<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, 2000
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)
<TABLE>
<S> <C>
NEVADA 95-1620188
(State or other jurisdiction of incorporation or (IRS Employer Identification No.)
organization)
550 South Hope Street, Suite 1825 90071
Los Angeles CA (Zip Code)
(Address of principal executive offices)
</TABLE>
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. As of August 11, 2000, there
were 3,436,808 shares of Common Stock, $0.25 par value per share, and 7,058,408
shares of Class A Common Preference Stock, $0.01 par value per share.
================================================================================
<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, 2000 (Unaudited) and December 31, 1999.............................. 1
Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 2000 and 1999 (Unaudited).............. 3
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2000 and 1999 (Unaudited)........................ 4
Notes to Consolidated Financial Statements.......................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 21
PART 2. Other Information
------
Item 1. Legal Proceedings................................................................... 32
Item 2. Changes in Securities............................................................... 32
Item 3. Defaults Upon Senior Securities..................................................... 32
Item 4. Submission of Matters to a Vote of Security Holders................................. 32
Item 5. Other Information................................................................... 32
Item 6. Exhibits and Reports on Form 8-K.................................................... 32
Signatures................................................................................... 33
</TABLE>
-i-
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
2000 1999
-------------------- -------------------
ASSETS (In thousands of dollars)
------------------------------------------------------ -----------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 3,392 $ 15,077
Restricted cash 1,783 948
Receivables 860 695
Inventories 274 316
Prepayments and other current assets 2,159 1,389
Due from affiliate -- 1,000
-------- --------
Total current assets 8,468 19,425
Equity investment in unconsolidated affiliates 29,382 17,246
Equity investment in foreign affiliates 1,466 2,140
Note receivable from joint venture partners 686 1,549
Assets held for sale 3,566 5,740
Property held for development 29,223 31,623
Property and equipment, net 65,194 58,501
Other assets 3,388 1,807
Excess of cost over net assets acquired, net of
accumulated amortization of $116 in 2000 and
$1,744 in 1999 112 9,975
-------- --------
Total assets $141,485 $148,006
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------
Current Liabilities:
Accounts payable $ 2,131 $ 3,340
Film rental payable 1,932 1,718
Accrued property costs 3,967 4,355
Accrued taxes 434 708
Accrued restructuring charges 532 846
Bank debt 15,310 8,618
Notes payable to affiliate 3,198 1,998
Other accrued expenses and liabilities 796 703
-------- --------
Total current liabilities 28,300 22,286
-------- --------
Note payable 687 1,035
Other liabilities 6,808 5,917
Deferred tax liabilities 8,368 8,368
-------- --------
Total long term liabilities 15,863 15,320
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
2000 1999
----------------------------------------------
LIABILITIES AND SHAREHOLDERS EQUITY (In thousands of dollars)
------------------------------------------- ---------------------------------------------
<S> <C> <C>
Minority interests in equity of subsidiaries 20,250 22,797
Redeemable Preferred stock of Reading 7,000 7,000
Commitments and Contingencies (Note 8)
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, 8,734,065 issued and
7,058,408 outstanding 87 87
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 and 3,436,808
and 3,512,308 outstanding at June 30, 2000 and
December, 31, 1999, respectively 1,361 1,361
Additional paid-in capital 31,111 31,111
Retained earnings 70,411 73,449
Accumulated other comprehensive loss (11,181) (4,052)
Cost of treasury shares, 3,682,906 and 3,607,406
shares at June 30, 2000 and December 31, 1999,
respectively (21,717) (21,353)
-------- --------
Total shareholders' equity 70,072 80,603
-------- --------
Total liabilities and shareholders' equity $141,485 $148,006
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
CRAIG CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands of dollars, except for share amounts)
<S> <C> <C> <C> <C>
Revenues:
Theater admissions $ 7,647 $ 6,716 $ 15,544 $12,245
Theater concessions 2,526 2,085 5,022 3,712
Theater advertising and other 589 393 1,228 706
Real estate 199 80 388 129
------- ------- -------- -------
10,961 9,274 22,182 16,792
------- ------- -------- -------
Expenses:
Theater costs 8,923 7,234 18,139 13,037
Theater concession costs 529 435 1,067 802
Depreciation and amortization 721 811 1,525 1,519
General and administrative expenses 3,003 3,329 5,896 6,155
Write-down of assets held for sale 1,725 -- 1,725 --
------- ------- -------- -------
14,901 11,809 28,352 21,513
------- ------- -------- -------
Loss from operations (3,940) (2,535) (6,170) (4,721)
(Loss) earnings from equity
investments (1,011) 3,820 (1,090) 3,969
Gain on exchange of Angelika 3,555 -- 3,555 --
Other income (expense) 540 (20) 575 (1)
Interest and dividend income 122 651 309 1,439
Interest expense (248) (63) (499) (119)
------- ------- -------- -------
(Loss) earnings before taxes
and minority interest (982) 1,853 (3,320) 567
Minority interest 223 (159) 867 257
------- ------- -------- -------
(Loss) earnings before taxes (759) 1,694 (2,453) 824
Provision for taxes (253) (266) (471) (488)
------- ------- -------- -------
Net (loss) earnings (1,012) 1,428 (2,924) 336
Dividends paid on subsidiary
redeemable preferred stock (114) (114) (228) (228)
------- ------- -------- -------
Net (loss) earnings applicable to
$(1,126) $ 1,314 ($3,152) $ 108
======= ======= ======== =======
Basic and diluted (loss) earnings
per share: $( 0.11) $0.12 $( 0.30) $0.01
======= ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CRAIG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------------
2000 1999
--------------- --------------
Operating Activities (In thousands of dollars)
<S> <C> <C>
Net (loss) income $ (2,924) $ 336
Adjustments to reconcile net earnings loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,525 1,519
Deferred rent expense 167 161
Equity loss of affiliates 1,090 (3,969)
Write off of capitalized development costs 5 479
Write-down of assets held for sale 1,725 --
Gain on sale of assets, net (3,527) --
Minority interest (867) (257)
Changes in operating assets and liabilities:
(Increase) decrease in receivables (165) 39
Increase in other assets (271) (251)
Decrease in payables (1,967) (686)
Increase in accrued film rental 552 907
Increase (decrease) in other liabilities 100 (283)
-------- --------
Net cash used in operating activities (4,557) (2,005)
-------- --------
Investing activities
Purchase of property held for development (157) (385)
Acquisition fixed assets/property and equipment (12,342) (15,862)
Purchase of Citadel Class B stock (31) --
Purchase of G&L common stock and property -- (1,961)
Payments on property purchase commitments -- (6,665)
Proceeds from New Zealand joint venture 1,024 (650)
Decrease in cash due to Angelika exchange (636) --
(Increase) decrease in restricted cash (2,253) 29
-------- --------
Net cash used in investing activities (14,395) (25,494)
-------- --------
Financing activities
Treasury stock repurchases (364) (366)
Distributions to minority partner (43) (207)
Payment of Reading preferred dividends (114) (228)
Note to New Zealand joint venture (486) (109)
Capital contribution from minority interest 305 --
Proceeds from note payable 10,521 2,712
Payment on notes payable (2,339) (133)
-------- --------
Net cash provided by financing activities 7,480 1,669
-------- --------
Effect of foreign exchange rate changes on cash (213) 339
-------- --------
Decrease in cash and cash equivalents (11,685) (25,491)
Cash and cash equivalents at beginning of the period 15,077 63,314
-------- --------
Cash and cash equivalents at end of period $ 3,392 $ 37,823
======== ========
</TABLE>
Non-Cash Transaction: Exchange of 50% Angelika interest for equity investment in
--------------------
National Auto Credit, Inc. (see Note 3).
See accompanying notes to consolidated financial statements.
4
<PAGE>
Craig Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
June 30, 2000
(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 consolidated subsidiaries (collectively,
the "Consolidated Company").
The Company's principal holdings at June 30, 2000 and December 31, 1999
consisted of (i) common and preferred stock representing approximately 78% of
the voting power of Reading Entertainment, Inc. ("REI", and collectively with
its consolidated subsidiaries, "Reading"), (ii) common shares representing
approximately 16.6% and 16.4% of the outstanding Class B and Class A common
shares of Citadel Holding Corporation ("CHC" and collectively with its
consolidated subsidiaries "Citadel"), respectively, and, (iii) 16.4% of the
outstanding common stock of Big 4 Ranch, Inc., a company owing a 40% interest in
certain agricultural properties located in Kern County, California, and (iv)
cash and cash equivalents. The Consolidated Company holds a 48% interest in
Citadel and 49% interest in Big 4 Ranch, Inc.
REI, its majority owned subsidiary, is principally in the business of
developing and operating multi-plex cinemas in Australia, New Zealand, Puerto
Rico and the United States, and of developing and operating entertainment
centers in Australia and New Zealand. Reading's cinemas are owned through
various subsidiaries under the Angelika Film Centers and Reading Cinemas names
in the United States (the "Domestic Cinemas"); through Reading Cinemas of Puerto
Rico, Inc., under the CineVista name in Puerto Rico ("CineVista" or the "Puerto
Rico Circuit"); and the Reading Australia Entertainment Pty Limited
(collectively with its subsidiaries referred to herein as "Reading Australia")
under the Reading Cinemas name in Australia (the "Australia Circuit") and
through a cinema joint venture operating under the Berkley Cinemas name in New
Zealand. REI's entertainment center development activities in Australia are also
conducted through Reading Australia, and in New Zealand through the Reading New
Zealand. REI operates in two business segments, cinemas operations and real
estate development. REI is also a participant in two real estate joint ventures
in Philadelphia, Pennsylvania, and holds certain property for sale located in
Pennsylvania and Australia and owns certain lease equipment that it leases to
third parties. In addition, REI also owns approximately 25.9% of the National
Auto Credit, Inc.'s ("NAC") common stock which is accounted for under the equity
method.
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 various joint
ventures. Investments in other companies are carried at cost.
The financial statements have been prepared in accordance with generally
accepted accounting principles in the United States for interim information and
in accordance with the rules of the Securities and Exchange Commission and
therefore, do not include all information and footnotes required by generally
5
<PAGE>
Craig Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
June 30, 2000
(amounts in tables in thousands)
--------------------------------------------------------------------------------
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, 1999 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 and six
months ended June 30, 2000 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2000. Certain amounts in
previously issued financial statements have been reclassified to conform to
current period presentation.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company is
required to adopt SAB 101 in the fourth quarter of 2000. Management does not
expect the adoption of SAB 101 to have a material effect on the Company's
results of operations or on its financial position.
BASIC AND DILUTED (LOSS) EARNINGS PER COMMON SHARE: Basic (loss) earnings
--------------------------------------------------
per share is calculated by dividing net (loss) earnings applicable to common
shareholders by the weighted average shares outstanding during the period. The
weighted average number of shares outstanding for the three and six months ended
June 30, 2000 were 10,495,216 and 10,507,799, respectively. The weighted average
number of shares outstanding for the three and six months ended June 30, 1999
were 10,639,224 and 10,646,204, respectively. Basic and diluted (loss) earnings
per share for the three and six months ended June 30, 2000 and 1999 were
calculated based on net (loss) 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 approximately $114,000 per quarter.
Diluted (loss) earnings per share is calculated by dividing net (loss)
earnings applicable to common shareholders by the weighted average common shares
outstanding plus the dilutive effect of stock options. At both June 30, 2000 and
1999, stock options to purchase 659,940 shares of Common Stock and 65,000 shares
of Class A Common Preference Stock were outstanding. The average exercise prices
of the Common Stock and Class A Common Preference Stock were $6.04 and $6.65 at
June 30, 2000, respectively, and $6.20 and $7.20 per share at June 30, 1999,
respectively. However, the Company reported a net loss for the three and six
months period ended June 30, 2000, and thus the options were anti-dilutive.
6
<PAGE>
Craig Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
June 30, 2000
(amounts in tables in thousands)
--------------------------------------------------------------------------------
NOTE 2 -- COMPREHENSIVE INCOME (LOSS)
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), which establishes rules for the
reporting and presentation of comprehensive income and its components. SFAS 130
requires foreign currency translation adjustments, which were reported
separately in shareholders' equity prior to adoption of SFAS 130, to be included
in other comprehensive (loss) income. The following sets forth the Company's
comprehensive (loss) or income, comprised entirely of foreign currency
adjustments for the periods shown:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------- ------ -------- ------
<S> <C> <C> <C> <C>
Net (loss) earnings $(1,012) $1,428 $ (2,924) $ 336
Other comprehensive (loss) income (1,611) 1,953 (7,129) 3,036
------- ------ -------- ------
Comprehensive (loss) income $(2,623) $3,381 $(10,053) $3,372
======= ====== ======== ======
</TABLE>
NOTE 3 - EQUITY INVESTMENT IN UNCONSOLIDATED AFFILIATES
The carrying value of each of the Company's equity investments is as
follows (unaudited):
December 31,
June 30, 2000 1999
------------- ----
Citadel $ 16,959 $ 17,246
BRI -- --
AFC 3,319 --
NAC 9,104 --
-------- --------
$ 29,382 $ 17,246
======== ========
At June 30, 2000, the Consolidated Company owned 2,567,823 shares of Class
A Nonvoting Common Stock (the "Class A Shares") and 653,255 shares of Class B
Voting Common Stock (the "Class B Shares") of Citadel representing an ownership
interest of approximately 48.29%. The Company accounts for its investment in
Citadel by the equity method. Citadel's net loss for the three and six months
ended June 30, 2000 were approximately ($686,000) and ($455,000), respectively,
and the Consolidated Company's share of such losses for the three and six months
ended June 30, 2000 was ($363,000) and ($318,000), respectively, and are
included in the Condensed Consolidated Statement of Operations as "(Loss)
earnings from equity investments." Citadel's assets and liabilities totaled
$46,150,000 and $13,420,000, respectively, at June 30, 2000. The closing prices
of Citadel's Class A Nonvoting and Class B Voting common stock on the American
Stock Exchange were $3.06 and $3.25 per share, respectively, at June 30, 2000.
7
<PAGE>
Craig Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
June 30, 2000
(amounts in tables in thousands)
--------------------------------------------------------------------------------
Management believes that the June 30, 2000 carrying value of the Citadel
investment amounting to approximately $16,959,000 approximates the underlying
financial statement equity in the net assets of Citadel.
During 1997, Craig acquired 666,000 of the Citadel shares it owns upon the
exercise of a warrant at a cost of approximately $3.00 per share, or $1,998,000.
Such exercise was consummated pursuant to delivery by Craig of its secured
promissory note in the amount of $1,998,000, secured by 500,000 shares of REI
Common Stock. Interest is payable quarterly in arrears at the prime rate, which
amounted to 9.50% at June 30, 2000. Interest expense paid pursuant to this note
amounted to approximately $133,000 and $78,000 for the six months ended June 30,
2000 and 1999, respectively. 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 and has been included in the accompanying balance sheet as
"Note Payable to Citadel".
The Consolidated Company owns 3,322,279 shares of common stock of BRI
representing an ownership interest of approximately 49%. BRI owns a 40% interest
in three agricultural partnerships which own agricultural land located in
California. A company controlled and owned 1% by the Chairman of the Board of
the Company and owned 99% by certain members of his family owns a 20% interest
in the partnerships and Citadel owns the remaining 40% interest in the
partnerships. The Consolidated Company accounts for its investment in the BRI
common stock by the equity method. BRI's net loss for the six months ended June
30, 2000 and 1999 totaled ($508,000) and ($113,000), respectively. During Fiscal
2000 and 1999, the Consolidated Company did not record its 49% share of the 2000
or 1999 loss, as the carrying value of its investment in BRI had previously been
reduced to $0 and the Company has no obligation to fund BRI's operating losses.
BRI had deficit equity of approximately ($657,000) at June 30, 2000.
As discussed in Note 11, on April 5, 2000, Reading sold a 50% interest in
the Angelika Film Center New York ("AFC") to National Auto Credit, Inc. ("NAC")
in exchange for 8,999,900 shares of NAC common stock and 100 shares of NAC
preferred stock. As a result of this transaction, the Consolidated Company (1)
discontinued consolidating AFC for financial reporting purpose as of April 5,
2000 and started accounting for its remaining 33.3% investment in AFC under the
equity method, and (2) recorded its 25.9% ownership of NAC common stock and 100%
ownership of NAC preferred stock amounting to approximately $9,720,000 under the
equity method. NAC's net loss for the two months ended June 30, 2000 was
approximately ($2,381,000) and the Consolidated Company's share of such loss was
($616,000) and is included in "(Loss) earnings from equity investments" in the
Consolidated Statement of Operations. NAC's assets and liabilities totaled
$108,680,000 and $20,577,000, respectively, at May 31, 2000. The closing price
of NAC common stock at June 30, 2000 was $0.85 per share. The NAC preferred
stock shares were valued at the stated liquidation preference value of $1.50 per
share.
AFC's net income for the three and six months ended June 30, 2000 were
approximately $193,000 and $316,000, respectively, and the Consolidated
Company's share of such income was approximately $199,000 which is included in
the Consolidated Statement of Operations for the six months ended June 30, 2000.
8
<PAGE>
Craig Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
June 30, 2000
(amounts in tables in thousands)
--------------------------------------------------------------------------------
Of the $199,000 of AFC earnings, approximately $162,000 was recorded during
the first quarter of 2000 when AFC was being consolidated. AFC's assets and
liabilities totaled $11,044,000 and $1,087,000, respectively, at June 30, 2000.
Management believes that the carrying value of the Consolidated Company's
investment at June 30, 2000 of $3,319,000 approximates the Consolidated
Company's underlying equity in the net assets of AFC.
NOTE 4 -- EQUITY INVESTMENTS IN FOREIGN AFFILIATES
At June 30, 2000 and December 31, 1999, the Consolidated Company's equity
investments in foreign affiliates is comprised of Reading New Zealand's 50%
ownership interest in a joint venture (the "NZ JV"), which owns two cinemas and
leases a third cinema. The equity investment in the NZ JV does not include a
loan to the joint venture partner of approximately $686,000 and $1,222,000 at
June 30, 2000 and December 31, 1999, respectively. The equity interest in the NZ
JV earnings for the three and six months ended June 30, 2000 was approximately
$49,000 and $81,000, respectively, and are included in "(Loss) earnings from
equity investments" in the Consolidated Statement of Operations for the three
and six months ended June 30, 2000.
The carrying value of Reading New Zealand's assets fluctuates due to
changes in the exchange rate between the U. S. dollar and New Zealand dollar
($0.4690 and $0.5215 were the respective exchange rates of each of the U. S.
dollar per New Zealand dollar at June 30, 2000 and December 31, 1999).
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Land/1/ $ 2,775 $ 3,015
Buildings 15,766 13,258
Leasehold improvements 27,148 28,138
Equipment 27,280 24,717
Construction-in-progress and property development costs 14,706 11,137
-------- ------------
87,675 80,265
Less: Accumulated depreciation (7,825) (7,108)
Less: Provision for asset impairment of CineVista (14,656) (14,656)
-------- ------------
$ 65,194 $ 58,501
======== ============
</TABLE>
/1/ Does not include land held for development, which is included in the
Consolidated Balance Sheet as "Property held for development".
9
<PAGE>
Craig Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
June 30, 2000
(amounts in tables in thousands)
--------------------------------------------------------------------------------
The carrying value of Reading Australia's assets will fluctuate due to
changes in the exchange rate between the Australian and U.S. dollars. At June
30, 2000 and December 31, 1999, the exchange rates for the U. S. dollar per
Australian dollar were $0.5971 and $0.6543.
NOTE 6 -- ASSETS HELD FOR SALE
Assets held for sale are comprised of the following components as of June
30, 2000 and December 31, 1999.
Reading Australia owns a 50% interest in the Whitehorse Property Group
("WPG"). The ownership is structured as a joint venture with Burstone which owns
the remaining 50% interest in WPG. WPG owns a shopping center located near
Melbourne, Australia. In connection with the purchase of WPG, Reading Australia
provided a loan to Burstone in the amount of approximately $1,400,000, the
proceeds of which were used by Burstone to acquire its interest in WPG. The loan
is secured by Burstone's interest in WPG and is guaranteed by the principals of
Burstone. In early 2000, Reading Australia and Burstone agreed to sell the
property and commenced marketing the property during the second quarter of 2000.
WPG's net losses for the three and six months ended June 30, 2000 totaled
approximately ($118,000) and ($274,000), respectively. The Consolidated Company
recognized 100% of such losses which have been included in the Consolidated
Statements of Operations for the three and six months ended June 30, 2000 as
"(Loss) earnings from equity investments". WPG's assets and liabilities totaled
approximately $16,022,000 and $13,009,614, respectively, at June 30, 2000. It is
currently anticipated that the net proceeds to be received by WPG from the sale
will be less than the carrying value of the Consolidated Company's investment in
and note receivable balance. Accordingly, included in the Statement of
Operations for the six months ended June 30, 2000 is a "Write-down of assets
held for sale" amounting to approximately $1,725,000 to reflect the uncertainty
regarding the ultimate recovery of the investment and the note receivable. The
carrying amount of the Consolidated Company's interest, net of $1,725,000
valuation reserve, is approximately $654,000 (inclusive of the loan to the
Company's joint venture partner as discussed above) and is classified as "Assets
held for Sale" in the Consolidated Balance Sheet at June 30, 2000.
In order to maximize capital available for Reading, a determination was
made to sell the Royal George Theatre (the "RGT"). Accordingly, $2,912,000, the
Company's carrying value of the RGT, which the Consolidated Company believes is
less than the estimated net realizable value (based upon an appraisal of the
property), has been classified as Property held for sale in the Condensed
Consolidated Balance Sheet at June 30, 2000 and December 31, 1999. The
Consolidated Company recognized revenues of $475,000 and $49,000 in Income
before taxes and minority interest from its investment in RGT for in the six
months ended June 30, 2000.
In July 2000, Reading sold a 3/4-acre parcel of land located in
Philadelphia, Pennsylvania, for net proceeds to the Company of approximately
$1,3 3,000.
10
<PAGE>
Craig Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
June 30, 2000
(amounts in tables in thousands)
--------------------------------------------------------------------------------
NOTE 7 -- INCOME TAXES
Craig and Reading file separate consolidated federal and state tax returns.
Accordingly, one company's tax benefits from net operating loss and capital loss
carryforwards cannot be used to offset the other company's tax liabilities.
Income tax expense for the three and six months ended June 30, 2000 for the
Consolidated Company was approximately $253,000 and $471,000 respectively,
including accruals of $211,000 and $421,000 respectively for foreign withholding
tax which will be paid if certain intercompany loans are repaid. Income tax
expense for the three and six month periods ending June 30, 1999 for the
Consolidated Company was approximately $266,000 and $488,000, including accruals
of $216,000 and $423,000 respectively for foreign withholding tax which will be
paid if certain intercompany loans are repaid.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
At June 30, 2000, the Consolidated Company had cash balances amounting to
approximately $3,392,000 and current liabilities exceeding current assets of
approximately $19,832,000. REI is majority owned by the Company and accordingly,
is included in the Consolidated Financial Statements of the Company. However,
Craig and REI are separate public companies and each entity's capital resources
and liquidity is legally independent of the other and any intercompany loans,
receivables or dividends would require approval of each separate company's Board
of Directors. At June 30, 2000, Craig had cash balances of approximately
$178,000, a management fee receivable from Reading and Citadel of approximately
$860,000, and current liabilities of approximately $2,378,000 inclusive of a
demand note payable due to Citadel amounting to $1,998,000.
Since October 1996, the liquidity of Craig has been principally dependent
on Reading's ability to pay dividends in accordance with the terms of the
Reading Preferred Stock held by the Company amounting to $3,575,000 annually. As
of June 30, 2000, Reading was approximately $5,363,000 in arrears with respect
to such dividends. As discussed below, Reading does not currently have the
resources or a plan to pay such dividends in the near future. Accordingly,
Craig's future liquidity is dependent on Craig obtaining financing, Reading
obtaining financing or other cash resources which will permit it to pay
dividends on its Series B Preferred Stock and/or selling Citadel or Reading
securities held by Craig. However, Craig has no present plan or intention to
sell Citadel or Reading securities. In order to improve its liquidity, Reading
is in the process of selling a number of assets, including a) certain property
located in the Philadelphia metropolitan area, b) the Royal George Theatre in
Chicago, c) WPG and d) all or substantially all of its domestic cinema assets.
In the event that such resources prove insufficient for such purposes, Reading
will consider a) postponing or delaying development projects or b) bringing in
joint venture partners and/or selling additional assets. Currently, the
operating costs of Craig after consideration of intercompany allocation of
general and administrative costs approximate $1,200,000 annually. Following the
relocation of the Reading's Philadelphia office to Los Angeles in July 2000, the
levels of intercompany allocations will be reviewed and adjusted accordingly.
11
<PAGE>
Craig Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
June 30, 2000
(amounts in tables in thousands)
--------------------------------------------------------------------------------
At June 30, 2000, the Consolidated Company had commitments for major
capital expenditures, property purchase commitments, and purchase money debt
commitments for 2000 and thereafter which totaled approximately $18,542,000
inclusive of bank debt due within one year of approximately $15,310,000. Also,
the Consolidated Company had commitments to build cinemas and entertainment
centers aggregating to approximately $29,520,000, of which approximately
$15,000,000 is anticipated to be funded in the next twelve months. In addition,
Citadel holds all of the outstanding shares of Reading's Series A Voting
Convertible Preferred Stock and has the option to require Reading to repurchase
such shares at its stated value of $7,000,000 at any time during a ninety-day
period commencing October 16, 2001.
Reading Australia has obtained a bank loan that provides for initial
borrowings of up to $15,000,000 and if additional bank participants are secured,
aggregate borrowings of up to $44,625,000 and an extension of the loan maturity
from December 31, 2000 to December 31, 2003. The existing line-of-credit should
provide Reading Australia with adequate funding to complete an entertainment
center presently under development in Sydney, and if additional lenders are
secured, with adequate funding for a second entertainment center located in the
Melbourne area in 2001. At June 30, 2000, $7,942,000 had been borrowed under
Reading Australia's line-of-credit.
At the present time, Reading has substantial assets invested in land, in
entertainment center projects which are currently under construction or which
have not been fully leased, and in cinemas which have been opened for less than
six months and which, as a result, have higher operating costs than matured
cinema operations. Accordingly, the Consolidated Company is currently recording
losses. In order to improve its liquidity, Reading is in the process of selling
a number of assets, including a) certain property located in the Philadelphia
metropolitan area, b) the Royal George Theatre in Chicago, c) WPG and d) all or
substantially all of its domestic cinema assets. In the event that such sources
prove insufficient for such purposes, Reading will consider a) postponing or
delaying development projects, b) bringing in joint venture partners and/or c)
selling additional assets.
In April 2000, a bank lender to CineVista demanded repayment of the then
outstanding line of credit loan balance, $4,350,000, after CineVista failed to
satisfy certain financial covenants following the impairment loss recorded by
CineVista in the fourth quarter of 1999. CineVista has repaid $950,000 of the
outstanding bank debt and is in discussions with the lender concerning repayment
of the remaining outstanding balance $3,400,000. Reading and the bank lender
have tentatively agreed to a repayment schedule which would effectively reduce
the outstanding balance to zero by December 31, 2000. However, as of this date,
the lender has not rescinded the acceleration demand pending the formalization
of the agreement. The Consolidated Company does not presently have adequate
liquid resources to repay such amounts, although management believes that asset
sales, including the sale of certain Philadelphia properties which closed in
July 2000 for net proceeds to Reading of approximately $1,393,000, the
anticipated sale of the Royal George Theatre, and the possible sale of the
Company's Domestic Cinemas may provide Reading with sufficient funds to repay
CineVista's bank debt.
12
<PAGE>
Craig Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
June 30, 2000
(amounts in tables in thousands)
--------------------------------------------------------------------------------
The Consolidated Company also has $2,678,000 in seller provided financing
which relates to a mortgage on property owned by Reading New Zealand, due in May
2001. In June 2000, Reading obtained a short-term loan of $1,200,000 from
Citadel, its affiliate, in order to pay off a $1,180,000 loan due to the former
owner of the RGT. Reading New Zealand has received proposals from several banks
relating to refinancing the $1,389,000 of Reading New Zealand bank debt which is
due is December 2000.
Under the terms of the joint venture agreement with WPG and Burstone,
Reading Australia has guaranteed 50% of WPG's bank debt and 100% of certain
ground lease payments, which guarantee amounts totaled approximately $6,695,000
at June 30, 2000. The bank loan has been renewed by the lender on a month-to-
month basis during 2000. WPG is currently endeavoring to sell the property
secured by this debt.
Legal Claims
------------
The City of Philadelphia (the "City") has asserted that Reading's North
Viaduct property requires environmental decontamination and that Reading's share
of any such remediation cost would aggregate approximately $3,500,000. Reading
presently is in discussions with the City involving a possible conveyance of the
property and believes that recorded reserves related to the North Viaduct are
adequate.
On April 7, 2000, Sam J. Frankino, who prior to the issuance of shares to
Reading on April 5, 2000, had been the majority stockholder of NAC, filed a
written consent with NAC in which he purported, in effect, to undo all of the
actions taken by the Board of Directors subsequent to March 1, 2000, to
declassify the Board of Directors of NAC and to remove all of those directors
who had voted in favor of the issuance of shares of NAC to Reading. On April 12,
2000, Mr. Frankino filed an action in the Delaware Court of Chancery under
Section 225 of the Delaware Corporations Laws, seeking, among other things, a
determination by the Court that he had effectively undone the action taken by
the prior board and removal of all of such directors. The Company is advised
that the management and the directors who are the subject of Mr. Frankino's
removal effort intend to vigorously oppose Mr. Frankino's lawsuit. The Company
is further advised that NAC has filed a lawsuit against Mr. Frankino seeking,
among other things, damages in the amount of $100 million for harm allegedly
caused to NAC as a result of Mr. Frankino's control and dominance of that
company.
The Frankino suit and the NAC suit have been consolidated for trial. After
such consolidation, Mr. Frankino filed an answer-and-counterclaim in which he
purported to join REI and its subsidiary, FA, Inc., as third-party defendants in
the consolidated action. Mr. Frankino's third-party complaint alleges that REI,
FA, Inc., and NAC's financial advisors aided and abetted alleged breaches of
fiduciary duty by the NAC's board of directors who voted in favor of NAC's
issuance of shares to Reading's subsidiary. REI and its subsidiary have filed a
motion to dismiss Mr. Frankino's complaint for lack of proper service of process
and lack of jurisdiction over it and its subsidiary. No date has been set for
the hearing on Reading's motion. If that motion to dismiss is not granted,
Reading intends to vigorously oppose Mr. Frankino's suit.
13
<PAGE>
Craig Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
June 30, 2000
(amounts in tables in thousands)
--------------------------------------------------------------------------------
The Company is advised that the trial date for this action, originally
scheduled for September 2000, has been postponed to an undetermined date.
Tax Audit
---------
Reading's 1996 tax return is under review by the Internal Revenue Service
(the "Service"). While the Company believes its reporting position in such
period to be reasonable and the Service has not alleged any deficiencies, no
assurances can be made that the Company's tax reporting position will be upheld.
Hedging Activities
------------------
Reading has not utilized forward contracts to hedge or offset exposure to
market risks arising from changes to foreign exchange rates, principally that of
U.S. dollar to Australian and New Zealand dollar. Accordingly, actual costs of
construction projects and amounts reflected as commitments may fluctuate based
upon foreign exchange rates at the time of payments.
NOTE 9 -- SEGMENT INFORMATION
The following sets forth certain information concerning the Consolidated
Company's two segments, real estate development and cinema operations, for the
three and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Corporate
Real Estate Cinema and
Three months ended June 30: Development Operations Eliminations Consolidated
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000
----
Revenues $ 138 $10,762 $ 61 $10,961
Operating (loss) income (3,194) 667 (1,413) (3,940)
1999
----
Revenue $ 0 $ 9,194 $ 80 $ 9,274
Operating (loss) (956) 277 (1,856) (2,535)
--------------------------------------------------------------------
Corporate
Real Estate Cinema and
Six months ended June 30: Development Operations Eliminations Consolidated
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000
----
Revenues $ 277 $21,794 $ 111 $22,182
Operating (loss) income (3,831) 668 (3,007) (6,170)
1999
----
Revenues $ 0 $16,663 $ 129 $16,792
Operating (loss) income (1,704) 381 (3,398) (4,721)
</TABLE>
14
<PAGE>
Craig Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
June 30, 2000
(amounts in tables in thousands)
--------------------------------------------------------------------------------
The following table indicates the relative amounts of revenues from cinema
operations by geographic area during the six-months period ended June 30, 2000
and 1999. The Company has no export revenues.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Revenues: 2000 1999 2000 1999
-------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Puerto Rico $3,917 $3,326 $7,120 $6,047
Mainland United States 2,034 3,728 5,508 6,682
Australia and New Zealand 4,811 2,140 9,166 3,934
</TABLE>
NOTE 10 -- 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.
<TABLE>
<CAPTION>
Condensed Balance Sheet: June 30, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Cash and cash equivalents $ 178 $ 1,801
Other current assets 910 743
--------- ------------
Total current assets 1,088 2,544
Investment in Common Stock of Reading 41,941 49,040
Investment in Preferred Stock of Reading 55,000 55,000
Investment in Citadel 6,206 6,288
Property and equipment, net 819 689
Other assets 87 117
Excess of cost over net assets acquired 1,044 1,065
--------- ------------
Total assets $106,185 $ 114,743
======== ===========
Liabilities and stockholders equity:
-----------------------------------
Accounts payable and accured expenses $ 380 $ 493
Note payable to Citadel, current 1,998 1,998
Deferred tax liabilities 30,410 30,410
Stockholders' equity 73,397 81,842
--------- ------------
Total liabilities and stockholders' equity $106,185 $ 114,743
======== ===========
</TABLE>
15
<PAGE>
Craig Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
June 30, 2000
(amounts in tables in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
Condensed Statement of Operations: 2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
--------
(Losses) earnings from Reading investment $ (561) $ 427 $(2,169) $ (340)
(Loss) earnings from Citadel investment (133) 1,296 (113) 1,355
Interest income 5 28 26 78
------- ------ ------- ------
(689) 1,751 (2,256) 1,093
------- ------ ------- ------
Expenses:
--------
General and administrative expense 344 356 672 821
Depreciation and amortization 45 42 90 86
Interest expense 47 39 133 78
------- ------ ------- ------
436 437 895 985
------- ------ ------- ------
(Loss) earnings before income taxes (1,125) 1,314 (3,151) 108
Income taxes -- -- -- --
------- ------ ------- ------
Net (loss) earnings $(1,125) $1,314 $(3,151) $ 108
======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
----------------------------------------
June 30, June 30,
Condensed Statement of Cash Flows: 2000 1999
--------------- ---------------
<S> <C> <C>
Operating Activities:
--------------------
Net (loss) earnings $(3,151) $ 108
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Undistributed borrowings of equity affiliates 2,282 (1,015)
Increase in affiliate receivables (165) --
Other (18) (2)
------- -------
Net cash used in operating activities (1,052) (909)
------- -------
Investing Activities:
--------------------
Dividends received from Reading -- --
Acquisition of Citadel stock (31) --
Acquisition of G&L Common Stock -- (361)
Acquisition of property from G&L -- (1,600)
Purchase of equipment (176) (50)
------- -------
Net cash used in investing activities (207) (2,011)
------- -------
Financing Activities:
--------------------
Repurchase of common stock (364) (366)
------- -------
Decrease in cash and cash equivalents (1,623) (3,286)
Cash and cash equivalents at beginning of period 1,801 4,721
------- -------
Cash and cash equivalents at end of period $ 178 $ 1,435
======= =======
</TABLE>
16
<PAGE>
Craig Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
June 30, 2000
(amounts in tables in thousands)
--------------------------------------------------------------------------------
NOTE 11 -- SALE OF ANGELIKA INTEREST
On April 5, 2000, Reading sold a 50% interest in the Angelika Film Centers
LLC (the "AFC") to National Auto Credit, Inc. ("NAC") which resulted in the
reduction of its ownership interest in AFC to 33.3%. AFC is the owner of the NY
Angelika. The 50% membership interest (the "Angelika Interest") was conveyed in
exchange for 8,999,900 shares of the common stock of NAC, representing
approximately 25.9% of the outstanding common stock of that company (calculated
after the issuance of such shares), and 100 shares of the Series A Preferred
Stock of NAC, representing 100% of such class. The Series A Preferred Stock has
a liquidation preference of $1.50 per share, is convertible into the common
stock of NAC on a share for shares basis, is entitled to a dividend preference
equal to any dividends declared on the NAC common stock (determined on a per
share basis), and enjoys certain special voting rights. As a consequence of that
transfer, (a) AFC is now owned 50% by NAC, 33.3% by Reading and 16.7% by Sutton
Hill (a company owned equally by the Chairman of the Company's Board of
Directors and a major shareholder of the Company, and (b) Reading and its
affiliates own approximately 29% of the outstanding common stock of NAC. NAC
Common Stock closed on June 30, 2000 at $0.85 per share.
Reading had a financial statements basis of approximately $4,923,000 in the
50% AFC interest sold to NAC. The sales price was determined to be approximately
$9,720,000 which was calculated using the $1.08 per common stock share, the
average per share price of the NAC common stock for ten trading days prior to
April 5, 2000, and the $1.50 per preferred stock share as specified in the sales
agreement. The sales transaction resulted in a gain of approximately $4,797,000
of which approximately $1,242,000 or 25.9% was deferred to represent Reading's
25.9% equity interest in NAC. The deferred gain is included in the Consolidated
Balance Sheet at June 30, 2000 as other long-term liabilities. The deferred gain
on this transaction will not be recognized until either Reading disposes its
ownership interest in NAC or NAC disposes of its ownership interest in AFC.
As a result of the partial disposition of AFC, Reading's ownership of AFC
was reduced to 33.3% which resulted in the Consolidated Company's accounting for
its remaining investment in AFC under the equity method of accounting from the
date of disposition (April 5, 2000) through June 30, 2000 as compared to
consolidating the AFC for financial reporting purposes as of December 31, 1999
and operating periods prior to April 2000. The deconsolidation of AFC in April
2000 resulted in a decrease to the Consolidated Balance Sheet captions as
follows:
(In thousands)
--------------
Cash $ (636)
Other assets (192)
Property, plant and equipment (695)
Cost in excess of net assets acquired (9,840)
Liabilities (1,240)
Minority liability (1,670)
17
<PAGE>
Craig Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
June 30, 2000
(amounts in tables in thousands)
================================================================================
Included in the Consolidated Statement of Operations are the consolidated
results of AFC prior to the exchange transaction as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
----- ------- ------- -------
<S> <C> <C> <C> <C>
Theater revenues $ 610 $ 1,584 $ 2,046 $ 3,485
Theater costs (586) (1,010) (1,609) (2,272)
Depreciation and amortization (10) (172) (183) (343)
General and administrative (1) (75) (40) (165)
----- ------- ------- -------
Income from operations 13 327 214 705
Minority interest and income tax (2) (67) (52) (143)
----- ------- ------- -------
Net earnings $ 11 $ 260 $ 162 $ 562
===== ======= ======= =======
</TABLE>
NAC is a publicly traded company whose shares are traded in the over-the-
counter market. Historically, NAC has been in the business of originating,
purchasing and servicing sub-prime loans secured by second hand automobiles.
However, in recent periods, NAC has sold substantially all of its inventory of
loans, substantially reduced its work force and, in essence, reduced its assets
to cash and its interest in AFC. The Consolidated Company is advised by NAC that
it is considering investments in several industries, one of them being domestic
cinema exhibition, and that the acquisition of the AFC Interest constituted a
possible first step in what may be a substantially larger commitment to that
industry. Accordingly, Reading has also granted to NAC an option to purchase
Reading's remaining 33.3% membership interest in AFC for approximately
$9,000,000 in cash and/or NAC common stock (such common stock to be valued at
$1.50 per share) through August 30, 2000. In the first quarter, Reading had
received $500,000 from NAC for an option that has since expired unexercised. For
the six months ended June 30, 2000, the Consolidated Company has recorded the
$500,000 as other income.
NOTE 12 -- SUBSEQUENT EVENTS
In December 1998, REI, J. Cotter, the Chairman of the Board and principal
stockholder of the Company, and Michael R. Forman entered into an Agreement in
Principle (the "Reading Agreement in Principle") providing for a series of
transactions which contemplated REI leasing or acquiring various cinemas and
live theatre properties held by entities owned by Messrs. Cotter and Forman.
Through their interest in Craig Corporation, Messrs. Cotter and Forman are
principal stockholders of both Reading and the Company.
In May 2000, Reading and Citadel entered into an agreement ("Reading
Assignment") in which Reading assigned its rights, and Citadel assumed Reading's
obligations, under the Reading Agreement in Principle, subject to certain
modifications agreed to by Messrs. Cotter and Forman. Under the Reading
assignment, Citadel reimbursed Reading for a deposit of $1,000,000 that Reading
had made under the Reading Agreement in Principle.
18
<PAGE>
Craig Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
June 30, 2000
(amounts in tables in thousands)
================================================================================
The modified Reading Agreement in Principle provided for Citadel to
sublease, from Sutton Hill Associates ("Sutton Hill", a partnership owned
equally by Messrs. Cotter and Forman) and operate four cinemas, and manage three
other cinemas then managed by City Cinemas Corporation (a company also owned by
Messrs. Cotter and Forman), all of which are located in Manhattan (New York
City) and which together are known as the "City Cinemas Circuit". The Reading
Agreement in Principle also provided for the merger ("OBI Merger") with Off
Broadway Investments, Inc. ("OBI"), which is in the business of owning or
leasing off-Broadway style theatres in the New York City and leasing that space
to producers of off-Broadway theatrical presentations. OBI owns two live
theatres in New York City, the Orpheum and Minetta Lane Theatres, and leases a
third live theatre, the Union Square Theatre. OBI has a right of first refusal
to buy the property in which the Union Square Theatre is located, and the
landlord has informed OBI that it is currently marketing that property for sale.
Citadel will consider exercising this right of first refusal if the price for
the property is commercially reasonable. In addition, the Reading Agreement in
Principle provided for certain other transactions, as described below.
On July 28, 2000, Citadel and Sutton Hill reached agreement on definitive
documentation for the transactions contemplated by the modified Reading
Agreement in Principle (collectively, including the OBI Merger, the "Sutton Hill
Transactions"). The agreements and other documents relating to the Sutton Hill
Transactions (the "Sutton Hill Transaction Documents") will be delivered on
behalf of the parties upon receipt by Sutton Hill of certain third-party
consents. If Sutton Hill does not receive such consents by August 25, 2000, the
Sutton Hill Transaction Documents will not become effective, unless the parties
agree to an extension of the delivery date. Absent a material adverse change, it
is likely that the parties would agree to such an extension if the same should
be required to obtain such consents. The Sutton Hill Transactions, once
effective, will include:
[a] An operating sublease ("Operating Lease") between a subsidiary of
Citadel and Sutton Hill Capital, LLC ("SHC"), a wholly-owned subsidiary of
Sutton Hill. Under the Operating Lease, Citadel will sublease from SHC four
Manhattan theatres (the "City Cinemas Theatres"), for a term of ten years
at an annual rent of $3,217,500, subject to certain cost-of-living and
other adjustments. In addition, Citadel will be responsible for the rent
and other payments due under the underlying leases, which currently
aggregate approximately $990,000 per year (including $330,000 payable to
affiliates of Mr. Forman). At the end of the initial ten-year term, Citadel
will have options to either purchase the underlying leases for the City
Cinemas Theatres, for a cash purchase price of $44 million, or renew the
Operating Lease at the then fair market rental. Citadel will pay $5,000,000
in cash (including the deposit referred to above) in consideration of the
option, which will be a credit against the purchase price if the option is
exercised. In addition, if Citadel exercises the purchase option, it will
also have the option to purchase from an affiliate of Mr. Forman, for an
additional $4,000,000 in cash, the fee interests underlying two of the City
Cinemas Theatres.
19
<PAGE>
Craig Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
June 30, 2000
(amounts in tables in thousands)
================================================================================
[b] An agreement between Citadel and City Cinemas, for Citadel to act as
sub-manager for three cinemas for which City Cinemas is the manager. Also,
City Cinemas will assign to Citadel management agreements, between Reading
and City Cinemas, under which City Cinemas manages the Angelika Film Center
and Cafe and certain other theatres controlled by Reading.
[c] The purchase by Citadel from Messrs. Cotter and Forman of a one-sixth
interest in Angelika Film Centers, LLC ("AFC"), which owns and operates the
Angelika Film Center and Cafe. In payment for that interest, Citadel will
issue notes in the aggregate principal amount of $4,500,000, which will
bear interest at the rate of 8.25%, payable quarterly, and mature two years
from July 28, 2000.
[d] A credit facility (the "SHC Credit Facility"), under which SHC may
borrow up to $28,000,000 from Citadel. Borrowings under the SHC Credit
Facility will bear interest at the rate of 8.25% (subject to certain
adjustments), payable quarterly, and will mature on December 1, 2010 or, if
earlier, the closing of Citadel's purchase of the leases for the City
Cinemas Theatres on exercise of its purchase option under the Operating
Lease. Citadel will not be obligated to make such loans prior to July 28,
2007, although it has certain options to accelerate that date. The
indebtedness under the SHC Credit Facility will be secured by a pledge of
the membership interest in SHC and will be subordinate to $11 million of
indebtedness of SHC to an affiliate of Mr. Forman.
[e] The OBI Merger which will be consummated by merging OBI into Citadel
Off Broadway Theatres, Inc., a wholly-owned subsidiary of Citadel, which
will be the surviving corporation, provided the holders of Citadel's Class
B Voting Common Stock approve the issuance of shares of Citadel's two
classes of stock to acquire OBI. Citadel will issue up to 2,625,820 shares
of Class A Non-Voting Common Stock and 656,455 shares of Class B Voting
Common Stock in the OBI Merger. If the issuance of shares is not approved,
the OBI Merger will be completed by Citadel paying $10,000,000 cash, less
certain expenses.
[f] A first right of negotiation to acquire the remainder of Reading's
domestic cinemas assets.
The Operating Lease, the AFC purchase agreement, the SHC Credit Facility,
the OBI Merger, and related matters were negotiated and approved by the Citadel
Conflicts Committee, which received an opinion of its financial advisor as to
the fairness of the transaction to Citadel.
20
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Craig Corporation (Craig and collectively with its wholly owned
subsidiaries, the "Company") is in the business of identifying, acquiring,
owning and strategically managing controlling interests in other operating
companies. At June 30, 2000, 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 876,885 and 230,521 shares of Class A
Nonvoting Common Stock and Class B Voting Common Stock representing
approximately 16.4% and 17.3%of such classes of Common Stock of Citadel Holding
Corporation ("CHC" and collectively with its wholly owned subsidiaries,
"Citadel") Common Stock, respectively, and 1,107,406 (approximately 16.6%)
shares of Big 4 Ranch, Inc. ("BRI"). 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. The Consolidated Company
currently owns approximately 48.29% of the Common Stock of Citadel,
approximately 49% of the Common Stock of BRI, and approximately 29% of the
common stock of National Auto Credit, Inc. ("NAC").
REI has elected to focus in the business of developing and operating
multiplex cinemas in Australia, New Zealand, the United States and Puerto Rico,
and in developing and eventually operating cinemas based entertainment centers
in Australian and New Zealand.
Results of Operations
The following is a comparison of the results of operations for the three
months ended June 30, 2000 ("2000 Three Months") with the three months ended
June 30, 1999 ("1999 Three Months") and a comparison of the results of
operations for the six months ended June 30, 2000 ("2000 Six Months") with the
six months ended June 30, 1999 (the "1999 Six Months"). Due to the nature of the
Consolidated Company's development, acquisition and disposition activities, the
timing associated with the results of such activities, and the results of
operations of nine new cinemas consisting of 78 screens that opened since
January 1, 1999 (excluding an 8 screen cinema, which closed in June 2000), and
the deconsolidation of the Consolidated Company's investment in the Angelika New
York, the Consolidated Company's financial position, results of operations and
cash flows have varied significantly and, in the view of management are not
necessarily indicative of future operating results.
The Consolidated Company's entertainment center developments have not
commenced operation, although the cinemas portion of one entertainment center
commenced operation in December 1999. Reading Australia anticipates completion
of two entertainment centers, one of which includes a ten screen cinema in 2000.
As such, the entertainment center developments have not produced significant
income or cash flow for the three months or six months ended June 30, 2000.
The Consolidated Company's net loss applicable to common shareholders for
the 2000 Three Months and 2000 Six Months approximated ($1,126,000) or ($0.11)
per basic share and ($3,152,000) or ($0.30) per basic share, respectively, as
compared to the 1999 Three Months and 1999 Six Months net income applicable to
common shareholders of approximately $1,314,000 or $0.12 per basic share and
$108,000 or $0.01 per basic share, respectively. The decrease in net earnings in
the 2000 Three Months and 2000 Six Months is principally attributable to (1) the
write-down of the Whitehorse property and the loan loss provision for Burstone
Victoria Pty Limited ("Burstone"), the Whitehorse joint venture partner,
amounting to approximately ($1,725,000), (2) as a result of lower cash balances,
a ($529,000) and ($1,130,000) decrease in "Interest and dividend income" for the
three and six months ended June 30, 2000 from prior year, respectively, and (3)
an increase in equity loss from Citadel and NAC of approximately ($4,021,000)
and ($616,000), respectively. In addition, the net earnings in the 2000 periods
have been
21
<PAGE>
impacted by an increase in "Theater Costs" as discussed below. In each of the
three and six month periods ended June 30, 2000 and 1999, "Net (loss) earnings
applicable to common shareholders" has been adjusted for the 6.5% per annum
dividend ($114,000 quarterly and $228,000 for the six month periods) on the
$7,000,000 stated value of Reading Convertible Preferred Stock held by Citadel.
Theater Revenues are comprised of Admissions, Concessions, and Advertising
and other revenues. "Theater costs" and "Theater concession costs" (collectively
"Theater Operating Expense") reflect the direct theater costs of CineVista, the
Domestic Cinemas and Reading Australia's cinemas. "General and Administrative"
expenses are presented without consideration of intercompany management fees.
Theater Revenues, Theater Operating Expenses, and General and Administrative
expenses for each of the six month periods ended June 30, 2000 and 1999 were as
follows:
<TABLE>
Domestic
2000 Cine Vista/1/ Cinemas/2/ Australia Corporate Total
------------- ----------- --------- --------- -----
<S> <C> <C> <C> <C> <C>
Theater Revenue $7,120,000 $5,508,000 $ 9,166,000 $ 0 $21,794,000
Theater Operating Expense 6,717,000 5,033,000 7,456,000 0 19,206,000
Depreciation and
Amortization 65,000 530,000 759,000 171,000 1,525,000
General & Administrative 378,000 134,000 1,964,000 3,420,000 5,896,000
Write-down of Whitehorse 0 0 1,725,000 0 1,725,000
---------------------------------------------------------------------------------------
$ (40,000) $ (189,000) $(2,738,000) $(3,591,000) (6,558,000)
=======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Domestic
1999 Cine Vista/1/ Cinemas/2/ Australia Corporate Total
----------- ---------- ----------- --------- -----
<S> <C> <C> <C> <C> <C>
Theater Revenue $6,047,000 $6,682,000 $ 3,934,000 $ $16,663,000
Theater Operating Expense 5,531,000 5,259,000 3,049,000 13,839,000
Depreciation and
Amortization 436,000 627,000 388,000 68,000 1,519,000
General & Administrative 423,000 240,000 1,822,000 3,670,000 6,155,000
-------------------------------------------------------------------------------------
$ (343,000) $ 556,000 $(1,325,000) $(3,738,000) $(4,850,000)
=====================================================================================
</TABLE>
/1/Includes CineVista's general and administrative expense in 2000 and 1999 and
are reported net of approximately $591,000 and $700,000, respectively, in
management fees paid to Reading Corporate.
/2/Domestic Cinema operations in 2000 and 1999 include $475,000 and $381,000,
respectively, in Theater Revenues and $419,000 and $229,000, respectively, of
Theater Operating Expense from the Royal George Theater.
CineVista
---------
CineVista's Theater Revenues increased approximately 17.8% or $1,073,000 to
$7,120,000 in the six months ended June 30, 2000 from $6,047,000 in the
corresponding prior year period. The increase was mainly due to 12 new screens
opened at the Plaza Carolina since last year as well as higher-grossing movies
released during the second quarter 2000 such as the "Perfect Storm", "Gone in 60
Seconds", and the "Gladiators".
CineVista's Theater Operating Expenses increased approximately 21.4% or
$1,186,000 to $6,717,000 in the six months ended June 30, 2000 from $5,531,000
in the corresponding period. The largest portion of the increase was due to the
$403,000 increase in base rent due to the opening of the Plaza Carolina and
payment of the common area maintenance (CAM) differential expense at the Plaza
Americas and Humacao of approximately $100,000. The remaining increase is
attributable to higher
22
<PAGE>
start-up costs associated with the Plaza Carolina, an approximately 15% increase
in the utilities rate from prior year, and increased maintenance and repair
expenses.
CineVista's Depreciation and amortization expense decreased approximately
($973,000) or 93.7% from $1,038,000 to $65,000. The decrease is attributable to
the fact that CineVista's assets were deemed impaired and written down to their
estimated net realizable value during the third and fourth quarters of 1999.
CineVista's General and administrative expenses decreased approximately
10.6% or $45,000 from $423,000 to $378,000. The decrease is primarily due to an
approximately $50,000 decrease in professional fees.
Domestic Cinemas
----------------
Domestic Cinemas' Theater Revenues decreased approximately 17.6% or
$1,174,000 to $5,508,000 for the six months ended June 30, 2000 from $6,682,000
in the corresponding prior year six month period. The primary reason for the
decrease in theater revenue from prior year is due to the fact that the
Consolidated Company stopped consolidating the Angelika New York ("AFC") when it
sold a 50% interest in AFC to National Auto Credit, Inc. ("NAC") on April 5,
2000. (The Consolidated Company's remaining 33.3% interest in the AFC is being
accounted for under the equity method of accounting). The 1999 Six Months period
includes $3,485,000 of Theater revenue from the AFC as compared to $1,506,000
reported prior to the deconsolidation of AFC in April 2000. This decrease was
offset by increases reported by Reading Cinema Manville and the Royal George
Theater in Chicago which commenced operating in May 1999 and March 1999,
respectively. At June 30, 2000 and 1999, the Domestic Cinemas included 34
screens and 4 stages at six locations.
Theater Operating Expenses decreased approximately 4.3% or $226,000 from
$5,259,000 to $5,033,000 for the six months ended June 30, 2000 from the
corresponding prior year period, primarily as a result of the deconsolidation of
AFC as discussed above. The decrease attributable to the deconsolidation of AFC
amounting to approximately $1,203,000 was offset by increased expenses of
approximately $812,000 reported by Reading Cinemas Manville which opened in May
1999 and thus, had less than 2 months of theater operating expenses reported in
the six months ended 1999 as well as increased operating expenses from the Royal
George Theater ("RGT").
The Domestic Cinemas' General and Administrative expenses decreased 44.2%
or $106,000 to $134,000 for the six months ended June 30, 2000 from $240,000 in
the corresponding prior year period due to reduced management fees paid to City
Cinemas as a result of the decreased Theater Revenue in managed cinemas.
Additionally, the administrative expenses decreased approximately $125,000 as a
result of the deconsolidation of AFC.
Australia
---------
Theater Revenues for Australian operations increased approximately 133.0%
or $5,232,000 to $9,166,000 for the six months ended June 30, 2000 from
$3,934,000 in the same six months period in 1999. Substantially all of the
increase is due to the contribution of 5 new cinemas with 45 screens which were
not in operation in the six months ended June 30, 1999. Reading Australia
commenced operation of 2 new cinemas totaling 22 screens in the last quarter of
1999 and another cinema with 8 screens in the second quarter of 2000. At June
30, 2000 and 1999, Reading Australia operated 71 screens at 10 locations and 26
screens at 5 locations, respectively.
23
<PAGE>
Included as "Write-down of assets held for sale" for Reading Australia is
approximately $1,725,000 of write down relating to the Whitehorse property,
which is classified as "Assets held for sale" on the Consolidated Financial
Statement as of June 30, 2000. Included in the $1,725,000 write-down is
approximately a $410,000 write-down of Reading Australia's 50% equity investment
in the Whitehorse property and $1,315,000 loan loss provision taken for the loan
receivable from Burstone as described in Note 6 to the Consolidated Financial
Statements. The write-down was taken during the second quarter of 2000 as
Reading determined, in light of offers made for the Whitehorse property, that
the carrying value of the property was in excess of the likely net proceeds from
a sale of the property.
Theater Operating Expenses for Australian operations increased
approximately 144.5% or $4,407,000 to $7,456,000 for the six months ended June
30, 2000 from $3,049,000 in the same period of 1999. The increase is primarily
due to the initial start-up costs associated with the new cinemas and the
operation of the 5 new cinemas.
General and Administrative expense increased approximately 7.8% or $142,000
for the six months ended June 30, 2000 to $1,964,000 from $1,822,000 in the same
period in 1999. The increase primarily related to carrying the costs of land
held for development.
Corporate
---------
General and Administrative costs (net of $320,000 and $212,000 associated
with the New Zealand operations for the 2000 and 1999 Six Months, respectively)
decreased approximately 10.4% or $358,000 to $3,100,000 for the six months ended
June 30, 2000 from $3,458,000, in the corresponding prior year period primarily
as a result of decreased payroll costs, travel and entertainment costs and
office expenses associated with the Consolidated Company's relocation of its
offices from Philadelphia to Los Angeles.
"Interest and dividend" income for the six months ended June 30, 2000 and
1999 were $309,000 and $1,439,000, respectively. The decrease in "Interest and
dividend" revenues is primarily a result of a reduction in average investable
fund balances for the six months ended June 30, 2000 as compared to the
corresponding prior year period due to investment of the majority of the
Consolidated Company's available cash balance in the Consolidated Company's
development projects.
Real Estate Revenues
--------------------
Real estate revenues include rental income and the net proceeds of sales of
Reading's real estate in the United States which Reading is in the process of
liquidating.
(Loss) earnings from equity investments
---------------------------------------
"(Loss) earnings from equity investments" include (loss) earnings from the
Consolidated Company's investment in Citadel, BRI, WPG , NZ JV, AFC and NAC for
the six months ended June 30, 2000. "(Loss) earnings from equity investments"
includes (loss) earnings from the Consolidated Company's investment in Citadel,
BRI, WPG, and NZ JV for the six months ended June 30, 1999. "(Loss) earnings
from equity investments" decreased $5,059,000 to a loss of ($1,090,000) in the
six months ended June 30, 2000 from income of $3,969,000 in the corresponding
prior year period. The decrease in 2000 six months period is primarily a result
of (1) equity losses amounting to ($616,000) reported in 2000 from the
Consolidated Company's April 2000 investment in NAC, (2) the increased losses of
WPG in 2000 (see Note 6) to the Consolidated Financial Statements, and (3) the
1999 Six
24
<PAGE>
months period including equity earnings from Citadel of $3,919,000 as compared
to a ($113,000) loss in the 2000 Six Months. The Citadel equity earnings in 1999
Six Months included a non-recurring gain for the sale of real estate by Citadel.
Other Income (Expense)
----------------------
"Other income" totaled $575,000 in the six months ended June 30, 2000 as
compared to ($1,000) in the corresponding prior year period. Increase in "Other
income" is due to $500,000 of option fee received from NAC in the first quarter
of 2000 that was recognized as other income during the second quarter of 2000.
Minority Interest
-----------------
The components of "Minority Interest" in the 2000 and 1999 Six Months is as
follows:
Six Months ended
June 30,
--------
2000 1999
---- ----
(in thousands)
---------------------------
REI $ 959 $ 434
AFC (43) (112)
Australian Cinemas (49) (65)
----- -----
Minority interest income $ 867 $ 257
===== =====
The principal component of minority interest is derived from the Company's
holdings in REI. The Company owns preferred stock in REI which provides for an
annual dividend of approximately $3,575,000 and approximately 69% of the
outstanding REI common stock. REI minority income in the 2000 and 1999 Six
Months reflects the 30.7% minority interests share of REI losses. REI has
reported losses in the 2000 and 1999 Six Months and has not declared or paid the
dividends accumulating to the Company since fiscal 1998 amounting to
approximately $5,363,500. The 16.67% minority interest in income of AFC amounted
to $112,000 in the 1999 Six Months. The 16.67% minority interest in income of
AFC amounted to approximately $43,000 from January 1, 2000 to April 5, 2000,
when Reading sold a 50% interest in AFC to NAC and the Consolidated Company
stopped consolidating AFC. The decrease in the Angelika minority income is also
due to the deconsolidation of the results of AFC as of April 5, 2000. Minority
interest in the income of the Australian cinemas represents the 25% minority
interests ownership in two cinemas in the 2000 and 1999 Six Months.
Income Tax Provision
--------------------
Income tax expense for the 2000 Six Months was approximately $471,000,
including accruals of $421,000 for foreign withholding tax which will be paid if
certain intercompany loans are repaid. Income tax expense for the 1999 Six
Months was approximately $488,000, including accruals of $423,000 for foreign
withholding tax which will be paid if certain intercompany loans are repaid.
25
<PAGE>
Three Months Ended June 30, 2000 and 1999
-----------------------------------------
Theater Revenues, Theater Operating Expenses, and General and Administrative
expenses for the three month periods ended June 30, 2000 and 1999, were as
follows:
<TABLE>
<CAPTION>
Three month period ended June 30:
Domestic
2000 Cine Vista Cinemas Australia Corporate Total
----
<S> <C> <C> <C> <C> <C>
Theater Revenue $3,917,000 $ 2,034,000 $ 4,811,000 $ 0 $ 10,762,000
Theater Operating Expense 3,580,000 2,072,000 3,800,000 0 9,452,000
Depreciation and Amortization 32,000 183,000 422,000 84,000 721,000
General & Administrative 169,000 52,000 1,063,000 1,719,000 3,003,000
Write-down of Whitehorse 0 0 1,725,000 0 1,725,000
------------------------------------------------------------------------------------
$ 136,000 ($ 273,000) ($2,199,000) ($1,803,000) ($4,139,000)
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
Domestic
1999 Cine Vista Cinemas Australia Corporate Total
----
<S> <C> <C> <C> <C> <C>
Theater Revenue $3,326,000 $3,728,000 $2,140,000 $ $ 9,194,000
Theater Operating Expense 3,013,000 3,026,000 1,630,000 7,669,000
Depreciation and Amortization 217,000 355,000 206,000 33,000 811,000
General & Administrative 238,000 107,000 998,000 1,986,000 3,329,000
-----------------------------------------------------------------------------------
($443,000) $ 240,000 ($694,000) ($2,019,000) ($2,615,000)
===================================================================================
</TABLE>
CineVista
---------
CineVista's Theater Revenues increased approximately 17.8% or $591,000 to
$3,917,000 in the three months ended June 30, 2000 from $3,326,000 in the
corresponding prior year period. The increase was mainly due to 12 new screens
opened at the Plaza Carolina since last year as well as higher-grossing movies
released during the second quarter 2000 such as the "Perfect Storm", "Gone in 60
Seconds", and the "Gladiators".
CineVista's Theater Operating Expenses increased approximately 18.8% or
$567,000 to $3,580,000 in the three months ended June 30, 2000 from $3,013,000
in the corresponding period. The largest portion of the increase was due to the
increase in occupancy costs attributable to the opening of the Plaza Carolina
and to expense items which vary directly with the increased Theater Revenue.
CineVista's General and administrative expenses decreased approximately
30.0% or $69,000 from $238,000 to $169,000. The decrease is primarily due to an
approximately $50,000 decrease in professional fees.
Domestic Cinemas
----------------
Domestic Cinemas' Theater Revenues decreased approximately 45.4% or
$1,694,000 to $2,034,000 for the three months ended June 30, 2000 from
$3,728,000 in the corresponding prior year three month period. The primary
reason for the decrease in theater revenue from prior year is due to the fact
that the Consolidated Company stopped consolidating the AFC when it sold a 50%
interest in AFC
26
<PAGE>
to NAC on April 5, 2000. (The Company's remaining 33% interest in the AFC is
being accounted for under the equity method of accounting). This decrease was
offset by increases reported by Reading Cinema Manville and the Royal George
Theater in Chicago which commenced operating in May 1999 and March 1999,
respectively.
Theater Operating Expenses decreased approximately 3.2% or $954,000 from
$3,026,000 to $2,072,000 for the three months ended June 30, 2000 from the
corresponding prior year period, primarily as a result of the deconsolidation of
AFC as discussed above. The decrease attributable to the deconsolidation of AFC
was offset by increased expenses reported by Reading Cinemas Manville which
opened in May 1999 and thus, had less theater operating expenses reported in the
three months ended 1999 as well as increased operating expenses from RGT.
The Domestic Cinemas' General and Administrative expenses decreased 51.4%
or $55,000 to $52,000 for the three months ended June 30, 2000 from $107,000 in
the corresponding prior year period due to reduced management fees paid to City
Cinemas as a result of the decreased Theater Revenue in managed cinemas which
were in operation in both 1999 and 2000 and as a result of the deconsolidation
of AFC.
Australia
---------
Theater Revenues for Australian operations increased approximately 124.8%
or $2,671,000 to $4,811,000 for the three months ended June 30, 2000 from
$2,140,000 in the same three months period in 1999. Substantially all of the
increase is due to the contribution of 5 new cinemas with 45 screens which were
not in operation in the three months ended June 30, 1999. Reading Australia
commenced operation of 2 new cinemas totaling 22 screens in the last quarter of
1999 and another cinema with 8 screens in the second quarter of 2000. At June
30, 2000 and 1999, Reading Australia operated 71 screens at 10 locations and 26
screens at 5 locations, respectively.
Included as "Write-down of assets held for sale" for Reading Australia is
approximately $1,725,000 of write down relating to the Whitehorse property,
which is classified as "Assets held for sale" on the Consolidated Financial
Statement as of June 30, 2000. Included in the $1,725,000 write-down is
approximately a $700,000 write-down of Reading Australia's 50% equity investment
in the Whitehorse property and $1,200,000 loan loss provision taken for the loan
receivable from the Whitehorse joint venture partner as described in Note 6 to
the Consolidated Financial Statements. The write-down was taken during the
second quarter of 2000 as Reading determined, in light of offers made for the
Whitehorse property, that the carrying value of the property was in excess of
the net proceeds from a sale of the property.
Theater Operating Expenses for Australian operations increased
approximately 133.1% or $2,170,000 to $3,800,000 for the three months ended June
30, 2000 from $1,630,000 in the same period of 1999. The increase is primarily
due to the initial start-up costs associated with new cinemas and the operation
of the 5 new cinemas and due to an increase of approximately 1.6% in film and
concession costs as a percentage of Theater Revenue.
General and Administrative expense increased approximately 6.5% or $65,000
for the three months ended June 30, 2000 to $1,063,000 from $998,000 in the same
period in 1999. The increase primarily related to carrying the costs of land
held for development.
27
<PAGE>
Corporate
---------
General and administrative expenses (net of $211,000 and $130,000
associated with the New Zealand operations in the 2000 and 1999 Three Months,
respectively) decreased approximately 18.8% or $348,000 to $1,508,000 for the
2000 Three Months from $1,856,000 in the 1999 Three Months primarily as a result
of the various costs associated with Reading's relocation of its offices from
Philadelphia to Los Angeles decreasing during the second quarter of 2000.
Interest income amounted to $122,000 and $651,000 in the 2000 and 1999
Three Months, respectively. The decrease in interest income is primarily a
result of a reduction in average investable fund balances for the three months
ended June 30, 2000 as compared to the corresponding prior year period due to
increasing investment in the Consolidated Company's development projects.
(Loss) earnings from equity investments
---------------------------------------
"(Loss) earnings from equity investments" include (loss) earnings from the
Consolidated Company's investment in Citadel, BRI, WPG , NZ JV, AFC and NAC for
the three months ended June 30, 2000. "(Loss) earnings from equity investments"
includes (loss) earnings from the Consolidated Company's investment in Citadel,
BRI, WPG, and NZ JV for the three months ended June 30, 1999. "(Loss) earnings
from equity investments" decreased $4,831,000 to a loss of ($1,011,000) in the
three months ended June 30, 2000 from income of $3,820,000 in the corresponding
prior year period. The decrease in 2000 Three Months period is a result of (1)
equity losses amounting to ($616,000) reported in 2000 from the Consolidated
Company's April 2000 investment in NAC, (2) the increased losses of WPG in 2000
(see Note 6) to the Consolidated Financial Statements, and (3) the decrease in
the 1999 Three Months period equity earnings from Citadel of $3,772,000 as
compared to a ($69,000) loss in the 2000 Three Months. The Citadel equity
earnings in 1999 Three Months included a non-recurring gain for the sale of real
estate by Citadel.
Other Income (Expense)
----------------------
"Other income (expense)" totaled $540,000 in the 2000 Three Months as
compared to other expense of ($20,000) in the corresponding prior year period.
The increase in other income is primarily due to the $500,000 in NAC option fees
recognized as other income during the second quarter of 2000.
Minority Interest
-----------------
The components of "Minority Interest" in the 2000 and 1999 Three Months are
as follows:
Three Months ended
June 30,
--------
2000 1999
---- ----
(in thousands)
---------------------------
REI $ 290 $ (47)
AFC (41) (51)
Australian Cinemas (26) (61)
----- -----
Minority interest income (expense) $ 223 $(159)
===== =====
28
<PAGE>
The principal component of minority interest is derived from the Company's
holdings in REI. The Company owns preferred stock in REI which provides for an
annual dividend of approximately $3,575,000 and approximately 69% of the
outstanding REI common stock. REI minority income in the 2000 and 1999 Three
Months reflect the 30.7% minority interests share of REI earnings or losses. REI
reported net earnings in the 1999 Quarter before consideration of Preferred
Stock dividends accumulating to the Company. REI has not declared or paid the
dividends accumulating to the Company since December 1998 amounting to
approximately $5,544,500. "Minority interests" for the 2000 and 1999 Three
Months include $223,000 and ($159,000), respectively, from the minority shares
interest in the AFC. Minority interest in the income (loss) of the Australian
cinemas represents the 25% minority interests ownership in two cinemas during
the 2000 and 1999 Three Months.
Income Tax Provision
--------------------
Income tax expense in the 2000 Three Months period totaled $253,000 as
compared to $266,000 in the corresponding period last year.
Liquidity and Capital Resources
At June 30, 2000, the Consolidated Company had cash and cash equivalents
totaling approximately $3,392,000 which includes approximately $3,214,000 held
by Reading. At June 30, 1999, the Company had cash and cash equivalents of
approximately $178,000. REI is majority owned by the Company and, accordingly,
is included in the consolidated financial statements. However, Craig and REI 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.
Since October 1996, liquidity of Craig has been principally dependent on
Reading's ability to pay dividends in accordance with terms of the Reading
Preferred Stock held by the Company amounting to $3,575,000 annually. At June
30, 2000, Reading was $5,363,000 in arrears with respect to such dividends. As
discussed below. Reading does not currently have the resources or a plan to pay
such dividends in the near future. Accordingly, Craig's future liquidity is
dependent on Craig obtaining financing, Reading obtaining financing which will
permit it to pay dividends on its Series B Preferred Stock and/or selling
Citadel or Reading Securities held by Craig. Craig has no present plan or
intention to sell Citadel or Reading Securities. In order to improve its
liquidity, Reading is in the process of selling a number of assets, including a)
certain property located in the Philadelphia Metropolitan area, b) the Royal
George Theatre in Chicago, c) WPG and d) all or substantially all of its
domestic cinema assets. In the event that such resources prove insufficient for
such purposes, Reading will consider a) postponing or delaying development
projects or b) bringing in joint venture partners and/or selling additional
assets. Based on the current work allocation, the annual operating costs of
Craig, after consideration of intercompany allocation of general and
administrative costs, approximate $1,200,000 annually. Following the relocation
of the Reading Philadelphia office to Los Angeles in July 2000, the levels of
intercompany allocations will be reviewed and adjusted accordingly.
At June 30, 2000, the cash and cash equivalents held by Reading are
anticipated to be fully deployed in furtherance of Reading's cinema and
entertainment center development programs. Reading's total commitments exceed
the available liquid funds. In addition, the Company's affiliate, Citadel, holds
all of the outstanding shares of the Company's Series A Voting Convertible
Preferred Stock and has the option to require the Company to repurchase such
shares at its stated value of $7,000,000 at any time during a ninety day period
commencing October 16, 2001.
However, management believes that Reading has sufficient line-of-credit to
complete the entertainment center projects currently under development in
Sydney, and if addition bank lenders are secured, enough for completion of a
second entertainment center in Melbourne in 2001. Reading plans to leverage
these assets as they commence operations, and to use the proceeds from such
financings to continue the development program in the year 2001. In the event
that debt financing cannot be obtained on terms acceptable to Reading,
consideration will be given to seeking joint venture partners, issuing debt or
equity securities, delaying development of certain projects and/or selling land
currently held for development, or other assets. Reading is also in discussions
with various lenders concerning the possibility of securing lines of credit to
finance construction and other development obligations.
29
<PAGE>
Reading does not currently consider any of its development assets to be held for
sale. At June 30, 2000, Reading had total commitments of approximately
$29,520,000. Of this amount, it is currently anticipated that approximately
$15,000,000 will be funded in 2000.
The following summarizes the major sources and uses of cash funds in the
six months ended June 30, 2000 and 1999:
2000:
----
"Unrestricted cash and cash equivalents" decreased $11,685,000 from
$15,077,000 at December 31, 1999 to $3,392,000 at June 30, 2000. Working capital
deficit increased ($16,971,000) from ($2,861,000) at December 31, 1999 to
($19,832,000) at June 30, 2000.
The Consolidated Company used approximately $4,557,000 in cash for
operating purposes during the 2000 Six Months. In addition to the payment of
operating and general and administrative expenses, the principal use of cash
funds during the 2000 Six Months included a use of $14,395,000 in investing
activities, including $12,342,000 in property purchase commitment payments, and
$2,253,000 of increase in restricted cash.
Net cash provided by financing activities totaled $7,480,000 in the 2000
Six Months and was comprised of $10,521,000 in proceeds from notes payable and
$305,000 in capital contribution from minority interests, partially offset by
$2,339,000 in payments on notes payable, a $486,000 loan payment to the New
Zealand joint venture, $364,000 used to repurchase Craig Common stock, and
$114,000 in payment of Reading preferred dividends.
1999:
----
"Unrestricted cash and cash equivalents" decreased $25,491,000 from
$63,314,000 at December 31, 1998 to $37,823,000 at June 30, 1999. Working
capital decreased $24,559,000 from $47,445,000 at December 31, 1998 to
$22,886,000 at June 30, 1999.
The Consolidated Company used approximately $2,005,000 in cash for
operating purposes during the 1999 Six Months. In addition to the payment of
operating and general and administrative expenses, the principal use of cash
funds during the 1999 Six Months included a use of $25,494,000 in investing
activities, including $15,862,000 in purchases of property and equipment,
$6,665,000 in property purchase commitment payments, $385,000 for purchases of
property held for development, and $1,961,000 for purchases of property and
Common Stock related to G&L Realty.
Net cash provided by financing activities totaled $1,669,000 in the 1999
Six Months and was comprised of $2,712,000 of note payable proceeds, offset by
$228,000 in payments of preferred stock dividends by Reading to Citadel,
$366,000 used to repurchase Craig Common stock, $207,000 of distributions to
minority shareholders and a $109,000 loan to the New Zealand joint venture.
30
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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.
31
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For a 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, 1999.
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) Exhibits
27 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
None
32
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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: August 14, 2000 By: /s/ S. Craig Tompkins
------------------------- ---------------------
S. Craig Tompkins
President
Date: August 14, 2000 By: /s/ Andrzej J. Matyczynski
------------------------- --------------------------
Andrzej J. Matyczynski
Chief Financial Officer
33
