<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, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _____________________
Commission file number 1-8625
CITADEL HOLDING CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 95-3885184
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
550 South Hope Street
Suite 1825 Los Angeles CA 90071
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 239-0540
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [x] No
------- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. There were 6,003,924 shares of
Common Stock, $0.01 par value per share, as of August 11, 1995.
================================================================================
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
INDEX
-----
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART 1. Financial Information
------
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1995 (Unaudited)
and December 31, 1994......................................... 3
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1995 and 1994 (Unaudited)................ 4
Consolidated Statements of Cash Flows for Six Months Ended
June 30, 1995 and 1994 (Unaudited)............................ 5
Notes to Consolidated Financial Statements...................... 7
Item 2. Management's Discussion and Analysis of the Consolidated
Statements of Operations.................................... 12
PART 2. Other Information
-------
Item 1. Legal Proceedings........................................... 17
Item 2. Changes in Securities....................................... 18
Item 3. Defaults Upon Senior Securities............................. 18
Item 4. Submission of Matters to a Vote of Security Holders......... 18
Item 5. Other Information........................................... 18
Item 6. Exhibits and Reports on Form 8-K............................ 18
Signatures........................................................... 19
</TABLE>
2
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(NOTE 1)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
--------- -------------
(In thousands of dollars)
<S> <C> <C>
ASSETS
----------------------------------------------------
ASSETS
Cash and cash equivalents $16,247 $ 4,805
Investment in Fidelity Federal Bank-held for sale 11 13,405
Rental properties, less accumulated depreciation 21,892 19,858
Other receivables 1,258 1,219
Other assets 469 625
------- -------
Total assets $39,877 $39,912
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------
LIABILITIES:
Security deposits payable $ 244 $ 227
Accounts payable and accrued liabilities 1,643 3,001
Deferred proceeds from bulk sale 4,000 4,000
Short-term line of credit -- 950
Mortgage notes payable 16,252 13,896
-------- --------
Total liabilities 22,139 22,074
Commitments and contingencies
STOCKHOLDERS' EQUITY
Serial preferred stock, par value $.01;
5,000,000 shares authorized,
3% Cumulative Voting Convertible, ($3.95 or
$5,250,000 stated value)-1,329,114 shares
issued and outstanding 13 13
Common stock, par value $.01, 10,000,000
shares authorized, 6,669,924 shares
issued and outstanding 67 67
Paid-in capital 65,236 65,298
Retained deficit (46,163) (47,540)
Cost of 666,000 treasury shares (1,415) --
-------- --------
Total stockholders' equity 17,738 17,838
-------- --------
Total liabilities and stockholders' equity $ 39,877 $ 39,912
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(NOTE 1)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
------------------- --------------------
(In thousands of dollars, except per share amounts)
<S> <C> <C> <C> <C>
Real Estate Operations:
Rental income $1,264 $ -- $2,301 $ --
Interest income 168 -- 244 --
------ -------- ------ ---------
1,432 -- 2,545 --
Real estate operating expenses 617 -- 1,162 --
Depreciation and amortization 116 -- 216 --
Interest expense 290 -- 528 --
General and administrative expenses 339 -- 764 --
------ -------- ------ ---------
Total expenses 1,362 -- 2,670 --
Gain on sale of rental property -- -- 1,541 --
------ -------- ------ ---------
Net Gain from Real Estate Operations 70 -- 1,416 --
Administrative Charge from Fidelity
Federal Bank -- (393) -- (786)
Losses of and Write-Down of Investment
in Fidelity Federal Bank (39) (91,218) (39) (105,975)
------ -------- ------
Earnings (loss) before income taxes 31 (91,611) 1,377 (106,760)
Income tax expense (benefit) -- -- -- --
------ -------- ------ ---------
Net Earnings (Loss) $ 31 $(91,611) $1,377 $(106,760)
====== ======== ====== =========
Earnings (Loss) per share (after
preferred stock dividend) $0.00 $(13.95) $0.20 $ (16.19)
====== ======== ====== =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1995 1994
------------------------
(In thousands of dollars)
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ 1,377 $(106,760)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Gain on sale of rental property (1,541) --
Provision for estimated losses -- 46,979
Provision for loss on assets held for Bulk Sale -- 52,970
Loss on sale of loans and securities -- 4,600
Capitalized loan origination costs -- (408)
Amortization of deferred loan items 33 (465)
Originations of loans held for sale -- (53,321)
Proceeds from sale of loans held for sale -- 222,047
FHLB Stock dividend -- (1,350)
Depreciation and amortization 183 3,428
Other receivable (increase) (39) (1,317)
Other assets decrease 278 41,810
Deferred income tax liability -- (13,317)
Decrease in liabilities and deferred income (1,403) (2,077)
Other, net 24 443
------- ---------
Net cash provided by (used in) operating activities (1,088) 193,262
INVESTING ACTIVITIES
Proceeds from sale of Fidelity investment 11,938 --
Proceeds from sale of rental properties 8,778 --
Purchase of rental properties (9,449) (521)
Purchase of investment/mortgage back securities -- (59,886)
Principal repayments of mortgage back securities -- 7,632
Proceeds from sales of mortgage back securities -- 93,552
Purchase of loans -- (12,829)
Loans receivable, net increase -- (65,720)
Proceeds from sale of real estate owned -- 12,094
Premises and equipment additions,net -- (2,241)
------- ---------
Net cash provided by (used in) investing activities 11,267 (27,919)
FINANCING ACTIVITIES
Long-term mortgage borrowings 6,104 53,270
Capitalized financing costs (143) --
Demand deposits and passbook savings, net increase -- 17,397
Certificate accounts, net (decrease) -- (385,421)
Proceeds from FHLB advances -- 150,000
Repayments of FHLB advances -- (53,700)
Debt (repayments) (4,698) --
------- ---------
Net cash provided by (used in) financing activities 1,263 (218,454)
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 11,442 (53,111)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 4,805 145,961
------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $16,247 $ 92,850
======= =========
</TABLE>
(Continued)
5
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
SUPPLEMENTAL DISCLOSURES:
<TABLE>
<S> <C> <C>
Cash paid during the period for:
Interest on mortgages and line of credit $ 485 $ --
Interest on deposits, advances and borrowings -- 80,043
Income taxes -- (40,904)
Non-cash transactions:
Company common stock received in exchange
for Fidelity stock 1,415 --
Additions to real estate owned acquired
through foreclosure -- 81,197
Loans originated to finance sale of real
estate acquired through foreclosure -- 8,697
Transfer from investment to loan receivable -- 242,913
Transfer from held for sale to investment -- 6,664
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
Basis of Presentation
---------------------
On August 4, 1994, Citadel Holding Corporation ("Citadel") completed a
restructuring (together with the other transactions described below, the
"Restructuring") in which, among other things, Citadel's ownership interest in
Fidelity Federal Bank was reduced from 100% to approximately 16%. The reduction
was a result of Fidelity issuing and selling to investors in a public offering
shares of Class A and Class C common stock. As of August 4, 1994, Citadel's
investment in Fidelity was reclassified into 4,202,243 shares of Class B common
stock of Fidelity. As a result, effective January 1, 1994, Citadel no longer
consolidates Fidelity in its financial statements; rather it accounts for its
investment on the cost basis. In addition, several other events occurred in the
Restructuring, including:
a. Citadel sold to Fidelity all of the stock of Gateway Investment Services,
Inc., previously a wholly owned subsidiary of Citadel.
b. A newly formed subsidiary of Citadel, Citadel Realty, Inc. ("CRI"),
purchased four real properties from Fidelity for a purchase price of $19.8
million (Fidelity's book value) of which $13.9 million was financed by Fidelity
on a secured basis and the balance of which was financed by Craig Corporation
("Craig") a significant stockholder of Citadel, under a short-term line of
credit (note 4).
c. Citadel received from Fidelity by way of a dividend (i) one-year
transferable options, (the "Building Options" which were subsequently
contributed to CRI) to acquire two office buildings in Sherman Oaks and
Glendale, California, used in the operations of Fidelity (including its
headquarters buildings) for an aggregate exercise price of $9.3 million,
portions of which buildings would be leased back to Fidelity upon the purchase
by the Company (note 2), and (ii) Fidelity's interest in a lawsuit filed against
the former carrier of Fidelity's directors' and officers' insurance policies,
involving certain coverage and indemnity issues, which resulted in Citadel
collecting $2.5 million.
d) Citadel and Fidelity entered into a Stockholders' Agreement (the
"Stockholders' Agreement"), under which Citadel must reimburse Fidelity for
certain losses that may be incurred by Fidelity as a result of certain
environmental and other representations made by Fidelity in connection with the
bulk sale of loans and other assets to certain third parties in connection with
the Restructuring. Subject to a $4 million limit, the Stockholders' Agreement
requires Citadel to reimburse Fidelity for losses incurred by Fidelity, in
either repurchasing assets (sold in connection with the bulk sale) in the event
of breached representations, or curing such breaches.
7
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
The information for the three and six months ended June 30, 1994 presents the
Company's results of operations, as the holding company of Fidelity, prior to
the Restructuring, separate from the results of operations subsequent to the
Restructuring. Such 1994 results prior to the Restructuring have been reflected
in the statements of operations as losses of Investment in Fidelity.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments of a recurring nature considered necessary
for a fair presentation of its financial position as of June 30, 1995 and
December 31, 1994, the results of operations for the three months and six months
ended June 30, 1995 and 1994, and its cash flows for the six months ended June
30, 1995 and 1994. The results of operations for the three and six month
periods ended June 30, 1995 are not necessarily indicative of the results of
operations to be expected for the entire year.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, therefore, do not include
all information and footnotes required to be in conformity with generally
accepted accounting principles. The financial information provided herein,
including the information under the heading, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," is written with the
presumption that the users of the interim financial statements have read, or
have access to, the most recent Annual Report on Form 10-K which contains the
latest audited financial statements and notes thereto, together with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations as of December 31, 1994 and for the year then ended.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Included in cash and cash
equivalents at June 30, 1995 is approximately $15.9 million which is being held
in institutional money market mutual funds.
Earnings Per Share
------------------
Earnings per share is based on 6,114,924 and 6,595,624 shares, the
weighted average number of shares of common stock outstanding during the three
months ended June 30, 1995 and 1994, and 6,392,424 and 6,595,624 shares during
the six months ended June 30, 1995 and 1994, respectively. Common stock
equivalents (stock options, and Warrants) have been excluded from the
computations because their effect was anti-dilutive.
8
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
NOTE 2 - RENTAL PROPERTIES
--------------------------
The Company's rental properties at June 30, 1995 and December 31, 1994 consist
of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
-------- ------------
<S> <C> <C>
Land $ 7,616 $ 5,538
Building and improvements 14,592 14,517
------- -------
Total $22,208 $20,055
Less accumulated depreciation (316) (197)
------- -------
Rental properties, net $21,892 $19,858
------- -------
</TABLE>
At December 31, 1994, rental properties consisted of two apartment buildings and
two commercial buildings. During the three months ended March 31, 1995, the
Company sold an apartment rental property for approximately $5.9 million in
cash, net of expenses. The sale resulted in a gain of approximately $980,000
for financial statement purposes. As a result of the sale, approximately
$3,693,000 of a mortgage note payable was assumed and subsequently paid off by
the purchaser.
As described in note 1, the Company acquired, by way of dividend, the Building
Options. The office buildings subject to the Building Options are used by
Fidelity in its operations and are located in Glendale (the "Glendale Building")
and in Sherman Oaks (the "Sherman Oaks Building") On February 2, 1995, the
Company exercised the Building Options to purchase the two office buildings. On
March 23, 1995, the Company purchased and immediately sold the Sherman Oaks
Building for a gain of approximately $560,000 for financial statement purposes.
On May 18, 1995, the Company purchased the Glendale Building. The $7.12 million
exercise price was funded through internal sources and a $5.34 million five year
mortgage from Fidelity, which amortizes on a twenty year basis with interest
payable monthly at LIBOR plus 4.5%. The Company paid Fidelity points of 1% plus
normal closing costs; such loan is subject to prepayment penalties in year one
of 4%, decreasing by 1% each subsequent year.
The Company and Fidelity have entered into a ten year, full service gross lease
for four of the six floors of the Glendale Building. The rental rate for the
first five years of the lease term is $26,000 per month (including parking) for
the ground floor and approximately $75,000 per month (including parking, for the
fourth through sixth floors. The lease provides for annual rental increases at
a rate equal to the lower of the increase in the Consumer Price Index or 3%.
After five years, the lease provides that the rental rate for the ground floor
will be adjusted to the higher of the then current market rate or the prevailing
rental rate in the fifth year of the lease and the rental for the upper floors
will be adjusted to the higher of the current market rate or $1.50 per square
foot increased by the annual rental rate increase applied during the first five
years of the lease as described in the preceding sentence. Fidelity has the
option to extend the lease of the ground floor for two consecutive ten year
terms at a market rental rate and has the option to purchase the Glendale
Building, if still owned by the Company, at market value at the expiration of
the lease.
9
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
Public Storage occupies 30,879 square feet (two floors) on a lease that expires
in April 1996 with a total rental of approximately $53,900 per month.
NOTE 3 - INVESTMENT IN FIDELITY
-------------------------------
At December 31, 1994, the investment in Fidelity consisted of 4,202,243 shares
of Class B Common Stock at the fair value which was estimated by management to
be $3.19 per share or a total carrying value of approximately $13,405,000. At
June 30, 1995, the investment in Fidelity consisted of 7,243 shares of Fidelity.
During the three months ended June 30, 1995, the Company investment in Fidelity
was reduced by (1) the sale of 1,295,000 shares of such Class B Common Stock of
Fidelity in consideration for a cash payment of $2,220,000 and the return of
666,000 shares of the Company's common stock as part of the settlement of
litigation with Dillon Investors described below and (2) the sale of 2,900,000
shares for approximately $9,718,000, net of commissions.
On November 7, 1994, a stockholder, Dillon Investors L.P. ("Dillon Investors"),
filed a lawsuit in the Court of Chancery of the State of Delaware. The suit
named as defendants the Company, its directors and Craig Corporation, and
alleged that the Citadel 3% Cumulative Convertible Preferred Stock and the
Common stock sold to Craig during the fourth quarter of 1994 were issued at
unfair prices in order to entrench the Board of Directors in power in the face
of an unannounced proxy contest and possible consent solicitation by Dillon
Investors to take over control of the Board of Directors. The suit sought
recision of the issuance of the Citadel Common and Preferred Stock and the
reinstatement of borrowings from Craig under the short term line of credit.
On April 3, 1995, the Company, Craig and Dillon Investors and its affiliates
(the "Dillon Parties") entered into settlement agreements to resolve the
litigation, and the settlements were consummated on April 13, 1995. Under the
settlement agreements, the Dillon Parties purchased from Citadel 1,295,000
shares of Class B Common Stock of Fidelity in exchange for which Citadel
received from the Dillon Parties $2,220,000 and 666,000 shares of the Company's
common stock. For financial statement purposes the Company reflected the return
of the Company's common stock as treasury stock in the amount of approximately
$1,415,000, or $2.125 per share. Additionally, all existing litigation among
Citadel, Craig and the Dillon Parties was terminated, with mutual releases
executed and delivered. The Dillon Parties also agreed, for a period of one
year following the closing, not to purchase or acquire any other beneficial
interests in any of Citadel's securities, and not to engage in any solicitation
of consents or proxies.
The settlement terms also included an agreement by Craig with the Dillon Parties
not to exercise, prior to February 4, 1996, its right to tender any shares of
the 3% Cumulative Voting Convertible Preferred Stock of the Company for
conversion into the Company's common stock without the prior consent of holders
of a majority of the outstanding shares of Citadel Common Stock. In exchange
for such concession from Craig, the Company agreed to grant Craig a two year
warrant to acquire the 666,000 shares of the Company's Common Stock acquired
from the Dillon Parties at
10
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
a price of $3.00 per share, and the Company agreed to reimburse Craig for
certain expenses associated with the litigation up to $75,000.
On April 17, 1995, the Company sold 2,900,000 shares of Fidelity stock resulting
in net proceeds of approximately $9,718,000. The net proceeds, when combined
with the proceeds of the Dillon transaction described above, approximated the
book value of such Fidelity stock as of December 31, 1994.
NOTE 4 - SHORT-TERM LINE OF CREDIT
----------------------------------
In May 1995, the Company repaid the $950,000 outstanding balance of the short-
term line of credit with Craig. Pursuant with the terms of the credit agreement
the line of credit was canceled at the date of the repayment.
NOTE 5 - TAXES ON INCOME
------------------------
For the three months and six months ended June 30, 1995, no provision for income
taxes was required due to the realization for financial statement purposes of
income tax benefits with respect to the tax basis versus the book basis of
assets sold.
NOTE 6 - 3% CUMULATIVE VOTING CONVERTIBLE PREFERRED STOCK
---------------------------------------------------------
The Preferred stock was issued to Craig pursuant to a stock purchase Agreement
and Certificate of Designation which provides, among other things, that (i) the
preferred shares carry a liquidation preference equal to their stated value and
bear a cumulative (noncompounded) annual dividend equal to 3% of the stated
value, (ii) are convertible under certain circumstances into shares of common
stock of the Company, (iii) are redeemable at the option of the Company at any
time after November 1997 and (iv) are redeemable (subject to Delaware
limitations upon distributions to shareholders) at the option of Craig in the
event of a change of control of Citadel. Included in accrued liabilities and as
a reduction of additional paid in capital is $62,125 representing dividends
declared to Craig as of June 30, 1995. Such amount represents cumulative
dividends earned from the period of the preferred stock issuance in November
1994 through March 31, 1995. In July 1995, the Board declared a dividend of
$39,375 for the three month period ended June 30, 1995.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Citadel Holding Corporation, a Delaware corporation ("Citadel" and
collectively with its directly owned or indirectly wholly owned subsidiary, the
"Company"), was incorporated in 1983 to serve as the holding company for
Fidelity Federal Bank, a Federal Savings Bank ("Fidelity"). On August 4, 1994,
Citadel and Fidelity completed a recapitalization and restructuring transaction
(the "Restructuring"), which resulted in (i) the reduction of Citadel's interest
in Fidelity from 100% to 16.2%, (ii) the acquisition by the Company, at bulk
sale prices from Fidelity, of four real estate owned properties (the "REO
Properties"), (iii) the sale by Citadel to Fidelity of its Gateway Investment
Services, Inc. ("Gateway") subsidiary for $1 million, (iv) the transfer to
Citadel of Fidelity's interest in certain outstanding litigation, and (v) the
receipt by way of dividend from Fidelity of options to acquire at book value two
office buildings used by Fidelity in its operations (the Building Options").
Also in connection with the Restructuring, Citadel agreed to indemnify Fidelity
with respect to certain environmental and structural representations and
warranties made by Fidelity to certain third party buyers in connection with
bulk sales by Fidelity made as a part of the Restructuring, up to a limit of $4
million (the "Bulk Sale Indemnity").
As a result of the Restructuring, Citadel no longer consolidates Fidelity
in its financial statements, rather it accounts for its investment on the cost
basis. This change was effective as of January 1, 1994 for purposes of the
financial statements included elsewhere in this report, although Fidelity's
results of operations through August 4, 1994 are reflected in Citadel's
financial statements. Accordingly, no meaningful comparisons can be made
between the three months and six months ended June 30, 1995 with the comparable
periods in 1994.
Since the Restructuring, Citadel has been engaged primarily in the
ownership and management of commercial and residential property.
RESULTS OF OPERATIONS
The Company's net earnings for the three months and six months ended June
30, 1995 were $31,000 or $.00 per share and $1,377,000 or $.20 per share,
respectively. Included in the earnings for the six months ended June 30, 1995
is approximately $1,541,000 from the sale of the Sherman Oaks and Harbor City
properties. During the three months ended June 30, 1995, the Company sold
generally all of its investment in Fidelity, which resulted in the Company
receiving net cash proceeds of approximately $11,938,000 and the return of
666,000 shares of the Company's common stock. The net proceeds, when combined
with the amount ascribed to the common stock received, approximated the carrying
value of such Fidelity stock included in the balance sheet as Investment in
Fidelity held for sale at December 31, 1994. The sale of real properties in the
first quarter and the sale of Fidelity stock in the second quarter attributed to
the significant increase in cash equivalents at June 30, 1995. Accordingly,
interest income increased to $168,000 in the second quarter ended June 30, 1995
as compared to first quarter income of $76,000.
12
<PAGE>
Rental income amounted to $1,264,000 for the three months ended June 30,
1995 and $2,301,000 for the six months ended June 30, 1995. The increase in the
second quarter from the first quarter reflects the rental earnings from the
Company's May 1995 acquisition of the Glendale property, somewhat offset by the
reduction in earnings from the sale of the Harbor City property.
General and administrative expenses amounted to $339,000 for the three
months ended June 30, 1995 as compared to $425,000 for the first quarter ended
March 31, 1995. Such decrease is attributable to a reduction in payroll and
outside professional costs.
REAL ESTATE INTERESTS
---------------------
The table below provides an overview of the properties which constituted
all of the real properties owned by the Company at June 30, 1995.
<TABLE>
<CAPTION>
Units/ % Major Remaining
Address Type Sq. Feet Leased Tenants Lease Term
------------------ ----------- -------- ------ -------- -------------
<S> <C> <C> <C> <C> <C>
ARBOLEDA Office/ 178,000 99 American 1-5 years
1661 Camelback Rd. Restaurant Express
Phoenix, Arizona
BRAND Office 89,000 100 Fidelity/ 1-10 years
600 N. Brand Public
Glendale, CA Storage
PARTHENIA Apartment 27 96 NA 6-12 months
21028 Parthenia 26,000
Canoga Park, CA
VESELICH Apartment 216 95 NA 6-12 months
3939 Veselich Ave. 176,000
Los Angeles, CA
</TABLE>
Arboleda, Phoenix
-----------------
Although this property was fully leased at June 30, 1995, American Express,
which occupies 58% (100,098 sq. feet) of the property, announced that it does
not intend to renew at the expiration of the current term in February 1997.
While management believes that the leasing market in Phoenix will continue to
strengthen, it is anticipated that significant capital expenditures would be
necessary to relet the American Express space and that the space may remain
vacant for some time. With the uncertainty regarding the American Express lease
and certain planning issues on the adjacent site, management believes it to be
unlikely that proceeds would be maximized by a current disposition of the
property.
Brand, Glendale
---------------
As part of the Restructuring, Citadel acquired, by way of dividend, the
Building Options, which were subsequently assigned to Citadel Realty, Inc., its
13
<PAGE>
wholly owned subsidiary. The office buildings subject to the Building Options
included the Glendale Building which is used by Fidelity in its operations.
With regard to the purchase of the Glendale Building, Fidelity extended a 5
year loan, amortizing over twenty years, at an adjustable rate of interest tied
to LIBOR plus 4.5% per annum, adjustable monthly. The Company paid Fidelity
points of 1% plus normal closing costs. The loan is subject to prepayment
penalties in year one of 4%, decreasing 1% in each subsequent year.
The purchase of the Glendale Building closed on May 18, 1995. The Company
funded the $7.12 million exercise price to purchase the Glendale Building
through a borrowing from Fidelity of $5.34 million with the balance of the funds
coming from internal sources.
The Glendale Building is the headquarters building of Fidelity. Citadel
and Fidelity have entered into a 10 year, full service gross lease for four of
the six floors of the Glendale Building. The rental rate for the first five
years of the lease term is $26,000 per month (including parking) for the ground
floor and approximately $75,000 per month (including parking) for the fourth,
fifth and sixth floors. The lease provides for annual rental increases at a
rate equal to the lower of the increase in the Consumer Price Index or 3%.
After the first five years of the lease term, the rental rate for the ground
floor will be adjusted to the higher of the then current market rate or the
prevailing rental rate in the fifth year of the lease and the rental rate for
the upper floors will be adjusted to the higher of the then current market rate
or $1.50 per square feet increased by the annual rental rate increase applied
during the first five years of the lease as described in the preceding sentence.
Fidelity will have the option to extend the lease of the ground floor for two
consecutive five year terms at a market rental rate and will have the option to
purchase the Glendale Building at the market value at the expiration of the
lease term, provided that the Company then owns the building.
Public Storage occupies 30,879 square feet (two floors) on a lease that
expires in April 1996 with a total rental of $53,900 per month ($1.75/sq. ft.).
Parthenia, Canoga Park
----------------------
During the period, the apartment complex maintained an occupancy in the
high 90%.
Veselich, Los Angeles
---------------------
While the occupancy rate of this property in the last twelve months has
ranged from 80% to 95%, the property has historically experienced considerable
turnover of tenants. This has resulted in high overhead and reduced cash flows.
Management has addressed this issue by carrying out deferred maintenance,
increasing marketing expenditures and improving diligence on prospective
tenants. This has resulted in occupancy of 90% to 95% during the first six
months of 1995. It is expected that the property will be stabilized at near to
full occupancy sometime during 1995, but there can be no assurance on this
point.
14
<PAGE>
FINANCING OF REAL ESTATE INTERESTS
The Company's acquisition of the REO Properties was 100% leveraged: $13.9
million was obtained in the form of conventional mortgage loans by Fidelity
against the Arboleda, Veselich and Western Avenue Properties, while the balance
was obtained through drawdowns ($6.2 million) on an $8.2 million line of credit
(the "Craig Line of Credit") from Craig Corporation ("Craig").
With respect to the Veselich property, Fidelity extended a ten year loan,
amortizing over thirty years, at an adjustable rate of interest tied to the one
year Treasury rate plus approximately 3.7% per annum, with an initial rate of
7.25%. The loan relating to the Western property was assumed and subsequently
paid off by the purchaser when the property was sold in January 1995. The loan
secured by the Arboleda property has a seven year term, amortizing over 25
years, with an adjustable rate of interest tied to the six month LIBOR rate plus
4.5% per annum, with an initial rate of 9.25% per annum. The rate on this loan
for the second quarter was 9.25%. Fidelity did not provide financing with
respect to the Parthenia property.
The remainder of the purchase price of the REO Properties was drawn on the
Craig Line of Credit. The Craig Line was initially committed in the amount of
$8.2 million, of which $6.2 million was immediately drawn down. On November 10,
1994, the Company retired $5.25 million of the Craig Line of Credit by issuance
to Craig of 1,329,114 shares of the Company's 3% Cumulative Voting Convertible
Preferred Stock. The remaining $950,000 of the Craig Line of Credit was retired
in May 1995 and, accordingly, the Company has no further funds available under
the Craig Line of Credit.
On May 1, 1995, the Company obtained a loan of $765,000 on the Parthenia
property. The loan has a term of 30 years, with an adjustable rate of interest
at 2.95% over the 11th District cost of funds.
BUSINESS PLAN, CAPITAL RESOURCES AND LIQUIDITY
In prior periods, the Company relied almost exclusively on cash flow from
the operations of Fidelity and Gateway for its liquidity needs. As a result of
the Restructuring on August 4, 1994, Fidelity and Gateway are no longer
subsidiaries of the Company, and the Company and its wholly owned subsidiary,
CRI, no longer have the benefit of cash flow from these companies to meet the
Company's liquidity needs.
The Company expects that its sources of funds in the near term will include
cash on hand ($16.2 million at June 30, 1995), cash flow from the operations of
its real estate properties, if any, and proceeds from the sale of its
properties.
In the short term, uses of funds are expected to include (i) funding of the
repair of the earthquake damage to the parking structure of the Glendale
Building, (ii) operating expenses, (iii) any amounts that may become payable
under the $4 million Bulk Sale Indemnity, (iv) debt service under the property
mortgages and (v) dividends declared, if any, under the Preferred Stock.
Management believes that the Company's sources of funds will be sufficient to
meet its cash flow requirements for the foreseeable future.
15
<PAGE>
Management is currently evaluating the assets and opportunities available
to the Company with a view to developing a new business plan. Among the
alternatives under consideration are the continuation and expansion of its real
estate operations, the movement into a new line or lines of business, merger or
sale of the entire Company, and liquidation. However, as management believes
that the Company has value as a publicly traded entity with significant assets,
management believes it is unlikely that liquidation will be the selected
business plan. No conclusions have been reached regarding any of the forgoing
alternatives.
The Company has declared and paid dividends amounting to $62,125 on the 3%
Cumulative Voting Convertible Preferred Stock for the period from its issuance
in November 1994 through March 31, 1995 and declared dividends amounting to
$39,375 for the period of April 1, 1995 through June 30, 1995.
16
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1 - LEGAL PROCEEDINGS
--------------------------
The Company, Hecco Ventures I and James J. Cotter are defendants in a civil
action filed in 1990 by Alfred Roven in the United States District Court for the
Central District of California. The complaint alleges fraud by the Company in a
proxy solicitation relating to the Company's 1987 annual meeting of stockholders
and breach of fiduciary duty. The complaint seeks compensatory and punitive
damages in an amount alleged to exceed $40 million. The complaint grew out of
and was originally asserted as a counter claim in an action brought by the
Company against Roven to recover alleged short swing profits. The Company's
motion for dismissal as to certain claims under the Federal Securities Laws was
granted in the spring of 1991 and all federal claims were dismissed. However,
the Court retained jurisdiction over pendent state law claims for breach of
fiduciary duty. Roven was subsequently granted summary judgment on the short
swing profits claim. Roven has now filed a complaint in the California Superior
Court against the Company, Hecco Ventures I and James J. Cotter and, in
addition, S. Craig Tompkins and certain other persons, including the Company's
outside counsel and certain former directors of the Company, for malicious
prosecution in connection with the short swing profits litigation. The Company
believes that it has meritorious defenses to these claims, and has not reserved
any amounts with respect thereto. However, costs of defense could be material,
particularly considering the Company's limited cash flow and operating profits.
Following the Restructuring, Fidelity has significantly reduced staffing as
part of its efforts to reduce costs. Certain terminated employees have
threatened, and in one case filed, claims asserting that Citadel is in some
manner liable for what is asserted to be wrongful termination of these
individuals by Fidelity. In light of the fact that, among other things, these
employees were never employees of Citadel and were terminated only after
Citadel's interest in Fidelity had been reduced to 16% in essentially non-voting
interests in Fidelity, the Company believes it has no liability to these
individuals. However, costs of defense could be material.
In July 1995, Citadel was named as a defendant in a lawsuit alleging
violations of federal securities laws in connection with the offering of common
stock of Citadel's then wholly owned subsidiary, Fidelity Federal Bank, a FSB
("Fidelity"), in 1994 as part of the previously reported Restructuring. The
suit was filed by Harbor Finance Partners in an alleged class action complaint
in the United States District Court - Central District of California on July 28,
1995 and named as defendants Citadel, Fidelity, Richard M. Greenwood (Fidelity's
chief executive officer and Citadel's former chief executive officer), J.P.
Morgan Securities, Inc. and Deloitte & Touche LLP. The suit alleges that false
and misleading information was provided by the defendants in connection with
Fidelity's stock offering and the defendants knew and failed to disclose
negative information concerning Fidelity.
The complaint filed by Harbor Finance Partners raises certain claims
previously made in a wrongful termination and defamation action brought by
William Strocco against Fidelity and Citadel, which was filed in Los Angeles
County Superior Court on March 9, 1995. The plaintiff in that case is the
former
17
<PAGE>
manager of Fidelity's REO Department who alleges that his employment was
terminated in violation of public policy and was a result of breaches of his
implied employment contract and the implied covenant of good faith and fair
dealing. The plaintiff alleges his termination was related to the fact that he
objected to various aspects of Fidelity's Restructuring, including the selling
of REO properties in bulk sales, as not in the interests of Fidelity, and that
he asserted that the same was not fully disclosed to potential investors and to
the Office of Thrift Supervision. The plaintiff in this action also seeks
damages for defamation and interference with contractual relationship.
Both of these complaints seek damages in an unspecified amount. Citadel
believes that these claims against it are without merit and plans to vigorously
contest them.
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
------------------------------------------------------------
The 1995 annual meeting of stockholders (the "1995 Meeting" was held on
July 25, 1995. At the 1995 Meeting the directors were elected to serve on the
Board until the next annual meeting and until their successors are elected.
ITEM 5 - OTHER INFORMATION
--------------------------
Citadel has changed the address of its principal executive offices to 550
S. Hope Street, Suite 1825, Los Angeles, California 90071. The telephone
number at the new offices is (213) 239-0540.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
A. Exhibits
27 Financial Data Schedule
B. Reports on Form 8-K
(i) Current Report on Form 8-K of Citadel filed with the SEC on
April 4, 1995, reporting on Item 5.
(ii) Current Report on Form 8-K of Citadel filed with the SEC on
April 25, 1995, reporting on Item 5.
18
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITADEL HOLDING CORPORATION
---------------------------
By: /s/ Steve Wesson
-------------------------
President and Chief
Executive Officer
August 14, 1995
19
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