) The Tower Cinema (Sacramento, California) f) The Angelika Film Center Buffalo (Buffalo, New York); and g) The Angelika Film Center Dallas (under development in Dallas, Texas). Provided, that Reading is currently in negotiations with respect to the Angelika Film Center Buffalo, and may terminate its rights and obligations with respect to such cinema complex if it is not satisfied with the results of such negotiation. The purchase price of the Domestic Cinema Assets will be as follows: a) With respect to the remaining interest in AFC, the million; amount of $13.5 b) With respect to the cinemas at Houston, Mansville, Minneapolis, Sacramento and Buffalo, the lesser of Reading's historic cost basis in such assets and the fair market value of such cinemas (such fair market value to be determined, in the event of dispute between the parties, by binding arbitration under the rules of the American Arbitration Association); and c) With respect to the cinema under development in Dallas, Reading's cost basis in such asset. C. Exercise Option: National will have a period of sixty (60) days, through --------------- and including June 5, 2000 in which to determine whether or not it wishes to proceed with the acquisition of the City Cinema Rights and the Domestic Cinema Assets. National shall have the right to extend the sixty (60) day period provided in the immediately preceding sentence for up to two (2) additional periods of thirty (30) days, by written notice to Reading given on or before the expiration of such sixty (60) day period (or extension thereof) accompanied by payment to Reading of $100,000 in immediately available funds for each such thirty (30) day extension. If National determines that it wishes to exercise the option, it will give written notice of that election to Reading within this period. Thereafter, National and Reading will cooperate and work in good faith to complete the definitive documentation necessary to complete the transaction, with an intention to close such transactions within sixty (60) days of the date of such election. Closing shall be subject to compliance with the Hart-Scott- Rodino Antitrust Improvements Act. D. Citadel Offer: In the event that National elects to exercise the Option ------------- that is the subject of this letter agreement, National will offer to Citadel Holding Corporation ("Citadel") the right to form a joint venture with National or National Cinemas (as the case may be) to acquire the City Cinemas Rights and the Domestic Cinema Assets. The joint venture would be structured as a 2 Delaware limited liability company, and would be generally on the terms set out in Appendix B to this letter. Citadel will have until the later of (i) thirty (30) days following the date on which National offers Citadel such right and (ii) two (2) business days following the date on which National notifies Citadel (by coy of its notice to Reading) whether it elects to exercise the option granted to National by RDG and FA, Inc. by letter of even date herewith to purchase the additional 1/3 Membership Interest in AFC held by FA, Inc., in which to elect in writing to accept such offer. Thereafter, if Citadel elects to accept such offer, National and Citadel will cooperate and work in good faith to complete the definitive documentation necessary to complete the transaction within the time periods specified above. If Citadel has elected to participate in the joint venture and then fails for any reason, other than default by National or National Cinemas, to close, National will be entitled, at its option, within ten (10) business days of such default, to revoke through written notice to Reading, its exercise of the option to acquire the city Cinema Rights and the Domestic Cinema Assets. E. Exclusivity: Reading agrees to deal exclusively with National during the ----------- term of this option; provided, however, that Reading will be entitled to continue its negotiations with Citadel and to enter into agreements with Citadel with respect to the City Cinema Rights and the Domestic Cinema Assets, so long as any agreements entered into with Citadel are entered into subject to the rights of National under this letter agreement. National also acknowledges and agrees that Reading may elect to dispose of its interest in the Angelika Film Center Buffalo separate from this agreement. F. Return of Option Fee: In the event of failure to close the acquisition of -------------------- the City Cinemas Rights and the Domestic Cinema Assets due to default on the part of Reading, National will be entitled to a refund of the option fee. In all other cases, such fee will be deemed fully earned by Reading upon the execution and delivery of this letter agreement by Reading. G. Form and Payment of the Purchase Price: The purchase price will be paid in -------------------------------------- full at the Closing by wire transfer of currently available funds. In the event of such a closing, the option fee will be credited to the purchase price (including any fee paid for the extension thereof). [THE REMAINDER OF THIS PAGE IS LEFT INTENTIONALLY BLANK.] 3 Should you have any questions, please feel free to contact me at (440) 349-1000. Sincerely, /s/ David L. Huber David L. Huber Chairman of the Board and Chief Executive Officer ACCEPTED AND AGREED AS OF THIS 5th DAY --- OF APRIL, 2000 READING ENTERTAINMENT, INC. By: /s/ S. Craig Tompkins -------------------------- Its: Vice Chairman -------------------------- 4 EX-10.10 7 PURCHASE AGREEMENT DATED APRIL 5, 2000 EXHIBIT 10.10 ================================================================================ PURCHASE AGREEMENT AMONG NATIONAL AUTO CREDIT, INC., NATIONAL CINEMAS, INC. FA, INC. and READING ENTERTAINMENT, INC. ______________________________ Dated as of April 5, 2000 ______________________________ ================================================================================ TABLE OF CONTENTS -----------------
Page ---- ARTICLE I. DEFINITIONS.......................................................... 1 Section 1.1 Definitions...................................................... 1 ARTICLE II. PURCHASE AND SALE.................................................... 6 Section 2.1 Transfer of Shares............................................... 6 Section 2.2 Closing.......................................................... 6 Section 2.3 Purchase Price................................................... 6 Section 2.4 Certain Indemnitees.............................................. 7 Section 2.5 Newco............................................................ 7 Section 2.6 Option Letters................................................... 7 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE PARENT.......... 7 Section 3.1 Organization..................................................... 8 Section 3.2 Capitalization; Title to the Interests........................... 8 Section 3.3 Subsidiaries and Investments..................................... 8 Section 3.4 Authorization and Validity of Agreement.......................... 8 Section 3.5 No Conflict or Violation......................................... 9 Section 3.6 Consents and Approvals........................................... 9 Section 3.7 Financial Statements............................................. 9 Section 3.8 Absence of Certain Changes or Events............................. 10 Section 3.9 Tax Matters...................................................... 11 Section 3.10 Intentionally Omitted............................................ 12 Section 3.11 Intellectual Property............................................ 12 Section 3.12 Personal Property................................................ 12 Section 3.13 Real Property.................................................... 13 Section 3.14 Licenses, Permits and Governmental Approvals..................... 14 Section 3.15 Compliance with Law.............................................. 14 Section 3.16 Contracts........................................................ 15 Section 3.17 Intentionally Omitted............................................ 16 Section 3.18 Litigation....................................................... 16 Section 3.19 Insurance........................................................ 16 Section 3.20 Employee Plans................................................... 16 Section 3.21 Labor Matters.................................................... 16 Section 3.22 Environmental Matters............................................ 17 Section 3.23 Brokers and Finders.............................................. 17 Section 3.24 Year 2000 Compliance............................................. 17 Section 3.25 Intentionally Omitted............................................ 17 Section 3.26 Change in Ownership.............................................. 18
i Section 3.27 Intentionally Omitted........................................... 18 Section 3.28 Absence of Undisclosed Liabilities.............................. 18 Section 3.29 Purchase for Investment......................................... 18 Section 3.30 Restricted Securities........................................... 18 Section 3.31 Due Diligence................................................... 19 Section 3.32 Survival........................................................ 19 ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE BUYER AND NEWCO.............. 19 Section 4.1 Corporate Organization.......................................... 19 Section 4.2 Subsidiaries and Investments.................................... 20 Section 4.3 Authorization and Validity of Agreement......................... 20 Section 4.4 Capitalization.................................................. 20 Section 4.5 No Conflict or Violation........................................ 21 Section 4.6 Consents and Approvals.......................................... 21 Section 4.7 Financial Statements............................................ 21 Section 4.8 Absence of Certain Changes or Events............................ 21 Section 4.9 Tax Matters..................................................... 22 Section 4.10 Real Property................................................... 23 Section 4.11 Litigation...................................................... 25 Section 4.12 Employee Plans.................................................. 25 Section 4.13 Labor Matters................................................... 28 Section 4.14 Environmental Matters........................................... 28 Section 4.15 Purchase for Investment......................................... 29 Section 4.16 Brokers and Finders............................................. 29 Section 4.17 Due Diligence................................................... 29 Section 4.18 Survival........................................................ 29 ARTICLE V. COVENANTS OF THE PARTIES........................................... 30 Section 5.1 Consents and Approvals Required on Closing Date................. 30 Section 5.2 Further Assurances.............................................. 30 Section 5.3 Best Efforts.................................................... 30 Section 5.4 Nondisclosure................................................... 30 Section 5.5 Tax Matters..................................................... 30 Section 5.6 Cooperation on Tax Matters...................................... 31 Section 5.7 Amendment to Management Agreement............................... 31 Section 5.8 Amendment to Trademark License Agreement........................ 31 Section 5.9 Notification and Put Rights..................................... 31 Section 5.10 Amendment to Certificate of Incorporation....................... 32 Section 5.11 Board Representation............................................ 32 ARTICLE VI. INDEMNIFICATION.................................................... 32 Section 6.1 Indemnification by the Seller and the Parent.................... 32
ii Section 6.2 Procedures for Indemnification by the Seller and the Parent....... 33 Section 6.3 Indemnification by the Buyer and Newco............................ 34 Section 6.4 Procedures for Indemnification by the Buyer and Newco............. 35 ARTICLE VII. CONDITIONS TO OBLIGATIONS OF THE SELLER AND THE PARENT............... 36 Section 7.1 Representations and Warranties of the Buyer and Newco............. 36 Section 7.2 Performance of the Obligations of the Buyer and Newco............. 36 Section 7.3 Consents and Approvals............................................ 36 Section 7.4 No Violation of Orders............................................ 36 Section 7.5 Registration Rights Agreement..................................... 36 Section 7.6 Buyer Closing Documents........................................... 36 Section 7.7 Legal Matters..................................................... 37 ARTICLE VIII. CONDITIONS TO OBLIGATIONS OF THE BUYER AND NEWCO..................... 37 Section 8.1 Representations and Warranties of the Seller and the Parent....... 37 Section 8.2 Performance of the Obligations of the Seller and the Parent....... 37 Section 8.3 Consents and Approvals............................................ 37 Section 8.4 No Violation of Orders............................................ 37 Section 8.5 Sellers Closing Documents......................................... 38 Section 8.6 Legal Matters..................................................... 38 ARTICLE IX. TERMINATION.......................................................... 38 Section 9.1 Conditions of Termination......................................... 38 Section 9.2 Effect of Termination............................................. 39 Section 9.3 Intentionally Omitted............................................. 39 ARTICLE X. MISCELLANEOUS........................................................ 39 Section 10.1 Successors and Assigns............................................ 39 Section 10.2 Governing Law; Jurisdiction....................................... 39 Section 10.3 Service of Process................................................ 39 Section 10.4 Expenses; Fees.................................................... 39 Section 10.5 Severability...................................................... 39 Section 10.6 Notices........................................................... 39 Section 10.7 Amendments; Waivers............................................... 40 Section 10.8 Public Announcements.............................................. 41
iii Section 10.9 Entire Agreement.................................................. 41 Section 10.10 Parties in Interest............................................... 41 Section 10.11 Scheduled Disclosures............................................. 41 Section 10.12 Specific Performance.............................................. 41 Section 10.13 Section and Paragraph Headings.................................... 41 Section 10.14 Counterparts...................................................... 41
Exhibits - -------- Exhibit A - Form of Amendment and Waiver Exhibit B - Option Letters Exhibit C - Company Financial Statements Exhibit D - Form of Registration Rights Agreement Exhibit E - Form of Amendment to Trademark License Agreement Exhibit F - Certificate of Designation, Number, Powers, Preferences and Relative, Participating, Optional and Other Special Rights and the Qualifications, Limitations, Restrictions, and Other Distinguishing Characteristics of the Series A Convertible Preferred Stock of National Auto Credit, Inc. iv PURCHASE AGREEMENT THIS PURCHASE AGREEMENT (this "Agreement") is made and entered into as of this 4/th/ day of April, 2000, by and among National Auto Credit, Inc., a Delaware corporation (the "Buyer"), National Cinemas, Inc. ("Newco"), FA, Inc. (d/b/a FA of Delaware), a Delaware corporation (the "Seller"), and Reading Entertainment, Inc., a Nevada corporation (the "Parent"). PRELIMINARY STATEMENT WHEREAS, Angelika Film Centers LLC, a Delaware limited liability company (the "Company"), owns and operates the Angelika Film Center, consisting of a multiplex cinema and cafe complex, located at 18 W. Houston Street, New York, New York, in the SOHO District of Manhattan; WHEREAS, the Seller owns an 83.34% membership interest in the Company which, together with the remaining 16.66% membership interest in the Company owned by Sutton Hill Associates, a California general partnership ("Sutton Hill"), constitutes all of the outstanding membership interests in the Company (the "Interests"); and WHEREAS, the Parent owns indirectly all of the issued and outstanding shares of capital stock of the Seller and Buyer owns all of the issued and outstanding capital stock of Newco; and WHEREAS, the Buyer desires to enter into the motion picture exhibition business in the United States and to purchase a 50% membership interest in the Company from the Seller (the "Purchased Interests"), and the Seller desires to sell the Purchased Interests to the Buyer, on the Closing Date (as hereinafter defined), upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual terms, conditions and other agreements set forth herein, the parties hereto hereby agree as follows: ARTICLE I. DEFINITIONS Section 1.1. Definitions. As used in this Agreement (including the recitals and Schedules hereto), the following terms shall have the following meanings (such meanings to be applicable equally to both singular and plural forms of the terms defined): "Affiliate" shall mean, as to any Person, any other Person which directly or indirectly controls, or is under common control with, or is controlled by, such Person. As used in this definition, "control" (including, with its correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of the power to direct or cause the direction of management, policies or investments (whether through ownership of securities or partnership or other ownership interests, by management or advisory contract or otherwise) of such Person. 1 "Agreement" shall have the meaning set forth in the preamble hereto. "Amended Trademark License Agreement" shall have the meaning set forth in Section 5.9 hereof. "Amendment and Waiver" means the Amendment and Waiver to the Limited Liability Company Agreement between the Seller and Sutton Hill to be entered into among the Seller and Sutton Hill on or prior to the Closing Date in the form attached hereto as Exhibit A. "Benefit Arrangement" shall have the meaning set forth in Section 3.20 hereof. "Buyer" shall have the meaning set forth in the preamble hereto. "Buyer Common Stock" means the Common Stock, par value $.05 per share, of the Buyer. "Buyer Series A Preferred Stock" means the Series A Convertible Preferred Stock, par value $.05 per share, of the Buyer, described on Exhibit F hereto. "Buyer Employee Plans" shall have the meaning set forth in Section 4.12 hereof. "Buyer ERISA Affiliate" shall have the meaning set forth in Section 4.12 hereof. "Buyer Events of Breach" shall have the meaning set forth in Section 6.3 hereof. "Buyer Indemnitees" shall have the meaning set forth in Section 6.1 hereof. "Buyer Leased Property" shall have the meaning set forth in Section 4.10(b) hereof. "Buyer Leases" shall have the meaning set forth in Section 4.10(b) hereof. "Buyer Losses" shall have the meaning set forth in Section 6.1 hereof. "Buyer Material Adverse Effect" shall mean a material adverse effect on the business, operations, assets, properties or condition (financial or otherwise) of the Buyer and its subsidiaries, taken as a whole. "Buyer Multiemployer Plan" shall have the meaning set forth in Section 4.12(b) hereof. "Buyer Owned Real Property" shall have the meaning set forth in Section 4.10(a) hereof. "Buyer Pension Plans" shall have the meaning set forth in Section 4.12 hereof. "Buyer Plans" shall have the meaning set forth in Section 4.12 hereof. "Buyer Financial Statements" shall have the meaning set forth in Section 4.7 hereof. 2 "CERCLA" shall have the meaning set forth in Section 3.22(b) hereof. "Certificate of Designation" shall mean that Certificate of Designation, Number, Powers, Preferences and Relative, Participating, Optional and Other Special Rights and the Qualifications, Limitations, Restrictions, and Other Distinguishing Characteristics of the Series A Convertible Preferred Stock of National Auto Credit, Inc., the form of which is attached hereto as Exhibit F. "Closing" shall have the meaning set forth in Section 2.2 hereof. "Closing Date" shall have the meaning set forth in Section 2.2 hereof. "Code" shall mean the Internal Revenue Code of 1986, as amended, and all regulations promulgated thereunder, as in effect from time to time. "Commission" means the Securities and Exchange Commission. "Company" shall have the meaning set forth in the preliminary statement hereof. "Company Balance Sheet" shall have the meaning set forth in Section 3.7 hereof. "Company Financial Statements" shall have the meaning set forth in Section 3.7 hereof. "Company Material Adverse Effect" shall mean a material adverse effect on the business, operations, assets, properties or condition (financial or otherwise) of the Company. "Company Permits" shall have the meaning set forth in Section 3.14 hereof. "Company Unaudited Financial Statements" shall have the meaning set forth in Section 3.7 hereof. "Contracts" shall have the meaning set forth in Section 3.16 hereof. "Employee Plans" shall have the meaning set forth in Section 3.20(a) hereof. "Employment and Labor Agreements" shall have the meaning set forth in Section 4.13(a) hereof. "Environmental Laws" shall have the meaning set forth in Section 3.22(a) hereof. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and all regulations promulgated thereunder, as in effect from time to time. "GAAP" shall mean United States generally accepted accounting principles as in effect on the date on which the document or calculation to which it refers relates, applied on a consistent basis throughout the periods covered thereby. 3 "Government" shall mean any agency, division, subdivision, audit group or procuring office of the Government of the United States, any state of the United States or any foreign government, including the employees or agents thereof. "Hazardous Materials" shall have the meaning set forth in Section 3.22(c) hereof. "Income Tax" or "Income Taxes" shall mean all Taxes based upon, measured by, or calculated with respect to (i) gross or net income or gross or net receipts or profits (including, but not limited to, any capital gains, minimum taxes and any Taxes on items of tax preference, but not including sales, use, goods and services, real or personal property transfer or other similar Taxes), (ii) multiple bases (including, but not limited to, corporate franchise, doing business or occupation Taxes) if one or more of the bases upon which such Tax may be based upon, measured by, or calculated with respect to, is described in clause (i) above or (iii) withholding taxes measured by, or calculated with respect to, any payments or distributions (other than wages). "Indebtedness" shall mean all loan and credit agreements, indentures, debentures, promissory notes and other evidences of indebtedness, and all guarantees related thereto, of the Company. "Intellectual Property" shall have the meaning set forth in Section 3.11 hereof. "Interests" shall have the meaning set forth in the Preliminary Statement hereof. "Leases" shall have the meaning set forth in Section 3.13(b) hereof. "Leased Property" shall have the meaning set forth in Section 3.13(b) hereof. "Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien (statutory or other) or conditional sale agreement. "Management Agreement" shall mean the Management Agreement, dated as of August 27, 1996, by and between the Company and City Cinemas Corporation, a New York corporation. "Newco" shall have the meaning set forth in the preamble hereto. "NLRB" shall have the meaning set forth in Section 4.13(b) hereof. "Option Letters" shall have the meaning set forth in Section 2.6 hereof. "Parent" shall have the meaning set forth in the preamble hereto. "PBGC" shall have the meaning set forth in Section 4.12(e) hereof. "Permits" shall mean licenses, permits, franchises, authorizations and approvals issued or granted by the Government, any state or local government, any foreign national or local 4 government, or any department, agency, board, commission, bureau or instrumentality of any of the foregoing. "Person" shall mean and include any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, any other unincorporated organization or Government. "Plans" shall have the meaning set forth in Section 3.20(a) hereof. "Proceeding" shall have the meaning set forth in Section 6.2 hereof. "Purchased Interests" shall have the meaning set forth in the Preliminary Statement hereof. "Reading Investment" shall have the meaning set forth in Section 5.9 hereof. "Registration Rights Agreement" means the Registration Rights Agreement to be entered into among the Buyer and the Seller on the Closing Date in the form attached hereto as Exhibit D. "SEC Reports" means the registration statements, reports and proxy statements filed with the Commission. "Securities Act" shall mean the Securities Act of 1933, as amended. "Seller Events of Breach" shall have the meaning set forth in Section 6.1 hereof. "Seller Indemnitees" shall have the meaning set forth in Section 6.3 hereof. "Seller Losses" shall have the meaning set forth in Section 6.3 hereof. "Seller" shall have the meaning set forth in the preamble hereto. "Share Consideration" shall have the meaning set forth in Section 2.3 hereof. "Sutton Hill" shall have the meaning set forth in the Preliminary Statement hereof. "Taxes" shall mean any and all federal, state, local, foreign and other taxes, levies, fees, imposts, duties and charges of whatever kind (including any interest, penalties or additions to the tax imposed in connection therewith or with respect thereto), whether or not imposed on the Company, including, without limitation, taxes imposed on, or measured by, income, franchise, profits or gross receipts, and also ad valorem, value added, sales, use, service, real or personal property, capital stock, license, payroll, withholding, employment, social security, workers' compensation, unemployment compensation, utility, severance, production, excise, stamp, occupation, premium, windfall profits, transfer and gains taxes and customs duties. 5 "Tax Returns" shall mean returns, reports, information statements and other documentation (including any additional or supporting material) filed or maintained, or required to be filed or maintained, in connection with the calculation, determination, assessment or collection of any Tax and shall include any amended returns required as a result of examination adjustments made by the Internal Revenue Service or other Tax authority. "Transaction Documents" shall mean this Agreement and the Exhibits and Schedules hereto, the Registration Rights Agreement, the Option Letters, the Amendment and Waiver, the Amended Trademark License Agreement and all other agreements, instruments, certificates and other documents to be entered into or delivered by any party in connection with the transactions contemplated to be consummated pursuant to any of the foregoing. ARTICLE II. PURCHASE AND SALE Section 2.1. Transfer of Interests. On the Closing Date and upon the terms and subject to the conditions set forth in this Agreement, the Seller shall sell, assign, transfer, convey and deliver the Purchased Interests, free and clear of any liens, claims, charges, security interests or other legal or equitable encumbrances, limitations or restrictions, to the Buyer, and the Buyer shall purchase and accept the Purchased Interests from the Seller. Section 2.2. Closing. The closing of the sale and purchase of the Purchased Interests (the "Closing") shall take place on the 5/th/ day of April, 2000, or at such other time and date as the parties hereto shall agree in writing (the "Closing Date"), at the offices of De Martino Finkelstein Rosen & Virga, 1818 N Street, N.W., Suite 400, Washington, D.C. 20036, or at such other place as the parties hereto shall agree. At the Closing, the Seller shall deliver to the Buyer or its designees instruments of transfer reasonably acceptable to the Buyer transferring the Purchased Interests, with all stamp or other taxes attributable to the transfer of such Purchased Interests paid or provided for as contemplated herein, and the Seller and the Parent shall execute and deliver the Transaction Documents to which each of them is a party. In full consideration and exchange for the Purchased Interests, the Buyer shall thereupon pay to the Seller the purchase price as provided in Section 2.3 hereof, and the Buyer and Newco shall execute and deliver the Transaction Documents to which each of them is a party. Section 2.3. Purchase Price. Upon the terms and subject to the conditions set forth in this Agreement, in reliance on the representations, warranties, covenants and agreements of the parties contained herein, the consideration for the sale and transfer of the Purchased Interests on the Closing Date shall consist of (i) 8,999,900 shares of Buyer Common Stock (the "Common Share Consideration") and (ii) 100 shares of Buyer Series A Preferred Stock (the "Preferred Share Consideration"). The Buyer shall deliver to the Seller the certificates representing the Common Share Consideration on the Closing Date, and the Buyer shall deliver to the Seller the certificates representing the Preferred Share Consideration promptly following the acceptance for filing under the Delaware General Corporation Law of the Certificate of Designation. In the event that the Certificate of Designation for the Buyer's Series A Preferred Stock has not been filed with the appropriate Delaware authorities at the Closing Date, the parties will nevertheless 6 close the transaction, based upon Buyer's covenant to file such Certificate of Designation and to issue the Buyer Series A Preferred Stock immediately thereafter. In such case, stock certificates representing such Buyer Series A Preferred Stock will be conditionally delivered to Seller at the Closing to be effective immediately upon the filing of the Certificate of Designation. The failure to file the Certificate of Designation within 48 hours of the Closing will give to Seller the right, at its election, either (a) to rescind the transactions provided for in this Agreement or (b) to surrender to Buyer the Buyer Common Stock received and its rights to receive the Buyer Series A Common Stock in exchange for cash in the amount of $13.5 million. Section 2.4. Certain Indemnitees. Reference is made to that certain Guarantee dated August 28, 1996 by Parent in favor of Cable Building Associates, pursuant to which Parent has guaranteed the obligations of the Company under the lease between Cable Building Associates and the Company (the "Cable Guarantee"). Effective upon the Closing, NAC agrees to indemnify Parent for 50% of any liability that Parent may incur under the Cable Guarantee other than any liability resulting solely from the breach by Parent of its obligations under the Cable Guarantee. Upon the request of Parent, NAC and Parent will cooperate and work in good faith to separately document such indemnity, with the intention that Parent and NAC be, in effect, each responsible for 50% of the obligations of the guarantor under such guarantee. Section 2.5. Newco. On the Closing Date, the Buyer shall transfer to Newco the Purchased Interests. Seller hereby consents to the transfer of the Purchased Interests to Newco. The parties acknowledge and agree that other than Newco's obligations pursuant to this Agreement, ownership and management of the Purchased Interests, ownership of any distributions received from the Company and obligations pursuant to the operating agreement with respect to the Company, Newco shall not incur any liabilities or obligations or conduct any business. Buyer hereby covenants and agrees that it will not take, and will cause Newco not to take, any action that would foreseeably cause Newco to be unable to satisfy its obligations hereunder or would foreseeably render such obligations unenforceable, including, without limitation, any action with respect to the sale or other disposition by Newco of any of its assets, the declaration of dividends by Newco, the repurchase, redemption or other acquisition by Newco of any of its stock, the incurrence of indebtedness by Newco, the creation of any liens or encumbrances by Newco on any of its assets, or the merger, consolidation, liquidation or dissolution of Newco. Section 2.6. Option Letters. The Buyer and the Parent acknowledge that they are executing and delivering simultaneously with this Agreement the Option Letters in the form set forth as Exhibits B-1 and B-2 hereto (the "Option Letters"). ARTICLE III. REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE PARENT The Seller and the Parent (jointly and severally) represent and warrant to the Buyer as follows: 7 Section 3.1. Organization. The Company is a limited liability company duly formed, validly existing and in good standing under the laws of the State of Delaware and has all requisite power and authority and all governmental licenses, authorizations, permits, consents and approvals to own its properties and assets and to conduct its businesses as now conducted and as proposed to be conducted, except where the failure to be so organized, existing and in good standing or to have such power and authority will not, in the aggregate, have a Company Material Adverse Effect. The Company is duly qualified to do business as a foreign company and is in good standing in every jurisdiction where the character of the properties owned or leased by it or the nature of the business conducted by it makes such qualification necessary, except where the failure to be so qualified would not have a Company Material Adverse Effect. The Company is qualified to do business only in the State of New York. Copies of the Limited Liability Company Agreement, the Management Agreement of the Company and other formation documents of the Company, with all amendments thereto to the date hereof, have been furnished by the Parent to the Buyer or its representatives, and such copies are accurate and complete as of the date hereof. Section 3.2. Capitalization; Title to the Interests. The authorized and outstanding capitalization of the Company is as set forth in Schedule 3.2. All ------------ of the Purchased Interests are issued and outstanding as of the date of this Agreement and are owned of record and beneficially by the Seller as set forth in Schedule 3.2. The Purchased Interests have been duly authorized and validly - ------------ issued and no personal liability attaches to the ownership thereof. The Purchased Interests represent 50% of the issued and outstanding Interests of the Company. Except for this Agreement and as set forth on Schedule 3.2, there are ------------ no outstanding options, warrants, agreements, conversion rights, preemptive rights or other rights to subscribe for, purchase or otherwise acquire the Interests, any unissued or treasury shares of capital stock or interests of the Company, any outstanding obligations of the Company to repurchase, redeem or otherwise acquire outstanding Interests or any securities convertible into or exchangeable for any shares of capital stock or interests of the Company. The Seller owns beneficially and of record and has all of the ownership interests in, all of the Purchased Interests, free and clear of any mortgage, pledge, hypothecation, rights of others, claim, security interest, charge, encumbrance, title defect, title retention agreement, voting trust agreement, interest, option, lien, charge or similar restriction or limitation (including any restriction on the right to vote, sell or otherwise dispose of the Purchased Interests). Section 3.3. Subsidiaries and Investments. The Company does not, directly or indirectly, own, of record or beneficially, any outstanding voting securities or other equity interests in or control any corporation, limited liability company, partnership, trust, joint venture or other entity. Section 3.4. Authorization and Validity of Agreement. Each of the Seller and the Parent has all requisite corporate or other authority to enter into the Transaction Documents to which it is a party and to carry out its obligations thereunder. The execution and delivery of the Transaction Documents to which the Seller and Parent are parties by the Seller and the Parent and the performance by the Seller and the Parent of their respective obligations thereunder have been duly authorized by all necessary action on the part of the Seller and the Parent, and no other 8 proceedings on the part of the Seller and the Parent are necessary to authorize such execution, delivery and performance. The Transaction Documents to which the Seller and Parent are parties have been duly and validly executed and delivered by each of the Seller and the Parent and constitute a valid and binding obligation of each of the Seller and the Parent, enforceable against each of them in accordance with their terms, except as may be limited by applicable bankruptcy, insolvency, moratorium or similar laws of general application relating to or affecting creditors' rights generally and except for the limitations imposed by general principles of equity. Section 3.5. No Conflict or Violation. Assuming the consents and approvals listed on Schedule 3.6 are obtained or waived, the execution, delivery ------------ and performance by each of the Seller and the Parent of the Transaction Documents to which it is a party (i) does not and will not violate or conflict with the Limited Liability Company Agreement, Operating Agreement, Management Agreement or any formation documents of the Company, (ii) does not and will not violate any provision of law, or any order, judgment or decree of any court or other governmental or regulatory authority binding on the Company, the Seller or the Parent except which individually or in the aggregate would not have a Company Material Adverse Effect, (iii) does not violate and will not result in a breach of or constitute (with due notice or lapse of time or both) a default under any contract, lease, loan agreement, mortgage, security agreement, trust indenture or other agreement or instrument to which the Seller, the Parent or the Company is a party or by which the Seller, the Parent or the Company is bound or to which any of their respective properties or assets is subject, except which in the aggregate would not have a Company Material Adverse Effect, (iv) will not result in the creation or imposition of any Lien upon any of the Purchased Interests, and (v) will not result in the cancellation, modification, revocation or suspension of any of the licenses, franchises, Permits, authorizations or approvals referred to on Schedule 3.14, except which in the aggregate would not have a Company Material Adverse Effect. Section 3.6. Consents and Approvals. Except as set forth on Schedule 3.6, ------------ no consent, waiver, authorization or approval of, or declaration or filing with, any governmental or regulatory authority, domestic or foreign, or other Person is required in connection with the execution and delivery of the Transaction Documents by the Seller and the Parent or the performance by the Seller and the Parent of their respective obligations thereunder. Section 3.7. Financial Statements. The Parent has heretofore furnished to the Buyer copies of (i) the unaudited consolidated balance sheet of the Company as of December 31, 1999 (the "Company Balance Sheet"), together with the related statements of operations, members' equity and cash flows for the twelve month period then ended and the notes thereto, if any (the "Company Unaudited Financial Statements"); and (ii) the unaudited consolidated balance sheet of the Company as of December 31, 1998, together with the related statement of operations, members' equity and cash flows for the twelve month period then ended and the notes thereto, if any and (iii) the audited consolidated balance sheet of the Company as of the fiscal years ended January 1, 1998 and December 31, 1996, together with the related statements of operations, members' equity and cash flows for the periods then ended and the notes thereto, if any, (the financial statements listed in clause (i) (ii) and (iii) above being hereinafter referred to as the "Company Financial Statements"). Except as set forth therein, the Company Financial 9 Statements: (i) were prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby; (ii) present fairly in all material respects the financial position, results of operations and cash flow of the Company as of such dates and for the periods then ended, except for customary audit adjustments which are not material to the financial position or results of operations of the Company; and (iii) are in accordance with the books of account and records of the Company. The Company Financial Statements are attached hereto as Exhibit C. Section 3.8. Absence of Certain Changes or Events. Except as contemplated by this Agreement, or as set forth in Schedule 3.8, since December 31, 1999, the ------------ business of the Company has been conducted in the ordinary course consistent with past practices and, other than any of the following actions taken in the ordinary course of business, there has not been any: (a) Event that has had or is reasonably likely to have a Company Material Adverse Effect, and no factor or condition exists and no event has occurred that would be likely to result in a Company Material Adverse Effect; (b) Destruction of, damage to, or loss of, any material asset of the Company (whether or not covered by insurance); (c) Change in accounting methods or practices (including, without limitation, any change in depreciation or amortization methods, policies, or rate) by the Company; (d) Declaration or making of, or agreement to declare or make, any payment of dividends or distribution of any asset of any kind whatsoever in respect to any of the Company's interests, nor any purchase, redemption, or other acquisition or agreement to purchase, redeem, or otherwise acquire, any of such outstanding interests; (e) Borrowing of, or agreement to borrow, any funds by the Company, and the Company has not incurred or become subject to any material obligation or liability (whether absolute, accrued, contingent or otherwise); (f) Payment of any obligation or liability (absolute or contingent), by the Company other than current liabilities reflected in or shown on the Company Financial Statements and current liabilities incurred in the ordinary course of business; (g) Mortgage, pledge, or subjection to lien, charge, or other encumbrance, of any of the assets, properties, or rights (tangible or intangible) of the Company, except for mechanics lien and Liens for taxes, in each case, not yet due and payable; (h) Sale, transfer or disposal of any of the assets, properties, or rights (tangible or intangible) of the Company; (i) Agreement entered into granting any preferential rights to purchase any of the assets, properties, or rights (tangible or intangible) of the Company (including management and control thereof), or requiring the consent of any party to the transfer and 10 assignment of any such assets, properties, or rights (including management and control thereof); (j) Amendment, modification, or termination of any contract, lease, license, promissory note, commitment, indenture, mortgage, deed of trust, collective bargaining agreement, employee benefit plan, or any other agreement, instrument, indebtedness, or obligation to which the Company is a party, or by which it or any of its assets or properties are bound, except those agreements, amendments, or terminations effected in the ordinary course of business consistent with past practices; (k) Capital expenditure by the Company exceeding $25,000, or additions to property, plant and equipment used in the operations of the Company other than ordinary repairs and maintenance; (l) Citation received by the Company from any governmental entity or agency for any violations of any act, law, rule, regulation, or code of any governmental entity or agency, which citations in the aggregate would be reasonably likely to result in a Company Material Adverse Effect; (m) Claim against the Company for damages or alleged damages for any actual or alleged negligence or other tort or breach of contract (whether or not fully covered by insurance) except as would not have a Company Material Adverse Effect; or (n) Agreement by the Seller, the Parent or the Company to do any of the things described in the preceding clauses. Section 3.9. Tax Matters. Except as otherwise disclosed in Schedule 3.9, ------------ (i) the Company has filed (or joined in the filing of) when due all Tax Returns required by applicable law to be filed with respect to the Company and all Taxes shown to be due on such Tax Returns have been paid; (ii) all such Tax Returns were true, correct and complete in all material respects as of the time of such filing; (iii) all Taxes relating to periods ending on or before the Closing Date, owed by the Company (whether or not shown on any Tax Return) at any time on or prior to the Closing Date, if required to have been paid, have been paid (except for Taxes which are being contested in good faith); (iv) any liability of the Company for Taxes not yet due and payable, or which are being contested in good faith, has been provided for on the financial statements of the Company in accordance with and to the extent required by GAAP; (v) there is no action, suit, proceeding, investigation, audit or claim now pending against, or with respect to, the Company in respect of any Tax or assessment, nor is any claim for additional Tax or assessment asserted by any Tax authority; (vi) no material claim has been made by any Tax authority in a jurisdiction where the Company does not currently file a Tax Return that it is or may be subject to Tax by such jurisdiction, nor to the Company's knowledge is any such assertion threatened; (vii) there is no outstanding request for any extension of time within which to pay any Taxes or file any Tax Returns; (viii) there has been no waiver or extension of any applicable statute of limitations for the assessment or collection of any Taxes of the Company; (ix) no property of the Company is "tax- exempt use property" within the meaning of Section 168(h) of the Code; (x) the Company is not a party to any lease made pursuant to former Section 11 168(f)(8) of the Internal Revenue Code of 1954; (xi) the Company is currently and for all periods since its formation has qualified as a "partnership" within the meaning of Section 7701(a)(2) of the Code; (xii) the Company has a valid election in effect under Section 754 of the Code or, at the request of Buyer, will make a timely election under Section 754 of the Code with respect to the Purchased Interests; (xiii) Seller is not a "foreign person" within the meaning of Section 1445 of the Code; (xiv) the Company is not a party to any agreement, whether written or unwritten, providing for the payment of Taxes, payment for Tax losses, entitlements to refunds or similar Tax matters; and (xiv) the Company has withheld and paid all material Taxes required to be withheld in connection with any amounts paid or owing to any employee, creditor, independent contractor or other third party. Section 3.10. Intentionally Omitted. Section 3.11. Intellectual Property. Schedule 3.11 sets forth a true and ------------- complete list of all domestic and foreign trademarks, trademark applications, patents, registered copyrights (except copyrighted software and theatrical films and film trailers licensed to the Company in its ordinary course of business) and patent applications owned by, registered in the name of or licensed to or from the Company as of the date hereof. The Company owns or possesses adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on its business as presently conducted. Except as set forth on Schedule 3.11, the Company has not received any notice of any ------------- infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, individually or in the aggregate, would result in a Company Material Adverse Effect. Section 3.12. Personal Property. Except as set forth in Schedule 3.12, ------------- the Company owns and has good and marketable title, free and clear of all title defects and objections, security interests, Liens, charges and encumbrances of any nature whatsoever to each item of personal property owned or leased by the Company and reflected on the Company Balance Sheet and all such property acquired or leased since the date thereof, except for sales and dispositions in the ordinary course of business since such date. The property owned, leased or used by the Company is sufficient and adequate to carry on its business as presently conducted and all items thereof are in good operating condition and repair. Except as set forth in Schedule 3.12, the Company holds good and ------------- transferable leaseholds under valid and enforceable leases in all of the personal property leased by it, and none of the property leased by the Company is subject to any sublease, license or other agreement granting to any person any right to use such personal property. Except as set forth in Schedule 3.12, ------------- the Company is not in breach of or default (and no event has occurred which, with due notice or lapse of time or both, may constitute such a lapse or default) of any provision of any of its personal property leases. Except as disclosed in Schedule 3.12, and except for the personal property of the Seller ------------- located at 950 Third Avenue, 12 New York, New York, the Company does not hold any personal property of the Seller or any of their respective Affiliates or any other Person. Section 3.13. Real Property. (a) The Company does not own any real property. (b) Schedule 3.13(b) contains a list of all leases and subleases, ---------------- together with any amendments thereto and any subordination, nondisturbance and attornment agreements (the "Leases"), with respect to all real property leased by the Company (the "Leased Property"). Each Lease is in full force and effect. The Company has performed all material obligations required to be performed by it to date under each of the Leases and neither the Company nor, to the best knowledge of the Parent or the Seller, any other party thereto is (except as set forth on Schedule 3.13(b)) in material default under any of the Leases (and, ---------------- except as set forth on Schedule 3.13(b), no event has occurred which, with due ---------------- notice or lapse of time or both, would constitute such a lapse or default). Except as set forth on Schedule 3.13(b), no amount due under the Leases remains ---------------- unpaid and no material controversy, claim, dispute or disagreement exists between the parties to any of the Leases. The Company has delivered to the Buyer a copy of each Lease, and all amendments thereto, listed in Schedule -------- 3.13(b), except to the extent otherwise noted therein. - ------- (c) To the knowledge of the Parent and the Seller, the covenants, conditions, restrictions, encroachments, encumbrances, easements, rights of way, licenses, grants, building or use restrictions, exceptions, reservations, limitations or other impediments affecting the Leased Property do not and will not, with respect to each Leased Property, materially impair the Company's ability to use any such Leased Property in the operation of the Company's business as presently conducted. There are no pending or, to the knowledge of the Company, threatened condemnation or similar proceedings affecting the Leased Property. The Company has access to public roads, streets or the like or valid easements over private streets, roads or other private property for such ingress to and egress from the Leased Property, except as would not materially impair the Company's ability to use any such Leased Property in the operation of the Company's business as presently conducted. (d) All brokerage commissions and other compensation and fees payable by reason of the Leases have been paid in full or are reflected in the Company Financial Statements except for such commissions and other compensation related to options or extensions in the Leases which are not yet exercised. (e) No notices of violations have been received with respect to the improvements on the Leased Property and the operations therein conducted, including without limitation, health, fire, environmental, safety, zoning and building laws, ordinances and administrative regulations, except as set forth on Schedule 3.13(e). - ---------------- (f) There are no outstanding requirements or recommendations by any insurance company which has issued to the Company a policy covering the Leased Property, or 13 by any board of fire underwriters or other body exercising similar functions, requiring or recommending any repairs or work to be done on such property. (g) All public utilities required for the operation of the Leased Property, as it is currently operated, and necessary for the conduct of the business of the Company, as it is presently conducted, are installed and operating, and all installation and connection charges are paid in full. (h) Except as set forth in Schedule 3.13(b), the Leased Property is ---------------- not subject to any lease, sublease, license or other agreement granting to any person any right to the use, occupancy or enjoyment of such property or any portion thereof. (i) The plumbing, electrical, heating, air conditioning, elevator, ventilating and all other mechanical or structural systems for which the Company is responsible under the Leases in the buildings or improvements are, to the knowledge of the Company, in good working order and condition, and the roof, basement and foundation walls of such buildings and improvements for which the Company is responsible under said Leases are, to the knowledge of the Company, in good condition and free of leaks and other material defects. All such mechanical and structural systems and such roofs, basement and foundation walls for which others are responsible under said Leases are, to the knowledge of the Company, in good working order and condition and free of leaks and other material defects. Section 3.14. Licenses, Permits and Governmental Approvals. Schedule 3.14 ------------- sets forth a true and complete list of all material Permits issued or granted to the Company (the "Company Permits"), and all pending applications therefor. Such list contains a summary description of each such item and, where applicable, specifies the date issued, granted or applied for, the expiration date and the current status thereof. Except as set forth in Schedule 3.14, each Company Permit has been duly obtained, is valid and in full force and effect, and is not subject to any pending or threatened administrative or judicial proceeding to revoke, cancel or declare such Company Permit invalid in any respect. The Company Permits have never been suspended, revoked or otherwise terminated, subject to any fine or penalty, or subject to judicial or administrative review, for any reason other than the renewal or expiration thereof nor has any application of any of the Company for any Company Permit ever been denied. The Company Permits are sufficient and adequate in all material respects to permit the continued lawful conduct of the Company's business in the manner now conducted, and none of the operations of the Company are being conducted in a manner that violates any of the terms or conditions under which any Company Permit was granted, except for such Company Permits the absence of which would not have a Company Material Adverse Effect or any non-compliance which will not have a Company Material Adverse Effect. Except as set forth in Schedule 3.14, no ------------- such Company Permit will in any way be affected by, or terminate or lapse by reason of, the transactions contemplated by the Transaction Documents. Section 3.15. Compliance with Law. Except as set forth in Schedule 3.15 or as would not reasonably be expected to have a Company Material Adverse Effect, the operations of the Company have been conducted in accordance with all applicable laws, regulations, orders and 14 other requirements of all courts and other governmental or regulatory authorities having jurisdiction over the Company and its assets, properties and operations. Except as set forth in Schedule 3.15 or as would not reasonably be ------------- expected to have a Company Material Adverse Effect, the Company has not received notice of any violation of any such law, regulation, order or other legal requirement binding on it, and the Company is not in default with respect to any order, writ, judgment, award, injunction or decree of any federal, state or local court or governmental or regulatory authority or arbitrator, domestic or foreign, applicable to it or any of its assets, properties or operations. The Company does not have knowledge of any proposed change in any such laws, rules or regulations (other than laws of general applicability) that would materially and adversely affect the transactions contemplated by the Transaction Documents or all or a material part of the Company's business. Section 3.16. Contracts. (a) Schedule 3.16 sets forth (subject to the dollar amount ------------- limitations of clause (i) below) a true and complete list of all material contracts, agreements, instruments, commitments and other arrangements to which the Company is a party or to which the Parent or the Seller is a party and which otherwise relate to or affect in a material way any of the Company's assets, properties or operations including, without limitation, all written or oral, express or implied, (i) contracts, agreements and commitments for the purchase or sale of products or services which involve a consideration in excess of $25,000; (ii) contracts, loan agreements, letters of credit, repurchase agreements, mortgages, security agreements, guarantees, pledge agreements, trust indentures, promissory notes and other documents or arrangements relating to the borrowing or lending of money or for lines of credit (including intercompany Indebtedness); (iii) personal property leases, agreements relating to intangible assets; (iv) agreements and other arrangements for the sale, pledge, transfer of, or placing of a Lien on any Interests of the Company, any material assets, property or rights or for the grant of any options or preferential rights to purchase any assets, property or rights; (v) documents granting any power of attorney with respect to the affairs of the Company; (vi) suretyship contracts, performance bonds, working capital maintenance or other forms of guaranty agreements; (vii) contracts or commitments limiting or restraining the Company from engaging or competing in any lines of business or with any person, firm, or corporation; (viii) partnership or joint venture agreements; (ix) shareholder or membership agreements or agreements relating to the issuance of any securities of the Company or the granting of any registrations rights with respect thereto; and (x) all amendments, modifications, extensions or renewals of any of the foregoing (the foregoing contracts, agreements and documents are hereinafter referred to collectively as the "Contracts" and individually as a "Contract"). (b) Each Contract is valid, binding and enforceable against the Company in accordance with its terms, and in full force and effect on the date hereof. The Seller, the Parent and the Company have performed all material obligations, including, but not limited to, the timely making of any rental or other payments, required to be performed by it under, and is not in default or in breach of in respect of, any Contract, and no event has occurred which, with due notice or lapse of time or both, would constitute such a default. To the Company's knowledge, no other party to any Contract is in default in respect thereof, and no event has 15 occurred which, with due notice or lapse of time or both, would constitute such a default. The Parent has delivered to the Buyer or its representatives true and complete originals or copies of all the Contracts. Section 3.17. Intentionally Omitted. Section 3.18. Litigation. Except as set forth in Schedule 3.18, there are ------------- no claims, actions, suits, proceedings, labor disputes or investigations pending or, to the knowledge of the Seller or the Parent, threatened, before any federal, state or local court or governmental or regulatory authority, domestic or foreign, or before any arbitrator of any nature, brought by or against any of the Seller, Parent or, to their knowledge after due inquiry, the Company or any of its respective officers, directors, employees, agents or Affiliates, except as would not have a Company Material Adverse Effect. Schedule 3.18 sets forth a ------------- list and a summary description of all such pending actions, suits, proceedings, disputes or investigations. None of the Seller, the Parent nor the Company is subject to any order, writ, judgment, award, injunction or decree which of any national, state or local court or governmental or regulatory authority or arbitrator, domestic or foreign, which would have a Company Material Adverse Effect, or that would interfere with the transactions contemplated by the Transaction Documents. Section 3.19. Insurance. Schedule 3.19 sets forth a complete and accurate ------------- list of the insurance policies of the Company as in effect on the date hereof, including in each case the applicable coverage limits, deductibles and the policy expiration dates. No notice of any termination or threatened termination of any of such policies has been received by the Company and such policies are in full force and effect. Section 3.20. Employee Plans. The Company has no employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974) covering former and current employees of the Company, or under which the Company has any obligation or liability. Schedule 3.20 lists all material plans, contracts, bonuses, ------------- commissions, profit-sharing, savings, stock options, insurance, deferred compensation, or other similar fringe or employee benefits covering former or current employees of the Company or under which the Company has any obligation or liability (each, a "Benefit Arrangement"), if any. The Benefit Arrangements are and have been administered in substantial compliance with their terms and with the requirements of applicable federal, state and local laws. Section 3.21. Labor Matters. The Company is in material compliance with all laws, if applicable, regarding employment, wages, hours, equal opportunity, collective bargaining and payment of social security and other taxes. The Company is not engaged in any unfair labor practice or discriminatory employment practice and no complaint of any such practice against the Company has been filed or, to the best of the Company's knowledge, threatened to be filed with or by the National Labor Relations Board, the Equal Employment Opportunity Commission or any other administrative agency, federal or state, that regulates labor or 16 employment practices. The Company is in compliance with all applicable federal, state and local laws and regulations regarding occupational safety and health standards. Section 3.22. Environmental Matters. Notwithstanding anything to the contrary contained in this Agreement and in addition to the other representations and warranties contained herein: (a) The Company and its operations are in material compliance with all applicable laws, regulations and other requirements of governmental or regulatory authorities or duties under the common law relating to Hazardous Materials (as defined below) or to the protection of health, safety or the environment (collectively, "Environmental Laws") and has obtained, maintained in effect and complied in all material respects with all licenses, permits and other authorizations or registrations required under Environmental Laws except where such noncompliance or such failure to obtain, maintain in effect or comply with such licenses, permits and other authorizations or registrations would not give rise to a Material Adverse Effect. (b) The Company has not performed any act which would reasonably be expected to give rise to, and has not otherwise incurred, liability to any person (governmental or not) under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. (S) 9601 et seq. ("CERCLA"), or any -- ---- similar state or municipal law, except in either case where such liability would not constitute a Material Adverse Effect. nor has the Company received notice of any such liability or any claim therefor or submitted notice pursuant to Section 103 of CERCLA to any governmental agency. (c) To the knowledge of James A. Wunderle or Robert F. Smerling, no asbestos, lead, petroleum, hazardous substance, hazardous waste, contaminant, pollutant or toxic substance (as such terms may be defined in any Environmental Law and collectively referred to herein as "Hazardous Materials") has been released, placed, dumped or otherwise come to be located on, at, beneath or near, and no storage tank containing any Hazardous Materials is located at, any of the real property and/or improvements currently or formerly owned or leased by the Company which could subject the Company to a claim or claims pursuant to Environmental Laws. Section 3.23. Brokers and Finders. None of the Seller, the Parent, the Company or any of their respective officers, directors or employees has employed any broker or finder and none of the Seller, the Parent, the Company or any of their respective officers, directors or employees has incurred any liability for any investment banking fees, brokerage fees, commissions or finders' fees in connection with the transactions contemplated by this Agreement. Section 3.24. Year 2000 Compliance. To the knowledge of the Seller and the Parent after due inquiry, the software used by the Company will be year 2000 compliant, which, for purposes of this Agreement, shall mean that the data outside the range 1900-1999 will be correctly processed. Section 3.25. Intentionally Omitted. 17 Section 3.26. Change in Ownership. Neither the purchase of the Purchase Interests by the Buyer nor the consummation of the transactions contemplated by the Transaction Documents are reasonably likely to result in any material adverse change in the business operations of the Company or in the loss of the benefits of any servicing relationship. Section 3.27. Intentionally Omitted. Section 3.28. Absence of Undisclosed Liabilities. Except as set forth in Schedule 3.28, the Company has no indebtedness or liability, absolute or - ------------- contingent, direct or indirect, which is not shown or provided for on the balance sheets of the Company included in the Company Financial Statements other than liabilities incurred or accrued in the ordinary course of business (including liens of current taxes and assessments not in default) since December 31, 1999 and other than liabilities which GAAP does not require to be shown or provided for and there is no existing condition, situation or set of circumstances which would reasonably be expected to result in such a liability. Except as shown in such balance sheets or in the Company Financial Statements, the Company is not, directly or indirectly, liable upon or with respect to (by discount, repurchase agreements or otherwise), or obligated in any other way to provide funds in respect of, or to guarantee or assume, any debt, obligation or dividend of any person. Section 3.29. Purchase for Investment. Each of the Seller and the Parent is an accredited investor as defined under Rule 501(a) of the Securities Act. The Share Consideration will be acquired for investment for the Seller's own account and not with a view to the resale or distribution of any part thereof, except in compliance with the registration provisions of the Securities Act or an exemption therefrom. Section 3.30. Restricted Securities. Each of the Seller and the Parent understands that the Share Consideration is characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Buyer in a transaction not involving a public offering and that under such laws and applicable regulations the Share Consideration may be resold without registration under the Securities Act only in certain limited circumstances. Each of the Seller and the Parent further agrees that each certificate representing the Share Consideration shall be stamped or otherwise imprinted with a legend substantially in the following form: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS SUCH SECURITIES HAVE BEEN REGISTERED UNDER THAT ACT OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE." A certificate shall not bear such legend if the Seller shall have delivered to the Buyer an opinion of counsel reasonably satisfactory to the Buyer to the effect that the securities being sold may be publicly sold without registration under the Securities Act. The foregoing shall not be deemed to affect the obligations of the Buyer under the Registration Rights Agreement. 18 Section 3.31. Due Diligence. Each of the Seller and the Parent has sufficient knowledge and experience in investing in companies similar to the Buyer and is capable of evaluating the merits and risks of its investment in the Buyer as contemplated by this Agreement and is able to bear the economic risk of such investment for an indefinite period of time. Each of the Seller and the Parent has been given access to full and complete information regarding the Buyer and has utilized such access to its satisfaction for the purpose of obtaining information each of the Seller and the Parent desires or deems relevant to its decision to acquire the Share Consideration. Each of the Seller and the Parent has had the opportunity to ask questions of and receive answers from management and representatives of the Buyer, including the Buyer's accountants, to discuss the Buyer's business, management and financial affairs and to obtain any additional information each of the Seller and the Parent desires or deems relevant. Each of the Seller and the Parent has obtained, to the extent it has deemed necessary, professional advice with respect to the risks inherent in the acquisition of the Share Consideration, including, without limitation, the matters relating to the Buyer's business and financial condition set forth in the Buyer's internal reports and public filings. Section 3.32. Survival. Except where a representation or warranty expressly refers to another date, in which case such representation or warranty need be true and correct only as of such date, each of the representations and warranties set forth in this Section 3 shall be deemed represented and made by the Seller and the Parent at the Closing as if made at such time and shall survive the Closing for a period terminating on the later of (a) the date 6 months after the Closing Date, and (b) with respect to claims asserted pursuant to Section 6.1 of this Agreement before the expiration of the applicable representation or warranty, on the date such claim is finally liquidated or otherwise resolved; provided, however, that (x) the representations and -------- ------- warranties in Sections 3.22 hereof shall survive until the third anniversary of the Closing Date and (y) the representations and warranties in Sections 3.2 and 3.9 hereof shall survive until the applicable statute of limitations for third party or governmental actions has expired. ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE BUYER AND NEWCO The Buyer and Newco represent and warrant (jointly and severally) to the Seller as follows: Section 4.1. Corporate Organization. The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all requisite corporate power and authority to own its properties and assets and to conduct its businesses as now conducted, except where the failure to be so organized, existing and in good standing or to have such power or authority will not, in the aggregate, have a Buyer Material Adverse Effect. The Buyer is duly qualified to do business as a foreign corporation and is in good standing in every jurisdiction in which the character of the properties owned or leased by it or the nature of the business conducted by it makes such qualification necessary, except where the failure to be so qualified would not have a Buyer Material Adverse Effect. Newco is a corporation duly organized, validly existing and in good standing under the laws of the State of 19 Delaware, and has all requisite corporate power and authority to own its properties and assets and to conduct its businesses as now conducted. Section 4.2. Subsidiaries and Investments. Except as set forth in Schedule 4.2, the Buyer does not, directly or indirectly, own, of record or - ------------ beneficially, any outstanding voting securities or other equity interests in or control any corporation, limited liability company, partnership, trust, joint venture or other entity. Section 4.3. Authorization and Validity of Agreement. Each of the Buyer and Newco has all requisite power and authority to enter into the Transaction Documents to which it is a party and to carry out its obligations thereunder. The execution and delivery of the Transaction Documents to which Buyer and Newco are parties and the performance of the Buyer's and Newco's obligations thereunder have been duly authorized by all necessary corporate action by the Buyer and Newco, respectively, and no other proceedings on the part of the Buyer or Newco are necessary to authorize such execution, delivery and performance. The Transaction Documents to which the Buyer and Newco are parties have been duly executed by the Buyer and Newco, respectively, and constitute a valid and binding obligation of each of them, enforceable against each of them in accordance with their terms, except as may be limited by applicable bankruptcy, insolvency, moratorium or similar laws of general application relating to or affecting creditors' rights generally and except for the limitations imposed by general principles of equity. The Buyer has authorized the issuance and delivery of the Share Consideration in accordance with this Agreement. For purposes of Section 203 of the General Corporation Law of the State of Delaware, the Board of Directors of the Buyer, prior to the execution and delivery of this Agreement by the Buyer, and as a condition to the parties' reaching agreement hereunder, has approved the transactions that are the subject hereof as contemplated by subsection (a)(1) of said Section 203. Section 4.4. Capitalization. The authorized and outstanding capital stock of the Buyer is as set forth in Schedule 4.4. Upon issuance, sale and delivery ------------ as contemplated by this Agreement, the shares which constitute the Share Consideration will be duly authorized, validly issued, fully paid and non- assessable shares of the Buyer, free of all preemptive or similar rights, and entitled to the rights therein described. Except as set forth in Schedule 4.4, ------------ there are no outstanding options, warrants, agreements, conversion rights, preemptive or similar rights to subscribe for or purchase shares of capital stock of the Buyer. The fair market value of the Buyer's net assets (calculated net of all liabilities whether or not currently liquidated and whether currently known or unknown, including, without limitation, all contingent liabilities which may be asserted against the Buyer by a Person with respect to the actions of the Buyer, its officers and/or directors during the time that Sam Frankino was an officer and/or director of the Buyer, all current litigation claims, and any liabilities, if any, which may result from the current audit of the Buyer by the Internal Revenue Service) is not less than $1.65 per share. Notwithstanding the provisions of Section 4.18 to the contrary, the representation and warranty set forth in the penultimate sentence of this Section 4.4 shall be deemed represented and made by the Buyer at the Closing as if made at such time and shall survive the Closing for a period terminating on the earlier of (a) the date that the Buyer files its Annual Report on Form 10-K for the fiscal year ended January 31, 2001 with the Securities and Exchange Commission; or (b) April 1, 2001. 20 Section 4.5. No Conflict or Violation. (a) Assuming the consents and approvals listed on Schedule 4.6 are obtained or waived, the execution, delivery and performance by the Buyer and Newco of the Transaction Documents to which it is a party does not and will not violate or conflict with any provision of the Certificate of Incorporation or the By-laws of the Buyer or Newco and does not and will not violate any provision of law, or any order, judgment or decree of any court or other governmental or regulatory authority, nor violate nor will result in a breach of or constitute (with due notice or lapse of time or both) a default under any contract, lease, loan agreement, mortgage, security agreement, trust indenture or other agreement or instrument to which the Buyer or Newco is a party or by which either of them is bound or to which any of the Buyer's or Newco's properties or assets is subject, except for such violations, breaches or defaults which, in the aggregate, will not have a Buyer Material Adverse Effect. (b) Neither the transfer to Newco of the Purchased Interests and cash as contemplated in Section 2.5 hereof, nor the payment by Newco to the Seller of any amount required to be paid pursuant to Section 2.4(a) or (b) hereof, will render the Buyer or Newco insolvent or be made with the intention to hinder, delay or defraud creditors of either the Buyer or Newco, nor will any such transfer or payment contravene any requirement under Delaware or other applicable law that such payment be made only out of legally available funds. Section 4.6. Consents and Approvals. Except as set forth in Schedule 4.6, ------------ no consent, waiver, authorization or approval of, or declaration or filing with, any governmental or regulatory authority, domestic or foreign, or other Person is required in connection with the execution and delivery of the Transaction Documents by the Buyer or Newco or the performance by the Buyer or Newco of its obligations thereunder. Section 4.7. Financial Statements. The Buyer has heretofore furnished to the Seller copies of the audited consolidated balance sheets of the Company as of: (i) January 31, 1999, 1998 and 1997, together with the related statements of income, stockholders' equity and cash flows for the twelve month period then ended and the notes thereto, if any, and (ii) the unaudited consolidated balance sheet of the Company as of October 31, 1999, together with the related statements of income, stockholders' equity and cash flows for the nine month period then ended and the notes thereto, if any, (the "Buyer Financial Statements"). Except as set forth therein, the Buyer Financial Statements, including the notes thereto: (i) were prepared in accordance with GAAP; (ii) present fairly in all material respects the consolidated financial position, results of operations and changes in cash flows of the Buyer as of such dates and for the periods then ended; and (iii) are in accordance with the books of account and records of the Buyer. Section 4.8. Absence of Certain Changes or Events. (a) Except as contemplated by this Agreement or as set forth in Schedule 4.8, since October 31, 1999, there has not been: ------------ 21 (i) Any material adverse change in the business, operations, properties, assets, condition (financial or other) or prospects of the Buyer, or any event that has had or is reasonably likely to have a Buyer Material Adverse Effect, and no factor or condition exists and no event has occurred that would be likely to result in any such change; (ii) Any material loss, damage, destruction or other casualty to its business (whether or not insurance awards have been received or guaranteed); or (iii) Any material change in any method of accounting or accounting practice of the Buyer. (b) Except as contemplated by the Transaction Documents or as set forth in Schedule 4.8, since October 31, 1999, the Buyer has not: ------------ (i) Incurred any material obligation or liability (whether absolute, accrued, contingent or otherwise) relating to the operations of Buyer except in the ordinary course of business consistent with past practice; (ii) Sold or transferred any assets material to its business or canceled any debts or claims or waived any material rights relating to the operations of its business, except in the ordinary course of business consistent with past practice; (iii) Defaulted on any of its material obligations; (iv) Entered into any material transaction, except in the ordinary course of business consistent with past practice; (v) Made any capital expenditure in excess of $25,000, or additions to property, plant and equipment used in the operations of its business other than ordinary repairs and maintenance; (vi) Entered into any agreement or made any commitment to do any of the foregoing. Section 4.9. Tax Matters. Except as otherwise disclosed in Schedule 4.9, ------------ (i) the Buyer has filed (or joined in the filing of) when due all Tax Returns required by applicable law to be filed with respect to the Buyer and all Taxes shown to be due on such Tax Returns have been paid; (ii) all such Tax Returns were true, correct and complete in all material respects as of the time of such filing; (iii) all Taxes relating to periods ending on or before the Closing Date owed by the Buyer (whether or not shown on any Tax Return) or to which the Buyer may be liable under Treasury Regulations (S) 1.1502-6 (or analogous state or foreign provisions) by virtue of having been members of any "affiliated group" (or other group filing on a combined or unitary basis) at any time on or prior to the Closing Date, if required to have been paid, have been paid (except for Taxes which are being contested in good faith); (iv) any liability of the Buyer for Taxes not yet due and payable, or which are being contested in good faith, has been provided for 22 on the financial statements of the Buyer in accordance with and to the extent required by GAAP; (v) there is no action, suit, proceeding, investigation, audit or claim now pending against, or with respect to, the Buyer in respect of any Tax or assessment, nor is any claim for additional Tax or assessment asserted by any Tax authority; (vi) no material claim has been made by any Tax authority in a jurisdiction where the Buyer does not currently file a Tax Return that it is or may be subject to Tax by such jurisdiction, nor to the Buyer's knowledge is any such assertion threatened; (vii) there is no outstanding request for any extension of time within which to pay any Taxes or file any Tax Returns; (viii) there has been no waiver or extension of any applicable statute of limitations for the assessment or collection of any Taxes of the Buyer; (ix) no property of the Buyer is "tax-exempt use property" within the meaning of Section 168(h) of the Code; (x) the Buyer is not a party to any lease made pursuant to former Section 168(f)(8) of the Internal Revenue Code of 1954; (xi) the Buyer has not filed any agreement or consent under Section 341(f) of the Code; (xii) the Buyer is not a "foreign person" within the meaning of Section 1445 of the Code; (xiii) the Buyer is not a party to any agreement, whether written or unwritten, providing for the payment of Taxes, payment for Tax losses, entitlements to refunds or similar Tax matters; and (xiv) the Buyer has withheld and paid all material Taxes required to be withheld in connection with any amounts paid or owing to any employee, creditor, independent contractor or other third party. Section 4.10. Real Property. (a) Schedule 4.10(a) lists all real property owned by the Buyer or ---------------- its subsidiaries (the "Buyer Owned Real Property"). Except as disclosed on Schedule 4.10(a), the Buyer or its subsidiaries have good and marketable title - ---------------- in fee simple to the Buyer Owned Real Property free and clear of any Liens. All buildings, plants and structures included on the Buyer Owned Real Property lie wholly within the boundaries of the Buyer Owned Real Property and do not encroach upon the property of, or otherwise conflict with the property rights of, any other Person. (b) Schedule 4.10(b) contains a list of all leases and subleases, ---------------- together with any amendments thereto and any subordination, nondisturbance and attornment agreements (the "Buyer Leases"), with respect to all real property leased by the Buyer or its subsidiaries (the "Buyer Leased Property"). Each Lease is in full force and effect. Each of the Buyer or its subsidiaries has performed all material obligations required to be performed by it to date under each of the Leases and neither the Buyer or its subsidiaries nor any other party thereto is, except as set forth on Schedule 4.10(b), in material default under ---------------- any of the Leases (and, except as set forth on Schedule 4.10(b), no event has ---------------- occurred which, with due notice or lapse of time or both, would constitute such a lapse or default). No amount due under the Leases remains unpaid and no material controversy, claim, dispute or disagreement exists between the parties to any of the Leases. The Buyer has delivered to the Seller a copy of each Lease, and all amendments thereto, listed in Schedule 4.10(b), except to the ---------------- extent otherwise noted therein. (c) The covenants, conditions, restrictions, encroachments, encumbrances, easements, rights of way, licenses, grants, building or use restrictions, exceptions, 23 reservations, limitations or other impediments affecting the Buyer Owned Real Property or Buyer Leased Property do not and will not, with respect to each Buyer Owned Real Property or Buyer Leased Property, materially impair the Buyer's or its subsidiaries' ability to use any such Buyer Owned Real Property or Buyer Leased Property in the operation of the Buyer's and its subsidiaries' business as presently conducted. There are no pending or, to the knowledge of the Buyer, threatened condemnation or similar proceedings affecting the Buyer Owned Real Property. There are no pending or, to the knowledge of the Buyer, threatened condemnation or similar proceedings affecting the Buyer Leased Property. The Buyer and its subsidiaries have access to public roads, streets or the like or valid easements over private streets, roads or other private property for such ingress to and egress from the Buyer Owned Real Property and the Buyer Leased Property, except as would not materially impair the Buyer's and its subsidiaries' ability to use any such Buyer Owned Real Property or Buyer Leased Property in the operation of the Buyer's and its subsidiaries' business as presently conducted. (d) All brokerage commissions and other compensation and fees payable by reason of the Buyer Leases or the Buyer Owned Real Property have been paid in full or are reflected in the Buyer Unaudited Financial Statements except for such commissions and other compensation related to options or extensions in the Buyer Leases which are not yet exercised. (e) No notices of violations have been received with respect to the improvements on the Buyer Owned Real Property and Buyer Leased Property and the operations therein conducted, including without limitation, health, fire, environmental, safety, zoning and building laws, ordinances and administrative regulations, except as set forth on Schedule 4.10(e). ---------------- (f) There are no outstanding requirements or recommendations by any insurance company which has issued to the Buyer or its subsidiaries a policy covering the Buyer Owned Real Property or Buyer Leased Property, or by any board of fire underwriters or other body exercising similar functions, requiring or recommending any repairs or work to be done on such property. (g) All public utilities required for the operation of the Buyer Owned Real Property and the Buyer Leased Property, as they are currently operated, and necessary for the conduct of the business of the Buyer and its subsidiaries, as it is presently conducted, are installed and operating, and all installation and connection charges are paid in full. (h) Except as set forth in Schedule 4.10(b), the Buyer Owned Real ---------------- Property and the Buyer Leased Property are not subject to any lease, sublease, license or other agreement granting to any person any right to the use, occupancy or enjoyment of such property or any portion thereof. (i) The plumbing, electrical, heating, air conditioning, elevator, ventilating and all other mechanical or structural systems for which the Buyer or its subsidiaries are responsible under the Buyer Leases in the buildings or improvements are, to the knowledge of the Buyer, in good working order and condition, and the roof, basement and foundation walls of such buildings and improvements for which the Buyer or its subsidiaries are responsible 24 under said Buyer Leases, to the knowledge of the Buyer, are in good condition and free of leaks and other material defects. All such mechanical and structural systems and such roofs, basement and foundation walls for which others are responsible under said Buyer Leases are, to the knowledge of the Buyer, in good working order and condition and free of leaks and other material defects. Section 4.11. Litigation. Except as set forth in the Buyer's public filings or in Schedule 4.11, there are no claims, actions, suits, proceedings, ------------- labor disputes or investigations pending or, to the knowledge of Buyer, threatened before any federal, state or local court or governmental or regulatory authority, domestic or foreign, or before any arbitrator of any nature, brought by or against Buyer, any of its officers, directors, employees, agents or Affiliates, nor is any basis known to Buyer or its Affiliates for any such action, suit, proceeding or investigation which would reasonably be expected to have a Buyer Material Adverse Effect. The Buyer is not subject to any order, writ, judgment, award, injunction or decree of any national, state or local court or governmental or regulatory authority or arbitrator, domestic or foreign, which would have a Buyer Material Adverse Effect, or that would or might interfere with the transactions contemplated by the Transaction Documents. Section 4.12. Employee Plans. (a) Schedule 4.12 sets forth: (i) all "employee benefit plans," as ------------- defined in Section 3(3) of ERISA, and all other employee benefit arrangements or payroll practices, including, without limitation, any employment or consulting agreements, any such arrangements or payroll practices providing severance pay, sick leave, vacation pay, salary continuation for disability, retirement benefits, deferred compensation, bonus pay, incentive pay, stock options, hospitalization insurance, medical insurance, life insurance, scholarships or tuition reimbursements, maintained by the Buyer or its subsidiaries or to which the Buyer or its subsidiaries are obligated to contribute thereunder for current or former employees, consultants and directors of the Buyer or its subsidiaries (the "Buyer Plans"), and (ii) all "employee pension plans", as defined in Section 3(2) of ERISA, maintained by the Buyer or its subsidiaries or any trade or business (whether or not incorporated) which is or has ever been under control or treated as a single employer with the Buyer or its subsidiaries under Section 414(b), (c), (m), or (o) of the Code ("Buyer ERISA Affiliate") or to which the Buyer or its subsidiaries or any Buyer ERISA Affiliate has contributed or has ever been obligated to contribute thereunder (the "Buyer Pension Plans") (the Buyer Plans and Buyer Pension Plans are hereafter collectively referred to as the "Buyer Employee Plans"). (b) None of the Buyer Employee Plans is a multiemployer plan, as defined in Section 3(37) of ERISA ("Buyer Multiemployer Plan"), and neither the Buyer or its subsidiaries nor any Buyer ERISA Affiliate has withdrawn in a complete or partial withdrawal from any Buyer Multiemployer Plan, nor has any of them incurred any liability due to the termination or reorganization of a Buyer Multiemployer Plan. (c) Each Buyer Employee Plan that is intended to qualify under Section 401 of the Code has received a determination letter from the Internal Revenue Service to the effect 25 that it meets the requirements of Code Section 401(a) and the trust maintained pursuant thereto is exempt from federal income taxation under Section 501 of the Code, and nothing has occurred with respect to the operation of any such Buyer Employee Plan that could cause the loss of such qualification or exemption or the imposition of any liability, penalty or tax under ERISA or the Code. (d) All contributions (including all employer contributions and employee salary reduction contributions) required to have been made under any of the Buyer Employee Plans or by law (without regard to any waivers granted under Section 412 of the Code) to any funds or trusts established thereunder or in connection therewith have been made by the due date thereof (including any valid extension), and all contributions for any period ending on or before the Closing Date which are not yet due will have been paid or accrued on or prior to the Closing Date. No accumulated funding deficiencies exist in any of the Buyer Employee Plans subject to Section 412 of the Code. (e) There is no "amount of unfunded benefit liabilities" within the meaning of Section 4001(a)(18) of ERISA in any of the respective Buyer Pension Plans which are subject to Title IV of ERISA. Each of the respective Buyer Pension Plans are fully funded in accordance with the actuarial assumptions used by the Pension Benefit Guaranty Corporation (the "PBGC") to determine the level of funding required in the event of the termination of the Buyer Pension Plans. (f) None of the Buyer or its subsidiaries or any Buyer ERISA Affiliate has terminated any Buyer Pension Plan subject to Title IV, or incurred any outstanding liability under Section 4062 of ERISA to the PBGC or to a trustee appointed under Section 4042 of ERISA. All premiums due the PBGC with respect to the Buyer Pension Plans have been paid. None of the Buyer or its subsidiaries or any Buyer ERISA Affiliate has engaged in any transaction described in Section 4069 of ERISA. (g) There has been no "reportable event" within the meaning of Section 4043 of ERISA with respect to any Buyer Pension Plans subject to Title IV of ERISA which would require the giving of notice or any other event requiring disclosure under Section 4041(c)(3)(C) or 4063(a) of ERISA. (h) There has been no material violation of ERISA or the Code with respect to the filing of applicable reports, documents and notices regarding the Buyer Employee Plans with the Secretary of Labor or the Secretary of the Treasury or the furnishing of required reports, documents or notices to the participants or beneficiaries of the Buyer Employee Plans. (i) True, correct and complete copies of the following documents, with respect to each of the Buyer Employee Plans, have been delivered to the Seller by the Buyer: (i) all plans and related trust documents, and amendments thereto; (ii) the most recent Forms 5500; (iii) the last IRS determination letter; (iv) summary plan descriptions; (v) the most recent actuarial report relating to the Buyer Employee Plans; and (vi) written descriptions of all non- written agreements relating to the Buyer Employee Plans. 26 (j) There are no pending actions, claims or lawsuits which have been asserted or instituted against the Buyer Employee Plans, the assets of any of the trusts under such plans or the plan sponsor or the plan administrator, or against any fiduciary of the Buyer Employee Plans with respect to the operation of such plans (other than routine benefit claims), nor do the Buyer or Newco have knowledge of facts which could form the basis for any such claim or lawsuit. (k) All amendments and actions required to bring the Buyer Employee Plans into conformity in all material respects with all of the applicable provisions of ERISA, the Code and other applicable laws have been made or taken except to the extent that such amendments or actions are not required by law to be made or taken until a date after the Closing Date. (l) Any bonding required with respect to the Buyer Employee Plans in accordance with applicable provisions of ERISA has been obtained and is in full force and effect. (m) The Buyer Employee Plans have been maintained, in all material respects, in accordance with their terms and with all provisions of ERISA and the Code (including rules and regulations thereunder) and other applicable federal and state laws and regulations, and none of the Buyer or its subsidiaries or any "party in interest" or "disqualified Person" with respect to the Buyer Employee Plans has engaged in a "prohibited transaction" within the meaning of Section 406 of ERISA or 4975 of the Code. No fiduciary has any liability for breach of fiduciary duty or any other failure to act or comply in connection with the administration or investment of the assets of any Buyer Employee Plan. (n) None of the Buyer Employee Plans provide retiree life or retiree health benefits except as may be required under Section 4980B of the Code or Section 601 of ERISA and at the expense of the participant or the participant's beneficiary. The Buyer and its subsidiaries and the Buyer ERISA Affiliates have at all times complied with the notice and health care continuation requirements of Section 4980B of the Code and Sections 601 through 608 of ERISA. (o) Except as disclosed on Schedule 4.12, no stock or other security ------------- issued by the Seller, the Buyer or its subsidiaries or any of their Affiliates forms or has formed part of the assets of any Buyer Employee Plan. 27 Section 4.13. Labor Matters. (a) Except as set forth in Schedule 4.13: (i) none of the Buyer or ------------- its subsidiaries is a party to any outstanding employment, consulting or management agreements or contracts with officers or employees that provide for the payment of any bonus or commission; (ii) none of the Buyer or its subsidiaries is party to any collective bargaining agreement or other labor union contract applicable to persons employed by the Buyer or its subsidiaries nor do the Seller, the Buyer or its subsidiaries know of any activities or proceedings of any labor union to organize any such employees. The Buyer has furnished to the Seller complete and correct copies of all such agreements ("Employment and Labor Agreements"). The Buyer and its subsidiaries have not breached or otherwise failed to comply with any provisions of any Employment and Labor Agreement, and are in full compliance with all terms of any collective bargaining agreement and there are no grievances outstanding thereunder. (b) The Buyer and its subsidiaries are in compliance with all applicable laws relating to employment and employment practices, wages, hours, and terms and conditions of employment and are not engaged in any unfair labor practice; (ii) there is no unfair labor practice charge or complaint pending before the National Labor Relations Board ("NLRB"); (iii) there is no labor strike, material slowdown or material work stoppage or lockout actually pending or threatened against or affecting the Buyer or its subsidiaries, and the Buyer and its subsidiaries have not at any time experienced any strike, material slow down or material work stoppage, lockout or other collective labor action by or with respect to employees of the Buyer or its subsidiaries; (iv) there is no representation claim or petition pending before the NLRB or any similar foreign agency and no question concerning representation exists relating to the employees of the Buyer or its subsidiaries; (v) there are no charges with respect to or relating to the Buyer or its subsidiaries pending before the Equal Employment Opportunity Commission or any state, local or foreign agency responsible for the prevention of unlawful employment practices; and (vi) the Buyer and its subsidiaries have no formal notice from any federal, state, local or foreign agency responsible for the enforcement of labor or employment laws of an intention to conduct an investigation of the Buyer or its subsidiaries and no such investigation is in progress. Section 4.14. Environmental Matters. Notwithstanding anything to the contrary contained in this Agreement and in addition to the other representations and warranties contained herein: (a) The Buyer and its subsidiaries and their operations are in compliance with all applicable Environmental Laws and have obtained, maintained in effect and complied with all licenses, permits and other authorizations or registrations required under Environmental Laws. (b) The Buyer and its subsidiaries have not performed or suffered any act which could give rise to, or have otherwise incurred, liability to any person (governmental or not) under CERCLA or any similar state or municipal law, nor has the Buyer or its 28 subsidiaries received notice of any such liability or any claim therefor or submitted notice pursuant to Section 103 of CERCLA to any governmental agency. (c) No Hazardous Materials have been released, placed, dumped or otherwise come to be located on, at, beneath or near, and no storage tank containing any Hazardous Materials is located at, any of the real property and/or improvements currently or, to the knowledge of the Buyer, formerly owned or leased by the Company which could subject the Buyer to a claim or claims pursuant to Environmental Laws. Section 4.15. Purchase for Investment. Each of the Buyer and Newco is an accredited investor as defined under Rule 501(a) of the Securities Act. The Purchased Interest will be acquired for investment for Buyer's own account and not with a view to the resale or distribution of any part thereof, except in compliance with the registration provisions of the Securities Act or an exemption therefrom. Section 4.16. Brokers and Finders. None of the Buyer or its subsidiaries or any of their respective officers, directors or employees has employed any broker or finder, except for Slusser Associates, Inc., and none of the Buyer or its subsidiaries or any of their respective officers, directors or employees has incurred any liability for any investment banking fees, brokerage fees, commissions or finders' fees in connection with the transactions contemplated by this Agreement other than fees payable to Slusser Associates, Inc. Section 4.17. Due Diligence. Each of the Buyer and Newco has sufficient knowledge and experience in investing in companies similar to the Company and is capable of evaluating the merits and risks of its investment in the Company as contemplated by this Agreement and is able to bear the economic risk of such investment for an indefinite period of time. Each of the Buyer and Newco has been given access to full and complete information regarding the Company and has utilized such access to its satisfaction for the purpose of obtaining information each of the Buyer and Newco desires or deems relevant to its decision to acquire the Purchased Interests. Each of the Buyer and Newco has had the opportunity to ask questions of and receive answers from management and representatives of the Company to discuss the Company's business, management and financial affairs and to obtain any additional information each of the Buyer and Newco desires or deems relevant. Each of the Buyer and Newco has obtained, to the extent it has deemed necessary, professional advice with respect to the risks inherent in the acquisition of the Purchased Interests, including, without limitation, the matters relating to the Company's business and financial condition. Section 4.18. Survival. Except where a representation or warranty expressly refers to another date, in which case such representation or warranty need be true and correct only as of such date, each of the representations and warranties set forth in this Section 4 shall be deemed represented and made by the Buyer at the Closing as if made at such time and shall survive the Closing for a period terminating on the later of (a) date 6 months after the Closing Date, and (b) with respect to claims asserted pursuant to Section 6.2 of this Agreement before the expiration of the applicable representation or warranty, on the date such claim is finally liquidated or otherwise resolved; provided, -------- however, that (x) the representations and warranties in Sections 4.14 hereof - ------- 29 shall survive until the third anniversary of the Closing Date and (y) the representations and warranties in Sections 4.4 and 4.9 hereof shall survive until the applicable statute of limitations for third party or governmental actions has expired. ARTICLE V. COVENANTS OF THE PARTIES The Parties hereto covenant as follows (all covenants of the Seller and the Parent being joint and several obligations and all covenants of the Buyer and Newco being joint and several obligations): Section 5.1. Consents and Approvals Required on Closing Date. Each of the parties hereto has or will have on or prior to the Closing Date, at its cost and expense, obtained all necessary consents, waivers, authorizations and approvals of all governmental and regulatory authorities, domestic and foreign, and of all other Persons required on the Closing Date in connection with the execution, delivery and performance by it of the Transaction Documents. Section 5.2. Further Assurances. Upon the request of another party at any time after the Closing Date, the Buyer, Newco, the Seller and the Parent shall forthwith execute and deliver such further instruments of assignment, transfer, conveyance, endorsement, direction or authorization and other documents as the requesting party or its counsel may request to perfect title of the Buyer and its successors and assigns to the Purchased Interests and to perfect title of the Seller in and to the Share Consideration or otherwise to effectuate the purposes of the Transaction Documents. Section 5.3. Best Efforts. Upon the terms and subject to the conditions of this Agreement, each party shall use its reasonable best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable consistent with applicable law to consummate and make effective in the most expeditious manner practicable the transactions contemplated hereby and in the Transaction Documents. Section 5.4. Nondisclosure. Except as required under applicable law, from and after the Closing Date, no party shall use, divulge, furnish or make accessible to anyone any proprietary, material non-public, confidential or secret information to the extent relating to the Buyer or its subsidiaries, in the case of the Seller and the Parent, or relating to the Seller and the Parent, in the case of the Buyer and Newco (in each case including, without limitation, customer lists, supplier lists and pricing and marketing arrangements with customers or suppliers), and each of the parties shall cooperate reasonably with the others in preserving such proprietary, confidential or secret aspects of the parties. Section 5.5. Tax Matters. All transfer, documentary, sales, use, stamp, registration, value added and other such taxes and fees (including any penalties and interest) incurred in connection with this Agreement shall be borne and paid equally by the Parent and the Seller, on the one hand, and the Buyer and Newco, on the other hand, when due, and the Seller will file all necessary tax returns and other documentation with respect to all such taxes and fees, and, if 30 required by applicable law, the Buyer will, and will cause its affiliates to, join in the execution of any such tax returns and other documentation. Section 5.6. Cooperation on Tax Matters. The Buyer and the Seller shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with the preparation and filing of any tax return, statement, report or form (including any report required pursuant to Section 6043 of the Code and all Treasury Regulations promulgated thereunder), any audit, litigation or other proceeding with respect to taxes. Such cooperation shall include the retention and (upon the other party's request) the provision of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Seller and the Buyer agree (i) to retain, and to cause the Company to retain, all books and records with respect to tax matters pertinent to the Company relating to any pre-closing tax period, and to abide by all record retention agreements entered into with any taxing authority and (ii) to give the other party reasonable written notice prior to destroying or discarding any such books and records and, if the party so requests, the Buyer or the Seller, as the case may be, shall allow the other party to take possession of such books and records. Section 5.7. Amendment to Management Agreement. The Parent shall use its best efforts to cause the Company and City Cinemas Corporation to amend the Management Agreement so that it provides the Buyer with the same rights as the Parent pursuant to Section 3.2(b) thereof, and in any event, the Parent shall deliver to the Buyer the financial statements referenced in such Section promptly following receipt thereof. Section 5.8. Amendment to Trademark License Agreement. The Parent shall cause its affiliate Reading Investment Company, Inc. ("Reading Investment") and the Company to execute an amended Angelika-SOHO Trademark License Agreement dated as of April 15, 1997 by and between Reading Investment (as amended, the "Amended Trademark License Agreement") in the form attached hereto as Exhibit E. Section 5.9. Notification and Put Rights. (a) Buyer covenants and agrees that it shall provide written notice to Parent at least thirty (30) days prior to the date on which any of the following is proposed to occur: (i) the issuance of shares of Common Stock or of any class or series of Preferred Stock (in one or a series of related transactions) representing more than fifteen percent (15%) of the number or voting power of the shares of Common Stock or Buyer Preferred Stock, as the case may be, outstanding immediately prior to such issuance, or (ii) the making of an investment or series of related investments involving aggregate payments by Buyer of $10 million or more (calculated on a consolidated basis); (b) Parent shall notify Buyer within thirty (30) days after the date of the notice in paragraph (a) above whether it agrees with the proposed issuance or investment described in such notice. If (x) Parent objects to any such proposed transaction and (y) Buyer notifies Parent 31 that Buyer will nonetheless proceed with the proposed transaction, Parent shall have the option, exercisable within fifteen (15) days after the date of such written notice, to cause Buyer to repurchase, out of funds legally available therefor, all of the Common Share Consideration and the Preferred Share Consideration, for an aggregate purchase price equal to (aa) $13.5 million plus (bb) interest at a per annum rate of ten percent (10%) calculated on a daily basis through the date of such repurchase, which repurchase shall be consummated no later than thirty (30) days after the date of the notice of exercise of the option provided herein; and (c) The rights of Parent to receive notice and to require the Buyer to repurchase the Common Share Consideration and the Preferred Share Consideration shall expire on the date that is thirty (30) days following the date on which Buyer files with the Securities and Exchange Commission its Annual Report on Form 10-K for the fiscal year ended January 30, 2001, provided that the parties shall be obligated to consummate any repurchase for which Parent has provided notice of exercise of the repurchase option provided in Section 5.9(b) prior to such expiration date. Section 5.10. Amendment to Certificate of Incorporation. Buyer hereby covenants, subject to the fiduciary duty of the Board of Directors of Buyer, to present to the stockholders of Buyer, at Buyer's next annual or special meeting of stockholders, a proposed amendment to Buyer's restated Certificate of Incorporation to eliminate Article SIXTH thereof, and shall use their best efforts to solicit proxies in favor of such amendment. Section 5.11. Board Representation. Parent will be entitled to have a representative attend all meetings of the Board of Directors of the Buyer, and of any meetings of any executive or other similar committee of the Board of Directors as may be formed from time to time. Buyer will give Parent substantially the same notice of any such meeting as Parent provides to its directors, so as to allow such representative to attend such meetings in person, and provide to such representative copies of any materials provided to directors from time to time, whether or not in connection with any particular Board or executive committee meeting, contemporaneously with the delivery of such materials to such directors. Notwithstanding the above, it is acknowledged and agreed that such representative will not be entitled to attend any portions of any such meeting where specific advice is being given by legal counsel to the directors and where the presence of such representative would result in a waiver of any otherwise applicable attorney-client communication privilege. ARTICLE VI. INDEMNIFICATION Section 6.1. Indemnification by the Seller and the Parent. Notwithstanding the Closing and except to the extent that the Buyer or Newco has any knowledge or information with respect to such matter on or prior to the Closing Date, the Seller and the Parent, jointly and severally, shall indemnify and fully defend, save and hold the Buyer, Newco, and their directors, officers and employees (the "Buyer Indemnitees"), harmless if any Buyer Indemnitee shall at any time or from time to time suffer any damage, liability, loss, cost, expense (including all 32 reasonable attorneys' fees and expenses of investigation incurred by the Buyer Indemnitees in any action or proceeding between the Seller or the Parent and the Buyer Indemnitees or between the Buyer Indemnitees and any third party or otherwise), deficiency, interest, penalty, impositions, assessments or fines (collectively, "Buyer Losses") arising out of or resulting from, or shall pay or become obliged to pay any sum on account of, any and all the Seller Events of Breach. As used herein, "Seller Events of Breach" shall be and mean any one or more of the following: (a) any untruth or inaccuracy in any representation of the Seller or the Parent or the breach of any warranty of the Seller or the Parent contained in the Transaction Documents written notice of which has been given to the Seller and the Parent prior to the expiration of any survival period applicable thereto; (b) any failure of the Seller or the Parent duly to perform or observe any term, provision, covenant, agreement contained in the Transaction Documents on the part of such Person to be performed or observed, provided, however, that, except for Buyer Losses incurred by the Buyer Indemnitees in connection with the inaccuracy of any representation or the breach of any warranty of the Seller or the Parent relating to Taxes, the representations and warranties contained in Section 3.2 or actual fraud by the Seller or the Parent, the Seller and the Parent shall not have any obligation to make any payment under Section 6.1(a) hereof with respect to any representation or warranty unless (i) the Buyer Indemnitees have suffered Buyer Losses by reason of any particular representation or warranty, together with all other particular claims arising from the same facts and circumstances, in excess of $50,000 and (ii) until all Buyer Indemnitees have suffered Buyer Losses (other than Buyer Losses below the $50,000 threshold referred to in clause (i) above) by reason of all such claims that exceed $500,000, it being understood that once such amount is exceeded, the aggregate of all such claims in excess of $500,000 shall be payable by the Seller and Parent on demand by the Buyer. Section 6.2. Procedures for Indemnification by the Seller and the Parent. If a Seller's Event of Breach occurs or is alleged and a Buyer Indemnitee asserts that the Seller or the Parent has become obligated to such Buyer Indemnitee pursuant to Section 6.1 hereof, or if any suit, action, investigation, claim or proceeding (a "Proceeding") is begun, made or instituted by a third party as a result of which the Seller or the Parent may become obligated to a Buyer Indemnitee hereunder, such Buyer Indemnitee shall give written notice to the Seller and the Parent. The Seller and the Parent, jointly and severally, agree to defend, contest or otherwise protect the Buyer Indemnitee against any Proceeding at their sole cost and expense. The Buyer Indemnitee shall have the right, but not the obligation, to participate at its own expense in the defense thereof by counsel of the Buyer Indemnitee's choice and shall in any event cooperate with and assist the Seller and the Parent to the extent reasonably possible. If the Seller and the Parent fail timely to defend, contest or otherwise protect against such Proceeding, the Buyer Indemnitee shall have the right to do so, including, without limitation, the right to make any compromise or settlement thereof, and the Buyer Indemnitee shall be entitled to recover the entire cost thereof from the Seller or the Parent, including, without limitation, reasonable attorneys' fees, disbursements and amounts paid as the result of such Proceeding, as such costs are 33 incurred, and the Seller and the Parent shall be bound by any determination made in such Proceeding or any compromise or settlement effected by the Buyer. If the Buyer Indemnitee shall have reasonably concluded upon advice from counsel that there may be a conflict of interest between the Buyer Indemnitee and the Seller or the Parent, the Buyer Indemnitee shall have the right to defend, contest or otherwise protect against such Proceeding, provided that if the Buyer Indemnitee -------- shall compromise or settle such claims without consent of Seller and Parent, such compromise or settlement shall not bind Seller or Parent. If the Seller or the Parent assumes the defense of any Proceeding, (a) it will be conclusively established for purposes of this Agreement that the claims made in that Proceeding are within the scope of and subject to indemnification, (b) no compromise or settlement of such claims may be effected by the Seller or the Parent without the Buyer Indemnitee's consent unless (i) there is no finding or admission of any violation of federal, state, local, municipal, foreign, international, multinational or other administrative order, law, ordinance, principal of common law, regulation, statute or treaty or any violation of the rights of any Person and no effect on any other claims that may be made against the Buyer Indemnitee and (ii) the sole relief provided is monetary damages that are paid in full by the Seller or the Parent; and (c) the Buyer Indemnitee will have no liability with respect to any compromise or settlement of such claims effected without its consent. Section 6.3. Indemnification by the Buyer and Newco. Notwithstanding the Closing, and, with respect to paragraph (a) only, except to the extent that the Seller or the Parent has any knowledge or information with respect to such matter on or prior to the Closing Date (it being agreed that the Seller Indemnitees are entitled to indemnification under this Section 6.3 regardless of their knowledge of facts giving rise to any litigation referred to in paragraph (b) hereof or of their knowledge for purposes of the representation and warranty set forth in the penultimate sentence of Section 4.4 of any liabilities or claims against the Buyer or any of its Affiliates), the Buyer and Newco shall, jointly and severally, indemnify and agree to fully defend, save and hold the Seller, the Parent, or any Affiliate of the Seller or of the Parent and their directors, officers and employees (the "Seller Indemnitees"), harmless if any Seller Indemnitee shall at any time or from time to time suffer any damage, liability, loss, cost, expense (including all reasonable attorneys' fees and expenses of investigation incurred by the Seller Indemnitees in any action or proceeding between the Buyer or Newco and the Seller Indemnitees or between the Seller Indemnitees and any third party or otherwise), deficiency, interest, penalty, impositions, assessments or fines (collectively, "Seller Losses") arising out of or resulting from, or shall pay or become obligated to pay any sum on account of, any and all the Buyer Events of Breach. As used herein, "Buyer Events of Breach" shall be and mean any one or more of the following: (a) any untruth or inaccuracy in any representation of the Buyer or Newco or the breach of any warranty of the Buyer or Newco contained in the Transaction Documents written notice of which has been given to the Buyer and Newco prior to the expiration of any survival period applicable thereto; (b) any Proceeding is brought by any stockholder of the Buyer, either directly or derivatively, challenging any of the transactions contemplated herein or in any other Transaction Document or asserting any liability on the part of Parent, any of its affiliates or any of the respective officers or directors; 34 (c) any failure of the Buyer or Newco duly to perform or observe any term, provision, covenant, agreement or condition contained herein or in the Transaction Documents on the part of the Buyer or Newco to be performed or observed; provided, however, that, except for Seller Losses incurred by the Seller Indemnitees in connection with the inaccuracy of any representations or the breach of any warranty of the Buyer or Newco relating to Taxes, the representations and warranties contained in Section 5.4 hereof or actual fraud by the Buyer or Newco, the Buyer and Newco shall have no obligation to make any payment under Section 6.3(a) hereof with respect to any representation or warranty unless (i) the Seller Indemnitees have suffered Seller Losses by reason of any particular representation or warranty, together with all other particular claims arising from the same facts and circumstances, in excess of $50,000 and (ii) until all Seller Indemnitees have suffered Seller Losses (other than Seller Losses below the $50,000 threshold referred to in clause (i) above) by reason of all such claims that exceed $500,000, it being understood that once such amount is exceeded, the aggregate of all such claims in excess of $500,000 shall be payable by the Buyer and Newco on demand by the Seller. Section 6.4. Procedures for Indemnification by the Buyer and Newco. If a Buyer Event of Breach occurs or is alleged and a Seller Indemnitee asserts that the Buyer or Newco has become obligated to such Seller Indemnitee pursuant to Section 6.3 hereof, or if any Proceeding is begun, made or instituted by a third party as a result of which the Buyer or Newco may become obligated to a Seller Indemnitee hereunder, such Seller Indemnitee shall give written notice to the Buyer and Newco. The Buyer and Newco, jointly and severally, agree to defend, contest or otherwise protect the Seller Indemnitee against any Proceeding at their sole cost and expense. The Seller Indemnitee shall have the right, but not the obligation, to participate at its own expense in the defense thereof by counsel of the Seller Indemnitee's choice and shall in any event cooperate with and assist the Buyer and Newco to the extent reasonably possible. If the Buyer or Newco fail timely to defend, contest or otherwise protect against such Proceeding, the Seller Indemnitee shall have the right to do so, including, without limitation, the right to make any compromise or settlement thereof, and the Seller Indemnitee shall be entitled to recover the entire cost thereof from the Buyer or Newco, including, without limitation, reasonable attorneys' fees, disbursements and amounts paid as the result of such Proceeding, as such costs are incurred, and the Buyer or Newco shall be bound by any determination made in such Proceeding or any compromise or settlement effected by the Seller. If the Seller Indemnitee shall have reasonably concluded upon advice from counsel that there may be a conflict of interest between the Seller Indemnitee and the Buyer or Newco, the Seller Indemnitee shall have the right to defend, contest or otherwise protect against such Proceeding, provided that if the Seller -------- Indemnitee shall compromise or settle such claims without consent of Buyer and Newco, such compromise or settlement shall not bind the Buyer or Newco. If the Buyer or Newco assumes the defense of any Proceeding, (a) it will be conclusively established for purposes of this Agreement that the claims made in that Proceeding are within the scope of and subject to indemnification, (b) no compromise or settlement of such claims may be effected by the Buyer or Newco without the Seller Indemnitee's consent unless (i) there is no finding or admission of any violation of federal, state, local, municipal, foreign, international, multinational or other administrative order, law, ordinance, principal of common law, regulation, statute or treaty or 35 any violation of the rights of any Person and no effect on any other claims that may be made against the Seller Indemnitee and (ii) the sole relief provided is monetary damages that are paid in full by the Buyer or Newco; and (c) the Seller Indemnitee will have no liability with respect to any compromise or settlement of such claims effected without its consent. Notwithstanding the above, in the event of any claim for indemnity under clause 6.3(b) the Seller Indemnitees will be entitled to retain their own counsel and Buyer will promptly reimburse such Seller Indemnitees for the reasonable costs and disbursements of such separate counsel. ARTICLE VII. CONDITIONS TO OBLIGATIONS OF THE SELLER AND THE PARENT The obligations of the Seller and the Parent to consummate the transactions contemplated by the Transaction Documents are subject to the fulfillment, at or before the Closing Date of the following conditions, any one or more of which may be waived by the Parent and the Seller in their sole discretion: Section 7.1. Representations and Warranties of the Buyer and Newco. All representations and warranties made by the Buyer and Newco in this Agreement shall be true and correct in all material respects on and as of the Closing Date as if again made by the Buyer and Newco on and as of such date, except for any warranties made with reference to a specific date, which shall be true and correct as of such specific date. Section 7.2. Performance of the Obligations of the Buyer and Newco. The Buyer and Newco shall have performed in all material respects all obligations required under this Agreement to be performed by them on or before the Closing Date. Section 7.3. Consents and Approvals. All consents, waivers, authorizations and approvals of any governmental or regulatory authority, domestic or foreign, and of any Person, other than the Seller, the Parent or their respective subsidiaries or affiliates, required on the Closing Date in connection with the execution, delivery and performance of the Transaction Documents shall have been duly obtained and shall be in full force and effect on the Closing Date. Section 7.4. No Violation of Orders. No preliminary or permanent injunction or other order issued by any court or other governmental or regulatory authority, domestic or foreign, nor any statute, rule, regulation, decree or executive order promulgated or enacted by any government or governmental or regulatory authority, domestic or foreign, that declares any of the Transaction Documents invalid or unenforceable in any respect or which prevents the consummation of the transactions contemplated hereby shall be in effect on the Closing Date. Section 7.5. Registration Rights Agreement. On the Closing Date, the Buyer and the Seller shall enter into the Registration Rights Agreement in the form attached hereto as Exhibit D for the registration of the Buyer Common Stock included in the Share Consideration. Section 7.6. Buyer Closing Documents. The Buyer shall have delivered to the Seller or cause Newco to deliver to the Seller the following documents on the Closing Date: 36 (a) the certificates representing the Share Consideration; (b) a certificate dated the Closing Date of the Secretary of State of the jurisdiction of incorporation of the Buyer as to its good standing in such jurisdiction; (c) the Transaction Documents; and (d) such other documents, including legal opinions, or certificates relating to the transactions contemplated by the Transaction Documents as the Seller reasonably requests. Section 7.7. Legal Matters. All certificates, instruments, opinions and other documents required to be executed or delivered by or on behalf of the Buyer and Newco under the provisions of the Transaction Documents, and all other actions and proceedings required to be taken by or on behalf of the Buyer and Newco in furtherance of the transactions contemplated hereby and thereby, shall be reasonably satisfactory in form and substance to counsel for the Seller. ARTICLE VIII. CONDITIONS TO OBLIGATIONS OF THE BUYER AND NEWCO The obligations of the Buyer to consummate the transactions contemplated by the Transaction Documents are subject to the fulfillment, at or before the Closing Date of the following conditions, any one or more of which may be waived by the Buyer in its sole discretion: Section 8.1. Representations and Warranties of the Seller and the Parent. All representations and warranties made by the Seller and the Parent in this Agreement shall be true and correct in all material respects on and as of the Closing Date as if again made by the Seller and the Parent on and as of such date, except for any warranties made with reference to a specific date, which shall be true and correct as of such specific date. Section 8.2. Performance of the Obligations of the Seller and the Parent. The Seller and the Parent shall have performed in all material respects all obligations required under this Agreement to be performed by them on or before the Closing Date and the Buyer shall have received a certificate dated the Closing Date signed by the duly authorized representatives of the Seller and the Parent to that effect. Section 8.3. Consents and Approvals. All consents, waivers, authorizations and approvals of any governmental or regulatory authority, domestic or foreign, and of any Person, other than the Buyer, Newco or their respective subsidiaries or affiliates, in connection with the execution, delivery and performance of the Transaction Documents shall have been duly obtained and shall be in full force and effect on the Closing Date, subject to the proviso in Section 8.4 hereof. Section 8.4. No Violation of Orders. No preliminary or permanent injunction or other order issued by any court or other governmental or regulatory authority, domestic or foreign, nor 37 any statute, rule, regulation, decree or executive order promulgated or enacted by any government or governmental or regulatory authority, domestic or foreign, that declares any of the Transaction Documents invalid or unenforceable in any respect or which prevents the consummation of the transactions contemplated hereby shall be in effect on the Closing Date; provided that if Buyer or Newco -------- fail to consummate the transactions contemplated by the Transaction Documents because of a failure of the conditions specified in Sections 8.3 and 8.4 based solely upon the entry by the Delaware Court of Chancery in the Chancery Court Litigation or another court in related litigation of an injunction or other order barring the Closing, then the parties agree that their contractual rights under this agreement are not affected. Section 8.5. Seller Closing Documents. The Seller shall have delivered to the Buyer or caused the Parent to deliver to the Buyer the following documents on the Closing Date: (a) instruments of transfer duly transferring all the Purchased Interests on the Closing Date with appropriate transfer stamps, if any, affixed thereto; (b) a certificate dated the Closing Date of the Secretary of State of the State of Delaware as to its good standing in such jurisdiction; (c) copies of the consents, waivers and approvals specified on Schedule 3.6; - ------------ (d) the Transaction Documents; and (e) such other documents, including legal opinions, or certificates relating to the transactions contemplated by the Transaction Documents as the Buyer reasonably requests. Section 8.6. Legal Matters. All certificates, instruments, opinions and other documents required to be executed or delivered by or on behalf of the Seller and the Parent under the provisions of the Transaction Documents, and all other actions and proceedings required to be taken by or on behalf of the Seller and the Parent in furtherance of the transactions contemplated hereby and thereby, shall be reasonably satisfactory in form and substance to counsel for the Buyer. ARTICLE IX. TERMINATION Section 9.1. Conditions of Termination. Notwithstanding anything to the contrary contained herein, this Agreement may be terminated at any time before the Closing (a) by mutual consent of the Seller and the Buyer, (b) by the Seller if the conditions set forth in Section 8 hereof are not satisfied or waived by the Closing Date, (c) by the Buyer if the conditions set forth in Section 9 hereof are not satisfied or waived by the Closing Date or (d) by any party hereto that is not in breach of its material obligations hereunder if the Closing shall not have occurred on or prior to April 30, 2000, provided that the -------- Buyer and Newco shall not have a right to terminate this Agreement pursuant to clause (d) if they are prohibited from closing because of a preliminary or permanent injunction binding on them. 38 Section 9.2. Effect of Termination. In the event of termination pursuant to Section 9.1 hereof, this Agreement shall become null and void and have no effect, with no liability on the part of the Seller, the Company or the Buyer, or their respective directors, officers, agents or stockholders, with respect to this Agreement, except for the (i) liability of a party for expenses pursuant to Section 11.3 hereof, (ii) liability for any breach of this Agreement and (iii) Buyer and Newco's indemnification obligations under Section 6.3(b). Section 9.3. Intentionally Omitted. ARTICLE X. MISCELLANEOUS Section 10.1. Successors and Assigns. Except as otherwise provided in this Agreement, no party hereto shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other parties hereto and any such attempted assignment without such prior written consent shall be void and of no force and effect, provided that the Buyer may assign its rights to a wholly-owned subsidiary. This Agreement shall inure to the benefit of and shall be binding upon the successors and permitted assigns of the parties hereto. Section 10.2. Governing Law; Jurisdiction. This Agreement shall be construed, performed and enforced in accordance with, and governed by, the laws of the State of New York, without giving effect to the principles of conflicts of laws thereof. The parties hereto irrevocably elect as the sole judicial forum for the adjudication of any matters arising under or in connection with this Agreement, and consent to the jurisdiction of, the courts of the State of New York. Section 10.3. Service of Process. The parties hereto acknowledge and agree that under this Agreement process may be served, in the case of the Buyer and Newco, by delivery to CT Corporation, 111 8th Avenue, New York, New York, 10011, in the case of the Seller, the Parent and the Company, by delivery to Duane, Morris & Heckscher LLP, 380 Lexington Avenue, New York, New York 10168, Attn: Michael H. Margulis, Esq. or to such other address or to the attention of such other person in New York City as the parties may provide by notice by given in accordance with Section 10.6 hereof. Section 10.4. Expenses; Fees. Except as otherwise provided herein, each of the parties hereto shall pay its own expenses in connection with this Agreement and the transactions contemplated hereby, including, without limitation, any legal and accounting fees, whether or not the transactions contemplated hereby are consummated. Section 10.5. Severability. In the event that any part of this Agreement is declared by any court or other judicial or administrative body to be null, void or unenforceable, said provision shall survive to the extent it is not so declared, and all of the other provisions of this Agreement shall remain in full force and effect. Section 10.6. Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (i) on the date of 39 service if served personally on the party to whom notice is to be given, (ii) on the day of transmission if sent via facsimile transmission to the facsimile number given below, and telephonic confirmation of receipt is obtained promptly after completion of transmission, (iii) on the day after delivery to Federal Express or similar overnight courier or the Express Mail service maintained by the U.S. Postal Service or (iv) on the fifth day after mailing, if mailed to the party to whom notice is to be given, by first class mail, registered or certified, postage prepaid and properly addressed, to the party as follows: If to the Seller: Reading Entertainment, Inc. One Penn Square West 30 South Fifteenth Street, Suite 1300 Philadelphia, Pennsylvania 19102-4813 Attention: James J. Cotter, Chairman Facsimile: (215) 569-2862 Copy to: Potter Anderson & Corroon LLP Hercules Plaza 1313 N. Market Street Wilmington, Delaware 19801 Attention: John F. Grossbauer, Esq. Facsimile: (302) 984-1192 If to the Buyer: National Auto Credit, Inc. 30000 Aurora Road Solon, Ohio 44139 Attention: David L. Huber, Chairman of the Board Facsimile: (440) 349-0442 Copy to: National Auto Credit, Inc. 30000 Aurora Road Solon, Ohio 44139 Attention: Raymond A. Varcho, Esq., Vice President, Secretary and General Counsel Facsimile: (440) 349-3959 Any party may change its address for the purpose of this Section by giving the other party written notice of its new address in the manner set forth above. Section 10.7. Amendments; Waivers. This Agreement may be amended or modified, and any of the terms, covenants, representations, warranties or conditions hereof may be waived, only by a written 40 instrument executed by the parties hereto, or in the case of a waiver, by the party waiving compliance. Any waiver by any party of any condition, or of the breach of any provision, term, covenant, representation or warranty contained in this Agreement, in any one or more instances, shall not be deemed to be nor construed as further or continuing waiver of any such condition, or of the breach of any other provision, term, covenant, representation or warranty of this Agreement. Section 10.8. Public Announcements. The parties agree that after the signing of this Agreement, neither party shall make any press release or public announcement concerning the transactions contemplated by the Transaction Documents without the prior written approval of the other parties unless the disclosing party is advised by counsel that a press release or public announcement is required by law. If any such announcement or other disclosure is required by law, the disclosing party agrees to give the nondisclosing parties prior notice and an opportunity to comment on the proposed disclosure. Section 10.9. Entire Agreement. The Transaction Documents contain the entire understanding between the parties hereto with respect to the transactions contemplated hereby and thereby and supersedes and replaces all prior and contemporaneous agreements and understandings, oral or written, with regard to such transactions. All schedules hereto and any documents and instruments delivered pursuant to any provision hereof are expressly made a part of this Agreement as fully as though completely set forth herein. Section 10.10. Parties in Interest. Except for the rights granted to the Buyer Indemnitees and the Seller Indemnitees in Article VI hereof, nothing in this Agreement is intended to confer any rights or remedies under or by reason of this Agreement on any persons other than the Seller, the Parent, the Company, the Buyer and Newco and their respective successors and permitted assigns. Nothing in this Agreement is intended to relieve or discharge the obligations or liability of any third persons to the Seller, the Parent, the Company, the Buyer or Newco. No provision of this Agreement shall give any third persons any right of subrogation or action over or against the Seller, the Parent, the Company, the Buyer or Newco. Section 10.11. Scheduled Disclosures. Disclosure of any matter, fact or circumstance in a Schedule to this Agreement shall not be deemed to be disclosure thereof for purposes of any other Schedule hereto. Section 10.12. Specific Performance. The parties recognize that the Purchased Interests and the Company's principal asset, the Angelika Film Center, are unique and not capable of duplication. Accordingly, without limited or waiving any rights or remedies the parties may have under this Agreement now or hereinafter existing at law or in equity or by statute, each of the parties hereto shall be entitled to seek specific performance by the other of the obligations to be performed by the other in accordance with the provisions of this Agreement. Section 10.13. Section and Paragraph Headings. The section and paragraph headings in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. Section 10.14. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which shall constitute the same instrument. 41 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on April 5, 2000. SELLER: FA, INC. By: /s/ S. Craig Tompkins --------------------- Name: S. Craig Tompkins Title: Vice Chairman PARENT: READING ENTERTAINMENT, INC. By: /s/ S. Craig Tompkins --------------------- Name: S. Craig Tompkins Title: Vice Chairman BUYER: NATIONAL AUTO CREDIT, INC. By: /s/ David L. Huber ------------------ Name: David L. Huber Title: President Chairman CEO NEWCO: NATIONAL CINEMAS, INC. By: /s/ David L. Huber ------------------ Name: David L. Huber Title: President 42 EX-21.I 8 CONSOLIDATED SUBSIDIARIES EXHIBIT 21(i)
Reading Entertainment, Inc. Consolidated Subsidiaries - ------------------------------------------------------------------------------------------------------ JURISDICTION OF SUBSIDIARY INCORPORATION D/B/A - ------------------------------------------------------------------------------------------------------ Domestic Subsidiaries: - ---------------------- AHGP, Inc. Delaware, USA AHLP, Inc. Delaware, USA Angelika Film Centers LLC Delaware, USA Angelika Film Center Angelika Holding, Inc. Delaware, USA Bayou Cinemas, LP Delaware, USA Angelika Film Center & Cafe Cine Vista Holdings, Inc. Delaware, USA Entertainment Holdings, Inc. Delaware, USA FA, Inc. Delaware, USA Puerto Rico Holdings, Inc Delaware, USA Railroad Investments, Inc. Delaware, USA Reading Capital Corporation Delaware, USA Reading Center Development Corp. Pennsylvania, USA Reading Cinemas, Inc. Delaware, USA Reading Cinemas of Puerto Rico, Inc. Puerto Rico, USA CineVista Theaters Reading Cinemas New Jersey, Inc. Delaware, USA Reading Company Pennsylvania, USA Reading Holdings, Inc. Delaware, USA Reading International Cinemas LLC Delaware, USA Reading Investment Company Delaware, USA Reading Real Estate Company Pennsylvania, USA Reading Resources, Inc. Delaware, USA Reading Theaters, Inc. Delaware, USA Tower Angelika Theater Reading Transportation Company Pennsylvania, USA RG-I, Inc. Delaware, USA RG-II, Inc. Delaware, USA Royal George, LLC Delaware, USA The Port Reading Railroad Company New Jersey, USA - ------------------------------------------------------------------------------------------------------
Reading Entertainment, Inc. Consolidated Subsidiaries - ------------------------------------------------------------------------------------------------------ JURISDICTION OF SUBSIDIARY INCORPORATION D/B/A - ------------------------------------------------------------------------------------------------------ Trenton-Princeton Traction Company New Jersey, USA Twin Cities Cinemas, Inc. Delaware, USA Reading Cinemas Washington and Franklin Railway Company Penna. & Maryland, USA Western Gaming, Inc. Delaware, USA Wilmington & Northern Railroad Penna. & Delaware, USA International Subsidiaries: - --------------------------- Australia Cinema Management Pty Limited New South Wales, Australia Australia Country Cinemas Pty Limited New South Wales, Australia Reading Cinemas Darnelle Enterprises Limited Auckland, New Zealand R&W Cinema Properties Limited Auckland, New Zealand Reading Australia Leasing Pty Limited New South Wales, Australia Reading Cinema Properties Limited Auckland, New Zealand Reading Entertainment Australia Pty Limited New South Wales, Australia Reading Cinemas Reading Properties Pty Limited Victoria, Australia Reading New Zealand Limited Auckland, New Zealand Ronwood Investments Limited Auckland, New Zealand Tington Investments Limited Auckland, New Zealand Tobrooke Holdings Limited Auckland, New Zealand Berkeley Cinemas
EX-23.1 9 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33- 57222 of Reading Entertainment, Inc. on Form S-8 of our report dated April 11, 2000, appearing in this Annual Report on Form 10-K of Reading Entertainment, Inc. for the year ended December 31, 1999. DELOITTE & TOUCHE LLP Los Angeles, California April 11, 2000 EX-23.2 10 CONSENT OF ERNST & YOUNG EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-57222) pertaining to the Reading Entertainment, Inc. 1992 Non- Qualified Stock Option Plan of our report dated March 18, 1999, with respect to the consolidated financial statements of Reading Entertainment, Inc. as of December 31, 1998 and for each of the two years in the period ended December 31, 1998 included in Reading Entertainment Inc.'s Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ Ernst & Young LLP Philadelphia, Pennsylvania April 12, 2000 EX-27 11 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 13,277 0 409 0 316 15,881 95,772 6,294 138,496 19,796 1,035 7,000 1 7 102,675 138,496 8,450 40,319 1,930 35,497 47,639 0 380 (40,259) 923 (41,182) 0 0 0 (41,182) (6.11) (6.11) Represents par value of Reading Entertainment Series B preferred stock.
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