<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 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 August 13, 1996.
- --------------------------------------------------------------------------------
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
INDEX
-----
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART 1. Financial Information
- -------
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996 (Unaudited)
and September 30, 1995............................................... 3
Consolidated Statements of Operations for the Three and Nine Months
Ended June 30, 1996 and 1995 (Unaudited)............................. 4
Consolidated Statements of Cash Flows for the Nine Months
Ended June 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........................... 24
PART 2. Other Information
- ------
Item 1. Legal Proceedings............................................. 31
Item 2. Changes in Securities......................................... 31
Item 3. Defaults Upon Senior Securities............................... 31
Item 4. Submission of Matters to a Vote of Security Holders........... 31
Item 5. Other Information............................................. 31
Item 6. Exhibits and Reports on Form 8-K.............................. 31
Signatures............................................................... 32
</TABLE>
2
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
-------------------------- --------------
ASSETS (In thousands of dollars)
- --------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 56,550 $ 21,059
Receivables from affiliates 2,234 247
Other current assets 2,466 76
-------- --------
Total current assets 61,250 21,382
Investments in affiliates 79,372 60,171
Other investments 2,226 --
Property and equipment, net 18,132 915
Other assets 1,673 --
Intangible assets:
Beneficial leases 15,081 --
Excess of cost over net assets acquired 1,177 2,201
-------- --------
Total assets $178,911 $ 84,669
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 5,323 $ 692
Land contract payable 3,327 --
-------- --------
Total current liabilities 8,650 692
Other long-term liabilities 2,538 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 33,109 --
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 (114) --
Retained earnings 83,275 43,858
Cost of treasury shares, 1,229,153 and 1,154,095 (12,794) (12,137)
-------- --------
Total shareholders' equity 102,562 63,891
-------- --------
Total liabilities and shareholders' equity $178,911 $ 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
June 30, June 30,
1996 1995 1996 1995
---------- ----------- --------- --------
<S> <C> <C> <C> <C>
(In thousands of dollars, except per share amounts)
Revenues:
Theater revenues $ 3,998 -- 11,214 --
Equity in earnings of affiliates 1,433 1,353 4,942 2,471
Dividend income from affiliates 1,855 -- 2,412 --
Service income from affiliate 375 375 1,125 1,125
Interest and other dividend income 896 416 2,632 1,283
Other 79 -- 610 --
------- ------ -------- -------
8,636 2,144 22,935 4,879
------- ------ -------- -------
Expenses:
Theater costs 3,320 -- 9,101 --
Depreciation and amortization 415 23 1,208 46
Expenses from Australian theater
developments 402 -- 1,396 --
General and administrative expenses 1,470 416 4,891 1,605
------- ------ -------- -------
5,607 439 16,596 1,651
------- ------ -------- -------
Earnings before minority interest,other
income and income taxes 3,029 1,705 6,339 3,228
Minority interest (630) -- (466) --
Gain from conversion of common stock
interest in Stater 8,325 -- 58,286 --
------- ------ -------- -------
Earnings before income taxes 10,724 1,705 64,159 3,228
Provision for taxes (3,450) (715) (24,742) (1,370)
------- ------ -------- -------
Net earnings $ 7,274 $ 990 $ 39,417 $ 1,858
======= ====== ======== =======
Earnings per common and
common equivalent share $1.25 $0.17 $6.75 $0.31
======= ====== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
1996 1995
------------------------
(In thousands of dollars)
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 39,417 $ 1,858
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on conversion of common stock
investment in Stater (58,286) --
Amortization of intangibles 742 50
Undistributed earnings of affiliates (4,942) (2,471)
Depreciation 496 75
Deferred rent 123 --
Minority interest 466 --
Provision for deferred income taxes 24,592 1,370
Changes in operating assets and liabilities
net of effects of consolidating Reading:
(Increase) decrease in other current assets (1,124) (154)
(Increase) decrease in other assets (705) (10)
(Decrease) increase in liabilities 1,061 (151)
-------- -------
Net cash provided by (used in) operating activities 1,840 567
INVESTING ACTIVITIES
Acquisition of stock of equity affiliate (1,281) (287)
Other investments (410) --
Purchase of stock investment -- (442)
Proceeds from payoff of notes receivable -- 950
Sale of stock investment -- 457
Cash acquired as a result of consolidation of Reading
($46,644), net of acquisition costs 44,891 --
Purchase of judgement (1,285) --
Investment in Australian land acquisitions (8,051) --
Purchase of property and equipment (1,942) --
-------- -------
Net cash provided by (used in) investing activities 31,922 678
FINANCING ACTIVITIES
Short-term debt incurred for land purchase 3,326 --
Common stock repurchase (1,343) (823)
Payment of debt financing costs (254) --
-------- -------
Net cash provided by (used in) financing activities 1,729 (823)
Increase (decrease) in cash and cash
equivalents 35,491 422
Cash and cash equivalents at beginning
of period 21,059 21,205
-------- -------
Cash and cash equivalents at end
of period $ 56,550 $21,627
======== =======
</TABLE>
SUPPLEMENTAL DISCLOSURES:
During the nine months ended June 30, 1996 the Company (1) purchased 67,000
shares of Reading Common Stock in exchange for 66,042 shares of the Company
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
JUNE 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 Company ("RC" 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. 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 2).
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments of a recurring nature considered necessary
for a fair presentation of its financial position as of June 30, 1996 and
September 30, 1995, and the results of operations and its cash flows for the
three and nine month periods ended June 30, 1996 and 1995. The results of
operations for the three and nine month periods ended June 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
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.
6
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
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 5,818,630 and 5,934,970, the weighted average
number of shares of common stock outstanding during the three months ended June
30, 1996 and 1995, and 5,837,898 and 5,974,970 shares during the nine months
ended June 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, whichever is shorter. Included in
property and equipment at June 30, 1996 is approximately $7.9 million of
capitalized land and development costs purchased in connection with the
Company's investment in Reading International (Note 3).
Excess of cost over net assets acquired
- ---------------------------------------
The excess of cost over net assets acquired is amortized using the straight line
method over 40 years. Accumulated amortization at June 30, 1996 and September
30, 1995 was approximately $625,000 and $585,000 respectively. During the nine
months ended June 30, 1996, excess of cost over net assets acquired decreased as
a result of accounting for additional purchases of common stock of Reading.
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 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
7
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
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.
NOTE 2 - ACQUISITION OF READING COMPANY
- ---------------------------------------
During the nine months ended June 30, 1996, Craig increased its ownership in
Reading from 2,367,976 shares (47.6%) at September 30, 1995 to 2,452,526 shares
(52.5%) at June 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's 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's Common
Stock. The market price of the Reading Class A Common Stock as of the date of
transfer was $10.625. As a result of increasing its ownership in Reading to
greater than 50% in May 1996, the Company now 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 June
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 year or
October 1, 1995. Minority interest represents that portion of Reading's
financial results of operations that is not owned by the Company. 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 RDGCA. Reading is currently
involved in conventional multiplex cinema exhibition in Puerto Rico through its
Cine Vista Cinemas chain, is scheduled to close in the immediate future the
acquisition of the Angelika Film Center in New York (a specialty art multiplex
cinema and cafe complex), and is working with Craig through their 50% each
membership interests in Reading International Cinemas LLC, to develop a new
chain of multiplex cinemas in Australia. Summarized financial information as
reported by Reading at June 30, 1996 (which are included, after elimination of
intercompany accounts, in the consolidated financial statements of the Company)
and September 30, 1995 follows:
8
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
<TABLE>
<CAPTION>
June 30, Sept. 30,
1996 1995
-------- ---------
(In thousands)
<S> <C> <C>
CONDENSED BALANCE SHEET
Cash and cash equivalents $32,431 $47,469
Other current assets 1,861 2,794
Equity investment in Citadel 4,757 --
Other investments 2,041 1,771
Property and equipment 9,125 7,118
Intangible assets 15,081 15,770
Investment and advances
in Reading International 13,174 145
Other assets 1,607 1,966
Current liabilities 4,531 3,596
Note payable to Company 3,325 --
Other long-term liabilities 2,518 2,907
Shareholders' common equity 69,703 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.
In addition, Craig sold to Reading for an option fee of $50,000, a one year
option to acquire at fair market value, as determined by an investment banker
selected by the parties, the 1,329,114 shares of CHC 3% Cumulative Voting
Convertible Preferred Stock, stated value $3.95 per share, owned by the Company
and a warrant to acquire 666,000 shares of CHC Common Stock at $3.00 per share.
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Revenue:
Theater $3,998 $3,427 $11,214 $ 9,790
Equity earnings in Citadel 1,433 -- 1,433 --
Other 570 1,134 2,334 2,433
------ ------ ------- -------
Total revenue 6,001 4,561 14,981 12,223
Theater costs 3,075 2,739 8,880 7,795
Depreciation and amortization 386 341 1,120 1,091
Equity losses from Reading
International 52 -- 552 --
General and administrative 917 1,066 3,135 3,149
------ ------ ------- -------
Earnings before
income taxes 1,326 415 1,074 188
Income taxes 13 14 71 155
------ ------ ------- -------
Net earnings $1,313 $ 401 $ 1,003 $ 33
------ ------ ------- -------
</TABLE>
9
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
Included in the revenues for the three and nine months ended June 30, 1996 is
$1.433 million recorded as equity in earnings in Citadel which represents
Reading's 26% pro-rata portion of Citadel's earnings. See Note 3, page 15 for
further disclosure regarding Citadel's operating results for such periods.
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. Reading International is owned in equal shares by Craig and Reading.
Due to the Craig's 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 June 30, 1996,
the Company and Reading have made cash contributions to Reading International
approximating $27,856 million and have undertaken to contribute up to an
additional $37.5 million each for an aggregate commitment of $75 million on an
as needed basis. Craig's commitment is secured by Craig's Stater Bros. Holdings
Inc. Series B Preferred Stock, par value $100 per share (the "SBH Preferred
Stock") and the commitment of Reading is secured by certain assets of Reading.
A wholly owned subsidiary of Reading International has retained the services of
several executive employees 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 June 30, 1996, as expenses from Australian theater
development, is approximately $402,000 and $1,396,000 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 June 30, 1996, Reading International's assets amounted to approximately
$30,393,000 including cash of approximately $21.1 million. In addition, Reading
International's noncurrent assets at June 30, 1996 amounted to approximately
$8.1 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 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 March 31, 1996. Reading International is in
negotiations with several developers and landlords with respect to other
potential locations.
10
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
NOTE 4 - INVESTMENTS IN AFFILIATES
- ----------------------------------
The Company's investments in affiliates at June 30, 1996 and September 30, 1995
consist of the following:
<TABLE>
<CAPTION>
June 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") 4,757 2,036
------- -------
4,757 54,921
------- -------
Preferred Stock:
Stater Bros. Holdings Inc. 69,365 --
Citadel Holding Corporation 5,250 5,250
------- -------
74,615 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 (48% voting
interest) in Stater Bros. Holdings Inc. ("SBH" and collectively with its
operating subsidiaries, "Stater"). The remaining 50% interest (52% voting
interest) in Stater was owned by La Cadena Investments ("La Cadena"), a general
partnership consisting of key management executives of Stater. 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%. Included in dividend income
from affiliates for the three and nine months ended June 30, 1996, is
approximately $ 1,816,000 and $2,295,000, respectively earned from the date of
issuance of the SBH Preferred Stock on March 8, 1996 through June 30, 1996.
Dividends are paid
11
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
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. Pursuant to the option terms, SBH has a
transferable right to redeem the SBH Preferred Stock at any time prior to March
2006. 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.
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 June 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
Company's investment in Stater is not held for sale. 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. After the Company's
consideration of these factors, the Company recognized a gain of approximately
$49.96 million as of the quarter ended March 31, 1996. An additional gain of
approximately $8.325 million was recognized in the third quarter ending June 30,
1996 based upon further consultation with investment advisors and continued
analysis of these factors. As of June 30, 1996, 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.
Effective March 8, 1994, the Company entered into a consulting agreement with
SBH pursuant to which the Company has agreed, among other things, to render
consulting services for a five year period, for an annual fee of $1.5 million,
payable quarterly. Included in service income for the both the three and nine
months ended June 30, 1996 and 1995 is $375,000 and $1,125,000 earned pursuant
to this agreement.
Stater files required periodic reports with the Securities and Exchange
Commission (SEC). Summarized financial information of Stater is as follows:
12
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
June 23, September 24,
1996 1995
--------------------------
(In thousands)
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
CONDENSED STATEMENT OF INCOME
Thirty-Nine Weeks Ended
-------------------------
June 23, June 25,
1996 1995
---------- ----------
(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
========== ==========
Prior to SBH's exercise of its option to convert the Company's 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 amounting to
$1,165,000 for the three months ended June 30, 1995 and $3,489,000 and
$1,742,000 for the nine months ended June 30, 1996 and 1995, respectively.
Citadel
- -------
As of June 30, 1996 and September 30, 1995, the Company's investment in CHC is
as follows (in thousands):
June 30, September 30,
1996 1995
------- ------------
Common stock $ 4,757 $2,036
3% Cumulative Convertible Preferred Stock 5,250 5,250
------- ------
$10,007 $7,286
======= ======
13
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
During the nine months ended June 30, 1996, 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, the Company 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. The Company 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.
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 June 30, 1996. Assuming
full exercise of the Warrant, the Company together with Reading, would own
approximately 44.5% 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 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 the rate of 1% per year. The market price calculated in
accordance with the terms of Preferred Stock provisions approximated $2.39 at
June 30, 1996, which price, would result in the Preferred Stock converting into
approximately 2,247,997 shares, resulting in an increase in the Company's voting
ownership in Citadel to 46.2% at June 30, 1996, or 50.2% assuming, in addition,
the exercise of the Warrant.
For financial statement purposes, the Company carries its Citadel 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 June
30, 1996 and 1995 amounted to $39,375, and for the nine months ended June 30,
1996 and 1995 amounted to $118,125 and $101,500, 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 $1,433,000 and $1,453,000 for the three and nine months ended June
14
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CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
30, 1996, respectively and $0 and a loss of $451,000 for the three months and
nine months ended June 30, 1995, respectively.
Citadel's fiscal year is December 31. Summarized financial information of
Citadel as of June 30, 1996 and December 31, 1995 and for the three and six
months ended June 30, 1996 and 1995 follows:
June 30, December 31,
1996 1995
-----------------------
(In thousands)
Cash $19,168 $16,291
Properties held for sale 400 7,942
Rental properties 14,508 14,251
Other assets 1,312 1,331
Mortgage liabilities 10,372 16,186
Deferred proceeds -- 4,000
Other liabilities 1,629 1,909
Stockholders' equity 23,387 17,720
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
--------------------------------------
(In thousands)
Rental and other income $ 1,572 $ 1,432 $ 3,312 $ 2,545
Operating expenses (754) (617) (1,514) (1,162)
Depreciation (99) (83) (221) (183)
Interest expense (396) (323) (794) (561)
General and administrative (255) (339) (472) (764)
Gain on sale of property 1,473 -- 1,473 1,541
Gain related to Fidelity
Investment 4,000 (39) 4,000 (39)
------- ------- ------- -------
Net earnings $ 5,541 $ 31 $ 5,784 $ 1,377
------- ------- ------- -------
Included in Citadel's net earnings for the three months and six months ended
June 30, 1996 is (1) approximately 1,473,000 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.
15
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
NOTE 5 - OTHER INVESTMENTS
- --------------------------
Included in other investments is a judgement in the amount of $1.285 million
acquired by Reading from a major bank (the "Angelika Judgement") encumbering,
among other things, a controlling interest in Angelika Film Centers, Inc.
("AFCI") which has as its principal asset a Manhattan, New York multiplex
theater (the "Angelika"). The judgement was acquired as part of Reading's plan
to acquire, in conjunction with Manhattan-based City Cinemas Corporation ("City
Cinemas") (owned indirectly in equal parts by James J. Cotter, Chairman of
Reading and Craig, and Mr. Michael Forman, a beneficial stockholder of Craig) a
controlling interest in the Angelika. In July 1996, Reading and AFCI entered
into an asset and purchase agreement under which terms Reading will acquire for
approximately $10.582 million an 83.3% interest in the Angelika. Reading will
acquire these assets with a combination of cash, a fully collateralized
promissory note to the sellers and by receiving a credit for the Angelika
judgement together with an interest rate equal to 9%. The remaining ownership
interest in Angelika will be acquired by Sutton Hill Associates, a California
General Partnership ("Sutton Hill"), an affiliate of City Cinemas which
operates an additional 20 screens in seven cinemas in New York City. Reading and
Sutton Hill have formed a Delaware limited liability company, Angelika Film
Centers, LLC ("AFC"), to hold their interest in Angelika. Settlement of this
transaction is expected to occur in August 1996.
AFC will be managed by City Cinemas pursuant to the terms of a management
agreement (the "Management Agreement"). The Management Agreement provides for
City Cinemas to manage the Angelika for a minimum fee of $125,000 plus an
incentive fee equal to 50% of annual cash flow (as defined in the Management
Agreement) over $2 million, provided however that the maximum fee (minimum fee
plus incentive fee) may not exceed 5% of the Angelika revenues.
For accounting purposes, the acquisition will be accounted for under the
purchase method and, accordingly, the operating results of the Angelika will be
included in the Consolidated Statements of Operations beginning with the date of
settlement.
NOTE 6 - LONG-TERM DEBT
- -----------------------
In 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. 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
16
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
installments over the balance of the loan term. At June 30, 1996, no amounts
were outstanding under this agreement.
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 June
30, 1996 and September 30, 1995, the deferred tax liability components consisted
of the following:
June 30, September 30,
1996 1995
--------- --------------
(In thousands)
Deferred tax liabilities:
Book gains from preferred stock
investment, not realized
for tax 34,200
Other 7,032 13,742
-------- -------
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
-------- -------
As of June 30, 1996, the reported deferred tax assets are expected to be
realized as an offset against reversing temporary differences which create net
future tax liabilities.
The provision for taxes on income differs from the amounts computed by applying
the Federal income tax rate of 34% in 1996 to earnings before income taxes
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.
17
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
NOTE 8 - COMMON AND CLASS A COMMON PREFERENCE STOCK
- ---------------------------------------------------
During the nine months ended June 30, 1996, Craig repurchased 118,100 shares of
common stock and 23,000 shares of Class A common preference stock at a purchase
price of approximately $1,343,000. 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.
Subsequent to June 30, 1996, Craig repurchased 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 addition, 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 7 to 26 years
with certain leases containing options to extend the leases for an additional 30
years. The minimum remaining lease term, inclusive of any renewal options, for
any of the Cine Vista theaters is approximately 17 years. Certain theater
leases provide for contingent rentals based upon a specified percentage of
theater revenues with a guaranteed minimum. Substantially all of the leases
require the payment of property taxes, insurance and other costs applicable to
property. With the exception of one capital lease, all leases are accounted for
as operating leases. Cine Vista determines annual base rent expense by
amortizing total minimum lease obligations on a straight line basis over the
lease terms.
Cine Vista's future minimum lease payments, by year and in the aggregate, under
non-cancelable operating leases and the capital lease consist of the following
at June 30, 1996:
18
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
Capital Operating
Lease Lease
-------- ---------
(In thousands)
1997 $ 95 $ 1,315
1998 95 1,301
1999 95 1,426
2000 95 1,401
2001 95 1,401
Thereafter 1,211 13,826
------- ---------
Net minimum lease payments 1,686 $20,670
---------
Less amount representing interest (1,163)
-------
Present value of minimum lease
payments under capital lease $ 523
-------
In June 1995, Cine Vista entered into a lease agreement for a new six-plex
motion picture theater. The lease provides for a 20-year term with an average
annual base rent of approximately $185,000, with options to extend the lease up
to an additional 10 years. The lease 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 $1.2 million. Completion of construction and commencement of
theater operations is scheduled to occur in 1996.
A landlord of Cine Vista has alleged that Cine Vista underpaid rent by
approximately $587,000 for the thirty-six month period ended June 30, 1996.
Cine Vista is finalizing a settlement of this claim under which Cine Vista will
pay approximately $130,000 and the former owner of Cine Vista will pay
approximately $220,000. Provision for the expected settlement has been provided
by the Company during the nine months ended June 30, 1996.
Craig entered into a 50/50 joint venture and committed to invest up to
approximately $500,000 in a newly formed company, Hope Street Hospitality LLC,
established to develop a retail store/restaurant specializing in woodfire baked
goods. As of June 30, 1996, the Company has contributed approximately $410,000
to this development project which included in other investments at June 30,
1996, net of development expenses amounting to $175,000. In addition, the
Company has signed as a corporate guarantor, the facility lease obtained by Hope
Street Hospitality LLC. 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.
19
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
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. Three participants in the insurance settlement are insolvent.
Unreimbursed claims insured by these insolvent companies totaled $64,000 from
1992 through June 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 $146,000 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 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
20
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
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 June 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 eleven years which have elapsed since 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.
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.
21
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
NOTE 12 - SUBSEQUENT EVENT
- --------------------------
On August 12, 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, entered into a letter of intent (the "Letter of Intent") with its
majority owned subsidiary, Reading and its equity affiliate, Citadel,
contemplating two transactions. The first transaction is a reorganization of
Reading (the "Reorganization") pursuant to a proposed Agreement and Plan of
Merger (the "Merger Agreement") among Reading, Reading Entertainment, Inc., a
Delaware corporation ("Reading Entertainment") which is a newly formed, wholly
owned subsidiary of Reading, and Reading Merger Co. ("Merger Co.") which is a
newly formed, wholly owned subsidiary of Reading Entertainment. Pursuant to the
Reorganization, Reading will merge with Merger Co. and each outstanding share of
Reading's Class A Common Stock and Common Stock, par value $.01 per share, will
be converted into the right to receive one share of Reading Entertainment's
Common Stock, par value $.001 per share, and the outstanding shares of Merger
Company will be converted into shares of Common Stock of Reading. As a result,
Reading will become a wholly-owned subsidiary of Reading Entertainment and the
current shareholders of Reading will become shareholders of Reading
Entertainment.
The second transaction (the "Stock Transaction") is a contribution of assets to
Reading Entertainment by Craig and its wholly-owned subsidiary, Craig
Management, Inc. ("CMI"), and by Citadel in exchange for Reading Entertainment
convertible preferred and common stock and certain contractual rights.
Following consummation of the Reorganization, Reading Entertainment will issue
(i) 70,000 shares of Reading Entertainment's Series A Voting Cumulative
Convertible Preferred Stock, par value $.01 per share (the "Series A Preferred
Stock") to Citadel Acquisition Corp., Inc. ("CAC"), a newly formed wholly owned
subsidiary of Citadel, for 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
consist of the 693,650 shares of the Series B Preferred Stock of SBH, 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 will contribute cash of $7 million. Upon consummation of the
transactions, Craig will hold 77.4% of the voting power of Reading
Entertainment.
The Series A Preferred Stock will (i) bear a cumulative dividend of 6.5%,
payable quarterly, and (ii) be convertible at any time after 18 months from
issuance (or earlier upon a change 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 will (i) bear a cumulative dividend of 6.5%
payable quarterly,
22
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd)
and (ii) be convertible, at any time after 18 months from issuance, into shares
of Reading Entertainment Common Stock at a conversion price of $12.25 per share.
Holders of each series of Convertible Preferred Stock will be entitled to 9.64
votes per share held on all matters brought to a vote of the shareholders of
Reading Entertainment, voting as a single class with the holders of Reading
Entertainment Common Stock.
In addition, Citadel will have the option, exercisable at any time after the
closing of the Stock Transaction 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. Also, Citadel has the right to require
redemption of the Series A Preferred Stock after five years from the date of
issuance or earlier and 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 has agreed to reimburse
Citadel for its out of pocket costs with respect to the Stock Transaction, up to
a maximum of $280,000.
The Letter of Intent also provides, with respect to the CHC Preferred Stock
owned by Craig and to be transferred to Reading Entertainment in the
contemplated exchange that, except in the event of a change of control of
Citadel, 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% will be reduced to
3% from the date of the closing of the transactions forward.
The Letter of Intent is non-binding on each of the companies and consummation of
the Stock Transaction and the Reorganization is subject to certain conditions,
including execution of definitive agreements, approval of the stockholders of
Reading, delivery of written fairness opinions from respective financial
advisors and certain other standard and customary conditions. No approval of
the stockholders of Craig or CHC is required for approval of the transaction
contemplated by the Letter of Intent (the "Transactions"). While approval of the
stockholders of Reading is required, Craig has agreed to vote its 52.5% voting
interest in Reading in favor of the Transactions. Accordingly, the vote of no
other RC stockholder is required for approval of the Transactions.
As the financial statements of the Company include the assets of Craig and
Reading on a consolidated basis, such contemplated exchange, if consummated, is
not expected to materially impact the consolidated asset values of the Company.
However, the exchange will legally transfer 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 the Company will be principally dependent on Reading's
ability to pay dividends in accordance with the terms of the Preferred Stock
expected to be issued in the Stock Transaction.
23
<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 now reports its interest in Reading Company on
a consolidated basis. 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.
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,"
24
<PAGE>
amounted to approximately $9 million. As of June 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
Brothers".
The Company's investment in Stater is not held for sale. 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. After the Company's
consideration of these factors, the Company recognized a gain of approximately
$49.96 million as of the quarter ended March 31, 1996. An additional gain of
approximately $8.325 million was recognized in the third quarter ending June 30,
1996 based upon further consultation with investment advisors and continued
analysis of these factors. As of June 30, 1996, 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.
Results of Operations
- ---------------------
The following is a comparison of the results of operations for the three
months ended June 30, 1996 ("1996 Quarter") with the three months ended June 30,
1995 ("1995 Quarter") and the nine months ended June 30, 1996 ("1996 Nine
Months") and the nine months ended June 30, 1995 ("1995 Nine Months").
The Company's net earnings for the 1996 Quarter was approximately $7.274
million or $1.25 per share, including (1) approximately $1.433 million
representing the Company's pro-rata share of equity earnings of its affiliate
Citadel and (2) recognition of a portion of the deferred gain on the conversion
of the Company's common stock interest in SBH to preferred stock described
above, amounting to approximately $5.025 million net of income taxes provided,
as compared with net earnings of $.990 million or $0.17 per share for the 1995
Quarter. The net earnings for the 1996 Nine Months was approximately $39.417
million or $6.75 per share, as compared to $1.858 million or $0.31 per share for
the 1995 Nine Months. The 1996 Nine Months include 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.
Earnings before income taxes for the 1996 Quarter and 1995 Quarter amounted
to approximately $10.724 million and $1.705 million, respectively, and earnings
before income taxes amounted to $64.159 million and $3.228 million for the 1996
Nine Months and 1995 Nine Months, respectively. Included in the 1996 Quarter
and 1996 Nine Months earnings before income taxes is other income of
approximately $8.325 million and $58.286 million, respectively, reported as gain
from conversion of the Company's common stock interest in Stater to SBH
Preferred Stock.
25
<PAGE>
Service Income
- --------------
Effective March 8, 1994, the Company entered into a consulting agreement with
SBH pursuant to which the Company has agreed, among other things, to render
consulting services for a five year period, for an annual fee of $1.5 million,
payable quarterly. Included in service income for 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.
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 June 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)
Three Months Ended Nine Months Ended
June 30, June 30,
1996 1995 1996 1995
------ ------ ------ ------
SBH $ -- $1,165 $3,489 $2,907
CHC 1,433 -- 1,453 (451)
Reading -- 188 -- 15
------ ------ ------ ------
$1,433 $1,353 $4,942 $2,471
------ ------ ------ ------
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 include approximately only 0 and 5 months,
respectively, of the Company's share of Stater's operating results compared to 3
and 9 months in the 1995 periods. Included in the Statement of Operations as
dividend income from affiliates is approximately $1.816 million for the 1996
Quarter and $2.294 million for the 1996 Nine Months earned with respect to the
SBH Preferred Stock received in March 1996.
26
<PAGE>
The SBH Preferred Stock has a liquidation preference of $69.365 million
and a cumulative dividend preference of 10.5% or approximately $7,283,000
annually. Dividends are paid quarterly in arrears. At June 30, 1996, such
amount, which was paid in July, is included as Receivable from affiliate. 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 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 $5,541,000 (the Company's share
after preferred dividends amounting to approximately $1,433,000) in the 1996
Quarter as compared to $31,000 in the 1995 Quarter. CHC's net earnings include
approximately $1,473,000 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.
As of June 30, 1996, CHC's assets amounted to approximately $35.4 million and
were comprised of cash amounting to approximately $19.2 million and four
properties (two office buildings, one apartment building and certain raw land)
approximating $14.9 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 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 June 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 $11.2
million for the 1996 Nine Months as compared to $9.8 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, as well as, higher box office
27
<PAGE>
revenues at certain existing theaters. 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.
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 $896,000 in the 1996 Quarter as compared to $416,000 in the 1995
Quarter and amounted to $2,632,000 in the 1996 Nine Months as compared to
$1,283,000 in the 1995 Nine Months.
In the 1995 periods, interest income was earned on the Company's working
capital reserves maintained in institutional money market mutual funds as well
as, for a portion of the 1995 Nine Months, a $6.2 million loan to Citadel
accruing interest at prime plus 3% (the "Citadel loan"). Included in the 1995
Quarter and 1995 Nine Months is $220,000 and $142,000 of interest income earned
pursuant to the Citadel loan. In November 1994, the Company agreed to acquire
the CHC Preferred Stock in satisfaction of payment of $5.25 million of the
Citadel loan and, in May 1995, the balance of $950,000 was paid in full.
Accordingly, the 1996 periods as compared to the 1995 periods, reflect the
elimination of interest income earned on the Citadel loan.
General and administrative expenses
- -----------------------------------
Operating, general and administrative expenses of the Company amounted to
$1,470,000 for the 1996 Quarter compared to $416,000 for the 1995 Quarter.
General and administrative expenses in the 1996 Nine Months amounted to
$4,891,000 as compared to $1,605,000 for the 1995 Nine Months. The 1996 periods
include the consolidated accounts of Reading, amounting to $917,000 in the 1996
Quarter and $3,135,000 for the 1996 Nine Months. General and administrative
costs with respect to Reading for the comparable 1995 Quarter and 1995 Nine
Months amounted to $1,066,000 and $3,149,000, respectively.
Expenses in the 1996 Quarter and 1996 Nine Months includes approximately
$402,000 and $1,396,000, 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.
28
<PAGE>
Liquidity
- ---------
At June 30, 1996, the Company had cash and cash equivalents totaling
approximately $56.5 million which includes approximately $32.4 million held by
Reading and $21.6 million held by Reading International. At June 30, 1996, Craig
had cash and cash equivalents approximating $2.5 million. Reading is 52.5% owned
by the Company and, accordingly, is included in the consolidated financial
statements of the Company as of June 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 each undertaken 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. Craig currently has no debt outstanding and no
outstanding borrowing facilities. Based upon the current cash balances of Craig
additional financing would be required, if requested by Reading International,
to fund Craig's additional $37.5 million commitment.
Reading has signed an agreement to acquire an 83.3% interest in the Angelika
theater in Manhattan (See Note 5) for approximately $10.582 million. Reading
anticipates closing of this transaction to occur in August 1996 at which time
these funds will be disbursed. 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 needs to
simplify the corporate structures which it has to date found necessary to
utilize in pursuing such opportunities. Accordingly, the Stock Transaction
proposed between Craig, Reading and Citadel (see Note 12) has been 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 Stock Transaction, Craig would exchange its SBH Preferred Stock
(aggregate par value $69.365 million, its 50% membership interest in Reading
International and its CHC Preferred Stock in exchange for common and preferred
stock in Reading. Citadel will contribute cash in the amount of $7 million in
exchange for preferred stock
29
<PAGE>
in Reading and certain contractual rights. Among various things, including
execution of definitive agreements, implementation of the Stock Transactions is
dependent on approval of the Reading shareholders. Craig has agreed to vote its
52.5% of the outstanding Reading shares in favor of the Stock Transaction.
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 Company. However, the exchange will legally
transfer the title of such assets from Craig to Reading, resulting in Craig's
assets being comprised generally of Reading Common and Preferred Stock.
Accordingly, if the Stock Transaction is consummated, the future liquidity of
Craig will be principally dependent on Reading's ability to pay dividends in
accordance with the terms of the Preferred Stock expected to be issued in the
Stock 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 $.8 million at August 13, 1996), consulting fees from
Stater and quarterly dividends on the SBH Preferred Stock amounting to
approximately $1.821 million.
Cash and cash equivalents increased $35,491,000 from $21,059,000 at
September 30, 1995 to $56,550,000 at June 30 1996 due primarily to the effects
of accounting for the purchase of 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 principally by
the purchase of property and equipment amounting to $1,942,000, the purchase of
the Angeliska judgment amounting to $1,285,000 (see Note 5) and land
acquisitions by Reading International approximating $8,051,000.
During the 1996 Nine Months, Craig made additional acquisitions of common
stock of Citadel at a purchase price of approximately $1,281,000. In March 1996,
the Company 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 $1,343,000 in the 1996
Nine Months as a result of Craig's repurchasing 118,100 shares of its common
stock and 23,000 shares of its Class A common preference stock. Subsequent to
June 30, 1996, Craig repurchased 475,000 shares of its Common Stock for a
purchase price of $6,950,000. The source of funds for such purchase was working
capital. As of August 13, 1996, Craig's cash and cash equivalents approximated
$800,000.
30
<PAGE>
PART 2
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. The following exhibits are filed as part of this report:
10.27 Stock Exchange Agreement dated May 17, 1996 between Craig
Corporation and James J. Cotter.
10.28 Letter of Intent dated August 12, 1996 by and between Craig
Corporation, Reading Company, Citadel Holding Corporation,
Reading Entertainment Inc., Craig Management, Inc. and
Citadel Acquisition Corp., Inc.
27. Financial Data Schedule, Article 5.
B. No reports on Form 8-K were filed during the quarter ended June
30, 1996.
31
<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
August 19, 1996
By: /s/ Robin W. Skophammer
------------------------
Chief Financial Officer
August 19, 1996
32
<PAGE>
Page 1 of 6 Pages
EXHIBIT 10.27
STOCK EXCHANGE AGREEMENT
THIS STOCK EXCHANGE AGREEMENT, dated May 17, 1996 (the "Agreement"),
is entered into by and between Craig Corporation, a Delaware corporation
("Craig"), James J. Cotter, an individual residing in California ("Cotter").
RECITALS
--------
WHEREAS, Cotter owns 67,000 shares (the "Reading Shares") of Class A
Common Stock (the "Class A Stock") of Reading Company, a Pennsylvania
corporation ("Reading").
WHEREAS, Cotter desires to sell the Reading Shares to Craig, and Craig
desires to purchase the Reading Shares in exchange for 66,042 shares of Common
Stock of Craig (the "Craig Shares").
ARTICLE 1
EXCHANGE OF STOCK
-----------------
1.1 Exchange of Reading Shares for Craig Shares. Upon the terms and
-------------------------------------------
subject to the conditions contained herein, Cotter will sell, convey, transfer,
assign and deliver the Reading Shares to Craig, and Craig will accept the
Reading Shares from Cotter and in exchange therefor, Craig shall issue and
deliver to Cotter the Craig Shares. In connection with said transfer and
delivery, Craig shall deliver to Cotter irrevocable instructions, reasonably
satisfactory to legal counsel for Cotter, instructing its Transfer Agent to
issue the Craig Shares to Cotter, and Cotter shall deliver to Craig irrevocable
instructions, reasonably satisfactory to Craig's legal counsel, sufficient to
transfer the Reading Shares to Craig.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES BY CRAIG
---------------------------------------
Craig represents and warrants to Cotter that as of the date hereof:
2.1 Organization, Good Standing. Craig is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware.
2.2 Craig Shares. Upon issuance and delivery in the manner herein
------------
described, the Craig Shares will be duly authorized and
<PAGE>
Page 2 of 6 Pages
validly issued, fully paid and nonassessable shares of Common Stock of Craig,
free of preemptive rights, duly listed on the New York and Pacific Stock
Exchanges.
2.3 Authority Relative to this Agreement. The execution, delivery
------------------------------------
and performance of, and compliance with, this Agreement and the issuance of the
Craig Shares in exchange for the Reading Shares have been duly authorized by all
necessary corporate action on the part of Craig, and this Agreement is a valid
and binding agreement of Craig enforceable in accordance with its terms, except
as such enforcement is subject to any applicable bankruptcy, insolvency,
reorganization or other law relating to or affecting creditors' rights generally
and general principles of equity. No consent, license, approval or authority of,
or registration or declaration with, any governmental authority, bureau or
agency is required in connection with the execution, delivery and performance of
this Agreement by Craig or the issuance of the Craig Shares hereunder, other
than has been obtained.
2.4 Brokers or Finders. Cotter will not have any obligation to pay
------------------
any broker's, finder's, investment banker's, financial advisor's or similar fee
in connection with this Agreement or the transactions contemplated hereby by
reason of any action taken by or on behalf of Craig.
2.5 Investment Intent. The Reading Shares being acquired by Craig
-----------------
hereunder are being acquired for Craig's own account and not with the view to,
or for resale in connection with, any distribution other than resales made in
compliance with the registration and prospectus delivery requirements of the
Securities Act of 1933, as amended (the "Act"). Craig understands that the
Reading Shares have not been registered under the Act by reason of available
exemptions from the registration and prospectus delivery requirements of the
Act, that such Reading Shares must be held indefinitely unless such Reading
Shares are registered under the Act or unless any transfer is exempt from
registration, and that the reliance of the Reading Shareholders upon these
exemptions is predicated in part upon these representations and warranties by
Craig.
2.6 Investment Purposes. Craig acknowledges and agrees that it is
-------------------
acquiring the Reading Shares for investment purposes and will not transfer the
Reading Shares if such a transfer would be in violation of the Securities Act of
1933, as amended.
<PAGE>
Page 3 of 6 Pages
ARTICLE 3
REPRESENTATIONS AND WARRANTIES BY COTTER
----------------------------------------
Cotter hereby represents and warrants to Craig that as of the date
hereof:
3.1 Authority Relative to this Agreement. The execution, delivery
------------------------------------
and performance of, and compliance with, this Agreement and the terms of the
Exchange have been duly authorized by all necessary action on the part of
Cotter, and this Agreement is a valid and binding agreement of Cotter
enforceable in accordance with its terms, except as such enforcement is subject
to any applicable bankruptcy, insolvency, reorganization or other law relating
to or affecting creditors' rights generally and general principles of equity. No
consent, license, approval or authority of, or registration or declaration with,
any governmental authority, bureau or agency is required in connection with the
execution, delivery and performance of this Agreement by Cotter or the
performance of the Exchange.
3.2 Investment Intent. The Craig Shares being acquired by Cotter
-----------------
hereunder are being acquired for Cotter's own account and not with the view to,
or for resale in connection with, any distribution other than resales made in
compliance with the registration and prospectus delivery requirements of the
Securities Act of 1933, as amended (the "Act"). Cotter understands that the
Craig Shares have not been registered under the Act by reason of available
exemptions from the registration and prospectus delivery requirements of the
Act, that such Craig Shares must be held indefinitely unless such Craig Shares
are registered under the Act or unless any transfer is exempt from registration,
and that the reliance of Craig upon these exemptions is predicated in part upon
these representations and warranties by Cotter.
3.3 Legend. Cotter acknowledges and agrees that the certificates
------
representing the Craig Shares shall bear the following (or substantially
equivalent) legend on the face or reverse side thereof:
THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO A RIGHT OF FIRST
REFUSAL EXPIRING MAY 16, 1998 SET FORTH IN THE STOCK EXCHANGE
AGREEMENT DATED MAY 17, 1996 BETWEEN CRAIG CORPORATION AND JAMES J.
COTTER AND THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER SAID ACT OR UNLESS, IN THE OPINION OF COUNSEL IN FORM
AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH
OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS EXEMPT FROM THE
REGISTRATION PROVISIONS OF SAID ACT.
<PAGE>
Page 4 of 6 Pages
Any stock certificate issued at any time in exchange or substitution for any
certificate bearing such legend shall also bear such (or substantially
equivalent) legend unless, in the opinion of counsel for Craig, the securities
represented thereby need no longer be subject to restrictions pursuant to the
Act or applicable state securities laws. Craig shall not be required to transfer
on its books any certificate for securities in violation of the provisions of
such legend.
3.4 Brokers or Finders. Craig has not nor will it have any
------------------
obligation to pay any broker's, finder's, investment banker's, financial
advisor's, or similar fee in connection with this Agreement or the transactions
contemplated hereby by reason of any action taken by Cotter.
3.5 Title to the Reading Shares. Cotter owns beneficially 100% of
---------------------------
the Reading Shares, free and clear of all pledges, security interests, liens,
charges, encumbrances, equities, claims and options of whatever nature. Neither
Cotter nor any individual, corporation, entity or person having or claiming any
interest in, or with respect to, any of the Reading Shares owned by Cotter has
any such claim or interest, or have any right to claim or receive any other
payment or consideration with respect to such Reading Shares against or from
Craig at or after the date hereof.
ARTICLE 4
MISCELLANEOUS PROVISIONS
------------------------
4.1 Amendment and Modification. This Agreement may be amended,
--------------------------
modified or supplemented only by a written agreement executed by Craig and
Cotter.
4.2 Waiver of Compliance; Consents. Except as otherwise provided in
------------------------------
this Agreement, any failure of any of the parties to comply with any obligation,
covenant, agreement or condition herein may be waived by the party or parties
entitled to the benefits thereof only by a written instrument signed by the
party granting such waiver, but such waiver or failure to insist upon strict
compliance with such obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure. Whenever this Agreement requires or permits consent by or on behalf of
any party hereto, such consent shall be given in writing in a manner consistent
with the requirements for a waiver of compliance as set forth in this Section
4.2.
4.3 Notices. All notices, requests, consents and other
-------
communications hereunder to any party shall be deemed to be sufficient if
contained in a written instrument delivered in person or by telecopy or sent by
nationally-recognized overnight courier or first class registered or certified
mail, return receipt
<PAGE>
Page 5 of 6 Pages
requested, postage prepaid, addressed to such party at the address set forth
below or at such other address as may hereafter be designated in writing by such
party to the other parties:
(a) if to Craig, to:
Craig Corporation
550 S. Hope Street, Suite 1825
Los Angeles, CA 90071
Attn: Craig Tompkins
Tel: (213) 239-0555
FAX: (213) 239-0548
with a copy to:
Troy & Gould Professional Corporation
1801 Century Park East, 16th Floor
Los Angeles, CA 90067
Attn: James C. Lockwood, Esq.
Tel: (310) 553-4441
FAX: (310) 201-4746
(b) if to Cotter, to:
James J. Cotter
120 North Robertson Blvd.
Los Angeles, California 90048
Tel: (310) 659-5647
Fax: (310) 858-1449
with a copy to:
Ira Levin, Esq.
120 North Robertson Blvd.
Los Angeles, California 90048
Tel: (310) 855-8416
Fax: (310) 652-6490
All such notices, requests, consents and other communications shall be
deemed to have been delivered (a) in the case of personal delivery or delivery
by telecopy, on the date of such delivery, (b) in the case of dispatch by
nationally-recognized overnight courier, on the next business day following such
dispatch and (c) in the case of mailing, on the third business day after the
posting thereof.
4.4 Governing Law. This Agreement shall be governed by the laws of
-------------
the State of California (regardless of the laws that might otherwise govern
under applicable principles of conflicts of law) as to all matters, including
but not limited to matters of validity, construction, effect, performance and
remedies.
<PAGE>
Page 6 of 6 Pages
4.5 Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
4.6 Entire Agreement. This Agreement, embodies the entire agreement
----------------
and understanding of the parties hereto in respect of the transactions
contemplated by this Agreement. There are no restrictions, promises,
representations, warranties, covenants or undertakings, other than those
expressly set forth or referred to herein or therein. This Agreement supersedes
all prior agreements and understandings between the parties with respect to such
transactions.
4.7 Right of First Refusal. Cotter agrees that during the period
----------------------
ending May 16, 1998, before he may sell, assign or convey any interest in any or
all of the Craig Shares, he will notify Craig in writing and Craig will have the
right to purchase any of the Craig Shares proposed to be sold, assigned or
conveyed at a price of $9.00 per share by delivering payment against delivery of
the shares within 10 business days of the date of the written notice.
4.8 Further Assurances. Craig and Cotter agree that subsequent to
------------------
the date hereof, they will execute and deliver any and all documents,
certificates or instructions, if any, necessary to consummate the transfer of
the Reading Shares and the Craig Shares pursuant to the terms hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
have caused this Agreement to be duly executed on their respective behalf by
their respective officers thereunto duly authorized, as of the day and year
first above written.
CRAIG CORPORATION
By: /s/ S. Craig Tompkins
---------------------
Name: S. Craig Tompkins
Title: President
/s/ James J. Cotter
-------------------
JAMES J. COTTER
<PAGE>
EXHIBIT 10.28
Page 1 of 8 Pages
READING COMPANY
30 South 15th Street, Suite 1300
Philadelphia, Pennsylvania 19102
August 12, 1996
Mr. Steve Wesson
President
Citadel Holding Corporation
550 S. Hope Street, Suite 1825
Los Angeles, California 90071
Ms. Robin W. Skophammer
Chief Financial Officer
Craig Corporation
550 S. Hope Street, Suite 1825
Los Angeles, California 90071
Dear Mr. Wesson and Ms. Skophammer:
This letter is intended to set forth the principal terms of a proposed
transaction among Reading Company ("Reading"), Citadel Holding Corporation
("Citadel"), Craig Corporation ("Craig"), Reading Entertainment, Inc. ("Reading
Entertainment"), Craig Management, Inc., ("CMI"), and Citadel Acquisition Corp.,
Inc. ("CAC"). It is understood that this letter is not a binding agreement, but
constitutes a statement of intentions only and is subject to the preparation,
execution and delivery of definitive documentation by each of Reading, Reading
Entertainment, Citadel, CAC, Craig and CMI, and, in the case of Reading, to the
approval of its stockholders and to the delivery of fairness and legal opinions
to the respective parties.
Reading is planning to form a new holding company (the "Holding Company
Transaction") to be organized under the laws of the State of Delaware under the
name Reading Entertainment. Promptly following the completion of the Holding
Company Transaction, Reading Entertainment would issue the securities described
below in exchange for the consideration described below.
1. Citadel Holding Corporation and Citadel Acquisition Corp., Inc.:
---------------------------------------------------------------
1.1 Consideration to be Paid: Cash in the amount of $7 million, by wire
------------------------
transfer in currently available funds at the closing.
<PAGE>
Mr. Steve Wesson Page 2 of 8 Pages
Ms. Robin W. Skophammer
August 12, 1996
Page 2
1.2 Reading Entertainment Securities to be Issued: Series A Voting
---------------------------------------------
Cumulative Convertible Preferred Stock, with the following terms:
Stated Value: $7 million, $100 per share.
- ------------
Dividend: 6 1/2% per annum, payable quarterly, and cumulative
- -------- to the extent not paid.
Conversion Price: $11.50 per share
- ----------------
. No conversion for 18 months, unless there is a public
disclosure or announcement of a transaction that would
result in a third party (other than a Craig affiliate)
owning 50% or more of common stock or voting rights of
Reading or other change in control of Reading.
. On change of control, Reading would have the right to
(i) call Citadel or CAC owned Series A preferred shares
(at a redemption premium of 8% per annum ("p.a.") from
date of issuance through year 4 then decreasing 1% p.a.
thereafter beginning in year 5) only if Craig assumes
Citadel's asset put obligation described below and (ii)
call all other Series A preferred shares (at the
redemption premium specified in clause (i) above.
Citadel has the right to put (at stated value plus
accrued but unpaid dividends and the same redemption
premium). In the event Craig assumes the asset put
obligation, Craig will agree to issue Craig Class A
Common Preference Stock (the "Craig Stock") and the
exercise price for the Craig Stock to be increased or
decreased from Craig Stock market price to reflect the
percentage of discount or premium on Reading stock
(measured in terms of percentage difference between
market price of Reading stock on change of control date
and $11.75 or $12.25 per share, as applicable) which
Citadel would be entitled to receive. Craig Stock
market price (prior to adjustment) to be measured over
20 consecutive trading days prior to change of control
date.
<PAGE>
Mr. Steve Wesson Page 3 of 8 Pages
Ms. Robin W. Skophammer
August 12, 1996
Page 3
Vote Per Share: 9.64 votes, which is approximately equal to Stated
- -------------- Value / Common Stock price at close of trading on the
date of this Letter of Intent.
. Usual and customary preferred voting rights, plus
separate class vote for modifications or issuance of
any senior or pari passu equity securities.
Forced conversion: Trading average of 135% of conversion price over 180
- ----------------- trading day period.
Term: Perpetual
- ----
Put Rights: After 5 years at stated value plus accrued but unpaid
- ---------- dividends. In addition, right to put if dividend is in
arrears 4 quarters; but in no event shall put be exercised
sooner than 18 months.
Call Rights: Callable after 5 years at 108% of stated value plus
- ----------- accrued but unpaid dividends, decreasing thereafter at
2% p.a.
Ranking: Senior to the Series B Preferred Stock.
- -------
Registration Rights: Two demands; unlimited piggyback.
- --------------------
Transferability: Freely transferable, except for restrictions based
- --------------- upon securities laws or charter provisions.
Other: . Reading has the right of first offer on 100% of any
- ----- common or preferred stock of Reading that Citadel
sells. Reading will have 10 business days from being
offered the stock at a stated price. If Reading does
not elect to purchase within 10 business days, Citadel
has 180 days to sell at that or higher price.
<PAGE>
Mr. Steve Wesson Page 4 of 8 Pages
Ms. Robin W. Skophammer
August 12, 1996
Page 4
1.3 Asset Put: Citadel will have the right to exchange all or
---------
substantially all of its assets (other than Excluded Assets), together with any
debt encumbering or related to such assets, for Reading Common Stock.
Term: Immediately exercisable by Citadel. Notice of exercise
- ---- must be delivered on or before 30 days after filing of
Reading's annual report on Form 10-K for fiscal 1999.
Assets: (1) $20M in Net Asset Value (Gross Value less liabilities
- ------ including debt), of existing assets (including cash
and cash proceeds) at fixed stock price set forth
below; (2) existing assets over $20M in Net Asset
Value (up to a maximum of $30M in Net Asset Value),
and after acquired assets (other than cash) can only
be put at market price of stock, and (3) after
acquired assets over $5 M can only be put with
Reading's consent. No restrictions on Citadel
encumbering existing assets with additional or
refinanced debt.
Excluded Assets: (1) the Series A Preferred Stock and Common Stock
- --------------- issued on conversion,
(2) cash or marketable securities as Citadel may require
to maintain appropriate level of liquidity,
(3) assets with liabilities in excess of fair market
value of assets, and
(4) after acquired assets over $5M (except with
Reading's consent).
Asset Value: Fair market value
- -----------
Common Stock Price
- ------------------
issued in Exchange: Up to October '97 $11.75 per share thereafter $12.25
- ------------------ per share. If average trading price of Reading Common
Stock is in excess of 130% of put price for more than 60
days, then Citadel shall have 120 days, after notice from
Reading, to give notice of exercise of the asset put. If
Citadel does not give notice of exercise at this time,
then put price shall be fair market value of Common Stock.
Reading shall convert a portion of the Common Stock into
debt for that amount that would take the cumulative change
of control percentage of Reading under IRC (S) 382 over
45% after exercise of the asset put. The amount converted
to debt would be
<PAGE>
Mr. Steve Wesson Page 5 of 8 Pages
Ms. Robon W. Skophammer
August 12, 1996
Page 5
based on the value of Common Stock that would have
been received. The economic terms of the debt would
be determined by an independent investment banker.
If Citadel elects to sell the debt within 90 days
from issuance, Reading will take all reasonable
actions to assist in selling. Reading to reimburse
Citadel for Citadel's expenses and for amount by
which the net proceeds from the sale of the debt is
less than the value of the Common Stock that would
have been received on the date of conversion.
Registration Rights: Reading Common Stock received to have same
- ------------------- registration rights as described in Section 1.2.
Information Statement: Reading's expense
- ---------------------
Citadel 3% Preferred Stock: Redemption premium accrual rate reduced to 3%
- -------------------------- from Closing (no retroactive adjustment). No
conversion for a one-year period commencing on the
15th day following the filing of Citadel's Form
10-K for fiscal 1996, except in the event of a
change of control of Citadel.
1.4 Other Provisions: Reading will reimburse Citadel and CAC for their
----------------
reasonable out of pocket expenses (including fees and expenses of legal counsel
and financial advisors) with respect to the transaction, up to a maximum
reimbursement of $280,000.
2. Craig Corporation and Craig Management, Inc.:
--------------------------------------------
2.1 Consideration to be Paid: Craig and CMI will deliver at the closing
------------------------
their entire right, title and interest in the following assets:
a. 693,650 shares of Series B Stater Bros. Holdings Inc. 10.5%
Preferred Stock, stated value $100.00 per share,
b. 1,329,114 shares of Citadel 3% Cumulative Voting Convertible
Preferred Stock, stated value $3.95 per share, and
c. 50% Membership interest and any related interest in Reading
International Cinemas LLC.
2.2 Reading Entertainment Securities to be Issued:
---------------------------------------------
<PAGE>
Mr. Steve Wesson Page 6 of 8 Pages
Ms. Robin W. Skophammer
August 12, 1996
Page 6
a. Series B Voting Cumulative Convertible Preferred Stock, with the
following terms:
Stated Value: $55.0 million, $100 per share
- ------------
Dividend: 6 1/2% per annum, payable quarterly, and cumulative to the
- -------- extent not paid.
Conversion Price: $12.25 per share
- ----------------
a. No conversion for 18 months.
b. Forced Conversion: no forced conversion for first five
years and then forced conversion when average trading
price of 135% of conversion price over 180 trading day
period.
Vote Per Share: 9.64 votes, which is approximately equal to stated
- -------------- value / Common Stock price at the close of trading on the
date of this Letter of Intent. Plus, usual and customary
preferred voting rights, including right to elect director
in the event of missed dividends for six or more quarters,
whether or not consecutive.
Term: Perpetual
- ----
Put Rights: None
- ----------
Call Rights: No call for first five years and then callable at 108% of
- ----------- stated value plus accrued but unpaid dividends,
decreasing thereafter at 2% p.a.
Ranking: Junior to Series A Preferred Stock
- -------
Registration Rights: None
- -------------------
Transferability: Freely transferable, except for restrictions based
- --------------- upon securities laws or charter provisions.
b. 2,476,190 shares of Reading Entertainment Common Stock
<PAGE>
Mr. Steve Wesson Page 7 of 8 Pages
Ms. Robin W. Skophammer
August 12, 1996
Page 7
2.3 Other Agreements: Craig will agree to vote its shares in Reading in
----------------
favor of the Holding Company Transaction and in favor of the approval of the
transactions contemplated hereby. At the closing, (i) the Amended and
Restated Capital Funding Agreement between Reading Investment Company Inc.,
Craig and CMI dated March 8, 1996, and (ii) the Warrant and Preferred Purchase
Options set forth in the Stock Purchase and Sale Agreement dated March 27,
1996 by and between Craig and Reading Holdings, Inc., will be terminated.
The definitive documentation will include, among other things, usual and
customary terms and conditions including usual and customary representations,
warranties, indemnities and conditions to closing. It shall be a condition to
Closing for Citadel and CAC, on the one hand, and Craig and CMI, on the other,
that the other party shall have performed all of its obligations under the
Exchange Agreement. Each of the parties represents that they have reviewed a
draft dated August 8, 1996 of the proposed Exchange Agreement and that they are
in substantial agreement with respect to the material terms and conditions set
forth therein.
The parties agree to consult with one another in the preparation of a press
release reasonably acceptable to all parties announcing the transactions
contemplated by this agreement and as to the wording of any applicable filings
made on Form 13D with respect to Reading and/or Citadel, and to thereafter
refrain from public statements concerning the transaction, absent prior
notification to and consultation with the other parties hereto.
If this letter of intent correctly sets forth our understanding, please so
indicate by executing and returning a copy of this letter. By executing and
delivering this letter of intent, subject to the satisfaction of the conditions
precedent set forth in this letter, Reading is representing and warranting that
the above terms and conditions have been reviewed and approved by the
Independent Committee of, and the Board of Directors of, Reading, after advice
and counsel from its legal counsel and financial advisors. By executing and
delivering this letter of intent, subject to the satisfaction of certain of the
conditions precedent set forth in this letter, Citadel, CAC, Craig and CMI are
similarly representing and warranting that the above terms and conditions, in so
far as they relate to Citadel or to Craig, as the case may be, have been
reviewed and approved by the Independent Committees of, and the Boards of
Directors of, Citadel or Craig as the case may be, after advice and counsel from
their respective legal counsel and financial advisors.
Very truly yours,
/s/James J. Wunderle
James J. Wunderle
Chief Financial Officer
<PAGE>
Mr. Steve Wesson Page 8 of 8 Pages
Ms. Robim W. Skophammer
August 12, 1996
Page 8
ACKNOWLEDGED AND AGREED
CITADEL HOLDING CORPORATION CRAIG CORPORATION
/s/ Steve Wesson /s/ Robin W. Skophammer
- -------------------------- -------------------------------
By: Steve Wesson By: Robin W. Skophammer
Its: President Its: Chief Financial Officer
Date: August 12, 1996 Date: August 12, 1996
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