-----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, AYcntjXy0lqKZcwBdVxdcdp80w0/ihdOnlrXT1llyU0vLSL1Cm++1F3Ve6DM/5O4 CqGNKH8x7hNIkcjJsBV5Lg== 0001036050-97-000101.txt : 19970805 0001036050-97-000101.hdr.sgml : 19970805 ACCESSION NUMBER: 0001036050-97-000101 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970415 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: READING ENTERTAINMENT INC CENTRAL INDEX KEY: 0001023993 STANDARD INDUSTRIAL CLASSIFICATION: 7830 IRS NUMBER: 232859312 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14504 FILM NUMBER: 97581276 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 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, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ COMMISSION FILE NUMBER 333-13413 READING ENTERTAINMENT, INC. (Exact name of registrant as specified in its charter) DELAWARE 23-2859312 (State of incorporation) (I.R.S. Employer Identification No.) 30 SOUTH FIFTEENTH STREET 13TH FLOOR PHILADELPHIA, PENNSYLVANIA 19102 (Address of principal (Zip Code) executive offices) 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: None (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 April 8, 1997, 7,449,364 shares of Common Stock were outstanding and the aggregate market value of voting stock held by nonaffiliates of the Registrant was approximately $22,935,287. Documents incorporated by reference: Part III: Portions of proxy statement for 1997 Annual Meeting of Reading Entertainment, Inc. shareholders. PART I ITEM 1. BUSINESS GENERAL Reading Entertainment, Inc., a Delaware corporation ("REI" and collectively with its various subsidiaries and predecessors, the "Company" or "Reading"), was recently formed in order to effect a reorganization of Reading Company under a Delaware holding company. Initially organized in 1833, the Company's predecessors have been doing business in the United States for almost 165 years. Prior to the creation of the Consolidated Rail Corporation ("Conrail"), the Company was principally in the transportation business, owning and operating the Reading Railroad. Following the transfer of substantially all of its rolling stock and active rail lines to Conrail in 1976, the Company pursued a number of endeavors including the development of One Reading Center (a 600,000 square foot office complex located in Philadelphia) and initiated the activities which led to the development of the Pennsylvania Convention Center on land originally utilized by the Company for railroad operating purposes. Since 1976, the Company has reduced its railroad real estate holdings from approximately 700 parcels and rights-of-way to 28. In 1993, following the sale of its major railroad asset -- the Reading Terminal Headhouse -- and a thorough review of the opportunities available to it, the Company determined to refocus its essentially real estate based activities on the "Beyond-the-Home" or real estate based segment of the entertainment industry. Since that date, the Company . in 1994, acquired and has since expanded a chain of multiplex cinemas located in Puerto Rico ("Cine Vista"), . in 1996, acquired the Angelika Film Center, an art and speciality multiplex cinema and cafe facility located in the Soho district of New York City, and began the rollout of that concept into other cities, beginning with the development of a 29,000 square foot multiplex art cinema and cafe as a part of the Bayou Place development in Houston, Texas, and . in 1996, constructed and opened its first multiplex cinema in Australia, as the first step in the Company's plan to become one of the principal cinema circuits and an established developer of entertainment center complexes featuring multiplex cinema facilities in that country. In recognition of the significant amounts of capital required to compete in the cinema exhibition business, and in furtherance of its plan to focus on and the development of cinemas and cinema based entertainment centers, on October 15, 1996, the Company reorganized as REI (the "Reorganization"), and completed a private placement of common and preferred stock which increased shareholders' equity from approximately $69 million to approximately $156 million (the "Stock Transactions"). Most of the Company's theater development projects are in the early stage of development. At December 31, 1996, the Company had assets valued for balance sheet purposes at approximately $181.8 million and no material long term indebtedness. A significant portion of these assets, however, is represented by cash (totaling approximately $48.7 million at December 31, 1996), land held for development (cost basis $7.3 million at December 31, 1996), and equity securities in two other companies (valued at approximately $72.8 million for book purposes at December 31, 1996). These securities consist of 693,650 shares of the Series B Preferred Stock (the "Stater Preferred Stock") of Stater Bros. Holdings, Inc. ("Stater") which is principally in the business of owning and operating retail grocery stores in Southern California, and 1,564,473 shares of the common stock, representing approximately 26% of the voting power, of Citadel Holding Corporation ("CHC" and collectively with its subsidiaries, "Citadel"), which is principally in the business of owning commercial real estate and providing real estate consulting services to Reading. The 2 Company intends to use these assets to continue to build its Beyond-the-Home entertainment business, and not to engage in the retail grocery business or in the business of acquiring, selling, holding, trading or investing in securities. Stater files annual reports with respect to its debt securities with the Securities and Exchange Commission (the "SEC"). The Stater Preferred Stock carries a dividend of 10.5% or approximately $7,283,000 per annum. For its fiscal year ended September 30, 1996, Stater reported gross revenues of $1.7 billion, earnings before interest, depreciation and taxes, of $59 million, and net income of $16 million. Citadel is a publicly reporting and trading company, whose common stock is traded on the American Stock Exchange. Citadel's net earnings from the Company's date of acquisition of its Citadel interest on March 29, 1996 through December 31, 1996, were $6,183,000, inclusive of a nonrecurring gain on the sale of real estate of $1,473,000 and nonrecurring income of $4,000,000 from the recognition, for financial statement purposes of previously deferred proceeds from the bulk sale of loans and real estate by a previously owned subsidiary of CHC. The Company's share of such earnings was $1,526,000 which amount is included in the Consolidated Statement of Operations for the year ended December 31, 1996 as "Equity in earnings of affiliate." In addition to its principal activities in the Beyond-the-Home entertainment business, the Company continues to be engaged in the business of winding up its historic railroad related activities, including the sale or other exploitation of its residual real estate interests, and in certain financial activities such as equipment leasing through its affiliate, FA, Inc. Shares of the common stock, par value $.001 per share (the "Common Stock"), of REI are quoted on the Nasdaq National Market ("NNM") and trade on the Philadelphia Stock Exchange under the symbols RDGE and RDG, respectively. DESCRIPTION OF BUSINESS - - - ----------------------- The Company is primarily engaged in the development of cinema based entertainment centers and in the multiplex cinema exhibition business in Puerto Rico under the Cine Vista marquee, in Australia under the Reading Cinemas marquee, and with respect to exhibition of art and specialty in the United States under the Angelika marquee. While exceptions may be made with respect to certain well-situated cinemas with proven or projected draw as art and specialty houses, it is the Company's intention to develop or acquire exclusively multiplex venues. With respect to new construction, it is the Company's intention to focus primarily upon a stadium seating format, and to feature wall-to-wall screens and state-of-the-art projection and sound. Cine Vista - - - ---------- Acquired effective July 1, 1994, for a cash purchase price of $22.7 million (inclusive of acquisition expenses in the amount of $323,000), Cine Vista operated motion picture exhibition facilities in six leased locations in Puerto Rico at the time of its acquisition. Since that date, Cine Vista has added eight screens in a new complex at Plaza Palma Real in Humacao, and on March 26, 1997, six screens in a new complex in the Mayaguez Shopping Center in Mayaguez. In addition, an eight screen complex is under development to replace the current six-screen facility at the Mayaguez Mall, also in Mayaguez. This expanded facility is scheduled to open in mid 1998. The Company is currently negotiating with respect to the construction of approximately 22 additional screens at two locations in Puerto Rico and the expansion of one of its existing facilities. However, no assurances can be given that such negotiations will result in operating facilities. All of Cine Vista's theaters are modern multi-screen facilities. Listed below are Cine Vista's current locations and theater sites under development. 3
NUMBER OF EXISTING THEATERS LOCATION SCREENS ----------------- -------- --------- Plaza de las Americas Mall San Juan 10 El Senorial Shopping Center San Juan 4 Cinema Centro Bayamon* 6 Plaza del Norte Shopping Center Hatillo 6 Mayaguez Mall*** Hormigueros** 6 Cayey Shopping Center Cayey 4 Plaza Palma Real Humacao 8 Mayaguez Shopping Center (1) Mayaguez 6 UNDER DEVELOPMENT ----------------- Mayaguez Mall*** Hormigueros** 8
(1) Opened March 26, 1997 * San Juan metropolitan area ** Mayaguez metropolitan area *** Four of the six screens at the Mayaguez Mall will be closed in mid- 1997 in order to permit the construction of a new eight screen theater at this location. Upon completion of the new facility in mid-1998, the two existing screens will be closed. Puerto Rico is a self-governing Commonwealth of the United States with a population of approximately 3.8 million people. Puerto Rico exercises control over internal affairs similar to states of the U.S.; however, the relationship with the United States Federal Government is different than that of a state. Residents of Puerto Rico are citizens of the United States, but do not vote in national elections and, with certain exceptions, do not pay federal income taxes. Income taxes are paid instead under a system established by the Commonwealth. In recent years, there have been two major views concerning the future relationship with the United States Government; one favoring statehood and the other favoring continuation of commonwealth status. In 1993, Puerto Rico voters were asked in a plebiscite to express their preference for statehood (48.4%), commonwealth status (46.2%) or independence (4.4%). The United States mainland is Puerto Rico's largest trading partner. During the last four years, Puerto Rico has undergone significant retail shopping center development. During this period, the number of multiplex theaters has increased substantially. The Company's principal competitor, Caribbean Cinemas, a privately-owned company, has opened three complexes representing approximately 33 screens in the San Juan metropolitan area since the beginning of 1996. All of these complexes were under development at the time the Company purchased its interest in Cine Vista. These new screens have adversely affected the Company's current operations, reducing in the near term the Company's market share from approximately 42% to approximately 24% percent. The Company believes that, while Cine Vista has an opportunity to expand its operations through the development of new multiplex theaters and improvement of its existing operations, the Puerto Rico market will be substantially built out by the year 2000. It is unlikely that the Company will develop more than an additional thirty to thirty-five screens in Puerto Rico over the next three years (excluding the eight screens under development at the Mayaguez Mall). Cine Vista derives approximately 70% of its revenues from box office receipts. Ticket prices vary by location, and provide for reduced rates for senior citizens and children. Box office receipts are reported net of a 10% excise tax imposed by Puerto Rico. Show times and features are placed in advertisements in local newspapers with the costs of such advertisements paid by Cine Vista. Film distributors may supplementally advertise certain feature films with the costs generally paid by distributors. 4 Concession sales account for approximately 25% of total revenues. Concession products primarily include popcorn, candy and soda. Cine Vista has implemented training programs and incentive programs and experiments with product mix changes in order to increase the amount and frequency of concession purchases by theater patrons. Screen advertising revenues contribute approximately 4% of total revenues. Cine Vista has agreements with a major soft-drink bottler and an independent advertising production company to show advertisements on theater screens prior to feature film showings. Other sources of revenues 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 practices. Films are licensed on a film-by-film, theater-by-theater basis. Generally, film payment terms provide for payment to film distributors under a percentage of gross box office receipts formula or an adjusted gross receipts formula. Under the gross receipts formula, the film distributor receives a specified percentage of the gross box office receipts. Ordinarily, the percentage will decline from a range of 60-70% in the first playweek to a low of 30% after 4-5 weeks. Under an adjusted gross receipts formula, the film distributor receives a specified percentage (usually 90%) of the box office receipts over the "House Allowance," a negotiated allowance for theater expenses. Cine vista licenses film from substantially all of the major United States studios and is not dependent upon any one film distributor for all of its products. 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 Cine Vista's business. Cine Vista believes that the popularity of the Puerto Rico exhibition market and Puerto Rico rules governing film licensing make such a situation unlikely. In 1996, films licensed from Cine Vista's four largest film suppliers accounted for approximately 65% of Cine Vista's box office revenues. Competition: The Company believes there are approximately 32 first-run ----------- movie theaters in daily operation with approximately 179 screens in Puerto Rico. Based upon number of screens, box office revenues and number of theaters, Cine Vista is the second largest exhibitor in Puerto Rico. The three largest exhibitors are believed to account for over 99% of the box office revenues recorded in 1996 by theaters in daily operation. Competition among the theater exhibitors exists not only for theater patrons within certain geographic areas, but also for the licensing of films and the development of new theater sites. The number of sites suitable for multiplex cinemas is limited. Competitors of Cine Vista are expected to continue to open theaters competitive with Cine Vista's. Since the beginning of 1996, the Company's principal competitor has opened three complexes in the San Juan metropolitan area adding 33 screens, all of which are competitive with the Company's theaters, and which have attracted business that would otherwise have gone to theaters owned by Cine Vista. This competitor has at least one additional competitive theater under development, which is expected to add 12 screens to the San Juan market. Seasonality: Most major films are released to coincide with the summer ----------- months, when schools are closed or the winter holiday seasons. Accordingly, Cine Vista has historically recorded greater revenues and earnings during the second half of the calendar year. Employees: Cine Vista has approximately 175 employees in Puerto Rico, --------- approximately 15 of whom are employed under the terms of a collective bargaining agreement. The collective bargaining agreement expires in May 1997. The Company believes its relations with its employees in Puerto Rico to be good. Angelika Film Centers - - - --------------------- On August 27, 1996, the Company and Sutton Hill Associates ("Sutton Hill"), a New York cinema exhibitor, acquired, for approximately $12,570,000 (inclusive of $529,000 in acquisition costs), the Angelika Film Center (the "Angelika"), a multiplex theater located in the Soho district of New York City and which the Company believes to 5 be the premier specialty theater in the United States. The Company and Sutton Hill have formed a limited liability company, Angelika Film Centers LLC ("AFC"), to hold their interest in the Angelika. The Company contributed 83.3% of the capital of AFC and Sutton Hill contributed the remaining 16.7%. The operating agreement of AFC provides that all depreciation and amortization (the "Special Deductions") will first be allocated to Sutton Hill until the aggregate amount of such Special Deductions equals Sutton Hill's initial investment. Thereafter, the Company will receive all Special Deductions until the relative ownership interests are equal to the initial ownership interests of the parties. Sutton Hill has agreed to subordinate its interest in AFC to the Company's interest in order to permit the Company to pledge AFC and its assets as collateral to secure borrowings by the Company. In addition, Sutton Hill has agreed that the Company will be entitled to receive up to 100% of the proceeds of borrowings by AFC, up to the amount of the Company's initial capital contribution of AFC. AFC is managed by City Cinemas Corporation ("City Cinemas"), a cinema management company owned by Sutton Hill, pursuant to the terms of a management agreement (the "Management Agreement"). The Management Agreement provides for City Cinemas to manage the Angelika for a minimum annual fee of $125,000 plus an incentive fee equal to 50% of annual cash flow (as defined in the Management Agreement) over prespecified levels, provided, however, that the maximum annual fee (minimum fee plus incentive fee) may not exceed 5% of the Angelika's annual revenues. The Angelika reported 1996 revenue of $7.4 million. AFC has reached agreement with its landlord to extend the remaining term of the Angelika lease from approximately 12.5 years to approximately 29.5 years, and the landlord has submitted such amended lease to its lender for its consent. The Company is currently working to develop additional Angelika Film Centers in major urban areas located throughout the United States. It is not currently anticipated that City Cinemas would participate in centers located outside of New York City. In accordance with the Company's business plan, on February 27, 1997, the Company entered into an agreement for the construction and lease of a 1,450-seat, eight-screen, 29,000 square foot art and specialty cinema and cafe facility to be located in the Bayou Place entertainment center in Houston, Texas. Bayou Place is being developed by The Cordish Company pursuant to a ground lease and development agreement with the City of Houston. The complex sits over a 3,000-car parking garage and is located in the middle of the City's theater district. The lease is subject to approval by the City, the execution and delivery by the city of a suitable agreement of attornment and non-disturbance and the granting by the City of certain parking rights. Assuming the prompt approval of the lease and the prompt execution and delivery of such an agreement and grant of parking rights, it is anticipated that the Houston Angelika could be opened in time for the 1997 year-end Holiday season. The Company is currently in negotiation with owners and developers with respect to a number of additional potential locations. No assurances can be given, however, that any of the negotiations will result in operational theaters. The Company believes that the exhibition of first run art and specialty films is a niche business, in some ways distinct from the business of exhibiting bigger budget wide release films. At the present time, the only national chain specializing in art and specialty film is Landmark Cinemas, a subsidiary of Metromedia Company which operates over 140 screens in over 50 locations, principally in California and Washington. Many larger cities have smaller chains which operate one to five locations. While major chains specializing in conventional wide releases film product also may exhibit art and specialty product from time to time, these chains have typically limited themselves to the exhibition of such crossover art films as "Four Weddings and a Funeral," "The English Patient," "Pulp Fiction," "The Piano" and "Shine." This may change as more megaplex complexes with 16 or more screens are constructed, particularly if the number of films released by the distributors of conventional wide release film product decreases or if art and specialty film develops in popularity to the point where it enjoys a wider release than is currently typically the case with such films. Current levels of film production continue to provide megaplex exhibitors with sufficient film products to make such exhibitors inconsistent sources of screens for the distributors of art and specialty film. Art cinemas complexes, which typically do not exhibit conventional wide release films, are accordingly currently a more consistent source of screens to the distributors of art and art specialty film. Licensing/Pricing: Art and specialty films are available from many sources ----------------- ranging from the divisions of the larger film distributors specializing in the distribution of specialty films to individuals that have acquired domestic 6 rights to one film. Generally, film payment terms are based upon an adjusted gross receipts formula where the film distributors receive a specified percentage (usually 90%) of the box office receipts over the "House Allowance," a negotiated allowance for theater expenses. Competition: In most markets, art and specialty film is currently 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 there is currently a window of opportunity to construct, in a number of under-serviced urban markets, a nationwide chain of state-of-the-art multiplex cinemas specializing in art and specialty film. The Company further believes that the distributors of such films may favor distribution of art and speciality film to such a specialized chain as opposed to distribution to conventional megaplex operators, since megaplex operators will typically prefer to exhibit mainstream bigger budget film rather than art product and, accordingly, may not be as consistent and as dependable a source of screens as exhibitors who show only art and specialty film product. The Company also believes that patrons of art and specialty film may prefer a cinema experience that is different from that offered by a megaplex complex and that the familiarity and goodwill associated with the Angelika name and the strength of the Company's balance sheet may give the Company a competitive advantage over other independent exhibitors of art and speciality films. However, the cinema industry is currently in a state of significant change, as illustrated by the significant number of multiplex and megaplex theaters which have been constructed or announced in recent periods, and no assurances can be given that the Company's plans can be successfully implemented. 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 $98,000,000, $112,000,000, $244,000,000, $372,000,000, $355,000,000 in 1991 through 1995, respectively, and over $500,000,000 in 1996 (based upon management estimates). Employees: AFC has approximately 30 employees, three of whom are employed --------- under the terms of collective bargaining agreement. The collective bargaining agreement expires in October 1998. AFC believes its relations with its employees to be good. Reading Australia - - - ----------------- The Company commenced activities in Australia in mid-1995, and currently conducts business in Australia through its wholly-owned subsidiary, Reading Australia Pty. Limited ("RAPL" and, collectively with its various subsidiaries. "Reading Australia"). In November 1995, the Company and Craig Corporation (together with its wholly-owned subsidiaries, "Craig") formed a limited liability corporation, Reading International LLC ("Reading International"), which was owned equally by the Company and Craig. Reading International owns Reading Australia. REI acquired Craig's interest in Reading International in October 1996 (see the "Stock Transactions"). Reading Australia has retained several key executives resident in Australia, acquired or signed agreements to acquire several parcels of real estate for development as entertainment centers with multiplex cinemas and complementary uses and, on December 26, 1996, opened its first multiplex cinema in Australia. Reading Australia's initial business plan has been to focus on two types of locations. The first type of locations are large freehold sites or long-term leasehold properties located in metropolitan areas and which the Company believes can be developed as entertainment centers ("Entertainment Centers") providing patrons with not only a state-of-the-art multiplex cinema facility (typically featuring a complex with 12 or more screens), but also with convenient on-site parking and access to complementary amenities such as restaurants. Entertainment Center projects are currently being developed by wholly-owned subsidiaries of Reading Australia. The second type of locations are smaller sites ("Country Cinemas"), located in smaller metropolitan areas which cannot, in the view of the Company, currently support larger multiplex complexes. It is expected that the Country Cinemas will be developed by Australia Country Cinemas Pty. Limited ("ACC"), a company which will be owned 75% by a subsidiary of Reading Australia and 25% by a company owned by an Australian national, resident in Australia and from a family long experienced in the cinema exhibition and supply business. These Country 7 Cinemas are a secondary focus for the Company, the principal focus being upon the development and operation of entertainment centers, and it is uncertain as to how many Country Cinemas locations will be developed. The initial cinema opened by Reading Australia was a Country Cinema consisting of six screens and 1,364 seats located on a long-term leasehold property in Townsville, Queensland. In March 1997, the Company broke ground on another cinema, a six-plex virtually identical to the Townsville theater, located on a long-term leasehold in Mandurah, Western Australia. In addition, Reading Australia has signed contracts to acquire the following properties for development as Entertainment Centers:
LAND APPROXIMATE ESTIMATED SIZE IN APPROXIMATE CINEMA DEVELOPMENT SIZE IN SQUARE PURCHASE SIZE IN SQUARE FOOTAGE OF SITE FOOTAGE PRICE SQUARE FEET IMPROVEMENTS ---- ------- ----- ------------- ------------ Auburn, New South Wales 522,720 $8,500,000 60,000 210,000 Frankston, Victoria/1/ 227,750 N/A 64,000 94,000 Moonee Ponds, Victoria 129,949 $5,400,000 54,000 103,000 Newmarket, Queensland 172,160 $4,800,000 49,000 161,000
/1/Under the applicable development agreement, Reading Australia is required to make certain infrastructure improvements which are estimated to cost approximately $6,000,000. The Company has also signed a lease on a site mentioned below and is about to sign a lease on the second site mentioned below. In both cases, the Company's interest would be limited to that of the owner/operator of a multiples cinema as follows:
SITE CINEMA SIZE IN SQUARE FEET NUMBER OF SCREENS ---- -------------------------- ----------------- Liverpool, New South Wales 68,000 18 screens Penrith, New South Wales 70,000 12 screens
The Company has accumulated, as the consequence of three separate acquisitions, a 50 acre site in Burwood, Victoria. The site was originally acquired for development of a mega-plex cinema. However, such use is currently being revaluated as a consequence of an adverse land use determination, which negated certain permits which were in place at the time the land was acquired. The Company, generally speaking, has encountered substantial opposition to its attempt to develop freestanding cinema in entertainment complexes in Australia. Currently, most cinemas in Australia are located within the central business district (the "CBD") of the community which they serve. In the case of multiplex developments, such complexes are typically found on second or third floor locations in large privately-owned shopping centers. This course of development has historically been a function of Australian land use planning which is more protective of CBDs and of private shopping center development than is typically the case in the United States and has, in the view of the Company, resulted in facilities that are typically less convenient to the public and less modern than the current generation of U.S. multiplexes and in higher ticket prices than are typically found in the United States. In the view of the Company, the principal competitive restraint on the development of its business in Australia is the availability of sites. The Company's principal competitors and certain major commercial landlords are currently attempting to use this historical course of land use development to prevent the construction of freestanding cinemas in entertainment complexes, particularly where those complexes are located outside of an established CBD or shopping center development. At the present time, competitors or shopping centers' landlords are contesting the suitability, from a land use point of view, of several of the above referenced locations. In the case of the Company's 8 50-acre site at Burwood in Victoria, the relevant Minister (Minister for Planning and Local Government) preempted local zoning authorities to prohibit the Company's intended development of a 25-screen cinema complex, which would have competed with complexes owned by the principal theater operators in Australia and located in shopping centers owned by some of the principal landlords in Australia. The inability to development free standing cinemas as part of Entertainment Centers would be adverse to the Company, since the principal exhibitors in Australia have close historic relations with that country's principal shopping center owners. In light of the opposition encountered to date, no assurances can be given that the Company will be able to accomplish its business objectives in Australia. Furthermore, even if those objectives are eventually achieved, the realization of these objectives will likely require a longer period of time and a greater level of developmental costs than originally anticipated by the Company. While the Company remains committed to its plans with respect to Australia, no assurances can be given that the Company will be able to obtain the governmental approvals needed to develop its Entertainment Center sites and the Company does not anticipate that it will have any of its metropolitan locations open before the forth quarter of 1998. Each of the agreements signed by the Company to acquire or lease land is, in effect, subject to the receipt of all permits required for the construction of a multiplex cinema. As each of Frankston, Moonee Ponds and Newmarket are located in either CBD or an entertainment zone, the Company anticipates that it will receive the permits needed to proceed with such locations. The Company's transferor at Auburn has been granted development consent for the construction of a 2,000 seat, eight screen complex although building approval is required before construction can commence. However, a competitor has challenged the legality of such permit and filed suit to overturn the permit. The Company intends to vigorously defend this attempt by such competitor to delay or block this project. Reading Properties Pty. Limited, a subsidiary of RAPL, has been joined as a party in the relevant legal proceeding. As to Liverpool, the determination of the City Council to deny a permit has been appealed to the Land and Environment Court. Penrith is also located in an entertainment zone, and applications for necessary permits have been filed. As to the Burwood Property (a parcel of undeveloped land acquired by the Company in 1995 for $7.3 million), the Company is currently reviewing its options as to possible alternative uses of the site. At the present time, the Company believes it unlikely, absent a change in governmental attitude in Victoria as to the development of cinemas outside of established shopping centers, that the property can be developed for cinema or other entertainment- oriented purposes. However, the Company believes that the parcel has significant value for alternative uses. In addition to the locations referenced above, the Company has been in negotiations for some period of time with AMP Investments Limited ("AMP") concerning a ground lease and the construction of a twelve screen cinema on a 60,000 square foot pad at AMP's Mount Gravatt shopping center in Queensland. Based upon the advice of counsel, the Company is of the view that an enforceable lease currently exists between the Company and AMP with respect to that site. However, AMP is currently taking the position that no such lease exists and has stated an unwillingness to proceed. Without waiving its position that an enforceable lease does presently exist, the Company is presently continuing discussions with AMP, in an effort to overcome AMP's current unwillingness to proceed. If these discussions do not resolve the issue, the Company intends to litigate the matter. 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 9 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. Licensing/Pricing: Films are licensed under agreements with major film ----------------- distributors and several local distributors who distribute specialized films. Film exhibitors are provided with an opportunity to view films prior to negotiating with the film distributor the commercial terms applicable to its release. Films are licensed on a film-by-film, theater-by-theater basis. Reading Australia licenses films from all film distributors as appropriate to each location. Generally, film payment terms provide for payment to film distributors under a gross box office receipts formula or an adjusted gross receipts formula. Under the gross receipts formula, the film distributor receives a specified percentage of the gross box office receipts. Ordinarily, the percentage will decline from a range of 50%-60% in the first play week to a low of 25% after 4-5 weeks. Under an adjusted gross receipts formula, the film distributor receives a specified percentage, usually 80% or 90%, of the box office receipts over the "House Allowance," a negotiated allowance for theater expenses. Normally, the higher of the above two calculations is the amount paid to the distributor. Competition: The film exhibition business in Australia is concentrated and, ----------- to a certain extent, vertically integrated. The principal exhibitors in Australia include Village Roadshow Limited ("Village") with approximately 136 screens, Greater Union and affiliates with approximately 278 screens and Hoyts Cinemas ("Hoyts") with approximately 166 screens. Independents as a group operate approximately 560 screens. Greater Union is the owner of Birch Carroll & Coyle and a part owner of Village. All new multiplex cinema projects announced by Village are being jointly developed by Greater Union, Village, and Warner Bros. Hoyts has announced plans to add approximately 140 new multiplex screens. These companies have substantial capital resources. Village had a publicly reported consolidated net worth of approximately $650 million at June 30, 1996. The Greater Union organization does not separately publish financial reports, but its parent, Amalgamated Holdings, had a publicly reported consolidated net worth of approximately $210 million at June 30, 1996. Hoyts Cinemas recently completed a public offering, increasing its net worth to approximately $170 million. 10 The industry is somewhat vertically integrated in that Village also serves as a distributor of film in Australia for Warner Bros. and Disney/Touchstone/Buena Vista. Films produced or distributed by the majority of the local international independent producers are also distributed by Roadshow Film Distributors. Roadshow Film Distributors is owned equally by Village and Greater Union. The practical impact of this vertical integration is mitigated to some extent, however, by the Australian legal requirement that all films be made reasonably available to all exhibitors. Seasonality: Major films are generally released to coincide with the school ----------- holiday trading periods, particularly the summer holidays. Accordingly, Reading Australia would expect to record greater revenues and earnings during the first half of the calendar year. Employees: Reading Australia has seven executive and administrative --------- employees and approximately 30 theater employees. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS - - - ----------------------------------------------------------- The following table indicates the relative amounts of revenues from operations and identifiable assets of the Company by geographic area during the three-year period ended December 31, 1996. The Company has no export revenues.
1996 1995 1994 ---- ---- ---- Revenues: Puerto Rico............................... $ 15,523 $14,925 $ 8,060 Mainland United States (1)................ 3,256 273 697 Australia (2)............................. 0 0 0 Income (loss) from operations: (3) Puerto Rico............................... $ 385 $ 1,225 $ 889 Mainland United States.................... 956 273 697 Less: Minority Interest................... (67) 0 0 Australia.................................. (2,817) (781) 0 Add: Minority Interest.................... 388 390 0 Corporate and Other (4)................... 7,159 1,482 (3,238) Identifiable assets:(5) Puerto Rico............................... $ 26,529 $26,979 $26,488 Mainland United States.................... 15,824 0 0 Australia................................. 12,948 4,760 0 Less: Minority Interest................... 0 (2,380) 0 Corporate and other........................ 126,453 47,926 46,228 Consolidated Assets (6)................... $181,754 $77,924 $72,716
1. The Angelika revenues represent only the period from August 27, 1996 through December 31, 1996. 2. Reading Australia recorded no revenues other than interest and dividend income, which income is included in Corporate and other. 3. Reflects earnings before interest expense, taxes and intercompany interest and management fees. 4. Corporate and other income includes corporate General and Administrative expense, Other Income, and Interest Income/Expense and excludes intercompany interest and management fees. 11 5. Reading Australia has cash, cash equivalents, and the Stater Preferred Stock, which assets had an aggregate book value of $82,210,000 and have been included in the value of Corporate and other Assets. 6. Consolidated assets for 1995 and 1996 include the assets of Reading Australia. The Reorganization and Stock Transactions - - - ----------------------------------------- In October 1996, two transactions were approved by shareholders, the Reorganization and the Stock Transactions. Both transactions were completed on October 15, 1996. The Reorganization was effected pursuant to an Agreement and Plan of Merger (the "Merger Agreement") among Reading Company, REI, which was a newly formed, wholly-owned subsidiary of Reading Company, and Reading Merger Co. ("Merger Co.") which was a newly formed, wholly-owned subsidiary of REI. In the Reorganization, Reading Company merged with Merger Co. and each outstanding share of Reading Company's Common Stock and Class A Common Stock was converted into the right to receive one share of REI's Common Stock. As a result of the Reorganization, Reading Company became a wholly-owned subsidiary of REI and the shareholders of Reading Company became shareholders of REI. The Stock Transactions were carried out pursuant to an Exchange Agreement, dated September 4, 1996 (the "Exchange Agreement") between REI, Citadel, Reading Company and Craig. In the Stock Transactions, REI issued (i) 70,000 shares of Series A Voting Cumulative Convertible Preferred Stock (the "Series A Preferred Stock") to Citadel, and granted certain contractual rights to Citadel in return for $7 million in cash and (ii) 550,000 shares of Series B Voting Cumulative Convertible Preferred Stock (the "Series B Preferred Stock") and 2,476,190 shares of Common Stock to Craig in exchange for certain assets owned by Craig. The assets acquired by REI from Craig consisted of the 693,650 shares of Stater Preferred Stock, Craig's 50% membership interest in Reading International, of which an indirect wholly owned subsidiary of REI was the sole other member, and 1,329,114 shares of Citadel's 3% Cumulative Voting Convertible Preferred Stock, stated value $3.95 per share (the "Citadel Preferred Stock"). The contractual rights granted to Citadel in the Stock Transactions are set forth in an Asset Put and Registration Rights Agreement pursuant to which Citadel has the right (the "Asset Put Option"), exercisable at any time after October 15, 1996 and until 30 days after REI files its Annual Report on Form 10-K for the year ending December 31, 1999, to require REI to acquire substantially all of Citadel's assets, and assume related liabilities (such as mortgages), for shares of REI Common Stock. In exchange for up to $20 million in aggregate appraised value of Citadel assets on exercise of the Asset Put Option, REI is obligated to deliver to Citadel a number of shares of REI Common Stock determined by dividing the value of the Citadel assets by $11.75 if the notice of exercise is received by October 31, 1997 and $12.25 if notice is received thereafter. If the appraised value of the Citadel assets is in excess of $20 million, REI is obligated to pay for the excess of issuing Common Stock at the then fair market value. REI is not obligated to acquire more than $30 million of assets. The Series A and Series B Preferred Stock (collectively, the "Convertible Preferred Stock") have stated values of $7 million and $55 million, respectively. Holders of each series of the Convertible Preferred Stock are entitled to cast 9.64 votes per share, voting together with the holders of the Common Stock and the other series of Convertible Preferred Stock, on any matters presented to shareholders of REI. Each share of Series A Preferred Stock is convertible into shares of Common Stock at a conversion price of $11.50, and each share of Series B Preferred Stock is convertible into shares of Common Stock at a conversion price of $12.25, each subject to adjustment on certain events, at any time after April 15, 1998. The shares of Series A Preferred Stock may also be converted after a change in control. REI has the right to require conversion of the Series A Preferred Stock if the average market price of the Common Stock over a 180-calendar day period exceeds $15.525. REI granted certain registration rights to Citadel with respect to the shares of Common Stock issuable on conversion of the Series A Preferred Stock and the Asset Put Option. Citadel has the right during the 90 day period beginning October 15, 2001, or in the event of a change of control of the Company, to require the Company to repurchase the Series A Preferred Stock at its stated value plus accrued and unpaid dividends plus, in the case of a change of control, a premium. In addition, if REI fails to pay dividends on the Series A Preferred Stock for four quarters, Citadel may (after April 15, 1998) require REI to repurchase the Series A Preferred Stock. Also, REI has certain rights to redeem the Convertible Preferred Stock at its option. Due to the redemption provisions, the Series A Preferred Stock has not been included as a component of Shareholders' Equity in the Consolidated Balance Sheet and is separately categorized as "Preferred Stock." 12 REI and Citadel also agreed that, immediately following REI's receipt of the Citadel Preferred Stock from Craig, the Company would deliver the Citadel Preferred Stock to Citadel in exchange for an equal number of shares of a new series of Citadel preferred stock (the "Citadel Series B Preferred Stock"). The Citadel Preferred Stock and the Citadel Series B Preferred Stock were substantially identical, except that the Citadel Series B Preferred Stock reduced the accrual rate on the redemption premium from 9% per annum to 3% per annum subsequent to the closing of the Stock Transactions and also provided that the Citadel Series B Preferred Stock could not be presented for conversion to Citadel common stock for a period of one year beginning 15 days after Citadel filed its 1996 Annual Report on Form 10-K with the SEC. On December 18, 1996, REI elected to convert the Citadel Series B Preferred Stock into Citadel common stock whereupon Citadel exercised its right to redeem the Citadel Series B Preferred Stock. REI received gross proceeds of approximately $6.2 million on such redemptions. ITEM 2. PROPERTIES REI Executive and Administrative Offices - - - ---------------------------------------- REI leases approximately 6,600 square feet of office space in center city Philadelphia. A subsidiary of the Company shares office space in New York City with City Cinemas. This space approximates 2,600 square feet, and the cost is apportioned between City Cinemas and REI. Center City Philadelphia Properties - - - ----------------------------------- The Company's properties in center city Philadelphia, all of which are owned in fee, consist of several parcels of land aggregating approximately .67 acres located near or adjacent to the site of the Convention Center which are currently leased to a parking lot operator; the Viaduct north of Vine Street to Fairmount Avenue and adjacent parcels, comprising approximately 6.75 acres; and properties owned by partnerships in which the Company has interests. Partnership Properties - - - ---------------------- S.R. Developers: A subsidiary of the Company is a general partner in S.R. Developers, a partnership which owns one property in center city Philadelphia. Parametric Garage Associates: A subsidiary of the Company is a general partner in Parametric Garage Associates, a partnership which owns the 750-car Gallery II Parking Garage (the "Garage"). The Garage is adjacent to the Pennsylvania Convention Center Complex. The Company has primary responsibility for the leasing and management of 19,000 gross rentable square feet of retail space on the ground level of the Garage pursuant to a management agreement and provides certain other management services to the partnership. Other Domestic Non-Entertainment Real Estate - - - -------------------------------------------- When the Company's railroad assets were conveyed to Conrail, the Company retained fee ownership of approximately 700 parcels and rights-of-way located throughout Pennsylvania, Delaware, and New Jersey. Approximately 23 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. Entertainment Properties - - - ------------------------ The Company currently leases approximately 227,728 square feet of completed theater space in the United States, Puerto Rico and Australia, as follows: 13
Approximate Aggregate Range of Terms Average Remaining Term Square Footage (including renewals) (including renewals) -------------- -------------------- -------------------- United States 23,050 12.5 12.5/1/ Puerto Rico 181,728 16-40 years 30 Australia 16,000 30 30
/1/The Company has reached agreement with its landlord to extend the remaining term of the Angelika lease to approximately 29.5 years, and the landlord has submitted such amended lease to its lender for consent. In addition, the Company has signed leases with respect to additional to-be-built theater space of 29,000 square feet in the U.S., 36,000 square feet in Puerto Rico, and 170,000 square feet in Australia (calculated exclusive of the Mount Gravatt lease). These leases have average terms (including renewals) of 36 years and average base rents of $464,000. The Company currently has contracted to purchase 1,052,571 square feet of land comprised of four sites for the construction of cinemas and entertainment complexes in Australia. For more detailed information about the Company's entertainment properties, please see the discussion under Item 1. - Business - Description of Business, above. Cine Vista Properties - - - --------------------- All of Cine Vista's real properties are leased. The eight theaters are leased pursuant to long-term leases with remaining terms and renewal options ranging from 16 to 40 years. Cine Vista has executed an additional lease for an expansion of an existing theater, which lease term commences with occupancy, expected in mid-1998. The landlord of one of Cine Vista's theaters has the right to terminate the lease relating to space presently housing two screens, subject to six months' notice. All of the Cine Vista's theater leases provide for the payment of minimum fixed rental payments and, in certain cases, may require additional payments based upon a percentage of theater revenues. Cine Vista also leases approximately 6,100 square feet of warehouse space and 2,200 square feet of office space. Angelika Film Centers Properties - - - -------------------------------- The Angelika Film Center is located in a leased facility of approximately 23,000 square feet in the Soho district of New York City. Reading Australia Properties - - - ---------------------------- Reading Australia maintains leased offices in Melbourne and Sydney, Australia pursuant to short term leases. The total leased space is approximately 2,300 square feet. In December 1995, Reading Australia acquired a 50 acre site in a suburban area outside of Melbourne. Reading Australia had intended to build a multiplex theater on this site but the Minister for Planning and Local Government has intervened to negate certain permits which were in place at the time the land was acquired. Reading Australia believes that the site has value as an assemblage for other uses, even if its unable to develop the site as a theater. Reading Australia opened its first theater in December 1996 in leased facilities in Townsville, Queensland under the Country Cinema concept and has broken ground on a second facility now under construction in Mandurah, West Australia. Reading Australia is aggressively pursuing other locations in and about Sydney and Melbourne and elsewhere in Australia upon which it may develop theater operations. It has made several refundable deposits related to lease and purchase deposits. 14 ITEM 3. LEGAL PROCEEDINGS Environmental - - - ------------- Reading Company has been advised by the Environmental Protection Agency ("EPA") that it is a potentially responsible party ("PRP") under environmental laws including Federal Superfund legislation ("Superfund") for a site located in Douglassville, Pennsylvania. The EPA issued an Administrative Order under Superfund against 34 PRPs requiring, among other things, that the named parties be required to incinerate materials at the site pursuant to a 1989 Record of Decision ("ROD"). The ROD estimated that the incineration would cost approximately $53 million. Thirty-six PRPs were also named in a civil action brought by the United States Government which seeks to recover alleged costs incurred at the site by the United States of approximately $22 million. Reading Company was named in a third-party action instituted by the majority of the 36 PRPs sued by the United States. The actions instituted against the Company and approximately 300 PRPs seek to have the parties contribute to reimbursement for past costs and any costs associated with further remediation at the site. In 1995, the federal district court judge who presided over Reading Company's bankruptcy reorganization ruled that all liability asserted against Reading Company relating to the site was discharged pursuant to the consummation order issued in conjunction with Reading Company's bankruptcy on December 31, 1980. The judge's decision has been appealed and the appeal was heard in July 1996. The appellate court has not yet rendered its opinion. Pursuant to a settlement of litigation, the City of Philadelphia, Conrail, and the Southeastern Pennsylvania Transportation Agency have agreed to pay an amount ranging from 52% to 55% of future costs Reading Company may incur in cleaning environmental contamination on one of its properties, the Viaduct, which Reading Company believes may be contaminated by PCBs. Reading Company has advised the EPA of the potential contamination. Reading Company has not determined the scope and extent of any such PCB contamination. However, Reading Company has been advised by counsel that, given the lack of regulatory attention to the Viaduct in the fourteen years which have elapsed since the EPA was notified of the likelihood of contamination, it is unlikely that Reading Company will be required to decontaminate the Viaduct or incur costs related thereto. 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 current directors of the Company (other than Gregory R. Brundage) as defendants. The Complaint alleged, among other things, that the Independent Committee set up to review the transactions and the current and former directors of the Company breached their fiduciary duty to the minority shareholders in the review and negotiation of the Reorganization and Stock Transactions and that none of the directors of the Company were independent and that they all were controlled by James J. Cotter, Craig or those controlled by them. The Complaint also alleged, in part, that the defendants failed to disclose the full future earnings potential of the Company and that Craig would benefit unjustly by having its credit rating upgraded and its balance sheet bolstered and that the value of the minority shareholders' interest in the Company was diluted by the transactions. The Complaint sought injunctive relief to prevent the consummation of the Stock Transactions and recision of the Stock Transactions if they were consummated and divestiture by the defendants of the assets or shares of the Company that they obtained as a result of the Stock Transactions, and unspecified damages and other relief. In October, all of the defendants filed preliminary objections to the Complaint and thereafter, by agreement of the parties and Order of the Court, the Company was dismissed as a defendant without prejudice. Plaintiff dismissed with prejudice his request for preliminary and permanent injunctive relief to prevent the consummation of the Stock Transactions and his request to rescind and set aside the Stock Transactions. 15 In November, 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 either the Company or Reading 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. Management believes that the allegations contained in the amended complaint are without merit and intends to vigorously defend the directors in the matter. The Company has Directors and Officers liability insurance and believes that the claim is covered by such insurance. The Company is not a party to any other pending legal proceedings or environmental action which management believes could have a material adverse effect on its financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At the Company's 1996 Annual Meeting of Shareholders held on October 15, 1996, shareholders (i) elected six directors (ii) approved a proposal to adopt an Agreement and Plan of Merger, which Plan of Merger effected the Reorganization and (iii) approved a proposal to approve an Exchange Agreement, which Exchange Agreement effected the Stock Transactions. The results of the votes were as follows: (i) Election of Directors For Withheld --- -------- James J. Cotter 2,678,663 256,673 Gregory R. Brundage 2,677,165 258,171 Edward L. Kane 2,678,617 256,719 John W. Sullivan 2,678,665 256,671 Albert J. Tahmoush 2,678,665 256,671 S. Craig Tompkins 2,678,503 256,833 For Against Abstain --- ------- ------- (ii) Approval of Plan of Merger 2,676,560 258,573 203 (iii) Approval of Exchange Agreement 2,676,508 258,621 207 EXECUTIVES OFFICERS OF THE REGISTRANT NAME AGE POSITION ---- --- -------- James J. Cotter 59 Chairman of the Board of Directors S. Craig Tompkins 46 Vice Chairman and Director Robert F. Smerling 62 President John Rochester 53 Chief Executive Officer, Australian Cinemas Operations and Reading Australia Pty Ltd. James A. Wunderle 45 Executive Vice President, Chief Financial Officer and Treasurer 16 Charles S. Groshon 43 Vice President Eileen M. Mahady 31 Controller Mr. Cotter has been Chairman of the Board of Directors since December 1991, Chairman of the Company's Executive Committee since March 1993 and a director since September 1990. Mr. Cotter has been Chairman of the Board of Craig since 1988 and a director since 1985. Mr Cotter has been a director and the Chairman of the Board of Citadel since 1991. From October 1991 to June 1993, Mr. Cotter also served as the acting Chairman of Citadel's wholly-owned subsidiary, Fidelity Federal Bank, FSB ("Fidelity"), and served as a director of Fidelity until December 1994. Mr. Cotter has been a director and Chief Executive Officer of Townhouse Cinemas Corporation (motion picture exhibition) since 1987, Executive Vice President and a director of The Decurion Corporation (motion picture exhibition) since 1969 and a director of Stater and its predecessors since 1987. From 1988 through January 1993, Mr. Cotter also served as the President and a director of Cecelia Packing Corporation (a citrus grower and packer), a company wholly owned by Mr. Cotter. Mr. Cotter is also a director and Executive Vice President of Pacific Theatres, a wholly-owned subsidiary of Decurion. Mr. Smerling has been President of Reading Entertainment since January 1997. Mr. Smerling has served as President of Reading Cinemas, Inc. since November 1994. Mr. Smerling also serves as the President of Cine Vista and the Chief Executive Officer of Reading Australia. Mr. Smerling served as president of Loews Theater Management Corporation, a subsidiary of Sony Corporation, from May 1990 until November 1994. Mr. Smerling also serves as President and Chief Executive Officer of City Cinemas, a motion picture exhibitor located in New York City, New York. City Cinemas is an affiliate of James J. Cotter and has entered into an Executive Sharing Agreement with the Company with respect to the services of Mr. Smerling. Mr. Tompkins has been Vice Chairman since January 1997. Mr. Tompkins has been a Director of the Company since March 1994 and was President of the Company from March 1994 through December 1996. Mr. Tompkins is also President and Director of Craig and has served in such positions since March 1, 1994. Prior thereto, Mr. Tompkins was a partner in the law firm of Gibson, Dunn & Crutcher for more than the past five years. Mr. Tompkins has been a director of Citadel since May 1994 and a director of G&L Realty Corp., a New York Stock Exchange listed REIT (Real Estate Investment Trust), since December 1994. Since July 1995, Mr. Tompkins has been the Vice Chairman of Citadel, and currently serves as that company's Secretary/Treasurer and Principal Accounting Officer. Mr. Rochester has been Chief Executive Officer of Reading Australia since November 1995. From 1990 through 1995, Mr. Rochester was the Managing Director of Television & Media Services Ltd. (formerly Hoyts Entertainment Ltd.). He also served in several other executive offices for that organization since 1987. Mr. Wunderle has been Chief Financial Officer since January 1987 and Executive Vice President, Treasurer, and Chief Financial Officer since December 1988. He has been Treasurer since March 1986. Mr. Groshon has been Vice President of the Company since December 1988. He was an internal auditor with the Company from August 1984 until December 1988, and a staff accountant prior thereto. Ms. Mahady has been Controller of the Company since April 1990. Prior to joining the Company, she was a senior auditor with Ernst & Young. Ms. Mahady is a Certified Public Accountant. In addition, the Company has contractual arrangements with certain other individuals and/or certain affiliated companies which make available to the Company consulting services from the following individuals: John Foley: Mr. Foley has been a full time employee of City Cinemas since January 1997, and in this capacity provides booking and site identification advice to the Company. Prior to joining City Cinemas, Mr. Foley was the President of Distribution for Miramax, where he, among other things, developed and implemented the distribution plan for "The English Patient," the winner of nine Academy Awards and one of the most profitable art films 17 of all time. Prior to joining Miramax in 1994, Mr.Foley was the President of Distribution for MGM/UA from 1989 through 1993. Steve Wesson: Mr.Wesson has been the President and Chief Executive Officer of CHC since August 1994. Prior to his employment by Citadel in 1993, Mr. Wesson was the Chief Executive Officer of Burton Properties Trust Inc., the U.S. real estate subsidiary of The Burton Group PLC, from 1989. Reading owns 26% of the outstanding Common Stock of CHC, and receives real estate consulting services from Citadel pursuant to an agreement with that company. 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Common Stock Summary - - - -------------------- The following table sets forth the high and low prices of Reading Company Class A Common Stock from January 1, 1995 through October 15, 1996, and the REI Common Stock from October 16, 1996 through December 31, 1996, as reported on the NNM. The Reading Company Class A Common Stock was also traded on the Philadelphia Exchange from September 9, 1996 through October 15, 1996 and the REI Common Stock has been traded on such exchange since October 15, 1996. Reading Company's Common Stock traded infrequently on the over-the-counter "pink sheet" market. Historical bid/asked data is insufficient to provide high and low price information on Reading Company's Common Stock during 1995 and 1996.
1996 QUARTER 1ST 2ND 3RD 4TH - - - ------- ---- ---- ---- ---- HIGH 11 11 11 1/8 10 3/8 LOW 9 10 10 9 1995 QUARTER 1ST 2ND 3RD 4TH - - - ------- ---- ---- ---- ---- HIGH 11 1/2 11 1/8 10 3/16 9 1/2 LOW 9 5/8 9 7/8 9 8 1/2
On April 8, 1997, the high, low and closing prices for REI Common Stock on the NNM were $11.63, $11.38 and $11.38, respectively. On April 8, 1997, there were approximately 1,000 shareholders of record of REI Common Stock, which amount does not include individual participants in security position listings. Neither REI nor Reading Company have paid any dividends on their Common Stock. The Board of Directors does not intend to authorize payment of dividends on the Common Stock in the foreseeable future. Holders of the Convertible Preferred Stock are entitled to receive quarterly cumulative dividends at the annual rate of $6.50 per share of Series A Preferred Stock and $6.50 per share of Series B Preferred Stock, in each case before any dividends (other than dividends payable in Common Stock) are paid to the holders of the Common Stock. On October 15, 1996, REI issued the Convertible Preferred Stock to Craig and Citadel. See Item 1. - Business - The Reorganization and Stock Transactions. The Convertible Preferred Stock was offered and sold pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933 as a non-public offering to a limited number of persons. 19 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, 1996/(1)/ 1995/(2)/ 1994/(2)/ 1993 1992 - - - ------------------------------------------------------------------------------------------------------------------- Revenues $ 22,944 $17,632 $10,911 $ 3,306 $ 4,421 Income (loss) applicable to common shareholders before cumulative effect of accounting change 6,092 2,351 (1,652) (520) (3,424) Cumulative effect of accounting change 0 0 0 132 0 - - - ------------------------------------------------------------------------------------------------------------------- Net income (loss) applicable to common shareholders $ 6,092 $ 2,351 ($1,652) ($388) ($3,424) =================================================================================================================== Per share information: Income (loss) applicable to common shareholders before cumulative effect of accounting change $ 1.11 $ 0.47 ($0.33) ($0.11) ($0.69) Cumulative effect of accounting change 0 0 0 0.03 0 - - - ------------------------------------------------------------------------------------------------------------------- Net income (loss) applicable to common shareholders $ 1.11 $ 0.47 ($0.33) ($0.08) ($0.69) =================================================================================================================== - - - ------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1996 1995 1994 1993 1992 - - - ------------------------------------------------------------------------------------------------------------------- Total assets $181,754 $75,544 $72,716 $70,121 $71,509 Redeemable preferred stock $ 7,000 $ 0 $ 0 $ 0 $ 0 Shareholders' equity $155,954 $68,712 $66,086 $68,026 $68,416 ===================================================================================================================
/(1)/ Includes results of Citadel from March 30, 1996, the acquisition of the Angelika from August 28, 1996 and the Stock Transactions from October 16, 1996. /(2)/ Results of operations of Cine Vista have been included since its acquisition effective July 1, 1994. 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company has elected to focus its theater development and related real estate development activities in three principal areas: (i) the management and development of motion picture theaters in Australia; (ii) the domestic management and development and acquisition of specialty motion pictures theaters which feature foreign and limited release art films similar to the Angelika; and (iii) the management and development of motion picture theaters in Puerto Rico. To provide the Company with equity to execute its theater acquisition and development plans, the Company completed a private placement in late 1996 (which included the Reorganization and Stock Transactions as described below). THE REORGANIZATION AND STOCK TRANSACTIONS The Reorganization was effected in order to consolidate the Company's operations under a holding company incorporated under the laws of the State of Delaware. The Company believes that such a structure will facilitate the financing of the Company, without subjecting such capital to the contingent liabilities of the Company's historical railroad business, and permit the Company to avail itself of a more established body of corporate law than that of Pennsylvania (the state in which Reading Company is incorporated). The Stock Transactions permitted the Company to acquire assets which, in the opinion of management, could be converted into cash or utilized as collateral to raise cash funds necessary to finance the Company's theater and real estate development activities. Pursuant to the Stock Transactions, The Company received $7,000,000 of cash from Citadel. In return the Company issued to Citadel, $7,000,000 in stated value (70,000 shares) of the Company's Series A Preferred Stock and granted Citadel certain contractual rights including the Asset Put Option. The Asset Put Option grants Citadel the right to require the Company to acquire substantially all of Citadel's assets and assume related liabilities in return for the issuance of Common Stock at any time through a date 30 days after the Company files its 1999 Annual Report on Form 10-K. The number of shares to be issued will be determined by dividing the appraised value of the Citadel assets or $20 million, whichever amount is lower, by $11.75 if Citadel exercises the Asset Put Option by October 31, 1997 and $12.25 thereafter. If the appraised value of Citadel assets is in excess of $20 million, the Company will issue Common Stock at fair market value for such excess up to a total of $30 million in Citadel assets. In addition, the Company agreed to exchange the Citadel Preferred Stock, which the Company acquired from Craig in the Stock Transactions, for Citadel's Series B Preferred Stock containing terms modified in certain respects from the terms of the Citadel Preferred Stock. The Company received from Craig the Stater Preferred Stock with a stated value of $69,365,000, the Citadel Preferred Stock with a stated value of $5,250,000 and Craig's 50% interest in Reading International. In return, REI issued to Craig, 2,476,190 shares of Common Stock and 550,000 shares ($55,000,000 stated value) of Series B Voting Cumulative Preferred Stock (the "Series B Preferred Stock"). Certain Financial Reporting Considerations - - - ------------------------------------------ The Reorganization and Stock Transactions have been accounted for as a reorganization of related entities requiring that the Company reflect the assets received at the lower of the value which they were recorded on the books of the affiliates, Craig or Citadel, or market. The assets received were therefore recorded as follows:
Cash $ 7,000,000 Citadel Preferred Stock (1) 5,250,000 * Stater Bros. Preferred Stock 67,978,000 * 50% Ownership interest in Reading International 13,194,000 ------------ Gross Book Value of Assets Received $ 93,422,000 ============
21 * Plus accrued and unpaid dividends (1) The Citadel Preferred Stock was redeemed by Citadel in December 1996. The Stock Transactions are intended to qualify as an exchange under Section 351(a) (a "351 Exchange") of the Internal Revenue Code of 1986, as amended (the "Code"). In a 351 Exchange, the party acquiring the assets (in the Stock Transactions, REI) retains the contributing parties' tax basis in the acquired assets, with no taxable gain recognized as a result of the exchange. The parties contributing assets (in the Stock Transactions, Craig and Citadel) obtain a basis in the assets received in the exchange equal to the basis in the assets which are contributed in the exchange (the Series A and Series B Preferred Stock). With the exception of the Stater Preferred Stock, the book value of the assets received in the Stock Transactions approximated the tax basis in the assets received. Craig's adjusted tax basis (for federal tax purposes) in the Stater Preferred Stock was approximately $5 million. The estimated tax liabilities associated with the assets received in the Stock Transactions were $22,042,000 in deferred federal income taxes primarily relating to the Stater Preferred Stock. At the time of the closing of the Stock Transactions, the Company had a gross deferred federal tax asset of $55,968,000 and a tax asset valuation allowance (the "TAVA") in the same amount. Upon receipt of the Stater Preferred Stock, the Company determined that it was more- likely-than-not that a portion of the deferred tax asset which had previously been fully reserved, would be realized and the Company reduced the TAVA by $20,782,000 which amount reflects the amount of federal tax loss carryforwards ("NOLs") which were expected to be utilized net of $1,260,000 in alternative minimum tax ("AMT"). A portion of the reversal of the tax asset valuation allowance, $3,957,000, was included in "Income tax benefit" in the Company's Consolidated Statement of Operations and was subsequently reclassified from "Retained Earnings" to "Other Capital". The balance, $18,085,000, was credited directly to "Other Capital" in the Company's Consolidated Statement of Shareholders' Equity. The amount which was included in income was equal to the NOLs which remained available to the Company and which existed as of the date of the Company's 1981 quasi- reorganization. At the time of the Company's quasi-reorganization, the Company also realized a loss relating to the conveyance of certain assets to Conrail and charged such loss directly to "Other Capital." The benefits of NOLs relating to such charge cannot be reflected in the Company's Consolidated Statement of Operations. As of January 1, 1997, the Company has no NOLs which existed at the time of the Company's quasi-reorganization and therefore, any future reductions in the Company's tax valuation allowance will be reflected as income in the Company's Consolidated Statement of Operations. The Company issued Common Stock and the Convertible Preferred Stock in exchange for assets received in the Stock Transactions. The Convertible Preferred Stock was reflected on the Consolidated Balance Sheet of the Company at December 31, 1996 at its stated value ($100 per share), which value management believes approximates market. The Series A Preferred Stock has not been included as a component of Shareholders' Equity since it includes provisions which permit a majority of the holders to request redemption at stated value plus accrued and unpaid dividends for a 60 day period beginning October 15, 2001 and also provides for redemption at the option of the majority of the holders, if the Company fails to pay four quarterly dividends or in event of a change in control. In addition to issuing to Citadel the Series A Preferred Stock, the Company also granted the Asset Put Option, which under certain circumstances permits Citadel to exchange substantially all of its assets for Common Stock. The Company did not allocate any value to the Asset Put Option due in part to the subjective nature of the assumptions utilized in option pricing models and the fact that stock option valuation models are intended to value transferable options and the Asset Put Option is not transferable. Had a value been separately ascribed to the Asset Put Option, the value of such option would have been deducted from the value of the Series A Preferred Stock and included as "Other Capital" in the Company's Consolidated Statement of Shareholders' Equity. In addition to the 6.5% dividend payable on the $62 million of Convertible Preferred Stock, the Company has elected to include as a component of "Preferred Stock Dividends" in its calculation of earnings per common share, a provision which will total approximately $68,000 in 1997 for the amortization of the value of the Asset Put Option (based upon a valuation utilizing the Black & Scholes option valuation model). 22 Management believes that the tax gain (related to the Stater Preferred Stock) recognized by the Company was offset by the Company's NOL carryforwards (See Note 6 to the Consolidated Financial Statements contained elsewhere herein). However, the amount of NOLs carried on the books of the Company has not been audited by the Internal Revenue Service (the "IRS"), and there can be no assurance that the IRS would agree with the Company as to the amount of NOL available to offset such gains. Use of the NOLs is subject to certain limitations, including those resulting from certain changes in the ownership of the Company. While the transfer restrictions which are applicable to the Company's equity securities are intended to minimize the risk of such ownership changes, ownership changes unknown to the Company may have occurred despite or in violation of such restrictions. In addition, the Code and related case law limit the ability to use NOLs to offset certain "built-in" gains on contributed its property. Although the Company does not believe that such limitations on the use of its NOLs would apply to the disposition of the Stater Preferred Stock, there can be no assurance that the IRS would not take a different position. Also, if the IRS were to determine that the principal purpose of the Stock Transactions was to make use of the NOLs and the Company could not show otherwise, such use may not be available. In such case, the financial position of the Company could be materially adversely affected. LIQUIDITY AND CAPITAL RESOURCES Reading Australia's business plan provides for the development of Country Cinemas and Entertainment Centers (See Item I, Business). The Country Cinemas are smaller and more likely to be located in leased premises while the Entertainment Cinemas are generally free-standing sites, many of which will include related retail developments which may be developed or sold as the Company's theaters are developed. It is intended that the Entertainment Centers be constructed on land owned by the Company and, accordingly, such centers are capital intensive at this stage of development. Reading Australia has signed three purchase agreements and a development agreement to acquire sites which will require the payment of approximately $19,300,000. If all of these projects are developed, Reading Australia estimates the total development cost of these four entertainment centers will aggregate in excess of $100,000,000, over the next two to three years. To provide Reading Australia with funding needed to complete its theater development plans without requiring REI to guarantee the indebtedness of Reading Australia and as a means of minimizing the Company's exposure to fluctuations in the value of the Australian dollar and to demonstrate the Company's commitment to the Australian market, the Company contributed its Stater Preferred Stock to Reading Australia. The Company anticipates that Reading Australia will pledge the Stater Preferred Stock as collateral for Australian dollar borrowings and Reading Australia has had preliminary discussions in furtherance thereof. In addition, the Company has been advised that Stater is considering exercising its right to repurchase the Stater Preferred Stock and that such repurchase may occur as early as prior to the end of Stater's fiscal year, September 30, 1997. If such repurchase were to occur, the repurchase would be at stated value, $69,365,000. However, there can be no assurance that such repurchase can or will be effected. The Company's contribution of the Stater Preferred Stock to Reading Australia resulted in a taxable gain (for federal tax purposes) of approximately $62,977,000 and resulted in an AMT liability of $1,260,000. Cine Vista opened a new six-plex on March 26, 1997 and will close four of six screens at another location in April 1997 in order to initiate construction of a new eight-plex at the same location, which construction is anticipated to be completed in mid-1998. The Company anticipates that it will invest approximately $8.4 million in 1997 and 1998 in furtherance of these two projects. Cine Vista is also negotiating provisions of an agreement to expand one facility and to open new theaters at two new sites which, collectively could result in the addition of up to 30 new screens. The timing of the additions is not predictable nor is the Company assured of concluding these proposed developments. The capital cost of these new additions is estimated to total approximately $15 million. Cine Vista may use funds available under its Line of Credit (See Note 10 to the Consolidated Financial Statements contained elsewhere herein) to fund its theater development activities. The Company recently announced the signing of a lease for the first new theater based upon the Angelika concept to be located in Houston, Texas. The Company is actively seeking sites to develop Angelika type theaters throughout the United States and will consider acquiring leasehold or ownership interests in conjunction with such developments. The cash cost of such developments can range from approximately $1.5 million for a turnkey leased facility to over $7 million for an owned site. 23 If the Company is successful in its efforts to develop all of the projects which it is presently considering, its capital requirements over the next three years will exceed its existing cash balances, the value of the Stater Preferred Stock (or the proceeds thereof) and existing borrowing arrangements. However, the Company believes that additional funding could be realized through, among other things, bank borrowings, sale and lease back transactions and the issuance/sale of additional equity either of REI, Reading Australia or at the project level. The following summarizes the major sources and uses of cash funds in each of the three years ended December 31, 1996, 1995 and 1994: 1996: - - - ----- "Unrestricted cash and cash equivalents increased $4,491,000 in 1996 from $44,189,000 in 1995 to $48,680,000 at December 31, 1996. Working capital increased $62,000 from $42,666,000 at December 31, 1995 to $42,728,000 at December 31, 1996. While not necessarily indicative of its results of operations determined under generally accepted accounting principles, Cine Vista's and the Angelika's (net of minority interest of $67,000) operating cash flow (income before depreciation and amortization) of $2,520,000 contributed to the Company's liquid funds in 1996. Other principal sources of liquid funds in 1996 were $4,165,000 in "Interest and dividend" income, $4,327,000 in "Other income," $11,686,000 in proceeds from the Stock Transactions (net of $1,505,000 of paid and accrued expenses and inclusive of the proceeds from the redemption of the Citadel Series B Preferred Stock), and Craig contributions of $12,888,000 to Reading International which benefited the Company upon the Company's acquisition of 100% ownership in Reading International. Additionally, principal sources of liquid funds included a net increase of $4,544,000 in "Accounts payable and accrued expenses." In addition to operating expenses, other uses of liquid funds in 1996 included, the purchase of the Angelika for $9,217,000 (total purchase price of $12,570,000 net of a credit of $1,285,000 for a judgement secured by a portion of the stock of the seller of the Angelika (the "Angelika Judgement") and the minority partner contribution of $2,068,000), the purchase of the Citadel Common Stock (see Note 3 to the Consolidated Financial Statements contained elsewhere herein) for $3,325,000, purchases, primarily by Reading Australia, of $11,075,000 in property and equipment and a net increase in "Amounts receivable" of $2,406,000. 1995: - - - ----- "Unrestricted cash and cash equivalents" together with "Available-for-sale securities" decreased $747,000 in 1995 from $44,936,000 in 1994 to $44,189,000 at December 31, 1995. Working capital decreased $717,000 from $43,383,000 at December 31, 1994 to $42,666,000 at December 31, 1995. Cine Vista's operating cash flow (income before depreciation and amortization) of $2,625,000 contributed to the Company's liquid funds in 1995. Other principal sources of liquid funds in 1995 were $2,435,000 in "Interest and dividends" income and $2,341,000 in "Other income" proceeds from litigation. In addition to operating expenses, principal uses of liquid funds in 1995 include a $1,040,000 increase in amounts "Due from affiliate" related to the Company's advance to Reading International on behalf of Craig of its share of certain capital contributions to the entity, which amount was reimbursed by Craig in February 1996, a $1,040,000 contribution to Reading International (the Company's share), $1,828,000 for the purchase of property, plant and equipment related primarily to Cine Vista's new eight screen multiplex theater which commenced operations during December 1995 and $1,285,000 for the purchase of the Angelika Judgement. 1994: - - - ----- "Unrestricted cash and cash equivalents" together with "Available-for-sale securities" decreased $21,378,000 in 1994 from $66,314,000 at December 31, 1993 to $44,936,000 at December 31, 1994 due primarily to the $22,700,000 purchase of Cine Vista. Working capital decreased accordingly. 24 While not necessarily indicative of its results of operations determined under generally accepted accounting principles, Cine Vista's operating cash flows (income before depreciation and amortization) of $1,573,000 for the period subsequent to July 1, 1994 (the acquisition effective date) contributed to the Company's liquid funds in 1994. Other principal sources of liquid funds were $2,134,000 in "Interest and dividends" income and receipt of $1,000,000 in full repayment of a loan made in 1993 to an officer of Reading Cinemas in accordance with the terms of his employment by the Company. Other sources of liquid funds included a net increase of $829,000 in "Accounts payable and accrued expenses," primarily due to Cine Vista operations subsequent to the purchase date. In addition to the purchase of Cine Vista, principal uses of liquid funds include a net increase of $565,000 in "Amounts receivable," and a net decrease of $458,000 in other liabilities. Prior to the Company's 1981 quasi-reorganization, the Company had extensive railroad and related operations. Such operations may have contributed to environmental contamination of properties now owned by the Company, previously sold by the Company, or to which the Company, prior to its reorganization, sent waste. The ultimate extent of liabilities, if any, with respect to such matters, as well as the timing of cash disbursements, if any, cannot be determined. However, management is of the opinion, based on the information currently known, that while the ultimate liability resulting from such matters could have a material effect upon the results of operations in a given year, they will not have a material adverse effect upon the Company's financial position or liquidity. RESULTS OF OPERATIONS Due to the nature of the Company's development and acquisition activities and the timing associated with the results of such activities, the effect of litigation awards and settlements, the third quarter acquisition of the Angelika and the fourth quarter 1996 closing of the Stock Transactions, historical revenues and earnings have varied significantly and are not indicative of future operating results. Revenue - - - ------- Theater Revenue is comprised of Admissions, Concessions and Advertising and other revenues and totaled the amounts set forth below in each of the three years ended December 31, 1996 inclusive of minority interest where applicable:
1996 1995 1994 ---- ---- ---- $18,236,000 $14,925,000 $8,080,000
Theater Revenue includes revenues from Cine Vista since its acquisition on July 1, 1994 and the results of the Angelika subsequent to the Angelika's acquisition on August 28, 1996. Cine Vista's Theater Revenue increased approximately 4% between 1995 and 1996 as a result of the addition of a new eight screen theater which commenced operations in late 1995. Cine Vista's Theater Revenues on a same theater basis decreased approximately $686,000 (4.6%) between 1995 and 1996 primarily as a result of the opening by a competitor of three new multiplex theaters in the San Juan metropolitan market. Theater Revenues in 1996 included $2,713,000 in revenue (inclusive of minority interest) from the Angelika for the period beginning August 28, 1996 (the date that the Company's interest in the Angelika was acquired) through the end of 1996. Revenues from admissions at the Angelika increased approximately 32% from the admission revenues recorded by the Angelika in the same period of the prior year (such revenues which were recorded prior to the Company's acquisition of the Angelika are therefore not included the Company's consolidated financial results). The Company opened its first theater in Australia, a six-plex located in Townsville, Queensland, at the end of December. Revenues from the new theater were not material in 1996 and have not been included in the consolidated financial results of the Company in 1996. 25 In 1997, the Company will receive the benefit of a full year of Angelika Theater Revenues (which totaled $7,549,000 in 1996) and the results of the Company's theater in Townsville, Australia. Cine Vista opened a new six-plex in March 1997 and in mid-1997 will close four of six screens at another location to initiate construction of a new eight-plex at the location which construction is anticipated to be completed in mid-1998. Accordingly, Cine Vista anticipates a net increase of two screens in 1997 and the addition of six more screens in mid- 1998. However, the increased competition in the San Juan metropolitan market is expected to decrease theater revenues in 1997, relative to 1996 levels, if overall box office revenues on the island remain equal to the prior year. Real Estate revenues include rental income and the net proceed of sales of the Company's real estate. Real estate revenues increased from $272,000 in 1995 to $543,000 in 1996. Real estate revenues totaled $697,000 in 1994. Rental income in 1995 and 1994 was approximately equal, however in 1996 it included $289,000 from rentals on the leased equipment (See Note 4 to the Consolidated Financial Statements included elsewhere herein). Gains on sale of property totaled ($43,000, $0 and $308,000, in each of the three years ended December 31, 1996, 1995 and 1994, respectively. Real estate revenues in 1994 included $179,000 from the collection, by a real estate joint venture, of certain insurance proceeds. The Company has 28 parcels and rights-of-way remaining, many of which are of limited marketability. Future real estate revenues may increase as larger properties are sold. However, management believes that most of the properties held for sale will be liquidated within the next three years. Interest and dividend revenues were as follows in each of the three years ended December 31, 1996, 1995 and 1994:
1996 1995 1994 ---- ---- ---- $4,165,000 $2,435,000 $2,134,000
The increase in interest income between 1994 and 1995 resulted from higher interest yields on invested funds. Interest and dividend income increased $1,730,000 in 1996 largely as a result of the Company's acquisition of the Stater Preferred Stock on October 15, 1996 in the Stock Transactions. The Stater Preferred Stock has a dividend yield of 10.5% and contributed approximately $1,377,000 since its acquisition. The increase in interest and dividend income associated with the Stater Preferred Stock was offset somewhat by lower average investable fund levels (due in part to the purchase of the Angelika) during the period prior to the closing of the Stock Transactions. Expenses - - - -------- "Theater costs," "Theater concession costs" and "Depreciation and amortization" reflect the direct theater costs of Cine Vista and the Angelika's operations. These costs inclusive of minority interest increased $3,440,000 from $12,793,000 in 1995 to $16,233,000 in 1996 due primarily to increased costs associated with higher revenues, the operating expenses associated with the addition of a new Cine Vista eight-screen theater in late 1995 and the inclusion of $2,300,000 of theater costs associated with the Angelika's operations subsequent to acquisition. During the fourth quarter of 1996, the minimum wage for Puerto Rico was increased by approximately 15%. Since most of Cine Vista's theater employees are paid minimum wage, the increase will have a negative effect on its operating results in future periods. 26 "General and administrative" expenses for the years listed below include the following components:
1996 1995 1994 ---- ---- ---- Cine Vista $1,050 $ 922 $ 427 Angelika/(1)/ 137 0 0 Australia/(1)/ 2,057 390 0 Other, general 3,087 3,278 4,126 ----- ----- ----- Total $6,331 $4,590 $4,553 ====== ====== ======
/(1)/Net of minority interest for applicable periods. Cine Vista "General and administrative" expense increased in 1995 from 1994 due mainly to the fact that 1994 only included such expenses from the Company's acquisition of Cine Vista on July 1, 1994. The "Australia" component increased $1,666,000 in 1996 as compared to 1995 due to an increase in professional fees associated with the development of various theater sites, some of which were ultimately not selected by the Company, as well as a full year of salary expense associated with the employees located in Australia. The "Other general" component of "G&A" decreased $849,000 from 1994 to 1995 largely as a result of the inclusion in 1994 of $795,000 related to a provision for uncollectible loans. The investment in and operating results of Reading International were reported under the equity method through 1995. On October 15, 1996, the Company acquired, among other things, ownership of all of Reading International and consolidated the results of Reading International with the results of the Company in 1996. (See Note 3 to the Consolidated Financial Statements contained elsewhere herein). "Equity loss from investment in Australian joint venture" appearing in the 1995 Consolidated Statement of Operations reflects the Company's 50% share of the initial general and administrative expenses in Australia and noncapitalized development expenditures relating to new theater site analysis and selection (See Note 8 to the Consolidated Financial Statements contained elsewhere herein). Reading Australia's first theater opened at the end of 1996, however related operations have not been included in the Consolidated Statement of Operations for 1996 as they are not material. Reading Australia anticipates continuing losses during the next several years until additional new theaters are developed and operations increased. A "Provision for environmental matters" of $1,306,000 was recorded in 1994 and relates primarily to the Douglassville disposal site (See Note 10 to the Consolidated Financial Statements contained elsewhere herein). Equity in Earnings of Affiliate - - - ------------------------------- The $1,526,000 in "Equity in earnings of affiliate" reflects earnings from the Company's investment in Citadel. Citadel's 1996 earnings include a nonrecurring gain on sale of real estate of $1,473,000 and nonrecurring income of $4,000,000 from the recognition, for financial statement purposes, of previously deferred proceeds from the bulk sale of loans by a previously owned subsidiary of Citadel (See Note 4 to the Consolidated Financial Statements included elsewhere herein). Other Income - - - ------------ "Other income" totaled $4,327,000, $2,341,000 and $79,000 in the three years ended December 31, 1996, 1995 and 1994, respectively, and is primarily comprised of litigation settlements and awards. The principal components of "Other income" in 1996 included a $2,360,000 settlement of the Company's claim against Conrail, the City of Philadelphia, the Southeastern Pennsylvania Transportation Authority and several other parties for reimbursement of costs incurred by the Company associated with cleanup of PCB continuation to certain properties 27 formerly owned by the Company (See Note 10 to the Consolidated Financial Statements contained elsewhere herein), a $941,000 gain from the redemption of the Citadel Series B Preferred Stock, which resulted from the requirement that the Citadel Series B Preferred Stock be recorded at the value reflected on Craig's books at the time of the Stock Transactions, and $1,119,000 received net of expenses in settlement of a claim against a third party for failure to pay certain fees. "Other income" in 1995 included $1,146,000 received in settlement of a condemnation claim, a $425,000 settlement of certain litigation relating to a lease of a property developed by the Company, $319,000 received in settlement of two matters related to the Company's former railroad operations, and $233,000 relating to the expiration of the time period for redemption of unclaimed reorganization debt obligations. Minority Interest - - - ----------------- Minority interest of $321,000 in 1996 included Craig's $388,000 share of Reading International's loss for the period prior to the Company's acquiring 100% ownership in the Stock Transactions, offset by $67,000 of the minority share of the Angelika income. Income Tax Provision - - - -------------------- The income tax benefit in 1996 included the $3,957,000 benefit associated with the reversal of the tax asset valuation allowance, described above, offset by AMT of $2,195,000, an accrual for foreign withholding taxes of $446,000 which will be paid if certain intercompany loans are repaid and state taxes of $80,000 (See Note 6 to the Consolidated Financial Statements contained elsewhere herein). "Income Tax" expense in 1995 was composed primarily of AMT expense. Net Income (Loss) - - - ----------------- As a result of the above, "Net income" increased from $2,351,000 in 1995 to $7,003,000 in 1996. In 1994 the Company recorded a loss of $1,652,000. Net Income (Loss) Applicable to Common Shareholders - - - --------------------------------------------------- In 1996, "Net income applicable to common stockholders" has been reduced by the 6.5% per annum dividend on the $62,000,000 of Convertible Preferred Stock for the period subsequent to the closing on the Stock Transactions, and amortization of the Asset Put Option (See "Financial Reporting Considerations," above). EFFECTS ON INFLATION The Company does not believe that inflation has a material effect upon its existing operations. RECENT ACCOUNTING PRONOUNCEMENTS The Company adopted SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" in 1996. SFAS 107 requires the disclosure of the fair value of certain financial instruments for which it is practicable to estimate that value and requires the disclosure of significant assumptions used in such estimates. The Company also adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in 1996. SFAS No. 121 establishes accounting standards for the impairment of long-lived assets, certain intangible assets and costs in excess of net assets related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. 28 The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation" in 1996. SFAS No. 123 establishes a fair value method of accounting for stock- based employee compensation plans. As permitted by SFAS No. 123, the Company has elected to continue to account for stock based compensation according to the provisions of APB No. 25, "Accounting for Stock Issued to Employees." FORWARD-LOOKING STATEMENTS From time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing, including those contained herein. Such forward-looking statements may be included in, without limitation, reports to stockholders, press releases, oral statements made with the approval of an authorized executive officer of the Company and filings with the Securities and Exchange Commission. The words or phrases "anticipates," "expects," "will continue," "estimates," "projects," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The results contemplated by the Company's forward-looking statements are subject to certain risks, trends, and uncertainties that could cause actual results to vary materially from anticipated results, including without limitation, delays in obtaining leases and permits for new multiplex locations, construction risks and delays, the lack of strong film product, the impact of competition, market and other risks associated with the Company's investment activities and other factors described herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated by reference to pages F-1 through F-26. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 29 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 1997 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 respects to its 1997 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 1997 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the Company's proxy statement with respect to its 1997 Annual Meeting of Shareholders. 30 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE (a)(1) Financial Statements Consolidated Balance Sheets as of December 31, 1996 and December 31, 1995 F-1 - F-2 Consolidated Statements of Operations for the years ended F-3 December 31, 1996, December 31, 1995 and December 31, 1994. Consolidated Statements of Cash Flows for the years ended F-4 - F-5 December 31, 1996, December 31, 1995 and December 31, 1994. Consolidated Statements of Shareholders' Equity for the years F-6 - F-7 ended December 31, 1996, December 31, 1995 and December 31, 1994. Notes to Consolidated Financial Statements. F-8 - F-25 Report of Independent Auditors - Ernst & Young LLP. F-26
All schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the related instructions or are not applicable and therefore have been omitted. (a)(3) Exhibits 2.1 Agreement and Plan of Merger Among Reading Company, Reading Entertainment, Inc., and Reading Merger Co. (Incorporated by reference to Exhibit A to the Proxy Statement/Prospectus included in Reading Entertainment, Inc.'s Registration Statement on Form S-4, File No. 333-13413.) 3(i) Certificate of Incorporation of Reading Entertainment, Inc. as amended. (Incorporated by reference to Exhibit B to the Proxy Statement/Prospectus included in Reading Entertainment, Inc.'s Registration Statement on Form S-4, File No. 333-13413.) 3(ii) Bylaws of Reading Entertainment, Inc. (Incorporated by reference to Exhibit C to the Proxy Statement/Prospectus included in Reading Entertainment, Inc.'s Registration Statement on Form S-4, File No. 333-13413.) 4.1 Certificate of Designations, Preferences and Rights of Series A Voting Cumulative Convertible Preferred Stock and Series B Voting Cumulative Convertible Preferred Stock of Reading Entertainment, Inc. (Incorporated by reference to Exhibit G to the Proxy Statement/Prospectus included in Reading Entertainment, Inc.'s Registration Statement on Form S-4, File No. 333-13413.) 31 10.1 Reading Company 1982 Non-Qualified Stock Option Plan, as Amended. (Incorporated by reference to Exhibit 4(b) to Reading Company's Registration Statement No. 2-83039, as amended.) 10.2 Reading Company 1982 Incentive Stock Option Plan, as Amended. (Incorporated by reference to Exhibit 4(a) to Reading Company's Registration Statement No. 2-83039, as amended.) 10.3 Reading Company 1992 Non-Qualified Stock Option Plan. (Incorporated by reference to Exhibit 4(B) to Reading Company's Registration Statement No. 33-57222, as amended.) 10.4 Executive Sharing Agreement by and between Reading Cinemas, Inc. and City Cinemas Corp. dated as of November 1, 1993. (Incorporated by reference to Exhibit 10.1 to Reading Company's Annual Report on Form 10-K for the year ended December 31, 1993.) 10.5 Purchase Agreement dated July 8, 1994 by and among Theater Acquisitions, L.P., Theater Acquisitions of Puerto Rico, Inc., and Reading Company. (Incorporated by reference to Exhibit 2(a) to Reading Company's Quarterly Report on Form 10-Q for the period ended June 30, 1994.) 10.6 Letter Agreement dated August 9, 1994 by and among Theater Acquisitions, L.P., Theater Acquisitions of Puerto Rico, Inc., and Reading Company. (Incorporated by reference to Exhibit 2(b) to Reading Company's Quarterly Report on Form 10-Q for the period ended June 30, 1994.) 10.7 Credit Agreement by and between Reading Cinemas of Puerto Rico, Inc., and Citibank, N.A., as administrative agent for the Lenders thereunder dated as of December 20, 1995. (Incorporated by reference to Exhibit 10.11 to Reading Company's Annual Report on Form 10-K for the year ended December 31, 1995.) 10.8 The First Amendment dated February 7, 1996 to the Credit Agreement by and between Reading Cinemas of Puerto Rico, Inc., and Citibank, N.A., as administrative agent for the Lenders thereunder dated as of December 20, 1995. (Incorporated by reference to Exhibit 10.12 to Reading Company's Annual Report on Form 10-K for the year ended December 31, 1995.) 10.9 Limited Liability Company Agreement of Reading International Cinemas LLC dated November 9, 1995. (Incorporated by reference to Exhibit 10.13 to Reading Company's Annual Report on Form 10-K for the year ended December 31, 1995.) 10.10 RC Revocable Trust Agreement between Reading Investment Company, Inc. and Craig Corporation and Craig Management, Inc., as trustee, dated November 9, 1995. (Incorporated by reference to Exhibit 10.14 to Reading Company's Annual Report on Form 10-K for the year ended December 31, 1995.) 10.11 Stock Purchase and Sale Agreement dated as of March 30, 1996 by and between Reading Holdings, Inc. and Craig Corporation. (Incorporated by reference to Exhibit 10.18 to Reading Company's Annual Report on Form 10-K for the year ended December 31, 1995.) 10.12 Amended and Restated Capital Funding Agreement by and between Reading Investment Company, Inc., Craig Corporation, Craig Management, Inc., and Reading International 32 Cinemas LLC. (Incorporated by reference to Exhibit 10.19 to Reading Company's Annual Report on Form 10-K for the year ended December 31, 1995.) 10.13 Service Deed between Australia Cinema Management Pty Limited and John Rochester dated May 7, 1996. (Incorporated by reference to Exhibit 10.20 to Reading Company's Quarterly Report on Form 10-Q for the period ended June 30, 1996.) 10.14 Exchange Agreement among Reading Company, Reading Entertainment, Inc., Craig Corporation, Craig Management, Inc., Citadel Holding Corporation, and Citadel Acquisition Corp., Inc. (Incorporated by reference to Exhibit F to the Proxy Statement/Prospectus included in Reading Entertainment, Inc.'s Registration Statement on Form S-4, File No. 333-13413.) 10.15 Asset Put and Registration Rights Agreement dated October 15, 1996 by and among Reading Entertainment, Inc., Citadel Holding Corporation, and Citadel Acquisition Corp., Inc. 10.16 Certificate of Designation of the Series B 3% Cumulative Voting Convertible Preferred Stock of Citadel Holding Corporation. 10.17 Preferred Stock Purchase Agreement dated November 10, 1994, between Citadel Holding Corporation and Craig Corporation. (Incorporated by reference to Exhibit 2 to Citadel Holding Corporation's Report on Form 8-K dated November 14, 1994). 10.18 Option Agreement, dated September 3, 1993, among Stater Bros. Holdings Inc., Craig Corporation, and Craig Management Inc. (Incorporated by reference to Exhibit 10.24 to Craig Corporation's Annual Report on Form 10-K for the year ended September 30, 1993.) 10.19 The Sale Agreement dated as of July 1, 1996, by and among Reading Investment Company, Inc., as Purchaser, AFCI, as Seller, and Houston Cinema, Inc., with all Exhibits and Schedules omitted. (Incorporated by reference to Exhibit 2(a) to Reading Company's Report on Form 8-K dated August 27, 1996.) 10.20 Amendment to the Sale Agreement made and entered into as of July 27, 1996 by and among Reading Investment Company, Inc., AFCI and Houston Cinema, Inc. (Incorporated by reference to Exhibit 2(b) to Reading Company's Report on Form 8-K dated August 27, 1996.) 10.21 $2,000,000.00 Non-Negotiable Secured Promissory Note dated as of August 27, 1996 (the "Holdback Note") by AFC, as Maker, to AFCI, as Payee. (Incorporated by reference to Exhibit 2(c) to Reading Company's Report on Form 8-K dated August 27, 1996.) 10.22 Pledge Agreement dated August 27, 1996 by and among AFCI, as Secured Party, and AFC, as Debtor, concerning the cash security for the Holdback Note. (Incorporated by reference to Exhibit 2(d) to Reading Company's Report on Form 8-K dated August 27, 1996.) 10.23 The Agreement of Lease between Cable Building Associates and Houston Cinema, Inc. dated March 4, 1988 together with Amendment of Lease dated December 26, 1989. (Incorporated by reference to Exhibit 10.31 to Reading Entertainment, Inc.'s Registration Statement on Form S-4, File No. 333-13413.) 33 10.24 Limited Liability Company Agreement between Angelika Cinemas, Inc. and Sutton Hill Associates dated August 27, 1996. (Incorporated by reference to Exhibit 10.32 to Reading Entertainment, Inc.'s Registration Statement on Form S-4, File No. 333-13413 10.25 Management Agreement dated as of August 27, 1996 between Angelika Film Centers, LLC and City Cinemas Corporation. (Incorporated by reference to Exhibit 10.33 to Reading Entertainment, Inc.'s Registration Statement on Form S-4, File No. 333-13413.) 10.26 Restated Certificate of Incorporation of Stater Bros. Holdings Inc. (Incorporated by reference to Exhibit 3.1 to Stater Bros. Holdings Inc. Registration Statement on Form S- 4, File No. 33-77296.) 10.27 Purchase Agreement between Equipment Leasing Associates 1995-VI Limited Partnership and FA, Inc. effective December 20, 1996. 10.28 Master Lease Agreement between FA, Inc. and Equipment Leasing Associates 1995-VI Limited Partnership dated December 20, 1996. 10.29 Nonrecourse Promissory Note between FA, Inc. and Equipment Leasing Associates 1995-VI Limited Partnership effective December 20, 1996. 10.30 Lease Rental Purchase Agreement between FA, Inc. and Ralion Financial Services, Inc. dated December 31, 1996. 21(i) List of Subsidiaries of Reading Entertainment, Inc. 23.1 Consent of Independent Auditors - Ernst & Young LLP 27 Financial Data Schedule (b) Reports on Form 8-K. The Company filed current reports on Form 8-K on October 30, 1996. (c) See item 14(a)(3) above. (d)(1) Not applicable. (d)(2) Not applicable. (d)(3) Not applicable. 34 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 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 4/14/97 - - - -------------------------------- James J. Cotter Chairman and Director /s/ S. Craig Tompkins 4/14/97 - - - -------------------------------- S. Craig Tompkins Vice Chairman and Director /s/ James A. Wunderle 4/14/97 - - - -------------------------------- James A. Wunderle Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) /s/ Eileen M. Mahady 4/14/97 - - - -------------------------------- Eileen M. Mahady Controller /s/ Gregory R. Brundage 4/14/97 - - - -------------------------------- Gregory R. Brundage Director /s/ Edward L. Kane 4/14/97 - - - -------------------------------- Edward L. Kane Director /s/ John W. Sullivan 4/14/97 - - - -------------------------------- John W. Sullivan Director /s/ Albert J. Tahmoush 4/14/97 - - - -------------------------------- Albert J. Tahmoush Director Exhibit Index ------------- Exhibit No. -- 10.15 Asset Put and Registration Rights Agreement dated October 15, 1996 by and among Reading Entertainment, Inc., Citadel Holding Corporation, and Citadel Acquisition Corp., Inc. 10.16 Certificate of Designation of the Series B 3% Cumulative Voting Convertible Preferred Stock of Citadel Holding Corporation. 10.27 Purchase Agreement between Equipment Leasing Associates 1995-VI Limited Partnership and FA, Inc. effective December 20, 1996. 10.28 Master Lease Agreement between FA, Inc. and Equipment Leasing Associates 1995-VI Limited Partnership dated December 20, 1996. 10.29 Nonrecourse Promissory Note between FA, Inc. and Equipment Leasing Associates 1995-VI Limited Partnership dated December 20, 1996. 10.30 Lease Rental Purchase Agreement between FA, Inc. and Ralion Financial Services, Inc. dated December 31, 1996. 21(i) List of Subsidiaries of Reading Entertainment, Inc. 23.1 Consent of Independent Auditors - Ernst & Young LLP 27 Financial Data Schedule READING ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
December 31, - - - ----------------------------------------------------------------------------------------------------- 1996 1995 - - - ----------------------------------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $48,460 $44,189 Amounts receivable, less allowance of $70 in 1996 and $291 in 1995 3,117 711 Due from affiliate 0 1,040 Restricted cash 3,683 360 Inventories 151 112 Prepayments and other current assets 814 498 - - - ----------------------------------------------------------------------------------------------------- Total current assets 56,445 46,910 - - - ----------------------------------------------------------------------------------------------------- Investment in Stater Preferred Stock 67,978 0 Investment in Citadel Common Stock 4,850 0 Net investment in leased equipment 2,125 0 Restricted cash 517 362 Property and equipment: Land 7,332 0 Buildings 743 733 Capitalized premises lease 538 538 Leasehold improvements 5,774 5,095 Equipment 5,990 3,787 Construction-in-progress and property development costs 2,562 236 ------ ------ 22,939 10,389 Less: Accumulated depreciation 1,809 1,176 ------ ------ 21,130 9,213 Other assets, less valuation allowance of $42 2,480 3,521 Intangible assets: Beneficial leases - net of accumulated amortization of $2,284 in 1996 and $1,370 in 1995 14,624 15,538 Cost in excess of assets acquired - net of accumulated amortization of $197 in 1996 11,605 0 - - - ----------------------------------------------------------------------------------------------------- 125,309 28,634 - - - ----------------------------------------------------------------------------------------------------- $181,754 $75,544 =====================================================================================================
See Notes to Consolidated Financial Statements. F-1 READING ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
December 31, - - - ----------------------------------------------------------------------------------------------- 1996 1995 - - - ----------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $5,183 $2,279 Accrued taxes 3,156 442 Accrued property costs and other 1,240 308 Film rent payable 1,102 299 Note payable 1,500 0 Property purchase commitment 230 0 Due to affiliate 183 0 Other liabilities 1,122 916 - - - ------------------------------------------------------------------------------------------------ Total current liabilities 13,716 4,244 - - - ------------------------------------------------------------------------------------------------ Capitalized lease, less current portion 516 521 Note payable 500 0 Other liabilities 1,972 2,067 - - - ------------------------------------------------------------------------------------------------ Total long term liabilities 2,988 2,588 - - - ------------------------------------------------------------------------------------------------ Minority interests 2,096 0 Reading Entertainment Redeemable Series A Preferred Stock, par value 7,000 0 $.001 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 0 Reading Entertainment preferred stock, par value $.001 per share: Authorized - 9,380,000 shares; None issued 0 0 Reading Entertainment common stock, par value $.001 per share: Authorized - 25,000,000 shares; Issued and outstanding in 1996 -- 7,449,364 shares 7 0 Reading Company preferred stock, par value $1.00 per share: Authorized in 1995 -- 5,000,000 shares; None issued 0 0 Reading Company common stock, par value $.01 per share: Authorized -- 10,000,000 shares; Issued and outstanding in 1995 -- 11,530 shares 0 1 Reading Company Class A common stock, par value $.01 per share: Authorized -- 15,000,000 shares; Issued and outstanding 1995 -- 5,145,161 shares 0 51 Reading Company Class A common stock in treasury, at cost: 1995 -- 183,397 shares 0 (2,622) Other capital 138,594 56,257 Retained earnings 17,238 15,035 Foreign currency translation adjustment 114 (10) - - - ------------------------------------------------------------------------------------------------ Total shareholders' equity 155,954 68,712 - - - ------------------------------------------------------------------------------------------------ $181,754 $75,544 ================================================================================================
See Notes to 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, - - - ----------------------------------------------------------------------------------- 1996 1995 1994 - - - ----------------------------------------------------------------------------------- REVENUES: Theater: Admissions $12,986 $10,356 $ 5,633 Concessions 4,486 3,883 2,141 Advertising and other 764 686 306 Real estate 543 272 697 Interest and dividends 4,165 2,435 2,134 - - - ----------------------------------------------------------------------------------- 22,944 17,632 10,911 - - - ----------------------------------------------------------------------------------- EXPENSES: Theater costs 13,631 10,784 5,742 Theater concession costs 821 640 360 Depreciation and amortization 1,793 1,369 681 General and administrative 7,106 4,200 4,553 Provision for environmental matters 0 0 1,306 Equity loss from investment in Australian theater developments 0 390 0 - - - ----------------------------------------------------------------------------------- 23,351 17,383 12,642 - - - ----------------------------------------------------------------------------------- (Loss) income from operations (407) 249 (1,731) Equity in earnings of affiliate 1,526 0 0 Other income, net 4,327 2,341 79 - - - ----------------------------------------------------------------------------------- Income (loss) before income taxes (benefit) and minority interests 5,446 2,590 (1,652) Minority interests (321) 0 0 - - - ----------------------------------------------------------------------------------- Income (loss) before income taxes (benefit) 5,767 2,590 (1,652) Income taxes (benefit) (1,236) 239 0 - - - ----------------------------------------------------------------------------------- Net income (loss) 7,003 2,351 (1,652) Less: Preferred stock dividends and amortization of asset put option (911) 0 0 - - - ----------------------------------------------------------------------------------- Net income (loss) applicable to common shareholders $6,092 $2,351 ($1,652) =================================================================================== Per share information: - - - ----------------------------------------------------------------------------------- Net income (loss) applicable to common shareholders after preferred stock dividends and amortization of asset put option $1.11 $0.47 ($0.33) =================================================================================== Weighted average common shares outstanding 5,494,145 4,973,369 4,973,548
See Notes to Consolidated Financial Statements. F-3 READING ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Year Ended December 31, - - - ------------------------------------------------------------------------------------------------------ 1996 1995 1994 - - - ------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income (loss) $7,003 $2,351 ($1,652) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Condemnation award 0 (1,146) 0 Depreciation 644 453 226 Amortization 1,149 916 455 Deferred rent expense 245 165 82 Deferred income tax expense (benefit) (3,957) 132 0 Equity in earnings of affiliate (1,526) 0 0 Equity loss from Australian joint venture 0 390 0 Minority interest in net loss of Australian joint venture (388) 0 0 Minority interest in net income of the Angelika 67 0 0 Preferred stock redemption premium (941) 0 0 Gain on sale of real estate (43) 0 (308) Gain on real estate joint venture investments 0 0 (179) Discharge of reorganization obligations 0 (223) 0 Provision for environmental matters 0 0 1,306 Changes in operating assets and liabilities: (Increase) decrease in amounts receivable (2,406) 135 (565) (Increase) decrease in inventories (17) (26) 24 (Increase) decrease in prepaids and other current assets (177) 95 (119) Decrease in notes receivable due from officer of subsidiary 0 0 1,000 Increase (decrease) in accounts payable and accrued expenses 4,544 (119) 829 Increase (decrease) in film rent payable 769 (60) (65) Decrease in other liabilities (134) (392) (458) Other, net (403) (49) 329 - - - ------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 4,429 2,622 905 - - - ------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. F-4 READING ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (IN THOUSANDS)
Year Ended December 31, - - - ------------------------------------------------------------------------------------------------------- 1996 1995 1994 - - - ------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 4,429 $ 2,622 $ 905 - - - ------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of the Angelika (12,570) 0 0 Reimbursement proceeds for the Angelika judgement 1,293 0 0 Purchase of property and equipment (11,075) (1,828) (66) Proceeds from redemption of Citadel preferred stock investment 6,191 0 0 Purchase of Citadel common stock (3,325) 0 0 (Increase) decrease in restricted cash (1,478) 208 83 (Decrease) increase in due from affiliate 1,040 (1,040) 0 Investment in leased equipment (See Note 4) (75) 0 0 Net proceeds from sales of real estate 91 0 570 Investment in Australian joint venture 0 (1,040) 0 Purchase of the Angelika judgement (See Note 3) 0 (1,285) 0 Purchase of Cine Vista 0 0 (22,720) Net proceeds from condemnation award 0 1,146 0 Net proceeds from real estate joint venture investments 0 185 138 Purchases of available-for-sale securities 0 (510) (12,261) Sales and maturities of available-for-sale securities 0 36,319 42,589 - - - ------------------------------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (19,908) 32,155 8,333 - - - ------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from minority partner of Australian joint venture 12,888 0 0 Cash acquired as a result of consolidation of Australian joint venture 95 0 0 Proceeds from issuance of Series A redeemable preferred stock 7,000 0 0 Proceeds from minority partner for purchase of the Angelika 2,068 0 0 Distributions to minority partner of the Angelika (38) 0 0 Payments of Stock Transactions issuance costs (1,056) 0 0 Payment of preferred stock dividends (910) 0 0 Payments of debt financing costs (256) 0 0 Purchase of treasury stock (1) (1) (2) - - - ------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 19,790 (1) (2) - - - ------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents 180 0 0 - - - ------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 4,491 34,776 9,236 Cash and cash equivalents at beginning of year 44,491 9,413 177 - - - ------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 48,680 $44,189 $9,413 =======================================================================================================
See Notes to Consolidated Financial Statements. F-5 READING ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995, 1994 (IN THOUSANDS, EXCEPT SHARES)
--------------------Reading Company------------------ ------------Reading Entertainment--------- Common Stock Class A Common Stock Treasury Stock Common Stock Series B Preferred Stock ------------------------------------------------------------------------------------------------- Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount ------------------------------------------------------------------------------------------------- Balance at December 31, 1993 14,149 $ 1 5,142,542 $ 51 (183,116) ($2,619) 0 $ 0 $ 0 $ 0 Net loss Adjustment to beginning balance for change in accounting method net of income taxes of $19 Change in unrealized gains and losses net of income taxes of $19 Reading Company common stock converted to Reading Company Class A common stock (1,858) 1,858 Reading Company treasury stock purchased (134) (2) -------------------------------------------------------------------------------------------------- Balance at December 31, 1994 12,291 1 5,144,400 51 (183,250) (2,621) 0 0 0 0 Net income Change in unrealized gains and losses Realization of tax benefit resulting from pre-quasi- reorganization Foreign currency translation adjustment resulting from equity method of accounting in Reading International Reading Company common stock converted to Reading Company Class A common stock (761) 761 Reading Company treasury stock purchased (147) (1) -------------------------------------------------------------------------------------------------- Balance at December 31, 1995 11,530 1 5,145,161 51 (183,397) (2,622) 0 0 0 0 -------------------------------------------------------------------------------------------------- Foreign Unrealized Currency Gains and Other Retained Translation (Losses) Capital Earnings Adjustment --------------------------------------------------- Balance at December 31, 1993 $ 0 $55,057 $15,536 $ 0 Net loss (1,652) Adjustment to beginning balance for change in accounting method net of income taxes of $19 38 Change in unrealized gains and losses net of income taxes of $19 (324) Reading Company common stock converted to Reading Company Class A common stock Reading Company treasury stock purchased ------------------------------------------------------- Balance at December 31, 1994 (286) 55,057 13,884 0 Net income 2,351 Change in unrealized gains and losses 286 Realization of tax benefit resulting from pre-quasi- reorganization 1,200 (1,200) Foreign currency translation adjustment resulting from equity method of accounting in Reading International (10) Reading Company common stock converted to Reading Company Class A common stock Reading Company treasury stock purchased ------------------------------------------------------- Balance at December 31, 1995 0 56,257 15,035 (10) -------------------------------------------------------
F-6 Reading Entertainment, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity (continued) Years ended December 31, 1996, 1995, 1994 (in thousands, except shares)
-----------------------Reading Company----------------------- Common Stock Class A Common Stock Treasury Stock ----------------- -------------------- --------------------- Shares Amount Shares Amount Shares Amount - - - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1995 11,530 $1 5,145,161 $51 (183,397) ($2,622) Net income Realization of tax benefit resulting from pre-quasi-reorganization operating loss carryforwards Foreign currency translation adjustment resulting from equity method of accounting in Reading International Reading Company common stock converted to Reading Company Class A common stock (2,853) 2,853 Reading Company treasury stock purchased (120) (1) Reading Company Common and Class A common stock converted to Reading Entertainment common stock (8,677) (1) (5,148,014) (51) Reading Company Class A common stock in treasury retired 183,517 2,623 Issuance of Reading Entertainment common stock and Series B Preferred to Craig in accordance with terms of Stock Transactions Issuance costs of Stock Transactions Reading Entertainment Series A and B preferred dividends declared -------------------------------------------------------------------------------------- Balance at December 31, 1996 0 $0 0 $0 0 $0 ====================================================================================================================================
Foreign -----------Reading Entertainment------------- Unrealized Currency Common Stock Series B Preferred Stock Gains and Other Retained Translation ------------------------------------------ Shares Amount Shares Amount (Losses) Capital Earnings Adjustment - - - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1995 0 $0 0 $0 $0 $56,257 $15,035 ($10) Net income 7,003 Realization of tax benefit resulting from pre-quasi-reorganization operating loss carryforwards 22,042 (3,957) Foreign currency translation adjustment resulting from equity method of accounting in Reading International Reading Company common stock 124 converted to Reading Company Class A common stock Reading Company treasury stock purchased Reading Company Common and Class A common stock converted to Reading Entertainment common stock 4,973,174 5 45 Reading Common Class A common stock in treasury retired (2,622) Issuance of Reading Entertainment common stock and Series B Preferred to Craig in accordance with terms of Stock Transactions 2,476,190 2 550,000 1 64,377 Issuance costs of Stock Transactions (1,505) Reading Entertainment Series A and B preferred dividends declared (843)/(1)/ -------------------------------------------------------------------------------------- Balance at December 31, 1996 7,449,364 $7 550,000 $1 $0 $138,594 $17,238 $114 ====================================================================================================================================
(1) Represents dividends per share of $1.36 for Reading Entertainment Series A redeemable preferred stock and dividends per share of $1.36 for Reading Entertainment Series B preferred stock. See Notes to Consolidated Financial Statements. F-7 READING ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 (AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) In October 1996, Reading Company merged with a wholly owned subsidiary of Reading Entertainment, Inc., a newly formed Delaware corporation ("REI" or "Reading Entertainment" and collectively, with its subsidiaries and predecessors, "Reading" or the "Company"). As a result of the merger, shareholders of Reading Company became entitled to receive one share of REI Common Stock in exchange for each share of Reading Company Common Stock or Class A Common Stock (the "Reorganization") (See Note 2). The Company has operated motion picture exhibition theaters in leased locations in the Commonwealth of Puerto Rico under the name Cine Vista since 1994. In August 1996, the Company acquired an 83.3% interest in the Angelika Film Center (the "Angelika"), a multiplex theater located in New York City (See Note 3). In November 1995, the Company and Craig Corporation (together with its wholly owned subsidiaries, "Craig") formed Reading International Cinemas LLC ("Reading International"), a limited liability company owned equally by the Company and Craig until October 15, 1996, which has initiated theater development activities in Australia through Reading Australia Pty. Limited (together with its subsidiaries "Reading Australia"). On October 15, 1996, Reading Entertainment acquired ownership of 100% of Reading International (See Note 2). The Company is also a participant in two real estate joint ventures and holds certain property for sale located primarily in Philadelphia, Pennsylvania and has acquired certain leased equipment as an investment. 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 including the results of the Angelika subsequent to August 27, 1996, the effective date of the Angelika acquisition. Significant intercompany transactions and accounts have been eliminated. INCOME TAXES: The Company underwent a quasi-reorganization in 1981. The quasi-reorganization did not require restatement of any assets or liabilities or any other modification of capital accounts. Through the year ended December 31, 1996, the Company is required to make a transfer from "Retained earnings" to "Other capital" in the Consolidated Statement of Shareholders' Equity in an amount equal to the tax benefit resulting from utilization of federal net operating loss carryforwards which relate to periods prior to the quasi- reorganization. Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. CASH EQUIVALENTS: The Company considers all highly liquid investments with original maturities of three months or less at the time of acquisition to be cash equivalents. Cash equivalents are stated at cost plus accrued interest, which approximates fair market value, and consist principally of federal agency securities and short-term money market instruments. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVENTORIES: Inventories are comprised of confection goods used in Cine Vista's, the Angelika's and Reading Australia's operations and are stated at the lower of cost (first-in, first-out method) or net realizable value. PROPERTY AND EQUIPMENT: Property and equipment is carried at cost. Depreciation of buildings, capitalized premises lease, leasehold improvements and equipment is recorded on a straight-line basis over the estimated useful F-8 lives of the assets or, if the assets are leased, the remaining lease term (inclusive of options, if likely to be exercised), whichever is shorter. The estimated useful lives are generally as follows: Building and Improvements 40 years Equipment 7-15 years Furniture and Fixtures 7 years Leasehold Improvements 20 years CONSTRUCTION IN PROGRESS AND PROPERTY DEVELOPMENT COSTS: Construction-in- progress and property development costs are comprised of all direct costs associated with the development of potential theater locations (whether for purchase or lease). Amounts are carried at cost unless management decides that a particular theater location will not be pursued to completion. If such a judgement is made, previously capitalized costs which are no longer of value are expensed. PROPERTY HELD FOR SALE: Property held for sale is carried at the lower of cost, including related holding costs, or estimated net realizable value and is classified as a noncurrent asset due to the inherent difficulty in estimating the timing of future sales. INTANGIBLE ASSETS: Intangible assets are comprised of beneficial theater leases used in Cine Vista's operations and cost in excess of net assets acquired in the acquisition of the Angelika. The amount of the purchase price of the 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 assets was determined by an independent appraiser. The amount of the Cine Vista 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 Cine Vista's leases at the time of the Company's acquisition of Cine Vista and allocating such amount as a component of the purchase price of Cine Vista. The beneficial leases are amortized on a straight-line basis over the remaining term of the underlying leases, which approximates 17 years. TRANSLATION OF NON-U.S. CURRENCY AMOUNTS: The financial statements and transactions of Reading Australia's operations (see Note 3) are maintained in their functional currency (Australian dollars) and translated into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency Translation." Assets and liabilities are translated at exchange rates in effect at the balance sheet date. Revenues and expenses are translated at the average exchange rate for the period. Translation adjustments are reported as a separate component of shareholders' equity. INCOME (LOSS) PER SHARE: Income (loss) per share (Reading Entertainment Common Stock for the period subsequent to Reorganization and Reading Company Class A Common and Common Stock for periods prior to the Reorganization) is calculated by dividing net income (loss) available to common shareholders by the weighted average shares outstanding during the period and the dilutive effect, if any, of common stock equivalents that are outstanding. Net income available to common stock shareholders reflects the reduction for dividends declared on the Company's preferred stock and for amortization of an estimate of an asset put option had one been recorded (See Note 2). RECLASSIFICATION: Certain amounts in previously issued financial statements have been reclassified to conform with the current presentation. ACCOUNTING CHANGES: The Company adopted SFAS No. 107, "Disclosure about Fair Value of Financial Instruments" in 1996. SFAS No. 107 requires the disclosure of the fair value of certain financial instruments for which it is practicable to estimate that value and requires the disclosure of significant assumptions used in such estimates. The Company also adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in 1996. SFAS No. 121 establishes accounting standards for the impairment of long-lived assets, certain intangible assets and costs in excess of net assets related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. F-9 READING ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) The Company adopted SFAS No. 123, "Accounting for Stock-based Compensation." in 1996. SFAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans, and establishes accounting standards for issuance of equity instruments to acquire goods and services from non-employees. NOTE 2- REORGANIZATION AND STOCK TRANSACTIONS In October 1996, two transactions were approved by the Company's shareholders, the Reorganization and the exchange by REI of capital stock for certain assets of Citadel Holding Corporation (together with its wholly owned subsidiaries, "Citadel") and Craig (the "Stock Transactions"). Both transactions were completed on October 15, 1996. The Reorganization was effected pursuant to an Agreement and Plan of Merger (the "Merger Agreement") among Reading Company, REI, which was a newly formed, wholly-owned subsidiary of Reading Company, and Reading Merger Co. ("Merger Co.") which was a newly formed, wholly-owned subsidiary of REI. In the Reorganization, Reading Company merged with Merger Co. and each outstanding share of Reading Company's Common Stock and Class A Common Stock was converted into the right to receive one share of REI's Common Stock (the "Common Stock"). As a result of the Reorganization, Reading Company became a wholly-owned subsidiary of REI and the Shareholders of Reading Company became shareholders of REI. The Stock Transactions were carried out pursuant to an Exchange Agreement, dated September 4, 1996 (the "Exchange Agreement"). In the Stock Transactions, REI issued (i) 70,000 shares of Series A Voting Cumulative Convertible Redeemable Preferred Stock, (the "Series A Preferred Stock"), to Citadel, and granted certain contractual rights to Citadel, in return for $7 million in cash and (ii) 550,000 shares of Series B Voting Cumulative Convertible Preferred Stock, (the "Series B Preferred Stock"), and 2,476,190 shares of Common Stock to Craig in exchange for certain assets owned by Craig. The assets acquired by REI from Craig consist of 693,650 shares of Stater Bros. Holdings, Inc.'s ("Stater") Series B Preferred Stock (the "Stater Preferred Stock"), Craig's 50% membership interest in Reading International, of which an indirect wholly owned subsidiary of REI was the sole other member, and 1,329,114 shares of Citadel's 3% Cumulative Voting Convertible Preferred Stock, stated value $3.95 per share (the "Citadel Preferred Stock"). The contractual rights granted to Citadel in the Stock Transactions are set forth in an Asset Put and Registration Rights Agreement pursuant to which Citadel has the right (the "Asset Put Option"), exercisable at any time after October 15, 1996 and until 30 days after REI files its Annual Report on Form 10-K for the year ending December 31, 1999, to require REI to acquire substantially all of Citadel's assets, and assume related liabilities (such as mortgages), for shares of Common Stock. In exchange for up to $20 million in aggregate appraised value of Citadel assets on exercise of the Asset Put Option, REI is obliged to deliver to Citadel a number of shares of Common Stock determined by dividing the appraised value of the Citadel assets by $11.75 if the notice of exercise is received by October 31, 1997 and $12.25 if notice is received thereafter. If the value of the Citadel assets is in excess of $20 million, REI is obliged to pay for the excess by issuing common stock at the then-fair market value up to a maximum of $30 million of assets. Also, in conjunction with the Stock Transactions, REI agreed to reimburse Citadel for its out-of-pocket costs with respect to the transaction, up to a maximum of $280,000. The Series A and Series B Preferred Stock (collectively the "Convertible Preferred Stock") have stated values of $7 million and $55 million, respectively. Citadel has the right during the 90-day period beginning October 15, 2001, or in the event of a change of control of REI, to require the Company to repurchase the Series A Preferred Stock at its stated value plus accrued and unpaid dividends or, in the case of a change in control, a premium. Due to the redemption provisions, the Series A Preferred Stock has not been included as a component of Shareholders' Equity in the Consolidated Balance Sheets and will be separately categorized as "Preferred Stock," until such time that the redemption provision is exercised or expires. For financial reporting purposes, the Company did not allocate any value to the Asset Put Option, due to the Company's belief that the value is immaterial and that the methods of valuing F-10 READING ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) options include numerous subjective assumptions and are not intended to value non-transferable options such as the Asset Put Option. REI and Citadel also agreed that immediately following REI's receipt of the Citadel Preferred Stock from Craig, the Company would deliver the Citadel Preferred Stock to Citadel in exchange for an equal number of shares of a new series of Citadel Preferred Stock (the "Citadel Series B Preferred Stock"). The Citadel Preferred Stock and the Citadel Series B Preferred Stock were substantially identical, except that the Citadel Series B Preferred Stock reduced the accrual rate on the redemption premium from 9% per annum to 3% per annum subsequent to the closing of the Stock Transactions and also provided that the Citadel Series B Preferred Stock could not be presented for conversion to Citadel common stock for a period of one year beginning 15 days after Citadel filed its 1996 Annual Report on Form 10-K with the Securities and Exchange Commission. On December 18, 1996, Reading Entertainment elected to convert the Citadel Series B Preferred Stock into Citadel common stock whereupon Citadel exercised its right to redeem the Citadel Series B Preferred Stock. Under the terms of the Citadel Series B Preferred Stock, the Company received all accrued and unpaid dividends and a redemption premium of $941,000, which premium was included in "Other income" in the fourth quarter Consolidated Statement of Operations in 1996. NOTE 3-THEATER ACQUISITION AND DEVELOPMENT ACTIVITIES On August 27, 1996, the Company and Sutton Hill Associates ("Sutton Hill"), acquired from Angelika Film Centers, Inc. ("AFCI") the assets comprising the Angelika, a multiplex theater located in New York City. The purchase price of the Angelika was approximately $12,570,000 (subject to certain adjustments), inclusive of acquisition costs of approximately $529,000. The Company and Sutton Hill formed a limited liability company, Angelika Film Centers LLC ("AFC"), to hold their interest in the Angelika. AFC acquired the Angelika assets with a combination of available cash, a fully collateralized promissory note issued to AFCI in the amount of $2,000,000 and credit in full satisfaction of a judgement encumbering certain of the stock of AFCI, with interest on such judgement at a rate of 9% per annum. The Company had acquired the judgement from a bank for $1,285,000 in November 1995. The short-term portion ($1,500,000) and the long-term portion ($500,000) of the promissory note and an escrow established in relation to this future obligation have been classified a "Note payable" and "Restricted cash," respectively, in the Consolidated Balance Sheet as of December 31, 1996. The Company contributed 83.3% of the capital of AFC and Sutton Hill contributed the remaining 16.7%. The operating agreement of AFC provides that all depreciation and amortization (the "Special Deductions") will first be allocated to Sutton Hill until the aggregate amount of such Special Deductions equals Sutton Hill's initial investment. Thereafter, the Company will receive all Special Deductions until the relative ownership interests are equal to the initial ownership interests of the parties. Sutton Hill has agreed to subordinate its interest in AFC to the Company's interest in order to permit the Company to pledge AFC and its assets as collateral to secure borrowing by the Company. In addition, Sutton Hill has agreed that the Company will be entitled to receive up to 100% of the proceeds of borrowing by AFC, up to the amount of the Company's initial capital contribution to AFC. AFC is managed by City Cinemas, a New York motion picture exhibitor and an affiliate of Sutton Hill, pursuant to the terms of a management agreement (the "Management Agreement"). The Management Agreement provides for City Cinemas to manage the Angelika for a minimum annual fee of $125,000 plus an incentive fee equal to 50% of annual cash flow (as defined in the Management Agreement) over prespecified levels provided, however, that the maximum annual fee (minimum fee plus incentive fee) may not exceed 5% of the Angelika'a annual revenues. F-11 READING ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) The Company's 83.3% interest in the Angelika was accounted for using the purchase method and the Angelika's operating results since the acquisition on August 27, 1996 have been consolidated with the operating results of the Company. Sutton Hill's initial capital investment and share of the Angelika's net earnings for the period subsequent to the acquisition of the Angelika have been recorded as "Minority interest" in the Consolidated Balance Sheet as of December 31, 1996. The pro forma consolidated operating results set forth below assume that the acquisition of the Angelika was completed at the beginning of 1995 and include the impact of certain adjustments, including amortization of intangibles, depreciation and reduction and reductions in "Interest and dividend" income resulting from payment of the purchase price.
Year Ended December 31, --------------------------------- 1996 1995 ---------- ---------- Revenues $27,443 $24,530 ========== ========== Net income $6,861 $1,944 ========== ========== Per Share: Net income $1.25 $.39 ========== ==========
Reading International Cinemas LLC --------------------------------- In November 1995, the Company and Craig formed Reading International to develop and operate multiplex cinemas in Australia under the operating name Reading Cinemas. On October 15, 1996, as a part of the Stock Transactions, Reading acquired Craig's 50% interest in Reading International. Since formation, Reading Australia has acquired a 50 acre site near Melbourne, signed three purchase agreements, a development agreement and entered into three leases of properties to be developed as theaters. Reading Australia's first theater commenced operations in late 1996. Reading International was equally owned by the Company and Craig prior to conclusion of the Stock Transactions on October 15, 1996 (See Note 2), and wholly-owned by the Company subsequent thereto. In 1996, the Company consolidated the financial results of Reading International and reflected Craig's 50% share of the losses prior to the Stock Transactions as "Minority Interest" (which amount totaled $388,000) in the Company's Consolidated Financial Statements. The pro forma consolidated operating results set forth below assume that the Company owned 100% of Reading International since formation, in November 1995, and include the impact of certain adjustments, including reductions in net income and "Interest and dividend" income resulting from the operations of and funding requirements associated with 100% ownership of Reading International. F-12 READING ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
Year Ended December 31, ----------------------- 1996 1995 ------- ------- Revenues $22,943 $17,632 ======= ======= Net income $6,614 $1,961 ======= ======= Per Share: Net income $1.20 $.39 ======= =======
NOTE 4 - INVESTMENTS Citadel Holding Corporation --------------------------- In March 1996, the Company purchased from Craig 1,564,473 shares of the common stock of Citadel (the "Citadel Common Stock") for an aggregate purchase price of $3,324,505, representing slightly less than $2.125 per share and ownership of approximately 26.1% of Citadel Common Stock. On the day prior to the acquisition of the Citadel Common Stock, the closing price of the Citadel Common Stock on the American Stock Exchange was $2.25 per share. Upon acquisition of the Citadel Common Stock, the Company paid Craig with a five year unsecured, interest-bearing promissory note (the "Citadel Note"), which note was retired on July 29, 1996. Interest of approximately $85,000 was paid to Craig on the Citadel Note. The Company also acquired from Craig (for $50,000) a one-year option to acquire, at fair market value, the Citadel Preferred Stock, which option was canceled in conjunction with the Stock Transactions (See Note 2). The Company accounts for its investment in the Citadel Common Stock by the equity method. Citadel's net earnings from the Company's date of acquisition, March 29, 1996 through December 31, 1996, were $6,183,000, inclusive of a nonrecurring gain on the sale of real estate of $1,473,000 and nonrecurring income of $4,000,000 from the recognition for financial statement purposes of previously deferred proceeds from the bulk sale of loans and real estate by a previously owned subsidiary of Citadel. The Company's share of such earnings for the same period was $1,526,000, which amount is included in the Consolidated Statement of Operations for the year ended December 31, 1996 as "Equity in earnings of affiliate." Citadel's assets and liabilities totaled $30,292,000 and $12,568,000, respectively, as of December 31, 1996. Management believes that the December 31, 1996 carrying amount of the Citadel Common Stock investment approximates its fair value. The pro forma consolidated operating results set forth below assume that the acquisition of the Company's Common Stock interest in Citadel was completed at the beginning of 1995 and include the impact of certain adjustments, including an increase in interest expense resulting from the Citadel Note. F-13 READING ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATE) Year Ended December 31, ---------------------- 1996 1995 ------- ------- Revenues $22,943 $17,632 ======= ======= Net income $6,992 $2,406 ======= ======= Per Share: Net income $1.27 $.48 ======= =======
State Preferred Stock --------------------- The 693,650 shares of Stater Preferred Stock acquired by the Company in the Stock Transactions have a liquidation preference, stated value and redemption value of $69,365,000 and a cumulative dividend preference of 10.5% through September 2002, increasing to 12% per annum in October 2002 and thereafter increasing 100 basis points per year to a maximum of 15%. The Stater Preferred Stock is redeemable by Stater without premium at anytime. In addition, the Company can require Stater to redeem the Stater Preferred Stock at stated value plus accrued and unpaid dividends beginning in 2009. Stater is a leading supermarket chain in Southern California, operating 110 supermarkets in the Inland Empire Region of Southern California. All of the common stock of Stater is owned by La Cadena Investments, a general partnership whose partners include three members of Stater's senior management. There is no public market for the Stater Preferred Stock, although the Company does have certain registration rights relating to such shares. The Stater Preferred Stock has been recorded on the Consolidated Balance Sheet as "Investment in Stater Preferrred Stock" and valued at $67,978,000 (98% of stated value) which amount is consistent with a valuation of the Stater Preferred Stock prepared by an independent investment banker. Net Investment in Leased Equipment ---------------------------------- During 1996, a wholly-owned subsidiary of the Company purchased computer controlled manufacturing equipment for $40,934,000 which equipment was leased to manufacturing companies (the "User Leases"). Concurrent with the purchase of the equipment, the Company leased the equipment back to the seller, subject to the User Leases, for a period of five years (the "Wrap Lease"). The Company's investment in the equipment was funded through a cash payment of $1,944,000 and the issuance of a nonrecourse promissory note (the "Promissory Note") in the amount of $38,990,000. Payments due under the Wrap Lease were subsequently sold to a third party in return for a $32,000 payment and assumption by the purchaser of all obligations under the Promissory Note. The Company has retained all rights and interest in the equipment subject to the User Leases and the Wrap Lease. Therefore, the Company has rights to the residual value of the equipment upon conclusion of the Wrap Lease (which term exceeds the term of the User Leases). The residual interest has been reflected at its net cost, $2,125,000, in the Consolidated Balance Sheet at December 31, 1996 as "Net investment in leased equipment." F-14 READING ENTERTAINMENT, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) NOTES 5-STOCK OPTION PLANS The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," (APB 25) and related Interpretations in accounting for its employee stock options because, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, if the exercise price of the Company's employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company had options outstanding under three Stock Option Plans, the 1982 Incentive Stock Option Plan, the 1982 Non-qualified Option Plan (collectively, the "1982 Plans") and the 1992 Non-qualified Stock Option Plan (the "1992 Plan"). Each plan was approved by shareholders in the year of adoption. No further grants may be made under the 1982 Plans and all options outstanding thereunder are currently exercisable at an exercise price of $12.50 per share. All options granted under the 1982 Plans were at fair market value on the date of grant. The 1992 Plan reserved 500,000 shares for grant and provides for one-third of options granted to be immediately exercisable, one-third exercisable on the first anniversary of the date of grant, and the final one-third exercisable upon the second anniversary date of the date of grant unless the Executive Committee of the Board of Directors (the "Committee"), in its discretion, decides otherwise. Options granted under the 1992 Plan shall not be for less than 100 percent of the fair market value on the date of grant and expire ten years from the date of grant and may contain certain other terms and conditions as determined by the Committee. All options granted under the 1992 Plan have an exercise price of $14.00 per share. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. No options have been granted subsequent to such date and therefore no pro forma information has been included. F-15 READING ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) Changes in the number of shares subject to options under the plans are summarized as follows:
1996 1995 1994 --------------------------- -------------------------- ------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price -------------------------- -------------------------- ------------------------ 1982 Plans: - - - ---------- Outstanding at beginning of year 17,000 $14.57 17,000 $14.57 17,000 $14.57 Expired (12,000) 15.44 -------------------------- -------------------------- ------------------------ Outstanding at end of period 5,000 12.50 17,000 14.57 17,000 14.57 -------------------------- -------------------------- ------------------------ 1992 Plan: - - - --------- Outstanding at beginning of year 342,732 14.00 357,732 14.00 357,732 14.00 Canceled (15,000) 14.00 -------------------------- -------------------------- ------------------------ Outstanding at the end of year 342,732 14.00 357,732 14.00 357,732 14.00 -------------------------- -------------------------- ------------------------ Total - - - ----- Outstanding at Year End 347,732 $13.98 359,732 $14.03 374,732 $14.03 ========================== ========================== ======================== Exercisable at Year End 337,357 $13.98 341,982 $14.03 347,107 $14.03 ========================== ========================== ========================
The weighted-average remaining contractual life of all options outstanding at December 31, 1996 was 5.2 years. NOTE 6 - INCOME TAXES Effective December 31, 1981, after approval by its shareholders, the Company eliminated its accumulated deficit by a charge to "Other capital." This quasi-reorganization did not require the restatement of any assets or liabilities or any other modification of capital accounts. Tax benefits realized from the carryforwards of pre-quasi-reorganization losses have been included in the determination of net income and then reclassified from "Retained earnings" to "Other capital." Had such tax benefits been excluded from net income, the Company would have reported net income of $1,667,000 or $.30 per share for the twelve months ended December 31, 1996.
Year Ended December 31, -------------------------------- 1996 1995 1994 -------- -------- -------- Income (loss) consists of the following components: United States $10,497 $3,916 ($1,359) Foreign (4,730) (1,326) (293) -------- -------- -------- Total $5,767 $2,590 ($1,652) ======== ======== ========
F-16 READING ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) Significant components of the provisions for income taxes attributable to operations are as follows:
Year ended December 31, ----------------------------- 1996 1995 1994 ------ ------- ------ Income taxes (benefit): Current: United States $2,195 $ 1,419 $ 0 Foreign 446 20 0 State and local 80 0 0 ------- ------- ------- Total 2,721 1,439 0 Increase (decrease) in valuation allowance (3,957) (1,200) 0 ------- ------- ------- Total income taxes (benefit) ($1,236) $ 239 $ 0 ======= ======= =======
Reconciliation of income taxes at United States statutory rates to income taxes as reported are as follows:
Year Ended December 31, ------------------------------ 1996 1995 1994 --------- -------- --------- Tax provision (benefit) at U.S. statutory rates $1,961 $ 881 ($ 562) Foreign and U.S. losses not currently benefited 234 538 562 Foreign witholding taxes 446 20 0 State income taxes 80 0 0 Reduction of Valuation Allowance due to Pre-Quasi-Reorganization losses (3,957) (1,200) 0 --------- -------- --------- Total income taxes (benefit) ($1,236) $ 239 $ 0 ========= ======== =========
The Stock Transactions (see Note 2) are intended to qualify as an exchange under Section 351(a) (a "351 Exchange") of the Internal Revenue Code of 1986, as amended (the "Code"). In a 351 Exchange, the party acquiring the assets retains the contributing parties' tax basis in the acquired assets, with no taxable gain recognized as a result of the exchange. The parties contributing assets obtain a tax basis in the assets received in the exchange equal to the basis in the assets which are contributed in the exchange. With the exception of the Stater Preferred Stock, the book value of the assets received in the Stock Transactions approximated the tax basis in the assets received. Craig's adjusted tax basis (for federal tax purposes) in the Stater Preferred Stock was approximately $5 million and, accordingly, upon the Company's contribution of the Stater Preferred Stock to Reading Australia, a taxable gain (for federal tax purposes) of approximately $62,977,000 was recorded by the Company. The estimated tax liabilities associated with the assets received in the Stock Transactions were $22,042,000 in deferred federal income taxes primarily relating to the Stater Preferred Stock. At the time of the closing on the Stock Transactions, the Company had a gross deferred federal tax asset of $55,968,000 and a valuation allowance in F-17 READING ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) the same amount. Upon receipt of the Stater Preferred Stock, the Company determined that it was more-likely-than-not that a portion of the deferred tax asset which had previously been fully reserved, would be realized and the Company reduced the valuation allowance by $20,782,000, which amount reflects the value of the Company's federal tax loss carryforwards which were expected to be utilized by the Company, net of $1,260,000 in federal alternative minimum tax ("AMT"). A portion of the reversal of the tax asset valuation allowance, $3,957,000, was included in "Income tax benefit" in the Company's Consolidated Statement of Operations and was subsequently reclassified from "Retained Earnings" to "Other Capital." The balance, $18,085,000, was credited directly to "Other Capital" in the Company's Consolidated Statement of Shareholders' Equity. The sale of the Wrap Lease payments described in Note 4 resulted in a taxable gain of approximately $39 million. This gain was not recognized for financial reporting purposes. Carryforwards and temporary differences which give rise to the deferred tax asset at December 31 are as follows:
1996 1995 ---------- ---------- Net operating loss carryforwards $ 16,156 $ 56,055 Alternative minimum taxes 2,928 733 Wrap Lease rental sale 13,171 0 Reserves and other, net 1,134 1,398 ---------- ---------- Gross deferred asset 33,389 58,186 Valuation allowance (33,389) (58,186) ---------- ---------- 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, 1996. The Company's federal tax net operating loss carryforwards expire as follows:
Year Amount --------------- --------------- 1997.......... $ 13 1998.......... 2,096 2000.......... 26,915 2002.......... 7,382 2003.......... 589 2007.......... 1,443 2008.......... 1,155 2009.......... 32 --------------- $39,625 ===============
In addition to the federal net operating loss carryforwards, the Company has AMT credits of $2,928,000 which can be carried forward indefinitely. Also, the Company has foreign net operating loss carryforwards of F-18 READING ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) $6,863,000 which expire between 2000 and 2001 unless utilized prior thereto. In 1996, the Company had $14,178,000 of federal net operating loss carryforwards that expired unused. The Company is required to pay AMT for 1996 and 1995. AMT is calculated separately from the regular federal income tax and is based on a flat rate applied to a broader tax base. Amounts payable thereunder cannot be totally eliminated through the application of net operating loss carryforwards. The Company recorded AMT expense of $2,195,000 and $87,000 in 1996 and 1995, respectively, and recorded no AMT expense in 1994. The Company paid $139,000, $1,000 and $3,000 in income taxes in 1996, 1995 and 1994, respectively. NOTE 7 - COMMITMENTS AND CONTINGENCIES Environmental - - - ------------- Reading Company has been advised by the Environmental Protection Agency ("EPA") that it is a potentially responsible party ("PRP") under environmental laws including Federal Superfund legislation ("Superfund") for a site located in Douglassville, Pennsylvania. The EPA issued an Administrative Order under Superfund against 34 PRPs requiring, among other things, that the named parties be required to incinerate materials at the site pursuant to a 1989 Record of Decision ("ROD"). The ROD estimated that the incineration would cost approximately $53 million. Thirty-six PRPs were also named in a civil action brought by the United States Government which seeks to recover alleged costs incurred at the site by the United States of approximately $22 million. Reading Company has been named in a third-party action instituted by the majority of the 36 PRPs sued by the United States. The actions instituted against the Company and approximately 300 PRPs seek to have the parties contribute to reimbursement for past costs and any costs associated with further remediation at the site. In 1995, the federal district court judge who presided over Reading Company's bankruptcy reorganization ruled that all liability asserted against Reading Company relating to the site was discharged pursuant to the consummation order issued in conjunction with the bankruptcy on December 31, 1980. The judge's decision has been appealed and the appeal was heard in July 1996. The appellate court has not yet rendered a decision on this matter. Based upon counsel's evaluation of possible outcomes on this matter, it is believed that the range of possible outcomes of this matter is from $0, if the appeal is upheld, to $3,000,000 if the appeal is not upheld. The Company accrued a $1,200,000 provision for this matter in 1994, all of which continues to be available to reduce the effect of an adverse ruling. Pursuant to a settlement of litigation, the City of Philadelphia, Conrail, and the Southeastern Pennsylvania Transportation Authority have agreed to pay an amount ranging from 52% to 55% of future costs that the Company may incur in cleaning environmental contamination on one of its other properties, the Viaduct, which the Company believes may be contaminated by polychlorinated biphenyls ("PCBs"). Reading Company has advised the EPA of the potential contamination. The Company has not determined the scope and extent of any such PCB contamination. However, the Company has been advised by counsel that, given the lack of regulatory attention to the Viaduct in the fourteen years which have elapsed since the EPA was notified of the likelihood of contamination, it is unlikely that the Company will be required to decontaminate the Viaduct or incur costs related thereto. Certain Shareholder Litigation - - - ------------------------------ In September 1996, the holder of 50 shares of the Company's Common Stock commenced a purported class action on behalf of the Company's minority shareholders owning Reading Company Class A Common Stock in the Philadelphia County Court of Common Pleas relating to the Reorganization and Stock Transactions (See Note 2). F-19 READING ENTERTAINMEMT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31,1996 (AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) The complaint in the action (the "Complaint") named the Company, Craig, two former directors of the Company and all of the current directors of the Company (other than Gregory R. Brundage) as defendants. The Complaint alleged, among other things, that the Independent Committee set up to review the transactions and the current and former directors of the Company breached their fiduciary duty to the minority shareholders in the review and negotiation of the Reorganization and Stock Transactions and that none of the directors of the Company were independent and that they all were controlled by James J. Cotter, Craig or those controlled by them. The Complaint also alleged, in part, that the defendants failed to disclose the full future earnings potential of the Company and that Craig would benefit unjustly by having its credit rating upgraded and its balance sheet bolstered and that the value of the minority sharehholders' interest in the Company was diluted by the transactions. The Complaint sought injunctive relief to prevent the consummation of the Stock Transactions and recision of the Stock Transactions if they were consummated and divestiture by the defendants of the assets or shares of the Company that they obtained as a result of the Stock Transactions, and unspecified damages and other relief. In October, all of the defendants filed preliminary objections to the Complaint and thereafter, by agreement of the parties and Order of the Court, the Company was dismissed as a defendant without prejudice. Plaintiff dismissed with prejudice his request for preliminary and permanent injunctive relief to prevent the consummation of the Stock Transactions and his request to rescind and set aside the Stock Transactions. In November, 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. Management believes that the allegations contained in the amended complaint are without merit and intends to vigorously defend the directors in the matter. The Company had Directors and Officers liability insurance and believes that the claim is covered by such insurance. The Company is not a party to any other pending legal proceedings or environmental action which management believes could have a material adverse effect on its financial position. NOTE 8-LEASE AGREEMENTS AND PURCHASE COMMITMENTS Cine Vista, the Angelika and Reading Australia determine 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 $2,675,000, $2,139,000 and $1,097,000 in 1996, 1995 and 1994, respectively. In 1996, 1995 and 1994, contingent rental expense under the Cine Vista operating leases totaled $220,000, $197,000, and $111,000, respectively. Cine Vista and the Angelika conduct their operations in leased premises. In addition, Reading Australia's first theater is located in a leased facility. The Company's theater leases have remaining terms inclusive of options of 12 to 36 years. Certain Cine Vista theater leases and the Reading Australia theater lease 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 noncancelable operating leases. With the exception of one capital lease, all leases are accounted for as operation leases. F-20 READING ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) Future minimum lease payments by year and in the aggregate, under noncancelable operating leases and the Cine Vista capital lease consist of the following at December 31, 1996:
CAPITAL OPERATING LEASE LEASES ----- ------ 1997 $ 95 $ 2,327 1998 95 2,371 1999 95 2,350 2000 95 2,314 2001 95 2,339 Thereafter 1,164 36,206 ---------- ---------- Total net minimum lease payments 1,639 $47,907 ========== Less amount representing interest 1,118 ---------- Present value of net minimum lease payments under capital lease $ 521 ==========
At December 31, 1996 the Company had three lease agreements for theater facilities (exclusive of the currently contested Mount Gravtt Lease) with a total of 20 screens which were then under construction or for which construction was anticipated to commence in 1997. The aggregate anticipated contribution for construction costs for such facilities was approximately $7,200,000 at December 31, 1996. The aggregate minimum annual rental for such leases is approximately $550,000, which rentals commence upon the opening of the theaters. One such theater, a six-plex in Mayaguez (a Cine Vista theater), commenced operations on March 26, 1997. The Company has entered into purchase agreements and lease agreements which are subject to satisfaction of certain contingencies, which contingencies were not satisfied as of March 1997. In conjunction with the lease and purchase agreements, the Company had escrowed or made deposits totaling $1,616,000 at December 31, 1996, which amount has been classified as "Restricted cash" on the Company's Consolidated Balance Sheet. NOTE 9--RELATED PARTY TRANSACTIONS In 1995, 1996 and 1997, the Company's Board of Directors voted to waive the transfer restrictions imposed by the provisions of the Company's capital stock to the extent necessary to permit James J. Cotter, Chairman of the Board of Directors of the Company and Craig, to acquire additional shares of the Company's capital stock. The transfer provisions prohibit a party from acquiring more than 4.75% of the Company's outstanding capital stock without the permission of the Company's Board of Directors and are intended to assure the continuing availability of the Company's federal tax loss carryforwards by precluding a change in control which could limit the value of the carryforwards. These transfer restrictions were subsequently extended to January 1, 2003 after shareholder approval at the Company's 1996 Annual Meeting of Stockholders held on October 15, 1996 (See Note 2). Prior to granting the waiver of the restrictions, the Board of Directors had determined that acquisition of the shares by Mr. Cotter and Craig would not affect the continuing availability of the Company's federal tax loss carryforwards. F-21 READING ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) The Company acquired the Angelika on August 27, 1996 (See Note 3). The theater is owned jointly by the Company and Sutton Hill, a partnership affiliated with City Cinemas, a Manhattan-based theater operator and owned in equal parts by Mr. James J. Cotter, the Company's Chairman, and Mr. Michael Forman. City Cinemas (also owned indirectly in equal parts by Messrs. Cotter and Forman) operates the theater pursuant to the Management Agreement. Mr. Cotter is a principal shareholder of Craig. A company controlled by Mr. Forman and his family beneficially own 12.4% of Craig's currently outstanding common stock. Robert F. Smerling, President of the Company, also serves as President of City Cinemas. The Stock Transactions (See Note 2) involved the issuance of Common Stock and Series B Preferred Stock to Craig (which as a result of the Stock Transactions and certain open market purchases holds securities representing approximately 78% of the Company's voting securities), in return for certain assets owned by Craig. The Company is a subsidiary of Craig. At the time that the negotiations which led to the Stock Transactions were initiated, Craig owned 51% of the Company's voting securities and the Chairman and President of the Company (both of whom are also directors of Craig and the Company) served in the same positions at Craig. The Company's Board of Directors therefore established an Independent Committee of the Board of Directors comprised of directors with no affiliation with Craig or Citadel (other than the Company's ownership in Citadel) to negotiate the terms of the proposed transaction with Craig and Citadel, to review the fairness of any consideration to be received or paid by the Company and the other terms of any such transaction and to make a recommendation to the Board of Directors concerning such transaction. The Company utilizes the services of certain Citadel employees, including the President and Chief Executive Officer of Citadel, for real estate advisory services. The Company pays Citadel for such services at a rate which is believed to approximate the fair market value of such services. An officer of Reading Australia is a joint venture partner of Reading Australia in certain theaters to be developed by Reading Australia. Pursuant to the agreement between the officer and Reading Australia, the officer will purchase a 25% interest in the theater which was opened by Reading Australia in December 1996. Amounts to be paid by the joint venture partner for the 25% interest will be funded by loans from Reading Australia. NOTE 10--LONG-TERM DEBT In December 1995, Cine Vista entered into a $15 million, eight-year revolving credit agreement (the "Credit Agreement") with a bank. Under terms of the Credit Agreement, Cine Vista may borrow up to $15 million to repay Cine Vista acquisition loans, which loans are payable to a wholly-owned subsidiary of the Company (the "Subsidiary Loans"), and fund certain new theater development expenditures (the "Development Expenditures"). During the initial 30 months of the eight-year term, Cine Vista may borrow and repay amounts outstanding under the Credit Agreement. Amounts outstanding at the end of the 30-month period are payable in increasing quarterly installments over the balance of the loan term. At December 31, 1996 and 1995, no amounts were outstanding under this agreement. As security for the loan, Cine Vista has pledged substantially all of its assets. In addition, the stock of Cine Vista's parent company has been pledged as security for the loan. In conjunction with the loan, the Company has also agreed to subordinate to the lender its right to payment of the Subsidiary Loans as well as certain other fees payable by Cine Vista to the Company under certain circumstances. In addition, the Company has agreed to contribute funds to Cine Vista in the event that estimated unpaid Development Expenditures exceed the amount of funds available to Cine Vista under the Credit Agreement. The provisions of the Credit Agreement require Cine Vista to maintain a minimal level of net worth and other financial ratios, restrict the payment of dividends, and limit additional borrowing and capital expenditures. Borrowings under the Credit Agreement accrue interest at LIBOR (the London Interbank Offered Rate) plus 2.25%, F-22 READING ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) or the base rate plus 1/2 of 1%, at Cine Vista's election. Cine Vista failed to maintain compliance with certain of the financial covenants contained in the Credit Agreement during 1996. The Company is currently working with the lender to revise certain of the financial covenants to ensure the continuing availability of the Line of Credit. The lender has waived compliance with the covenants for the periods involved. In accordance with the provisions of the Credit Agreement, Cine Vista is required to pay a commitment fee on the unused commitment equal to 1/2 of 1%. NOTE 11--QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarterly financial information for 1996 and 1995 is summarized below:
First Second Third Fourth 1996: Quarter Quarter Quarter Quarter --------- --------- --------- --------- Revenues $4,670 $4,559 $5,446 $8,269 Net (loss) income applicable to common shareholders ($ 273) $1,313 $1,372 $3,680 ========= ========= ========= ========= Per share information: Net (loss) income applicable to common shareholders ($ .05) $ .26 $ .28 $ .52 ========= ========= ========= ========= First Second Third Fourth 1995: Quarter Quarter Quarter Quarter --------- --------- --------- --------- Revenues $3,791 $4,089 $5,830 $3,922 Net (loss) income applicable to common shareholders ($ 79) $ 401 $2,065 ($ 36) ========= ========= ========= ========= Per share information: Net (loss) income applicable to common shareholders ($ .02) $ .08 $ .42 ($ .01) ========= ========= ========= =========
The second quarter includes $1,433,000 of equity earnings from the Citadel Common Stock investment. These equity earnings included the Company's 26.1% share of a nonrecurring gain on sale of real estate of $1,473,000 and nonrecurring income of $4,000,000 from the recognition for financial statement purpose of previously deferred proceeds from the bulk sale of loans by a previously owned subsidiary of Citadel (See Note 4). The third quarter includes $1,119,000 received net of expenses in full settlement of a claim relating to a prior year purchase offer. Fourth quarter revenues include $2,360,000 recorded as income related to a settlement of a claim for property cleanup amounts previously expensed by the Company (See Note 7). The fourth quarter also includes a $941,000 preferred stock redemption premium (See Note 2) and a deferred tax benefit of $3,957,280 related to the reduction in the deferred tax asset valuation allowance (See Note 6). The first, second and third quarters include equity losses from Reading International of $254,000, $52,000 and $68,000 respectively. Reading International's fourth quarter loss (which was consolidated with the Company's operations subsequent to the Stock Transactions) totaled $1,468,000. F-23 READING ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) 1995: - - - ----- The second quarter results include $425,000 received in settlement of certain litigation between the Company and ARAMARK. The third quarter results include revenues of $1,146,000 in settlement of a condemnation claim as well as $319,000 received in settlement of two matters related to the Company's former railroad operations. Also included in the third quarter was a $290,000 equity loss from Reading International. The fourth quarter results include revenues of $223,000 related to unclaimed reorganization debt-holders' obligations and a $102,000 equity loss from Reading International. NOTE 12--CAPITALIZATION Reading Entertainment Common Stock - - - ---------------------------------- REI Common Stock (par value $.001) is traded on the Nasdaq National Market under the symbol RDGE and the Philadelphia Stock Exchange under the symbol RDG. The Articles of Incorporation include restrictions on the transfer of Common Stock which are intended to reduce the risk that an "ownership change" within the meaning of Section 382(g) of the Internal Revenue Code of 1986, as amended, will occur, which change could reduce the amount of federal tax net loss carryforwards available to offset taxable income. The restrictions provide that any attempted sale, transfer, assignment or other disposition of any shares of Common Stock to any person or group who, prior to the transfer owns (within the meaning of the Code and such regulations) shares of Common Stock or any other securities of REI which are considered "stock" for proposes of Section 382, having a fair market value equal to or greater than 4.75% of the value of all outstanding shares of REI "stock" shall be void ab initio, unless the Board of Directors of the Company shall have given its prior written approval. The transfer restrictions will continue until January 1, 2003 (unless earlier terminated by the Company's Board of Directors). Reading Entertainment Series A and Series B Cumulative Convertible Preferred - - - ---------------------------------------------------------------------------- Stock - - - ----- Holders of the Convertible Preferred Stock are entitled to receive quarterly cumulative dividends at the annual rate of $6.50 per share. In the event of a liquidation of the Company, the holders of the Convertible Preferred Stock will be entitled to receive the stated value of $100 per share plus accrued and unpaid dividends before any payment is made to the holders of the Common Stock. The Series B Preferred Stock ranks junior to the Series A Preferred Stock in rights to dividend distributions and distributions in liquidation. Holders of the Convertible Preferred Stock are entitled to cast 9.64 votes per share. In the event that dividends are not paid on either series of the Convertible Preferred Stock for six consecutive quarters, the holders of such series of the Convertible Preferred Stock will be entitled to elect one director. Each share of Series A Preferred Stock is convertible into shares of Common Stock at a conversion price of $11.50 per share and each share of Series B Preferred Stock is convertible into shares of Common Stock at a price of $12.25 per share, at any time after April 15, 1998. The shares of Series A Preferred Stock are convertible prior to April 15, 1998 in the event that a change in control of the Company occurs. The Company also has the right to require conversion of the Series A Preferred Stock in the event that the average market price of the Common Stock over a 180 day period exceeds 135% of the conversion price of the Series A Preferred Stock. The Series B Preferred Stock has no mandatory conversion provisions. Citadel has certain registration rights with respect to the shares of the Common Stock to be received upon the conversion of the Series A Preferred Stock or the exercise of the Assets Put Option. F-24 READING ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (AMOUNTS IN TABLES IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA) The Company may, at its option, redeem the Series A Preferred Stock at any time after October 15, 2001, in whole or in part, at a redemption price equal to a percentage of the stated value (initially 108%, declining 2% per annum until the percentage equals 100%) plus accrued and unpaid dividends to the date of redemption. The holders of a majority of the Series A Preferred Stock have the right to require REI to repurchase the Series A Preferred Stock at the stated value plus accrued and unpaid dividends for a 90 day period beginning October 15, 2001. In addition, the holders of the Series A Preferred Stock may require the Company to repurchase the shares at the stated value plus accrued and unpaid dividends in the event that the Company fails to pay dividends on the Series A Preferred Stock in any four quarterly periods (after April 15, 1998). In the event of a change in control of the Company, the holders of a majority of the Series A Preferred Stock may require redemption at a premium. The Series A Preferred Stock has not been included as Shareholders' Equity in the Company's Consolidated Balance Sheet due to the mandatory redemption provisions. F-25 Report of Independent Auditors Board of Directors and Shareholders Reading Entertainment, Inc. We have audited the consolidated balance sheets of Reading Entertainment, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Reading Entertainment, Inc. and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Philadelphia, Pennsylvania March 19, 1997 F-26 EX-10.15 2 ASSET PUT AND REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.15 ------------- ASSET PUT AND REGISTRATION RIGHTS AGREEMENT This Asset Put and Registration Rights Agreement (this "Agreement") is --------- entered into as of this 15th day of October, 1996 by and among Reading Entertainment, Inc., a Delaware corporation ("Reading Entertainment"), Citadel --------------------- Holding Corporation, a Delaware corporation ("Citadel"), and Citadel Acquisition ------- Corp., Inc., a Delaware corporation ("CAC"), with reference to the following: --- A. The parties to this Agreement are also parties to an Exchange Agreement dated as of Septemer 4, 1996 (the "Exchange Agreement") pursuant to which CAC is ------------------ purchasing 70,000 shares (the "Preferred Shares") of Reading Entertainment's ---------------- Series A Voting Cumulative Convertible Preferred Stock, stated value $100 per share (the "Series A Preferred Stock"), for an aggregate cash purchase price of ------------------------ $7,000,000. B. As conditions to CAC's purchase of the Preferred Shares, Reading Entertainment has agreed that (i) Citadel shall have an option to exchange all or substantially all of its assets (other than Excluded Assets as defined below) for shares (the "Exchange Shares") of Reading Entertainment's Common Stock, --------------- $0.001 par value (the "Common Stock"), and (ii) Reading Entertainment will under ------------ certain circumstances register under the Securities Act of 1933, as amended (the "Act"), the Exchange Shares and any shares of Common Stock, received upon --- conversion of the Preferred Shares (the "Conversion Shares"), all in accordance ----------------- with and subject to the terms of this Agreement. NOW, THEREFORE, in consideration of the foregoing and the agreements set forth herein, the parties hereto agree as follows: ARTICLE ONE ASSET PUT 1.1 Asset Put. --------- (a) Commencing on the date hereof, Citadel shall have the right, by giving written notice to Reading Entertainment prior to 11:59 p.m. on the thirtieth (30th) day following the date on which Reading Entertainment files its Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "Exchange Notice"), to exchange (the "Asset Put") all or substantially all of --------------- its assets (other than the Excluded Assets as defined below), together with any debt encumbering or related to such assets, including without limitation, mortgages and leases (collectively, the "Citadel Assets"), for such number of -------------- shares of Common Stock as are determined with reference to the Citadel Asset Valuation and the Common Stock Value, as described below. The term "Excluded -------- Assets" shall mean (i) all Preferred Shares and Conversion Shares (or all shares - - - ------ of capital stock of CAC, if the sole assets of CAC are Excluded Assets), (ii) such cash and/or marketable securities as a special committee comprised of the independent directors of the Board of Directors of Citadel may reasonably determine are necessary in order to maintain an appropriate level of liquidity for Citadel and its subsidiaries, (iii) any assets that, in the reasonable opinion of the Board of Directors of Reading Entertainment, are subject to liabilities (including, without limitation, contingent or environmental liabilities) reasonably likely to be in excess of the fair market value of such assets, (iv) After Acquired Assets (as defined below) to the extent the After Acquired Assets Value (as defined in Section 1.2) exceeds $5,000,000 and (v) assets to the extent the Citadel Asset Valuation (as defined in Section 1.2) exceeds $30,000,000. "After Acquired Assets" shall mean any assets other than --------------------- cash and assets owned by Citadel or its subsidiaries on the date hereof and cash proceeds of the sale thereof. If any assets are excluded by reason of clause (iv) or (v), Reading Entertainment shall determine in good faith which assets shall be Excluded Assets on such basis. Subject to Section 1.1(e), the Asset Put shall be consummated (the "Closing") on the tenth business day following the Determination Date (as defined below), or such later date as the parties may agree, at the executive offices of Citadel at 10:00 a.m. local time (the "Closing Date"). At the Closing, Citadel shall deliver such ------------ stock powers, assignments, bills of sale, deeds, consents, cash by wire transfer and other instruments of transfer and conveyance as shall be necessary, within the reasonable requirements of Reading Entertainment, to transfer the Citadel Assets to Reading Entertainment and, subject to Section 1.1(c), Reading Entertainment shall deliver to Citadel the Exchange Shares, together with such assumption agreements, acknowledgments and other documents as shall be necessary, within the reasonable requirements of Citadel, to transfer and assign the Citadel Assets to Reading Entertainment and for Reading Entertainment to assume any and all debt encumbering the Citadel Assets. (b) Subject to Sections 1.1(c) and 1.3, the aggregate number of Exchange Shares to be delivered to Citadel at the Closing shall be determined by dividing the Citadel Asset Valuation by the Common Stock Value, rounded to the nearest whole number of shares. (c) In the event the issuance to Citadel, upon Citadel's exercise of the Asset Put, of the number of shares of Common Stock determined pursuant to Section 1.1(b) would result in an "owner shift" (as defined in Section 382 of the Internal Revenue Code, as amended (the "Code")) of Reading Entertainment ---- which, when added to all other "owner shifts" that have occurred during the "testing period," would result in aggregate "owner shifts" that count against the 50 percentage point limit (under Section 382(g) of the Code) in excess of 45 percentage points (the "Owner Shift Threshold"), Reading Entertainment shall --------------------- issue to Citadel the maximum number of shares of Common Stock which would not result in the crossing of such Owner Shift Threshold. Reading Entertainment may elect not to issue the shares of Common Stock (the "Excess Shares") which would ------------- exceed the number of shares determined by the preceding sentence. In such case, Reading Entertainment shall either: (i) issue to Citadel debt securities (the "Debt Securities") in an aggregate principal amount equal to the number of --------------- Excess Shares multiplied by the average of the closing sales prices of Common Stock on the Nasdaq National Market (or, if that shall not be the principal market on which the Common Stock shall be trading or quoted, then on such principal market)(the "Closing Price") for the thirty (30) consecutive trading ------------- days in which trading of the Common Stock occurs immediately preceding the Closing Date (the "Excess Share Value") or (ii) pay to Citadel cash, in ------------------ immediately available funds, in an amount equal to the Excess Shares Value (the "Cash Portion"). The economic terms of the Debt Securities, if any, shall be determined by an investment banking firm which shall be independent of Citadel and Reading (the "Independent Investment Banker"), and which shall be chosen by ----------------------------- Reading Entertainment, subject to Citadel's consent (not to be unreasonably withheld). All fees and expenses of, and any other charges incurred by the Independent Investment Banker shall be borne by Reading Entertainment. The form and terms of the Debt Securities shall be as otherwise agreed by Reading Entertainment and Citadel in good faith. (d) As promptly as practicable after receipt of the Exchange Notice, Reading Entertainment shall notify Citadel whether Reading Entertainment anticipates issuing to Citadel any Debt Securities and, if so, the aggregate principal amount of Debt Securities Reading Entertainment estimates it will issue (provided, that an inaccuracy in such estimate shall not limit Reading Entertainment's right to issue the full amount of Debt Securities permitted to be issued pursuant to Section 1.1(c)). If, within ninety (90) days from the date of such notice, Citadel notifies Reading Entertainment of Citadel's bona fide intention to sell all, but not less than all, the Debt Securities, if requested by Citadel in such notice, Reading Entertainment shall take all reasonable actions to assist Citadel in the sale of all or any portion of the Debt Securities to a third party or parties and shall, upon consummation of such sale: (i) reimburse Citadel for all out-of-pocket expenses incurred by Citadel in connection with the issuance of the Debt Securities and the negotiation and consummation of such sale, including, without limitation, reasonable fees and expenses of legal counsel, accountants, financial advisors, brokers and investment bankers and 2 (ii) pay to Citadel in cash by wire transfer in immediately available funds, the amount by which the net proceeds received by Citadel (without duplication of amounts reimbursed under clause (i) above) from the sale of the Debt Securities is less than the Excess Shares Value. (e) In the event Citadel's legal counsel advises Citadel that the exercise of the Asset Put and consummation of the transactions contemplated thereby will require the approval of Citadel's stockholders: (i) Within thirty (30) calendar days of the date of the Exchange Notice, Citadel shall prepare and file with the Securities and Exchange Commission (the "SEC") a proxy statement and related proxy material meeting --- the requirements of Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to be mailed to stockholders in connection ------------ with a meeting of the Citadel stockholders (the "Proxy Statement") or as --------------- soon as practicable thereafter, and use its commercially reasonable efforts to clear such materials with the SEC and mail such materials to the Citadel stockholders within sixty (60) calendar days of originally filing such materials with the SEC, or as soon as practicable thereafter. In such event, Citadel covenants that the Proxy Statement at the time of mailing to the Citadel stockholders and at the time of the meeting of stockholders held to approve the consummation of the Asset Put (the "Meeting") will not contain ------- any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading (other than statements or omissions therein supplied by Reading Entertainment in writing for use therein) and the Proxy Statement will comply as to form in all material respects with the provisions of the Exchange Act. (ii) Reading Entertainment shall furnish in writing for inclusion in the Proxy Statement such information as may be reasonably necessary to comply with the provisions of the Exchange Act and the rules and regulations thereunder and shall have been requested in writing by Citadel. (iii) As an additional condition to Citadel's obligation to consummate the Asset Put, Citadel may elect to receive at Citadel's expense, on or prior to the mailing date of the Proxy Statement, an opinion, reasonably satisfactory to Citadel, from a financial advisor selected by Citadel that the consummation of the Asset Put is fair from a financial point of view to Citadel and such opinion shall not have been withdrawn or modified in a manner which is not reasonably satisfactory to Citadel. (iv) Reading Entertainment and Craig Corporation, a Delaware corporation ("Craig"), agree that any Citadel voting securities which it, or ----- any of their respective subsidiaries or affiliates, may hold on the record date of any such meeting will be voted to approve the exercise and Closing of the Asset Put. (v) The Closing shall take place on or before the fifth business day next following the Meeting. If, at any time prior to the Closing Date, it shall be necessary to amend or supplement the Proxy Statement to correct any statement or omission with respect to Citadel, CAC or Reading Entertainment in order to comply with any applicable legal requirements, the appropriate party shall supply in writing the necessary information to Citadel and Citadel shall amend or supplement the Proxy Statement to the extent necessary to comply with applicable legal requirements. (f) The risk of loss or damage by fire or other casualty or cause to the Citadel Assets until the Closing shall be upon Citadel. In the event of loss or damage to a material amount of any 3 Citadel Assets following Citadel's delivery of the Exchange Notice and prior to the Closing, Citadel shall promptly notify Reading Entertainment in writing of such event describing with such particularity as is possible the extent of such loss or damage and the extent to which such loss or damage may be covered by any insurance policy of Citadel. Within ten (10) days after receipt of written notice from Citadel of such loss or damage, Reading Entertainment shall, at its option, either (i) have Citadel assign to Reading Entertainment at the Closing all insurance proceeds to which Citadel would be entitled as a result of such loss or damage or (ii) exclude such assets from the Citadel Assets; provided that Reading Entertainment shall have no right to exclude such assets under this Section 1.1(f) if Citadel promptly repairs the damaged asset substantially to its previous condition. If any assets are substituted or excluded pursuant to this Section 1.1(f), the Citadel Asset Valuation shall be adjusted accordingly. 1.2 Citadel Asset Valuation. ----------------------- (a) (i) The Exchange Notice shall set forth the name and address of a qualified Member of Appraisal Institute ("MAI") real estate appraiser to appraise the value of real estate assets which are part of the Citadel Assets (the "Real Estate Assets") and a qualified appraiser to appraise the ------------------ value of the non-real estate assets, if any, which are part of the Citadel Assets (the "Non-Real Estate Assets"), each appraiser chosen by Citadel ---------------------- (the "Citadel Appraisers") (such aggregate value being referred to as the ------------------ "Citadel Asset Valuation"). Within fifteen (15) business days of the date ----------------------- of the Exchange Notice, Reading Entertainment shall give Citadel notice of the names and addresses of a qualified MAI real estate appraiser to appraise the value of the Real Estate Assets and a qualified appraiser to appraise the value of the Non-Real Estate Assets, each chosen by Reading Entertainment (the "Reading Entertainment Appraisers"). Each of the Citadel -------------------------------- Appraisers and Reading Entertainment Appraisers (collectively, the "Appraisers") shall value the Citadel Assets to be appraised by them as of ---------- the date the last of the Appraisers is retained (the "Valuation Date"). The -------------- Appraisers shall be requested to separately appraise any After Acquired Assets. The Appraisers, in appraising any Citadel Assets, shall take into account any liabilities (including, without limitation, contingent or environmental liabilities) relating to or encumbering such Citadel Assets and the "value" thereof shall be determined net of any such liabilities which will encumber the Citadel Assets following the Closing. Any mortgage debt relating to any asset shall be deemed to be a liability equal to its outstanding principal amount as of the Valuation Date, which amount shall be deducted (without duplication) from the value otherwise attributable to such asset, unless such debt is repaid by Citadel at or prior to the Closing. (ii) Within thirty (30) days of the date of the Exchange Notice, Citadel and Reading Entertainment shall cause the Citadel and the Reading Entertainment Appraisers, respectively, to deliver to both Reading Entertainment and Citadel their respective appraisal reports setting forth the value of the Citadel Assets appraised by them. Thereafter, Reading Entertainment and Citadel agree to use their best efforts to agree on the Citadel Asset Valuation and the value of the After Acquired Assets (such value of the After Acquired Assets being the "After Acquired Asset Valuation;" the excess of the Citadel Asset Valuation over the After ----- Acquired Asset Valuation is hereinafter referred to as the "Existing Asset ------------------------ -------------- Valuation"). If an agreement on both valuations can be reached within five --------- (5) business days of the latest to be delivered of the Appraisers' reports, those valuations shall be the Citadel Asset Valuation and After Acquired Asset Valuation. If no agreement on either or both such matters can be reached within such five (5) business day period, the parties shall select and jointly engage, a third set of appraisers (the "Third Appraisers") who ---------------- shall be directed, as promptly as practicable, to value the Citadel Assets as of the Valuation Date and shall affirm the valuation of either the Reading Entertainment Appraisers or the Citadel Appraisers. Such determination by the Third Appraisers shall be binding upon Citadel and Reading Entertainment and the valuations affirmed by the Third Appraisers shall be the Citadel Asset Valuation and After Acquired Asset Valuation. The date when the Citadel Asset 4 Valuation and After Acquired Asset Valuation are determined as provided above shall be the "Determination Date." ------------------ (iii) If required by either Citadel or Reading Entertainment, the parties shall request the Appraisers to update their procedures, as set forth above, to a date not later than forty-five (45) days prior to the anticipated Closing Date, which date shall thereupon become the Valuation Date. Upon delivery of such reports, Citadel and Reading Entertainment shall, to the extent necessary as a result of any difference in such reports from the original reports of the Appraisers, repeat the procedures set forth in Section 1.2(a)(ii), and the dates and valuations, determined by such repeated procedures, shall be substituted for the dates and valuations as originally determined. (iv) With respect to the liabilities encumbering or relating to the Citadel Assets which require the consent of the other party for the assignment of such liabilities to Reading Entertainment, at or prior to the Closing, Citadel and Reading Entertainment shall cooperate with each other to obtain any such consent. In the event any such consent cannot be obtained, Reading Entertainment shall, at its own expense, refinance any or all of such debt to permit the transfer of such assets to Reading Entertainment. (v) Citadel shall be entitled to all income earned or accrued and shall be responsible for all liabilities and obligations incurred or payable in connection with the Citadel Assets through the close of business on the Closing Date and Reading Entertainment shall be entitled to all income earned or accrued and shall be responsible for all assumed liabilities incurred or payable in connection with the Citadel Assets after the close of business on the Closing Date. At the Closing, all assumed liabilities, accrued but unpaid expenses (including accrued interest) and prepaid expenses relating to the Citadel Assets shall be apportioned between Reading Entertainment and Citadel in accordance with generally accepted accounting principles ("GAAP") as of the close of business on the ---- Closing Date and the Citadel Asset Valuation shall be adjusted accordingly. The Citadel Asset Valuation shall also be adjusted for changes in the principal amount of any indebtedness to be assumed by Reading Entertainment between the Valuation Date and the Closing Date; provided however, that in the event Reading Entertainment refinances any such debt at the Closing, the Citadel Asset Valuation shall be determined immediately prior to the repayment or refinance of such debt. At or prior to the Closing, the parties will prepare a preliminary closing statement which shall set forth the final Citadel Asset Valuation and specify on a preliminary basis all adjustments to the Citadel Asset Valuation between the Valuation Date and the Closing Date. Promptly following the Closing, the parties will finalize such closing statement, making such adjustments as may be appropriate. (b) If the parties are unable to agree upon the Third Appraisers within the time periods set forth above, either Reading Entertainment or Citadel, by giving seven (7) days written notice to the other, may apply to the American Arbitration Association for the purpose of selecting the Third Appraisers and the parties agree that the decision of the American Arbitration Association selecting the Third Appraisers shall be final and binding. (c) Citadel and Reading Entertainment shall each be responsible for the fees and expenses of its own Appraisers. The fees and expenses of the Third Appraisers, if required, shall be paid by the party whose valuation is rejected and not affirmed by the Third Appraisers. (d) The Citadel Assets shall be valued at their fair market value as the assets are then constituted, assuming a willing buyer and a willing seller dealing at arms-length and unaffiliated with the other. 5 (e) All Real Estate Assets may be transferred to Reading Entertainment subject to all debt encumbering or related to such assets, which shall, in such event, be taken into consideration in connection with the valuation of the Real Estate Assets. (f) Citadel shall pay and be responsible for any transfer taxes or fees or prepayment penalties payable as a result of the transfer of the Citadel Assets. Reading Entertainment shall reimburse Citadel at the Closing or credit Citadel in computing the Citadel Asset Valuation for the amount of any liability incurred by Citadel for assumption fees relating to the assumption of any debt encumbering the Citadel Assets. 1.3 Common Stock Valuation. ---------------------- (a) Subject to Section 1.3(b), the "Common Stock Value" shall be ------------------ calculated as follows: (i) The Common Stock Value with respect to the first $20,000,000 of Existing Assets Valuation shall be (A) $11.75 per share if the Exchange Notice is given on or before October 31, 1997 or (B) $12.25 per share if the Exchange Notice is after October 31, 1997. (ii) The Common Stock Value with respect to the excess of the Existing Assets Valuation over $20,000,000, and with respect to the After Acquired Asset Valuation up to $5,000,000, shall be the average of the Closing Prices for the thirty (30) consecutive trading days in which trading of Common Stock occurs immediately preceding the Closing Date (the "FMV Value") --------- (iii) Unless Reading Entertainment shall consent, Citadel shall not be entitled to exchange After Acquired Assets to the extent the After Acquired Asset Valuation is in excess of $5,000,000. (iv) Unless Reading Entertainment shall consent, Citadel shall not be entitled to exchange Citadel Assets to the extent the Citadel Asset Valuation exceeds $30,000,000. (b) In the event the average of the Closing Price over any sixty (60) consecutive calendar days exceeds 130% of the Common Stock Value then in effect under Section 1.3(a)(i), Reading Entertainment may, at its option, give Citadel notice of such event. If Citadel does not deliver the Exchange Notice within 120 days of such notice, the Common Stock Value for all purposes shall then be the FMV Value. 1.4 Conditions to Asset Put Closing. ------------------------------- (a) The obligation of Citadel to convey the Citadel Assets to Reading Entertainment as provided in Section 1.1 of this Agreement is subject to the fulfillment, on or before the Closing Date, of each of the following conditions (unless waived by the written consent of Citadel): (i) Reading Entertainment shall deliver to Citadel a stock certificate representing the Exchange Shares and such shares shall be validly issued, fully paid and non-assessable, not subject to any preemptive or similar right (other than as set forth in Reading Entertainment's Certificate of Incorporation), and free and clear of any adverse claims whatsoever; (ii) Reading Entertainment shall deliver to Citadel certificates representing the Debt Securities, if any, and the Debt Securities, when delivered and paid for in accordance with 6 the Agreement, will be legal, valid and binding obligations of Reading Entertainment, enforceable in accordance with their terms, and free and clear of any liens, charges or other encumbrances; (iii) Reading Entertainment shall deliver to Citadel the Cash Portion, if any; (iv) Reading Entertainment shall deliver to Citadel such assumption agreements, acknowledgments and other documents as Citadel may reasonably request, in such form as shall be reasonably satisfactory to Citadel, to transfer the Citadel Assets to Reading Entertainment and for Reading Entertainment to assume the debt encumbering the Citadel Assets, including without limitation, any currently existing mortgages and then existing leases; (v) The representations and warranties of Reading Entertainment contained in Article Three shall be true in all material respects at and as of the date hereof and as of the Closing Date as if made at and as of the Closing Date and as if made with respect to the issuance of the Exchange Shares and Debt Securities, if any, except for any changes therein which (x) have been disclosed by Reading Entertainment in reports or statements filed by it under the Exchange Act, prior to the date of the Exchange Notice or (y) have otherwise been disclosed by Reading Entertainment to Citadel and, in the case of this clause (y), are reasonably acceptable to Citadel; Reading Entertainment shall have duly performed and complied in all material respects with all agreements, covenants and conditions required by this Article One to be performed or complied with prior to or at the Closing Date; and Reading Entertainment shall have delivered to Citadel a certificate dated the Closing Date and signed by its President or Chief Financial Officer to the effect set forth in this subparagraph; (vi) There shall not be in effect (x) any order or decision of a court of competent jurisdiction or governmental agency or authority or (y) any action or proceeding commenced by or before any court, governmental agency or authority or threatened by any governmental agency or authority that enjoins, restrains or prohibits or seeks to enjoin, restrain or prohibit the consummation of the transactions provided in Section 1.1 of this Agreement; (vii) All consents to the assignment of any contracts to be assigned to Reading Entertainment requiring the consent of the other party thereto shall have been obtained pursuant to written instruments satisfactory to Citadel or waived by Reading Entertainment; and (viii) If required, the consummation of the Asset Put shall have been validly adopted at the Meeting by the affirmative vote of the holders of at least a majority of the votes cast by the Citadel stockholders entitled to vote on the matter, and the Meeting shall have been duly called with a quorum present. (b) The obligation of Reading Entertainment to issue the Exchange Shares and Debt Securities, if any, to Citadel as provided in Section 1.1 of this Agreement is subject to the fulfillment, on or before the Closing Date, of each of the following conditions (unless waived by the written consent of Reading Entertainment): (i) Citadel shall deliver to Reading Entertainment such stock powers, assignments, bills of sale, deeds, title insurance policies, consents, cash by wire transfer and other instruments of transfer and conveyance as Reading Entertainment may reasonably request, in such form as shall be reasonably satisfactory to Reading Entertainment; (ii) The representations and warranties of Citadel contained in Article Three shall be true in all material respects at and as of the date hereof and as of the Closing Date as if 7 made at and as of the Closing Date; Citadel shall have duly performed and complied in all material respects with all agreements, covenants and conditions required by this Article One to be performed or complied with by Citadel prior to or on the Closing Date; and Citadel shall have delivered to Reading Entertainment a certificate dated the Closing Date and signed by its President or its Chief Financial Officer to the effect set forth in this subparagraph; (iii) There shall not be in effect (x) any order or decision of a court of competent jurisdiction or governmental agency or authority or (y) any action or proceeding commenced by or before any court, governmental agency or authority or threatened by any governmental agency or authority that enjoins, restrains or prohibits or seeks to enjoin, restrain or prohibit the consummation of the transactions provided in Section 1.1 of this Agreement; (iv) All consents to the assignment of any contracts to be assigned to Reading Entertainment requiring the consent of the other party thereto shall have been obtained pursuant to written instruments satisfactory to Reading Entertainment or waived by Citadel; (v) Citadel shall have made such filing with, and obtained such consents of, such governmental agencies as shall be required to be made or obtained by Citadel to effect the transfer of the Citadel Assets to Reading Entertainment; and (vi) All title insurance policies on the Real Estate Assets, as Reading Entertainment shall reasonably determine as necessary (and which shall be obtained at Reading Entertainment's expense), shall not be subject to any encumbrances other than encumbrances disclosed to and taken into account by the Appraisers in determining the Citadel Asset Valuation. (c) (i) In the event Citadel's acquisition of the Exchange Shares and Debt Securities, if any, shall be in connection with a plan of distribution of such Exchange Shares and Debt Securities to Citadel's stockholders or the reorganization, restructuring, recapitalization, liquidation, dissolution or winding up of Citadel, Reading Entertainment shall, at its own expense, prepare a registration statement, information statement or other documents and take such actions covering or otherwise relating to the Exchange Shares and Debt Securities, if any, as may be required under the Act and any other applicable state or federal securities law for Citadel to consummate such plan of distribution, reorganization, restructuring, recapitalization, liquidation, dissolution or winding up. (ii) In the event Citadel's acquisition of the Exchange Shares and Debt Securities, if any, are not in connection with such a plan, reorganization, restructuring, recapitalization, liquidation, dissolution or winding up, Citadel shall deliver an investment representation by Citadel with respect to the Exchange Shares and Debt Securities, if any, in form and substance equivalent to the investment representation made by CAC with respect to the Series A Preferred Stock set forth in Section 5.7 of the Exchange Agreement. ARTICLE TWO REGISTRATION RIGHTS 2.1 Definitions. For purposes of this Article Two only, the following ----------- definitions shall apply. (a) The terms "register," "registered," and "registration" refer to a -------- ---------- ------------ registration effected by preparing and filing a registration statement in compliance with the Act and the declaration or ordering of effectiveness of such registration statement by the SEC. 8 (b) The term "Registrable Securities" refers to the Conversion Shares and the Exchange Shares owned by (or issuable upon conversion of shares of Series A Preferred Stock owned by) the Holders, except that the Conversion Shares and the Exchange Shares shall cease to be Registrable Securities at the earliest date when (i) a registration statement with respect to the sale of such shares has become effective under the Act and the shares have been disposed of in accordance with such registration statement; (ii) such shares may be sold to the public pursuant to paragraph (k) of Rule 144 under the Act ("Rule 144") or -------- any successor provision; (iii) such shares shall have been transferred (under Rule 144 or otherwise), new certificates for the shares not bearing a legend restricting further transfer (other than as provided in Reading Entertainment's Certificate of Incorporation) shall have been delivered by Reading Entertainment and subsequent disposition of the shares does not require registration or qualification under the Act or state law then in force in the opinion of legal counsel for Reading Entertainment; or (iv) such shares cease to be outstanding. (c) The term "Holder" means a holder of record of Registrable ------ Securities on the books and records of Reading Entertainment which is either CAC, Citadel (if it exercises the Asset Put), or an assignee of a Holder who succeeds to the rights as a Holder in accordance with Section 2.9 hereof. (d) The number of shares of "Registrable Securities then outstanding" --------------------------------------- shall be determined by the number of shares of Common Stock which are Registrable Securities and the number of shares of Common Stock issuable pursuant to then convertible securities which are convertible into Registrable Securities. 2.2 Request for Registration. ------------------------ (a) Subject to Sections 2.2(b) and 2.2(c), if Reading Entertainment shall receive a written request (specifying that it is being made pursuant to this Article Three), from Holders of a majority of the Registrable Securities then outstanding, that Reading Entertainment file a registration statement under the Act, or a similar document pursuant to any other statute then in effect corresponding to the Act, covering the registration of at least a majority of the Registrable Securities then outstanding, then Reading Entertainment shall, within ten (10) business days of the receipt thereof, give written notice of such request to all Holders at their respective addresses and shall file as soon as practicable, and in any event within sixty (60) days of the receipt of such request, a registration statement under the Act covering all Registrable Securities which the Holders request to be registered within 30 days of the mailing of such notice to all Holders. (b) Notwithstanding the foregoing, (i) Reading Entertainment shall not be obligated to effect a registration pursuant to this Section 2.2 during the period starting with the date 60 days prior to Reading Entertainment's estimated date of filing of, and ending on a date six months following the effective date of, a registration statement pertaining to an underwritten public offering of securities for the account of Reading Entertainment, provided that Reading Entertainment is actively employing in good faith all reasonable efforts to cause such registration statement to become effective and that Reading Entertainment's estimate of the date of filing such registration statement is made in good faith; (ii) if Reading Entertainment shall furnish to the Holders initiating the registration request hereunder (the "Initiating Holders") a ------------------ certificate signed by the President of Reading Entertainment stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to Reading Entertainment or its shareholders for a registration statement to be filed in the near future, then Reading Entertainment's obligation to file a registration statement shall be deferred for a period not to exceed six months; provided, however, that Reading Entertainment may furnish such a certificate to the Initiating Holders only once in any one-year time period, and (iii) if the managing underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders which would otherwise be underwritten pursuant hereto, and the 9 number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all Holders thereof in proportion to the amount of Registrable Securities owned by each Holder; provided, however, that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting. (c) Reading Entertainment shall be obligated to effect only two registrations pursuant to this Section 2.2, provided however, that if the Holders who demand registration under this Section 2.2 are unable to register at least ninety percent (90%) of the Registrable Securities requested to be included in such registration, then the number of registrations which Reading Entertainment shall be obligated to effect under this Section 2.2 shall be increased by one. 2.3 "Piggyback" Registration. ----------------------- (a) Subject to Section 2.3(b), if at any time Reading Entertainment determines to register (including for this purpose a registration effected by Reading Entertainment for stockholders other than the Holders) any shares of Common Stock under the Act in connection with the public offering of such securities solely for cash on an SEC Form that would also permit the registration of the Registrable Securities (other than Forms S-4 and S-8), Reading Entertainment shall, each such time while Registrable Securities are outstanding, promptly give each Holder written notice of such determination. Upon the written request of each Holder given within 20 days after mailing of any such notice by Reading Entertainment, Reading Entertainment shall, subject to the provisions of Section 2.7, cause to be registered under the Act all of the Registrable Securities that each such Holder has requested be registered; provided however, that Reading Entertainment shall not be required to proceed with such registration if the offering is abandoned in its entirety and no other securities are offered for sale. (b) Reading Entertainment shall not be required under this Section 2.3 to include any Registrable Securities in such underwriting unless the Holders accept reasonable and customary terms of the underwriting as agreed upon between Reading Entertainment and the underwriters selected by it. 2.4 Obligations of Reading Entertainment. Notwithstanding any other ------------------------------------ provision hereof, whenever required under this Article Two to effect the registration of any Registrable Securities, Reading Entertainment shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its commercially reasonable efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, to keep such registration statement effective for up to 90 days. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its commercially reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be necessary for the Holders to dispose of the Registrable Securities, provided that Reading Entertainment shall not be required in connection therewith or as a condition thereto to qualify to do 10 business or to file a general consent to service of process or subject itself to taxation in any such states or jurisdictions. (e) Enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter, if any, of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Article Two, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Article Two, (i) an opinion, dated such date, of the counsel representing Reading Entertainment for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters and to the Holders requesting registration of Registrable Securities and (ii) a letter dated such date, from the independent certified public accountants of Reading Entertainment, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters and to the Holders requesting registration of Registrable Securities. (h) Make generally available to its stockholders an earnings statement satisfying the provisions of Section 11(a) of the Act (including by means of satisfying the provisions of Rule 158 under the Act) as soon as reasonably practical covering the 12-month period beginning with the first month of Reading Entertainment's first fiscal quarter commencing after the effective date of the registration statement. (i) Whenever any notice is required to be given under this Article Two, such notice may be given personally or by mail. Any notice given to a Holder shall be sufficient if given to the Holder at the last address set forth for such Holder on the stock transfer records of Reading Entertainment. Any notice given by mail shall be deemed to have been given when deposited in the United States mail with postage thereon prepaid. 2.5 Furnish Information. The selling Holders shall furnish to ------------------- Reading Entertainment such information regarding themselves, the Registrable Securities held by them, and the intended method of disposition of such securities as shall be required to effect the registration of the Registrable Securities. 2.6 Expenses of Registration. All expenses other than underwriting ------------------------ discounts and commission incurred in connection with any registration, filing or qualification pursuant to Sections 2.2 and 2.3, including, without limitation, all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for Reading Entertainment, and the reasonable fees and disbursements of a single counsel for the selling Holders selected by the Holders of a majority of the Registrable Securities then outstanding shall be borne by Reading Entertainment; provided, however, that Reading Entertainment shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 2.2 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses), unless, at the time of such withdrawal, the Holders have learned of a material adverse change in the condition, business or prospects of Reading Entertainment from that known to the Holders 11 at the time of their request, in which case the Holders shall not be required to pay any such expenses and shall retain all rights pursuant to Section 2.2. 2.7 Underwriting Requirements. In connection with any offering ------------------------- involving an underwriting of shares being issued by Reading Entertainment, Reading Entertainment shall not be required under Section 2.3 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between Reading Entertainment and the underwriters selected by it, and then only in such quantity as will not, in the reasonable opinion of the underwriters, jeopardize the success of the offering by Reading Entertainment. If the total amount of securities, including Registrable Securities, requested by stockholders to be included in such offering exceeds the amount of securities to be sold other than by Reading Entertainment that the underwriters reasonably believe compatible with the success of the offering, then Reading Entertainment shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters believe will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling stockholders according to the total amount of securities entitled to be included therein owned by each selling stockholder or in such other proportions as shall mutually be agreed to by such selling stockholders); provided, however, that in no event shall any securities of selling Holders be excluded until all securities of selling employees of, or consultants and advisors to, Reading Entertainment are excluded. 2.8 Indemnification and Contribution. In the event any Registrable -------------------------------- Securities are included in a registration statement under this Article Two: (a) To the extent permitted by law, Reading Entertainment will indemnify and hold harmless each Holder, the officers and directors of each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the Exchange Act, against any losses, claims, damages or liabilities (joint or several) to which they may become subject under the Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively, a "Violation"): (i) any untrue statement or alleged untrue statement of a material --------- fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by Reading Entertainment of the Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Act, the Exchange Act or any state securities law; and Reading Entertainment will reimburse each such Holder, officer or director, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that Reading Entertainment shall not be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon (x) a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, officer, director or controlling person of such Holder or underwriter or (y) any untrue statement or alleged untrue statement made in, or omission or alleged omission from, any preliminary prospectus or final prospectus, if the final prospectus or the final prospectus as amended or supplemented, respectively, which shall have been furnished, to the underwriter or Holder claiming indemnification, prior to the time such underwriter sent written confirmation of or the Holder made such sale to the person alleging such statement, alleged statement, omission or alleged omission, does not contain such statement, alleged statement, omission or alleged omission and a copy of such final prospectus or such prospectus as amended or supplemented, respectively, shall not have been sent or given to such person; and provided, further, that in no case shall Reading Entertainment be liable for amounts paid in settlement of any such loss, claim, damage, liability, 12 or action if such settlement is effected without the written consent of Reading Entertainment, which consent shall not be unreasonably withheld. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless Reading Entertainment, each of its directors, each of its officers who have signed the registration statement and any underwriters, against any losses, claims, damages or liabilities (joint or several) to which Reading Entertainment or any such director, officer, controlling person or underwriter may become subject, under the Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by or on behalf of such Holder expressly for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by Reading Entertainment or any such director, officer, controlling person or underwriter in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 2.8(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided further that, in no event shall any indemnity under this Section 2.8(b) exceed the net proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 2.8 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.8, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually reasonably satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. (d) In order to provide for just and equitable contribution under the Act in any case in which (i) any indemnified party makes claim for indemnification pursuant to this Section 2.8, but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact the express provisions of this Section 2.8 provide for indemnification, or (ii) contribution under the Act may be required on the part of any indemnified party; then the indemnifying party in lieu of indemnifying such indemnified party hereunder shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities, in such proportion as is appropriate to reflect the relative fault of the indemnifying parties on the one hand and of the indemnified parties on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the indemnifying parties and of the indemnified parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party, or by the indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties further agree that it would not be just and equitable if contribution pursuant to this Section 2.8(d) were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the immediately preceding paragraph. 13 The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities or actions in respect thereof referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 2.8(d), in no event shall any contribution under this Section 2.8(d) exceed the net proceeds from the offering received by such Holder. No person guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (e) The obligations of Reading Entertainment and Holders under this Section 2.8 shall survive the completion of any offering of Registrable Securities in a registration statement under this Article Two. 2.9 Assignment of Registration Rights. The rights to cause Reading --------------------------------- Entertainment to register Registrable Securities pursuant to this Article Two may be assigned by a Holder to any transferee or assignee of any amount of such securities; provided, in each case that (i) Reading Entertainment is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; (ii) such assignment shall be effective only if, immediately following such transfer, the further disposition of such securities by the transferee or assignee is restricted under the Act and (iii) the transferee or assignee agrees in writing to assume all the obligations of the transferor under this Article Two. 2.10 Limitations on Subsequent Registration Rights. From and after --------------------------------------------- the date of this Agreement, Reading Entertainment shall not, without the prior written consent of the Holders of a majority of the outstanding Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of Reading Entertainment which would allow such holder or prospective holder (a) to include such securities in any registration filed under Section 2.2 hereof, unless, under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of its securities will not reduce the amount of the Registrable Securities of the Holders which is included or (b) to make a demand registration which could result in such registration statement being declared effective within 120 days of the effective date of any registration effected pursuant to Section 2.2. 2.11 Amendment of Registration Rights. Any provision of this Article -------------------------------- Two may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of Reading Entertainment and the holders of a majority of the Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this Section 2.11 shall be binding upon each Holder of Registrable Securities, each future holder of all such securities and Reading Entertainment. ARTICLE THREE REPRESENTATIONS AND WARRANTIES 3.1 Representations and Warranties of Reading Entertainment. Reading ------------------------------------------------------- Entertainment hereby represents and warrants to each of Citadel and CAC as follows: (a) The representations and warranties of Reading Entertainment set forth in Section 3 of the Exchange Agreement are hereby incorporated by reference and are true and correct in all respects; and 14 (b) The representations and warranties of Reading Entertainment set forth in Section 3 of the Exchange Agreement relating to the Exchange Agreement and the consummation of the transactions contemplated thereby are true and correct in all respects as if made with respect to this Agreement and the consummation of the transactions contemplated hereby, other than, with respect to Section 3.6 of the Exchange Agreement, as required by Article Two hereof and other than any consent, approval, order, authorization, registration, declaration, or filing with a governmental authority which may be required to consummate the transactions contemplated by Article One hereof. 3.2 Representations and Warranties of Citadel and CAC. Citadel and ------------------------------------------------- CAC hereby jointly and severally represent and warrant to Reading Entertainment as follows: (a) The representations and warranties of each of Citadel and CAC set forth in Section 5 of the Exchange Agreement (except Section 5.5) are hereby incorporated by reference and are true and correct in all respects; and (b) The representations and warranties of Citadel and CAC set forth in Section 5 of the Exchange Agreement relating to the Exchange Agreement and the consummation of the transactions contemplated thereby are true and correct in all respects as if made with respect to this Agreement and the consummation of the transactions contemplated hereby, other than, with respect to Sections 5.1 and 5.3 of the Exchange Agreement, representations and warranties relating to or necessary in connection with approval of the stockholders of Citadel, which if required, will be obtained on or prior to the Closing Date. ARTICLE FOUR READING ENTERTAINMENT CHANGE OF CONTROL 4.1 Redemption By Reading Entertainment. In the event of any "Change ----------------------------------- in Control" (as defined in Reading Entertainment's Certificate of Designation, Preferences and Rights of the Series A Preferred Stock and Reading Entertainment's Series B Voting Cumulative Convertible Preferred Stock (the "Certificate")), Reading Entertainment shall not be entitled to redeem any ----------- Series A Preferred Stock held by Citadel, CAC or any of their respective affiliates pursuant to the first sentence of Section 5.1(a) of the Certificate unless, prior to or simultaneously with such redemption, Craig assumes, pursuant to an assumption agreement in form and substance satisfactory to Citadel in its reasonable discretion, all obligations of Reading Entertainment under Articles One, Two (as it relates to the Exchange Shares) and Five hereunder. Notwithstanding the foregoing, such assumption agreement by Craig shall provide: (a) In lieu of Common Stock, Citadel will be entitled to exchange the Citadel Assets (to the extent it would otherwise have been entitled to exchange the Citadel Assets for Common Stock) for Craig's Class A Common Preference Stock, par value $0.01 per share ("Craig Stock"), ----------- (b) For purposes of Section 1.3(a)(i), the Common Stock Value shall be determined by multiplying: (i) the average of the Closing Prices of the Craig Stock for the twenty (20) consecutive trading days on which trading of the Craig Stock occurs immediately prior to the date of the event which results in such Change of Control (the "Change of Control Date") by (ii) a fraction, the ---------------------- denominator of which shall be the Closing Price of the Common Stock on the Change of Control Date and the numerator of which shall be the applicable Common Stock Value of the Common Stock under Section 1.3(a)(i). For all other purposes, in determining the "Common Stock Value" with respect to the Craig Stock, Craig and the Craig Stock shall be deemed substituted for Reading Entertainment and the Common Stock. 15 (c) Craig shall represent and warrant to Citadel and CAC as to the matters covered by the representations and warranties of Reading Entertainment set forth in Article Three as if made by Craig with respect to such assumption agreements, this Agreement and the consummation of the transactions covered thereby and hereby. (d) References to the representations and warranties of Reading Entertainment in Section 1.4(a)(v) shall refer to representations and warranties of Craig as if made by Craig with respect to Craig. ARTICLE FIVE GENERAL PROVISIONS 5.1 General Provisions. ------------------ (a) Subject to Section 2.4(i), all notices, requests, demands or other communications required or authorized or contemplated to be given by this Agreement shall be in writing and shall be deemed to have been duly given, made and received when delivered against receipt, upon receipt of a facsimile transmission, when deposited in the United States mails (first class postage prepaid) or when deposited with Federal Express, and addressed as provided in Section 10.2 of the Exchange Agreement or to such other address and fax number as any of the parties hereto may from time to time designate in writing, prior to the giving of such notice. (b) Except as set forth in Article Two, no amendment or waiver of any provision of this Agreement shall in any event be effective, unless the same shall be in writing signed by the parties hereto, and then such amendment, waiver or consent shall be effective only in a specific instance and for the specific purpose for which given. (c) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. (d) Except as set forth in Article Two, this Agreement shall not be assigned by any party without the prior written consent of the other party hereto. (e) This Agreement and the documents and agreements referred to herein contain the entire understanding among the parties with respect to the transactions contemplated hereby and supersede all prior and contemporaneous agreements and understandings whether oral or written, relating to the subject matter hereof. (f) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, notwithstanding any Delaware or other conflict-of-law provisions to the contrary. (g) Each party hereto shall execute and deliver such further agreements and instruments, and take such further actions, as the other party may reasonably request in order to carry out the purpose and intent of this Agreement. (h) Except as provided in Section 1.2, should any party institute any arbitration, action, suit or other proceeding arising out of or relating to this Agreement, the prevailing party shall be entitled to receive from the losing party reasonable attorneys' fees and costs incurred in connection therewith. 16 (i) Other than as specifically provided herein, each party shall bear its own costs and expenses (including fees and disbursements of legal counsel) incurred in connection with the consummation of the transactions provided for herein. (j) No party, nor its respective counsel, shall be deemed the drafter of this Agreement for purposes of construing the provisions of this Agreement, and all language in all parts of this Agreement shall be construed in accordance with its fair meaning, and not strictly for or against any party. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective duly authorized officers as of the date first above written. READING ENTERTAINMENT, INC. By: /s/ S. Craig Tompkins ------------------------------------ Name: S. Craig Tompkins ---------------------------------- Its: President ----------------------------------- CITADEL ACQUISITION CORP., INC. By: /s/ Steve Wesson ------------------------------------ Name: Steve Wesson ---------------------------------- Its: President ----------------------------------- CITADEL HOLDING CORPORATION By: /s/ Steve Wesson ------------------------------------ Name: Steve Wesson ---------------------------------- Its: President ----------------------------------- Acknowledged and agreed, as to the matters set forth in Section 1.1(e)(iv) and Article Four: CRAIG CORPORATION By: /s/ S. Craig Tompkins ------------------------- Name: S. Craig Tompkins ----------------------- Its: President ------------------------ 17 EX-10.16 3 CERTIFICATE OF DESIGNATION EXHIBIT 10.16 CERTIFICATE OF DESIGNATION OF THE SERIES B 3% CUMULATIVE VOTING CONVERTIBLE PREFERRED STOCK (Par Value $.01 Per Share) OF CITADEL HOLDING CORPORATION ______________________ Pursuant to Section 151 of the General Corporation Law of the State of Delaware ______________________ Citadel Holding Corporation, a Delaware corporation (the "Company"), ------- certifies that pursuant to the authority conferred upon the Board of Directors of the Company (the "Board of Directors") by the Certificate of Incorporation of ------------------ the Company (the "Certificate of Incorporation"), and in accordance with the ---------------------------- provisions of Section 151 of the General Corporation Law of the State of Delaware, as amended (the "GCL"), the Board of Directors, on August 23, 1996, --- adopted the following resolution creating a series of its Preferred Stock, par value $.01 per share: RESOLVED, that a class of the Company's authorized preferred stock, par value $.01 per share, which shall consist of 1,329,114 shares of Preferred Stock, be hereby created, and that the designation and amount thereof and the voting powers, preferences, limitations, restrictions and relative rights and the qualifications, limitations and restrictions thereof are as follows: 1. Designation, Issuance and Stated Value. The designation of such series --------------------------------------- of the Preferred Stock authorized by this resolution shall be the Series B 3% Cumulative Voting Convertible Preferred Stock (the "Preferred Stock"). The --------------- maximum number of shares of Preferred Stock shall be 1,329,114. The shares of Preferred Stock shall be issued by the Company for their Stated Value (as defined herein), in such amounts, at such times and to such persons as shall be specified by the Board of Directors from time to time. For the purposes hereof, the "Stated Value" of each share of Preferred Stock (regardless of its par ------------ value) shall be $3.95 per share. 2. Rank. The Preferred Stock shall, with respect to dividend rights and ---- rights upon liquidation, winding up and dissolution, rank prior to the Company's common stock, par value $.01 per share (the "Common Stock"), and to all other ------------ classes and series of equity securities of the Company now or hereafter authorized, issued or outstanding (the Common Stock and such other classes and series of equity securities may be referred to herein collectively as the "Junior Stock"), other than any class or series of equity securities of the - - - ------------- Company ranking on a parity with (the "Parity Stock") or senior to (the "Senior ------------ ------ Stock") the Preferred Stock as to dividend rights and/or rights upon - - - ----- liquidation, dissolution or winding up of the Company. The Preferred Stock shall be subordinate to and rank junior to all indebtedness of the Company now or hereafter outstanding. The Preferred Stock shall be subject to creation of Senior Stock, Parity Stock and Junior Stock, to the extent not expressly prohibited by the Certificate of Incorporation, with respect to the payment of dividends and/or rights upon liquidation, dissolution or winding up of the Company. 3. Cumulative Dividends; Priority. ------------------------------- (a) Payment of Dividends. The holder of record of each share of -------------------- Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available therefor, a quarterly per share dividend (the "Quarterly Dividend") equal to (i) one-fourth of 3% of the ------------------ Stated Value of such share (pro-rated for any portion of a Dividend Period (as defined below) that such share shall have been issued and outstanding), plus (ii) accrued but unpaid per share dividends as to which a Dividend Payment Date (as defined below) has occurred. Dividends shall accrue from the last Dividend Payment Date (as defined below) prior to the Closing Date (the "Closing Date") of the Exchange Agreement by and among Reading Company, the Company, Craig Corporation, Reading Entertainment, Inc., Craig Management, Inc. and Citadel Acquisition Corp., Inc. and be payable (subject to declaration) quarterly on the fifteenth day of January, April, July and October in each year (or if such day is a non-business day, on the next business day), commencing on the first Dividend Payment Date to occur after the Closing Date, in respect of the immediately preceding calendar quarter (each of such dates a "Dividend Payment ---------------- Date"). Each declared dividend shall be payable to holders of record as they - - - ---- appear on the stock books of the Company at the close of business on such record dates as are determined by the Board of Directors or a duly authorized committee thereof (each of such dates a "Record Date"), which Record Dates shall be not ----------- more than 45 calendar days nor fewer than ten calendar days preceding the Dividend Payment Dates therefor. Quarterly dividend periods (each a "Dividend -------- Period") shall be the calendar quarters that commence on and include the first - - - ------ day of January, April, July and October of each year and shall end on and include the end of the calendar quarter that commenced with each of such dates. Dividends on the Preferred Stock shall be fully cumulative and shall accrue (whether or not declared), on a daily basis, from the first day of each Dividend Period; provided, however, that the initial quarterly dividend payable on the first Dividend Payment Date to occur after the Closing Date, and the amount of any dividend payable for any other Dividend Period shorter than a full Dividend Period shall be computed on the basis of a 360-day year composed of twelve 30- day months and the actual number of days elapsed in the relevant Dividend Period. (b) Priority as to Dividends. No full dividend shall be declared by the Board of Directors or paid or set apart for payment by the Company on any Parity Stock for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum set apart sufficient for such payment on the Preferred Stock through the most recent Dividend Payment Date. If any dividends are not paid or set apart in full, as aforesaid, upon the shares of the Preferred Stock and any Parity Stock, all dividends declared upon the Preferred Stock and any Parity Stock shall be declared pro rata so that the amount of dividends declared per share on the Preferred Stock and such Parity Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the Preferred Stock and such Parity Stock bear to each other. Unless full cumulative dividends, if any, accrued on all outstanding shares of the Preferred Stock have been or contemporaneously are declared and paid or declared and a sum set apart sufficient for such payment through the most recently completed Dividend Period, no dividend shall be declared or paid or set aside for payment or other distribution declared or made upon the Common Stock or upon any other Junior Stock (other than a dividend or distribution paid in shares of, or warrants, rights or options exercisable for or convertible into, Common Stock or any other Junior Stock), nor shall any Common Stock nor any other Junior Stock be redeemed, purchased or otherwise acquired for any consideration, nor may any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such securities, by the Company, except by conversion into or exchange for Junior Stock. Unless full cumulative dividends, if any, accrued on all outstanding shares of the Senior Stock have been or contemporaneously are declared and paid or declared and a sum set apart sufficient for such payment through the most recently completed dividend period therefor, no dividend shall be declared or paid or set aside for payment or other distribution declared or made upon the Preferred Stock (other than a dividend or distribution paid in shares of, or warrants, rights or options exercisable for or convertible into, Preferred Stock), nor shall any Preferred Stock be redeemed, purchased or otherwise acquired for any consideration, nor may any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such securities, by the Company, except by conversion into or exchange for Preferred Stock, Parity Stock or Junior Stock. Holders of the shares of the Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends as provided in Section (3)(a). 2 (c) Miscellaneous Provisions Relating to Dividends. Payment of ---------------------------------------------- dividends shall be subject to the following provisions: (i) Subject to the foregoing provisions of this Section 3, the Board of Directors may declare and the Company may pay or set apart for payment dividends and other distributions on any of the Junior Stock or Parity Stock, and may redeem, purchase or otherwise acquire out of funds legally available therefor any Junior Stock, and the holders of the shares of the Preferred Stock shall not be entitled to share therein; (ii) Any dividend payment made on shares of the Preferred Stock shall first be credited against the earliest accrued but unpaid dividend due with respect to shares of the Preferred Stock; (iii) All dividends paid with respect to shares of the Preferred Stock pursuant to this Section 3 shall be paid pro rata to the holders entitled thereto; and (iv) Holders of shares of the Preferred Stock shall be entitled to receive the dividends provided for in this Section 3 in preference to and in priority over any dividends upon any of the Junior Stock; and (v) Accrued but unpaid dividends on preferred stock shall not earn interest or compound. 4. Redemption at the Option of the Company. ---------------------------------------- (a) General. Except as expressly provided herein, the Company shall not have any right to redeem shares of the Preferred Stock prior to November 10, 1997. Thereafter, the Company shall have the right, at its sole option and election, subject to Section 6, to redeem outstanding shares of the Preferred Stock, in whole or in part at any, time and from time to time at a per share price (the "Redemption Price") equal to the sum of: ---------------- (i) the Stated Value; plus (ii) all accrued but unpaid Quarterly Dividends, whether or not declared, plus (iii) the "Premium," which shall mean: ------- (A) if the Redemption Date (as defined below) is on or prior to November 10, 1998, an amount equal to an accrual on the Stated Value of 9% per annum (not compounded) from November 10, 1994 to the Closing Date, plus an amount equal to an accrual on the Stated Value of 3% per annum (not compounded) from the Closing Date to the Redemption Date; or (B) if the Redemption Date is after November 10, 1998 and on or prior to November 10, 1999, an amount equal to an accrual on the Stated Value of 8% per annum (not compounded) from November 10, 1994 to the Closing Date, plus an amount equal to an accrual on the Stated Value of 3% per annum (not compounded) from the Closing Date to the Redemption Date; or (C) if the Redemption Date is after November 10, 1999 and on or prior to November 10, 2000, an amount equal to an accrual on the Stated Value of 7% per annum (not compounded) from November 10, 1994 to the Closing Date, plus an amount equal to an accrual on the Stated Value of 3% per annum (not compounded) from the Closing Date to the Redemption Date; or (D) if the Redemption Date is after November 10, 2000 and on or prior to November 10, 2001, an amount equal to an accrual on the Stated Value of 6% per annum (not 3 compounded) from November 10, 1994 to the Closing Date, plus an amount equal to an accrual on the Stated Value of 3% per annum (not compounded) from the Closing Date to the Redemption Date; or (E) if the Redemption Date is after November 10, 2001 and on or prior to November 10, 2002, an amount equal to an accrual on the Stated Value of 5% per annum (not compounded) from November 10, 1994 to the Closing Date, plus an amount equal to an accrual on the Stated Value of 3% per annum (not compounded) from the Closing Date to the Redemption Date; or (F) if the Redemption Date is after November 10, 2002 and on or prior to November 10, 2003, an amount equal to an accrual on the Stated Value of 4% per annum (not compounded) from November 10, 1994 to the Closing Date, plus an amount equal to an accrual on the Stated Value of 3% per annum (not compounded) from the Closing Date to the Redemption Date; or (G) if the Redemption Date is after November 10, 2003 and on or prior to November 10, 2004, an amount equal to an accrual on the Stated Value of 3% per annum (not compounded) from November 10, 1994 to the Closing Date, plus an amount equal to an accrual on the Stated Value of 3% per annum (not compounded) from the Closing Date to the Redemption Date; or (H) if the Redemption Date is after November 10, 2004 and on or prior to November 10, 2005, an amount equal to an accrual on the Stated Value of 2% per annum (not compounded) from November 10, 1994 to the Closing Date, plus an amount equal to an accrual on the Stated Value of 3% per annum (not compounded) from the Closing Date to the Redemption Date; or (I) if the Redemption Date is after November 10, 2005 and on or prior to November 10, 2006, an amount equal to an accrual on the Stated Value of 1% per annum (not compounded) from November 10, 1994 to the Closing Date, plus an amount equal to an accrual on the Stated Value of 3% per annum (not compounded) from the Closing Date to the Redemption Date; or (J) if the Redemption Date is after November 10, 2006, zero. Holders of shares of Preferred Stock to be redeemed who fail to claim the Redemption Price on the Redemption Date shall not be entitled to interest on the Redemption Price after the Redemption Date. (b) Notice of Redemption. The Company shall mail notice of redemption -------------------- of the Preferred Stock (a "Redemption Notice") at least 30, but no more than 60, ----------------- days prior to the date fixed for redemption (the "Redemption Date") to each --------------- holder of Preferred Stock to be redeemed, at such holder's address as it appears on the books of the Company. (c) Deposit. If such notice of redemption shall have been so mailed, ------- and if on or before the Redemption Date specified in such notice all said funds necessary for such redemption shall have been irrevocably deposited in trust (which deposit shall not be made sooner than the 15th day following the date of the Company's mailing of the notice of redemption pursuant to Section 4(b)), for the account of the holder of the shares of the Preferred Stock to be redeemed (and so as to be and continue to be available therefor), with a bank or trust company named in such notice doing business in the State of California and having combined capital and surplus of at least $50,000,000, thereupon and without awaiting the Redemption Date, all shares of the Preferred Stock with respect to which such notice shall have been so mailed and such deposit shall have been so made shall be deemed to be no longer outstanding, and all rights with respect to such shares of the Preferred Stock shall forthwith upon such deposit in trust cease and terminate, except only the right of the holders thereof on or after the Redemption Date to receive from such deposit the amount payable on redemption thereof, but without interest, upon surrender (and 4 endorsement or assignment to transfer, if required by the Company) of their certificates. In case the holders of shares of the Preferred Stock that shall have been redeemed shall not within two years (or any longer period if required by law) after the Redemption Date claim any amount so deposited in trust for the redemption of such shares, such bank or trust company shall, upon demand and if permitted by applicable law, pay over to the Company any such unclaimed amount so deposited with it, and shall thereupon be relieved of all responsibility in respect thereof, and thereafter the holders of such shares shall, subject to applicable escheat laws, look only to the Company for payment of the redemption price thereof, but without interest. 5. Redemption Following Change in Control. -------------------------------------- (a) Redemption at Option of Holder of Preferred Stock. In the event ------------------------------------------------- of a Change in Control (as defined below), each holder of shares of Preferred Stock shall have the right, at the sole option and election of such holder exercisable on or before the 90th day following the earliest event constituting a Change in Control, to require the Company to redeem some or all of the shares of Preferred Stock owned by such holder at the Redemption Price. For purposes of this Section 5, a "Change in Control" shall mean the occurrence of either of ------------------ the following events: (i) any person, entity or "group" (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules thereunder) other than Craig Corporation, a Delaware corporation ("Craig"), and its successors and affiliates, acquires beneficial ownership of over 35% of the outstanding voting securities of the Company ("affiliate" of a person shall mean any person directly or --------- indirectly controlling, controlled by or under common control with such person, and "control" of a person shall mean the power to direct the ------- affairs of such person by reason of ownership of voting stock, contract or otherwise); or (ii) the directors of the Company as of October 10, 1994 (the "Current Directors"), and any future directors ("Continuing Directors") of ----------------- -------------------- the Company who have been elected or nominated by a majority of the Current Directors or the Continuing Directors cease to constitute a majority of the Board of Directors. (b) Exercise of Redemption Rights. The holder of any shares of the ----------------------------- Preferred Stock seeking to exercise its redemption rights pursuant to Section 5(a) may exercise its right to require the Company to redeem such shares by surrendering for such purpose to the Company, at its principal office or at such other office or agency maintained by the Company for that purpose, a certificate or certificates representing the shares of Preferred Stock to be redeemed accompanied by a written notice stating that such holder elects to require the Company to redeem all or a specified integral number of such shares in accordance with the provisions of this Section 5. As promptly as practicable, and in any event within ten business days after the surrender of such certificates and the receipt of such notice relating thereto, the Company shall deliver or cause to be delivered to the holder of the shares being redeemed payment for such shares in immediately available funds and, if less than the full number of shares of the Preferred Stock evidenced by the surrendered certificate or certificates are being redeemed, a new certificate or certificates, of like tenor, for the number of shares evidenced by such surrendered certificate or certificates less the number of shares redeemed. Such redemptions shall be deemed to have been made at the close of business on the date of such payment and the rights of the holder thereof, except for the right to receive the payment for the redeemed shares in accordance herewith, shall cease on such date. 6. General Provisions Relating to Redemptions. Redemptions pursuant to ------------------------------------------ Sections 4 and 5 shall be subject to the following terms and conditions: (a) Pro-Rata Redemption. If less than all of the Preferred Stock at ------------------- the time outstanding is to be redeemed, the shares so to be redeemed shall be selected by lot, pro-rata or in such other manner as the Board of Directors may determine to be fair and proper. (b) Payment of Taxes. The Company shall not be required to pay any ---------------- tax that may be payable in respect of any payment in respect of a redemption of shares of Preferred Stock to a name 5 other than that of the registered holder of Preferred Stock redeemed or to be redeemed, and no such redemption payment shall be made unless and until the person requesting such payment has paid to the Company the amount of any such tax or has established, to the satisfaction of the Company, that such tax has been paid. (c) Status of Shares Redeemed. Shares of Preferred Stock redeemed, ------------------------- purchased or otherwise acquired for value by the Company shall, after such acquisition, be retired, and shall thereafter have the status of authorized and unissued shares of preferred stock and may be reissued by the Company at any time as shares of any series of preferred stock. (d) Conversion Prior to Redemption. From the date of a Redemption ------------------------------ Notice until the earlier of the Redemption Date or the date the deposit of funds in trust is made pursuant to Section 4(c), holders of shares of Preferred Stock subject to a Redemption Notice shall retain their right to an Optional Conversion (as defined in Section 7) of their shares. 7. Optional Conversion. Subject to the provisions of this Section 7 and ------------------- of Section 8, shares of Preferred Stock shall be convertible, at the option of the holder thereof (an "Optional Conversion"), into shares of Common Stock at a ------------------- conversion ratio (the "Conversion Ratio") of one share of Preferred Stock for a ---------------- fraction of a share of Common Stock, the numerator of which is the sum of the Stated Value plus any accrued but unpaid per share Quarterly Dividends, and the denominator of which is the average of the closing prices per share of the Common Stock on the American Stock Exchange (the "AMEX") for each of the 60 ---- business days immediately preceding the Original Conversion Date (as defined below), as quoted in The Wall Street Journal, or if the Common Stock is not listed or admitted to trade on AMEX, the average of the closing prices per share of the Common Stock on the principal national securities exchange on which the Common Stock is listed or admitted to trade for each of the 60 business days immediately preceding the Original Conversion Date (as defined below), as quoted in The Wall Street Journal, or if the Common Stock is not listed or admitted to trade on any such exchange, the average of the closing bid and asked prices for Common Stock as reported by NASDAQ for each of the 60 business days immediately preceding the Original Conversion Date (as defined below), as quoted in The Wall Street Journal, or other similar organization if NASDAQ is no longer reporting such information, or if not so available, the fair market price as determined in good faith by the Board of Directors of the Company (the "Market Price"), ------------ subject to the following: (a) Limits on Market Price. If the Market Price for any Optional ---------------------- Conversion would exceed $5.00, the Conversion Ratio shall be calculated as if the Market Price were $5.00. (b) Option of the Company to Redeem Tendered Preferred Stock. Subject -------------------------------------------------------- to the provisions of this Section 7(b), if the Market Price for any Optional Conversion shall be below $3.00, the Company shall have the option, exercisable for 30 days after receipt by the Company of the Notice of Conversion (as defined below) by written notice to the holder, to redeem any or all of the shares of Preferred Stock that have been tendered for conversion by the holder thereof (the "Tendered Preferred Stock") at the Redemption Price pursuant to Section ------------------------ 4(a); provided, however, that the Company shall complete such redemption within 90 days of the Company's notice of redemption and the Premium shall be calculated through the date of redemption using the accrual rate, as provided in Section 4(a)(iii), in effect on the Original Conversion Date (as defined below). (c) Exercise of Optional Conversion Rights. The holder of any shares -------------------------------------- of the Preferred Stock seeking to exercise its optional conversion rights pursuant to Section 7(a) may exercise its right to require the Company to convert such shares by surrendering for such purpose to the Company, at its principal office or at such other office or agency maintained by the Company for that purpose, a certificate or certificates representing the shares of Tendered Preferred Stock to be converted accompanied by a written notice stating that such holder elects to require the Company to convert all or a specified integral number of such shares into shares of Common Stock in accordance with the provisions of this Section 7 (the "Notice of Conversion"), and the date of -------------------- delivery to the Company of such Notice of Conversion shall be the "Original -------- Conversion Date" for such shares of Tendered Preferred Stock. Subject to - - - --------------- Section 7(b), as promptly as practicable, the Company shall deliver or cause to be delivered to the holder of the shares of 6 Tendered Preferred Stock,(i) a new certificate or certificates representing the number of shares of Common Stock into which the Tendered Preferred Stock has been converted, and (ii) if less than the full number of shares of Preferred Stock evidenced by the surrendered certificate(s) are being converted, a new certificate or certificates, of like tenor, for the number of shares of Preferred Stock that have not been converted and that the holder shall retain. Such conversions shall be deemed to have been made at the close of business on the Original Conversion Date and the rights of the holder thereof, except the right to receive the new certificate or certificates, shall cease on the Original Conversion Date or the Final Conversion Date (as defined below), as applicable. (d) Limits on Time of Conversion. Holders of shares of Preferred ---------------------------- Stock shall not be entitled to convert shares of Preferred Stock into shares of Common Stock for a one-year period commencing on the 15th day following the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, except in the event of a Change in Control of the Company. 8. General Provisions Relating to Conversion. Conversions pursuant to ----------------------------------------- Sections 7 shall be subject to the following terms and conditions: (a) Conversion Restrictions Pursuant to AMEX Rules. If an Optional ---------------------------------------------- Conversion would result, on the Original Conversion Date, in the issuance of a number of shares of Common Stock (the "Issuable Common Stock") that exceeds 20% --------------------- of the then-outstanding shares of Common Stock and if the AMEX rules and regulations, including, but not limited to, (S)713 of the AMEX Company Guide (the "AMEX Rules") shall require the affirmative vote of the stockholders of the ---------- Company with respect to such issuance before it will approve such excess shares of Issuable Common Stock for listing on AMEX (the "Ineligible Common Stock"), ----------------------- then, subject to any rights the Company may have to redeem the Preferred Stock in accordance with Section 7(b), the Company shall convert into Common Stock only the number of shares of Preferred Stock that will not result in the issuance of any Ineligible Common Stock, and shall deliver to the holder of the shares of Preferred Stock that were the subject of the Optional Conversion or Automatic Conversion a certificate for evidencing the shares of Preferred Stock that would have been converted but for the issuance of Ineligible Common Stock (the "Unconverted Preferred Stock"). The holder shall retain the Unconverted --------------------------- Preferred Stock until the next annual or special meeting of the stockholders of the Company at which the Company, subject to any rights it may have to redeem the Unconverted Preferred Stock in accordance with Section 7(b), shall submit a proposal for stockholder approval of the issuance of the Ineligible Common Stock. Pending such stockholder approval, the Unconverted Preferred Stock shall continue to be outstanding and entitled to all rights and privileges hereunder. (i) If such stockholder approval is obtained, the Unconverted Preferred Stock shall, as soon as practically possible and on a date selected by the Board of Directors (the "Final Conversion Date"), be converted into shares --------------------- of Common Stock at the ratio applicable to the Original Conversion Date upon (A) surrender to the Company of the certificate(s) representing the Unconverted Preferred Stock, (B) the Company's remittance to the holder of such Unconverted Preferred Stock of the benefits such holder would have received had the Unconverted Preferred Stock been converted into the Ineligible Common Stock on the Original Conversion Date, including, but not limited to, the benefits of any cash dividends, stock dividends, stock splits, reverse stock splits, and recapitalizations of the Common Stock, declared (and not rescinded) or effective, during the period from the Original Conversion Date through the Final Conversion Date (the "Stockholder Approval Period"), and (C) such holder's forfeiture or refund to the Company of any Quarterly Dividends on the Unconverted Preferred Stock that have accrued or been paid in respect of the Unconverted Preferred Stock during the Stockholder Approval Period. (ii) If such stockholder approval is not obtained, the Company shall redeem the Unconverted Preferred Stock at the Redemption Price; provided, however, that the Premium shall be calculated through the date of redemption using the accrual rate in effect on the Original Conversion Date. (b) Request of Majority for Stockholder Vote. At any time before a ---------------------------------------- conversion described in Section 8(a) occurs, the Company shall, upon the request of a majority of the outstanding 7 shares of Preferred Stock, submit a proposal for stockholder approval of the issuance of all shares of Common Stock issuable upon conversion of the Preferred Stock, including, without limitation, the Ineligible Common Stock, at the next meeting of stockholders of the Company that follows such request. (c) Conversion Restrictions Pursuant to Number of Authorized Shares of ------------------------------------------------------------------ Common Stock. If there are an insufficient number of authorized shares of - - - ------------ Common Stock to satisfy an Optional Conversion or an Automatic Conversion, the number of shares of Preferred Stock that would have been converted in the absence of such insufficiency shall be exchanged by the Company for a new class of preferred shares (the "New Shares") having the same aggregate stated value as the shares exchanged therefor and a stated value per share equal to the Market Price (up to a maximum of $5.00); provided, however, that such new class shall have identical rights, privileges and preferences as those of the Preferred Stock, except as stated in this Section 8(c). If there are an insufficient number of authorized New Shares to satisfy such exchange, the holders of shares of Preferred Stock to be so exchanged shall each receive a pro rata allocation of available New Shares for such exchange, and each such holder shall have the right, exercisable by written notice of such exercise delivered to the Company within 30 days of such exchange accompanied by certificates evidencing the remainder of their shares of Preferred Stock that would have been so exchanged but for such insufficiency, to require the Company to redeem such remaining shares at the Redemption Price in effect on the date of such exchange and in accordance with the provisions of Section 6. (d) Pro-Rata Conversion. If less than all of the Preferred Stock at ------------------- the time outstanding is to be converted, the shares so to be converted shall be selected by lot, pro-rata or in such other manner as the Board of Directors may determine to be fair and proper. (e) No Fractional Shares. No fractional shares or scrip representing -------------------- fractional shares of Common Stock shall be issued upon the conversion of any shares of Preferred Stock. Instead of any fractional interest in a share of Common Stock that would otherwise be deliverable upon the conversion of Preferred Stock, the Company shall pay to the holder an amount in cash (computed to the nearest cent) equal to the Market Price. If more than one share shall be surrendered for conversion at one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Preferred Stock so surrendered. (f) Payment of Taxes. The Company will pay any and all documentary, ---------------- stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on the conversion of shares of Preferred Stock pursuant to this Section 8; provided, however, that the Company shall not be required to pay any tax that may be payable in respect of any registration of transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the registered holder of Preferred Stock converted or to be converted, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Company the amount of any such tax or has established, to the satisfaction of the Company, that such tax has been paid. (g) Status of Shares Converted. Shares of Preferred Stock converted -------------------------- by the Company, shall, after such conversion, be retired, and shall thereafter have the status of authorized and unissued shares of preferred stock and may be reissued by the Company at any time as shares of any series of preferred stock. 9. Voting Rights. The holders of Preferred Stock shall have the ------------- following voting rights: (a) One Vote Per Share. Except as provided herein or by law, each ------------------ share of Preferred Stock shall entitle the holder thereof to one vote on all matters submitted to a vote of the Company's stockholders. (b) Voting With Common Stock. Except as otherwise provided herein or ------------------------ by law, the holders of Preferred Stock and the holders of Common Stock shall vote together as one class on all matters submitted to a vote of the Company's stockholders. 8 (c) Dividend Arrearages and Election of Director. If dividends in an -------------------------------------------- amount equal to two Quarterly Dividends have accrued and remain unpaid for two consecutive Dividend Periods, the holders of the Preferred Stock will thereupon have the right to vote as a separate class to elect one special director to the Board of Directors (in addition to the then authorized number of directors) and at each succeeding annual meeting of stockholders thereafter until such right is terminated as hereinafter provided. Upon payment of all dividend arrearages, the holders of Preferred Stock will be divested of such voting rights (until any future time when dividends in an amount equal to two Quarterly Dividends have accrued and remained unpaid for two consecutive Dividend Periods) and the term of the special director will thereupon terminate and the authorized number of directors will be reduced by one. (d) Parity or Senior Stock. So long as any shares of the Preferred ---------------------- Stock are outstanding (except when notice of the redemption of all outstanding shares of Preferred Stock has been given pursuant to Section 4(b) and shares of Common Stock and any necessary funds have been deposited in trust for such redemption pursuant to Section 4(c)), the Company shall not, without the affirmative vote or consent of the holders of at least a majority of the outstanding shares of Preferred Stock and any other series of preferred stock entitled to vote thereon at the time outstanding voting or consenting, as the case may be, together as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting called for the purpose, create, authorize or issue any new class of Parity Stock or Senior Stock. (e) Matters Affecting the Rights of Holders of Preferred Stock. So ---------------------------------------------------------- long as any shares of the Preferred Stock are outstanding (except when notice of the redemption of all outstanding shares of Preferred Stock has been given pursuant to Section 4(b) and shares of Common Stock and any necessary funds have been deposited in trust for such redemption pursuant to Section 4(c)), the Company shall not, without the affirmative vote or consent of the holders of at least a majority of the outstanding shares of Preferred Stock and any other series of preferred stock entitled to vote thereon at the time outstanding voting or consenting, as the case may be, together as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting called for the purpose, amend the Certificate of Incorporation or this Certificate of Designation, directly or indirectly, whether through a merger or otherwise, so as to affect materially and adversely the specified rights, preferences, privileges or voting rights of holders of shares of Preferred Stock. (f) Matters Deemed Not to Affect the Rights of Holders of Preferred --------------------------------------------------------------- Stock. Except as set forth in Section 9(d) above, the creation, authorization - - - ----- or issuance of any shares of any Junior Stock, Parity Stock or Senior Stock, the creation of any indebtedness of any kind of the Company, or the increase or decrease in the amount of authorized capital stock of any class, including Preferred Stock, shall not require the consent of the holders of Preferred Stock and shall not be deemed to affect materially and adversely the rights, preferences, privileges or voting rights of holders of shares of Preferred Stock. (g) Nomination of Director. Subject to the fiduciary duty of the ---------------------- Board of Directors the holders of a majority of the outstanding shares of the Preferred Stock shall have, in addition to their rights under Section 9(c), the right to nominate one director nominee to the slate of director nominees submitted to the stockholders of the Company by the Board of Directors. 10. No Sinking Fund. No sinking fund will be established for the --------------- retirement or redemption of shares of Preferred Stock. 11. Preemptive Rights. Each holder of any of the shares of Preferred ----------------- Stock shall be entitled to a preemptive right to purchase or subscribe for any unissued voting stock of any class of the Company, or any unissued stock or unissued other instrument which is, or may, upon the occurrence of certain condition(s), be convertible into voting stock of the Company, that the Board of Directors may propose to issue by means of an increase of the outstanding shares of capital stock of any class, or the issuance of bonds, certificates of indebtedness, debentures or other securities convertible into voting stock of the Company (the "Proposed Voting Securities"). Such preemptive rights shall extend only to the extent necessary to allow such holder of shares of Preferred Stock to maintain its proportionate share of the outstanding voting stock of the Company and the number of shares (or dollar amount, as applicable) of 9 Proposed Voting Securities each holder of Preferred Stock shall be entitled to purchase or subscribe for shall be the amount determined by multiplying the number of shares (or dollar amount, as applicable) of Proposed Voting Securities by a fraction, the numerator of which shall be the number of shares of Preferred Stock held by such holder, and the denominator of which shall be the number of votes entitled to be cast by all outstanding voting securities of the Company before the proposed issuance. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation to be executed by Steve Wesson, its President as of October 8, 1996. CITADEL HOLDING CORPORATION By: /s/ Steve Wesson ---------------------------------------- Name: Steve Wesson Title: President and Chief Executive Officer 10 EX-10.27 4 PURCHASE AGREEMENT Exhibit 10.27 PURCHASE AGREEMENT ------------------ Equipment Leasing Associates 1995-VI Limited Partnership ("Seller") hereby agrees to sell certain equipment to FA, Inc. ("Buyer") on the terms and conditions set forth below in this Purchase Agreement and the parties further agree that this Purchase Agreement shall establish binding commitments and unconditional promises of the parties hereto with respect to the subject matter hereof. 1. Purchase and Sale of Equipment. The equipment being purchased is ------------------------------ more particularly described on Schedule A hereto ("Equipment"). Buyer acknowledges that the Equipment is presently being leased to the various parties set forth on the pages attached to Schedule A, and is being conveyed subject to such leases. Buyer also acknowledges that the Equipment is also subject to certain encumbrances which are also listed on Schedule A (the "Senior Liens"). 2. Purchase Price. The purchase price of the Equipment is set forth -------------- on Schedule B and shall be paid in the manner specified in Schedule B. 3. Transfer of Title. The parties agree that the sale shall be ----------------- consummated and the transfer of title to said Equipment shall be deemed to have occurred on December 20, 1996 when: (a) the Seller and Buyer have executed this Purchase Agreement; (b) Seller has delivered of a Bill of Sale by Seller to Buyer which is accepted by Buyer; and (c) Buyer has paid the consideration set forth on Exhibit B to Seller in the amounts and in the manner specified on Schedule B. 4. Purchase Money Security Interest. Notwithstanding the foregoing, -------------------------------- Seller shall retain a purchase money security interest in the Equipment for any unpaid portion of the purchase price. Upon Buyer's failure to make payment in full upon the dates specified on Schedule B, Seller shall have the right, upon notice to Buyer, to take possession of the Equipment, to sell the Equipment, and exercise any and all rights with respect to the Equipment and the lease(s) of a secured party under the Uniform Commercial Code of Virginia if payment is not make in full upon the dates specified on Schedule B. 5. Leaseback. Seller and Buyer hereby agree that in conjunction --------- with the sale of the Equipment, Seller agrees to lease from Buyer and Buyer agrees to lease to Seller all of the Equipment for a term of sixty (60) months from December 20, 1996 with payments paid annually in arrears based on a present value of $38,989,635.00. Said annual payments in arrears will be computed using a ten percent (10%) debt rate. The proforma Master Lease Agreement ("Wrap Lease") to be used by the parties is attached hereto for reference. As consideration for the Leaseback, Seller, as Lessee, agrees to pay to Buyer, as Lessor, an amount of 5.0% of any and all remarketing proceeds received by Lessee with respect to the period from January 1, 1998 through December 31, 1998, for transactions wherein the original user lease has expired and a new user lease has commenced. 1 6. Further Documents. Seller and Buyer agree to execute such ----------------- further documents and instrument as are necessary, appropriate, and reasonable to more fully and fairly detail this Purchase Agreement and related agreements and understandings between the parties. IN WITNESS WHEREOF, the parties have executed this Purchase Agreement effective as of December 20, 1996. SELLER: EQUIPMENT LEASING ASSOCIATES 1995-VI LIMITED PARTNERSHIP By: Management Associates Limited Partnership VIII, General Partner By: Managing Partners Corporation, General Partner By: /s/ Donald Butler ------------------------------------- Title: Executive Vice President ----------------------------------- BUYER: FA, INC. By: /s/ S. Craig Tompkins ------------------------------------- Title: President ----------------------------------- 2 PURCHASE AGREEMENT ------------------ SCHEDULE A ---------- User Lessee: See attached schedule(s) (12 pages) (The Equipment Schedules, submitted as exhibits to the Purchase Agreement are omitted for purposes of this filing as it is written in French and would require translation. A copy is available at the Company's office.) Equipment: See attached schedule(s) (12 pages) (The Equipment Schedules, submitted as exhibits to the Purchase Agreement are omitted for purposes of this filing as it is written in French and would require translation. A copy is available at the Company's office.) Equipment Locations: To be further identified. 3 PURCHASE AGREEMENT ------------------ SCHEDULE B ---------- 1. Purchase Price: $40,934,000.00 -------------- 2. Method of Payment: ----------------- a. Equity: ------ (i) Cash payment in the amount of $75,000.00 upon execution hereof. (ii) Cash payment in the amount of $1,869,365.00 on or before January 31, 1997. b. Debt: ---- Delivery of a nonrecourse Promissory Note payable to the order of Seller in the amount of $38,989,635.00. 3. Effective Date: December 20, 1996. -------------- 4 EX-10.28 5 MASTER LEASE AGREEMENT Exhibit 10.28 MASTER LEASE AGREEMENT ---------------------- MASTER LEASE AGREEMENT, dated as of December 20, 1996, ("Lease"), between FA, Inc. ("Lessor"), and Equipment Leasing Associates 1995-VI Limited Partnership ("Lessee"). Lessor agrees to lease the equipment and accessories thereto listed on Schedule A attached hereto (the "Equipment") to Lessee, and Lessee hereby agrees to lease the Equipment from Lessor, on the terms and subject to the conditions specified herein. (If and to the extent that there are more than one Schedule A and related Schedule B attached hereto, each Schedule A and related Schedule B shall incorporate this Master Lease Agreement and shall be deemed a separate and distinct lease of the Equipment covered thereby.) The definition of terms in the Purchase and Sale Agreement of even date herewith between the Lessor, as "Buyer," and the Lessee, as "Seller" (the "Purchase Agreement"), regarding the applicable Equipment shall apply herein. 1. TERM. The term of this Lease shall commence and end on the dates ---- specified in Schedule B attached hereto. 2. RENT. Lessee hereby agrees to pay Lessor fixed rent in the amounts ---- and on the dates specified in Schedule B ("Fixed Rents"). Any and all payments of rent not paid when due as specified on Schedule B shall bear interest after the due date thereof at the rate of 10% per annum. Such interest shall accrue for every day such rent payment is overdue. 3. ACCEPTANCE OF EQUIPMENT BY LESSEE. Lessee hereby agrees that its --------------------------------- execution of this Lease shall, without further act, irrevocably constitute acceptance by Lessee of the Equipment for all purposes of the Lease in an "as is" condition. 4. MOVEMENT OF EQUIPMENT. In no event shall any Equipment be moved from --------------------- its present country without the written consent of Lessor. 5. RETURN OF EQUIPMENT. Unless a unit of Equipment has been previously ------------------- disposed of in accordance with Section 11(a) or (c), or in accordance with any other written agreement between Lessor and Lessee, Lessee will, at its own cost and expense, deliver possession of each unit of Equipment to Lessor upon the termination hereof, in the condition required for it to be maintained by Lessee pursuant to Section 8(b), at the location of the Equipment on that date, free and clear of any liens, charges, security interests, encumbrances or rights of any person, other than the rights of Lessor or any User Lessee or any lien, charge, security interest or encumbrance incurred by or on behalf of Lessor. 6. WARRANTIES AND SERVICE POLICIES. Unless Lessee shall have been ------------------------------- declared in default pursuant to Section 16, Lessor hereby covenants and agrees that Lessor will assign or otherwise make available to Lessee such rights as Lessor may have under any warranty or service policy with respect to the Equipment made by the manufacturer of the Equipment (the 1 "Manufacturer"), any subcontractors of the Manufacturer, or any vendors to the extent that the same may be assigned or otherwise made available to Lessee. 7. GENERAL TAX INDEMNITY. Lessee will pay, and will defend, indemnity --------------------- and hold Lessor harmless on an after-tax basis from, any and all Taxes (as defined below) and related audit and contest expenses on or relating to (a) any of the Equipment, (b) the Lease, (c) purchase acceptance, ownership, lease, possession, use operation, transportation, return or other disposition of any of the Equipment, and (d) rentals or earnings relating to any of the Equipment or the Lease. "Taxes" means present and future taxes or other governmental charges that are not based on the net income of Lessor, whether they are assessed to or payable by Lessee or Lessor, including, without limitation (i) sales, use, excise, licensing, registration, titling, franchise, business and occupation, gross receipts, stamp and personal property taxes, (ii) levies, imposts, duties, assessments, charges and withholdings, (iii) penalties, fines, and additions to tax and (iv) interest on any of the foregoing. Unless Lessor elects otherwise, Lessor will prepare and file all reports and returns relating to any Taxes and will pay all Taxes to the appropriate taxing authority. Lessee will reimburse Lessor for all such payments promptly on request. On or after any applicable assessment/levy/lien date for any personal property Taxes relating to any Equipment, Lessee agrees that upon Lessor's request Lessee shall pay to Lessor the personal property Taxes which Lessor reasonably anticipates will be due, assessed, levied or otherwise imposed on any Equipment during its Lease Term. If Lessor elects in writing, Lessee will itself prepare and file all such reports and returns, pay all such Taxes directly to the taxing authority, and send Lessor evidence thereof. Lessee's obligations under this section shall survive the expiration, cancellation or termination of the Lease. 8. POSSESSION; USE AND MAINTENANCE; COMPLIANCE WITH LAWS; INSURANCE. ---------------------------------------------------------------- (a) Possession. So long as no Event of Default shall have occurred ---------- and be continuing, Lessee and any User Lessee shall be entitled, as against Lessor or its assignee, to the possession and use of the Equipment in accordance with and during the term of this Lease; as long as any User Lessee is not in default under the User Lease, the User Lessee shall be entitled to continued possession and use of the Equipment. (b) Use and Maintenance. ------------------- (i) Lessee shall cause the Equipment to be used only in the manner for which it was designed and intended and so as to subject it only to ordinary wear and tear. Lessee shall not modify any unit of Equipment without the prior written approval of Lessor, except as provided in (ii) and (iii) below or as may be authorized by any sublease or User Lease as permitted under Section 14 hereof. Notwithstanding the preceding, Lessee may add, delete or substitute features or options on any unit of the Equipment provided none thereof decrease the value of the Equipment, in any way damage or injure the Equipment, interfere with the normal or satisfactory operation or maintenance of the Equipment or create a safety hazard, and, provided further, that at or following the expiration of the term hereof, Lessee shall, at its expense, remove such additions or alterations promptly on demand of Lessor, and, forthwith upon such removal, restore the Equipment to its original condition, less ordinary wear and tear. In the event that at the expiration of the term of the Lease for any item of Equipment, such item has been upgraded by additions, and/or replacements such that the item's value has been 2 increased over that which it would be absent such upgrades, then Lessee, in lieu of removing such upgrades, may leave same attached to the subject item and Lessor and Lessee agree to permit the item and such upgrades to be remarketed as a single unit, with any proceeds from such remarketing being distributed to Lessor and Lessee based upon the respective then fair market values (as defined in Section 23(h) hereof). (ii) Lessee may acquire and install, at Lessee's expense, such additional features or options (including memory) as may be available from time- to-time. Such additional features or options shall be removed by Lessee before the Equipment is returned to Lessor and Lessee shall repair all damages to the Equipment resulting from such installation and removal; provided, however, that Lessee shall not be required to remove additional features or options if Lessee complies with the procedures set forth in (i) above. (iii) Lessee shall, at Lessor's expense, make any modifications and acquire any additional features requested in writing by Lessor. (iv) Lessee shall cause all units of Equipment under lease to User Lessees to be maintained in good operating condition and repair, and will cause all necessary adjustments and repairs to be made to the Equipment. Lessee is hereby authorized to provide directions with respect to such maintenance, adjustments and repairs, and such maintenance shall be subject to the reasonable safety and security regulations of Lessee and any User Lessee. Charges for maintenance, installation and dismantling of the Equipment shall be borne by Lessee, and Lessee agrees promptly to reimburse Lessor for any amount thereof paid by Lessor. All Equipment shall be installed and operated as specified in the Manufacturer's installation manual and in places meeting at all times the standards established by Lessee for location and operation of similar equipment owned or leased by it. All units not leased to User Lessees shall be properly maintained to prevent deterioration or other damage. (v) Notwithstanding anything contained herein to the contrary, any improvements or additions that are made by Lessee shall be owned by Lessee provided that such improvements and additions shall be readily removable without causing material damage to the Equipment and any damage so caused is repaired or Lessee complies with the procedures set forth in (i) above; but ordinary maintenance and repairs performed by Lessee will not constitute an improvement or addition to the Equipment within the meaning hereof. (c) Governing Laws. Rules and Regulations. Lessee agrees to comply ------------------------------------- with all governmental laws, regulations, requirements and rules with respect to the use, maintenance and operation of each unit of Equipment. (d) Insurance. Lessee at its sole expense shall at all times keep --------- each item of Equipment insured against all risks of loss or damage from every cause whatsoever for an amount not less than the full replacement value of such item of Equipment. Lessee at its sole expense shall at all times carry public liability and property damage insurance in amounts reasonably satisfactory to Lessor protecting Lessee and Lessor from liabilities for injuries to persons and damage to property of others relating in any way to the Equipment. All insurers shall be reasonably satisfactory to Lessor. Lessee 3 shall deliver to Lessor satisfactory evidence of such coverage. Proceeds of any insurance covering damage or loss of the Equipment shall be payable to Lessor as loss payee and shall, at Lessor's option, be applied toward (a) the replacement, restoration or repair of the Equipment, or (b) payment of the obligations of Lessee under the Lease. If the User Lessee's insurance permits the User Lessee to replace the equipment with the insurance proceeds, then Lessor shall be obligated to allow the replacement or repair of the equipment with such insurance proceeds. Proceeds of any public liability or property insurance shall be payable first to Lessor as additional insured to the extent of its liability, then to Lessee. If an event of default occurs and is continuing, or if Lessee fails to make timely payments due under Section 2 hereof, then Lessee automatically appoints Lessor as Lessee's attorney-in-fact with full power and authority in the place of Lessee and in the name of Lessee or Lessor to make claim for, receive payment of, and sign and endorse all documents, checks or drafts for loss or damage under any such policy. Each insurance policy will require that the insurer give Lessor at least 30 days prior written notice of any cancellation of such policy and will require that Lessor's interests remain insured regardless of any act, error, omission, neglect or misrepresentation of Lessee. The insurance maintained by Lessee shall be primary without any right of contribution from insurance which may be maintained by Lessor. Lessor agrees that Lessee's obligations under this paragraph (d) of Section 8 shall be deemed satisfied with respect to any unit of Equipment subject to a User Lease or sublease permitted under Section 14 hereof which provides for the User Lessee or sublessee or any other party thereunder to insure the Equipment in a manner and in such amounts as comply with Lessee's responsibilities set forth in this subparagraph and if Lessee provides Lessor with an assignment of said insurance reasonably satisfactory to Lessor. (e) Inspection. Lessee will permit any authorized representative of ---------- Lessor to inspect the Equipment and reasonably to examine, copy or make extracts from, any and all books, records and documents in the possession of Lessee relating to the Equipment and performance of this Lease, all at such reasonable times and as often as may reasonably be requested. 9. REPRESENTATIONS AND WARRANTIES. ------------------------------ (a) Lessee's Representations. Lessee represents and warrants to, and ------------------------ covenants with, Lessor, as follows: (i) Organization and Existence. Lessee is, at the time of -------------------------- executing and delivering this Lease, and will be, on the Commencement Date and throughout the term of this Lease, a limited partnership duly and validly organized and existing in good standing under the laws of the State of Delaware and duly qualified to own its properties and carry on its business in each jurisdiction where the failure to be so qualified would be materially adverse to Lessee or its business, or Lessor. (ii) Power and Authority. Lessee has the power and authority to ------------------- execute and deliver this Lease and will at the time of execution and delivery hereof have the power and authority to execute and deliver or accept, as the case may be, any and all other agreements, instruments and documents executed and delivered or accepted in connection herewith or therewith and to pay and perform, when due, its obligations hereunder and thereunder. 4 (iii) Authorization. The execution and delivery or acceptance, ------------- as the case may be, of this Lease and the other documents contemplated hereby by Lessee have been duly authorized by all necessary action of Lessee and do not, and at the time of their execution and delivery or acceptance will not, violate or conflict with, or, with or without the giving of notice, the passage of time or both, constitute a default under, any provision of Lessee's instruments of organization, any law, or any order, writ, injunction, decree, rule or regulation of any court, administrative agency or any other governmental authority or any agreement or other document or instrument to which Lessee is, or will then be, a party, or by which Lessee or the Equipment is, or may then be, bound. (iv) Enforceability. This Lease and the other documents -------------- contemplated hereby constitute, or when executed and delivered will constitute, the valid and binding obligations of Lessee, enforceable against it in accordance with their respective terms, subject, however, to laws of general application affecting creditors' rights. (b) Lessor's Representations and Warranties. Lessor represents and --------------------------------------- warrants to, and agrees with, Lessee as follows: (i) Organization and Existence. Lessor is, at the time of -------------------------- executing and delivering this Lease, and will be, on the Commencement Date and throughout the term of this Lease, a corporation duly and validly organized and existing under the laws of the state of Delaware and duly qualified to own its properties and carry on its business in each jurisdiction where the failure to be so qualified would be materially adverse to Lessor or its business, or Lessee. (ii) Power and Authority. Lessor has the power and authority to ------------------- execute and deliver this Lease and will, at the time of execution and delivery thereof have the power and authority to execute and deliver or accept, as the case may be, the other documents contemplated hereby and to pay and perform, when due, its obligations hereunder and thereunder. (iii) Authorization. The execution and delivery or acceptance, ------------- as the case may be, of this Lease and the other documents contemplated hereby by Lessor, and the payment and performance by Lessor, when due, of its obligations hereunder and thereunder, have been duly authorized by all necessary action of Lessor and do not, and at the time of their execution and delivery or acceptance, as the case may be, will not, violate or conflict with, or, with or without the giving of notice, the passage of time or both, constitute a default under, any provision of Lessor's instruments of organization, any order, writ, injunction, decree, rule or regulation of any court, administrative agency or any other governmental authority or any agreement or other document or instrument to which Lessor is a party, or by which Lessor is, or may be, bound. (iv) Enforceability. This Lease and the other documents -------------- contemplated hereby constitute, or when executed and delivered will constitute, the valid and binding obligations of Lessor, enforceable against it in accordance with their respective terms, subject, however, to laws of general application affecting creditors' rights. 5 10. OWNERSHIP; FILING. ----------------- (a) Retention of Title. Lessor or its transferee shall and hereby ------------------ does retain full legal title to the Equipment notwithstanding the delivery of possession to, and use by, Lessee. (b) Duty to Mark Equipment. Lessee agrees to mark the Equipment with ---------------------- all information as may from time to time be required by Lessor in order to protect the title of Lessor to the Equipment and Lessor's rights under this Lease, and Lessee will replace promptly any such-markings which may be removed, defaced or destroyed. The failure to mark or identify any equipment shall not serve to diminish or prejudice Lessor's full legal title and ownership of the Equipment. (c) Filing. Lessee will cooperate with Lessor for the purpose of ------ protecting Lessor's title to the Equipment and the sums due under this Lease, including executing and filing appropriate financing statements. (d) Encumbrance: Disposition. Lessee shall not encumber and shall ------------------------ not by contract permit sublessees to encumber, nor shall Lessee dispose of, the Equipment other than as expressly permitted by this Lease; and Lessee agrees to cause the Equipment to remain free and clear of any such encumbrance. Furthermore, Lessee agrees that it shall claim no depreciation deduction for income tax purposes for the Equipment. In no event shall Lessee take any position on its tax return or any other document relating thereto that is inconsistent with Lessor's ownership of the Equipment. 11. DAMAGE TO EQUIPMENT; REQUISITION; EARLY TERMINATION. --------------------------------------------------- (a) Casualty Occurrence. In the event any unit of Equipment is ------------------- damaged, destroyed, lost, stolen, or title thereto shall be requisitioned or taken by any governmental authority under power of eminent domain or otherwise, such fact shall promptly be reported by Lessee to Lessor. Lessee shall determine in the event of damage, whether such unit of Equipment can be repaired. In the event Lessee determines that such unit of Equipment can be repaired, Lessee shall cause such unit of Equipment to be repaired, at Lessee's expense, as soon as reasonably practicable. Lessee shall be entitled to reimbursement from and to the extent of any insurance proceeds paid with respect to a unit of Equipment repaired by Lessee. In the event Lessee determines that the unit of Equipment cannot be repaired or in the event of such destruction, loss, theft, requisition or taking of title, such unit of Equipment shall be deemed to have suffered a "Casualty Occurrence" and, as soon as reasonably practicable after the date of such Casualty Occurrence, Lessee shall either (at Lessee's option) (x) pay to Lessor a purchase price equal to such Equipment's fair market value (as defined in Section 23(h) hereof plus a lease termination fee equal to the present value (using a discount rate equal to the discount rate set forth on Schedule B (the "Discount Rate")) of the remaining Fixed Rent applicable to the subject Equipment less the fair market value of Lessee's remaining leasehold interest hereunder with respect to such Equipment, or (y) replace such item with any item or items of like kind equipment, in accordance with the terms set forth in Section 23(g) hereof. The repair or replacement of the Equipment as hereinabove provided shall not result in any abatement or reduction in, or in any other way affect, the rent to be paid with respect to such Equipment, it being expressly agreed that the Fixed Rent payable with respect thereto shall continue in the same amounts and be payable at the same times as prescribed on Schedule B hereto as if such repair or replacement did not occur. In the event Lessee elects (in lieu of replacing) to purchase any unit of Equipment, as described above, the Fixed Rent 6 payable pursuant to Schedule B shall (as of the next rental payment) be reduced to an amount which bears the same relationship to the rental payable before such reduction as the value of Equipment leased after the Casualty Occurrence bears to the value of Equipment leased prior to the Casualty Occurrence. (b) Risk of Loss. Lessee shall, during the entire term of this ------------ Lease, bear the risk of loss to the Equipment and, except as provided in paragraph (a) of Section 11, shall not be released from its obligations hereunder in the event of any Casualty Occurrence to any unit of Equipment. (c) Option. So long as no Event of Default (as defined herein) shall ------ have occurred and be continuing, if, when and to the extent (x) a User Lessee exercises its option to purchase any unit of Equipment pursuant to an option contained in a User Lease, or (y) with respect to an item of Equipment not currently on lease to a User Lessee, Lessee determines that it is uneconomical to continue to hold such items of Equipment on lease, Lessee shall have the right to purchase the subject Equipment (the "Off-Lease Item") at a purchase price equal to its then fair market value (as herein defined and determined) and Lessee shall pay to Lessor a lease termination fee equal to the present value (discounted at the Discount Rate) of the remaining Fixed Rent applicable to the subject Equipment less the fair market value of Lessee's remaining leasehold interest hereunder. Lessor shall convey the Off-Lease Item to Lessee free and clear of any liens, claims or encumbrances created by, through or under Lessor, other than any underlying lien and the User Lease, if any, then in effect. Thereupon, this Lease shall terminate with respect to the Off-Lease Item. In lieu of the foregoing purchase and sale, Lessee shall have the right instead to substitute and replace such Item with other equipment which is substantially similar within the parameters set forth in Section 23(g) hereof (the "Replacement Item"). Effective upon such replacement, all incidents of Lessee's interest as Lessee hereunder in the Off-Lease Item ipso facto shall cease and terminate automatically and the Replacement Item shall become Equipment leased hereunder instead of the Off-Lease Item. In addition, effective upon such replacement, all of Lessor's right, title and interest in and to the Off-Lease Item shall be automatically assigned and shall pass to Lessee and Lessor shall have no further interest therein. The substitution for a unit of Equipment shall not result in any abatement or reduction in, or in any other way affect, the rent to be paid with respect to such Equipment, it being expressly agreed that the rent payable with respect thereto shall continue in the same amounts and be payable at the same times as prescribed on Schedule B hereto as if such substitution did not occur. In the event Lessee elects to purchase any unit of Equipment which was the subject of the option, in lieu of replacing such unit of Equipment, the rent payable pursuant to Schedule B shall (as of the next rental payment) be reduced to an amount which bears the same relationship to the rental payable before such reduction as the value of the Equipment leased after the exercise of the option bears to the value of Equipment leased prior to the exercise of the option. For purposes of the preceding sentence "value" shall be determined by reference to original cost of the Equipment to Lessor. 12. GENERAL INDEMNITY. Lessee assumes all risk and liability for, and ----------------- shall defend, indemnity and keep Lessor harmless on an after-tax basis from, any and all liabilities, obligations, losses, damages, penalties, claims actions, suits, costs and expenses, including reasonable attorney fees and expenses, of whatsoever kind and nature imposed on, incurred by or asserted against Lessor, in any way relating to or arising out of the manufacture, purchase, acceptance, rejection, ownership, possession, use, selection, delivery, lease, operation, condition, sale, return or other disposition of the Equipment or any part thereof (including, without limitation, any claim for latent or other defects, 7 whether or not discoverable by Lessee or any other person, any claim for negligence, tort or strict liability, any claim under any environmental protection or hazardous waste law and any claim for patent, trademark or copyright infringement). Lessee will not indemnity Lessor under this section for loss or liability caused directly and solely by the gross negligence or willful misconduct of Lessor. Lessee shall not be required to indemnify Lessor or Lessor's successors and assigns for loss or liability in respect of any unit of Equipment arising from acts or events that occur after possession of such unit of Equipment has been delivered to Lessor in accordance with Section 5. In this section, "Lessor" also includes any director, officer, employee, agent, successor or assign of Lessor. Lessee's obligations under this section shall survive the expiration, cancellation or termination of the Lease. 13. ASSIGNMENT. ---------- (a) By Lessor. Lessee agrees that Lessor may transfer or assign all --------- or any part of Lessor's right, title and interest in, under or to the Equipment and this Lease and any or all sums due or to become due pursuant to any of the above, to any third party (the "Assignee") for any reason. Lessee agrees that upon receipt of written notice from Lessor of such assignment, Lessee shall perform all of its obligations hereunder for the benefit of Assignee and, if so directed, shall pay all sums due or to become due hereunder directly to the Assignee or to any other party designated by the Assignee. Lessee hereby covenants, represents and warrants as follows and agrees that the Assignee shall be entitled to rely on and shall be considered a third-party beneficiary of the following covenants, representations and warranties: (i) Lessee's obligations to Assignee hereunder are absolute and unconditional and are not subject to any abatement, reduction, recoupment, defense, offset or counterclaim available to Lessee for any reason whatsoever including operation of law, defect in the Equipment, failure of Lessor to perform any of its obligations hereunder or for any other cause or reason whatsoever, whether similar or dissimilar to the foregoing; (ii) Lessee will not look to Assignee to perform any of Lessor's obligations hereunder; (iii) Lessee will not amend or modify this Lease without the prior written consent of the Assignee; and (iv) Lessee will send a copy to Assignee of each notice which Lessee sends to Lessor. (b) By Lessee. Lessee shall not, directly or indirectly, (a) mortgage, --------- assign, sell, transfer, or otherwise dispose of the lease or any interest therein or the equipment or any part thereof, or (b) sublease, rent, lend or transfer possession or use of the equipment or any part thereof to any party (except User Lessees as set forth in paragraph 14 below) or (c) create, incur, grant, assume or allow to exist any lien on the lease, any schedule, the equipment or part thereof. 14. SUBLEASE BY LESSEE. Subject to the terms and conditions of this ------------------ Section 14, Lessee may sublease any or all of the Equipment without the consent of Lessor or its Assignees if: 8 (a) the terms and conditions of such User Lease are generally as favorable to Lessee as the terms and conditions in Lessee's leases or subleases then being offered to others leasing similar equipment; and (b) the sublease is in the ordinary course of Lessee's business; (c) the sublease of any Equipment is not beyond the term of this Lease without the consent of the Lessor, which consent shall not be unreasonably withheld. Lessee, shall be responsible for any and all remarketing fees incurred in connection with the sublease of the Equipment, and Lessor, as between Lessor and Lessee, shall be responsible for any and all other reasonable costs and expenses incurred in connection therewith. 15. ASSIGNMENT OF SUBLEASES AND OTHER RESPONSIBILITIES. Lessor hereby -------------------------------------------------- assigns, transfers and conveys to Lessee, effective upon the Commencement Date hereof, all of Lessor's rights, title and interest in, under and to the initial User Lease(s) and the Remarketing Agreement. In consideration therefor, Lessee, for the benefit of Lessor (but not for the benefit of any other party, including, but not limited to, the User Lessee), hereby agrees to assume and discharge each and every one of the obligations of Lessor thereunder and hereby relieves Lessor of and releases Lessor from every obligation thereunder. Lessee further agrees (i) that it will pay and apply all rentals and other sums otherwise to be retained by Lessee under User Lease(s) to pay amounts due on the Underlying Debt, (ii) that it will not commingle such rents and other sums under any such User Lease(s) with its other assets so long as any such Underlying Debt applicable to such User Lease(s) remains outstanding, and (iii) that, subject to the rights of any Underlying Lender with respect to any Underlying Debt, it will pursue in a commercially reasonable manner its remedies against any User Lessee arising from any default or violation of any User Lease(s). Lessor agrees that so long as Lessee fulfills its covenants and obligations in this paragraph, Lessee shall have not further obligations or personal liability to discharge any Underlying Debt in favor of any Underlying Lender or to make any payment on account thereof. 16. EVENTS OF DEFAULT. The following events shall constitute Events of ----------------- Default: (a) Lessee shall fail to make any payment of rent when the same shall become due and such failure shall continue unremedied for a period of 15 days (fifteen) after written notice to Lessee; or (b) Lessee shall fail to provide or maintain insurance as required by paragraph above and such failure shall continue unremedied for a period of 5 (five) days after written notice to Lessee; (c) Lessee shall fail to perform or observe any other covenant, condition or agreement to be performed or observed by it hereunder, and such failure shall continue unremedied for a period of thirty (30) days after written notice thereof by Lessor, unless, if such default cannot reasonably be cured within said thirty (30) days, Lessee shall have promptly commenced action to cure such default during said period and shall diligently pursue said action; or 9 (d) Any representation or warranty made by Lessee herein, or in any agreement, document, or certificate furnished Lessor in connection herewith or pursuant hereto or pursuant to which this Lease is executed, shall prove to be incorrect at any time in any material respect and shall continue unremedied (if such representation or warranty is capable of being remedied) for a period of thirty (30) days after written notice thereof by Lessor; or (e) Lessee shall admit in writing its inability to pay its debts or shall have made a general assignment for the benefit of creditors; or shall have permitted the entry of an order for relief in bankruptcy; or shall take any action towards its dissolution or liquidation; or shall have filed a voluntary petition in bankruptcy or for reorganization or to effect a plan or other arrangement with creditors; or shall have filed an answer to a creditor's petition or other petition filed against it (admitting the material allegations thereof) for an order for relief in bankruptcy or for a reorganization; or shall have applied for or permitted the appointment of a receiver or trustee or custodian for any of its property or assets and such receiver, trustee or custodian so appointed shall not have been discharged within sixty (60) days after the date of his appointment; or if an order shall be entered, and shall not be dismissed or stayed within sixty (60) days from its entry, approving any petition for a reorganization of Lessee. 17. REMEDIES. Upon the occurrence of any Event of Default and, at any -------- time after notice and grace period duly given to Lessee as provided herein to cure said Event of Default, so long as the same shall be continuing, Lessor may, at Lessor's option, declare this Lease to be in default by written notice to such effect delivered to Lessee and, at any time thereafter, Lessor may exercise one or more of the following remedies, as Lessor in Lessor's sole discretion shall elect: (a) Proceed by appropriate court action, either at law or in equity, to enforce performance by Lessee of the applicable covenants of this Lease or to recover damages for the breach thereof; (b) Declare the entire amount of rent for the remainder of the term to be immediately due and payable without notice or demand to Lessee, whereupon Lessee shall pay such amount to Lessor discounted to present value at the Discount Rate; (c) Subject to the rights of any Underlying Lender and of any User Lessee not in default under a User Lease, cause Lessee, at its expense, promptly to return the Equipment to the possession of Lessor at the location where the Equipment is in last use and in the condition required upon the return thereof pursuant to Section 5, or Lessor, at Lessor's option, may enter upon the premises where the Equipment is located and take immediate possession of the same and render it unusable or remove it by summary proceedings or otherwise; (d) Subject to the rights of any Underlying Lender and of any User Lessee not in default under a User Lease, sell the Equipment at public or private sale as Lessor may determine, free and clear of any rights of Lessee, and hold Lessee liable for any deficiency resulting from an excess of the sum of all unpaid rent (if any) due and payable for periods up to and including the rental period during which such sale occurs, plus any accelerated rent (discounted as provided in (b)above), plus Lessor's costs and expenses incurred in connection with such repossession and sale, over the gross proceeds of such sale; 10 (e) Subject to the rights of any Underlying Lender and of any User Lessee not in default under an User Lease, Lessor may use, operate, lease, or hold the Equipment as Lessor in Lessor's sole discretion may decide. In addition, Lessee shall be liable for any and all costs and expenses (to the extent not provided for hereinabove), including reasonable attorney's fees, disbursements and any costs and expenses in placing the Equipment in the condition required by the terms hereof, including Section 5, incurred by reason of the occurrence of any Event of Default or the exercise of Lessor's remedies with respect thereto; (f) Except as otherwise provided above, no remedy referred to in this Section 17 is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Lessor at law or in equity, including, but not limited to, the right to terminate this Lease. No express or implied waiver by Lessor of any Event of Default hereunder shall in any way be, or be construed to be, a waiver of any future or subsequent Event of Default. (g) If an Event of Default hereunder shall occur which affects and relates to some but not all of the Equipment leased hereunder, then Lessor's foregoing remedies may be exercised only with respect to that item or those items of Equipment to which the Event of Default relates. 18. LESSOR'S RIGHT TO PERFORM FOR LESSEE. If Lessee fails to make any ------------------------------------ payment required to be made by it hereunder or fails to perform or comply with any of its agreements contained herein, Lessor may, upon ten (10) days' prior written notice to Lessee, make such payment and the amount of the reasonable expenses of Lessor incurred in connection with such payment or the performance of or compliance with such agreement, as the case may be, together with interest at the rate of ten percent (10%), shall be payable by Lessee upon demand. 19. NOTICES. All notices required or permitted to be delivered to any ------- party shall be in writing, and shall be deemed to be given when delivered, or when deposited in the United States mails, certified or registered and postage prepaid, with return receipt requested, as follows: (a) If to Lessor: FA, Inc. 103 Springer Building 3411 Silverside Road Wilmington, Delaware 19810 (b) If to Lessee: Equipment Leasing Associates 1995-VI Limited Partnership 11130 Sunrise Valley Drive, Suite 206 Reston, Virginia 22091 or to such other address as may be designated in writing from time to time by one party to the other. 20. NO SET-OFF FOR LESSEE. This Lease is a net lease, and Lessee's --------------------- obligation to pay all rent payable hereunder shall be absolute and unconditional, and all such rent shall be paid (and not recovered back for any reason) notwithstanding any circumstances, including without limitation (i) any 11 set-off, counterclaim, recoupment, defense or other right which Lessee may have against Lessor, the Manufacturer or anyone else for any reason whatsoever, (ii) except as provided in paragraphs (a) and (c) of Section 11, any defect in the Equipment, condition, title, design, operation or fitness for use of, or any damage to or loss or destruction of, the Equipment or an interruption or cessation in the use or possession thereof by Lessee for any reason whatsoever, or (iii) any insolvency, bankruptcy, reorganization or similar proceedings by or against Lessee. Anything contained in this Lease or any other agreement to the contrary notwithstanding, any obligation of Lessor shall be separate and independent from and shall not affect Lessee's obligation to make payment hereunder. 21. NO WARRANTIES BY LESSOR. LESSOR SUPPLIES THE EQUIPMENT AS IS AND NOT ----------------------- BEING THE MANUFACTURER OF THE EQUIPMENT, THE MANUFACTURER'S AGENT OR THE SELLER'S AGENT, MAKES NO WARRANTY OR REPRESENTATION, EITHER EXPRESS OR IMPLIED, AS TO THE EQUIPMENT'S MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, DESIGN, CONDITION, QUALITY, CAPACITY, MATERIAL OR WORKMANSHIP OR AS TO PATENT INFRINGEMENT OR THE LIKE, it being agreed that all such risks, as between Lessor and Lessee, are to be borne by Lessee. Lessee agrees to look solely to the Manufacturer or to suppliers of the Equipment for any and all warranty claims and any and all warranties made by the Manufacturer or the supplier of Lessor are hereby assigned to Lessee for the term of this Lease. Lessee agrees that Lessor shall not be responsible for the delivery, installation, maintenance, operation or service of the Equipment or for delay or inadequacy of any or all of the foregoing. Lessor shall not be responsible for any direct or consequential loss or damage resulting from the installation, operation or use of the Equipment or otherwise. 22. SECURITY INTEREST. ----------------- (a) To secure payment of the rent and its other obligations hereunder, Lessee hereby grants Lessor a security interest in all of Lessee's contract rights (and the proceeds thereof) under the following collateral (the "Collateral"): (i) Any and all User Leases, including any renewal or extension thereof; (ii) All rental or other payments due or to become due from User Lessees under the User Leases, including late charges, damages, insurance payments, or otherwise; (iii) Lessee's rights, if any, to the Equipment as now or later described in the schedules in accordance with the provisions of this Lease; (iv) Any and all collateral or security given for the performance of the obligations under any or all of the User Leases; and (v) Any and all proceeds from the User Leases, together with all of the rights and remedies of the Lessee under the User Leases. (b) Lessee agrees to take whatever steps are reasonably requested by Lessor to further evidence and perfect the Lessor's security interest granted herein, including, but not limited to, 12 executing and delivering a Collateral Lease Assignment to and for the benefit of Lessor contemporaneous with Lessee's execution and delivery hereof. 23. MISCELLANEOUS. ------------- (a) Consent. Unless otherwise expressly provided, wherever consent ------- or approval of either party is required herein, such consent or approval shall not be unreasonably withheld. (b) Counterparts. This Lease may be executed in several ------------ counterparts, each of which so executed shall be deemed to be an original, and in each case such counterparts shall constitute but one and the same instrument. (c) Severability. Any provision of this Lease which is prohibited or ------------ unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, Lessor and Lessee hereby waive any provision of law which renders any provision hereof prohibited or unenforceable in any respect. (d) Modification of Lease. No term or provision of this Lease may be --------------------- changed, waived, discharged, or terminated orally, but only by an instrument in writing signed by the party against whom the enforcement of the change, waiver, discharge or termination is sought. (e) Captions. The captions in this Lease are for convenience of -------- reference only and shall not define or limit any of the terms or provisions herein. (f) Governing Law. This Lease shall in all respects be governed by ------------- and construed in accordance with the laws of the Commonwealth of Virginia including all matters of construction, validity and performance. (g) Substitution of Equipment. Whenever Lessee elects to substitute ------------------------- equipment ("Substituted Equipment") as provided in Section 11(a) and (c) hereof, Lessee shall replace such item with any item or items of like kind equipment reasonably satisfactory to Lessor; provided, however, that (i) Lessee transfers to Lessor (by bill of sale or other documents necessary to effect such transfer) such Substituted Equipment, free and clear of all security interest, liens, leases, claims, charges and encumbrances, except as expressly permitted below, (ii) at the time of such replacement, the Substituted Equipment shall have an aggregate fair market value equal to or greater than the aggregate fair market value of the replaced Equipment (the "Replaced Equipment") immediately prior to the damage or destruction requiring its replacement; and (iii) the Substituted Equipment has the same cost recovery period under Section 168(c) of the Code as the Replaced Equipment and the substitution will be effectuated in accordance with, and qualify as, a "like kind exchange" pursuant to, and as defined in, Code Section 1031. Any item or items of Substituted Equipment may be subject to security interests, liens, or encumbrances, provided that the indebtedness relating to such security interest, liens or encumbrances, when added to all other indebtedness then outstanding on the Equipment (other than indebtedness on the Replaced Equipment), will not be in excess of the aggregate unpaid balance of the unpaid balance (principal and interest) outstanding on the Nonrecourse Note, and will be satisfied and 13 discharged in full by the payment of rent to be earned during the noncancellable terms of User Leases for the Equipment. For purposes hereof, a cancellation provision in a User Lease will not cause the otherwise non-cancelable terms thereof to be deemed cancelable provided that such cancellation provision requires that a termination or similar payment be made which will discharge and satisfy in full such outstanding indebtedness. Lessee shall give Lessor at least ten (10) days prior notice of any such substitution, which notice shall include (i) a description and appraisal (by an appraiser reasonably acceptable to Lessor) of the fair market value of the item or items of Replaced Equipment and proposed Substituted Equipment, (ii) copies of any and all leases, security agreements and other documents relating to security interest, liens, leases or encumbrances imposed or to be imposed, as permitted hereunder, on the item or items of proposed Substituted Equipment and (iii) a statement of the amounts secured by security interests, liens and encumbrances on the item or items to be replaced and on the proposed Substituted Equipment. The parties agree that, effective upon the substitution of Equipment in accordance with the provisions hereof, all incidents of Lessee's interest as Lessee hereunder in the Replaced Equipment ipso facto shall cease and terminate automatically and the Substituted Equipment shall become Equipment leased hereunder instead of the Replaced Equipment. In addition, effective upon such substitution, all of Lessor's right, title and interest in and to the Replaced Equipment shall be automatically assigned and shall pass to Lessee and Lessor shall have no further interest therein. Lessee and Lessor agree to execute and deliver such documents as are necessary to transfer title to and ownership of the Substituted Equipment to Lessor and title to and ownership of the replaced Equipment to Lessee. (h) Fair Market Value. For purposes hereof, the term "fair market ----------------- value" shall mean the purchase price or rental, as the case may be, that would be obtained in an arm's-length transaction between an informed and willing buyer or lessee under no compulsion to buy or lease and an informed and willing seller or lessor under no compulsion to sell or lease, as determined in the good faith exercise of the judgment of Lessor and Lessee at the applicable time. In the event the parties are unable to agree upon a fair market value of the Equipment, such value shall be determined in accordance with the foregoing definition by an independent appraiser to be mutually agreed upon by the parties or, failing such agreement, by a panel of three appraisers, one selected by Lessor, one selected by Lessee and a third selected by the first two, the cost of which will be deemed a remarketing expense payable out of the Equipment proceeds. (i) Legal Costs and Attorneys' Fees. Each of the parties hereto ------------------------------- agree that it shall pay directly any and all legal costs which it has incurred on its own behalf in the preparation of this Lease and other agreements pertaining to this Lease and any related transactions. In the event it becomes necessary for either party hereto to hire counsel to review or enforce any remedies arising out of any breach of this Lease, or if it becomes necessary for either party hereto to file suit to enforce this Agreement, or any provision contained herein, the party prevailing in such suit shall be entitled to recover, in addition to all other remedies or damages, as provided herein, reasonable attorneys' fees and costs incurred in such suit. (j) Other Documents: Expenses. Lessee agrees to sign and deliver to ------------------------- Lessor any additional documents reasonably deemed desirable by Lessor to effect the terms of the Master Lease or this Schedule including, without limitation, Uniform Commercial Code financing statements which Lessor is authorized to file with the appropriate filing officers. Lessee hereby irrevocably appoints Lessor as Lessee's attorney-in-fact with full power and authority in the place of Lessee and in the name 14 of Lessee to prepare, sign, amend, file or record any Uniform Commercial Code financing statements or other documents deemed desirable by Lessor to perfect, establish or give notice of Lessor's interests in the Equipment or any collateral as to which Lessee has granted Lessor a security interest. The signing or filing of Uniform Commercial Code financing statements and other recordings are undertaken as a precaution only since the parties intend this Schedule to be a lease transaction. Lessee shall pay upon Lessor's written request any actual out-of-pocket costs and expenses reasonably paid or incurred by Lessor in connection with the above terms of this section or the funding and closing of this Schedule. 15 IN WITNESS WHEREOF, the parties hereto have duly executed this Lease as of the date first above written. LESSOR: FA, INC. By: /s/ S. Craig Tompkins ------------------------------------------ Name: S. Craig Tompkins ------------------------------------------ Title: President ------------------------------------------ LESSEE: EQUIPMENT LEASING ASSOCIATES 1995-VI LIMITED PARTNERSHIP By: Management Associates Limited Partnership VIII, General Partner By: Managing Partners Corporation, General Partner By: /s/ Donald Butler ------------------------------------------ Name: Donald Butler ------------------------------------------ Title: Executive Vice President ------------------------------------------ 16 MASTER LEASE AGREEMENT SCHEDULE A See attached Equipment Schedules (12 pages). 17 EQUIPMENT SCHEDULES (The Equipment Schedules, submitted as exhibits to Exhibit A, Master Lease Agreement are omitted for purposes of this filing as it is written in French and would require translation. A copy is available at the Company's office.) 18 FA, Inc./Equipment Leasing Associates 1995-VI Limited Partnership ----------------------------------------------------------------- MASTER LEASE AGREEMENT ---------------------- SCHEDULE B ---------- I. RENT: The Fixed Rent specified under Section 2 of the Master Lease Agreement ---- shall be payable as follows:
Amount Due Date ------ -------- $288,989.14 December 31, 1996 $10,403,619.55 December 31, 1997 $10,403,619.55 December 31, 1998 $10,403,619.55 December 31, 1999 $10,403,619.55 December 31, 2000 $10,114,629.54 December 31, 2001
II. TERM: The term of this Lease shall commence on December 20, 1996 and ---- continue through December 20, 2001. III. DISCOUNT RATE: Ten Percent (10%) per annum. ------------- IV. SUPPLEMENTAL RENT: Lessor shall also be entitled to five per cent (5%) of ----------------- any and all remarketing proceeds from the Equipment with respect to the period from January 1, 1998 through December 31, 1998 for transactions wherein the original User Lease has expired and a new User Lease has commenced. 19 EX-10.29 6 NONRECOURSE PROMISSORY NOTE AS OF 12/20/96 Exhibit 10.29 NONRECOURSE PROMISSORY NOTE $38,989,635.00 Date: As of December 20, 1996 FOR VALUE RECEIVED, the undersigned, FA, INC. ("Payor"), with an address at 103 Springer Building, 3411 Silverside Road, Wilmington, Delaware 19810, promises to pay to the order of EQUIPMENT LEASING ASSOCIATES 1995-VI LIMITED PARTNERSHIP ("Payee"), a limited partnership organized and existing under the laws of the State of Delaware, in accordance with the terms and provisions set forth below, the principal sum of Thirty Eight Million Nine Hundred Eighty Nine Thousand Six Hundred Thirty Five Dollars ($38,989,635.00), together with interest on the outstanding principal from the effective date hereof at the rate of Ten percent (10%) per annum. --- ----- I. UNDERLYING TRANSACTIONS. Payor has as of this date purchased certain ----------------------- equipment described on Schedule A hereto (the "Equipment") from Payee, a portion of the purchase price for which is represented by the execution and delivery of this Nonrecourse Promissory Note (this "Promissory Note"). II. SECURITY. To secure payment of the amounts of principal and interest -------- due hereunder, the Payor has executed a Security Agreement with Payee granting a subordinate security interest in the Equipment to Payee. III. NONRECOURSE OBLIGATION. This Promissory Note is a negotiable, ---------------------- nonrecourse obligation of the Payor, and the Payee shall, in the event of a default hereunder, be entitled to look solely to the Equipment and other "Collateral" (as defined in and solely in accordance with the terms of the Security Agreement of even date herewith) for satisfaction and payment of the amounts due hereunder. Further, Payor shall have no personal liability whatsoever for: (i) payment of any indebtedness now or hereafter owing under or in connection with this Promissory Note and any other agreement relating thereto, (ii) any amounts owing under in connection with the Security Agreement of even date herewith, (iii) performance of any duty or obligation created or arising under, pursuant to or in connection with the Promissory Note, Security Agreement, and/or any other agreement relating thereto. IV. MANNER OF PAYMENT. The amounts of principal and interest due ----------------- hereunder shall be payable annually, in arrears, on a proportionate basis, compounded monthly and on the basis of a 360-day year of twelve 30-day months in United States currency remitted in accordance with the Schedule of Payments attached hereto as Schedule A. V. APPLICATION OF PAYMENTS. All payments under this Promissory Note shall ----------------------- be applied in satisfaction of the amount of interest accrued hereunder which is due and outstanding at the time of such payment. Only after all such interest has been paid shall the remainder, if any, be applied to reduce the then outstanding principal balance hereunder. VI. PLACE OF PAYMENT. All payments of this Promissory Note shall be made ---------------- at such place in the United States as Payee may from time to time designate by notice pursuant to Article XI hereof. -1- VII. PREPAYMENT. The amounts due under this Promissory Note may not be ---------- voluntarily prepaid without the written consent of Payee and must be mandatorily prepaid to the extent of any rents or other amounts received by Payor or its assigns under that certain Master Lease Agreement between Payor, as "Lessor," and Payee, as "Lessee," to the extent the same relate to the Equipment. VIII. DELINQUENT PAYMENTS. All amounts delinquent hereunder, whether of ------------------- principal or accrued interest, shall bear interest after the due date thereof at the rate of 10% per annum, computed on the basis of a 360-day year of twelve 30- --- ----- day months. Such interest shall accrue for every day such payment is overdue. IX. DEFAULT. Payor shall be deemed to be in default under this Promissory ------- Note upon the failure of Payor to pay any installment of interest or principal due hereunder in accordance with the terms and conditions hereof within fifteen (15) days after written notice of Payor's failure to pay any installment of interest or principal due hereunder. X. REMEDIES. If Payor shall be in default under this Promissory Note, -------- Payee shall have available to it all remedies available at law or in equity including the right to accelerate the payments due hereunder. XI. NOTICES. Any notice required or permitted to be given by Payor or ------- Payee pursuant to the terms of this Promissory Note shall be deemed given only if in writing when actually received by addressee or when mailed by certified or registered mail, return receipt requested, or foreign equivalent, addressed as follows: If to Payor: FA, Inc. 103 Springer Building 3411 Silverside Road Wilmington, Delaware 19810 If to Payee: Equipment Leasing Associates 1995-VI Limited Partnership 11130 Sunrise Valley Drive, Suite 206 Reston, Virginia 22091 The person and place to which notices are to be mailed to either party may be changed from time to time by such party by written notice to the other party. XII. SEVERABILITY. Except for section III, the invalidity or ------------ unenforceability of any provision of this Promissory Note shall not affect the validity or Enforceability of any other provision hereof. XIII. ASSIGNABILITY; SUCCESSORS AND ASSIGNS. This Promissory Note shall ------------------------------------- be binding upon Payor and shall inure to the benefit of Payee and its successors and assigns in the same manner and to the same extent and with like effect as if such successors and assigns were named in and made parties to this Promissory Note. XIV. ARTICLE HEADINGS. Article headings used herein are solely for ---------------- convenience of the parties hereto and shall not affect the interpretation or construction of this Promissory Note. -2- XV. APPLICABLE LAW. This Promissory Note shall be governed and construed -------------- for all purposes under and in accordance with the laws of the Commonwealth of Virginia applicable to contracts made and to be performed in such jurisdiction, without giving effect to the principles thereof with respect to the conflict of laws. XVI. NON-WAIVER. No term or condition of this Promissory Note can be ---------- waived except by the written consent of the Payee. Forbearance or indulgence by Payee in any regard whatsoever shall not constitute a waiver of the provisions of said terms or conditions, nor of any remedies otherwise available to Payee under this Promissory Note or at law or in equity. XVII. AMENDMENTS. This instrument shall not be amended, altered or ---------- changed without the express written consent of both parties. XVIII. CERTAIN PAYMENTS. Any payment by, or for the account of, Payor to ---------------- the holder of any First or Second Senior Lien (as said terms are defined in that certain Purchase and Sale Agreement of even date herewith between Payor, as Buyer, and Payee, as Seller) which is credited against principal of, or interest on, such Senior Lien, shall, as between Payor and Payee, be deemed to be a payment under this Promissory Note. IN WITNESS WHEREOF, the Payor has executed this instrument as of the date and year first above written. PAYOR: FA, Inc. By: /s/ S. Craig Tompkins ------------------------------- Title: President ------------------------------ -3- Fa, Inc./Equipment Leasing Associates 1995-VI Limited Partnership ----------------------------------------------------------------- NONRECOURSE PROMISSORY NOTE --------------------------- SCHEDULE A
SCHEDULE OF PAYMENTS: Amount* Due Date ------- -------- $288,989.14 December 31, 1996 $10,403,619.55 December 31, 1997 $10,403,619.55 December 31, 1998 $10,403,619.55 December 31, 1999 $10,403,619.55 December 31, 2000 $10,114,629.54 December 31, 2001
*Includes interest at 10% per annum. Equipment Schedule: See attached. (The Equipment Schedules, submitted as exhibits to the Nonrecourse Promissory Note are omitted for purposes of this filing as it is written in French and would require translation. A copy is available at the Company's office.) -4- EX-10.30 7 LEASE RENTAL PURCHASE AGREEMENT Exhibit 10.30 LEASE RENTAL PURCHASE AGREEMENT ------------------------------- This Purchase Agreement, dated as of the 31st day of December, 1996, by and between FA, INC., having an office and place of business at 103 Springer Building, 3411 Silverside Road, Wilmington, Delaware 19810, as seller (the "Seller"), and Ralion Financial Services, Inc., having an office and place of business at 54 Sasco Hill Road, Fairfield, Connecticut 06430, as buyer (the "Buyer"). WITNESSETH: ---------- WHEREAS, Seller is the owner of certain equipment described on Schedule A annexed hereto (the "Equipment"), which is presently being leased by Seller to Equipment Leasing Associates 1995-VI Limited Partnership the ("Lessee") pursuant to the lease described on Schedule A (the "Lease"); and WHEREAS, the Equipment and the Lessee's obligation to pay rent is encumbered by lien(s) (singly or collectively, as the case may be, the "Senior Lien"), in favor of the lender or lenders described on Schedule A with respect to the Equipment described therein (singly or collectively, as the case may be, the "Lender") including any purchase money lien to secure indebtedness incurred by Seller in connection with the Seller's acquisition of the Equipment; and WHEREAS, Seller desires to sell and Buyer desires to purchase all of Seller's right to receive Rent (as defined hereinbelow), certain Rent-Related Payments (as defined hereinbelow), and a certain 5% payment of remarketing proceeds payable from Lessee under the Lease as more fully identified in Schedule A and described in Section 1.1 below, on the terms set forth below; WHEREAS, Seller only intends to sell and Buyer only intends to purchase Seller's right to receive Rent and certain Rent-Related Payments under the Lease and not Seller's interest in the Equipment; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements hereinafter set forth, the parties agree as follows: 1. Sale of Assigned Rent. --------------------- 1.1 Definition of Rent. As used in this Purchase Agreement, the term ------------------ "Rent" shall mean and be limited to the periodic rental payments to be paid by Lessee under the Lease, and any late charges associated therewith under the Lease. 1.2 Definition of Rent-Related Payments. As used in this Purchase ----------------------------------- Agreement, the term "Rent-Related Payments" shall mean and be limited to the following payments that may be payable under the Lease, subject to the limitations set forth hereinbelow: insurance payments, termination payments, loss payments, including the right, if any, of the lessor under the Lease to receive from Lessee any amounts from the proceeds of Subleases of the Equipment. The foregoing payments shall constitute Rent-Related Payments: (a) only to the extent that such payments are on account of or in lieu of Rent, and (b) shall be limited to such amounts as may be necessary to compensate the owner of the Rent for its damages, if any, arising from -1- any cessation of payment of Rent, provided, however that such damages shall be limited to the present value of such owner's interest in the due and unpaid Rent after discounting the value of the due and unpaid Rent to present value. 1.3 Definition of Assigned Rent: As used in this Purchase Agreement, --------------------------- the term "Assigned Rent" shall mean and be limited to Seller's right, if any, to receive Rent and Rent-Related Payments under the Lease, which right is to be sold and assigned by Seller and purchased by Buyer pursuant to this Purchase Agreement. 1.4 Conveyance. Subject to the terms and conditions hereof, Seller ---------- hereby sells and assigns to Buyer, and Buyer hereby purchases from Seller, the Assigned Rent. Buyer acknowledges that the right to receive the Assigned Rent, and the Lease, are each encumbered by and subordinate to the rights of the Lender under the Senior Lien, and the rights of any Users under the User Leases. Seller further sells and assigns it interest in the 5% of remarketing proceeds to be paid to Seller by Lessee under the Master Lease Agreement. Notwithstanding anything herein to the contrary, Buyer does not assume, nor shall Lessee or any third party have the right to seek performance by Buyer of, any of Seller's obligations under the Lease, other than Seller's covenant of quiet enjoyment with respect to the Equipment. 1.5 Price. The purchase price to be paid by Buyer to Seller for the ----- Assigned Rent is the amount specified on Schedule A as the "full purchase price" therefor. Payment of the full purchase price is being made as follows: (a) by payment to Seller concurrently with the execution and delivery hereof, of the total amount specified in Schedule A as the "cash portion" (if any) by check payable to Seller; and (b) by Buyer's assumption, for the benefit of Seller, of all of Seller's outstanding obligations with respect to the "Applicable Indebtedness" as described in Schedule A. Buyer's assumption of the Applicable Indebtedness is further described in Section 5 of this Agreement. 1.6 Closing Date. The closing date (the "Closing Date") hereof, upon ------------ which the transaction described herein shall become effective, shall be December 31, 1996. 2. Representations, Warranties and Covenants of Seller. Seller --------------------------------------------------- represents, warrants and covenants to Buyer as follows: 2.1 Good Standing; Binding Obligation. Seller is a corporation duly --------------------------------- and validly organized and existing in good standing under the laws of the State of Delaware. Seller has full power and authority to enter into this Agreement. Seller had full power and authority to enter into the Lease and the transactions evidencing the Applicable Indebtedness at the time they were entered into. Seller has, and at all relevant times had, full power and authority to execute and deliver all other instruments and documents executed and delivered in connection with or relating to the transactions contemplated hereby and thereby, and to consummate the transactions contemplated hereby and thereby. This Agreement and the consummation of the transactions contemplated hereby, including the transactions creating or evidencing the Applicable Indebtedness and the Lease (collectively the "Underlying Agreements"), have been duly authorized by all necessary action of Seller, and each such agreement (including, without limitation, the Lease) has been duly executed and delivered by, and constitutes the legal, valid and binding obligations of, Seller, and to the best of Seller's knowledge, the other parties thereto, enforceable in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or similar laws relating to or affecting creditors' rights generally. There is no action, suit or proceeding pending against Seller and no law or any order, -2- writ, injunction, decree, rule or regulation of any court, administrative agency or other governmental authority which brings into question the validity of, or might in any way impair, the execution, delivery or performance by Seller of this Agreement or any of the Underlying Agreements. All approvals of and consents from governmental authorities and third parties required for the execution, delivery or performance by Seller of this Agreement and the Underlying Agreements have been (or will be) obtained and copies thereof have been (or will be) delivered to Buyer. 2.2 Inconsistent Agreements. The execution, delivery and performance by ----------------------- Seller of this Agreement and the transactions contemplated hereby, including under any of the Underlying Agreements, do not contravene, violate or conflict with any provisions of any law or any order, writ, injunction, decree, rule or regulation of any court, administrative agency or any other governmental authority applicable to Seller, and do not conflict with and are not inconsistent with, and will not result (with or without the giving of notice or passage of time or both) in a breach of, or constitute a default or require any consent not heretofore requested or obtained under, the terms of any of the Underlying Agreements, any credit agreement, lease, guarantee, document, agreement or instrument to which Seller is a party, by which Seller or its property is or may be bound, or to which Seller or its property may be subject and will not result in the creation of any lien, charge or encumbrance on the Assigned Rent, the Lease, or the Equipment or on any User Lease thereof, or be in violation of or beyond the authority conferred by Seller's agreement or certificate of limited partnership or any of Seller's other enabling or governing instruments. 2.3 Right to Receive Rent. On the date hereof, Seller shall, and hereby --------------------- does, transfer to Buyer the right to receive all Assigned Rent free and clear of all leases, liens, claims, charges, equities and encumbrances of any kind or nature whatsoever, except for the Applicable Indebtedness or as otherwise described herein or in Schedule A; neither the Lease nor the Applicable Indebtedness shall impair the consummation of the transactions contemplated hereby or impose obligations on the Buyer, other than those expressly agreed to in Sections 3.3 and 3.4 hereof. 2.4 Documentation. Seller will furnished to Buyer a true, correct and ------------- complete copy of each and every material document delivered to or by Seller in connection with the purchase of the Equipment by Seller and the right to receive Assigned Rent by Seller and the leasing of the Equipment pursuant to the Lease, and all material documents creating or relating to any lien, claim, charge, equity, encumbrance or transfer of title of any kind or nature concerning the Assigned Rent, the Lease, or the Equipment. Nothing has come to Seller's attention which would lead Seller to believe that (i) the Equipment is not in good working order, condition and appearance, or the Lease is not in full force and effect, or (ii) the sale of the Assigned Rent by Seller to Buyer hereunder, violates or infringes the rights of any party. 2.5 No Representations or Warranties by Seller. Buyer acknowledges ------------------------------------------- and agrees that Seller has not made, does not make and specifically negates and disclaims any representations, warranties, promises, covenants, agreements or guaranties of any kind or character whatsoever, whether express or implied, oral or written, past, present or future, of, as to, concerning or with respect to: (a) the value, nature, quality or condition of the Assigned Rents and the advisability of Buyer purchasing the Assigned Rents; (b) the profitability of purchasing the Assigned Rents; (c) Buyer affirms that it has not relied on Seller's skill or judgment to decide whether and under what conditions to purchase the Assigned Rents and further affirms that Seller has made no warranty that the purchase is appropriate or that the purchase will be economically viable; (d) the value, use, or quality of the Assigned Rents; -3- Buyer further acknowledges: (e) no person acting on behalf of Seller is authorized to make, and by execution of this Agreement Buyer acknowledges that no person has made, any representation, agreement, statement, warranty, guaranty or promise regarding the purchase to be made by Buyer or any transaction contemplated herein; and no such representation, warranty, agreement, guaranty, statement or promise if any, made by any person acting on behalf of Seller shall be valid or binding upon Seller unless expressly set forth herein; (f) it has been given the opportunity to inspect all aspects of Assigned Rents, including without limitation, all financial aspects of Assigned Rents and is relying solely on its own investigation of Assigned Rents and not on any information provided or to be provided by Seller. The provisions of this section 2.5 shall survive the closing or any termination of this Agreement. 2.6 Warranty Disclaimer. EXCEPT AS SET FORTH HEREIN SELLER MAKES NO ------------------- REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER. Seller shall in no event be liable to Buyer for any direct, indirect, special or consequential damages caused, directly or indirectly, by the Equipment or any inadequacy thereof for any purpose, or any deficiency or defect therein, by the use or maintenance thereof, or any repairs, servicing or adjustments thereto or by the failure of Lessee to make any payments of Assigned Rent for any reason, including the lack of creditworthiness of the Lessee or the User Lessees, or for any other reason. The provisions of this section 2.6 shall survive the closing or any termination of this Agreement. 3. Representations, Warranties and Covenants of Buyer. Buyer hereby -------------------------------------------------- represents, warrants and covenants to Seller as follows: 3.1 Binding Obligation. Buyer is duly organized and validly existing as a ------------------ corporation in good standing under the laws of the state of its incorporation. Buyer has full power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. This Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary action of Buyer and this Agreement constitutes the legal, valid and binding obligations of Buyer, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, reorganization, insolvency, moratorium, or similar laws relating to or affecting creditors' rights generally. There is no action, suit or proceeding pending against Buyer before or by any court, administrative agency or other governmental authority which brings in question the validity of, or might in any way impair, the execution, delivery or performance by Buyer of its obligations hereunder. No approval of, or consent from, any governmental authority or other third party is required for the execution, delivery or performance by Buyer of this Agreement. 3.2 Inconsistent Agreements. The execution, delivery and performance by ----------------------- Buyer of this Agreement and the transactions contemplated hereby do not contravene any law or any order, writ, injunction, decree, rule or regulation of any court, administrative agency or any other governmental agency, applicable to Buyer, and do not conflict with and are not inconsistent with, and will not result (with or without the giving of notice or passage of time or both) in a breach of or constitute a default or require any consent under, the terms of any credit agreement, indenture, mortgage, -4- agreement, deed of trust, security agreement, lease, guarantee or other instrument to which Buyer is a party or by which Buyer or its property is or may be bound, and will not be in violation of, or beyond the authority conferred by, Buyer's certificate of incorporation or other enabling or governing instruments of Buyer. 3.3 Quiet Enjoyment. So long as a User or Lessee shall not be in default --------------- under any of the provisions of a User Lease or Lease, as the case may be, Buyer shall take no action to interfere with such User's or Lessee's quiet and peaceful possession of the Equipment pursuant to such User Lease or Lease. 3.4 Priority of Liens. Buyer agrees, at the request of Seller, to execute ----------------- and deliver such documents, instruments and agreements as may be required to evidence, perfect and maintain the priority of the security interests represented by the Senior Lien including, without limitation, any subordination or security agreement in favor of Lender and any financing statements in form acceptable for recording in any appropriate jurisdiction. 3.5 Further Sales of the Right to Receive Rent. No sale, assignment, ------------------------------------------ transfer, encumbrance or hypothecation of the right to receive any Assigned Rent shall relieve Buyer of any of its obligations to Seller hereunder or otherwise. 4. Deliveries at Closing. --------------------- 4.1 Deliveries by Buyer. If required by the Lender, Buyer shall deliver ------------------- to Seller a document, acceptable in form and substance to the Lender, by which Buyer shall assume Seller's obligations with respect to the Applicable Indebtedness. 5. Specific Covenants. ------------------ (a) Of Buyer. Regardless of whether Buyer receives payment of Assigned -------- Rent, Buyer agrees (i) to pay or to cause or be paid on behalf of, as the case may be, the Lender, all principal of, all interest on, and all other sums due to the Lender on account of the Applicable Indebtedness, as and in the manner provided in the Underlying Agreements with respect to all Equipment, when due, (ii) to pay and perform when due, all of Seller's other obligations under the Underlying Agreements with respect to the Applicable Indebtedness, and (iii) not to modify or amend (or cause to be modified or amended) any of such Underlying Agreements without the prior written consent of Seller. Buyer's covenant and agreement as set forth in this paragraph 5(a) shall be a nonrecourse obligation and Buyer shall have no personal liability in connection therewith. However, if Buyer fails to comply with its covenant and agreement as set forth in this paragraph 5(a), then Buyer's right to receive and retain payment of the Assigned Rent shall immediately cease and terminate and such right shall revert to Seller in its entirety. In that event, Buyer shall thereafter forward any payment of Assigned Rent received by Buyer to Seller immediately upon receipt by Buyer, and Buyer shall be personally liable for its failure to do so. (b) Of Seller. If Seller shall receive any payment from a Lessee or User --------- which includes Assigned Rent, Seller will hold the same in trust for Buyer and will, immediately and without demand, deliver same to Buyer, or, if so provided in the Underlying Agreements, pay or cause such amounts to be paid to Lender in respect of the Applicable Indebtedness secured thereby. Seller shall, upon written request of Buyer, cause notice of the sale of the Assigned Rent hereby to Buyer and the assumption of Seller's obligations with respect to the Applicable Indebtedness to be served upon Lessee and any Lender, and to direct all payments of Assigned Rent hereafter to be made by Lessee to Buyer or as otherwise directed by Buyer or provided -5- in the Lease with respect thereto. 6. Assignment. Notwithstanding anything herein to the contrary, Buyer ---------- shall not, without the prior written consent of Seller, transfer or assign any or all of its rights under this Agreement, the Lease or any Underlying Agreements or User Lease to any third party. 7. Miscellaneous. ------------- 7.1 Assigns. Subject to the terms and conditions of Section 6 hereof, ------- this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 7.2 Survival. The agreements, representations, warranties and -------- covenants made herein shall survive the execution and delivery of this Agreement and the consummation of the transactions described herein. 7.3 Captions. The captions appearing in this Agreement and in any -------- other documents relating to this transaction are inserted only as a matter of convenience and in no way define, limit or describe the scope or intent of such sections or articles nor in any way affect this Agreement or any other documents relating to this transaction. 7.4 Modifications. This Agreement may not be altered, modified or ------------- amended except by a writing signed by the party against whom such alteration, modification or amendment is sought. 7.5 Further Assurances. The parties hereto agree to execute and ------------------ deliver, or cause to be executed and delivered, such further instruments or documents and take such other action as may be required to effectively carry out the transactions contemplated herein, provided the same do not impose any additional liabilities or obligations upon Buyer or Seller. 7.6 Entire Agreement. This Agreement embodies the entire agreement ----------------- between the parties relative to the subject matter hereof, and there are no oral or written agreements between the parties, nor any representations made by either party relative to the subject matter hereof, which are not expressly set forth herein. 7.7 Jury Waiver. SELLER AND BUYER DO HEREBY KNOWINGLY, VOLUNTARILY ------------ AND INTENTIONALLY WAIVE THEIR RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, OR UNDER OR IN CONNECTION WITH THIS AGREEMENT, THE DOCUMENTS DELIVERED BY Buyer AT CLOSING OR SELLER AT CLOSING, OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ANY ACTIONS OF EITHER PARTY ARISING OUT OF OR RELATED IN ANY MANNER WITH THIS AGREEMENT OR THE PROPERTY (INCLUDING WITHOUT LIMITATION, ANY ACTION TO RESCIND OR CANCEL THIS AGREEMENT AND ANY CLAIMS OR DEFENSES ASSERTING THAT THIS AGREEMENT WAS FRAUDULENTLY INDUCED OR IS OTHERWISE VOID OR VOIDABLE). THIS WAIVER IS A MATERIAL INDUCEMENT FOR SELLER TO ENTER INTO AND ACCEPT THIS AGREEMENT AND THE DOCUMENTS DELIVERED BY BUYER AT CLOSING AND SHALL SURVIVE THE CLOSING OR TERMINATION OF THIS AGREEMENT. 7.8 Notices. Any notice, request or other communication to either ------- -6- party by the other hereunder shall be deemed given on the earlier of the date the same is (i) actually received, or (ii) five (5) days after mailing by certified or registered mail, return receipt requested, postage prepaid and addressed to the party for which it is intended at the address set forth at the head of this Agreement. The place to which notices are to be given to either party may be changed from time to time by either party by like notice to the other. 7.9 Choice of Law. This Agreement shall be governed by and ------------- interested under the laws of the Commonwealth of Virginia without giving effect to the principles of conflicts of laws . 7.10 Severability. The invalidity or unenforceability of any ------------ provision of this Agreement shall not affect the validity or enforceability of any other provision. 7.11 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute on and the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered on the date first above written. SELLER: FA, INC. By: /s/ S. Craig Tompkins ------------------------------- Name: S. Craig Tompkins ------------------------------- Title: President ------------------------------- BUYER: Ralion Financial Services, Inc. By: /s/ John M. Costello ------------------------------- Name: John M. Costello ------------------------------- Title: President ------------------------------- -7- SCHEDULE A ---------- 1. LEASE: (a) That certain Master Lease Agreement dated as of December 20, 1996 between Lessee and Seller. (See Exhibit 10.29 of Reading Entertainment, Inc.'s December 31, 1996 10-K.) 2. USER(S) (IF OTHER THAN LESSEE): See attached Schedule. 3. USER LEASE(S) (IF OTHER THAN LEASE): See attached Schedule. 4. EQUIPMENT DESCRIPTION & LOCATION: See attached Schedule. 5. LENDER: (a) See attached Schedule for lenders with respect to User Leases. (b) ISO-trade with respect to certain remarketing proceeds from the Equipment. (c) Lessee, pursuant to that certain Nonrecourse Promissory Note (and related Security Agreement) dated as of December 20, 1996 issued by Seller to Lessee and payable out of the fixed rentals under the Lease. 6. APPLICABLE INDEBTEDNESS: That certain indebtedness in favor of the Lessee referenced in 5 (c). above, secured by the Lease referenced in 1 above and the Equipment. 7. FULL PURCHASE PRICE: See Schedule B. (The Schedules for Items 2., 3., 4., and 5.(a) submitted as exhibits to this Lease Rental Purchase Agreement are omitted for purposes of this filing as they are written in French and would require translation. A copy is available at the Company's office.) -8- SCHEDULE B ----------
FULL PURCHASE PRICE: $38,840,950.29 1. Cash payment on or before December 31, 1996 in the amount of: $32,000.00 2. Assumption of the Applicable Indebtedness in the outstanding amount of: $38,808,950.29
-9- EX-21.I 8 READING ENTERTAINMENT, INC. SUBSIDIARIES EXHIBIT 21(i) READING ENTERTAINMENT, INC. --------------------------- As of March 17, 1997
JURISDICTION OF CONSOLIDATED SUBSIDIARIES INCORPORATION 1. Angelika Cinemas, Inc. New York, USA 2. Angelika Film Centers LLC Delaware, USA 3. Australia Cinema Management New South Wales, Australia Pty Limited 4. Cine Vista Holdings, Inc. Delaware, USA 5. Entertainment Holdings, Inc. Delaware, USA 6. FA, Inc. Delaware, USA 7. The Port Reading Railroad Company New Jersey, USA 8. Puerto Rico Holdings, Inc. Delaware, USA 9. Railroad Investments, Inc. Delaware, USA 10. Reading Australia Pty Limited New South Wales, Australia 11. Reading Capital Corporation Delaware, USA 12. Reading Center Development Corp. Pennsylvania, USA 13. Reading Cinemas, Inc. Delaware, USA 14. Reading Cinemas of Puerto Rico, Puerto Rico, USA Inc. 15. Reading Cinemas U.K., Inc. Delaware, USA 16. Reading Company Pennsylvania, USA 17. Reading Country Cinemas Pty Ltd. New South Wales, Australia 18. Reading Holdings, Inc. Delaware, USA 19. Reading International Cinemas LLC Delaware, USA 20. Reading Investment Company Delaware, USA 21. Reading Merger Co. Pennsylvania, USA 22. Reading Properties Pty Limited Victoria, Australia 23. Reading Real Estate Company Pennsylvania, USA 24. Reading Resources, Inc. Delaware, USA 25. Reading Transportation Company Pennsylvania, USA 26. Trenton-Princeton Traction Company New Jersey, USA 27. Washington and Franklin Railway Pennsylvania and Company Maryland, USA 28. Western Gaming, Inc. Delaware, USA 29. Wilmington & Northern Railroad Pennsylvania and Delaware, USA
UNCONSOLIDATED MINORITY INTERESTS
1. Allentown Terminal Railroad Pennsylvania, USA Company 2. Baltimore and Cumberland Valley Pennsylvania, USA Railroad Extension Company 3. Pennsylvania-Reading Seashore New Jersey, USA Lines 4. Philadelphia Belt Line Railroad Pennsylvania, USA Company (The) 5. Trailer Train Company PARTNERSHIPS 1. Parametric Garage Associates 2. Rutherford Industrial Center Partners, G.P.
EX-23.1 9 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Forms S-8 No. 2-83039 and No. 33-57222) pertaining to the stock option plans of Reading Entertainment, Inc. of our report dated March 19, 1997, with respect to the consolidated financial statements of Reading Entertainment, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. /s/ Ernst & Young LLP Philadelphia, Pennsylvania April 15, 1997 EX-27 10 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 48,680 0 3,117 70 151 56,445 22,939 1,809 181,754 13,716 516 7,000 1 7 155,946 181,754 4,486 22,944 821 16,245 7,106 0 0 5,767 (1,236) 7,003 0 0 0 7,003 $1.11 $1.11 REPRESENTS PAR VALUE OF READING ENTERTAINMENT SERIES B PREFERRED STOCK
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