<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _____________________
Commission file number 1-6123
CRAIG CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 95-1620188
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
550 South Hope Street
Suite 1825 Los Angeles CA 90071
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 239-0555
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. There were 4,171,870 shares of
Common Stock, $0.25 par value per share, and 1,622,000 shares of Class A Common
Preference Stock, $0.01 par value per share, as of February 14, 1996.
================================================================================
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
INDEX
-----
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART 1. Financial Information
- -------
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1995 (Unaudited)
and September 30, 1995........................................ 3
Consolidated Statements of Earnings for Three Months Ended
December 31, 1995 and 1994 (Unaudited)........................ 4
Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 1995 and 1994 (Unaudited).................. 5
Notes to Consolidated Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 14
PART 2. Other Information
- -------
Item 1. Legal Proceedings..................................... 18
Item 2. Changes in Securities................................. 18
Item 3. Defaults Upon Senior Securities....................... 18
Item 4. Submission of Matters to a Vote of Security Holders... 18
Item 5. Other Information..................................... 18
Item 6. Exhibits and Reports on Form 8-K...................... 18
Signatures........................................................ 19
</TABLE>
2
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1995 1995
------------ ------------
(In thousands of dollars)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $18,645 $21,059
Other current assets 320 323
------- -------
Total current assets 18,965 21,382
Investments in affiliates 64,198 60,171
Excess of cost over net assets acquired, net 1,960 2,201
Other assets 5,667 915
------- -------
Total assets $90,790 $84,669
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,003 692
Payable to affiliate 1,690 --
Land contract payable 3,144 --
-------- --------
Total current liabilities 5,837 692
Other long-term liabilities 44 56
Option to sell investment in affiliate 14,650 14,650
Deferred tax liabilities 6,247 5,380
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, par value $.25,
1,000,000 shares authorized, none issued -- --
Class A common preference stock, par value
$.01, 10,000,000 shares authorized,
1,645,000 issued and outstanding 16 16
Class B common stock, par value $.01,
20,000,000 shares authorized, none issued -- --
Common stock, par value $.25,
7,500,000 shares authorized, 5,444,065
shares issued 1,361 1,361
Additional paid-in capital 30,793 30,793
Cumulative foreign currency
translation adjustment (20) --
Retained earnings 44,708 43,858
Cost of treasury shares, 1,231,095 and 1,154,095 (12,846) (12,137)
-------- --------
Total shareholders' equity 64,012 63,891
-------- --------
Total liabilities and shareholders' equity $ 90,790 $ 84,669
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1995 1994
-------------------------
(In thousands of dollars,
except per share amounts)
<S> <C> <C>
Service income from affiliate $ 375 $ 375
Equity in earnings of affiliates 1,933 723
Interest and dividend income 320 408
------ ------
Revenue 2,628 1,506
------ ------
Operating, general and
administrative expenses 1,036 730
------ ------
Earnings before minority
interests and income taxes 1,592 776
Minority interest in net loss
of consolidated subsidiary 125 --
Provision for income taxes (867) (355)
------ ------
Net earnings 850 421
------ ------
Earnings per common and
common equivalent share $ 0.14 $ 0.07
------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1995 1994
---------- ----------
(In thousands of dollars)
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 850 $ 421
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 25 25
Amortization of excess purchase price 16 17
Undistributed earnings of affiliates (1,933) (723)
Increase in deferred taxes 867 355
Changes in operating assets and liabilities:
Decrease (increase) in other current assets 3 (369)
Decrease (increase) in other assets (445) --
Increase (decrease) in accrued liabilities 356 220
------- -------
Net cash (used) in operating activities (261) (54)
INVESTING ACTIVITIES
Purchase of property (4,232) --
Other investments (100) (343)
Acquisition of stock of affiliates (1,926) (291)
------- -------
Net cash provided (used in) investing activities (6,258) (634)
FINANCING ACTIVITIES
Borrowings and advances from affiliates 1,690 --
Short-term debt incurred for land purchase 3,144 --
Common stock repurchase (709) --
------- -------
Net cash provided by financing activities 4,125 --
EFFECT OF FOREIGN EXCHANGE RATE CHANGES (20) --
------- -------
(Decrease) in cash and cash equivalents (2,414) (688)
Cash and cash equivalents at beginning of period 21,059 21,205
------- -------
Cash and cash equivalents at end of period $18,645 $20,517
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Basis of Presentation and Principle of Consolidation
- ----------------------------------------------------
The consolidated financial statements include the accounts of Craig Corporation
and its majority-owned subsidiaries (the "Company"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
During the three months ended December 31, 1995, the Company and its 49%
affiliate, Reading Company ("Reading"), formed Reading International Cinemas LLC
("Reading International") to develop and operate multiplex cinemas in Australia.
Reading International is owned in equal shares by the Company and Reading. The
Company's 50% direct interest in Reading International, together with its 49%
interest in Reading, results in a 74.5% interest by the Company in Reading
International. Minority interest represents the minority stockholders'
proportionate share of the equity in the income (loss) of Reading International
which is included in the consolidated financial statements.
Investments in affiliates in which the Company holds a 20 to 50% percent
ownership interest are accounted for using the equity method (Note 2).
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments of a recurring nature considered necessary
for a fair presentation of its financial position as of December 31, 1995 and
September 30, 1995, and the results of operations and its cash flows for the
three months ended December 31, 1995 and 1994. The results of operations for
the three month periods ended December 31, 1995 and 1994 are not necessarily
indicative of the results of operations to be expected for the entire year.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, therefore, do not include
all information and footnotes required to be in conformity with generally
accepted accounting principles. The financial information provided herein,
including the information under the heading, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," is written with the
presumption that the users of the interim financial statements have read, or
have access to, the most recent Annual Report on Form 10-K which contains the
latest audited financial statements and notes thereto, together with
Management's Discussion and Analysis of Financial Condition and Results of
Operations as of September 30, 1995 and for the year then ended.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash equivalents are
stated at cost, which approximates market value, and consist primarily of
federal agency securities. Included in cash and cash equivalents at December
31, 1995 is approximately $16.4 million, which is held in government securities
having maturities of three months or less.
6
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
Earnings Per Share
- ------------------
Earnings per share is based on 5,916,220 and 6,024,970, the weighted average
number of shares of common stock outstanding during the three months ended
December 31, 1995 and 1994, respectively. Common stock equivalents (stock
options) have been excluded from the computations because the effect on such
computation was not significant or was anti-dilutive in the periods reported.
Depreciation and amortization
- -----------------------------
Depreciation and amortization of property and leasehold improvements is
generally provided using the straight line method over the estimated useful
lives of the assets or the shorter of the estimated lives or lease term for
leasehold improvements.
The excess of cost over net assets acquired is amortized using the straight line
method over periods ranging from 20 to 40 years. Accumulated amortization at
December 31, 1995 and September 30, 1995 was approximately $601,000 and $585,000
respectively. The $225,000 decrease in excess of cost over net assets acquired
between September 30, 1995 and December 31, 1995 resulted from the accounting
for the additional purchases of investments in equity affiliates.
NOTE 2 - INVESTMENTS IN AFFILIATES
- ----------------------------------
The Company's investments in affiliates at December 31, 1995 and September 30,
1995 consist of the following:
<TABLE>
<CAPTION>
December September
1995 1995
-------- -------
(in thousands)
<S> <C> <C>
Stater Bros. Holdings Inc. ("SBH") $22,041 $20,160
Reading Company ("RC") 33,680 32,725
Citadel Holding Corporation ("CHC") 8,477 7,286
------- -------
$64,198 $60,171
======= =======
</TABLE>
Stater
- ------
Investments in affiliates include the Company's 50% interest (48% voting
interest) in Stater Bros. Holdings Inc. ("SBH" and collectively with its
operating subsidiaries, "Stater"). The remaining 50% interest (52% voting
interest) in Stater is owned by La Cadena Investments ("La Cadena"), a general
partnership consisting of key management executives of Stater.
In 1994, the Company received $14.65 million from SBH pursuant to an agreement
which pertains to an option granted by the Company to Stater, which in turn
provides the means by which the Company's continuing 50% economic interest in
Stater may, in the future, be acquired by Stater, at Stater's option. The
$14.65
7
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
million received is included in the balance sheet as a deferred credit under the
caption "Option to sell investment in affiliate". The reciprocal option rights
held by the Company and La Cadena Investments under the existing Shareholder
Agreement are suspended for the life of the option. The option has an initial
term of two years, but may be extended for ten additional years if Stater
converts the Company's common stock interest in SBH to preferred stock prior to
March 8, 1996. In February 1996, SBH exercised its right to convert all the
Company's Common stock in SBH into 693,650 shares of SBH's Series B Preferred
Stock, stated value $100 per share, effective March 8, 1996. The preferred
stock will have a liquidation preference of approximately $69.365 million and a
cumulative dividend preference beginning at 10.5%, increasing to 12% after 78
months, and further increasing every twelve months thereafter by an additional
1%, to a terminal cumulative dividend rate of 15%. In the event dividends on
the preferred stock for two or more quarterly dividend periods remain unpaid by
SBH, the Company will have the right to elect a majority of the Board of
Directors. The Company has the right to have the preferred stock redeemed at
any time following the fifteenth anniversary of the granting of the option.
Effective March 8, 1994, the Company entered into a consulting agreement with
SBH pursuant to which the Company has agreed, among other things, to render
consulting services for a five year period, for an annual fee of $1.5 million,
payable quarterly. Included in service income for the three months ended
December 31, 1995 and 1994 is $375,000 earned pursuant to this agreement.
Stater files the required periodic reports with the Securities and Exchange
Commission (SEC). Copies of these reports are available from the SEC.
Summarized financial information of Stater is as follows:
<TABLE>
<CAPTION>
December 24, September 24,
1995 1995
------------ -------------
(In thousands)
<S> <C> <C>
CONDENSED BALANCE SHEET
Current assets $166,644 $158,647
Property, plant and equipment, net 119,736 118,627
Other assets 35,082 36,808
Current liabilities 117,679 113,633
Long-term debt 172,836 173,099
Other liabilities 13,772 13,772
Shareholders' common equity 17,175 13,578
</TABLE>
The payment of dividends by Stater to the Company is restricted subject to
various financial covenants in the Stater credit agreements. On January 31,
1996, SBH completed a sale and leaseback transaction involving five of its
supermarkets with an unrelated third party. Gross proceeds from the transaction
were approximately $18.5 million.
8
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Thirteen Weeks Ended
---------------------
Dec. 24, Dec. 25,
1995 1994
---------- --------
(In thousands)
<S> <C> <C>
Revenues $408,740 $390,642
Cost of goods sold 316,479 303,957
-------- --------
Gross profit 92,261 86,685
General and administrative 77,813 75,890
Depreciation and amortization 3,058 2,801
Consulting costs 375 375
-------- --------
Income from operations 11,015 7,619
Interest expense, net 4,700 4,928
Other (income) loss 270 102
Income taxes 2,448 1,036
-------- --------
Net income $ 3,597 $ 1,553
======== ========
</TABLE>
Included in equity earnings of affiliates is the Company's share of SBH's
operating results amounting to $1,881,000 and $859,000 for the three months
ended December 31, 1995 and 1994, respectively.
Reading
- -------
During the three months ended December 31, 1995, the Company increased its
ownership in RC from 2,367,976 shares (47.6%) at September 30, 1995 to 2,438,776
shares (49%) at December 31, 1995 through the purchase of an additional 70,800
shares at a cost of approximately $645,000. Based on the closing price per
share of RC at December 31, 1995 of $9.125, the aggregate market value of the
Company's investment in RC at that date was approximately $22,254,000 Subsequent
to December 31, 1995, the Company increased its ownership in RC to 2,452,526
shares or 49.3% of the outstanding RC securities, through the purchase of an
additional 13,750 shares for a purchase price of approximately $125,000.
Summarized financial information of Reading at December 31, 1995 and September
30, 1995 follows:
<TABLE>
<CAPTION>
Dec. 31, Sept. 30,
1995 1995
-------- ---------
(In thousands)
<S> <C> <C>
CONDENSED BALANCE SHEET
Current assets $46,839 $50,263
Property and equipment 9,213 7,118
Intangible assets 15,537 15,770
Investment and advances
in Reading International 720 145
Other assets 3,244 1,966
Current liabilities 4,244 3,596
Other long-term liabilities 2,588 2,907
Shareholders' common equity 68,721 68,759
</TABLE>
9
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
In November 1995, Reading and the Company formed Reading International Cinemas
LLC ("Reading International") to develop and operate multiplex cinemas in
Australia. Reading International is owned in equal shares by Reading and the
Company, each of which committed to make an initial contribution of $5 million,
on an as needed basis for an aggregate initial contribution of $10 million. In
addition, to the Company's 50% interest, the Company indirectly owns an
additional 24.5% interest in Reading International through its 49% ownership
interest in Reading, the other 50% owner of Reading International. For
financial statement purposes, the Company consolidates its 74.5% interest in
Reading International and, accordingly, eliminates from its equity earnings
(losses) from affiliates, the Company's proportionate share of Reading's
operating results of Reading International.
During the three months ended December 31, 1995, Reading advanced to and on
behalf of Reading International approximately $1,791,000, inclusive of $968,725
advanced on behalf of the Company in connection with its capital contribution
requirements. Such amounts due Reading by the Company are due on demand.
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1995 1994
--------- ---------
(In thousands)
<S> <C> <C>
Revenue:
Theatre $3,205 $3,158
Other 1,090 696
------ ------
Total revenue 4,295 3,854
Theatre costs 2,642 2,587
Depreciation and amortization 348 414
Equity losses from Reading
International 246 --
General and administrative 1,048 1,142
------ ------
Earnings (loss) before
income taxes 11 (289)
Income taxes 48 --
------ ------
Net (loss) $ (37) $ (289)
------ ------
</TABLE>
Included in equity earnings of affiliates is the Company's share of Reading's
operating results, adjusted for the Company's ownership in Reading
International, amounting to earnings of $32,000 and losses of $136,000 for the
three months ended December 31, 1995 and 1994, respectively.
Citadel
- -------
As of December 31, 1995 and September 30, 1995, the Company's investment in CHC
is as follows (in thousands):
<TABLE>
<CAPTION>
December September
1995 1995
-------- ---------
<S> <C> <C>
Common stock $3,227 $2,036
3% Cumulative Convertible Preferred Stock 5,250 5,250
------ ------
$8,477 $7,286
====== ======
</TABLE>
10
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
During the three months ended December 31, 1995, the Company increased its
ownership in CHC from 993,112 shares (16.5%) at September 30, 1995 to 1,564,473
shares (26%) at December 31, 1995 through the purchase of an additional 571,361
shares at a cost of approximately $1,281,000. Based on the closing price per
share of CHC at December 31, 1995 of $2.375, the aggregate market value of the
Company's common stock investment in CHC at that date was approximately
$3,716,000. In addition to its common stock holdings, the Company holds
1,329,114 shares of CHC 3% Cumulative Voting Convertible Preferred Stock with a
stated value of $5,250,000. The preferred shares represent approximately 18.1%
of the voting power of CHC and together with the common shares owned by the
Company represents approximately 39.5% of the voting power of CHC as of December
31, 1995. The Company also holds warrants exercisable at $3.00 per share, to
purchase an additional 666,000 shares of CHC Common Stock. Assuming full
exercise of the warrants, the Company would own approximately 44.5% of the then
issued outstanding voting securities of CHC.
The Preferred stock was issued to the Company in November 1994 pursuant to a
Stock Purchase Agreement and Certificate of Designation which provides, among
other things, that (i) the preferred shares carry a liquidation preference equal
to their stated value and bear a cumulative (noncompounded) annual dividend
equal to 3% of the stated value, (ii) are convertible under certain
circumstances into shares of common stock of CHC, (iii) are redeemable at the
option of CHC at any time after November 1997 and (iv) are redeemable (subject
to Delaware limitations upon distributions to shareholders) at the option of the
Company in the event of a change of control of CHC. Subject to certain
limitations, the Preferred Stock is convertible into common stock of CHC at a
conversion price per share equal to the market price, as defined, per share of
CHC common stock, calculated as the per share stated value of $3.95 divided by
the average of the closing price per share of the CHC common stock for each of
the 60 days preceding the conversion. Assuming a market price of $2.375, the
Company's preferred stock if converted would be at 2,210,525 shares, resulting
in an increase in the Company's voting ownership in CHC to 46% at December 31,
1995. For financial statement purposes the Company carries its preferred stock
investment at cost amounting to $5.25 million. Dividends earned and included in
dividend and interest income for the three months ended December 31, 1995 and
1994 amounted to approximately $39,000 and $18,000 respectively.
Included in equity earnings of affiliates is the Company's portion of CHC's
operating results, less preferred stock dividends, amounting to earnings of
$20,000 for the three months ended December 31, 1995.
NOTE 3 - READING INTERNATIONAL
- ------------------------------
As described above, Reading International is owned in equal shares by the
Company and Reading. However, when the Company's share is considered with its
49% interest in Reading, the Company's direct and indirect ownership in Reading
11
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
International approximates 74.5%. Accordingly, the consolidated financial
statements of the Company include the accounts of Reading International and its
foreign subsidiaries at December 31, 1995. Reading International was formed to
develop and operate multiplex theaters in Australia. The Company and Reading
have each committed to make an initial contribution of $5 million, on an as
needed basis. As of December 31, 1995, advances and contributions amounting to
approximately $2,080,000 have been made to finance capital expenditures and
general and administrative expenses. Included in the statements of operations
for the three months ended December 31, 1995, as operating, general and
administrative expenses, is approximately $492,000 of administrative and
development costs incurred with respect to operations of Reading International.
As of December 31, 1995, Reading International's assets amounting to
approximately $4,760,000 are principally comprised of a land purchase and
various refundable property and lease deposits. Included in other assets at
December 31, 1995 is approximately $4,223,000 of costs related to the purchase
of land and development costs, and $351,000 of refundable property deposits.
The land purchase was made pursuant to a real estate purchase contract with the
seller which provided for installment payments, including approximately
$3,144,000 due on December 20, 1996, which is reflected as "Land contract
payable" on the balance sheet at December 31, 1995.
NOTE 4 - TAXES ON INCOME
- ------------------------
Under SFAS No. 109, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory rates
applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities. At
December 31, 1995 and September 30, 1995, the deferred tax liability components
consisted of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1995 1995
------------- --------------
(in thousands)
<S> <C> <C>
Deferred tax liabilities:
Other $ 157 $ --
Undistributed earnings from
equity investments 14,517 13,742
------- -------
Total deferred tax liabilities 14,674 13,742
------- -------
Deferred tax assets:
Unrealized capital loss from writedown
of equity securities (7,680) (7,680)
Federal benefit of state taxes (515) (450)
Other (232) (232)
------- -------
Total deferred tax assets (8,427) (8,362)
------- -------
Net Deferred tax liabilities $ 6,247 $ 5,380
------- -------
</TABLE>
12
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
As of December 31, 1995, the reported deferred tax assets are expected to be
realized as an offset against reversing temporary differences which create net
future tax liabilities.
The provision for taxes on income differs from the amounts computed by applying
the Federal income tax rate of 34% in 1995 to earnings before income taxes
principally due to (1) state income taxes provided, net of federal income tax
benefit and, (2) losses incurred from the Company's foreign subsidiary
operations upon which no U.S income tax benefit is currently realizable.
NOTE 5 - COMMON AND CLASS A COMMON PREFERENCE STOCK
- ---------------------------------------------------
During the three months ended December 31, 1995, the Company repurchased 54,000
shares of common stock and 23,000 shares of Class A common preference stock at a
purchase price of approximately $709,000. Subsequent to December 31, 1995, the
Company repurchased an additional 64,100 shares of the Company's common stock
for approximately $635,000.
13
<PAGE>
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company's investments in Stater Bros. Holdings Inc. ("SBH" and,
collectively with its subsidiaries, "Stater"), Reading Company ("RC" and
collectively with its subsidiaries, "Reading") and Citadel Holding Corporation
("CHC" and collectively with its subsidiaries, "Citadel") are included in the
Company's Consolidated Financial Statements on the equity method of accounting.
See Notes 1 and 2 of Notes to the Consolidated Financial Statements.
Results of Operations
- ---------------------
The following is a comparison of the results of operations for the three
months ended December 31, 1995 (1995 Quarter) with the three months ended
December 31, 1994 (1994 Quarter).
The Company's net earnings for the 1995 Quarter were $850,000 or $0.14 per
share, as compared with net earnings of $421,000 or $0.07 per share for the 1994
Quarter. The increase in the 1995 Quarter as compared to the 1994 Quarter is
principally attributable to improved operating results reported by the Company's
affiliate, SBH (the Company's share amounting to $1,881,000 for the 1995 Quarter
as compared to $859,000 for the 1994 Quarter), and a reduction in professional
fees and employee costs. Such improvements were offset, in part, by operating
losses after minority interest, of $367,000 from the Company's subsidiary,
Reading International Cinemas LLC ("Reading International").
Service Income
- --------------
Effective March 8, 1994, the Company entered into a consulting agreement with
SBH pursuant to which the Company has agreed, among other things, to render
consulting services for a five year period, for an annual fee of $1.5 million,
payable quarterly. Included in service income for the 1995 and 1994 Quarter is
$375,000 earned pursuant to this agreement.
Equity in earnings of affiliates
- --------------------------------
Equity in earnings of affiliates reflects the Company's share of net earnings
or losses of Stater, Reading and Citadel before preferred dividends. The
following table sets forth the contribution by affiliate of the equity in
earnings or losses of affiliates:
Equity in Earnings of Affiliates - Contribution by Affiliates
-------------------------------------------------------------
(In thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1995 1994
------ --------
<S> <C> <C>
SBH $1,881 $ 859
CHC 20 --
Reading 32 (136)
------ ------
$1,933 $ 723
------ ------
</TABLE>
14
<PAGE>
Stater
- ------
Stater sales amounted to $408.7 million for the 1995 Quarter, an increase of
4.6% when compared to $390.6 million for the 1994 Quarter. Sales from like
stores increased 5.2% for the 1995 Quarter. Stater operated 110 stores at
December 24, 1995 and 111 stores at December 25, 1994. Stater's gross profits
for the 1995 Quarter increased to $92.3 million or $22.57% of sales compared to
$86.7 million or 22.19% of sales in the 1994 Quarter. The increase in gross
profits was due to increased efficiencies in Stater's warehousing and
transportation departments and the introduction of higher gross margin
categories, such as prepackaged gourmet vegetables and fresh cut flowers.
Selling, general and administrative expenses amounted to $77.8 million or
19.04% of sales for the 1995 Quarter as compared to $75.9 million or 19.43% of
sales for the 1994 Quarter. The increase in the 1995 Quarter is due primarily
to costs incurred to operate at a higher level of sales. This was offset, in
part, by a reduction in salaries, wages and related benefits as a result of a
new Retail Clerks collective bargaining agreement. During the 1995 Quarter, SBH
entered into a new four year collective bargaining agreement with the Retail
Clerks Union. The new agreement included a one-time bonus expense paid to all
full and part time union members and a suspension of employer contributions to a
union benefits trust. Additionally, during the 1995 Quarter, SBH received an
additional credit for employer contributions to a union benefits as a result of
the early termination of the prior collective bargaining agreement. As a result
of the new collective bargaining agreement, salaries, wages and benefit expense
was reduced by $1.3 million.
Interest expense amounted to $5.0 million for the 1995 Quarter, as compared
to $5.1 million for the 1994 Quarter.
Stater's net income for the 1995 Quarter amounted to $3.6 million as compared
to $1.6 million for the 1994 Quarter.
Reading
- -------
Reading's operating results for the 1995 Quarter amounted to a net loss of
approximately $37,000 as compared to a net loss of $289,000 for the 1994
Quarter. Included in the 1995 loss is Reading's share of its 50% equity
operating losses from Reading International amounting to $246,000. The
Company's 49% share of such equity losses, amounting to approximately $121,000,
has been eliminated from the amount reported as equity earnings of affiliates in
connection with reporting the Company's interest in Reading International as a
consolidated subsidiary. Accordingly, the Company has included in equity
earnings of affiliates the Company's share of operating results of Reading,
adjusted for the operating results of Reading International, resulting in
reported earnings of $32,000 with respect to Reading for the 1995 Quarter as
compared to a loss of $136,000 for the 1994 Quarter.
The improvement in Reading's operating results for the 1995 Quarter as
compared to the 1994 Quarter is due, in part, to an increase in interest income
earned on its investable cash balances offset by the equity losses of its
affiliate Reading International. Operating results from Reading's theater
15
<PAGE>
operations in Puerto Rico, Cine Vista, and general and administrative expenses
were comparable between the 1995 and 1994 Quarters.
In February 1996, Reading obtained a $15 million line of credit with respect
to Cine Vista's operations, which line of credit is expected to provide
sufficient funds to complete Cine Vista's new theater development plans and
provide additional liquid funds for RC.
Interest income and expense
- ---------------------------
Interest and dividend income decreased in the 1995 Quarter to $320,000 as
compared to $408,000 in the 1994 Quarter. In the 1994 Quarter interest income
was earned on the Company's working capital reserves maintained in institutional
money market mutual funds as well as, for a portion of the 1994 quarter, a $6.2
million loan to Citadel accruing interest at prime plus 3% (the "Citadel loan").
Included in the 1994 Quarter is $142,000 of interest income earned pursuant to
the Citadel loan. In November 1994, the Company agreed to acquire preferred
stock in satisfaction of payment of $5.25 million of the Citadel loan and in May
1995 the balance of $950,000 was paid in full. Accordingly, the 1995 Quarter as
compared to the 1994 Quarter, reflects the elimination of interest income earned
on the Citadel loan.
In February 1996, SBH exercised its right to convert the Company's common
stock in SBH into 693,650 shares of SBH's Series B Preferred Stock, stated value
$100 per share, effective March 8, 1996. The preferred stock will have a
liquidation preference of $69.365 million and a cumulative dividend preference
of 10.5% or approximately $7,283,000 annually. Pursuant to the terms of the
option agreement between the Company and SBH, SBH has the right to redeem the
preferred stock at anytime prior to its mandatory redemption thirteen years from
the date of its issuance.
Operating, general and administrative expenses
- ----------------------------------------------
Operating, general and administrative expenses of the Company increased
$306,000 from $720,000 in the 1994 Quarter to $1,036,000 in the 1995 Quarter.
The 1995 Quarter includes approximately $492,000 of general administrative and
development expenses incurred with respect to the foreign operations of Reading
International. The overall increase in general and administrative expenses
resulting from the costs associated with the operations of Reading International
was offset by reductions in wages, and legal and professional fees in the 1995
Quarter as compared to the 1994 Quarter. The 1994 Quarter included bonus awards
of $115,000. No bonus awards were paid or granted in the 1995 Quarter.
Liquidity
- ---------
At December 31, 1995 the Company has cash and cash equivalents totaling
approximately $18.6 million. During the 1995 Quarter the Company and Reading
formed Reading International. The Company and Reading each committed to make a
contribution of $5 million on an as needed basis. The Company has significant
liquidity and believes that the Company's sources of funds will be sufficient to
meet its cash flow requirements for the foreseeable future. In addition, it is
expected that Reading has sufficient working capital to fund its 50% interest in
Reading International. Accordingly, the liabilities of Reading International
16
<PAGE>
included in the Company's consolidated financial statements are expected to be
financed in equal contributions by Reading and the Company.
At December 31, 1995, current liabilities of the Company amounted to
approximately $5.8 million, including approximately $4.2 million attributable to
liabilities of Reading International. Such liabilities of Reading International
include approximately $.7 million of investment contributions made by Reading in
the form of advances which are reflected as a current payable to affiliate in
the consolidated financial statements of the Company. However, it is expected
that Reading will not require immediate repayment of such advances, but instead
will convert them to capital. The remaining liabilities of Reading International
are principally comprised of accrued operating expenses and contractual land
payment obligations amounting to approximately $3.48 million, which amounts are
expected to be funded equally by Reading and the Company as they become due. In
addition to such future funding requirements of $1.74 million as of December 31,
1995, included in the balance sheet as payable to affiliate, is the Company's
obligation to reimburse Reading for contributions made on the Company's behalf
to Reading International amounting to approximately $970,000.
During the 1995 Quarter the Company made additional acquisitions of stock of
its equity affiliates, Reading and Citadel, amounting to $645,000 and
$1,281,000, respectively. Subsequent to December 31, 1995, the Company made
further stock purchases of its affiliate, Reading for a purchase price of
approximately $125,000.
Cash and cash equivalents decreased approximately $709,000 in the 1995
Quarter as a result of the Company's repurchasing 54,000 shares of its common
stock and 23,000 shares of its Class A common preference stock. In January
1996, the Company repurchased an additional 64,100 shares of its common stock
for approximately $635,000.
In February 1996, SBH exercised its right to convert the Company's common
stock in SBH into 693,650 shares of SBH's Series B Preferred Stock, stated value
$100 per share, effective March 8, 1996. The preferred stock will have a
liquidation preference of $69.365 million and a cumulative dividend preference
of 10.5%, to be paid quarterly. Until such time as SBH exercises its right to
repurchase the preferred stock, annual dividend payments are expected to
approximate $7,283,000 annually. Accordingly, the Company's cash flows with
respect to its interest in Stater are expected to increase significantly.
Under the terms of the Option Agreement between Stater and the Company, in
the event that Stater were to exercise its option to purchase the Company's
Stater stock for cash, the Company would receive gross proceeds of approximately
$69.365 million. Such gross proceeds would be subject to income taxes which,
assuming an effective combined federal and state tax rate of 40.1%, would result
in net proceeds to the Company of $41.5 million. In addition, upon the
occurrence of the exercise by Stater of the option, the $14.65 million option
payment received in Fiscal 1994 would become taxable. Such tax liability,
assuming an effective combined federal and state tax rate of 40.1%, would amount
to $5.9 million and has been included in the financial statements as a deferred
tax liability at December 31, 1995.
17
<PAGE>
PART 2
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. The following exhibit is filed as part of this report:
27. Financial Data Schedule, Article 5
B. No reports on Form 8-K were filed during the quarter ended
December 31, 1995.
18
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRAIG CORPORATION
-----------------
By: /s/ S. Craig Tompkins
------------------------
President
February 20, 1996
By: /s/ Robin W. Skophammer
------------------------
Chief Financial Officer
February 20, 1996
19
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<PERIOD-START> OCT-01-1995 OCT-01-1994
<PERIOD-END> DEC-31-1995 DEC-31-1994
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