-----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, EOt+1GlgqmHjDFHmmq8lxSnS9ZWEbgTwjh49e7S8MRK/E6w3CDlPpBSvPE/uxIOY ij2dtPjZ2OkrXZ66lU8Vjw== 0000950109-96-005332.txt : 19960816 0000950109-96-005332.hdr.sgml : 19960816 ACCESSION NUMBER: 0000950109-96-005332 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: READING CO CENTRAL INDEX KEY: 0000082334 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE THEATERS [7830] IRS NUMBER: 236000773 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00649 FILM NUMBER: 96613881 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-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES SECURITIES EXCHANGE ACT OF 1934 For Quarterly period ended June 30, 1996 OR [] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition from ........ to ........ Commision file number 1-649 READING COMPANY (Exact name of registrant as specified in its charter) Pennsylvania 23-600773 (State of incorporation) (I.R.S. Employer Identification No.) One Penn Square West 30 South Fifteenth Street, Suite 1300 Philadelphia, Pennsylvania 19102-4813 (Address of principal executive offices) (Zip Code) Registrant's telephone number: 215-569-3344 Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No[_] There were 4,964,533 shares of Class A Common Stock and 8,678 shares of Common Stock outstanding as of July 27, 1996. INDEX READING COMPANY AND SUBSIDIARIES
PART I. - FINANCIAL INFORMATION PAGE - ------------------------------- ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets -- June 30, 1996 (Unaudited) and December 31, 1995................................................................... 3-4 Condensed Consolidated Statements of Operations -- Three Months and Six Months Ended June 30, 1996 and 1995 (Unaudited)............................................................ 5 Condensed Consolidated Statements of Cash Flows -- Three Months and Six Months Ended June 30, 1996 and 1995 (Unaudited)............................................................ 6 Notes to Condensed Consolidated Financial Statements (Unaudited)....................................... 7-20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 21-24 PART II. - OTHER INFORMATION - ---------------------------- Item 6. Exhibits and Reports on Form 8-K........................................................................ 25-28 Signatures....................................................................................................... 29
-2- PART I - Financial Information Item 1. Financial Statements Reading Company and Subsidiaries Condensed Consolidated Balance Sheets (in thousands, except shares and per share amounts)
- ------------------------------------------------------------------------------------------------- (Unaudited) June 30, December 31, 1996 1995* - ------------------------------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $32,431 $44,147 Available-for-sale securities 49 42 Amounts receivable 726 624 Due from affiliates 96 1,040 Restricted cash 360 360 Inventories 88 112 Prepayments and other current assets 479 498 Due from insurance companies 63 87 - ------------------------------------------------------------------------------------------------- Total current assets 34,292 46,910 - ------------------------------------------------------------------------------------------------- Investment in Australian joint venture 13,174 640 Other investments 7,084 1,771 Restricted cash 214 362 Real estate held for sale or development 1,107 1,110 Property and equipment: Buildings 733 733 Capitalized premises lease 538 538 Leasehold improvements 5,214 5,095 Equipment 3,761 3,787 Construction-in-progress 348 236 - ------------------------------------------------------------------------------------------------- 10,594 10,389 Less: Accumulated depreciation 1,469 1,176 - ------------------------------------------------------------------------------------------------- 9,125 9,213 Intangible assets: Beneficial leases - net of accumulated amortization of $1,827 15,081 15,538 in 1996 and $1,370 in 1995 - ------------------------------------------------------------------------------------------------- 45,785 28,634 - ------------------------------------------------------------------------------------------------- $80,077 $75,544 =================================================================================================
* The balance sheet at December 31, 1995 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See Notes to Condensed Consolidated Financial Statements. -3- Reading Company and Subsidiaries Condensed Consolidated Balance Sheets (continued) (in thousands, except shares and per share amounts)
- ------------------------------------------------------------------------------------------------------ (Unaudited) June 30, December 31, 1996 1995* - ----------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 1,955 $ 2,279 Accrued compensation 292 222 Accrued taxes and other 438 528 Film rent payable 783 299 Other liabilities 1,063 916 Note payable to affiliate 3,325 0 - ----------------------------------------------------------------------------------------------------- Total current liabilities 7,856 4,244 - ----------------------------------------------------------------------------------------------------- Capitalized lease, less current portion 519 521 Other liabilities 1,999 2,067 - ----------------------------------------------------------------------------------------------------- Total long term liabilities 2,518 2,588 - ----------------------------------------------------------------------------------------------------- Commitments and contingencies (See Note 10) Shareholders' equity Preferred stock, par value $1.00 per share: Authorized -- 5,000,000 shares Common stock, par value $.01 per share: Authorized -- 10,000,000 shares Issued 1996 -- 8,828 shares; 1995 -- 11,530 shares 1 1 Class A common stock, par value $.01 per share: Authorized -- 15,000,000 shares Issued 1996 -- 5,147,863 shares; 1995 -- 5,145,161 shares 51 51 Other capital 57,094 56,257 Retained earnings 15,237 15,035 Foreign currency translation adjustment (57) (10) Class A common stock in treasury, at cost: 1996 -- 183,480 shares; 1995 -- 183,397 (2,623) (2,622) - ----------------------------------------------------------------------------------------------------- Total shareholders' equity 69,703 68,712 - ----------------------------------------------------------------------------------------------------- $80,077 $75,544 =====================================================================================================
* The balance sheet at December 31, 1995 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See Notes to Condensed Consolidated Financial Statements. -4- Reading Company and Subsidiaries Condensed Consolidated Statements of Operations (in thousands, except shares and per share amounts)
Three Months Ended Six Months Ended June 30, June 30, - -------------------------------------------------------------------------------------------------------------- 1996 1995 1996 1995 - -------------------------------------------------------------------------------------------------------------- REVENUES: Theater: Admissions $2,781 2,376 $5,557 $4,637 Concessions 1,043 901 2,064 1,710 Advertising and other 174 150 388 294 Real estate 70 68 144 135 Interest and dividends 491 594 1,076 1,103 Equity in earnings of affiliate 1,433 0 1,433 0 Other 9 472 24 490 - -------------------------------------------------------------------------------------------------------------- 6,001 4,561 10,686 8,369 - -------------------------------------------------------------------------------------------------------------- EXPENSES: Theater costs 3,141 2,586 6,112 4,917 Theater concession costs 179 153 347 293 Depreciation and amortization 386 341 772 678 General and administrative 917 1,066 2,087 2,004 Equity loss from Australian theater developments 52 0 307 0 - -------------------------------------------------------------------------------------------------------------- 4,675 4,146 9,625 7,892 - -------------------------------------------------------------------------------------------------------------- Income before income taxes 1,326 415 1,061 477 Income tax provision 13 14 22 155 - -------------------------------------------------------------------------------------------------------------- Net income $1,313 $401 $1,039 $322 ============================================================================================================== Per share information: Net income $0.26 $0.08 $0.21 $0.06 ============================================================================================================== Average shares outstanding 4,973,222 4,973,368 4,973,241 4,973,398 ==============================================================================================================
See Notes to Condensed Consolidated Financial Statements. -5-
Reading Company and Subsidiaries Condensed Consolidated Statement of Cash Flows (Unaudited) (in thousands) Six Months Ended June 30, - ------------------------------------------------------------------------------------- 1996 1995 - ------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 1,039 $ 322 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation 293 231 Amortization 476 455 Deferred rent expense 82 82 Equity in earnings from affiliate (1,433) 0 Equity loss from Australian theater developments 307 0 Deferred income tax expense 0 132 Changes in operating assets and liabilities: Increase in amounts receivable (102) (338) Decrease in inventories 24 4 (Increase) decrease in prepaids and other current assets (72) 145 Decrease in insurance proceeds receivable 24 514 Decrease in accounts payable and accrued expenses (344) (316) Increase in film rent payable 484 233 Decrease in other liabilities (3) (206) Other, net 54 (24) - -------------------------------------------------------------------------------------- Net cash provided from operating activities 829 1,234 - -------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of property and equipment (206) (270) Investment in Australian joint venture (See Note 5) (12,888) 0 Purchase of Citadel preferred stock option (See Note 4) (50) 0 Angelika acquisition organization costs (See Note 4) (231) 0 Net proceeds from real estate joint venture investments 0 185 Decrease in restricted cash 148 60 Purchases of available-for-sale securities (91) (451) Sales and maturities of available-for-sale securities 84 26,051 Decrease in due from affiliate 944 0 - ------------------------------------------------------------------------------------- Net cash (used for) provided from investing activities (12,290) 25,575 - ------------------------------------------------------------------------------------- FINANCING ACTIVITIES Payments of debt financing costs (254) 0 Purchase of treasury stock (1) 0 - ------------------------------------------------------------------------------------- Net cash used for financing activities (255) 0 - ------------------------------------------------------------------------------------- (Decrease) increase in cash and cash equivalents (11,716) 26,809 Cash and cash equivalents at beginning of year 44,147 9,413 - ------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 32,431 $36,222 =====================================================================================
See Notes to Condensed Consolidated Financial Statements. -6- READING COMPANY AND SUBSIDIARIES Notes to Condensed Financial Statements (unaudited) June 30, 1996 (amounts in tables in thousands) NOTE 1 -- OWNERSHIP AND BASIS OF PRESENTATION Reading Company (the "Company") has operated motion picture exhibition theaters in leased locations in the Commonwealth of Puerto Rico since the acquisition of Theater Acquisitions of Puerto Rico, Inc. ("TAPR") in 1994. In November 1995, the Company and Craig Corporation ("Craig"), currently the owner of approximately 52.5% of the Company's capital stock, formed Reading International Cinemas LLC ("Reading International"), a limited liability company owned equally by the Company and Craig which has initiated theater development activities in Australia. The Company's remaining real estate activities include the managed sale of certain of its real properties, the possible future development of certain center city Philadelphia properties and participation in two real estate joint ventures. The condensed consolidated financial statements of Reading Company and Subsidiaries ("the Company") include the accounts of Reading Company and its majority-owned subsidiaries. Significant intercompany transactions and accounts have been eliminated. Certain amounts in previously issued financial statements have been reclassified to conform with current classifications. TAPR was acquired as of July 1, 1994 and the results of TAPR have been consolidated with the Company's operating results since that date (See Note 3). On December 31, 1994, TAPR was merged into its parent corporation, Reading Cinemas of Puerto Rico, Inc. ("RCPR") with RCPR the surviving corporation and the operating name changed to Cine Vista (unless otherwise required by the context, TAPR, RCPR, and Cine Vista may be used interchangeably herein). The financial statements have been prepared in accordance with generally accepted accounting principles for interim information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments of a recurring nature considered necessary for a fair presentation of the results for the interim periods presented have been included. Operating results for the six months ended June 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS: For purposes of the Balance Sheet and Statement of Cash Flows, the Company considers all highly liquid investments with maturities of three months or less at the time of acquisition to be cash equivalents. Cash equivalents are stated at cost plus accrued interest, which approximates market value, and consist principally of federal agency securities and short-term money market instruments. AVAILABLE-FOR-SALE SECURITIES: Management classifies government securities held by the Company with maturities in excess of three months at the time of purchase as available-for-sale as such investments together with "Cash and cash equivalents" are expected to be used to fund expansion of theater operations, acquisition or other development activities. -7- READING COMPANY AND SUBSIDIARIES Notes to Condensed Financial Statements (unaudited) June 30, 1996 (amounts in tables in thousands) USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVENTORIES: Inventories are comprised of confection goods used in Cine Vista's operations and are stated at the lower of cost (first-in, first-out method) or net realizable value. INCOME PER SHARE: Income per share (Common Stock and Class A Common Stock) is calculated by dividing net income (loss) by the aggregate of the weighted average shares outstanding during the period and the dilutive effect, if any, of common stock equivalents that are outstanding. There were 359,732 and 374,732 Class A Common shares issuable under stock option plans on June 30, 1996 and 1995, respectively. These options were anti-dilutive and were therefore excluded from the per share calculation. PROPERTY AND EQUIPMENT: Property and equipment is carried at cost. Depreciation of buildings, capitalized premises lease, leasehold improvements and equipment is recorded on a straight line basis over the estimated lives of the assets or, if the assets are leased, the remaining lease term (inclusive of options, if likely to be exercised), whichever is shorter. The estimated useful lives are generally as follows: Building and Improvements 40 years Equipment 15 years Furniture and Fixtures 7 years Leasehold Improvements 20 years INTANGIBLE ASSETS: Intangible assets are comprised of beneficial theater leases used in Cine Vista's operations. The amount of the TAPR purchase price ascribed to the beneficial leases was determined by an independent appraiser by computing the present value of the excess of market rental rates over the rental rates in effect under TAPR's leases at the time of the Company's acquisition of TAPR and allocating such amount as a component of the purchase price of TAPR. The beneficial leases are amortized on a straight-line basis over the remaining term of the underlying leases which approximates 17 years. TRANSLATION OF NON-U.S. CURRENCY AMOUNTS: The financial statements and transactions of Reading International's (See Note 5) Australian operations are maintained in their functional currency (Australian dollars) and translated into U.S. dollars in accordance with SFAS No. 52 "Foreign Currency Translation". Assets and liabilities are translated at exchange rates in effect at the balance sheet date and shareholders' equity is translated at historical exchange rates. Revenues and expenses are translated at the average exchange rate for the period. Translation adjustments are reported as a separate component of shareholders' equity. NOTE 3 -- ACQUISITION OF CINE VISTA Effective July 1, 1994, the Company acquired TAPR from Theater Acquisitions, LP ("TALP") for an aggregate cash purchase price of approximately $22,700,000, inclusive of acquisition costs of $323,000. Cine Vista operates motion picture exhibition theaters in seven leased locations with a total of 44 screens in the Commonwealth of Puerto Rico. At the time of its acquisition, TAPR operated 36 screens in six leased locations. The acquisition was accounted for using the purchase method and TAPR's operating results since July 1, 1994 have been consolidated with the operating results of the Company. -8- READING COMPANY AND SUBSIDIARIES Notes to Condensed Financial Statements (unaudited) June 30, 1996 (amounts in tables in thousands) The purchase price was subject to the satisfaction of certain contingencies in accordance with the provisions of a purchase agreement by and among TAPR, TALP and the Company dated July 1, 1994 (the "Purchase Agreement"). The landlord of one of Cine Vista's theaters has the right to terminate the lease relating to space presently housing two theaters, subject to six months notice. Accordingly, $1 million of the purchase price was escrowed and was payable over 36 months provided the landlord did not cancel the lease during such period or assert other claims relating to the lease, in which case the escrow is available for set off. The landlord has asserted certain claims relating to the computation of the rent and the Company and TALP therefore amended the terms under which the payments are made from the escrow. Under amended terms, payments of $30,000 are paid monthly to TALP. This escrow, which is invested in short term commercial paper, has been classified as "Restricted cash." At June 30, 1996, $557,000 was due to TALP under this arrangement and has been classified as an "Other liability" (See Note 10). Cine Vista currently has three new theaters under development and is seeking additional theater sites in Puerto Rico. NOTE 4 -- INVESTMENTS On November 8, 1995, the Company acquired from a major bank, for $1,285,000, a judgement (the "Angelika Judgement") encumbering, among other things, a controlling interest in Angelika Film Centers, Inc. ("AFCI") which has as its principal asset a Manhattan multiplex theater, the Angelika. The judgement was acquired as part of the Company's plan to acquire, in conjunction with Manhattan-based City Cinemas Corporation ("City Cinemas") (James J. Cotter, Chairman of the Company, has an ownership interest in City Cinemas), a controlling interest in the Angelika. The Company also has acquired options to purchase shares representing 5/13ths of the voting power of AFCI and to obtain certain other creditor claims against AFCI. In July 1996 the Company signed a definitive purchase agreement to acquire the Angelika, pursuant to which the Company will, in effect, receive a credit against the purchase price equal to the amount of the judgement, plus interest thereon at a rate of 9% per annum. On March 29, 1996, the Company purchased from Craig 1,564,473 shares of the common stock of Citadel Holding Corporation, ("Citadel" and the "Citadel Common Stock", respectively) for an aggregate purchase price of $3,324,505, representing slightly less than $2.125 per share and ownership of approximately 26.1% of Citadel Common Stock. The Company paid Craig for the Citadel Common Stock with a five year unsecured promissory note (the "Reading Note") which provides for the payment of interest at a rate equal to LIBOR plus 2.25%. The Reading Note is recorded on the Condensed Consolidated Balance Sheet at June 30, 1996 as "Note payable to affiliate" and was retired on July 29, 1996. The Company accounts for its investment in the Citadel Common Stock by the equity method. Citadel's net earnings for the three months ended June 30, 1996 were $5,541,000, inclusive of revenues of $1,573,000, 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 purpose of previously deferred proceeds from the bulk sale of loans by a previously owned subsidiary of Citadel. Citadel's net income available to common stockholders was $5,500,000 of which the Company's share for the same period was $1,434,000 which amount is included in the Condensed Consolidated Statement of Operations for the six months ended June 30, 1996. Pro forma operating results reflecting the acquisition of Citadel are set forth below for the six months ended June 30, 1996 and 1995. For purposes of preparing the pro forma operating statements, the acquisition of the Citadel investment was assumed to be completed at the beginning of each period presented and certain adjustments have been made, including reductions in "Interest and dividend" income and the recording of interest expense resulting from payment of the purchase price. -9- READING COMPANY AND SUBSIDIARIES Notes to Condensed Financial Statements (unaudited) June 30, 1996 (amounts in tables in thousands)
Six Months Ended June 30, 1996 June 30, 1995 Revenues $10,739 $8,707 ================ ================ Net income $ 1,029 $ 526 ================ ================ Per Share: Net income: $ .21 $ .11 ================ ================
The Company also acquired from Craig (for $50,000) a one year option to acquire, at fair market value, as determined by an investment banker selected by the parties, 1,329,114 shares of the 3% Cumulative Voting Convertible Preferred Stock, stated value $3.95 per share, of Citadel and an option to acquire, under certain circumstances, a warrant to acquire 666,000 shares of Citadel Common Stock at an exercise price of $3 per share. Management believes that the June 30, 1996 carrying amounts of the above- mentioned investments and the Company's other investments totalling $661,000, approximate fair value. NOTE 5 -- READING INTERNATIONAL CINEMAS LLC In November 1995, the Company and Craig formed Reading International to develop and operate multiplex cinemas in Australia and other markets. A wholly owned subsidiary of Reading International has retained the services of several executive employees in Australia who provide services with respect to such Australian operations on a full time or substantially full time basis. Reading International is equally owned by the Company and Craig. On March 29, 1996, the Company and Craig entered into a capital funding agreement (the "Capital Funding Agreement") with respect to Reading International pursuant to which they agreed to increase the capital committed by the Company and Craig to Reading International from $10 million to approximately $103 million through a combination of cash contributions and secured capital funding undertakings. Under the terms of the Capital Funding Agreement, the Company and Craig each immediately contributed to Reading International $12,500,000 in cash, for an aggregate $25,000,000. In addition, the Company and Craig have undertaken to contribute up to an additional $37,500,000 each, for an aggregate future commitment of $75,000,000 on an as needed basis. The commitments of the Company and Craig are secured by various assets of the two parties. The collateral pledged by Craig was reviewed by an independent committee of the Company's Board of Directors comprised of outside directors who are unaffiliated with Craig, and found to be adequate to secure Craig's commitment under the Capital Funding Agreement. The Company pledged its interest in Cine Vista and government agency securities. The Company may substitute collateral for the Funding Commitment, provided that the fair market value of the collateral substituted is equal to at least 125% of the Funding Commitment or, in the case of government or government agency securities, equal to 100% of the Funding Commitment. -10- READING COMPANY AND SUBSIDIARIES Notes to Condensed Financial Statements (unaudited) June 30,1996 (amounts in tables in thousands) The Company accounts for its investment in Reading International and its foreign subsidiaries by the equity method. Summarized financial information for Reading International as of June 30, 1996 is as follows: Cash and cash equivalents $ 12,114 Other current assets 776 ---------- Total current assets 21,890 Property and developments 7,922 Other noncurrent assets 181 ---------- Total noncurrent assets 8,103 ---------- Total assets $ 29,983 ========== Current liabilities 3,644 Shareholders' equity 26,349 ---------- Total liabilities and shareholder's equity $ 29,993 ==========
Reading International's net loss for the six months ended June 30, 1996 was $614,000, consisting primarily of general and administrative expenses and development costs incurred with respect to its theater development activities. The Company's share of the loss from Reading International was $307,000, which is included in the Consolidated Statement of Operations for the six months ended June 30, 1996. As of June 30, 1996, advances and contributions amounting to approximately $27,856,000 have been made to Reading International by Reading and Craig. Pursuant to a land purchase contract, Reading International is required to make an installment payment of $3,326,000 on December 20, 1996 which amount is included in current liabilities on Reading International's balance sheet at June 30, 1996. NOTE 6 -- LEASES Cine Vista conducts all of its operations in leased premises. The leases relate to motion picture theaters with remaining terms of approximately 7 to 26 years with certain leases containing options to extend the leases for up to an additional 30 years. The minimum remaining lease term, inclusive of any renewal options, for any of Cine Vista's theaters is approximately 17 years. Cine Vista also leases office, warehouse space and various equipment. Certain theater leases provide for contingent rentals based upon a specified percentage of theater revenues with a guaranteed minimum. Performance under one lease has been guaranteed by the Company. Substantially all of the leases require the payment of property taxes, insurance and other costs applicable to the property. With the exception of one capital lease, all leases are accounted for as operating leases. Cine Vista determines annual base rent expense by amortizing total minimum lease obligations on a straight-line basis over the lease terms. Cine Vista's future minimum lease payments, by year and in the aggregate, under noncancellable operating leases and the capital lease consist of the following at June 30: -11- READING COMPANY AND SUBSIDIARIES Notes to Condensed Financial Statements (unaudited) June 30,1996 (amounts in tables in thousands)
CAPITAL OPERATING LEASE LEASES ----- ------ 1997 $ 95 $ 1,315 1998 95 1,301 1999 95 1,426 2000 95 1,401 2001 95 1,401 Thereafter 1,211 13,826 ---------- ---------- Total net minimum lease payments 1,686 $20,670 ========== Less amount representing interest (1,163) ---------- Present value of net minimum lease payments under capital lease $ 523 ==========
In June 1995, Cine Vista entered into a lease agreement for a new six-plex motion picture theater. The lease provides for a 20-year term with an average annual base rent of approximately $185,000 with options to extend the lease up to an additional 10 years. The lease also provides for contingent rentals based upon a specified percentage of theater revenues with a guaranteed minimum and requires the payment of property taxes, insurance and other costs applicable to the property. The lease will be effective after completion of construction of the new theater. Cine Vista is responsible for certain construction costs of the theater which are presently estimated to total $1.2 million. Completion of construction and commencement of theater operations is scheduled to occur in 1996. NOTE 7 -- REAL ESTATE HELD FOR SALE OR DEVELOPMENT "Real estate held for sale or development" at June 30, 1996 is carried at the lower of cost or estimated net realizable value and is classified as a noncurrent asset due to the inherent difficulty in estimating the timing of future sales. The Company is exploring development and sale options for its center city Philadelphia properties which are adjacent to the Pennsylvania Convention Center site and is actively seeking buyers for its properties located outside center city Philadelphia. -12- READING COMPANY AND SUBSIDIARIES Notes to Condensed Financial Statements (unaudited) June 30,1996 (amounts in tables in thousands) NOTE 8 -- OTHER LIABILITIES Other liabilities consisted of the following:
June 30, December 31, 1996 1995 --------------- --------------- Reserve for guarantee obligations of SWS Industries, Inc. (See Note 10) $ 406 $ 406 Obligations related to past railroad operations and environmental issues (See Note 10) 1,248 1,251 Cine Vista deferred purchase price (See Note 3) 557 707 Minimum rent obligations 329 247 Other 522 372 --------------- --------------- 3,062 2,983 Less estimated current portion (1,063) (916) --------------- --------------- $ 1,999 $2,067 =============== ===============
NOTE 9 -- INCOME TAXES The Company accounts for income taxes under SFAS No. 109 "Accounting Income Taxes". Under SFAS No. 109, an income tax provision is recorded in the statement of operations using the enacted federal rates. Effective December 31, 1981, after approval by its shareholders, the Company eliminated its accumulated deficit by a charge to "Other capital." This quasi-reorganization did not require the restatement of any assets or liabilities or any other modification of capital accounts. Tax benefits realized from the carryforwards of pre-quasi- reorganization losses have been included in the determination of net income and then reclassified from "Retained earnings" to "Other capital". Had such tax benefits been excluded from net income, the Company would have reported net income of $202,000 or $.04 per share for the six months ended June 30, 1996 and a net loss of $43,000 or $.01 per share for the six months ended June 30, 1995. At December 31, 1995, net operating loss carryforwards totalled $162.7 million of which $123.1 million expires at the end of 1996 unless utilized prior thereto and $39.6 million will expire in various amounts between 1997 and 2009 unless utilized prior thereto. -13- READING COMPANY AND SUBSIDIARIES Notes to Condensed Financial Statements (unaudited) June 30,1996 (amounts in tables in thousands) Carryforwards and temporary differences which give rise to the deferred tax asset are as follows:
June 30, December 31, 1996 1995 ------------ ------------- Net operating loss carryforwards $ 54,581 $ 55,325 Reserves 1,004 1,004 Other, net 242 242 ------------ ------------- Gross deferred asset 55,827 56,571 Valuation allowance (55,827) (56,571) ------------ ------------- Net deferred asset $ 0 $ 0 ============ =============
Based on an analysis of the likelihood of realizing the Company's gross deferred tax assets (taking into consideration applicable statutory carryforward periods), the Company concluded that under SFAS No. 109, a valuation allowance for the entire asset was necessary. The Company is required to pay federal alternative minimum tax ("AMT"). AMT is calculated separately from the regular federal income tax and is based on a flat rate applied to a broader tax base. Amounts payable thereunder cannot be totally eliminated through the application of net operating loss carryforwards. The Company recorded AMT expense of $22,000 and $23,000 in the six months ended June 30, 1996 and 1995, respectively. Upon adoption of SFAS No. 109 in 1993, a deferred tax asset of $132,000 was recorded for the tax benefits which were determined by management to be more likely than not to be realized from the Company's net operating loss carryforwards. The Company recorded a $132,000 tax provision in the Condensed Consolidated Statement of Operations for the six months ended June 30, 1995 related to the realization of such tax benefits in that period. NOTE 10-- COMMITMENTS AND CONTINGENCIES SWS Industries, Inc. - -------------------- The Company sold a subsidiary, SWS Industries, Inc. ("SWS"), in 1987. SWS subsequently filed for bankruptcy in 1988. Under the terms of the SWS sales agreement, the Company remained liable as guarantor on various performance bonds issued on behalf of SWS. The Company's liability under the performance bond guarantees has been reduced as the related contracts have been completed or settled. Completion activities will continue throughout 1996. Management believes the remaining reserve at June 30, 1996 is adequate for the remaining obligations of the Company. Cine Vista - ---------- A landlord of Cine Vista has alleged that Cine Vista underpaid rent by approximately $587,000 for the thirty-six month period ended June 30, 1996. Cine Vista is finalizing a settlement of this claim under which Cine Vista will pay approximately $130,000 and the former owner of Cine Vista will pay approximately $220,000. Future rental rates may also increase as a result of the settlement. A provision for the settlement has been reflected in Cine Vista's financial results for the six months ended June 30, 1996. -14- READING COMPANY AND SUBSIDIARIES Notes to Condensed Financial Statements (unaudited) June 30, 1996 (amounts in tables in thousands) Historical Railroad Operations - ------------------------------ The Company is a defendant in various personal injury legal actions relating to its railroad operations prior to reorganization and has insurance coverage relating to such actions. In accordance with the provisions of a 1990 settlement agreement (the "Settlement Agreement") with its insurance carriers, the Company receives quarterly reimbursement for certain personal injury legal actions. At June 30, 1996, $63,000 was reimbursable to the Company for amounts expended in defense and settlement of such actions. This amount has been classified as "Due from insurance companies." Three participants in the insurance settlement are insolvent. Unreimbursed claims insured by these insolvent companies totaled $64,000 from 1992 through June 30, 1996. The Company believes that it may be entitled to reimbursement of such amounts from the other parties to the agreement and may request an arbitration hearing on such matters. Based upon the backlog of pending personal injury cases and the Company's experience in settling such cases, the Company has established a reserve of $146,000 reflecting the potential effect of such insolvencies on future insurance reimbursement if no recovery is received from either the insolvent carriers or the other parties to the Settlement Agreement. The reserve associated with such insolvencies may increase if additional claims are filed; however, the Company does not believe that such amount will be material. Environmental - ------------- The Company and a wholly-owned subsidiary, Reading Transportation Company ("RTC"), have each been advised by the Environmental Protection Agency ("EPA") that they are potentially responsible parties ("PRPs") under environmental laws including Federal Superfund legislation ("Superfund") for a site located in Douglassville, Pennsylvania. The EPA issued an Administrative Order under Superfund against 34 PRPs requiring, among other things, that the named parties be required to incinerate materials at the site pursuant to a June 30, 1989 Record of Decision ("ROD"). The ROD estimated that the incineration would cost approximately $53 million. Thirty-six PRPs were also named in a civil action brought by the United States Government which seeks to recover alleged costs incurred at the site by the United States of approximately $22 million. Reading and RTC have each been named in a third-party action instituted by the majority of the 36 PRPs sued by the United States. The actions instituted against the Company and approximately 300 PRPs seek to have the parties contribute to reimbursement for past costs and any costs associated with further remediation at the site. During 1994, based upon the Company's and counsel's evaluation of possible outcomes in the matter, the Company increased its "Provision for environmental matters" by $1,200,000. In September 1995, the federal district court judge who presided over Reading's reorganization ruled that all liability asserted against Reading relating to the site was discharged pursuant to the consummation order issued in conjunction with the Company's amended plan of reorganization on December 31, 1980. The United States Department of Justice and a named defendant in the above described Administrative Order have appealed the decision and the appeal was heard in July 1996. The judge's decision did not affect the potential liability of RTC for the site. RTC has no assets and therefore cannot fund a settlement or judgement relating to this matter and the Company believes that the potential liability of RTC, if any, is not in excess of $300,000. Based upon the appeal and possible alternate attempts by the PRPs to obtain Reading's participation in funding for the site as well as the existence of the other environmental matters set forth below, the Company has not reduced its "Provision for environmental matters." The Company is a party to a consent decree relating to a Superfund site located on land owned by the Company. Apart from future operation and maintenance expenses ("O&M"), remediation is complete. During 1994, the Company paid approximately $106,000 as its estimated share of ten years of O&M and charged such amount to "Provisions for environmental matters" expense. The Company believes that the amounts expended to -15- READING COMPANY AND SUBSIDIARIES Notes to Condensed Financial Statements (unaudited) June 30, 1996 (amounts in tables in thousands) date will be adequate to fund O&M at the site. If additional amounts are required, such amounts would not be material. In 1991, the Company filed a lawsuit against the Southeastern Pennsylvania Transportation Authority ("SEPTA"), Conrail, the City of Philadelphia, and other parties which sought to recover costs expended by the Company in conjunction with the cleanup of polychlorinated biphenyls ("PCBs") in the Reading Terminal Train Shed and a portion of the viaduct south of Vine Street. In January 1996, the Company and several parties agreed to settle this litigation by providing for the Company to receive payments totalling $2.35 million which amount the Company anticipates receiving in 1996. The parties to the settlement also agreed to pay an amount ranging from 52% to 55% of certain future costs the Company may incur in cleaning environmental contamination on one of its other properties, the Viaduct, which the Company believes may be contaminated by PCBs resulting from former railroad operations on that property conducted by, or on behalf of the Reading Railroad, Conrail, the City of Philadelphia or the SEPTA. The Company has advised the Environmental Protection Agency of the potential contamination. The Company has not determined the scope and extent of any such PCB contamination. However, the Company has been advised by counsel that, given the lack of regulatory attention to the Viaduct in the eleven years which have elapsed since EPA was notified of the likelihood of contamination, it is unlikely that the Company will be required to decontaminate the Viaduct or incur costs related thereto. Prior to the Company's reorganization, the Company had extensive railroad and related operations. Such operations could have contributed to environmental contamination of properties now owned by the Company, previously sold or leased by the Company, or to which the Company, prior to its reorganization, sent waste. The ultimate extent of liabilities, if any, with respect to such matters, as well as the timing of cash disbursements, if any, cannot be determined. However, management is of the opinion that while the ultimate liability resulting from such matters could have a material effect upon the results of operations in a given year, they will not have a material adverse effect upon the Company's financial position or liquidity. The following is an analysis of the Company's accrual for environmental claims: Balance at January 1, 1994 $ 336 Provisions 1,306 Payments (133) ---------- Balance at December 31, 1994 1,509 Provisions 0 Payments (248) ---------- Balance at December 31, 1995 1,261 Provisions 0 Payments (3) ---------- Balance at June 30, 1996 $ 1,258 ==========
-16- READING COMPANY AND SUBSIDIARIES Notes to Condensed Financial Statements (unaudited) June 30, 1996 (amounts in tables in thousands) NOTE 11 -- RELATED PARTY TRANSACTIONS In 1994, 1995 and 1996, the Company's Board of Directors voted to waive the transfer restrictions imposed by the provisions of the Company's Class A Common Stock to the extent necessary to permit James J. Cotter, Chairman of the Board of Directors of the Company and Craig, to acquire additional shares of the Company's Class A Common Stock. The transfer provisions prohibit a party from acquiring more than 4.75% of the Company's outstanding capital stock without the permission of the Company's Board of Directors and are intended to assure the continuing availability of the Company's tax loss carryforwards by precluding a change in control which could limit the value of the carryforwards. Craig currently owns approximately 52.5% of the Company's outstanding capital stock and has been granted approval to acquire up to 55%. Prior to granting the waiver of the restrictions, the Board of Directors had determined that acquisition of the shares by Mr. Cotter and Craig would not affect the continuing availability of the Company's tax loss carryforwards. The Company has signed an agreement to acquire Angelika (See Note 4 and Note 13). The theater will be owned jointly by the Company and Sutton Hill Associates, a California general partnership ("Sutton Hill") affiliated with City Cinemas, a Manhattan-based theater operator. City Cinemas (owned indirectly in equal parts by James J. Cotter, the Company's Chairman, and Mr. Michael Forman) will operate the theater pursuant to a management agreement. Mr. Cotter is a principal shareholder of Craig. Mr. Forman beneficially owns 16.4% of Craig's common stock. Robert F. Smerling, President of Cine Vista, also serves as President of City Cinemas. On March 29, 1996, the Company purchased from Craig 1,564,473 shares of Citadel Common Stock and acquired an option to acquire 1,329,114 shares of Citadel's 3% Cumulative Voting Preferred Stock and under certain circumstances a warrant to acquire 666,000 shares of Citadel Common Stock at an exercise price of $3 per share. The purchase of Citadel Common Stock was paid by the issuance of a five year unsecured $3,324,505 promissory note payable to Craig, which note was retired on July 29, 1996. An independent committee comprised of outside directors not affiliated with Craig reviewed, negotiated and approved the provisions of the Citadel Stock Purchase Agreement and the Option Agreement. (See Note 4 and Note 12). In November 1995, the Company and Craig formed Reading International to develop and operate multiplex cinemas in Australia and other markets. On March 29, the Company and Craig entered into a Capital Funding Agreement pursuant to each of the parties contributed $12,500,000 and pledged to contribute an additional $37,500,000 each to Reading International. The Company and Craig each pledged various assets as security for the additional capital commitments. An independent committee comprised of outside directors not affiliated with Craig reviewed and determined that the collateral pledged by Craig as security for its funding commitment was adequate. (See Note 5.) NOTE 12 -- LONG-TERM DEBT In December 1995, Cine Vista entered into a $15 million eight year revolving credit agreement (the "Credit Agreement") with a bank. Under terms of the Credit Agreement, Cine Vista may borrow up to $15 million to repay Cine Vista acquisition loans, which loans are payable to a wholly-owned subsidiary of the Company (the "Subsidiary Loans"), and fund certain new theater development expenditures (the "Development Expenditures"). During the initial 30 months of the eight-year term, Cine Vista may borrow and repay amounts outstanding under the Credit Agreement. Any amounts outstanding during the initial term would be payable in increasing quarterly installments over the balance of the loan term. At June 30, 1996, no amounts were outstanding under this agreement. -17- READING COMPANY AND SUBSIDIARIES Notes to Condensed Financial Statements (unaudited) June 30, 1996 (amounts in tables in thousands) As security for the loan, Cine Vista has pledged substantially all of its assets. In addition, the stock of Cine Vista's parent company has been pledged as security for the loan. In conjunction with the loan, the Company has also agreed to subordinate to the lender its right to payment of the Subsidiary Loans as well as certain other fees payable by Cine Vista to the Company under certain circumstances. In addition, the Company has agreed to contribute funds to Cine Vista in the event that estimated unpaid Development Expenditures exceed the amount of funds available to Cine Vista under the Credit Agreement. The provisions of the Credit Agreement require Cine Vista to maintain a minimal level of net worth and other financial ratios, restrict the payment of dividends, and limit additional borrowings and capital expenditures. Borrowings under the Credit Agreement accrue interest at LIBOR (the London Interbank Offered Rate) plus 2.25%, the cost of Section 936 deposits (deposits held by lenders in Puerto Rico which are qualified under Section 936 of the Internal Revenue Code) to the lender (currently 5.29%) plus 2.25%, or the base rate plus 1/2 of 1%, at Cine Vista's election. In accordance with the provisions of the Credit Agreement, Cine Vista is required to pay a commitment fee on the unused commitment equal to 1/2 of 1%. The Company paid Craig for the Citadel Common Stock with a five year unsecured promissory note which provides for payment of interest at a rate equal to LIBOR plus 2.25% (See Note 4). This promissory note is recorded on the Condensed Consolidated Balance Sheets as "Note payable to affiliate" at June 30, 1996. On July 29, 1996, the note was repaid in full. NOTE 13 - SUBSEQUENT EVENTS In July 1996, the Company and the owners of AFCI entered into an asset purchase and sale agreement under which terms the Company will acquire for approximately $10,582,000 an 83.3% interest in the Angelika. The Company will acquire these assets with a combination of available cash, a fully collateralized promissory note to be issued to the sellers and by receiving a credit for the Angelika Judgement (See Note 4) together with interest thereon at a rate equal to 9%. The remaining ownership interest in Angelika will be acquired by Sutton Hill, an affiliate of City Cinemas which operates an additional 20 screens in seven cinemas in New York City. The Company and Sutton Hill have formed a Delaware limited liability company, Angelika Film Centers, LLC ("AFC"), to hold their interest in the Angelika. The Company anticipates settlement on this transaction to occur during August 1996. Management believes the Angelika is the premier specialty theater in the United States. The Company will contribute 83.3% of the capital to AFC and City Cinemas will contribute the remaining 16.7%. The provisions of the joint venture agreement provide that all depreciation and amortization (the "Special Deductions") will first be allocated to Sutton Hill until the aggregate amount of such Special Deductions equal 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 as collateral for borrowings and receive 100% of the proceeds of any such borrowings. In addition Sutton Hill has agreed to subordinate its membership interest to the extent necessary to permit the Company to receive up to 100% of the proceeds of borrowings by AFC up to the amount of the Company's initial capital contribution in AFC. AFC will be managed by City Cinemas 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 fee of $125,000 plus an incentive fee equal to 50% of annual cash flow (as defined in the Management -18- READING COMPANY AND SUBSIDIARIES Notes to Condensed Financial Statements (unaudited) June 30, 1996 (amounts in tables in thousands) Agreement) over $2,000,000, provided however that the maximum fee (minimum fee plus incentive fee) does not exceed 5% of the Angelika revenues. For accounting purposes, the acquisition will be accounted for under the purchase method and accordingly, the operating results of the Angelika will be included in the Condensed Consolidated Statement of Operation beginning with the date of settlement. In July 1996, the Company received $1,250,000 in full settlement of its claim against TPI Enterprises, Inc. ("TPI"). The matter related to the Company's 1993 offer to acquire from TPI a partnership interest in a partnership which operates motion picture exhibition theaters. This amount, net of related expenses, will be recorded as income in the Condensed Consolidated Statement of Operations for the three months ending September 30, 1996. Also in July 1996, the Company and the landlord of one of Cine Vista's theaters reached a preliminary understanding relating to a claim the landlord had asserted regarding the computation of rent (See Note 10). The agreement, when finalized will require the Company and TALP to pay $130,000 and $220,000, respectively, to the landlord. The Company recorded $130,000 in the Condensed Consolidated Statement of Operations for the three months ended June 30, 1996 as an estimate of additional rent expense for this matter and will record monthly rent expense to this landlord at a slightly higher amount than in periods prior to this agreement. On August 12, 1996, the Company, with the approval of the Board of Directors entered into a letter of intent (the "Letter of Intent") contemplating two transactions. The first transaction is a reorganization of the Company (the "Reorganization") pursuant to a proposed Agreement and Plan of Merger (the "Merger Agreement") among the Company, Reading Entertainment, Inc., a Delaware corporation ("Reading Entertainment") which is a newly formed, wholly-owned subsidiary of the Company, and Reading Merger Co., a Pennsylvania corporation ("Merger Co.") which is a newly formed, wholly-owned subsidiary of Reading Entertainment. Pursuant to the Reorganization, the Company will merge with Merger Co. In the Reorganization, each outstanding share of the Company's Common Stock, par value $.01 per share (the "Common Stock") (other than shares of Common Stock as to which dissenters' rights are perfected), and Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), will be converted into the right to receive one share of Reading Entertainment's Common Stock, par value $.001 per share (the "Reading Entertainment Common Stock"), and the outstanding shares of Merger Co. will be converted into shares of Common Stock of the Company. As a result, the Company will become a wholly-owned subsidiary of Reading Entertainment and the current shareholders of the Company will become shareholders of Reading Entertainment. Among other changes in the rights of shareholders resulting from the Reorganization, the transfer restrictions on the Company's Class A Common Stock, which are currently scheduled to expire January 1, 1997, will be extended with respect to the Reading Entertainment Common Stock to January 1, 2003, in order to reduce the possibility that a change-in-control of Reading Entertainment will occur, which change could reduce the amount of its net operating loss carryforwards available to offset taxable income. The second transaction (the "Stock Transaction") is a contribution of assets to Reading Entertainment by Craig, Craig Management, Inc., a wholly-owned subsidiary of Craig ("CMI"), and Citadel in exchange for Reading Entertainment convertible preferred and common stock. Following consummation of the Reorganization, Reading Entertainment will issue (i) 70,000 shares of Reading Entertainment's Series A Voting Cumulative Convertible Preferred Stock, par value $.01 per share (the "Series A Preferred Stock") to Citadel Acquisition Corp., Inc. ("CAC"), a newly formed, wholly owned subsidiary of Citadel, for $7,000,000 cash and (ii) 550,000 shares of Reading Entertainment's Series B Voting Cumulative Convertible Preferred Stock, par value $.001 per share (the "Series B Preferred Stock" and, together with the Series A Preferred Stock, the "Convertible Preferred Stock"), -19- READING COMPANY AND SUBSIDIARIES Notes to Condensed Financial Statements (unaudited) June 30, 1996 (amounts in tables in thousands) and 2,476,190 shares of Reading Entertainment Common Stock to Craig and CMI in exchange for certain assets now held by Craig. The assets to be transferred by Craig consist of 693,650 shares of the Series B Preferred Stock of Stater Bros. Holdings Inc., Craig's 50% membership interest in Reading International, and 1,329,114 shares of Citadel's 3% Cumulative Voting Convertible Preferred Stock, stated value $3.95 per share, which assets have been valued for the transaction at $81,000,000. The Series A Preferred Stock will (i) bear a cumulative dividend of 6.5%, payable quarterly, and (ii) be convertible, at any time after 18 months from issuance (or earlier upon a change in control of Reading Entertainment) into shares of Reading Entertainment Common Stock at a conversion price of $11.50 per share. The Series B Preferred Stock will (i) bear a cumulative dividend of 6.5%, payable quarterly, and (ii) be convertible, at any time after 18 months from issuance, into shares of Reading Entertainment Common Stock at a conversion price of $12.25 per share. Holders of each series of Convertible Preferred Stock will be entitled to 9.64 votes per share held on all matters brought to a vote of the shareholders of Reading Entertainment, voting as a single class with the holders of the Reading Entertainment Common Stock and the other series of Convertible Preferred Stock. In addition, Citadel will have the option, exercisable at any time after closing of the Stock Transaction through a date 30 days after the Company's 1999 Form 10-K is filed, to exchange all or substantially all of its assets for shares of Reading Entertainment Common Stock. Also, Citadel and CAC will have certain demand and piggyback registration rights with respect to the Reading Entertainment Common Stock issuable on conversion of the Series A Preferred Stock or on such asset exchange. In addition, if Reading Entertainment fails to pay dividends on the Series A Preferred Stock for 4 consecutive quarters after 18 months from issuance, CAC will have the option to require Reading Entertainment to repurchase such shares at their aggregate liquidation value plus accumulated dividends. Citadel will also have a right to require redemption of the Series A Preferred Stock in the event of a change in control of the Company and after 5 years from the date of issuance. In addition, the Company has agreed to reimburse Citadel for its out of pocket costs with respect to the Stock Transaction, up to a maximum of $280,000. The Letter of Intent is non-binding on each of the companies and consummation of the Stock Transaction and the Reorganization is subject to certain conditions, including execution of definitive agreements, approval of the stockholders of the Company, delivery of written fairness opinions from the respective financial advisors and certain other standard and customary conditions. No stockholder approval is required with respect to Craig and Citadel. Craig, which owns approximately 52.5% of the Company's capital stock, has agreed to vote its shares in favor of the transactions, and, accordingly, the vote of no other Reading stockholder is required for approval of the transactions. -20- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: Due to the nature of the Company's historical business activities, revenues and earnings have varied significantly reflecting the results of real estate and other asset sales as well as the amount and timing of development activities. In addition, Reading International is acquiring properties and entering into leases for sites in Australia which it will develop into motion picture theaters. Until the theaters have been constructed and are placed in operation, Reading International will have no material revenues and can be expected to generate losses. Accordingly, period-to-period comparisons of operating results will not be indicative of future financial results. Cine Vista's business is seasonal and the results of Cine Vista included in the six- month period ended June 30, 1996 may not be indicative of Cine Vista's annual operating results. Revenues in the six-month period ended June 30, 1996 increased $2,317,000 to $10,686,000 from $8,369,000 in the corresponding six-month period last year. The increase was due primarily to a 21% increase in theater revenues recorded by Cine Vista (which increase resulted from higher box office revenues at existing theaters and the opening of a new 8-screen theater in late 1995) and the equity earnings of $1,433,000 from the Company's investment in Citadel (See Note 4). These equity 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. Revenues in the six- month period last year included a $425,000 litigation settlement. "Theater costs", "Theater concession costs" and "Depreciation and amortization" reflect the direct theater costs of Cine Vista's operations. These costs increased $1,343,000 from $5,888,000 in the six months ending June 30, 1995 to $7,231,000 in this year's six-month period due primarily to increased costs associated with higher revenues and the operating expenses associated with the opening of a new 8-screen theater in late 1995. Significant increases in the current six-month period include a $519,000 increase in film rent (a 2% increase as a percentage of box office revenues), an increase in concession costs of $54,000 (which costs remained constant as a percentage of concession revenues from the prior year), a $98,000 increase in contingent rent under facility leases and increased wage and salary expense (which amount remained constant as a percentage of sales). "General and administrative" expenses in the current six-month period remained consistent with the prior year six-month period. "Equity loss from investment in Australian joint venture" reflects the Company's 50% share of the initial general and administrative expenses in Australia and noncapitalized development expenditures relating to new theater site analysis and selection (See Note 5). The Company does not anticipate material revenues from Reading International during the next 12 months and therefore anticipates continuing losses during such period as new theaters are developed and operations initiated. The investment in and operating results of Reading International are reported under the equity method. The Company recorded AMT expense of $22,000 and $23,000 in the six months ended June 30, 1996 and 1995, respectively. Upon adoption of SFAS No. 109 in 1993, a deferred tax asset of $132,000 was recorded for the tax benefits which were determined by management to be more likely than not to be realized from the Company's net operating loss carryforwards. The Company recorded a $132,000 tax provision in the Condensed Consolidated Statement of Operations for the six months ended June 30, 1995 related to the realization of such tax benefits in that period. The Company recorded net income of $1,039,000 and net income of $322,000 for the six months ended June 30, 1996 and 1995, respectively. -21- Revenues for the three months ended June 30, 1996 increased $1,440,000 to $6,001,000 from $4,561,000 compared with the three months ended June 30, 1995. The increase was due primarily to an increase in revenues from Cine Vista of $571,000 and the inclusion of $1,433,000 of equity earnings from the Citadel investment (See Note 4). These equity 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. The increase in revenues in the current six-month period was offset somewhat by the inclusion of $425,000 received in the prior year quarter in settlement of certain litigation. "General and Administrative" expense decreased $149,000 from $1,066,000 in the corresponding three months period last year. The decrease was due mainly to lower professional fees. LIQUIDITY AND CAPITAL RESOURCES: The Company has sufficient funding available to meet its current commitments. However, the Company believes that there are significant expansion opportunities in the cinema exhibition business and, that if it is to fully exploit the opportunities for growth in the exhibition business, the Company needs to increase its capital base and simplify the corporate structures which it has to date found necessary to utilize in pursuing such opportunities. Accordingly, the Stock Transaction (See Note 13) has been developed to achieve the goals of significantly increasing the Company's capital base while simultaneously simplifying its corporate structure. Pursuant to the terms of the Stock Transaction, the Company would receive 693,650 shares of Series B Preferred Stock of Stater Bros. Holdings, Inc. (aggregate par value $69,365,000), Craig's 50% membership interest in Reading International (increasing the Company's ownership to 100% of Reading International), 1,329,114 shares of the 3% Cumulative Voting Convertible Preferred Stock of Citadel (stated value of $5,250,000) and $7,000,000 in cash. In payment for the assets, the Company would issue common and preferred stock to Craig and Citadel. It is believed by the Company that the non-cash assets may be hypothecated or sold in order to significantly increase the Company's base of liquid funds for investment in the cinema exhibition business. Implementation of the Stock Transactions is dependent upon a shareholder vote, which vote will be secured at the Company's 1996 Annual Meeting of Shareholders. Craig currently owns approximately 52.5% of the Company's voting securities and has agreed to vote its shares in favor of the Stock Transaction. In November 1995, the Company and Craig formed Reading International in order to make available additional capital and liquidity to develop other theater opportunities in Australia. Reading International is actively seeking properties to develop in Australia and has acquired two sites and has made deposits for several other real property purchases or leases. On March 29, 1996, the Company and Craig entered into a Capital Funding Agreement with respect to Reading International pursuant to which they agreed to increase the capital committed by the Company and Craig to Reading International from $10 million to approximately $103 million through a combination of cash contributions and secured capital funding undertakings (See Note 5). The Company and Craig each immediately contributed to Reading International $12,500,000 in cash and have undertaken to contribute up to an additional $37,500,000 on an as needed basis (the "Funding Commitment"). To secure the Funding Commitment, the Company pledged its interest in Cine Vista and certain government securities and Craig pledged its interest in Stater Brothers Holdings, Inc. The Company may substitute collateral for the Funding Commitment provided that the fair market value of the collateral substituted is equal to at least 125% of the unfunded Funding Commitment or, in the case of government or government agency securities, equal to 100% of the unfunded portion of the Funding Commitment. The Company has signed an agreement to acquire an 83.3% interest in the Angelika theater in Manhattan (See Note 4 and Note 13) for approximately $10,582,000. The Company anticipates closing of this transaction to occur in August 1996 at which time the funds would be disbursed. Cine Vista has three new theaters under development and is seeking additional theater sites in Puerto Rico. Cine Vista entered into a revolving credit agreement in December 1995 (the "Credit Agreement"). In accordance with the terms of the Credit Agreement, Cine Vista may borrow up to $15,000,000 to repay certain loans payable to a wholly-owned subsidiary of the Company and fund certain new theater development expenditures (See Note 12). No amounts are presently outstanding under the Credit Agreement. The Company may use funds available under the Credit Agreement to fund its other theater development activities provided that a portion of such funds are utilized to fund certain Cine Vista development projects. -22- On March 29, 1996, the Company purchased from Craig 1,564,473 shares of Citadel Common Stock for an aggregate purchase price of $3,324,505 (See Note 4). The Company paid Craig for the Citadel Common Stock with a five year unsecured promissory note which provides for the payment of interest at a rate equal to LIBOR plus 2.25%. In July 1996 the note together with accrued interest was repaid. The Company also acquired from Craig (for $50,000) a one year option to acquire, at fair market value, as determined by an investment banker selected by the parties, 1,329,114 shares of the 3% Cumulative Voting Convertible Preferred Stock, stated value $3.95 per share of Citadel and an option to acquire, under certain circumstances, a warrant to acquire 666,000 shares of Citadel Common Stock. In January 1996, the Company and the other parties agreed to settle litigation whereby the Company sought to recover certain environmental cleanup costs previously expended by the Company on properties it formerly owned. The agreement provides for the Company to receive payments totalling $2.35 million to recover these costs, which amount the Company anticipates receiving in 1996. The parties to the settlement also agreed to pay an amount ranging from 52% to 55% of certain future costs, if any, the Company may incur in cleaning environmental contamination on the Viaduct (See Note 10). Prior to the Company's reorganization, the Company had extensive railroad and related operations. Such operations may have contributed to environmental contamination of properties now owned by the Company, previously sold by the Company, or to which the Company, prior to its reorganization, sent waste. The ultimate extent of liabilities, if any, with respect to such matters, as well as the timing of cash disbursements, if any, cannot be determined. However, management is of the opinion, based on the information currently known, that while the ultimate liability resulting from such matters could have a material effect upon the results of operations in a given year, they will not have a material adverse effect upon the Company's financial position or liquidity. "Cash and cash equivalents" together with "Available-for-sale securities" decreased $11,709,000 from $44,189,000 at December 31, 1995 to $32,480,000 at June 30, 1996 due primarily to $12,888,000 in capital contributions to Reading International (See Note 5) and a decrease in "Accounts payable and accrued expenses" of $344,000. While not necessarily indicative of cash flows determined under generally accepted accounting principles, Cine Vista's operating cash flow (income before depreciation and amortization) totaled $983,000 in the six month period ended June 30, 1996 verses $1,029,000 in the prior year six month period. Current period Cine Vista operating cash flow includes $130,000 in additional rent expense recorded as a result of the settlement with a landlord (See Note 13). In addition to Cine Vista's operating cash flow, other significant sources of liquid funds during this period included "Interest and dividends" revenue of $1,076,000, a decrease in due from affiliate of $944,000 (related to the payment by Craig of amounts advanced by the Company on Craig's behalf for Reading International) and an increase of $484,000 in film rent payable. Principal sources of liquid funds in the prior year six-month period included $1,029,000 from Cine Vista's operating cash flow, $1,103,000 in "Interest and dividends" revenue and a decrease in insurance proceeds receivable of $514,000. In addition to operating expenses, the principal uses of liquid funds for the six months ended June 30, 1995, included a decrease in "Amounts receivable" of $338,000, a decrease in "Accounts payable and accrued expenses" of $316,000, a decrease in "Other liabilities" of $206,000 and $207,000 used to purchase property, plant and equipment for Cine Vista's operations. -23- For accounting purposes, the acquisition will be accounted for under the purchase method and accordingly, the operating results of the Angelika will be included in the Condensed Consolidated Statement of Operation beginning with the date of settlement. In July 1996, the Company received $1,250,000 in full settlement of its claim against TPI Enterprises, Inc. ("TPI"). The matter related to the Company's 1993 offer to acquire from TPI a partnership interest in a partnership which operates motion picture exhibition theaters. This amount, net of related expenses, will be recorded as income in the Condensed Consolidated Statement of Operations for the three months ended September 30, 1996. Also in July 1996, the Company and the landlord of one of Cine Vista's theaters reached a preliminary understanding relating to a claim the landlord had asserted regarding the computation of rent (See Note 10). The agreement, when finalized will require the Company and TALP to pay $130,000 and $220,000, respectively to the landlord. The Company recorded $130,000 in the Condensed Consolidated Statement of Operations for the three months ended September 30, 1996 as an estimate of additional rent expense in relation to this matter and will record monthly rent expense to this landlord at a slightly higher amount than in periods prior to this agreement. -24- PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.8 By-Laws of Registrant, as amended May 23, 1996. 10.20 Service Deed between Australia Cinema Management Pty Limited and John Rochester dated May 7, 1996. 10.21 Letter of Intent dated August 12, 1996 by and between Reading Company, Citadel Holding Corporation and Craig Corporation. 27 Financial Data Schedule -25- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. READING COMPANY, REGISTRANT Date: August 14, 1996 By: /s/ James A. Wunderle -------------------------- ----------------------------------- James A. Wunderle Executive Vice President, Chief Operating Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer) Date: August 14, 1996 By: /s/ Eileen M. Mahady -------------------------- ----------------------------------- Eileen M. Mahady Controller (Principal Accounting Officer) -26- EX-3.8 2 BY-LAWS EXHIBIT 3.8 BY-LAWS OF READING COMPANY ARTICLE I CORPORATION OFFICE ------------------ 1.1 Registered Office. The Corporation shall have and continuously ------------------ maintain in the Commonwealth of Pennsylvania a registered office at an address to be designated from time to time by the Board of Directors which may, but need not, be the same as its place of business. 1.2 Business Office. The Corporation may also have offices at such ---------------- other places as the Board of Directors may from time to time designate or the business of the Corporation may require. ARTICLE II SHAREHOLDERS ------------ 2.1 Meetings. --------- 2.1.1 Place. Meetings of the shareholders shall be held at such ----- place, within or without the Commonwealth of Pennsylvania, as may be determined from time to time by the Board of Directors and need not be held at the registered office of the Corporation. 2.1.2 Annual Meeting. An annual meeting of the shareholders for -------------- the election of directors and for the transaction of other business as may be properly be brought before the meeting shall be held in each calendar year at such time and place as may be determined by the Board of Directors. 2.1.3 Special Meetings. Special meetings of the shareholders ---------------- may be called at any time by the President, the Chairman of the Board, any three members of the Board of Directors or the holders of at least one-fifth of the outstanding shares of stock of the Company entitled to vote at the meeting. The request of any person who has called a special meeting of shareholders shall be addressed to the Secretary of the Corporation, shall be signed by the persons making the request and shall state the purpose or purposes of the meeting. Upon receipt of any such request it shall be the duty of the Secretary to fix the time and provide written notice of the special meeting of shareholders, which shall be held not more than 60 days after the receipt of the request. If the Secretary shall neglect or refuse to fix the time or provide written notice of the special meeting, the person or persons making the request may fix the time and provide written notice of the special meeting. 2.2 Notice. Written notice of the time and place of each meeting ------ of shareholders, other than an adjourned meeting of shareholders, and of the general nature of the business to be transacted at each special meeting of shareholders shall be given to each shareholder of record entitled to vote at the meeting at least five days before the date of the meeting unless a greater period of notice is required by law in a particular case. 2.3 Quorum. The presence in person or by proxy of the shareholders ------ entitled to cast at least a majority of votes that all shareholders are entitled to cast on a particular matter to be acted upon at the meeting shall constitute a quorum of the shareholders for the purpose of considering such matter. The shareholders present at a duly organized meeting can continue to do business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. If a meeting cannot be organized because a quorum has not attended, those present may, except as otherwise provided by statute, adjourn the meeting to such time and place as they may determine. 2.4 Voting Rights. ------------- 2.4.1 One Vote per share. Each shareholder shall have the ------------------ right at every shareholders' meeting to one vote for each share of Common Stock and one vote for each share of Class A Common Stock of the Corporation standing in the name of the shareholder on the books of the Corporation which is entitled to vote at such meeting. Shares of Common Stock and Class A Common Stock shall be voted together as a single class. Each shareholder may vote such shares either in person or by proxy. 2.4.2 Majority. Whenever any corporate action is to be taken -------- by vote of the shareholders of this Corporation, it shall be authorized by a majority of the votes cast at a duly organized meeting of the shareholders by the holders of shares entitled to vote thereon. 2.5 Record Date. The Board of Directors may fix a time, not more ----------- than ninety days prior to the date of any meeting of shareholders, or the date fixed for the payment of any dividend or distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares will be made or go into effect, as a record date for the 2 determination of the shareholders entitled to notice of, or to vote at, any such meeting, or entitled to receive payment of any such dividend or distribution, or to receive any such allotment of rights, or to exercise the rights in respect to any such change, conversion, or exchange of shares. Only such shareholders as shall be shareholders of record on the date so fixed shall be entitled to notice of, or to vote at, such meeting or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after any record date fixed, as aforesaid. 2.6 Shareholder Communications. Whenever the Corporation has been -------------------------- unable to communicate with a shareholder for more than 24 consecutive months because communications to the shareholder are returned unclaimed or the shareholder has otherwise failed to provide the Corporation with a current address, the giving of notice to such shareholder pursuant to Section 2.2 of these By-laws shall not be required. Any action or meeting that is taken or held without notice or communication to that shareholder shall have the same validity as if the notice or communication had been duly given. Whenever a shareholder provides the Corporation with a current address, this Section 2.6 shall cease to be applicable to such shareholder. The Corporation shall not be required to give notice to any shareholder pursuant to Section 2.2 of these By- laws if and for so long as communication with such shareholder is unlawful. 2.7 Participation by Telephone. Unless otherwise provided by a -------------------------- resolution with respect to a specific meeting or with respect to a class of meetings, no shareholder may participate in such meeting or meetings of shareholders by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear one another. Any notice otherwise required to be given in connection with any meeting at which participation by conference telephone or other communications equipment is permitted shall so specify. 2.8 Adjournment. Any regular or special meeting of the ----------- shareholders of the Corporation, including one at which directors are to be elected, may be adjourned for such period as the shareholders present and entitled to vote shall direct. 3 ARTICLE III DIRECTORS --------- 3.1. Number and Term. The Board shall consist of eight Directors. --------------- Except as provided in Section 3.4 hereof, the Directors shall be elected by the shareholders. Each Director shall hold office until the next annual meeting of shareholders or until his earlier death, resignation or removal. Any director may resign at any time upon written notice to the Corporation. Such resignation shall be effective upon receipt thereof by the Corporation or at such subsequent time as shall be specified in the notice of resignation. The Chairman of the Board shall be elected by the Board and preside at all meetings of the shareholders and directors, and in his absence the Board shall designate a member of the Board to act as chairman at such meeting. The Board may elect a Vice Chairman of the Board. Unless designated as the Chief Executive Officer pursuant to Section 4.1 hereof, neither the Chairman of the Board nor Vice Chairman of the Board shall be an officer of the Corporation. 3.1.2 Nomination by Shareholders. No shareholder shall be -------------------------- permitted to nominate a candidate for election as a Director at or at any time after the 1993 Annual Meeting of Shareholders unless such shareholder shall provide in writing, not later than 120 days before the first anniversary of the preceding annual meeting of shareholders, to the Nominating Committee of the Board or in the absence of such committee to the Secretary of the Corporation, information about such candidate which, were such candidate a nominee of the Board of Directors for whom the Corporation solicited proxies, would be required to be disclosed in the proxy materials pursuant to which such proxies would be solicited as set forth in Items 7-8 of Schedule 14A promulgated by the Securities and Exchange Commission or any successor provisions. 3.2 Powers. All corporate powers as required or permitted by ------ applicable law, the Articles of Incorporation or these By-laws shall be exercised by or under authority of, and the business and affairs of the Corporation shall be managed under the direction of the Board of Directors. 3.3 Meetings. -------- 3.3.1 Place. Meetings of the Board of Directors shall be held ----- at the principal office of the Corporation in Philadelphia, Pennsylvania or at such other place as may be designated by the Board or in the notice of the meeting. 4 3.3.2 Regular Meetings. Regular meetings of the Board of ---------------- Directors shall be held at least quarterly on such dates and at such time as the Board may designate. Notice of regular meetings need not be given. 3.3.3 Special Meetings. Special meetings of the Board of ---------------- Directors may be called at any time by the Chairman of the Board and shall be called by him on the written request of three Directors. Notice (which need not be written) of the time and place of each special meeting shall be given to each Director at least two days before the meeting. 3.3.4 Quorum. A majority of the Directors in office shall ------ constitute a quorum for the transaction of business at any meeting. The acts of a majority of the Directors present and voting at any meeting at which a quorum is present shall be the acts of the Board of Directors. 3.3.5 Participation. One or more Directors may participate in a ------------- meeting of the Board or a committee of the Board by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. 3.4 Vacancies. Vacancies in the Board of Directors, including --------- vacancies resulting from an increase in the number of directors, shall be filled by vote of a majority of the remaining members of the Board, even if less than a quorum. Any person selected to fill such a vacancy shall serve until the next meeting of the shareholders called for the purpose of electing Directors. 3.5 Committees. ---------- 3.5.1 Executive Committee. The Board of Directors may, by ------------------- resolution adopted by a majority of the entire Board, create an Executive Committee which shall consist of three or more Directors and shall have and exercise the authority of the Board over the business of the Corporation between meetings of the Board, except as restricted by Section 3.5.3 hereof. 3.5.2 Additional Committees. The Board of Directors may, by --------------------- resolution adopted by a majority of the entire Board, designate one or more additional committees, each committee to consist of two or more Directors and such alternate members (also Directors) as may be designated by the Board. To the extent provided in such resolution, any such committee shall have and exercise the powers of the Board of Directors. Unless otherwise determined by the Board, in the absence or disqualification of any member of a committee the member or members thereof present at any meeting and not disqualified from 5 voting, whether or not he or they constitute a quorum, may unanimously appoint another Director to act at the meeting in the place of any such absent or disqualified member, except as restricted by Section 3.5.3 hereof. 3.5.3 Actions not permitted by Committees. No Committee ----------------------------------- shall have power or authority as to the following: (1) The submission to shareholders of any action requiring approval of shareholders; (2) The creation or filling of vacancies in the Board; (3) The adoption, amendment or repeal of the By-laws; (4) The amendment or repeal of any resolution of the Board that by its terms is amendable or repealable only by the Board; or (5) Action on matters committed by the By-laws or resolution of the Board to another committee of the Board. 3.6 Limitation of Liability of Directors. ------------------------------------- 3.6.1 Fiduciary Duty. A director of this Corporation shall -------------- stand in a fiduciary relation to this Corporation and shall perform his duties as a director, including his duties as a member of any committee of the Board of Directors upon which he may serve, in good faith, in a manner he reasonably believes to be in the best interests of this Corporation, and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. In performing his duties, a director shall be entitled to rely in good faith on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following: (1) One or more officers or employees of this Corporation whom the director reasonably believes to be reliable and competent in the matters presented. (2) Counsel, public accountants or other persons as to matters which the director reasonably believes to be within the professional or expert competence of such persons. (3) A committee of the Board of Directors upon which he does not serve, duly designated in accordance with law, as to matters within its designated authority, which committee the director reasonably believes to merit confidence. 6 A director shall not be considered to be acting in good faith if he has knowledge concerning the matter in questions that would cause his reliance to be unwarranted. 3.6.2 Consideration of all Factors. In discharging the duties ---------------------------- of their respective positions, the Board of Directors, committees of the Board of Directors and individual directors may, in considering the best interests of this Corporation, consider the effects of any action upon employees, upon suppliers and customers of this Corporation and upon communities in which offices or other establishments of this Corporation are located, and all other pertinent factors. The consideration of these factors shall not constitute a violation of Section 3.6 hereof. 3.6.3 Actions. Absent breach of fiduciary duty, lack of good ------- faith or self-dealing, actions taken as a director or any failure to take any action shall be presumed to be in the best interests of this Corporation. 3.6.4 No Personal Liability. A director of this Corporation --------------------- shall not be personally liable for monetary damages as such for any action taken or any failure to take any action unless: (1) the director has breached or failed to perform the duties of his office under Sections 3.6.1 through 3.6.3 hereof; and (2) the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. 3.6.5 Governing Law. The provisions of Section 3.6.4 hereof ------------- shall not apply to: (1) the responsibility or liability of a director pursuant to any criminal statute; or (2) the liability of a director for the payment of taxes pursuant to local, state or federal law. 3.6.6 Shareholder Approval to Amend. Notwithstanding any ----------------------------- other provisions of these By-laws, the approval of shareholders shall be required to amend, alter, change, repeal or adopt any provision as part of these By-laws which is inconsistent with the purpose or intent of Sections 3.6.1, 3.6.2, 3.6.3, 3.6.4, 3.6.5 or 3.6.6 of this Article III. The provisions of this Section 3.6 were adopted by shareholders of the Corporation on April 24, 1987. 7 ARTICLE IV OFFICERS -------- 4.1 Election. The Board of Directors shall elect a President, -------- Treasurer, Secretary and such Vice President and other officers and assistant officers as the board may authorize from time to time. Two or more offices may be held by the same person. The Directors shall designate either the Chairman of the Board or the President to be the chief executive officer of the Corporation. Each officer shall hold office at the pleasure of the Board and until his successor has been selected and qualified or until his earlier death, resignation or removal. Any officer may resign at any time upon written notice to the Corporation. Any such resignation shall be effective upon receipt thereof by the Corporation or at such subsequent time as may be specified in the notice of resignation. 4.2 President. The President may be designated as the chief --------- operating officer or the chief executive officer of the Corporation. In the absence of the Chairman of the Board, the President shall preside at all meetings of the Board and of the shareholders and shall perform the other duties of the Chairman of the Board. 4.3 Chief Executive Officer. The Chief Executive Officer of the ----------------------- Corporation shall have general supervision over the business of the Corporation and may perform any act and execute any instrument for the conduct of its business and he or any officer or employee authorized by him may appoint, remove or suspend agents or employees of the Corporation and may determine their duties and compensation. 4.4 Vice President. The Vice President or, if more than one, the -------------- Vice Presidents in the order, if any, established by the Board shall, in the absence or incapacity of the President, have the authority to exercise all the powers and perform the duties of the President. The Vice Presidents, respectively, shall also have such other authority and perform such other duties as may be provided in the By-laws or as shall be determined by the Board or the President. Any Vice President may, in the discretion of the Board, be designated as "executive," "senior," by departmental or functional classification, or chief operating officer. 4.5 Secretary. The Secretary shall attend all meetings of the --------- Board and of the shareholders and keep accurate records thereof in one or more minute books kept for that purpose and shall perform the duties customarily performed by the secretary of a corporation and such other duties as may be assigned to him by the Board or the President. 8 4.6 Treasurer. The Treasurer shall be responsible for the custody --------- of the corporate funds and securities; shall be responsible for full and accurate accounts of receipts and disbursements in books belonging to the Corporation; and shall perform such other duties as may be assigned to him by the Board or the President. 4.7 Assistant Officers. Each assistant officer shall assist in the ------------------ performance of the duties of the officer to whom he is assistant and shall perform such duties in the absence of the officer. He shall perform such additional duties as the Board of Directors, the President or the officer to whom he is assistant may from time to time assign him. Such officers may be given such functional titles as the Board of Directors shall from time to time determine. 4.8 Other Officers. The duties of the other officers shall be -------------- those usually related to their officers, except as otherwise prescribed by resolution of the Board of Directors. 4.9 Standard of Care. An officer shall perform his duties as an ---------------- officer in good faith, in a manner he reasonably believes to be in the best interests of the Corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. A person who so performs his duties shall not be liable by reason of having been an officer of the Corporation. The Corporation may secure the fidelity of any or all of the officers by bond or otherwise at its expense. 4.10 Removal, Vacancies. Any officer or agent of the Corporation ------------------ may be removed by the Board with or without cause. The removal shall be without prejudice to the contract rights, if any, of any person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. ARTICLE V INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS ------------------------------------------------------------ 5.1 Indemnification. This Corporation shall indemnify any director --------------- or officer, and may indemnify any other employee or agent, who was or is a party to, or is threatened to be made a party to or who is called as a witness in connection with any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of this 9 Corporation, by reason of the fact that he is or was a director, officer, employee or agent of this Corporation, or is or was serving at the request of this Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorney's fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding unless the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness. 5.2 Non Exclusive Right. The indemnification and advancement of ------------------- expenses provided by, or granted pursuant to, this Article V shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any By-law, agreement, contract, vote of shareholders or disinterested directors pursuant to the direction, howsoever embodied, of any court of competent jurisdiction or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. It is the policy of this Corporation that indemnification of, and advancement of expenses to, directors and officers of this Corporation shall be made to the fullest extent permitted by law. To this end, the provisions of this Article V shall be deemed to have been amended for the benefit of directors and officers of this Corporation effective immediately upon any modification of the Business Corporation Law of the Commonwealth of Pennsylvania (the "BCL") or the Directors' Liability Act of the Commonwealth of Pennsylvania (the "DLA") or any modification, or adoption of any other law that which expands or enlarges the power or obligation of corporations organized under the BCL or subject to the DLA to indemnify, or advance expenses to, directors and officers of this Corporation. 5.3 Expenses. This Corporation shall pay expenses incurred by an -------- officer or director, and may pay expenses incurred by any other employee or agent, in defending a civil or criminal action, suit or proceeding in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by this Corporation. 5.4 Continuation of Indemnification. The indemnification and ------------------------------- advancement of expenses provided by, or granted pursuant to, this Article V shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. 10 5.5 Security for Obligations. This Corporation shall have the ------------------------ authority to create a fund of any nature, which may, but need not be, under the control of a trustee, or otherwise secure or insure in any manner, its indemnification obligations, whether arising under these By-laws or otherwise. This authority shall include, without limitation, the authority to (i) deposit funds in trust or in escrow, (ii) establish any form of self-insurance, (iii) secure its indemnity obligation by grant of a security interest, mortgage or other lien on the assets of this Corporation or (iv) establish a letter of credit, guaranty or surety arrangement for the benefit of such persons in connection with the anticipated indemnification or advancement of expenses contemplated by this Article V. The provisions of this Article V shall not be deemed to preclude the indemnification of, or advancement of expenses to, any person who is not specified in Section 5.1 of this Article V but whom this Corporation has the power or obligation to indemnify, or to advance expenses for, under the provisions of the BCL [or the DLA or] otherwise. The authority granted by this Section 5.5 shall be exercised by the Board of Directors of this Corporation. 5.6 Right to Defend. As soon as practicable after receipt by any --------------- person specified in Section 5.1 of this Article V of notice of the commencement of any action, suit or proceeding specified in Section 5.1 of this Article V, such person shall, if a claim with respect thereto may be made against this Corporation under Article V of these By-laws, notify this Corporation in writing of the commencement or threat thereof; however, the omission so to notify this Corporation shall not relieve this Corporation from any liability under Article V of these By-laws unless this Corporation shall have been prejudiced thereby or from any other liability which it may have to such person other than under Article V of these By-laws. With respect to any such action as to which such person notifies this Corporation of the commencement of threat thereof, this Corporation may participate therein at its own expense and, except as otherwise provided below, to the extent that it desires, this Corporation jointly with any other indemnifying party similarly notified, shall be entitled to assume the defense thereof, with counsel selected by this Corporation to the reasonable satisfaction of such person. After notice from this Corporation to such person of its election to assume the defense thereof, this Corporation shall not be liable to such person under Article V of these By-laws for any legal or other expenses subsequently incurred by such person in connection with the defense thereof other than as otherwise provided below. Such person shall have the right to employ his own counsel in such action, but the fees and expenses of such counsel incurred after notice from this Corporation of its assumption of the defense thereof shall be at the expense of such person unless: (i) the employment of counsel by such person shall have been 11 authorized by this Corporation; (ii) such person shall have reasonably concluded that there may be a conflict of interest between this Corporation and such person in the conduct of the defense of such proceeding or (iii) this Corporation shall not in fact have employed counsel to assume the defense of such action. This Corporation shall not be entitled to assume the defense of any proceeding brought by or on behalf of this Corporation or as to which such person shall have reasonably concluded that there may be a conflict or interest. If indemnification under Article V of these By-laws or advancement of expenses are not paid or made by this Corporation, or on its behalf, within 90 days after a written claim for indemnification or a request for an advancement of expenses has been received by the Corporation, such person may, at any time thereafter, bring suit against this Corporation to recover the unpaid amount of the claim or the advancement of expenses. The right to indemnification and advancements of expenses provided hereunder shall be enforceable by such person in any court of competent jurisdiction. The burden of proving that indemnification is not appropriate shall be on this Corporation. Expenses reasonably incurred by such person in connection with successfully establishing the right to indemnification or advancement of expenses, in whole or in part, shall also be indemnified by this Corporation. 5.7 Contract. A contract shall exist between this Corporation -------- and its officers and directors with respect to indemnification and advancement of expenses as provided by this Article V and as otherwise provided by applicable law. 5.8 Amendment. The repeal of Article V, in its entirety, of these --------- By-laws, or any other alteration or amendment thereof which may impair or otherwise diminish the protection afforded by such provisions to the persons described therein, shall be effective only with respect to transactions, actions or omissions to act by such persons which occur after the effective date of such repeal or amendment and shall have no effect whatsoever with respect to such transactions, actions or omissions occurring prior to such effective date. 5.9 Adoption. The provisions of this Article V were adopted by the -------- shareholders of this Corporation on April 24, 1987. 12 ARTICLE VI SHARE CERTIFICATES AND TRANSFERS -------------------------------- 6.1 Share Certificates. Every shareholder of record shall be ------------------ entitled to a share certificate representing the shares held by him. Every share certificate shall bear the corporate seal (which may be a facsimile) and the signature of the President or a Vice President and the Secretary or an Assistant Secretary or the Treasurer of the Corporation. Where a certificate is signed by a transfer agent or registrar the signature of any corporate officer may be a facsimile. 6.2 Transfers. Upon surrender to the Corporation of a share --------- certificate duly endorsed by the person named in the certificate or by attorney duly appointed in writing and accompanied where necessary by proper evidence of succession, assignment or authority to so transfer, and, subject to any restrictions on transfer as provided on the certificate or in the Articles of Incorporation, a new certificate shall be issued to the person entitled thereto and the old certificate shall be cancelled and the transfer recorded on the appropriate share register of the Corporation. A transferee of shares of the Corporation shall not be a record holder of such shares entitled to the rights and benefits associated therewith unless and until the share transfer has been recorded on the share transfer books of the Corporation. No transfer shall be made if it would be inconsistent with the provisions of Article 8 of the Pennsylvania Uniform Commercial Code. ARTICLE VII FISCAL YEAR ----------- 7.1 The fiscal year of the Corporation shall begin on the first day of January of each year and shall end on the following thirty-first day of December. ARTICLE VIII CONTRIBUTIONS ------------- 8.1 Contributions. The Board of Directors is authorized to make such ------------- contributions and donations for such 13 public and charitable purposes as may now, or hereafter, be authorized or permitted under the laws of Pennsylvania. ARTICLE IX PROVISIONS OF BUSINESS CORPORATION LAW -------------------------------------- NOT APPLICABLE TO THE CORPORATION --------------------------------- 9.1 Section 910 of the Pennsylvania Business Corporation Law, Pennsylvania Statute Annotated Title 15 (S)1910, shall not be applicable to this Corporation. (Amended June 2, 1988) 9.2 Section 911 of the Pennsylvania Business Corporation Law, Pennsylvania Statute Annotated Title 15, (S)1911, shall not be applicable to this Corporation. (Amended June 2, 1988) 9.3 Subsections (d) through (f) of Section 511 of the Business Corporation Law of 1988, Pennsylvania Statute Annotated Title 15 (S)511(d) through (S)511(f), shall not be applicable to this Corporation. (Amended May 15, 1990) 9.4 Subsections (e) through (g) of Section 1721 of the Business Corporation Law of 1988, Pennsylvania Statute Annotated Title 15 (S)1721(e) through (S)1721(g), shall not be applicable to this Corporation. (Amended May 15, 1990) 9.5 Subchapter G of Chapter 25 of the Business Corporation Law of 1988 shall not be applicable to this Corporation. (Amended May 15, 1990) 9.6 Subchapter H of Chapter 25 of the Business Corporation Law of 1988 shall not be applicable to this Corporation. (Amended May 15, 1990) ARTICLE X AMENDMENTS ---------- 10.1 These by-laws may be amended at any regular or special meeting of the Board of Directors by the vote of a majority of all the Directors in office or at any annual or special meeting of shareholders by the vote of the holders of a majority of the outstanding stock entitled to vote. Notice to shareholders of any such shareholders' meeting shall set forth the proposed amendment or change or a summary thereof. __________________ 14 By-laws amended and restated by Board resolution on May 15, 1990. Article III, (S)3.1.1 Amended by Board resolution on September 18, 1990. Article III, (S)3.1.2 Deleted by Board resolution on March 4, 1992. Article III, (S)3.1.2 Adopted by Board resolution on May 4, 1992. Article III, (S)3.1 Amended by Board resolution on May 22, 1992. Article III, (S)3.1 Amended by Board resolution on February 26, 1993. Article III, (S)3.1 Amended by Board resolution on October 6, 1995. Article III, (S)3.1 Amended by Board resolution on May 23, 1996. 15 EX-10.20 3 SERVICE DEED EXHIBIT 10.20 AUSTRALIA CINEMA MANAGEMENT PTY LIMITED AND JOHN ROCHESTER SERVICE DEED SERVICE DEED DEED dated May 7, 1996 between: 1. AUSTRALIA CINEMA MANAGEMENT PTY LIMITED (ACN 071 110 097) incorporated in New South Wales of Level 17, Chifley Tower, 2 Chifley Square, Sydney, New South Wales ("Company"); and 2. JOHN ROCHESTER of 71 Mimosa Road, Turramurra, New South Wales ("Employee"). RECITALS A. The Company has agreed to employ the Employee and the Employee has agreed to serve the Company on the terms of this Deed. B. The Employee has agreed that he will at the request of the Company work for and perform service on behalf of any Group Member. IT IS AGREED as follows. I. DEFINITIONS AND INTERPRETATION 1.1 DEFINITIONS The following definitions apply unless the context requires otherwise. BURGUNDY means Burgundy Two Pty Limited. GROUP means: (a) Ward Cinemas; (b) Burgundy; and (c) the Company and any Related Body Corporate from time to time. GROUP MEMBER means any member of the Group. INCENTIVE PAYMENT means the payment by the Company to the Employee under Clause 5.7 and Schedule 1. OPERATIVE DATE means 1 January 1996. RELATED BODY CORPORATE means, in relation to a body corporate, a body corporate which is: (a) a holding company of the first-mentioned body; (b) a subsidiary of the first-mentioned body; or (c) a subsidiary of a holding company of the first-mentioned body. RELEVANT GROUP MEMBER means each Group Member for whom the Employee may work or perform services from time to time. SHAREHOLDERS' AGREEMENT means the proposed agreement between Burgundy, Ward Cinemas, the Company, Robert Ward and Andrew Ward relating to Ward Cinemas and the Company. SUPERANNUATION FUND means a superannuation fund which is established by the Company and which is a COMPLYING SUPERANNUATION FUND as defined by the Superannuation Industry (Supervision) Act or any other relevant legislation. TERM means the period during which this Deed and the Employee's employment with the Company whether under Clause 8 or otherwise. TERMINATION DATE means the date of termination of the Employee's employment with the Company whether under Clause 8 or otherwise. TOTAL REMUNERATION means the amount of remuneration paid by the Company in respect of the Employee, being the amount set out in Clause 5.1(a), as adjusted from time to time under Clause 5.1(c). WARD CINEMAS means the proposed proprietary limited company to be established for the purpose of owning, developing and operating cinemas in areas other than the urban and suburban areas of Adelaide, Sydney, Brisbane, Melbourne, Perth and the Gold Coast. 1.2 INTERPRETATION Headings are for convenience only and do not affect interpretation. The following rules of interpretation apply unless the context requires otherwise. (a) The singular includes the plural and conversely. (b) A gender includes all genders. (c) Where a word or phrase is defined, its other grammatical forms have a corresponding meaning. (d) A reference to a Clause or Schedule is to a clause of or schedule to this Deed. (e) A reference to any party to this Deed or any other agreement or document includes the party's successors and permitted assigns. (f) A reference to conduct includes, without limitation, any omission, statement or undertaking, whether or not in writing. (g) A reference to currency is to Australian currency. (h) A reference to any legislation or to any provision of any legislation includes any modification or re-enactment of it, any legislative provision substituted for it and all regulations and statutory instruments issued under it. 2. TERM OF EMPLOYMENT 2.1 ENGAGEMENT The Company shall employ the Employee as Chief Executive Officer and the Employee shall serve the Company (or, if directed by the Company, one or more Group Members) in accordance with this Agreement during the Term. 2.2 TERM This Agreement, and the Employees' employment with the Company, will continue from the Operative Date for a period of 2 years after which it will be automatically renewed from year to year unless it is terminated by either party under Clause 8. 3. EMPLOYEE'S OBLIGATIONS 3.1 POSITION The Employee shall perform the duties of Chief Executive Officer or any other position that may be agreed in writing between the Company and the Employee from time to time. 3.2 DUTIES OF EMPLOYEE The Employee shall, as Chief Executive Officer, during the Term, report to the Chairman of the Board and the Board of Directors of the Company and shall do the following: (a) Give the whole of his time, ability and attention in normal working hours, or when reasonably required outside those hours, to the business and affairs of the Company and any Relevant Group Member. The Employee will not be entitled to receive any remuneration for work performed outside ordinary business hours. (b) Faithfully and diligently perform the duties and exercise the powers consistent with his office that may be assigned to him by the Company or any Relevant Group Member from time to time. (c) Comply with all reasonable directions given to him by the Company or any Relevant Group Member. (d) Observe and comply with the provisions set out in any written policy, practice or procedure circulated by the Company or any Relevant Group Member from time to time. (e) Use his best endeavours to promote the interests of the Group. (f) Protect the property of the Group from theft, loss, damage or neglect and without delay give notice immediately to the Company or any Relevant Group Member or its responsible representatives of any theft, loss, damage or neglect of such property which may come to his knowledge. 4. COMPETITION AND CONFIDENTIALITY DURING EMPLOYMENT 4.1 NO COMPETITION During the Term, the Employee shall not directly or indirectly be concerned or interested whether as principal, agent, partner, shareholder, director, employee or otherwise in any firm, corporation or entity involving the conduct of, or preparation for, any business in competition with, or of a similar nature to, any business for the time being carried on by the Company or any Group Member. 4.2 CONFIDENTIALITY During the Term, the Employee shall not, without the prior written consent of the Company or any Relevant Group Member, disclose or use any confidential information of any kind including, without limitation, any formula, process, method of manufacture, trade secret, record, data or any information concerning the business, affairs or customers of the Group which may come to his knowledge, except: (i) disclosure or use in the proper course of the Employee's duties; (ii) for information which is freely available to the public; or (iii) to the extent the Employee is required to disclose information by law or requirement of any regulatory body. 4.3 NO LIMITATION ON DUTIES OF EMPLOYEE Nothing in this Clause 4 limits the generality of the Employee's duties arising either in Clause 3 or otherwise. 5. REMUNERATION AND BENEFITS 5.1 TOTAL REMUNERATION (a) The Employee's Total Remuneration will be $200,000.00 per annum which will comprise the following: (i) superannuation contributions by the Company or a Relevant Group Member under Clause 5.5; (ii) payment by the Company or a Relevant Group Member for any benefits (whether subject to fringe benefits tax or otherwise) which the Employee receives under Clause 5.2; (iii) payment of fringe benefits tax by the Company or a Relevant Group Member under Clause 5.6; and (iv) payment of the balance of the Remuneration to the Employee in equal monthly installments on or about the 15th day of each month (the PAYMENT DATE). (b) The Total Remuneration shall be inclusive of all payments made to or for the benefit of the Employee other than any payments made under Clauses 5.3, 5.4 or 5.7 which shall be in addition to the Total Remuneration. (c) The Company shall undertake a review of the Total Remuneration on each anniversary of the Operative Date. The amount of any increase in the Total Remuneration resulting from such review will be in the sole and absolute discretion of the Company. The Company shall not reduce the Total Remuneration on any such review. 5.2 APPLICATION OF TOTAL REMUNERATION The Employee may elect by notice to the Company to substitute any benefits which may be lawfully provided by the Company to the Employee for any part of the Total Remuneration and on receipt of a request from the Employee the company shall apply a part of the Total Remuneration to the provision of the requested benefits. 5.3 BONUS PAYMENTS In its sole and absolute discretion, the Company may make bonus payments to the Employee throughout the term of the Employee's employment. 5.4 TRAVEL AND EXPENSES The Company or any Relevant Group Member shall reimburse the Employee for all travelling and other out of pocket expenses properly incurred by the employee in or about its business. Those expenses must be evidenced in the manner that the company or the Relevant Group Member reasonably requires. 5.5 SUPERANNUATION The Employee shall be entitled to be a member of the Superannuation Fund. The Company or Relevant Group Member shall provide for contributions in respect of the Employee to the Superannuation Fund in accordance with the rules of that fund. The Company or a Relevant Group Member shall contribute the minimum level contribution required to satisfy the requirements of any relevant legislation. 5.6 FRINGE BENEFITS TAX The Company shall deduct from the Employee's remuneration by way of reimbursement all fringe benefits taxes associated with the provision of payments and reimbursements to the Employee, other than any fringe benefits tax payable in respect of a single car parking space in Sydney which will be paid by the Company. 5.7 INCENTIVE PAYMENT The Company shall pay the Employee the Incentive Payment under terms set out in Schedule 1. 6. LEAVE ENTITLEMENTS 6.1 ANNUAL LEAVE The Company shall allow the Employee annual leave in accordance with the relevant legislative requirements. 6.2 SICK LEAVE The Company shall allow the Employee long service leave in accordance with the relevant legislative requirements. 6.3 LONG SERVICE LEAVE The Company shall allow the Employee long service leave in accordance with the relevant legislative requirements. 7. IRREVOCABLE OFFER This Deed constitutes an irrevocable offer by the Employee to any Group Member to become a party to this Deed. A Group Member shall be taken to have accepted the offer and to be a party to this Deed if the Employee works for, or performs services on behalf of, that Group Member. 8. TERMINATION 8.1 TERMINATION FOR BREACH BY EMPLOYEE The Company may immediately terminate this Deed by notice to the Employee in writing if the Employee at any time: (a) commits any serious breach or persistently breaches this Deed including, without limitation, intentional disobedience, dishonesty, serious or persistent breach of duty or serious or persistent neglect; (b) materially breaches this Deed and does not remedy that breach within two days after receiving notice from the Company specifying the breach; (c) commits an act of bankruptcy, is declared bankrupt or enters into any composition or arrangement with or makes any assignment of his property in favor of his creditors generally. (d) becomes of unsound mind or a person whose person or estate is liable to be dealt with in any way under laws relating to mental health; (e) is convicted of a criminal offence which, in the reasonable opinion of the Company, will detrimentally affect any Group Member; or (f) has conducted himself in a manner which, in the reasonable opinion of the Company, will detrimentally affect any Group Member. 8.2 PAYMENT ON TERMINATION If the Employee's employment is terminated under Clause 8.1, the Company shall not be obliged to pay the Employee any moneys other than the following. (a) Any accrued remuneration to which the Employee is entitled to on Termination Date. (b) Any contributions to the Superannuation Fund due as at the Termination Date. (c) Any amount to which the Employee is entitled in lieu of unused annual leave. (d) Any amount to which the Employee is entitled under the relevant legislation relating to long service leave. 8.3 GENERAL TERMINATION (a) The Company may at any time and for any reason terminate the Employee's employment by giving one month's notice to the Employee. (b) If the Company terminates the Employee's employment under paragraph (a), the Company shall pay the Employee the entitlements and the severance payment specified in paragraphs (c) and (d) respectively in accordance with those paragraphs. (c) On the expiry of the relevant notice period, the Company shall pay the Employee the following entitlements: (A) any payments or reimbursements which are owed to the Employee under this Deed; and (B) any amounts which are owed to the Employee under the relevant legislative requirements relating to annual leave and long service leave. (d) Commencing on the date which is one month after the date of expiry of the relevant notice period and monthly thereafter, the Company shall pay the Employee a termination payment as follows: (i) if the Company terminates the Employee's employment under paragraph (a) before the second anniversary of the Operative Date, the Company shall pay in 17 equal monthly installments the amount of $283,334.00 less: (A) any payments made to the Employee for long service leave; and (B) any additional payments which the Company is or becomes obliged to make to the Employee under any order or direction of any court, tribunal or other judicial or administrative body; or (ii) if the Company terminates the Employee's employment under paragraph (a) after the second anniversary of the Operative Date, the Company shall pay in 11 equal monthly installments the amount $183,334.00 less: (A) any payments made to the Employee for long service leave; and (B) any additional payments which the Company is or becomes obliged to make to the Employee under any order or direction of any court, tribunal or other judicial or administrative body. (e) Any outstanding entitlements under paragraph (d) will be accelerated and become immediately due and payable by the Company to the Employee if both of the following events occur: (i) both Reading Company and Craig Corporation withdraw from any material investment or involvement in the operations of all Group Members and their respective Relevant Body Corporates in Australia; and (ii) the Employee does not receive an offer of employment on terms no less favorable than those contained in this Deed from the purchaser (if any) of any Group Member. (f) The parties acknowledge that any payments made by the Company under this clause 8.3 are in the nature of additional consideration by the Company to the Employee for the Employee's covenants in clause 10.2. (g) The Employee may at any time and for any reason resign as Chief Executive Officer by giving four (4) months' notice to the Company. 8.4 SUSPENSION OF EMPLOYEE The Company may suspend the Employee on full pay for any period if the Company considers it in the best interests of the Company to do so. 8.5 NO CLAIM FOR COMPENSATION (a) If this Deed is terminated by the Company under Clause 8, the Employee will not be entitled to claim any amounts by way of retirement allowance or liquidated damages or any other payments as a consequence of termination except for the payments set out in Clauses 8.2 and 8.3. (b) Any payments by the Company under this Clause 8 shall be without prejudice to any rights or remedies the Company may have against the Employee and shall not constitute any admission of fact or liability. 8.6 TRANSFER OF SUPERANNUATION After termination of this Deed, subject to the terms of the trust deed and rules of the Superannuation Fund, the Company shall cause that the trustee of the Superannuation Fund transfers the Employee's entitlements under the Superannuation Fund to another superannuation fund nominated by the Employee or deals with then otherwise in accordance with relevant legislation. 8.7 SURVIVAL OF EMPLOYEE'S OBLIGATIONS ON TERMINATION Clause 8.5, 8.8, 8.9, 9 and 10 survive the termination of this Deed. 8.8 RETURN OF COMPANY PROPERTY (a) On termination of this Deed, the Employee shall immediately deliver to the Company all books, documents, papers, materials, credit cards, motor vehicles and other property of the Group which may then be in the Employee's possession or under his power or control. (b) At the request of the Company, the Employee shall sign a statutory declaration to the effect that: (i) he has complied with paragraph (a); and (ii) he does not have in his possession or under his power or control any property of the Group. (c) If the Company requests a statutory declaration under paragraph (b), the Company may withhold any payments due to the Employee under this Clause until the Employee has complied with that paragraph. 8.9 RESIGNATION AS DIRECTOR Subject to the Shareholders' Agreement and at the request of the Company, the Employee shall resign from any office held by him on the board of any Group Member on the termination of his employment. 9. AMALGAMATION OR RECONSTRUCTION The Employee will have no claim against the Company in respect of the termination of this Deed and shall not be entitled to any payment under Clause 8.3(d) if: (a) the Employee is terminated because of the liquidation of the Company for the purposes of amalgamation or reconstruction of the Group; and (b) the Employee is offered employment with any business of the Company or Group resulting from that amalgamation or reconstruction on terms not less favourable than the terms of the Deed. 10. OBLIGATIONS OF EMPLOYEE AFTER EMPLOYMENT CEASES 10.1 CONFIDENTIALITY (a) Subject to paragraph (b), the Employee undertakes to the Company and each Relevant Group Member that her will not, at any time after his employment cease, in any manner directly or indirectly disclose or use any confidential information of any kind, including, without limitation, any formula, process, method of manufacture, trade secret, record, data or any information concerning the business, affairs or customers of the Company acquired by the Employee in the course of or in consequence of his employment whether before or after the date of this Deed. (b) Paragraph (a) does not apply to the disclosure of information which is freely available to the public, or disclosures required of the Employee by any applicable law or requirement of any regulatory body. 10.2 COVENANT NOT TO COMPETE The Employee covenants with the Company that, neither: (a) the Employee, whether: (i) directly or indirectly; (ii) on hid own account; (iii) jointly with or on behalf of any other person or corporation as an officer, employee, independent contractor, partner, joint venturer or agent; or (iv) as principal, employee, partner, agent, director, or otherwise on any account or pretence; (b) any agent, independent contractor or employee while employed or engaged by him or by any firm or corporation in which he has a substantial interest whether that interest is legally enforceable or not; nor (c) any firm or corporation in which he may be interested as an employee, director, shareholder, beneficial owner or controller (whether that control can be legally enforced or not) of shares, lender or adviser or otherwise, shall: (1) carry on or be engaged or concerned in, any business in competition with, or of a similar nature to, any business being carried on by any Group Member as at the Termination Date: or (2) either on his own account or for any person, firm, company, organization, or entity solicit or endeavour to solicit or entice away from the Group any director or employee or any customer or supplier of the Group, for a period of 2 years after the Termination Date in any Australian state or territory in which any Group Member carries on business as at the Termination Date. 10.3 EXCEPTION Clause 10.2 shall not prevent the Employee from holding less than 5% of the issued capital of any company whose shares are listed on the Australian Stock Exchange Limited. 10.4 REMEDIES The Employee acknowledges that the remedy at law for breach of Clause 10.1 or 10.2 would be inadequate and that temporary and permanent relief by way of injunction against him may be granted in any proceedings which the Company or any Relevant Group Member or any persons on its behalf may bring to enforce any of the provisions of that Clause without the necessity of proof of actual damage suffered by the Company or any Relevant Group Member as the case may be. 10.5 PROTECTION OF GOODWILL The Employee acknowledges that having regard to his duties with the Group, his undertakings in Clauses 10.1, 10.2 and 10.3 are reasonable and necessary for the protection of the goodwill of the Group. 11. SET-OFF On termination of his employment, the Employee authorizes each Relevant Group Member to set-off against and deduct from all or any amounts payable to the Employee, any amount owing by the Employee to that Group Member on any account. 12. GOVERNING LAW This Deed is governed by the laws of New South Wales. The parties submit to the non-exclusive jurisdiction of courts exercising jurisdiction there. 13. NO WAIVER No failure to exercise and no delay in exercising any right, power or remedy under this Deed will operate as a waiver. Nor will any single or partial exercise of any right, power or remedy preclude any other or further exercise of hat or any other right, power or remedy. 14. NOTICES Any notice required to be given under this Deed by any party to another shall be in writing addressed to the intended recipient at the address last notified by the intended recipient to the party giving notice. 15. SEVERANCE Any provision of this Deed which is prohibited or unenforceable in any jurisdiction will be ineffective in that jurisdiction to the extent of the prohibition or enforceability of that provision in any other jurisdiction. 16. ASSIGNMENT The rights and obligations of each party under this Deed are personal. They cannot be assigned, charged or otherwise dealt with and no party shall attempt or purport to do so, without the prior written consent of the parties. 17. AMENDMENT This Deed may be amended only by an instrument in writing executed by or on behalf of both parties. 18. ENTIRE DEED This Deed contains the entire agreement of the parties with respect to its subject matter. It sets out the only conduct relied on by the parties and superseded all earlier conduct by the parties with respect to its subject matter. EXECUTED AS A DEED IN SYDNEY EXECUTED FOR AND ON BEHALF OF AUSTRALIA CINEMA MANAGEMENT PTY LIMITED BY /s/ James J. Cotter ------------------------------ Signature Director ------------------------------ Office held /s/ S. Craig Tompkins - -------------------------------- Witness S. Craig Tompkins Corporate Seal - ------------------------------- Print name SIGNED SEALED and DELIVERED ) by JOHN ROCHESTER /s/ B. John Rochester ------------------------------ in the presence of: ) Signature /s/ C. S. Ward - -------------------------------- Witness C. S. Ward - -------------------------------- Print name SCHEDULE 1 INCENTIVE PAYMENT (CLAUSE 5.7) 1. OBLIGATION TO PAY THE INCENTIVE PAYMENT (a) As long as this Deed has not been terminated earlier, on or at any time after the fourth anniversary of the Operative Date, the Employee may elect by notice to the company to receive the Incentive Payment. On the Company's receipt of that notice, the Employee will be entitled to payment of the Incentive Payment within one hundred and twenty (120) days after the end of the applicable Calculation Period. (b) If the Company terminated the Employee's engagement under Clause 8.3 before the fourth anniversary of the Operative Date for any reason other than for cause the Employee will still be entitled to payment of the Incentive Payment within one hundred and twenty (120) days after the end of the applicable Calculation Period. (c) The Incentive Payment shall be calculated in accordance with the formula set out in Clause 2 of this Schedule 1. 2. INCENTIVE PAYMENT FORMULA The formula for calculating the Incentive Payment is: IP = 1.0% X [(6 X CF) - (C + D)] where: IP means Incentive Payment; CF means the operating income of all Included Burgundy Cinemas during Calculation Period less that part of the Company's general and administrative expenses which are Allocable to the Included Burgundy Cinemas; C means the value of that part of the shareholder's funds of the Burgundy Two as at the end of the Calculation Period which is Allocable to Included Burgundy Cinemas; D means the value of that part of the net debt incurred by Burgundy Two during the Calculation Period which is Allocable to Included Burgundy Cinemas; ALLOCABLE means that prorata portion determined by multiplying the amount to be allocated by a fraction, expressed as a percentage, the numerator of which is the average number of screens in Included Burgundy Cinemas and the denominator of which is the total average number of screens in all cinemas owned, directly or indirectly, by Burgundy Two during the Calculation Period. In the case of less than wholly owned Affiliates, the number of screens owned by such Affiliates multiplied by the percentage ownership held by Burgundy Two, or by one or more of its wholly owned Affiliates. For the purpose of determining the average number of screens, no screen will be included with respect to any time period during which it is not open for business. In the case of determining as appropriate allocation of debt: (a) the entirety of any debt and all of the screens of any Affiliate will be included, whether or not such Affiliate is less than wholly owned by Burgundy Two, to the extent that Burgundy Two or any of its parents or Affiliates are liable for such debt; (b) guarantees will be treated the same as debt to the extent of the amount guaranteed; and (c) intercompany debt will be treated in a manner which avoids double counting of such indebtedness. BURGUNDY TWO means Burgundy Two Pty Limited of Level 17, The Chifley Square, Sydney NSW 2000. CALCULATION PERIOD means the twelve (12) month period ending on either: (a) if the Employee notifies the Company under Clause 1(a) of this Schedule 1, the last day of the fiscal year in which the Company receives such notice; or (b) if the Company terminates the Employee's employment under Clause 8.3 before the fourth anniversary of the Operative Date, then, at the Employee's election (such election to be given in writing to the Company within sixty (60) days after the Employee has been given notice under Clause 8.3 by the Company), either: (i) the last day of the fiscal year in which the Company's termination of the Employee's employment is effective; or (ii) the last day of the fiscal year in which the fourth anniversary of the Operative Date would have fallen. INCLUDED BURGUNDY CINEMAS means the cinemas in which Burgundy Two holds, directly or indirectly through one or more Affiliates, a freehold or leasehold interest at any time during the Calculation Period, other than cinemas which were acquired as a part of a chain of 15 or more screens. EX-10.21 4 LETTER OF INTENT Exhibit 10.21 Reading Company 30 South 15th Street, Suite 1300 Philadelphia, Pennsylvania 19102 August 12, 1996 Mr. Steve Wesson President Citadel Holding Corporation 550 S. Hope Street, Suite 1825 Los Angeles, California 90071 Ms. Robin W. Skophammer Chief Financial Officer Craig Corporation 550 S. Hope Street, Suite 1825 Los Angeles, California 90071 Dear Mr. Wesson and Ms. Skophammer: This letter is intended to set forth the principal terms of a proposed transaction among Reading Company ("Reading"), Citadel Holding Corporation ("Citadel"), Craig Corporation ("Craig"), Reading Entertainment, Inc. ("Reading Entertainment"), Craig Management, Inc., ("CMI"), and Citadel Acquisition Corp., Inc. ("CAC"). It is understood that this letter is not a binding agreement, but constitutes a statement of intentions only and is subject to the preparation, execution and delivery of definitive documentation by each of Reading, Reading Entertainment, Citadel, CAC, Craig and CMI, and, in the case of Reading, to the approval of its stockholders and to the delivery of fairness and legal opinions to the respective parties. Reading is planning to form a new holding company (the "Holding Company Transaction") to be organized under the laws of the State of Delaware under the name Reading Entertainment. Promptly following the completion of the Holding Company Transaction, Reading Entertainment would issue the securities described below in exchange for the consideration described below. 1. Citadel Holding Corporation and Citadel Acquisition Corp., Inc.: --------------------------------------------------------------- 1.1 Consideration to be Paid: Cash in the amount of $7 million, by ------------------------ wire transfer in currently available funds at the closing. 1.2 Reading Entertainment Securities to be Issued: Series A Voting --------------------------------------------- Cumulative Convertible Preferred Stock, with the following terms: Stated Value: $7 million, $100 per share. ------------ Dividend: 6 1/2% per annum, payable quarterly, and -------- cumulative to the extent not paid. Conversion Price: $11.50 per share ---------------- . No conversion for 18 months, unless there is a public disclosure or announcement of a transaction that would result in a third party (other than a Craig affiliate) owning 50% or more of common stock or voting rights of Reading or other change in control of Reading. . On change of control, Reading would have the right to (i) call Citadel or CAC owned Series A preferred shares (at a redemption premium of 8% per annum ("p.a.") from date of issuance through year 4 then decreasing 1% p.a. thereafter beginning in year 5) only if Craig assumes Citadel's asset put obligation described below and (ii) call all other Series A preferred shares (at the redemption premium specified in clause (i) above. Citadel has the right to put (at stated value plus accrued but unpaid dividends and the same redemption premium). In the event Craig assumes the asset put obligation, Craig will agree to issue Craig Class A Common Preference Stock (the "Craig Stock") and the exercise price for the Craig Stock to be increased or decreased from Craig Stock market price to reflect the percentage of discount or premium on Reading stock (measured in terms of percentage difference between market price of Reading stock on change of control date and $11.75 or $12.25 per share, as applicable) which Citadel would be entitled to receive. Craig Stock market price (prior to adjustment) to be measured over 20 consecutive trading days prior to change of control date. Vote Per Share: 9.64 votes, which is approximately equal to -------------- Stated Value / Common Stock price at close of trading on the date of this Letter of Intent. . Usual and customary preferred voting rights, plus separate class vote for modifications or issuance of any senior or pari passu equity securities. Forced conversion: Trading average of 135% of conversion price over ----------------- 180 trading day period. Term: Perpetual ---- Put Rights: After 5 years at stated value plus accrued but ---------- unpaid dividends. In addition, right to put if dividend is in arrears 4 quarters; but in no event shall put be exercised sooner than 18 months. Call Rights: Callable after 5 years at 108% of stated value ----------- plus accrued but unpaid dividends, decreasing thereafter at 2% p.a. Ranking: Senior to the Series B Preferred Stock. ------- Registration Rights: Two demands; unlimited piggyback. -------------------- Transferability: Freely transferable, except for restrictions --------------- based upon securities laws or charter provisions. Other: . Reading has the right of first offer on 100% ----- of any common or preferred stock of Reading that Citadel sells. Reading will have 10 business days from being offered the stock at a stated price. If Reading does not elect to purchase within 10 business days, Citadel has 180 days to sell at that or higher price. 1.3 Asset Put: Citadel will have the right to exchange all or --------- substantially all of its assets (other than Excluded Assets), together with any debt encumbering or related to such assets, for Reading Common Stock. Term: Immediately exercisable by Citadel. Notice of ---- exercise must be delivered on or before 30 days after filing of Reading's annual report on Form 10-K for fiscal 1999. Assets: (1) $20M in Net Asset Value (Gross Value less ------ liabilities including debt), of existing assets (including cash and cash proceeds) at fixed stock price set forth below; (2) existing assets over $20M in Net Asset Value (up to a maximum of $30M in Net Asset Value), and after acquired assets (other than cash) can only be put at market price of stock, and (3) after acquired assets over $5 M can only be put with Reading's consent. No restrictions on Citadel encumbering existing assets with additional or refinanced debt. Excluded Assets: (1) the Series A Preferred Stock and Common --------------- Stock issued on conversion, (2) cash or marketable securities as Citadel may require to maintain appropriate level of liquidity, (3) assets with liabilities in excess of fair market value of assets, and (4) after acquired assets over $5M (except with Reading's consent). Asset Value: Fair market value ----------- Common Stock Price ------------------ issued in Exchange: Up to October '97 $11.75 per share thereafter ------------------ $12.25 per share. If average trading price of Reading Common Stock is in excess of 130% of put price for more than 60 days, then Citadel shall have 120 days, after notice from Reading, to give notice of exercise of the asset put. If Citadel does not give notice of exercise at this time, then put price shall be fair market value of Common Stock. Reading shall convert a portion of the Common Stock into debt for that amount that would take the cumulative change of control percentage of Reading under IRC (S) 382 over 45% after exercise of the asset put. The amount converted to debt would be based on the value of Common Stock that would have been received. The economic terms of the debt would be determined by an independent investment banker. If Citadel elects to sell the debt within 90 days from issuance, Reading will take all reasonable actions to assist in selling. Reading to reimburse Citadel for Citadel's expenses and for amount by which the net proceeds from the sale of the debt is less than the value of the Common Stock that would have been received on the date of conversion. Registration Rights: Reading Common Stock received to have same ------------------- registration rights as described in Section 1.2. Information Statement: Reading's expense --------------------- Citadel 3% Preferred Stock: Redemption premium accrual rate reduced to 3% -------------------------- from Closing (no retroactive adjustment). No conversion for a one-year period commencing on the 15th day following the filing of Citadel's Form 10-K for fiscal 1996, except in the event of a change of control of Citadel. 1.4 Other Provisions: Reading will reimburse Citadel and CAC for ---------------- their reasonable out of pocket expenses (including fees and expenses of legal counsel and financial advisors) with respect to the transaction, up to a maximum reimbursement of $280,000. 2. Craig Corporation and Craig Management, Inc.: ------------------------------------------- 2.1 Consideration to be Paid: Craig and CMI will deliver at the ------------------------ closing their entire right, title and interest in the following assets: a. 693,650 shares of Series B Stater Bros. Holdings Inc. 10.5% Preferred Stock, stated value $100.00 per share, b. 1,329,114 shares of Citadel 3% Cumulative Voting Convertible Preferred Stock, stated value $3.95 per share, and c. 50% Membership interest and any related interest in Reading International Cinemas LLC. 2.2 Reading Entertainment Securities to be Issued: --------------------------------------------- a. Series B Voting Cumulative Convertible Preferred Stock, with the following terms: Stated Value: $55.0 million, $100 per share ------------ Dividend: 6 1/2% per annum, payable quarterly, and -------- cumulative to the extent not paid. Conversion Price: $12.25 per share ---------------- a. No conversion for 18 months. b. Forced Conversion: no forced conversion for first five years and then forced conversion when average trading price of 135% of conversion price over 180 trading day period. Vote Per Share: 9.64 votes, which is approximately equal to -------------- stated value / Common Stock price at the close of trading on the date of this Letter of Intent. Plus, usual and customary preferred voting rights, including right to elect director in the event of missed dividends for six or more quarters, whether or not consecutive. Term: Perpetual ---- Put Rights: None ---------- Call Rights: No call for first five years and then callable ----------- at 108% of stated value plus accrued but unpaid dividends, decreasing thereafter at 2% p.a. Ranking: Junior to Series A Preferred Stock ------- Registration Rights: None ------------------- Transferability: Freely transferable, except for restrictions --------------- based upon securities laws or charter provisions. b. 2,476,190 shares of Reading Entertainment Common Stock 2.3 Other Agreements: Craig will agree to vote its shares in Reading ---------------- in favor of the Holding Company Transaction and in favor of the approval of the transactions contemplated hereby. At the closing, (i) the Amended and Restated Capital Funding Agreement between Reading Investment Company Inc., Craig and CMI dated March 8, 1996, and (ii) the Warrant and Preferred Purchase Options set forth in the Stock Purchase and Sale Agreement dated March 27, 1996 by and between Craig and Reading Holdings, Inc., will be terminated. The definitive documentation will include, among other things, usual and customary terms and conditions including usual and customary representations, warranties, indemnities and conditions to closing. It shall be a condition to Closing for Citadel and CAC, on the one hand, and Craig and CMI, on the other, that the other party shall have performed all of its obligations under the Exchange Agreement. Each of the parties represents that they have reviewed a draft dated August 8, 1996 of the proposed Exchange Agreement and that they are in substantial agreement with respect to the material terms and conditions set forth therein. The parties agree to consult with one another in the preparation of a press release reasonably acceptable to all parties announcing the transactions contemplated by this agreement and as to the wording of any applicable filings made on Form 13D with respect to Reading and/or Citadel, and to thereafter refrain from public statements concerning the transaction, absent prior notification to and consultation with the other parties hereto. If this letter of intent correctly sets forth our understanding, please so indicate by executing and returning a copy of this letter. By executing and delivering this letter of intent, subject to the satisfaction of the conditions precedent set forth in this letter, Reading is representing and warranting that the above terms and conditions have been reviewed and approved by the Independent Committee of, and the Board of Directors of, Reading, after advice and counsel from its legal counsel and financial advisors. By executing and delivering this letter of intent, subject to the satisfaction of certain of the conditions precedent set forth in this letter, Citadel, CAC, Craig and CMI are similarly representing and warranting that the above terms and conditions, in so far as they relate to Citadel or to Craig, as the case may be, have been reviewed and approved by the Independent Committees of, and the Boards of Directors of, Citadel or Craig as the case may be, after advice and counsel from their respective legal counsel and financial advisors. Very truly yours, /s/James J. Wunderle James J. Wunderle Chief Financial Officer ACKNOWLEDGED AND AGREED Citadel Holding Corporation Craig Corporation /s/ Steve Wesson /s/ Robin W. Skophammer - ---------------- ----------------------- By: Steve Wesson By: Robin W. Skophammer Its: President Its: Chief Financial Officer Date: August 12, 1996 Date: August 12, 1996 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 32,431 49 726 0 88 34,292 10,594 1,469 80,077 7,856 519 52 0 0 69,646 80,077 2,064 10,686 347 7,231 2,394 0 0 1,061 22 1,039 0 0 0 1,039 $0.21 $0.21 See "Note 2 - Summary of Significant Accounting Policies, Available-for-Sale Securities" to the Notes to Condensed Financial Statements for June 30, 1996.
-----END PRIVACY-ENHANCED MESSAGE-----