<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: March 31, 1997
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 May 13, 1997.
================================================================================
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
INDEX
-----
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART 1. Financial Information
- ------
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1997 (Unaudited)
and December 31, 1996............................................ 3
Consolidated Statements of Earnings for the Three Months
Ended March 31, 1997 and 1996 (Unaudited)........................ 4
Consolidated Statements of Cash Flows for Three Months
Ended March 31, 1997 and 1996 (Unaudited)........................ 5
Notes to Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of the Consolidated
Statements of Operations......................................... 12
PART 2. Other Information
- -------
Item 1. Legal Proceedings............................................. 17
Item 2. Changes in Securites.......................................... 17
Item 3. Defaults Upon Senior Securites................................ 17
Item 4. Submission of Matters to a Vote of Security Holders........... 17
Item 5. Other Information............................................. 17
Item 6. Exhibits and Reports on Form 8-K.............................. 17
Signatures................................................................ 18
</TABLE>
2
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
ASSETS (IN THOUSANDS OF DOLLARS)
- ------------------------------------- -------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 48,226 $ 52,172
Receivables, net 890 3,117
Restricted cash 4,151 3,683
Receivable from affiliates 2,047 244
Inventories 120 151
Prepayments and other current assets 1,192 856
-------- --------
Total current assets 56,626 60,223
Investment in Stater 67,978 67,978
Equity investment in Citadel 4,690 4,625
Net investment in leased equipment 2,125 2,125
Property and equipment, net 18,230 16,376
Other assets 3,191 2,519
Restricted cash -- 517
Excess of cost over net assets acquired 11,464 11,605
-------- --------
Total assets $164,304 $165,968
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------
CURRENT LIABILITIES:
Accounts payable 5,221 $ 5,143
Film rental payable 1,319 1,102
Accrued property costs 918 1,240
Accrued taxes 1,571 3,580
Note payable 2,000 1,500
Other accrued expenses and liabilities 1,425 1,871
-------- --------
Total current liabilities 12,454 14,436
Capitalized lease, less current portion 514 516
Note payable -- 500
Other long-term liabilities 2,366 1,972
Deferred tax liabilities 8,208 8,208
Minority interests in equity of
subsidiaries 32,876 33,511
Redeemable Preferred stock of Reading 7,000 7,000
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 30,828 30,828
Foreign currency translation adjustment (211) 114
Retained earnings 88,646 87,260
Cost of treasury shares, 1,704,153 and
1,154,095 (19,754) (19,754)
-------- --------
Total shareholders' equity 100,886 99,825
-------- --------
Total liabilities and shareholders'
equity $164,304 $165,968
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
--------------------------
(in thousands of dollars,
except for share amounts)
<S> <C> <C>
Revenues:
Theater admissions $4,252 $ 2,776
Theater concessions 1,310 1,021
Theater advertising and other 209 214
Real estate 37 74
Equity in earnings of Stater -- 1,608
Dividend income from Stater 1,796 479
Service income from Stater 375 375
------ --------
7,979 6,547
------ --------
Expenses:
Theater costs 4,429 2,970
Theater concession costs 298 168
Depreciation and amortization 356 429
Loss from joint venture -- 75
General and administrative
expenses 1,948 2,137
------ --------
7,031 5,779
------ --------
Earnings before minority interest,
other income and taxes 948 768
Earnings from investment in Citadel 65 40
Other income 230 15
Interest income 675 806
Gain from conversion of common stock
interest in Stater -- 49,961
------ --------
Earnings before taxes and minority
interest 1,918 51,590
Minority interest (174) 138
------ --------
Earnings before taxes 1,744 51,728
Provision for taxes (244) (20,435)
------ --------
Net earnings $1,500 $ 31,293
====== ========
Earnings per common and common
equivalent share: $ 0.26 $ 5.40
====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CRAIG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1997 1996
-------- -------
(In thousands of dollars,
except per share amounts)
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ 1,500 $ 31,293
Adjustments to reconcile net earnings
(loss) to net cash provided by (used
in) operating activities:
Gain on conversion of common stock
investment in Stater -- (49,961)
Depreciation and amortization 356 429
Deferred rent 396 41
Undistributed earnings of affiliates (65) (1,608)
Increase (decrease) in deferred taxes -- 20,425
Minority interest 174 (138)
Changes in operating assets and
liabilities:
(Increase) decrease in receivables 188 129
(Increase) decrease in other current
assets (306) (622)
Increase (decrease) in payables (2,688) (367)
Increase (decrease) in film rental 217 24
Increase (Decrease) in other liabilities (4) 155
Other, net (164) (36)
------- --------
Net cash provided by (used in) operating
activities (396) (236)
INVESTING ACTIVITIES
Purchase of stock of
subsidiary--minority interest (819) (124)
Purchase of property, plant and
equipment (2,445) (582)
Cash acquired as a result of
consolidation of Reading -- 44,147
Decrease in restricted cash 31 89
Other investments -- (110)
------- --------
Net cash provided (used in) investing
activities (3,233) 43,420
FINANCING ACTIVITIES
Distributions to minority partner (87) --
Payment of debt financing costs -- (185)
Treasury stock repurchases -- (634)
------- --------
Net cash provided (used in) financing
activities (87) (819)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES (230) 65
------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (3,946) 42,430
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE PERIOD 52,172 18,645
------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $48,226 $ 61,075
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Craig Corporation and Subsidiaries
Notes to Condensed Financial Statements (unaudited)
March 31, 1997
(amounts in tables in thousands)
NOTE 1 -- BASIS OF PRESENTATION
BASIS OF CONSOLIDATION: The consolidated financial statements include the
accounts of Craig Corporation ("Craig") and its wholly owned subsidiaries
(collectively, the "Company")and its majority owned subsidiaries (collectively,
the "Consolidated Company"). Such majority owned subsidiaries include the
accounts of Reading Entertainment, Inc. ("REI" and together with its
consolidated subsidiaries, "Reading"). Through its subsidiaries, Reading
operates motion picture exhibition theaters in the Commonwealth of Puerto Rico,
New York, New York and Australia. Investments in which the Consolidated Company
holds a 20 to 50 percent interest are accounted for using the equity method. All
significant intercompany transactions and accounts have been eliminated in
consolidation. Minority interest in equity of subsidiaries reflects the minority
stockholders' proportionate share of REI and the Consolidated Company's other
joint ventures. During the three months ended March 31, 1997, the Company
increased its ownership in REI through the purchase of 78,500 common shares
(approximately 1%) for a purchase price of $819,000. Such purchase resulted in a
decrease to "Minority interest in equity of subsidiaries" of approximately
$819,000. As of March 31, 1997, the Company held approximately 78% of the
outstanding voting securities of REI.
The financial statements have been prepared in accordance with generally
accepted accounting principles for interim information and, therefore, do not
include all information and footnotes required by generally accepted accounting
principles for complete financial statements. 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 December 31, 1996 and for the year then ended. In the opinion
of management, all adjustments of a recurring nature considered necessary for a
fair presentation of the results for the interim periods presented have been
included. Operating results for the three months ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
Certain amounts in previously issued financial statements have been
reclassified to conform with the current period presentation.
NET EARNINGS PER COMMON SHARE: Net earnings per common share is calculated
by dividing net earnings available to common shareholders by the weighted
average shares outstanding during the period and the dilutive effect, if any, of
common stock equivalents that are outstanding. The weighted average number of
shares outstanding for the three months ended March 31, 1997 and March 31, 1996
were 5,384,912 and 5,798,219, respectively. Net earnings per share for the
three months ended March 31, 1997 was calculated based on net earnings available
to common stock shareholders, which includes a reduction for dividends declared
on the redeemable preferred stock in REI held by Citadel amounting to $113,750.
NOTE 2 -- ACQUISITION AND INVESTMENT ACTIVITIES
At March 31, 1997, the Consolidated Company's interest in Citadel was
approximately 26.1%. On April 11, 1997, Craig exercised its warrant to purchase
666,000 shares of Citadel Common Stock increasing the Consolidated Company
holdings in Citadel to approximately 33.4%. Such exercise was consummated
pursuant to delivery by Craig of its secured promissory note in the amount of
$1.998 million, secured by 500,000 shares of REI Common Stock. Interest is
payable quarterly in arrears at the prime rate. Principal and accrued but
unpaid interest is due upon the earlier of April 11, 2002 or 120 days following
Citadel's written demand for payment.
The Company accounts for its investment in the Citadel Common Stock by the
equity method. Citadel's net earnings for the three months ended March 31, 1997
and 1996 were $246,000 and $243,000, respectively, and the Company's share of
such earnings adjusted for preferred stock dividends was $65,000 and 40,000,
respectively. Such amounts are included in the Condensed Consolidated Statement
of Operations for the three months ended March 31, 1997 and 1996, respectively,
as "Earnings from investment in Citadel." Citadel's assets and liabilities
totaled $28,936,000 and $10,966,000, respectively, as of March 31, 1997
inclusive of a $7,000,000 investment in REI.
-6-
<PAGE>
Craig Corporation and Subsidiaries
Notes to Condensed Financial Statements (unaudited)
March 31, 1997
(amounts in tables in thousands)
Reading acquired an 83.3% interest in the Angelika Film Center LLC (the
"Angelika") in August 1996. The Company acquired the Angelika assets, in part,
by issuing a promissory note to the sellers of such assets in the amount of
$2,000,000. The note is fully collateralized by escrowed funds classified as
"Restricted cash". A portion of this note, $1,500,000, bears interest per annum
at the thirteen week U.S. Treasury bill rate, while the remaining $500,000 bears
interest at 9% per annum. Principal of $1,500,000 was paid in full in April
1997.
In April 1997, Reading Australia Pty Limited (together with its
subsidiaries "Reading Australia") entered into an agreement with an officer of a
subsidiary whereby the officer may borrow up to approximately $800,000 from
Reading Australia to invest in certain country cinema developments. In
accordance with the agreement (which agreement was effective as of January 2,
1997), the officer has borrowed approximately $400,000 from Reading Australia
and utilized the proceeds of the borrowing to acquire a 25% ownership interest
(computed after consideration of certain management fees payable to Reading
Australia) in Reading Australia's theater in Townsville, Queensland.
NOTE 3 -- INVESTMENT IN STATER BROS. HOLDINGS, INC. ("SBH")
Effective March 8, 1996, SBH exercised its right to convert all of the
Company's common stock in SBH into 693,650 shares of 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%
Upon the conversion by SBH in March 1996 of the Company's common stock
interest to preferred stock, the Company discontinued the use of the
equity method of accounting for its investment in Stater. Included in the three
months ended March 31, 1996 as "Equity in Earnings of Stater" is approximately
$1.608 million reflecting the Company's 50% interest in such SBH earnings from
January 1, 1996 until the conversion of the Company's common stock interest to
preferred stock on March 8, 1996. Included as "Dividend income from Stater" is
approximately $1.796 million for the three months ended March 31, 1997 and $.479
million for the three months ended March 31, 1996 reflecting dividends from the
date of issuance of the SBH Preferred Stock on March 8, 1996.
Prior to the preferred stock conversion, the net carrying value of the
Company's 50% common stock interest amounted to approximately $9 million. In
Fiscal 1996, the Company recorded approximately $58.978 million (inclusive of
the $49.961 million recorded in the 1996 Quarter) of the difference between
$67.978 million (98% of the 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 conversation as "Gain from conversion of common
stock interest in Stater. The SBH Preferred Stock is included in the
accompanying Consolidated Balance Sheet as "Investment in Stater" and valued at
$67.978 million, 98% of stated value. 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
repurchase by Stater. The Consolidated Company expects to account for the
deferred gain of approximately $1.387 million (difference between the stated
value and the Company's carrying value) if realized upon the repurchase or other
sale of the SBH Preferred Stock.
-7-
<PAGE>
Craig Corporation and Subsidiaries
Notes to Condensed Financial Statements (unaudited)
March 31, 1997
(amounts in tables in thousands)
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Land $ 7,237 $ 7,332
Buildings, leaseholds and
improvements 3,363 1,718
Capitalized premises lease 538 538
Equipment 7,057 6,450
Construction-in-progress and
property development costs 2,457 2,562
------- -------
20,652 18,600
Less: Accumulated
depreciation (2,422) (2,224)
------- -------
$18,230 $16,376
======= =======
</TABLE>
NOTE 5 -- INCOME TAXES
Craig and Reading file separate consolidated federal and state income tax
returns. One company's net operating loss and capital loss carryforwards,
therefore, cannot be used to offset the other company's tax liabilities. Income
tax expense for the three months ended March 31, 1997 reflects current estimated
tax liabilities amounting to approximately $244,000, including federal and state
income tax expense of $135,000 and $109,000 of foreign withholding taxes, which
will be paid if certain intercompany loans are repaid. Income tax expense for
the three months ended March 31, 1996 amounted to approximately $20,435,000 and
was principally comprised of deferred tax liabilities resulting from the gain
reported upon the conversion of the Company's SBH Common Stock to SBH Preferred
Stock.
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
Leases
------
Cine Vista commenced operations of a newly-constructed, leased six-plex
theater located in Puerto Rico on March 26, 1997. At March 31, 1997, the
Consolidated Company had lease agreements for three theater facilities with a
total of 22 screens which were then under construction or for which construction
is anticipated to commence in 1997. The aggregate anticipated contribution for
construction costs for such facilities was approximately $13,000,000 at March
31, 1997. The aggregate minimum annual rental commitment for such leases is
approximately $550,000, which rentals commence upon the opening of the theaters.
Reading has entered into purchase agreements and other lease agreements
which are subject to satisfaction of certain contingencies, which contingencies
were not satisfied as of May 15, 1997. In conjunction with lease and purchase
agreements, the Company escrowed and/or made deposits totaling $2,579,000 at
March 31, 1997, which amount has been classified as "Restricted cash" in the
Consolidated Company's Condensed Consolidated Balance Sheet.
-8-
<PAGE>
Craig Corporation and Subsidiaries
Notes to Condensed Financial Statements (unaudited)
March 31, 1997
(amounts in tables in thousands)
NOTE 7 -- LONG-TERM DEBT
In December 1995, Cine Vista entered into a $15 million, eight-year
revolving credit agreement (the "Credit Agreement") with a bank. Under terms of
the Credit Agreement, Cine Vista may borrow up to $15 million to repay Cine
Vista acquisition loans, which loans are payable to a wholly-owned subsidiary of
Reading and fund certain new theater development expenditures. At March 31,
1997 and December 31, 1996, no amounts were outstanding under this agreement.
The provisions of the Credit Agreement require Cine Vista to maintain a
minimal level of net worth and other financial ratios, restrict the payment of
dividends, and limit additional borrowing and capital expenditures. Cine Vista
failed to maintain compliance with certain of the financial covenants contained
in the Credit Agreement during 1996 and the quarter ended March 31, 1997.
Reading is currently working with the lender to revise certain of the Credit
Agreement's financial coverage to ensure its continuing availability. The
lender has waived compliance with the covenants during 1996 and Reading has
requested a waiver for the covenant violations during the three months ended
March 31, 1997.
NOTE 8 -- PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
As described in Note 1, the accompanying consolidated financial statements,
include the accounts of Craig and its majority owned subsidiaries. The following
information reflects only the accounts of Craig and its wholly owned
subsidiaries. Craig and Reading are separate public companies and each entity's
capital resources and liquidity is legally independent of the other and any
intercompany loans or receivables would require approval of each separate
company's Board of Directors. Accordingly, the future working capital of Craig
will be primarily dependent on (i) Reading's ability to pay dividends in
accordance with the terms of the Series B Preferred Stock, and (ii) the service
income from Stater amounting to approximately $1.5 million annually. The
Consulting Agreement with Stater expires in March 1999, however, Stater has the
right to terminate the Consulting Agreement upon its redemption, in full, of the
SBH Preferred Stock.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET: MARCH 31, DEC. 31,
1997 1996
--------- --------
<S> <C> <C>
Assets:
- -------
Cash $ 2,591 $ 3,492
Dividend receivable from
Reading 894 --
Other current assets 145 146
-------- --------
Total current assets 3,630 3,638
Investment in Common Stock of
Reading 70,534 69,425
Investment in Preferred Stock
of Reading 55,000 55,000
Property and equipment, net 904 943
Other assets 251 252
Excess of cost over net assets
acquired 1,186 1,196
-------- --------
Total assets $131,505 $130,454
======== ========
Liabilities and stockholders equity:
- ------------------------------------
Accounts payable and accrued
expenses $ 781 $ 803
Deferred tax liabilities 30,250 30,250
Stockholders' equity 100,474 99,401
-------- --------
Total liabilities and
stockholders' equity $131,505 $130,454
======== ========
</TABLE>
-9-
<PAGE>
Craig Corporation and Subsidiaries
Notes to Condensed Financial Statements (unaudited)
March 31, 1997
(amounts in tables in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
CONDENSED STATEMENT OF OPERATIONS: 1997 1996
- ---------------------------------------- ---------------------------
<S> <C> <C>
Revenues:
- ---------
Equity in earnings of Stater $ -- 1,608
Equity in earnings of Reading 290 (137)
Dividend income from Reading 894 --
Dividend income from affiliates -- 519
Service income from Stater 375 375
Interest income 34 221
------ --------
$1,593 $ 2,586
------ --------
Expenses:
- ---------
General and administrative 435 500
Equity loss from Australian
theatre developments 254
Loss from joint venture -- 75
------ --------
435 829
------ --------
Earnings before other income and income
taxes 1,158 1,757
Gain from conversion of common stock
interest in Stater -- 49,961
------ --------
Earnings before income taxes 1,158 51,718
Income taxes (85) (20,425)
------ --------
$1,073 $ 31,293
====== ========
CONDENSED STATEMENT OF CASH FLOWS:
Operating Activities:
- ---------------------
Net earnings 1,073 31,293
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Gain on conversion of Stater
common stock -- (49,961)
Undistributed earnings of
equity affiliates (290) (1,344)
Increase in deferred taxes -- 20,425
Other (865) (182)
------ --------
Net cash provided by (used in)
operating activities (82) 231
Investing Activities:
- ---------------------
Acquisition of Reading Stock (819) (124)
Investment in Reading Australia -- (12,888)
Other investments -- (110)
Purchase of equipment -- (115)
------ --------
Net cash provided by (used in)
investing activities (819) (13,237)
Financing Activities:
- ---------------------
Payment of affiliate advances -- (1,040)
Treasury stock repurchases -- (634)
------ --------
Net cash (used in) financing
activities -- (1,674)
Decrease in cash and cash equivalents (901) (14,680)
Cash and cash equivalents at beginning
of period 3,492 18,549
------ --------
Cash and cash equivalents at end of
period $2,591 $ 3,869
====== ========
</TABLE>
-10-
<PAGE>
Craig Corporation and Subsidiaries
Notes to Condensed Financial Statements (unaudited)
March 31, 1997
(amounts in tables in thousands)
NOTE 9 -- IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share," which is required to be adopted on December 31,
1997. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of Statement
128 on the calculation of the Company's primary and fully diluted earnings per
share is not expected to be material.
-11-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Craig Corporation (Craig and collectively with its wholly owned subsidiary,
the "Company") is in the business of identifying, acquiring, owning and
strategically managing controlling interests in other operating companies. At
March 31, 1997, the Company owned common stock of Reading Entertainment, Inc.
("REI" and collectively with its consolidated subsidiaries, "Reading") and REI
Series B Preferred Stock representing approximately 78% of the voting power of
that company, and 666,000 shares of Citadel Holding Corporation ("CHC" and
collectively with its wholly owned subsidiaries, "Citadel") Common Stock as well
as a 50% membership interest in a developmental chain restaurant operation, Hope
Street Hospitality ("HSH"). As used herein, the term the "Consolidated Company"
is used to describe, for accounting purposes, the Company reporting on a
consolidated basis its ownership interest in REI.
REI has elected to focus its theater development and related real estate
development activities in three principal areas: (i) the management and
development of multiplex motion picture theaters and entertainment centers
featuring multiplex cinemas in Australia; (ii) the domestic management and
development and acquisition of specialty multiplex motion pictures theaters
which feature foreign and limited release art films similar to the Angelika; and
(iii) the management and development of multiplex motion picture theaters in
Puerto Rico.
RESULTS OF OPERATIONS
The following is a comparison of the results of operations for the three
months ended March 31, 1997 ("1997 Quarter") with the three months ended March
31, 1996 ("1996 Quarter").
Due to the nature of the Consolidated Company's development and acquisition
activities and the timing associated with the results of such activities coupled
with the change in the Consolidated Company's ownership interest in Stater Bros.
Holdings, Inc. ("SBH"), described below, the Consolidated Company's financial
position, results of operations and cash flows have varied significantly and
management believes are not indicative of future operating results.
The Consolidated Company's net earnings for the 1997 Quarter approximated
$1.5 million or $.26 per share and earnings before income taxes amounted to
approximately $1.744 million as compared to 1996 Quarter net earnings of
approximately $31.293 million or $5.40 per share and earnings before income
taxes of approximately $51.728 million. The 1996 Quarter net earnings include a
gain on the conversion of the Company's common stock interest in Stater to
preferred stock amounting to approximately $49.961 million and a provision for
income taxes amounting to approximately $20.435 million.
Earnings from investment in Stater
- ----------------------------------
Effective March 8, 1996, SBH exercised its right to convert all of the
Company's common stock in SBH into 693,650 shares of 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%.
Upon the conversion by SBH in March 1996 of the Company's common stock
interest to preferred stock, the Company discontinued the use of the equity
method of accounting for its investment in Stater. Included in the 1996 Quarter
is approximately $1.608 million reflecting the Company's 50% interest in such
SBH earnings from January 1, 1996 until the conversion of the Company's common
stock interest to preferred stock on March 8, 1996. Included as "Dividend income
from Stater" is approximately $1.796 million earned in the 1997 Quarter as
compared to $.479 million in the 1996 Quarter reflecting dividends from the date
of issuance of the SBH Preferred Stock on March 8, 1996.
Prior to the preferred stock conversion, the net carrying value of the
Company's 50% common stock interest amounted to approximately $9 million. In
Fiscal 1996, the Company recorded approximately $58.978 million (inclusive of
the $49.961 million recorded in the 1996 Quarter) of the difference between
$67.978 million (98% of the 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 conversation as "Gain from conversion of common
stock interest in Stater". The SBH Preferred Stock is included in the
accompanying Consolidated Balance Sheet as "Investment in Stater" and valued at
$67.978 million, 98% of stated value. 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
repurchase by
-12-
<PAGE>
Stater. The Consolidated Company expects to account for the deferred gain of
approximately $1.387 million (difference between the stated Value and the
Company's carrying value) if realized upon the repurchase or other sale of the
SBH Preferred Stock.
Theater Revenue
- ---------------
Theater Revenue is comprised of Admissions, Concessions and Advertising and
other revenues and totaled the amounts set forth below in each of the three
months ended March 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
- ------------- ----------
<S> <C>
$5,771,000 $4,011,000
</TABLE>
Cine Vista's Theater Revenues decreased approximately 31% between the
current and prior year quarters primarily as a result of the opening by a
competitor of three new multiplex theaters in the San Juan metropolitan market
and a slight decrease in box office revenue on the island versus the comparable
period last year. Cine Vista opened a new six-plex in March 1997 and in mid-
1997 will close four of six screens at another location to initiate construction
of a new 8-plex at the location which construction is anticipated to be
completed in mid-1998. Accordingly, Cine Vista anticipates a net increase of
two screens in 1997 and the addition of six more screens in mid-1998. However,
the increased competition in the San Juan metropolitan market is expected to
decrease theater revenues in subsequent quarters in 1997, relative to 1996
levels, if overall box office revenues on the island remain equal to the prior
year.
Theater Revenue for the three months ended March 31, 1997 includes revenues
of $1,925,000 from the Angelika which was acquired on August 28, 1996. Revenues
from admissions at the Angelika increased approximately 23% from the admission
revenues recorded by the Angelika in the same quarter of the prior year (such
revenues which were recorded prior to the Company's acquisition of the Angelika
are therefore not included the Consolidated Company's condensed consolidated
financial results).
The Consolidated Company opened its first theater in Australia, a six-plex
located in Townsville, Queensland, at the end of December 1996. Revenues from
the new theater totaled $801,000 and have been included in the Consolidated
Statement of Operations for the three months ended March 31, 1997.
Real Estate
- -----------
Real Estate revenues include rental income and the net proceed of sales of
Reading's real estate. Real estate revenues in the current year quarter
remained consistent with the prior year quarter. Reading has 28 parcels and
rights-of-way remaining, many of which are of limited marketability. Future
real estate revenues may increase as larger properties are sold. However,
management believes that most of the properties held for sale will be liquidated
within the next three years.
Service Income from Stater
- --------------------------
Effective March 8, 1994, the Company entered into a consulting agreement
with Stater 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 1997 and 1996
Quarter is $.375 million earned and paid pursuant to this agreement. Stater has
the right to terminate the consulting agreement, if it were to repurchase the
SBH Preferred Stock.
Expenses
- --------
"Theater costs," "Theater concession costs" and "Depreciation and
amortization" reflect the direct theater costs of Cine Vista, the Angelika and
Reading Australia's theater operations. These costs increased $1,516,000 from
$3,567,000 in the prior year quarter to $5,083,000 in the current year quarter
due primarily to the inclusion of $1,454,000 of theater costs associated with
the Angelika's operations subsequent to the August 1996 acquisition and $833,000
in costs associated with the new six-plex theater which opened in Australia in
December 1996 (which costs include approximately $100,000 of start-up costs
associated with the initialization of activities at the theater). During the
fourth quarter of 1996, the minimum wage for Puerto Rico was increased by
approximately 15%. Since most of Cine Vista's theater employees are paid
minimum wage, the increase will have a negative effect on its operating results
in future periods.
-13-
<PAGE>
"General and administrative" expenses for the three months ended March 31,
1997 and 1996 listed below include the following components:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cine Vista $ 221,000 $ 295,000
Angelika 126,000 0
Australia 292,000 509,000
Craig 383,000 458,000
Reading, general 926,000 875,000
---------- ----------
Total $1,948,000 $2,137,000
========== ==========
</TABLE>
General and administrative expenses in the 1997 and 1996 Quarters include
general, administrative and development expenses incurred with respect to the
foreign operations of Reading Australia amounting to approximately $292,000 and
$509,000, respectively. Reading Australia is actively seeking properties to
develop state-of-the-art multiplex cinemas facilities and entertainment centers
in Australia and has acquired a property and has made deposits and entered into
agreements for several other real property purchases or leases. Fiscal 1996
expenses include non-capitalized expenditures associated with the development of
various theater sites, some of which were ultimately abandoned as well as a full
year of salary expense associated with the employees and consultants located in
Australia. Reading Australia's first theater opened at the end of 1996.
Reading Australia anticipates continuing development expense during the next
several years until theaters are developed and operations increased. No
assurances can be given that Reading Australia will successfully develop such
cinemas, nor that if developed, such operations will be successful.
Earnings from investment in Citadel
- -----------------------------------
At March 31, 1997, the Consolidated Company's holdings in Citadel included
a 26.1% common stock interest. On April 11, 1997, Craig exercised its warrant
to purchase 666,000 shares of Citadel Common Stock increasing the Consolidated
Company's holdings in Citadel to approximately 33.4%. Such exercise was
consummated pursuant to delivery by Craig of its secured promissory note in the
amount of $1.998 million, secured by 500,000 shares of REI Common Stock.
Interest is payable quarterly in arrears at the prime rate. Principal and
accrued but unpaid interest is due upon the earlier of April 11, 2002 or 120
days following Citadel's written demand for payment.
Citadel reported net income of approximately $246,000 in the 1997 Quarter
as compared to $243,000 in the 1996 Quarter. Included in the Consolidated
Statement of Earnings for the 1997 and 1996 Quarters is approximately $65,000
and $40,000 respectively, reflecting the Consolidated Company's share of
Citadel's earnings, adjusted for preferred dividends, from its investment in
Citadel during the periods reported.
Other Income
- ------------
"Other income" totaled $230,000 and $15,000 in the 1997 and 1996 Quarters,
respectively, and is comprised in the current year quarter primarily of amounts
received from a third party as reimbursement of certain acquisition related
expenditures which were expensed in prior periods.
Minority Interest
- -----------------
"Minority interest" amounted to approximately $174,000 for the three months
ended March 31, 1997 and includes the minority interest's share of the Company's
consolidated net earnings of Reading amounting to $129,000, Sutton Hill's
minority share of the Angelika income amounting to $52,000 and $7,000 which
reflects the minority share of the Townsville operating losses (See Note 2). The
"minority interest" of $138,000 for three months ended March 31, 1996 reflects
the minority interests shares of Reading's losses for the period. During the
1997 Quarter, the Company purchased an additional 78,500 shares (approximately
1% of the outstanding shares) of REI Common Stock, which purchase price of
approximately $819,000 resulted in a decrease to "Minority interest in equity of
subsidiaries" included on the Consolidated Balance Sheet.
-14-
<PAGE>
Income Tax Provision
- --------------------
Income tax expense in the 1997 Quarter was $244,000 as compared to
$20,435,000 in the 1996 Quarter. The 1997 Quarter includes a current tax
provision for foreign withholding taxes of $109,000 which will be paid if
certain intercompany loans are repaid and estimated federal and state taxes of
$135,000. Income tax expense in the 1996 Quarter principally related to
deferred tax liabilities associated with the gain recognized in the conversion
of the Company's SBH Common Stock to SBH Preferred Stock. As a result of the
Stock Transactions in October 1996, described more fully in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, the SBH Preferred
Stock was transferred to Reading. The Stock Transactions are intended to
qualify as an Exchange under Section 351(a) of the Internal Revenue Code of
1986. Upon receipt of the SBH Preferred Stock, Reading determined that it was
more-likely-than-not that a portion of a tax asset valuation allowance related
to Reading deferred federal tax assets would be realized. The Company accounted
for its Fiscal 1996 Reading Stock purchases and the Stock Transactions as a
purchase. The fair value of the assets and liabilities received were considered
after realization by Reading of the previously reserved tax assets.
Accordingly, the Company reduced its deferred tax liabilities in Fiscal 1996 in
the amount of approximately $22 million with a corresponding decrease to the
allocated fair value of Reading assets purchased.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Consolidated Company had cash and cash equivalents
totaling approximately $48.226 million which includes approximately $45.635
million held by Reading. At March 31, 1997, Craig had cash and cash equivalents
of approximately $2.591 million. REI is majority owned by the Company and,
accordingly, is included in the consolidated financial statements of the Company
as of March 31, 1997. However, Craig and REI are separate public companies and
each entity's capital resources and liquidity is legally independent of the
other and any intercomapny loans or receivables would require approval of each
separate company's Board of Directors. Accordingly, the future liquidity of
Craig will be principally dependent on Reading's ability to pay dividends in
accordance with the terms of the Reading Preferred Stock issued in the October
1996 Stock Transactions, amounting to approximately $3.575 million annually. In
addition to such dividends, Craig receives from Stater quarterly consulting
payments amounting to $1.5 million annually. Stater has the right to terminate
the consulting agreement prior to its expiration in March 1999, if Stater were
to repurchase the SBH Preferred Stock. While no assurances can be given, REI
has been advised that Stater is considering exercising its rights to repurchase
the SBH Preferred Stock.
To provide Reading Australia with funding needed to complete its theater
development plans without requiring REI to guarantee the indebtedness of Reading
Australia and as a means of minimizing exposure to fluctuations in the value of
the Australian dollar and to demonstrate commitment to the Australian market,
REI contributed its SBH Preferred Stock to Reading Australia. It is anticipated
that Reading Australia will pledge the SBH Preferred Stock as collateral for
Australian dollar borrowings and Reading Australia has had preliminary
discussions in furtherance thereof. In addition, Reading has been advised that
Stater is considering exercising its right to repurchase the SBH Preferred Stock
and that such repurchase may occur as early as prior to the end of Stater's
fiscal year, September 30, 1997. If such repurchase were to occur, the
repurchase would be at stated value, $69,365,000. However, there can be no
assurance that such repurchase can or will be effected.
Cine Vista opened a new six-plex on March 26, 1997 and will close four of
six screens at another location in mid-1997 in order to initiate construction of
a new eight-plex at the same location, which construction is anticipated to be
completed in mid-1998. It is anticipated that approximately $7.7 million will be
invested in 1997 and 1998 in furtherance of these two projects. Cine Vista is
also negotiating provisions of an agreement to expand one facility and to open
new theaters at two new sites which, collectively could result in the addition
of up to 30 new screens. The timing of the additions is not predictable nor is
there assurances that these proposed developments will be concluded. The capital
cost of these new additions is estimated to total approximately $15 million.
Reading entered into a lease for the first new theater based upon the
Angelika concept to be located in Houston, Texas in the first quarter of 1997.
Reading is actively seeking sites to develop Angelika type theaters throughout
the United States and will consider acquiring leasehold or ownership interests
in conjunction with such developments. The cash cost of such developments can
range from approximately $1.5 million for a turnkey leased facility to over $7
million for an owned site.
If the Consolidated Company is successful in its efforts to develop all of
the projects which it is presently considering, its capital requirements over
the next three years will exceed its existing cash balances, the value of the
SBH Preferred Stock (or the proceeds thereof) and existing borrowing
arrangements. However, the Consolidated Company believes that additional
funding could be realized through, among other things, bank borrowings, sale-
leaseback transactions and the issuance/sale of additional equity either of REI,
Reading Australia or at the project level.
-15-
<PAGE>
The following summarizes the major sources and uses of cash funds in each
of 1997 and 1996 Quarters, respectively:
1997:
- ----
"Unrestricted cash and cash equivalents" decreased $3,946,000 from
$52,172,000 at December 31, 1996 to $48,226,000 at March 31, 1997. Working
capital decreased $1,615,000 from $45,787,000 at December 31, 1996 to
$44,172,000 at March 31, 1997. Net cash used in operating activities amounted
to $396,000 in the 1997 Quarter.
Net cash used in investing activities amounted to approximately $3,233,000
in the 1997 Quarter including $2,445,000 in the purchase of property and
equipment and $819,000 used to purchase an additional 78,500 shares
(approximately 1% of the outstanding stock) of REI.
Net cash used in financing activities amounted to $87,000 in the 1997
Quarter and was comprised of a distribution to the Angelika minority partner.
1996:
- ----
"Unrestricted cash and cash equivalents" increased $42,430,000 from
$18,645,000 at December 31, 1995 to $61,075,000 at March 31, 1996 due primarily
to the effect of accounting for the purchase of REI in Fiscal 1996 on a
consolidated basis. During Fiscal 1996, the Company increased its ownership of
Reading to greater than 50% which 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
$44,147,000 as of January 1, 1996. The increase resulting from the
consolidation of Reading in the 1996 Quarter was offset by the purchase of
property, plant and equipment amounting to $582,000, the purchase of REI Common
Stock amounting to $124,000 and other investments of $110,000.
Net cash used in financing activities amounted to $819,000 in the 1996
Quarter as a result of Craig's repurchasing 64,100 shares of its common stock
for approximately $634,000 and payment of Reading debt financing costs of
$185,000.
Prior to Reading's 1981 quasi-reorganization, Reading had extensive
railroad and related operations. Such operations may have contributed to
environmental contamination of properties now owned by Reading, previously sold
by Reading, or to which Reading, prior to its reorganization, sent waste. The
ultimate extent of liabilities, if any, with respect to such matters, as well as
the timing of cash disbursements, if any, cannot be determined. However,
management is of the opinion, based on the information currently known, that
while the ultimate liability resulting from such matters could have a material
effect upon the results of operations in a given year, they will not have a
material adverse effect upon Reading's financial position or liquidity.
FORWARD-LOOKING STATEMENTS
From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing, including those contained
herein. Such forward-looking statements may be included in, without limitation,
reports to stockholders, press releases, oral statements made with the approval
of an authorized executive officer of the Company and filings with the
Securities and Exchange Commission. The words or phrases "anticipates,"
"expects," "will continue," "estimates," "projects," or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The results contemplated by the Company's forward-looking statements are
subject to certain risks, trends, and uncertainties that could cause actual
results to vary materially from anticipated results, including without
limitation, delays in obtaining leases and permits for new multiplex locations,
construction risks and delays, the lack of strong film product, the impact of
competition, market and other risks associated with the Company's investment
activities and other factors described herein.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share," which is required to be adopted on December 31,
1997. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of Statement
128 on the calculation of the Company's primary and fully diluted earnings per
share is not expected to be material.
-16-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 24, 1997, a shareholder owning 50 shares of Reading Entertainment,
Inc. ("REI") common stock commenced a purported derivative action (the "Action")
on behalf of the Company entitled Walter Alphin v. James J. Cotter, et. al. in
-----------------------------------------
the Philadelphia County Court of Common Pleas. The complaint in the Action
named Craig Corporation ("Craig"), former directors of Reading Company, Gerard
P. Laheney and Ralph B. Perry III and all of the current directors of REI as
defendants. The Action alleges that the defendants breached their fiduciary
duty to Reading Company by failing to utilize certain tax assets of Reading
Company over the years and such failure resulted in the defendants causing
Reading Company to use certain of the tax assets for the ultimate benefit of
Craig. No monetary claims have been asserted against Craig or Reading in the
Action and the plaintiff seeks unspecified monetary damages from the defendants.
Management is reviewing the Action and believes that the suit has no merit and
that it will not have a material adverse effect upon the companies. Reading has
directors and officers liability insurance and believes that the claims set
forth in the Action are covered by such insurance, if Reading is ultimately
deemed to have any monetary responsibility through its indemnification of REI's
directors.
For a further description of legal proceedings, please refer to Item 3
entitled "Legal Proceedings" contained in the Company's Form 10-K for the fiscal
year ended December 31, 1996.
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 HOLDER.
Not applicable.
ITEM 5 OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the reporting period.
-17-
<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. REGISTRANT
Date: May 15, 1997 By: /s/ S. Craig Tompkins
--------------------- -----------------------------
S. Craig Tompkins
President
Date: May 15, 1997 By: /s/ Robin W. Skophammer
--------------------- -----------------------------
Robin W. Skophammer
Chief Financial Officer
-18-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> MAR-31-1997 MAR-31-1996
<CASH> 48,226 61,075
<SECURITIES> 0 42
<RECEIVABLES> 2,937 1,553
<ALLOWANCES> 0 0
<INVENTORY> 120 86
<CURRENT-ASSETS> 56,626 63,712
<PP&E> 20,652 17,035
<DEPRECIATION> (2,422) (1,734)
<TOTAL-ASSETS> 164,304 180,621
<CURRENT-LIABILITIES> 12,454 4,941
<BONDS> 7,514 520
0 0
0 0
<COMMON> 1,377 1,377
<OTHER-SE> 99,509 93,359
<TOTAL-LIABILITY-AND-EQUITY> 164,304 180,621
<SALES> 5,771 4,011
<TOTAL-REVENUES> 7,979 6,547
<CGS> 5,083 3,567
<TOTAL-COSTS> 7,031 5,779
<OTHER-EXPENSES> (970) (50,882)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 1,918 51,728
<INCOME-TAX> 244 20,435
<INCOME-CONTINUING> 1,500 31,293
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,500 31,293
<EPS-PRIMARY> 0.26 5.40
<EPS-DILUTED> 0.26 5.40
</TABLE>
