<PAGE>
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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: September 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _____________________
Commission file number 1-6123
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 3,762,912 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 November 13, 1996.
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<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
INDEX
-----
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART 1. Financial Information
- ------
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996 (Unaudited)
and September 30, 1995................................................ 3
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 1996 and 1995 (Unaudited)......................... 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1996 and 1995 (Unaudited)......................... 5
Notes to Consolidated Financial Statements............................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
PART 2. Other Information
- ------
Item 1. Legal Proceedings.............................................. 35
Item 2. Changes in Securities.......................................... 36
Item 3. Defaults Upon Senior Securities................................ 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information.............................................. 36
Item 6. Exhibits and Reports on Form 8-K............................... 36
Signatures................................................................ 37
</TABLE>
2
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995
-----------------------------------
ASSETS (In thousands of dollars)
- ------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 39,288 $ 21,059
Available-for-sale securities 3,887 --
Restricted cash 3,470 --
Receivables from affiliates 48 247
Other current assets 1,694 76
-------- --------
Total current assets 48,387 21,382
Investments in affiliates 79,414 60,171
Property and equipment, net 19,499 915
Other assets 4,242 --
Intangible assets:
Beneficial leases 14,853 --
Excess of cost over net assets acquired 12,743 2,201
-------- --------
Total assets $179,138 $ 84,669
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 5,640 $ 692
Note payable 1,500 --
Land contract payable 3,344 --
-------- --------
Total current liabilities 10,484 692
Other long-term liabilities 3,065 56
Option to sell investment in affiliate -- 14,650
Deferred gain from conversion of common
stock of affiliate to preferred stock 1,210 --
Deferred tax liabilities 30,842 5,380
Minority interest in equity of subsidiary 35,899 --
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 30,818 30,793
Foreign currency translation adjustment 60 --
Retained earnings 85,127 43,858
Cost of treasury shares, 1,704,153 and 1,154,095 (19,744) (12,137)
-------- --------
Total shareholders' equity 97,638 63,891
-------- --------
Total liabilities and shareholders' equity $179,138 $ 84,669
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------------------ -----------------
<S> (In thousands of dollars, except per share amounts)
<C> <C> <C> <C>
Revenues:
Theater revenues $4,994 -- 13,003 --
Equity in earnings of affiliates 41 1,737 3,083 3,485
Dividend income from affiliates 1,876 40 4,248 118
Service income from affiliate 375 375 1,125 1,125
Interest and other dividend income 765 307 2,469 1,104
Other 1,207 -- 1,374 --
------ ------ -------- -------
9,258 2,459 25,302 5,832
------ ------ -------- -------
Expenses:
Theater costs 3,789 -- 10,248 --
Depreciation and amortization 475 54 1,310 75
Expenses from Australian theater
developments 456 -- 1,368 --
General and administrative expenses 1,755 525 5,008 1,425
------ ------ -------- -------
6,475 579 17,934 1,500
------ ------ -------- -------
Earnings before minority interest,
other income and income taxes 2,783 1,880 7,368 4,332
Minority interest (683) -- (1,170) --
Gain from conversion of common stock
interest in Stater -- -- 58,286 --
------ ------ -------- -------
Earnings before income taxes 2,100 1,880 64,484 4,332
Provision for taxes (247) (280) (24,065) (1,295)
------ ------ -------- -------
Net earnings $1,853 $1,600 $ 40,419 $ 3,037
====== ====== ======== =======
Earnings per common and
common equivalent share $ 0.33 $ 0.27 $ 7.07 $ 0.51
====== ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
------------------------
(In thousands of dollars)
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 40,419 $ 3,037
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Gain on conversion of common stock
investment in Stater (58,286) --
Amortization of intangibles 800 49
Undistributed earnings of affiliates (3,083) (3,485)
Depreciation 548 75
Deferred rent 130 --
Minority interest 1,138 --
Provision for deferred income taxes 24,745 1,240
Changes in operating assets and liabilities
net of effects of consolidating Reading:
Increase (decrease) in other current assets 277 193
Other (410) --
Decrease (increase) in liabilities (26) 69
-------- -------
Net cash provided by operating activities 6,252 1,178
INVESTING ACTIVITIES
Acquisition of stock of equity affiliate -- (1,044)
Other investments (3,887) 343
Increase restricted cash (1,462) --
Proceeds from payoff of notes receivable -- 950
Proceeds from Angelika judgement 1,293 --
Cash acquired as a result of consolidation of Reading
($44,188), net of acquisition costs 43,081 --
Purchase of Angelika (12,394) --
Investment in Australian land acquisitions (4,331) --
Purchase of property and equipment (1,336) (18)
-------- -------
Net cash provided by (used in) investing activities 20,964 235
FINANCING ACTIVITIES
Proceeds from minority partner for purchase of Angelika 2,069 --
Common stock repurchase (7,584) (823)
Payment of deferred restructuring costs (804) --
Payment of debt financing costs (254) (48)
-------- -------
Net cash provided by (used in) financing activities (6,573) (871)
Increase (decrease) in cash and cash
equivalents 20,643 542
Cash and cash equivalents at beginning
of period 18,645 20,517
-------- -------
Cash and cash equivalents at end
of period $ 39,288 $21,059
======== =======
</TABLE>
SUPPLEMENTAL DISCLOSURES:
During the nine months ended September 30, 1996 the Company (1) purchased 67,000
shares of Reading Common Stock in exchange for 66,042 shares of the Company's
Common Stock and (2) exchanged its common stock interest in Stater with a net
book value of approximately $9,000,000 for Stater Preferred Stock with a stated
redemption value of $69,365,000.
See accompanying notes to consolidated financial statements.
5
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Basis of Presentation and Principle of Consolidation
- ----------------------------------------------------
The consolidated financial statements include the accounts of Craig Corporation,
its wholly owned subsidiaries ("Craig") and its majority-owned subsidiaries (the
"Company"). Such majority owned subsidiaries include Reading Entertainment,
Inc. ("RE" and together with its subsidiaries "Reading") and Reading
International Cinemas LLC ("Reading International"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Minority interest in equity of subsidiary reflects the minority stockholders'
proportionate share of Reading and the Company's other joint ventures. Certain
amounts in previously issued financial statements have been reclassified to
conform with current classifications.
Common stock investments in affiliates in which the Company holds a 20 to 50%
percent ownership interest are accounted for using the equity method (Note 4).
During September 1996, Craig changed its fiscal year end date from a September
30 year end to December 31. Results of operations since September 30, 1995, the
date of the last audited balance sheet, through December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
Revenues:
Equity in earnings of affiliates $ 723
Service income from affiliate 375
Interest and other dividend income 408
------
1,506
General and administrative expenses 730
------
Earnings before income taxes 776
Provision for taxes 355
------
Net earnings $ 421
------
Earnings per common and common
equivalent share $ 0.14
------
</TABLE>
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 September 30, 1996 and
1995, and the results of operations and its cash flows for the three and nine
month periods ended September 30, 1996 and 1995. The results of operations for
the three and nine month periods ended September 30, 1996 and 1995 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
6
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
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 short-
term money market instruments and federal agency securities.
Available for sale securities
- -----------------------------
Management classifies promissory notes, treasury and federal agency securities
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, acquisitions or
other development activities.
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 amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
Earnings Per Share
- ------------------
Earnings per share is based on 5,539,803 and 5,934,970, the weighted average
number of shares of common stock outstanding during the three months ended
September 30, 1996 and 1995, and 5,721,015 and 5,952,970 shares during the nine
months ended September 30, 1996 and 1995, 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.
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
7
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
exercised), whichever is shorter. Included in property and equipment at
September 30, 1996 is approximately $8.5 million of capitalized land and
development costs purchased in connection with the Company's investment in
Reading International (Note 3) The estimated useful lives are generally as
follows:
<TABLE>
<CAPTION>
<S> <C>
Building and improvements 40 years
Equipment 7-15 years
Furniture and fixtures 7 years
Leasehold improvements 20 years
</TABLE>
Excess of cost over net assets acquired
- ---------------------------------------
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
September 30, 1996 and 1995 was approximately $684,000 and $585,000
respectively. During the three and nine months ended September 30, 1996, excess
of cost over net assets acquired increased approximately $11.625 million,
reflecting the cost of the net Angelika assets acquired by Reading (see Note 5)
in excess of their fair value, determined by an independent appraiser. The cost
of the excess of assets acquired related to the Angelika acquisition is being
amortized on a straight line basis over a period of 20 years. The increase in
excess of cost over net assets acquired during the nine month period ended
September 30, 1996 was offset by a decrease as a result of accounting for
additional purchases of outstanding common stock of Reading by Craig at a cost
less than the fair value of the underlying net assets acquired.
Intangible assets - Beneficial leases
- -------------------------------------
Intangible assets include beneficial theater leases used in Cine Vista's
operations calculated by computing the present value of the excess of market
rental rates over the rental rents in effect under Cine Vista leases. Such
allocated amount is being amortized on a straight-line basis over the remaining
terms of the leases which approximates 17 years.
Translation of Non-U.S. Currency Amounts
- ----------------------------------------
The financial statements and transactions of Reading International's Australian
operations (Note 3) are maintained in their functional currency (Australian
dollars) and translated into U.S. dollars in accordance with SFAS No. 52
"Foreign Currency Translation". Assets and liabilities are translated at
exchange rates in effect at the balance sheet date 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 a
separate part of shareholders' equity.
8
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 2 - ACQUISITION OF READING COMPANY
- ---------------------------------------
Since September 30, 1995, Craig has increased its ownership in Reading from
47.6% to 2,610,826 shares (52.5%) at September 30, 1996 through the purchase of
an additional 242,850 shares at a cost of approximately $1,752,000 and through
the issuance of the 66,042 shares of Craig Common Stock. On May 17, 1996, Craig
entered into an agreement with the Chairman of the Board, James J. Cotter, to
exchange 67,000 shares of Reading Class A Common Stock held by Mr. Cotter in
exchange for 66,042 of Craig Common Stock. The market price of the Reading Class
A Common Stock as of the date of transfer was $10.625.
As described in Note 11, on October 15, 1996, Craig and Reading and certain of
their affiliates consummated a transaction (the "Exchange Transaction") whereby
Craig exchanged assets valued for purposes of the Exchange transaction at $81
million in return for certain equity securities of Reading. As a consequence of
the Exchange Transaction, Craig holds in the aggregate approximately 77.4% of
the voting power of Reading.
As a result of increasing its ownership in Reading to greater than 50% in May
1996, the Company reports its ownership interest in Reading on a consolidated
basis and therefore, the assets and liabilities of Reading are recorded in the
Company's consolidated financial statements at September 30, 1996. The
acquisition of such shares was accounted for in accordance with purchase
accounting with the fair value of the assets and liabilities as reported by
Reading approximating book value. In accordance with the provisions of
Accounting Research Bulletin 51, "Consolidated Financial Statements" the Company
has reflected the purchase of Reading in the Consolidated Statements of
Operations as though it had been acquired at the beginning of the Company's new
fiscal year or January 1, 1996. Included in the consolidated statement of
operations as "Minority interest" for the three months and nine months ended
September 30, 1996 is that portion of Reading's financial results of operations
that is not owned by the Company amounting to approximately $.651 million and
$1.138 million, respectively. The Company's 47.6% interest in Reading at
September 30, 1995 is included in the Balance Sheet as Investment in affiliates,
amounting to approximately $32.725 million (Note 4).
Reading is traded on the NASDAQ under the symbol RDGE. Reading is currently
involved in conventional multiplex cinema exhibition in Puerto Rico through its
Cine Vista Cinemas chain, in the domestic exhibition of art and specialty film
through its recent acquisition of the Angelika Film Center in New York (a
specialty art multiplex cinema and cafe complex), and the development of a new
chain of conventional multiplex cinemas in Australia. Reading intends to expand
the Angelika Film Center concept to other cities, and is currently reviewing a
number of potential locations suitable for such complexes.
Summarized financial information as reported by Reading at September 30, 1996
(which are included, after elimination of intercompany accounts, in the
consolidated financial statements of the Company) and September 30, 1995
follows:
9
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
<TABLE>
<CAPTION>
Sept. 30, Sept. 30,
1996 1995
--------- ---------
(In thousands)
<S> <C> <C>
CONDENSED BALANCE SHEET
Cash and cash equivalents $21,144 $47,469
Other current assets 2,935 2,794
Equity investment in Citadel 4,799 --
Other investments -- 1,771
Property and equipment 9,997 7,118
Intangible assets 26,430 15,770
Investment and advances
in Reading International 13,192 145
Other assets 3,764 1,966
Current liabilities 5,932 3,596
Minority liability 2,101 --
Other long-term liabilities 3,065 2,907
Shareholders' common equity 71,163 68,759
</TABLE>
On March 29, 1996, Craig sold to Reading its common stock investment in Citadel
Holding Corporation ("CHC" and together with its subsidiaries "Citadel") for an
aggregate purchase price of $3,324,505, which was paid in the form of a five
year unsecured promissory note, which note was paid in full on July 29, 1996.
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
-------- ------- -------- -------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Revenue:
Theater $4,994 $5,079 $13,003 $11,720
Equity earnings in Citadel 41 -- 1,475 --
Other 1,601 2,230 2,844 3,959
------ ------ ------- -------
Total revenue 6,636 7,309 17,322 15,679
Theater costs 3,789 3,559 10,248 8,782
Depreciation and amortization 443 341 1,215 1,021
Equity losses from Reading
International 68 289 375 289
General and administrative 875 1,018 2,961 3,009
------ ------ ------- -------
Earnings before
income taxes 1,461 2,102 2,523 2,578
Minority interest 32 -- 32 --
Income taxes 57 37 79 192
------ ------ ------- -------
Net earnings $1,372 $2,065 $ 2,412 $ 2,386
------ ------ ------- -------
</TABLE>
Included in the revenues for the three and nine months ended September 30, 1996
is $41,000 and $1.475 million, respectively, recorded as equity in earnings in
Citadel which represents Reading's 26% pro-rata portion of Citadel's earnings.
10
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
See Note 3, page 17 for further disclosure regarding Citadel's operating results
for such periods. In addition, included in other income for the three months
and nine months ended September 30, 1996, is approximately $1.119 million
reflecting proceeds from settlement of a legal claim.
NOTE 3 - READING INTERNATIONAL CINEMAS LLC ("READING INTERNATIONAL")
- --------------------------------------------------------------------
In November 1995, the Company and Reading, formed Reading International Cinemas
LLC ("Reading International") to develop and operate multiplex cinemas in
Australia. On September 30, 1996, Reading International was owned in equal
shares by Craig and Reading. Due to the Craig greater than 50% direct interest
in Reading, it consolidates the accounts of Reading, which results in the
consolidation of Reading International.
On March 29, 1996, Craig and Reading entered into a capital funding agreement
(the "Capital Funding Agreement") with respect to Reading International pursuant
to which the parties agreed to increase the capital committed by Craig and
Reading from $10 million to $103 million through the combination of cash
contributions and secured capital funding undertakings. As of September 30,
1996, the Company and Reading had made cash contributions to Reading
International approximating $27.856 million and had undertaken to contribute up
to an additional $37.5 million each for an aggregate commitment of $75 million
on an as needed basis. Craig commitment was secured by Craig Stater Bros.
Holdings Inc. Series B Preferred Stock, par value $100 per share (the "SBH
Preferred Stock") and the commitment of Reading was secured by certain assets of
Reading. On October 15, 1996, the Exchange Transaction was approved (Note 11)
whereby, among other things, Reading acquired Craig interest in Reading
International and the Capital Funding Agreement was terminated.
A wholly owned subsidiary of Reading International has retained the services of
several executives in Australia who provide management services with respect to
such Australian operations on a full time basis or substantially full time
basis. Included in the statements of operations for the three and nine month
periods ended September 30, 1996, as expenses from Australian theater
development, is approximately $456,000 and $1,368,000 of administrative and
development costs incurred with respect to the operations of Reading
International. Reading International has no current revenues and is currently
entirely developmental in nature.
As of September 30, 1996, Reading International's assets amounted to
approximately $29.8 million, including cash and available-for-sale securities of
approximately $20.8 million. In addition, Reading International's noncurrent
assets at September 30, 1996 amounted to approximately $8.7 million and are
comprised principally of two contiguous parcels of land (and related development
costs), and refundable property and lease deposits. One of the parcels was
purchased
11
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
pursuant to a real estate purchase contract with the seller which provided for
installment payments, including approximately $3.3 million due on December 20,
1996, which is reflected as "Land contract payable" on the balance sheet at
September 30, 1996. Reading International is in negotiations with several
developers and landlords with respect to other potential locations.
NOTE 4 - INVESTMENTS IN AFFILIATES
- ----------------------------------
The Company's investments in affiliates at September 30, 1996 and 1995 consist
of the following:
<TABLE>
<CAPTION>
Sept. 30, Sept. 30,
1996 1995
--------- --------
(In thousands)
<S> <C> <C>
Common stock:
Stater Bros. Holdings Inc. ("SBH") $ -- $ 20,160
Reading Company ("RC") -- 32,725
Citadel Holding Corporation ("CHC") 4,799 2,036
------- --------
4,799 54,921
- ----------------------------------- ------- --------
Preferred Stock:
Stater Bros. Holdings Inc. 69,365 --
Citadel Holding Corporation 5,250 5,250
------- --------
79,414 5,250
- ------------------------------------ -------
Total investments in affiliates $79,372 $ 60,171
------- -------
</TABLE>
SBH
- ---
Prior to March 8, 1996, the Company held a 50% common stock interest in Stater
Bros. Holdings Inc. ("SBH" and collectively with its operating subsidiaries,
"Stater"). The remaining 50% interest in Stater was owned by La Cadena
Investments ("La Cadena"), a general partnership consisting of key management
executives of Stater.
Effective March 8, 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 (the "SBH Preferred Stock"). The SBH Preferred
Stock has a liquidation preference and redemption value of $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%. Included in dividend income
from affiliates for the three and nine months ended September 30, 1996, is
approximately $1,836,000 and $4,130,000, respectively earned from the date of
issuance of the SBH Preferred Stock on March 8, 1996 through September 30, 1996.
12
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
Dividends are paid quarterly in arrears. The payment of dividends by SBH to the
Company is restricted subject to various financial covenants in the Stater
credit agreements. The SBH Preferred Stock entitles the Company to (1) elect
one director of SBH, (2) vote 20% of the total number of votes, and (3) elect a
majority of the Board of Directors of SBH if two or more quarterly preferred
stock dividends remain unpaid. Under the terms of an option acquired in 1994,
SBH has a transferable right to redeem the SBH Preferred Stock at any time prior
to March 2006 at redemption value plus accumulated dividends. If not redeemed
by SBH, prior to March 2006, the Company has the right to have the SBH Preferred
Stock redeemed at any time following March 8, 2009 at redemption value plus
accumulated dividends.
Upon the conversion by SBH in March 1996 of the Company's common stock interest
to redeemable preferred stock, the Company discontinued the use of the equity
method of accounting for its investment in Stater. Prior to the preferred stock
conversion, the net book value of Stater amounted to approximately $20.3 million
and the carrying value of the Company's 50% common stock interest, net of the
$14.65 million option proceeds received in 1994 and reflected on the balance
sheet at September 30, 1995 as "Option to sell investment in affiliate",
amounted to approximately $9 million. As of September 30, 1996, the Company has
recorded approximately $58.286 million of the difference between the $69.365
million stated value of the SBH Preferred Stock and the Company's net carrying
value of its previous common stock investment ($9 million) at the time of the
conversion as "Gain from conversion of common stock interest in Stater". The
ultimate value of the SBH Preferred Stock is based upon various market factors
including, but not limited to, Stater's operating performance, Stater's existing
senior debt covenants, interest rates, the SBH Preferred Stock provisions, and
the likelihood of redemption, from time to time, by Stater. Based upon
consultation with investment advisors and continued analysis of these factors
the Company has deferred approximately $2.08 million of the gain from the
conversion by Stater of the Company's common stock interest to SBH Preferred
Stock. Such deferred gain, net of deferred taxes provided, is reflected in the
balance sheet as "Deferred gain from conversion of common stock of affiliate to
preferred stock" in the amount of approximately $1.210 million.
Pursuant to the Exchange Transaction described in Note 11, Craig transferred
legal ownership of its SBH Preferred Stock to Reading.
Effective March 8, 1994, Craig entered into a consulting agreement with SBH
pursuant to which Craig, 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 both the three and nine months ended
September 30, 1996 and 1995 is $375,000 and $1,125,000, respectively, earned
pursuant to this agreement. The agreement may be terminated by SBH, at its
option, upon a redemption of the SBH Preferred Stock.
13
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
Stater files required periodic reports with the Securities and Exchange
Commission (SEC). Stater's year end is September 30 and accordingly, financial
information of Stater as of September 30 is not currently available. The most
current summarized financial information of Stater filed with the SEC is as
follows:
<TABLE>
<CAPTION>
June 23, September 24,
1996 1995
---------- -------------
(In thousands)
<S> <C> <C>
CONDENSED BALANCE SHEET
Current assets $ 186,867 $ 158,647
Property, plant and equipment, net 107,859 118,627
Other assets 33,820 36,808
Current liabilities 116,907 113,633
Long-term debt 172,293 173,099
Other liabilities 15,600 13,772
Redeemable preferred stock 69,365 --
Shareholders' common equity (45,619 13,578
<CAPTION>
CONDENSED STATEMENT OF INCOME
Thirty-Nine Weeks Ended
-------------------------
June 23, June 25,
1996 1995
---------- ----------
<S> <C> <C>
(In thousands)
Revenues $1,244,312 $1,177,288
Cost of goods sold 959,246 914,424
---------- ----------
Gross profit 285,066 262,864
General and administrative 239,252 229,167
Depreciation and amortization 9,220 8,622
Consulting costs 1,125 1,125
---------- ----------
Income from operations 35,469 23,950
Interest expense, net 13,634 14,619
Other (income) loss 1,122 473
Income taxes 8,390 3,543
---------- ----------
Net income $ 12,323 $ 5,315
========== ==========
</TABLE>
Prior to the conversion of the Company's SBH common stock to SBH Preferred Stock
in March 1996, the Company included in equity earnings of affiliates the
Company's share of SBH's operating results. Included in equity earnings of
affiliates for the nine months ended September 30, 1996 and 1995 is the
Company's share of SBH's net earnings amounting to approximately $1.608 million
and $2.834 million, respectively.
14
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
Citadel
- -------
As of September 30, 1996 and 1995, the Company's investment in CHC is as
follows:
<TABLE>
<CAPTION>
Sept. 30, Sept. 30,
--------- ---------
1996 1995
--------- ---------
(In thousands)
<S> <C> <C>
Common stock $ 4,799 $2,036
3% Cumulative Convertible Preferred Stock 5,250 5,250
- -------------------------------------------- ------- ------
$10,049 $7,286
======= ======
</TABLE>
The Company increased its common stock ownership in CHC from 993,112 shares
(16.5%) at September 30, 1995 to 1,564,473 shares (26%) through the purchase of
an additional 571,361 shares at a cost of approximately $1,281,000. In
addition, at September 30, 1996, Craig owns 1,329,114 shares of CHC 3%
Cumulative Voting Convertible Preferred Stock (the "CHC Preferred Stock") with a
stated value of $5,250,000. Craig also holds a warrant, exercisable at $3.00
per share, to purchase an additional 666,000 shares of CHC Common Stock (the
"Warrant"). In March 1996, Craig sold to Reading its common stock interest in
CHC and an option to purchase its CHC Preferred Stock and, under certain
circumstances, the Warrant. On October 15, 1996, pursuant to the Exchange
Transaction described in Note 11, Craig transferred its CHC Preferred to Reading
and the option to purchase such shares and the Warrant was canceled.
As of September 30, 1996, the CHC Preferred Stock represents approximately 18.1%
of the voting power of CHC and together with the common shares owned by Reading,
represent approximately 39.5% of the voting power of CHC as of September 30,
1996. Assuming full exercise of the Warrant, the Company together with Reading,
would own approximately 44.4% of the then issued outstanding voting securities
of CHC.
The CHC 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 CHC 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. If the market price, as defined, is below
$3.00 per share, CHC may redeem the CHC Preferred Stock if tendered for
conversion. Except in the case of a tender by the Company at a conversion price
less than $3.00 per share, CHC
15
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
does not have the right to call for redemption of the CHC Preferred Stock until
November 1997. CHC may redeem the CHC Preferred Stock, if tendered by the
Company at an amount equal to the sum of (1) Stated Value ($3.95 per share), (2)
any unpaid dividend and (3) a premium to Stated Value equal to 9% per annum
during the period November 1994 to November 1998 and thereafter reducing at a
rate of 1% per year (the "Accrual Percentage"). The market price calculated in
accordance with the terms of Preferred Stock provisions approximated $2.4885 at
September 30, 1996, which price, would result in the Preferred Stock converting
into approximately 2,109,705 shares, resulting in an increase in the Company's
voting ownership in Citadel to 45.3% at September 30, 1996, or 49.4% assuming,
in addition, the exercise of the Warrant.
On October 15, 1996, the CHC Preferred Stock was exchanged by Citadel for
1,329,114 shares of Series B Cumulative Voting Convertible Preferred Stock (the
"CHC Series B Preferred Stock"). The terms of the CHC Series B Preferred Stock
are substantially identical to the terms of the Preferred Stock except that (i)
the Accrual Percentage is 3% after October 15, 1996 and (ii) except for a change
in control of CHC, the CHC Series B Preferred Stock will not be convertible into
CHC Common Stock for one year commencing on the 15th day following the filing of
CHC's Annual Report for the year ending December 31, 1996.
For financial statement purposes, the Company carries its CHC Preferred Stock
investment at cost amounting to $5.25 million. Dividends earned and included in
dividend and interest income for both the three months ended September 30, 1996
and 1995 and for both the nine months ended September 30, 1996 and 1995 amounted
to $39,375 and $118,125, respectively.
Included in equity earnings of affiliates is the Company's ownership portion of
Citadel's operating results, less preferred stock dividends, amounting to
earnings of $41,000 and $1,475,000 for the three and nine months ended September
30, 1996, respectively, and a loss of $23,000 and $474,000 for the three months
and nine months ended September 30, 1995, respectively.
Summarized financial information of Citadel as of September 30, 1996 and
December 31, 1995 and for the three and nine months ended September 30, 1996 and
1995 follows:
<TABLE>
<CAPTION>
Sept. 30, December 31,
1996 1995
------------------------
(In thousands)
<S> <C> <C>
Cash $19,815 $16,291
Properties held for sale -- 7,942
Rental properties 14,462 14,251
Other assets 1,143 1,331
Mortgage liabilities 10,333 16,186
Deferred proceeds -- 4,000
Other liabilities 1,543 1,909
Stockholders' equity 23,544 17,720
</TABLE>
16
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
-------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Rental and other income $1,278 $1,812 $ 4,590 $ 4,357
Operating expenses (485) (760) (1,999) (1,922)
Depreciation (75) (127) (296) (343)
Interest expense (262) (361) (1,056) (889)
General and administrative (279) (659) (751) (1,423)
Gain on sale of property 20 -- 1,493 1,541
Gain related to Fidelity
Investment -- -- 4,000 (39)
------ ------ ------- -------
Net earnings $ 197 $ (95) $ 5,981 $ 1,282
------ ------ ------- -------
</TABLE>
Included in Citadel's net earnings for the nine months ended September 30, 1996
is (1) approximately $1,493,000 from the sale of an apartment property and (2)
non-recurring income amounting to $4 million resulting from the recognition for
financial statement purposes of previously deferred proceeds from the bulk sale
of loans and properties by Citadel's previously owned subsidiary, Fidelity
Federal Bank (Fidelity). At the time of the bulk sale in 1994 by Fidelity,
Citadel agreed to indemnify Fidelity, up to $4 million, with respect to certain
losses that might have been incurred by Fidelity in the event of a breach by
Fidelity of certain environmental and structural representations made by
Fidelity to the purchaser of such loans and properties. Fidelity has reached
settlement with the purchaser regarding such bulk sale claims and has agreed to
release Citadel from the indemnity given to Fidelity.
NOTE 5 - ANGELIKA ACQUISITION
- -----------------------------
On August 27, 1996, Reading and Sutton Hills Associates ("Sutton Hills"), a
partnership which is owned by Mr. James J. Cotter and another principal
stockholder of Craig, acquired the Angelika, a multiplex theater located in New
York City. The purchase price of the Angelika was approximately $12.394
million, inclusive of acquisition costs of approximately $529,000. The Company
and Sutton Hill have formed a limited liability company, Angelika Film Centers
LLC ("AFC"), to hold their interests in the Angelika. AFC acquired the Angelika
assets with a combination of available cash, a fully collateralized promissory
note issued to the sellers in the amount of $2 million and credit in full of a
judgement encumbering the Angelika, with interest on such judgement at a rate of
9%. Reading had acquired such judgement from a bank for $1.285 million in
November 1995. The short-term portion ($1.5 million) and the long-term portion
($.5 million of the promissory note and an escrow established in relation to
this future obligation have been classified as "Note payable" and "Restricted
cash", respectively, in the Consolidated Balance Sheet as of September 30, 1996.
17
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
Reading contributed 83.3% of the capital of AFC and Sutton Hill contributed the
remaining 16.7%. The operating agreement of AFC provides that all the
depreciation and amortization ("Special Deductions") will first be allocated to
Sutton Hill until the aggregate amount of such Special Deductions equals Sutton
Hills initial investment. Thereafter, Reading 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 their
interest in AFC to Reading's interest in order to permit Reading to pledge AFC
and its assets as collateral to secure borrowings of Reading. In addition,
Sutton Hill has agreed that Reading will be entitled to receive up to 100% of
the proceeds of borrowings by AFC, up to the amount of Reading's initial
contribution to AFC.
AFC is managed by City Cinemas, an affiliate of Sutton Hill, pursuant to the
terms of a management agreement (the "Management Agreement"). The Management
Agreement provides for City Cinemas to manage the Angelika for a minimum annual
fee of $125,000 plus an incentive fee equal to 50% of annual cash flow (as
defined in the Management Agreement) over specified levels, provided however,
that the maximum fee (minimum fee plus incentive fee) may not exceed 5% of the
Angelika revenues.
For accounting purposes, the acquisition was accounted for using the purchase
method and the operating results of the Angelika since the acquisition on August
27, 1996 have been consolidated with the operating results of the Company.
Sutton Hills initial capital investment and share of Angelika's net earnings for
the period subsequent to the acquisition have been included on the Balance Sheet
as "Minority interest in equity of subsidiary" in the amount of $2.101 million
at September 30, 1996.
NOTE 6 - LONG-TERM DEBT
- -----------------------
In December 1995, Cine Vista, a wholly owned subsidiary of Reading, entered into
a $15 million eight year revolving credit agreement (the "Credit Agreement")
with a bank. Under the terms of the Credit Agreement, Cine Vista may borrow up
to $15 million to repay Cine Vista acquisition loans, which are loans payable to
a wholly-owned subsidiary of Reading and fund certain new theater development
expenditures. As security for the loan, Cine Vista has pledged substantially
all of its assets. During the initial 30 months of the Credit Agreement, 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 September 30,
1996, no amounts were outstanding under this agreement.
18
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 7 - 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
September 30, 1996 and 1995, the deferred tax liability components consisted of
the following:
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995
-------------- --------------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Book gains from preferred stock
investment, not realized
for tax 34,200 13,742
Other 7,032 --
-------- -------
Total deferred tax liabilities 41,232 13,742
-------- -------
Deferred tax assets:
Capital loss carryforward from
sale of equity securities (7,680) --
Unrealized capital loss from
writedown of equity securities -- (7,680)
Federal benefit of state taxes (2,480) (450)
Other (230) (232)
-------- -------
Total deferred tax assets (10,390) (8,362)
-------- -------
Net Deferred tax liabilities $ 30,842 $ 5,380
-------- -------
</TABLE>
As of September 30, 1996, the reported deferred tax assets of Craig are expected
to be realized as an offset against reversing temporary differences which create
net future tax liabilities.
At December 31, 1995, Reading had net operating loss carryforwards totalling
$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. Reading carryforwards which give
rise to a deferred tax asset amounted to approximately $54 million at September
30, 1996. Based upon an analysis of the likelihood of Reading realizing the
deferred tax assets, it was concluded that under SFAS No. 109, a valuation
allowance for the entire asset was necessary at September 30, 1996. As a result
of the Exchange Transaction consummated in October 1996, described in Note 11,
and its related impact on the Companies future financial statements, Reading
anticipates recording a material adjustment in the fourth quarter of 1996
decreasing the valuation allowance and thereby recognizing income from the
reduction.
The provision for taxes on income differs from the amounts computed by applying
the Federal income tax rate of 34% in 1996 to earnings before income taxes
19
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
principally due to (1) state income taxes provided, net of federal income tax
benefit, (2) dividend income exclusion and (3) losses incurred from the
Company's foreign subsidiary operations, upon which no U.S income tax benefit is
currently realizable.
NOTE 8 - COMMON AND CLASS A COMMON PREFERENCE STOCK
- ---------------------------------------------------
Since September 30, 1995, Craig has repurchased 593,100 shares of common stock
and 23,000 shares of Class A common preference stock at a purchase price of
approximately $8,293,000. As described in Note 2, on May 17, 1996, Craig agreed
to purchase 67,000 shares of Reading Common Stock from James J. Cotter in
exchange for 66,042 shares of its Common Stock. Under the terms of the
agreement, Mr. Cotter granted to Craig, for a two-year period, the right of
first refusal to acquire the 66,042 shares of Craig's Common Stock at a price of
$9.00 per share in the event that Mr. Cotter determines to sell, assign or
convey any interest in such shares. Issuance of these shares has been recorded
based on the closing price of Reading stock on May 17, 1996, or $10.625 per
share, as an increase to treasury stock and paid in capital.
The Common Stock repurchase included 475,000 of the 950,000 shares of its Common
Stock owned by certain funds managed by Southeastern Asset Management, Inc.
("Southeastern") at a purchase price of $6.95 million, or approximately $14.6315
per share. In order to mitigate any possible adverse effect with respect to the
utilization of Reading's net operating loss carryforward, which might result
from the disposition of the remaining 475,000 shares of Common Stock to a single
purchaser, Southeastern has agreed for a period of time not to sell more than
237,500 of its remaining shares to any single entity or individual.
NOTE 9 - LEASES
- ---------------
Cine Vista conducts all of its operations in leased premises. The leases relate
to motion picture theaters with remaining terms of approximately 6.5 to 26 years
with certain leases containing options to extend the leases for an additional 30
years. The minimum remaining lease terms, inclusive of any renewal options, for
any of the Cine Vista theaters and the Angelika theater are approximately 17 and
12 years, respectively. Certain theater leases provide for contingent rentals
based upon a specified percentage of theater revenues with a guaranteed minimum.
Performance under one Cine Vista lease has been guaranteed by Reading.
Substantially all of the leases require the payment of property taxes, insurance
and other costs applicable to 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.
20
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
Cine Vista's future minimum lease payments, by year and in the aggregate, under
non-cancelable operating leases and the capital lease consist of the following
at September 30, 1996:
<TABLE>
<CAPTION>
Capital Operating
Lease Lease
-------- ---------
(In thousands)
<S> <C> <C>
1997 $ 95 $ 1,749
1998 95 1,787
1999 95 1,919
2000 95 1,904
2001 95 1,904
Thereafter 1,187 17,521
------- -------
Net minimum lease payments 1,662 $26,784
-------
Less amount representing interest (1,140)
-------
Present value of minimum lease
payments under capital lease $ 522
-------
</TABLE>
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 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
approximately $1.5 million. Completion of construction and commencement of
theater operations is scheduled to occur in early 1997.
In September 1996, Cine Vista entered into a lease agreement with the landlord
of an existing theater which provides for the replacement of six screens in two
facilities with a new 10 screen facility. The lease provides for a 25 year term
and an increase in annual base rent of approximately $32,000 with options to
extend the lease up to an additional 10 years. Cine Vista will be responsible
for all costs of the new facility, which costs are estimated to total
approximately $5.4 million. Completion of construction and commencement of
theater operations is scheduled to occur in late 1997.
Craig entered into a 50/50 corporate joint venture and committed to invest up to
approximately $500,000 in a newly formed company, Hope Street Hospitality LLC,
established to develop the concept for a chain retail store/restaurant
specializing in woodfire baked goods. Craig has contributed approximately
$675,000 to this development project. Included in general and administrative
expenses for the three months and nine months ended September 30, 1996 is
approximately $375,000 and $550,000, respectively, representing development
expenses and operating losses of this venture. In addition, the Company has
signed as a corporate guarantor, the facility lease obtained by Hope Street
Hospitality LLC.
21
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
The lease commenced on March 1, 1996, the terms of which included a prepayment
of approximately $150,000 and annual minimum payments of $102,540, to be paid
monthly for 10 years. In addition to the base rent which is to be adjusted for
annual increase in CPI, the lessor will receive a percentage of gross monthly
sales in excess of certain minimums. The lease provides the lessor with a one-
time option to cancel the lease at the end of the third year for approximately
$45,000.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
Reading Company and subsidiaries
- --------------------------------
Historical Railroad Operations
------------------------------
Reading 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,
Reading receives quarterly reimbursement for certain personal injury legal
actions. At September 30, 1996, $124,000 was reimbursable to Reading for
amounts expended in defense and settlement of such actions. Three participants
in the insurance settlement are insolvent. Unreimbursed claims insured by these
insolvent companies totaled $64,000 from 1992 through September 30, 1996 and 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 on the backlog of pending personal injury cases and
Reading's experience in settling such cases, a reserve of $148,000 has been
recorded reflecting the potential effect of such insolvencies on future
reimbursement if no recovery is received from either the insolvent carriers or
the other parties of 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
-------------
Reading 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") 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
22
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
party action instituted by a majority of the 36 PRPs sued by the United States.
The actions instituted against Reading and approximately 300 PRPs seek to have
the parties contribute to reimbursement for past costs and any costs associated
with further remediation of the site.
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 Reading's 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. However, 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 alternative attempts by the PRPs to obtain Reading's participation
in funding for this site as well as the existence of other environmental matters
set forth below, the Company has included on its balance sheet at September 30,
1996, in other long-term liabilities, a liability for environmental claims of
approximately $1.2 million.
Reading is a party to a consent decree relating to a Superfund site located on
land owned by Reading. Apart from future operation and maintenance expenses
(O&M), remediation is complete. The Company believes that the amounts expended
to date will be adequate to fund the O&M with respect to the site. However, if
additional amounts are required, such amounts would not be material.
In 1991, Reading filed a lawsuit against the Southeastern Transportation
Authority ("SEPTA"), Conrail, the City of Philadelphia, and other parties which
sought to recover costs expended by Reading 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, Reading and
several parties agreed to settle this litigation by providing for Reading to
receive payments totaling $2.35 million, which amount Reading anticipates
receiving in 1996. The parties to the settlement also agreed to pay an amount
ranging from 52% to 55% of certain future costs Reading may incur in cleaning
environmental contamination on one of its other properties, the Viaduct, which
Reading 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. Reading has advised the
Environmental Protection Agency of the potential contamination. Reading has not
determined the scope and extent of any such PCB contamination. However, Reading
has been advised by counsel that, given the lack of regulatory attention to the
Viaduct in the twelve years which have elapsed since the EPA was notified of the
likelihood of contamination, it is unlikely that Reading will be required to
decontaminate the Viaduct or incur costs related thereto.
23
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
Prior to Reading's reorganization, Reading had extensive railroad and related
operations. Such operations could have contributed to environmental
contamination of properties now owned by Reading, previously sold or leased by
Reading, or to which Reading, prior to its reorganization, sent to waste. The
ultimate extent of liabilities, if any, with respect to such matters, as well as
the timing of the 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 impact upon the Company's
financial position or liquidity.
In September 1996, an individual shareholder of Reading commenced a purported
class action on behalf of Reading's minority shareholders owning Class A Common
Stock (the "Shareholder Action"), entitled Walter Alfin v. Reading Company, et
al., in the Philadelphia County Court of Common Pleas relating to the
transactions which were approved by Reading shareholders on October 15, 1996
(See Note 11). The complaint in the Shareholder Action (the "Complaint") named
Reading, Craig, former directors of Reading, Gerard P. Laheney and Ralph B.
Perry III,and all current directors of Reading as defendants. The complaint
alleges, among other things, that (i) none of the directors of Reading are
independent and each was appointed by James J. Cotter, Craig or those controlled
by them: (ii) resignations of Messrs. Laheney and Perry from the Board of
Reading, and of Edward L. Kane from the Board of Craig, were a sham designed to
give the "appearance" that each is disinterested, and that, in reality, none of
the defendants can exercise independent business judgement or protect the
interests of Reading's minority shareholders; (iii) the Stock Transactions are
"in violation of defendants' fiduciary duties owed" to the holders of Class A
Common Stock and "in violation of Pennsylvania law," in that the Stock
Transactions lack a valid business purpose and are "designed and intended solely
to minimize the interests of" the holders of Reading's Class A Common Stock and
"dilute their continued equity participation" in Reading, to the advantage of
Craig, Citadel, and their controlling shareholders; (iv) the Board of Directors
of Reading are unable to consider the transactions in a way that reflects the
"intrinsic value" of the Class A Common Stock; (v) the defendants other than
Reading have breached their fiduciary and other duties to the purported class in
that they have not exercised independent business judgement, have acted to the
detriment of the holders of Class A Common Stock in order to benefit defendants,
and have participated in a plan to dilute the interests of such shareholders for
no proper business purpose, particularly that the investment in the Stater Stock
is inconsistent with Reading's identified business; (vi) Reading's Board of
Directors have "gone through the motions" of appointing the Independent
Committee of "purportedly independent directors"; (vii) the defendants have
failed to disclose the "full extent of the future earnings potential" of Reading
as well as the value of its assets and the assets to be transferred to it; and
(viii) Craig will benefit unjustly by having its credit rating upgraded and its
balance sheet bolstered. The Complaint seeks preliminary and permanent
injunctive relief to prevent the consummation of the Stock Transactions or any
similar transaction,
24
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
recision of the Stock Transactions if they are consummated, divesture by the
defendants of assets and shares of Reading they may obtain as a result of the
Stock Transactions, and unspecified damages and other relief. Management
believes that the allegations are without merit and intends to vigorously defend
itself against such Shareholders Action.
NOTE 11 - SUBSEQUENT EVENT
- --------------------------
On October 15, 1996, Craig, with the approval of the Board of Directors, upon
recommendation of a special committee of the independent directors of the Board
of Directors, consummated the transaction (the"Exchange Transaction") with its
majority owned subsidiary, Reading and its equity affiliate, Citadel,
contemplated by an exchange agreement (the "Exchange Agreement"), dated as of
September 4, 1996. Immediately prior to the Exchange Transaction, there was a
reorganization of Reading (the "Reorganization") pursuant to a proposed
Agreement and Plan of Merger (the "Merger Agreement") among Reading Company,
Reading Entertainment, Inc., a Delaware corporation ("Reading Entertainment")
and a newly formed, wholly owned subsidiary of Reading Company, and Reading
Merger Co. ("Merger Co."), a newly formed, wholly owned subsidiary of Reading
Entertainment. Pursuant to the Reorganization, Reading merged with Merger Co.
and each outstanding share of Reading Company's Class A Common Stock and Common
Stock, par value $.01 per share, was converted into one share of Reading
Entertainment's Common Stock, par value $.001 per share, and the outstanding
shares of Merger Company were converted into shares of Common Stock of Reading.
As a result, Reading became a wholly-owned subsidiary of Reading Entertainment
and the current shareholders of Reading Company became shareholders of Reading
Entertainment.
Pursuant to the terms of the Exchange Agreement, Craig and its wholly-owned
subsidiary, Craig Management, Inc. ("CMI"), and Citadel contributed assets,
valued for purposes of the transaction at $88 million, in exchange for Reading
Entertainment convertible preferred and common stock and certain contractual
rights. Reading Entertainment issued (i) 70,000 shares of Reading
Entertainment's Series A Voting Cumulative Convertible Preferred Stock, par
value $.001 per share (the "Series A Preferred Stock") to Citadel Acquisition
Corp., Inc. ("CAC"), a newly formed wholly owned subsidiary of Citadel, for 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"), and 2,476,190 shares of Reading Entertainment Common Stock to
Craig and CMI in exchange for certain assets now held by Craig and CMI (the
"Craig Assets"). The Craig Assets consisted of the 693,650 shares of the SBH
Preferred Stock, Craig's 50% membership interest in Reading International and
the 1,329,114 shares of CHC Preferred Stock, which assets have been valued for
the transaction at $81 million. CAC contributed cash of $7 million. Upon
consummation of the transac-
25
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
tions, Craig and CAC hold approximately 77.4% and 5%, respectively, of the
voting power of Reading Entertainment.
The Series A Preferred Stock (i) bears a cumulative dividend of 6.5%, payable
quarterly, and (ii) is convertible at any time after 18 months from issuance (or
earlier upon a change of 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 (i) bears a cumulative dividend of 6.5% payable
quarterly, and (ii) is 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 are
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 Reading Entertainment Common Stock.
In addition, Citadel has the option, exercisable at any time after October 15,
1996 through a date 30 days after Reading's 1999 Form 10-K is filed, to exchange
all or substantially all of its assets for Reading Entertainment Common Stock.
Reading Entertainment is not obligated to acquire (i) the shares of Series A
Preferred Stock purchased by CAC or Reading Entertainment Common Stock held by
CAC, (ii) such amount of cash or marketable securities as Citadel determines to
retain to provide necessary liquidity to Citadel, (iii) such other assets as the
Board of Directors of Reading Entertainment determines are subject to
liabilities reasonably likely to be in excess of the fair market value of such
assets, (iv) assets acquired by Citadel subsequent to closing without Reading
Entertainment's approval to the extent such acquired assets have a value in
excess of $5 million or (v) any assets exceeding $30 million in aggregate value.
In exchange for Citadel's assets on exercise of the Asset Put Option, Reading
Entertainment will deliver to Citadel a number of shares of Reading
Entertainment Common Stock determined by dividing the value of the Citadel
assets, as determined by appraisal, by a stated value of the Reading Common
Stock.
In Exchange Transaction Reading Entertainment exchanged the CHC Preferred Stock
contributed to it by Craig for an equal number of newly issued CHC Series B
Preferred Stock (See Note 4, Citadel). The CHC Series B Preferred Stock has the
same terms as the CHC Preferred Stock except that, subject to certain
exceptions, if such CHC Preferred Stock is not tendered for conversion by
Reading Entertainment prior to the 15th day following the filing of Citadel's
1996 Form 10-K, the rights to convert will be suspended for a one year period.
In addition, the current redemption premium accrual rate of 9% was reduced to 3%
from October 15, 1996 forward.
Citadel has the right to require redemption of the Series A Preferred Stock
after five years from the date of issuance or earlier if Reading fails to pay
dividends on the Series A Preferred Stock for four quarters, but in no event
earlier than 18 months from the date of issuance, or in the event of a change of
control of Reading, whenever such change of control may occur. Reading agreed
to reimburse
26
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
Citadel for its out of pocket costs with respect to the Stock Transaction, up to
a maximum of $280,000.
Direct costs associated with the above transactions have been capitalized by the
Company and are included in "Other assets" in the Consolidated Balance Sheet at
September 30, 1996 amounting to approximately $1.5 million.
As the financial statements of the Company include the assets of Craig and
Reading on a consolidated basis, such Exchange Transaction is not expected to
materially impact the consolidated exchange asset values of the Company.
However, as described in Note 8, as a result of the Exchange Transaction,
Reading anticipates recording a material adjustment to its deferred tax
valuation allowance, thereby recognizing income tax benefits in the fourth
quarter of 1996. In addition, the exchange legally transferred the control of
such assets from Craig to Reading, resulting in Craig's assets being comprised
primarily of Reading Common Stock and Series B Preferred Stock. Accordingly,
the future working capital of Craig will be principally dependent on Reading's
ability to pay dividends in accordance with the terms of the Series B Preferred
Stock.
PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
- ---------------------------------------------
As described in Note 1, the consolidated financial statements, included herein,
include the accounts of Craig Corporation and its majority owned subsidiaries.
The following information reflects the only the accounts of Craig Corporation
and its wholly owned subsidiaries. This information should be read in
conjunction with the other notes to the consolidated financial statements.
<TABLE>
<CAPTION>
September 30, 1996
-------------------
(In thousands)
<S> <C>
ASSETS:
Cash $ 2,840
Receivables from affiliates 48
Other current assets 145
--------
Total current assets 3,033
Investments in affiliates 74,615
Investment in majority owned subsidiaries 50,552
Property and equipment, net 966
Other assets 277
Excess of cost over net assets acquired 1,207
--------
Total assets $130,650
========
LIABILITIES AND STOCKHOLDERS EQUITY:
Accounts payable and accrued expenses $ 809
Deferred gain from conversion of common
stock of affiliate to preferred stock 1,209
Deferred tax liabilities 30,992
Total stockholders liability 97,640
--------
Total liabilities and stockholders' equity $130,650
========
</TABLE>
27
<PAGE>
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Prior to March 1996, 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") were
included in the Company's Consolidated Financial Statements on the equity method
of accounting. See Notes 1, 2 and 3 of Notes to the Consolidated Financial
Statements. In March and May of 1996, certain transactions occurred which
resulted in the Company exchanging its common stock interests in SBH and
increasing its ownership in RC and, accordingly, the Company no longer accounts
for these investments utilizing the equity method of accounting. In May and
June 1996, the Company increased it ownership interest in RC from less than 50%
to approximately 52.5% by the purchase of an additional 158,300 shares of RC
Common Stock. Consequently, the Company reports its interest in Reading Company
on a consolidated basis for the 1996 periods. Due to the changes in the
Company's ownership interests in its affiliates, the presentation of the
Company's financial position and results of operations have varied significantly
from the presentation of its financial position and results of operations for
previous periods.
Results of Operations
- ---------------------
During September 1996, Craig changed its fiscal year end date from a
September 30 year end to December 31.
The following is a comparison of the results of operations for the three
months ended September 30, 1996 ("1996 Quarter") with the three months ended
September 30, 1995 ("1995 Quarter") and the nine months ended September 30, 1996
("1996 Nine Months") and the nine months ended September 30, 1995 ("1995 Nine
Months").
The Company's recorded net earnings for the 1996 Quarter of approximately
$1.853 million or $0.33 per share, as compared to $1.6 million or $0.27 per
share for the 1995 Quarter. The 1996 Quarter includes other income amounting to
approximately $1.119 million, net of expenses, in full settlement of a legal
claim. Net earnings for the 1996 Nine Months was approximately $40.419 million
or $7.07 per share, as compared to $3.037 million or $0.51 per share for the
1995 Nine Months. The 1996 Nine Months includes (1) a gain on the conversion of
the Company's common stock interest in SBH to preferred stock amounting to
approximately $34.9 million, net of income taxes provided and (2) approximately
$1.475 million representing the Company's pro-rata share of equity earnings of
its affiliate Citadel and (3) other income amounting to approximately $1.119
million, net of expenses, in full settlement of a legal claim.
Earnings before income taxes for the 1996 Quarter and 1995 Quarter amounted
to approximately $2.1 million and $1.88 million, respectively, and earnings
before income taxes amounted to $64.484 million and $4.332 million for the 1996
Nine Months and 1995 Nine Months, respectively. Included in the 1996 Nine
Months earnings before income taxes is other income of approximately $58.286
million reported as gain from conversion of the Company's common stock interest
in Stater to SBH Preferred Stock.
28
<PAGE>
Gain from conversion of common stock interest in Stater
- -------------------------------------------------------
Prior to March 8, 1996, the Company held a 50% common stock interest in SBH.
In March 1994, the Company entered into a series of restructuring agreements,
whereby the Company received, among other things, a $14.65 million option
payment from SBH which provided Stater with the option to acquire all, but not
less than all, of the Company's interest in Stater. The option had an initial
term of two years (March 8, 1996), but could be extended for ten additional
years if Stater converted the Company's common stock interest in SBH to
preferred stock prior to March 8, 1996.
Effective March 8, 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 (the "SBH Preferred Stock"). The SBH Preferred
Stock has a liquidation preference and redemption value of $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%. The SBH Preferred Stock, if
owned by the Company, entitles the Company to (1) elect one director of Stater,
(2) vote 20% of the total number of votes, and (3) elect a majority of the Board
of Directors of Stater if two or more quarterly preferred stock dividends remain
unpaid. Pursuant to the option terms, Stater has a transferable right to
purchase the SBH Preferred Stock at any time prior to March 2006. If not
purchased by Stater prior to March 2006, the Company has the right to have the
SBH Preferred Stock redeemed at any time following March 8, 2009.
Upon the conversion by SBH in March 1996 of the Company's common stock
interest to redeemable preferred stock, the Company discontinued the use of the
equity method of accounting for its investment in Stater. Prior to the
preferred stock conversion, the carrying value of the Company's 50% common stock
interest, net of the $14.65 million option proceeds received in 1994 and
reflected on the balance sheet at September 30, 1995 as "Option to sell
investment in affiliate", amounted to approximately $9 million. As of September
30, 1996, the Company has recorded approximately $58.286 million of the
difference between the $69.365 million stated value of the SBH Preferred Stock
and the Company's net carrying value of its previous common stock investment ($9
million) at the time of the conversion as "Gain from conversion of common stock
interest in Stater".
The ultimate value of the SBH Preferred Stock is based upon various market
factors including, but not limited to, Stater's operating performance, Stater's
existing senior debt covenants, interest rates, the SBH Preferred Stock
provisions, and the likelihood of redemption, from time to time, by Stater.
Based upon consultation with investment advisors and continued analysis of these
factors the Company has deferred approximately $2.08 million of the gain from
the conversion by Stater of the Company's common stock interest to SBH Preferred
Stock as of September 30, 1996. Such deferred gain, net of deferred taxes
provided, is reflected in the balance sheet as "Deferred gain from conversion of
common stock of affiliate to preferred stock" in the amount of approximately
$1.210 million.
29
<PAGE>
Service Income
- --------------
Effective March 8, 1994, Craig 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 both the 1996 and 1995
Quarter is $375,000 and for both the 1996 and 1995 Nine Months is $1,125,000,
earned pursuant to this agreement. SBH has the right to terminate the
consulting agreement if it were to redeem the SBH Preferred Stock.
Equity in earnings of affiliates
- --------------------------------
As described above, in March 1996, the Company's common stock interests in
SBH was exchanged for preferred stock and in May 1996 the Company increased its
ownership in RC to greater than 50%. As a result of increasing its ownership in
RC to greater than 50%, the Company now reports its ownership in Reading on a
consolidated basis and therefore the assets and liabilities of RC are recorded
in the Company's consolidated balance sheet and the revenues and expenses are
recorded in the Company's Statement of Operations as of and for the nine months
ended September 30, 1996 as compared to the prior years presentation under the
equity method of accounting which reflects RC on the Balance Sheet as Investment
in affiliate and in the Statement of Operations as equity earnings in affiliate.
Equity in earnings of affiliates reflects the Company's share of net earnings or
losses of Stater, Reading and Citadel before preferred dividends, for the
periods in which the Company held its common stock interests. The following
table sets forth the contribution by affiliate of the equity in earnings or
losses of affiliates less preferred stock dividends for the periods reported:
Equity in Earnings of Affiliates - Contribution by Affiliates
-------------------------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
----- ------ ------ ------
<S> <C> <C> <C> <C>
SBH $ -- $ 786 $1,608 $2,834
CHC 41 (23) 1,475 (474)
Reading -- 974 -- 1,125
----- ------ ------ ------
$ 41 $1,737 $3,083 $3,485
----- ------ ------ ------
</TABLE>
Stater
- ------
Effective March 8, 1996, upon receipt by the Company of SBH Preferred Stock
in exchange for its common stock interest, the Company discontinued the use of
the equity method of accounting for its investment in Stater. Accordingly, the
1996 Quarter and 1996 Nine Months are not comparable to the 1995 Quarter and
1995 Nine Months as they no longer include the Company's share of Stater's
operating results after February 1996. Included in the Statement of Operations
as dividend
30
<PAGE>
income from affiliates is approximately $1.836 million for the 1996 Quarter and
$4.130 million for the 1996 Nine Months earned with respect to the SBH Preferred
Stock received in March 1996. The payment of dividends by Stater to the Company
is restricted subject to various financial covenants in the Stater credit
agreements.
Citadel
- -------
In March 1996, Craig sold its common stock interest in Citadel to Reading for
an aggregate sale price of approximately $3.325 million which was paid in the
form of a five year unsecured note which provided for the payment of interest at
a rate equal to LIBOR plus 2.25%. The note was paid in full on July 29, 1996.
At June 30, 1996, the Company's holdings in CHC include a 26.1% common stock
interest and 1,329,114 shares of CHC 3% Cumulative Voting Convertible Preferred
Stock, stated value $3.95 per share, or $5.25 million, in the aggregate, which
represents approximately 18.1% of the voting power of CHC. In addition, the
Company owns a warrant to purchase 666,000 shares of CHC at $3.00 per share,
which, if issued, when considered with the Company's current holdings, would
represent approximately 44.5% of the then issued outstanding voting securities
of CHC.
CHC reported net income of approximately $197,000 in the 1996 Quarter as
compared to a loss of $95,000 in the 1995 Quarter. CHC reported net income of
$5,981,000 (the Company's share after preferred dividends amounting to
approximately $1,475,000) in the 1996 Nine Months as compared to $1,282,000 in
the 1995 Nine Months. CHC's net earnings for the 1996 Nine Months include
approximately $1,493,000 from the sale of a rental property and non-recurring
income amounting to $4 million resulting from the recognition of previously
deferred proceeds from the bulk sale of loans and properties by CHC's previously
owned subsidiary. CHC's net earnings for the 1995 Nine Months include
approximately $1,541,000 from the sale of rental property.
As of September 30, 1996, CHC's assets amounted to approximately $35.4
million and were comprised of cash amounting to approximately $19.8 million and
three properties (two office buildings and one apartment building) approximating
$14.5 million. On October 15, 1996, CHC acquired Reading equity securities and
an Asset Put Option for approximately $7 million (See Note 11 to Consolidated
financial statements). In addition, in October 1996, Citadel amended the office
lease of one its properties, entered into a new lease with Disney Enterprises,
Inc. and as a result expects to incur leasehold improvement and building upgrade
costs of approximately $3.9 million.
Reading - Theater revenues and theater costs
- --------------------------------------------
The 1996 Quarter and Nine Months includes the results of RC on a consolidated
basis rather than the equity method of accounting. See Note 2 to the
Consolidated financial statements for a comparison of Reading's operating
results on a stand alone basis for the 1996 periods as compared to the 1995
periods. As of September 30, 1996, RC's principal operating revenues are
derived from conventional multiplex cinema exhibition in Puerto Rico through its
Cine Vista Cinemas chain. Theater revenues increased to $13 million for the
1996 Nine
31
<PAGE>
Months as compared to $11.7 million for the 1995 Nine Months. The increase was
due primarily to an increase resulting from the opening of a new 8-screen
theater in late 1995, higher box office revenues at certain existing theaters
and the inclusion of approximately $.8 million in Angelika theater revenues
subsequent to its acquisition in late August 1996.
Theater costs reflect the direct theater costs of Cine Vista operations. The
increase in theater costs in the 1996 Nine Months as compared to the 1995 Nine
Months reflects the higher costs associated with higher revenues, increased film
rent percentages, and the operating expenses associated with the opening of the
8-screen theater in late 1995 and the Angelika in August 1996.
Interest income and expense
- ---------------------------
The increase in interest and dividend income in the 1996 Quarter as compared
to the 1995 Quarter is generally attributable to accounting for Reading on a
consolidated basis in the 1996 Quarter and 1996 Nine Months as compared to the
equity method in the 1995 corresponding periods. Interest and dividend income
amounted to $765,000 in the 1996 Quarter as compared to $307,000 in the 1995
Quarter and amounted to $2,469,000 in the 1996 Nine Months as compared to
$1,104,000 in the 1995 Nine Months.
Revenue from "Interest and other dividends" is expected to decrease due to
lower investable funds due to the purchase of Angelika and funding of the
development of Reading International.
General and administrative expenses
- -----------------------------------
Operating, general and administrative expenses of the Company amounted to
$1,755,000 for the 1996 Quarter compared to $525,000 for the 1995 Quarter.
General and administrative expenses in the 1996 Nine Months amounted to
$5,008,000 as compared to $1,425,000 for the 1995 Nine Months. The 1996 periods
include the consolidated accounts of Reading, amounting to $875,000 in the 1996
Quarter and $2,961,000 for the 1996 Nine Months. General and administrative
costs with respect to Reading for the comparable 1995 Quarter and 1995 Nine
Months amounted to $1,018,000 and $3,009,000, respectively. In addition to the
increase in general and administrative expenses caused by consolidating Reading,
the Company incurred development and operating losses with respect to its
corporate joint venture in a retail store/restaurant chain concept amounting to
approximately $375,000 in the 1996 Quarter and $550,000 in the 1996 Nine Months.
Expenses in the 1996 Quarter and 1996 Nine Months includes approximately
$456,000 and $1,368,000, respectively, of general, administrative and
development expenses incurred with respect to the foreign operations of Reading
International. Reading International is actively seeking properties to develop
in Australia and has acquired a property and has made deposits for several other
real property purchases or leases. The Company does not anticipate revenues
from Reading International during the next 15 months and therefore anticipates
continuing losses during such periods as operations are developed.
Liquidity
- ---------
At September 30, 1996, the Company had cash and cash equivalents totaling
approximately $39.3 million which includes approximately $21.1 million held by
32
<PAGE>
Reading and $15.3 million held by Reading International. At September 30, 1996,
Craig had cash and cash equivalents approximating $2.8 million. Reading is
majority owned by the Company and, accordingly, is included in the consolidated
financial statements of the Company as of September 30, 1996 (see Notes 1 and 2
to consolidated financial statements). However, Craig and Reading are separate
public companies and each entity's capital resources and liquidity is
independent of the other.
In November 1995, the Craig and Reading formed Reading International in
order to make available additional capital and liquidity to develop theater
opportunities in Australia. On March 29, 1996, Craig and Reading entered into a
Capital Funding Agreement with respect to Reading International pursuant to
which they agreed to increase the capital committed by the Craig and Reading to
Reading International to approximately $103 million through a combination of
cash contributions and secured capital funding undertakings. Craig and Reading
each immediately contributed to Reading International $12.5 million in cash and
have undertook to contribute up to an additional $37.5 million on an as needed
basis (the "Funding Commitment"). To secure the Funding Commitment, Craig
Management Inc., a wholly owned subsidiary of Craig pledged its SBH Preferred
Stock interest and Reading pledged its interest in Cine Vista and certain
government securities. Pursuant to the Exchange Transaction, Craig transferred
its interest in Reading International to Reading and the Capital Funding
Agreement was terminated.
Reading acquired an 83.3% interest in the Angelika theater in Manhattan (See
Note 5) for approximately $12.394 million in August 1996. Cine Vista, has three
new theaters under development and is seeking additional theater sites in Puerto
Rico. In December 1995, Cine Vista entered into a revolving credit agreement
which terms allow Cine Vista to borrow up to $15 million to repay certain loans
to a wholly owned subsidiary of Reading and fund certain new theater development
expenditures. No amounts are presently outstanding under the credit agreement.
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 needed to
simplify the corporate structures which it found necessary to utilize in
pursuing such opportunities. Accordingly, the Exchange Transaction consummated
between Craig, Reading and Citadel (see Note 11) was developed to achieve the
goals of increasing Reading's capital base while simultaneously simplifying the
corporate structure of Reading and Craig. Pursuant to the terms of the Exchange
Transaction, Craig exchanged its SBH Preferred Stock, its 50% membership
interest in Reading International and its CHC Preferred Stock in exchange for
common and preferred stock in Reading. Citadel contributed cash in the amount
of $7 million in exchange for preferred stock in Reading and certain contractual
rights.
As the consolidated financial statements of the Company reflect the assets
of Craig and Reading on a consolidated basis, such contemplated Stock
Transaction, if consummated, is not expected to materially impact the
consolidated asset values of the assets transferred as reported by Craig. The
Exchange Transaction legally transferred the title of the above described assets
from Craig to Reading, resulting in Craig's assets being comprised generally of
Reading Common and Preferred Stock. Accordingly, the future liquidity of Craig
will be principally dependent on Reading's ability to pay dividends in
accordance with
33
<PAGE>
the terms of the Reading Preferred Stock issued in the Exchange Transaction,
amounting to approximately $3.575 million annually.
Craig expects that its sources of funds in the near term will include cash
on hand (approximately $2.8 million at November 13, 1996), consulting fees from
Stater and quarterly dividends on the Reading Preferred Stock received in the
Exchange Transaction, amounting to approximately $3.575 million annually.
Cash and cash equivalents increased $20,643,000 from $18,645,000 at
January 1, 1996 to $39,288,000 at September 30, 1996 due primarily to the
effects of accounting for Reading on a consolidated basis. As described above,
during the 1996 Nine Months, Craig increased its ownership in Reading from less
than 50% to approximately 52.5%. Such purchase resulted in the Company
including the assets and liabilities of Reading on a consolidated basis in the
financial statements, which had the effect of increasing cash and cash
equivalents by approximately $44,891,000, net of Craig's cash purchase of the
acquisition amounting to approximately $1,752,000. The increase resulting from
the consolidation of Reading in the 1996 Nine Months was offset by the purchase
of property, plant and equipment amounting to $1.9 million, the purchase of the
Angelika theater amounting to $12.4 million (See Note 5) and land acquisitions
by Reading International amounting to approximately $4.3 million.
In March 1996, Craig sold its common stock interest in Citadel to Reading
for an aggregate sale price of approximately $3.325 million, which was paid in
the form of a five year unsecured note which provided for the payment of
interest at a rate equal to LIBOR plus 2.25%. Such note was paid in full on
July 29, 1996.
Cash and cash equivalents decreased approximately $7,584,000 in the 1996
Nine Months as a result of Craig's repurchasing 516,100 shares of its common
stock. The source of funds for such purchase was working capital. As of
November 13, 1996, Craig's cash and cash equivalents approximated $2.6 million.
34
<PAGE>
PART 2
ITEM 1. LEGAL PROCEEDINGS
In September 1996, an individual shareholder of Reading commenced a
purported class action on behalf of Reading's minority shareholders owning Class
A Common Stock (the "Shareholder Action"), entitled Walter Alfin v. Reading
Company, et al., in the Philadelphia County Court of Common Pleas relating to
the transactions which were approved by Reading shareholders on October 15, 1996
(See Note 11). The complaint in the Shareholder Action (the "Complaint") named
Reading, Craig, former directors of Reading, Gerard P. Laheney and Ralph B.
Perry III,and all current directors of Reading as defendants. The complaint
alleges, among other things, that (i) none of the directors of Reading are
independent and each was appointed by James J. Cotter, Craig or those controlled
by them: (ii) resignations of Messrs. Laheney and Perry from the Board of
Reading, and of Edward L. Kane from the Board of Craig, were a sham designed to
give the "appearance" that each is disinterested, and that, in reality, none of
the defendants can exercise independent business judgement or protect the
interests of Reading's minority shareholders; (iii) the Stock Transactions are
"in violation of defendants' fiduciary duties owed" to the holders of Class A
Common Stock and "in violation of Pennsylvania law," in that the Stock
Transactions lack a valid business purpose and are "designed and intended solely
to minimize the interests of" the holders of Reading's Class A Common Stock and
"dilute their continued equity participation" in Reading, to the advantage of
Craig, Citadel, and their controlling shareholders; (iv) the Board of Directors
of Reading are unable to consider the transactions in a way that reflects the
"intrinsic value" of the Class A Common Stock; (v) the defendants other than
Reading have breached their fiduciary and other duties to the purported class in
that they have not exercised independent business judgement, have acted to the
detriment of the holders of Class A Common Stock in order to benefit defendants,
and have participated in a plan to dilute the interests of such shareholders for
no proper business purpose, particularly that the investment in the Stater Stock
is inconsistent with Reading's identified business; (vi) Reading's Board of
Directors have "gone through the motions" of appointing the Independent
Committee of "purportedly independent directors"; (vii) the defendants have
failed to disclose the "full extent of the future earnings potential" of Reading
as well as the value of its assets and the assets to be transferred to it; and
(viii) Craig will benefit unjustly by having its credit rating upgraded and its
balance sheet bolstered. The Complaint seeks preliminary and permanent
injunctive relief to prevent the consummation of the Stock Transactions or any
similar transaction, recision of the Stock Transactions if they are consummated,
divesture by the defendants of assets and shares of Reading they may obtain as a
result of the Stock Transactions, and unspecified damages and other relief.
Management believes that the allegations are without merit and intends to
vigorously defend itself against such Shareholders Action.
35
<PAGE>
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 exhibits are 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
September 30, 1996.
36
<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
November 14, 1996
By: /s/ Robin W. Skophammer
------------------------
Chief Financial Officer
November 14, 1996
37
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-01-1996
<CASH> 39,288
<SECURITIES> 3,887
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 48,387
<PP&E> 19,499
<DEPRECIATION> 0
<TOTAL-ASSETS> 179,138
<CURRENT-LIABILITIES> 10,484
<BONDS> 0
0
0
<COMMON> 1,377
<OTHER-SE> 96,261
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 13,003
<TOTAL-REVENUES> 25,302
<CGS> 10,248
<TOTAL-COSTS> 16,764
<OTHER-EXPENSES> (58,286)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 64,484
<INCOME-TAX> (24,065)
<INCOME-CONTINUING> 40,419
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,419
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 7.07
</TABLE>
