<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: September 30, 1998
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)
<TABLE>
<S> <C>
DELAWARE 95-3885184
(State or other jurisdiction of incorporation or (IRS Employer Identification No.)
organization)
550 South Hope Street 90071
Suite 1825 Los Angeles CA (Zip Code)
(Address of principal executive offices)
</TABLE>
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. As of November 12, 1998, there
were 6,669,924 shares of Common Stock, $0.01 par value per share outstanding.
================================================================================
<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 September 30, 1998 (Unaudited)
and December 31, 1997.................................................... 3
Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 1998 and 1997 (Unaudited).................................. 4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 (Unaudited).................................. 5
Notes to Consolidated Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of the Consolidated
Statements of Operations................................................. 14
PART 2. Other Information
- - ------
Item 1. Legal Proceedings........................................................ 18
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>
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
------------------------------------
(IN THOUSANDS OF DOLLARS)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 5,471 $ 4,364
Rental property, less accumulated depreciation 7,701 13,652
Rental property held for sale 5,915 --
Investment in shareholder affiliate 7,000 7,000
Equity investment in Agriculture Partnerships 794 1,129
Note receivable from Agriculture Partnerships 458 831
Capitalized leasing costs, net 1,626 1,384
Other receivables 252 94
Other assets 815 406
-------- --------
Total assets $ 30,032 $ 28,860
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Security deposits payable $ 93 $ 90
Accounts payable and accrued liabilities 1,497 1,009
Deferred rental revenue 267 312
Mortgage notes payable 9,270 9,395
Minority interest 43 --
-------- --------
Total liabilities 11,170 10,806
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Serial preferred stock, par value $.01, 5,000,000
shares authorized, 3% Cumulative Voting
Convertible, none outstanding -- --
Serial preferred stock, par value $.01, 5,000,000
shares authorized, Series B 3% Cumulative Voting
Convertible, none outstanding -- --
Common Stock, par value $.01, 20,000,000 shares
authorized, 6,669,924 issued and outstanding 67 67
Additional paid-in capital 59,603 59,603
Accumulated (deficit) (38,810) (39,618)
Note receivable from stockholder upon common stock
issuance (1,998) (1,998)
-------- --------
Total stockholders' equity 18,862 18,054
-------- --------
Total liabilities and stockholders' equity $ 30,032 $ 28,860
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Rental income $1,369 $1,318 $4,083 $3,712
Farming management fee 4 -- 105 --
Consulting fees from shareholder 100 60 300 180
------ ------ ------ ------
1,473 1,378 4,488 3,892
------ ------ ------ ------
Expenses:
Real estate operating expenses 579 543 1,679 1,527
Depreciation and amortization 130 102 307 301
Interest expense 244 249 739 761
General and administrative expenses 201 284 1,055 821
------ ------ ------ ------
Total expenses 1,154 1,178 3,780 3,410
------ ------ ------ ------
Dividends from investment in Reading 113 114 341 341
Interest income 59 65 166 238
Interest income from shareholder 42 43 129 81
Earnings (loss) from investment in and
advances to Agriculture Partnerships (164) -- (271) --
Minority interest (4) -- (15) --
Gain (loss) on sale of properties -- -- -- (16)
------ ------ ------ ------
Earnings before income taxes 365 422 1,058 1,126
Provision for income taxes (120) (15) (250) (60)
------ ------ ------ ------
Net earnings $ 245 $ 407 $ 808 $1,066
====== ====== ====== ======
Basic earnings per share $0.04 $0.06 $0.12 $0.17
------ ------ ------ ------
Diluted earnings per share $0.04 $0.06 $0.12 $0.17
------ ------ ------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------------------------------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 808 $1,066
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation 307 301
Loss on sale of rental property -- 16
Equity loss from Agriculture Partnerships 325 --
Amortization of deferred leasing costs 193 160
Amortization of deferred loan costs 26 39
Minority interest 15 --
Changes in operating assets and liabilities:
Decrease (increase) in other receivables (158) 218
Decrease (increase) in other assets (314) 112
Increase (decrease) in security deposits 3 15
Increase (decrease) in liabilities and deferred rent 443 (695)
------ ------
Net cash provided by (used in) operating activities 1,648 1,232
INVESTING ACTIVITIES
Purchase of equipment (153) --
Purchase deposit for real estate interest -- (250)
Proceeds from sale of property -- 1,128
Purchase of and additions to real estate (233) (583)
------ ------
Net cash provided by (used in)investing activities (386) 295
FINANCING ACTIVITIES
Payment of loans by Agriculture Partnerships 615 --
Commissions paid on leases (431) --
Short-term loans to Agriculture Partnerships (242) --
Proceeds from minority interest in Big 4 Farming LLC 28 --
Repayments of long-term borrowings (125) (868)
------ ------
Net cash (used in) financing activities (155) (868)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,107 659
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,364 6,356
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $5,471 $7,015
====== ======
</TABLE>
SUPPLEMENTAL DISCLOSURES:
Interest paid during the nine months ended September 30, 1998 and 1997 was
$720,000 and $723,000, respectively. During the nine months ended September 30,
1997, the Company issued 666,000 shares of common stock in exchange for a
secured note receivable amounting to $1,998,000.
See accompanying notes to consolidated financial statements
-5-
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- - ---------------------------------------------------
Basis of Presentation
- - ---------------------
The consolidated financial statements include the accounts of Citadel
Holding Corporation ("Citadel") and its consolidated subsidiaries (collectively,
the "Company"). All significant intercompany balances and transactions have
been eliminated in consolidation.
On December 31, 1997, the Company acquired, through its interest in three
general partnerships (the "Partnerships"), a 40% interest in approximately 1,580
acres of agricultural land and related improvements, located in Kern County,
California, commonly known as the Big 4 Ranch (the "Property"). The other two
partners in the Partnerships are Visalia LLC ("Visalia," a limited liability
company controlled by Mr. James J. Cotter, the Chairman of the Board of the
Company, and owned by Mr. Cotter and certain members of his family), which has a
20% interest and Big 4 Ranch, Inc., a publicly held corporation, which has the
remaining 40% interest. Immediately prior to the Acquisition, the Company
capitalized Big 4 Ranch, Inc. with a cash capital contribution of $1,200,000 and
then distributed 100% of the share of Big 4 Ranch, Inc., to the shareholders of
record of the Company's common stock as of the close of business on December 23,
1997, as a spin-off dividend. The Company accounts for its 40% investment in the
Partnership utilizing the equity method of accounting.
In October 1996, the Company contributed cash in the amount of $7,000,000
to Reading Entertainment, Inc. ("REI" and collectively with its consolidated
affiliates, "Reading") in exchange for 70,000 shares of REI Series A Voting
Cumulative Convertible Preferred Stock (the "REI Preferred Stock") and an option
to transfer all or substantially all (subject to certain limitations) of its
assets to REI for REI Common Stock (the "Asset Put Option"). The Company
accounts for its investment in REI at cost.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments of a recurring nature considered
necessary for a fair presentation of its financial position as of September 30,
1998 and December 31, 1997 and the results of operations and its cash flows for
the periods ended September 30, 1998 and 1997. The results of operations for
the three and nine month periods ended September 30, 1998 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, 1997 and for the year then ended.
-6-
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
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 September 30, 1998 is approximately $4,777,000 which is
being held in institutional money market mutual funds.
Basic Earnings Per Share
- - ------------------------
Basic earnings per share is based on 6,669,924 shares, the weighted average
number of shares outstanding during the three months ended September 30, 1998
and 1997, respectively, and for the nine months ended September 30, 1998 and
1997 is based on 6,669,924 and 6,425,968 shares, respectively. Diluted earnings
per share is based on 6,689,076 and 6,689,456, the weighted average number of
shares of common stock and potential common shares outstanding during the three
and nine months ended September 30, 1998, respectively, and is based on
6,669,924 and 6,425,968 shares for the three and nine months ended September 30,
1997, respectively. Stock options to purchase 53,000 shares of Common Stock
were outstanding during 1998 and 1997 at a weighted average exercise price of
$2.81 per share and a Warrant to purchase 666,000 shares of Common Stock at
$3.00 per share was outstanding until April 1997, at which time the warrant was
exercised. The calculations of the diluted weighted average number of shares
outstanding for the three and nine months ended September 30, 1998 include the
effect of such stock options amounting to 19,152 and 19,532 shares,
respectively. The Warrants and Stock options were anti-dilutive during the 1997
periods.
NOTE 2 - RENTAL PROPERTY AND RENTAL PROPERTY HELD FOR SALE
- - ----------------------------------------------------------
The Company's rental property and rental property held for sale at
September 30, 1998 and December 31, 1997 consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---- ----
(IN THOUSANDS)
-------------------------------------
<S> <C> <C>
Rental Property:
Land $ 2,951 $ 4,439
Building and improvements 5,252 10,096
------- -------
Total 8,203 14,535
Less accumulated depreciation (502) (883)
------- -------
Rental property, net $ 7,701 $13,652
======= =======
PROPERTY HELD FOR SALE:
Land $ 1,488 $ --
Building and improvements 5,077 --
------- -------
Total 6,565 --
Less: Accumulated depreciation (650) --
------- -------
Property held for sale, net $ 5,915 $ --
======= =======
</TABLE>
-7-
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
At December 31, 1997, rental properties consisted of two office buildings
located in Glendale, California and Phoenix, Arizona. During the third quarter
of 1998, the Company commenced efforts to sell the office building located in
Arizona and, accordingly, has classified such property as "Rental property held
for sale" at September 30, 1998. Rental income and real estate operating
expenses from the property held for sale for the Nine Months ended September 30,
1998 amounted to approximately $2,430,000 and $1,168,000, respectively. At
September 30, 1998, capitalized leasing and commission costs related to this
property amounted to approximately $515,000 and such property is encumbered by a
mortgage in the amount of approximately $4,250,000. The Company is currently in
negotiations with interested parties for the sale of that property at a price
significantly in excess of the carrying value of that property. No assurance
can be made that a sale will occur.
In February 1997, the Company leased approximately 87% of the California
rental property to Disney Enterprises ("Disney"). Amongst other lease
provisions, the lease provides that the Company contribute an additional
$1,950,000 towards tenant improvements. As of September 30, 1998, Disney has
not requested that such capital expenditures be made by the Company.
NOTE 3 - INVESTMENT IN SHAREHOLDER AFFILIATE
- - --------------------------------------------
At September 30, 1998 and December 31, 1997, the Company owned 70,000
shares of the Series A Preferred Stock of Reading Entertainment, Inc. ("REI")
and the Asset Put Option described in greater detail below. The REI Preferred
Stock has (i) a liquidation preference of $100 per share or $7,000,000 ("Stated
Value"), (ii) bears a cumulative dividend of 6.5%, payable quarterly, and (iii)
is convertible into shares of REI Common Stock at a conversion price of $11.50
per share. The closing price of REI stock on September 30, 1998 was
approximately $8.375 per share. REI, may at its option, redeem the Series A
Preferred Stock at any time after October 15, 2001, in whole or in part, at a
redemption price equal to a percentage of the Stated Value (initially 108% and
decreasing 2% per annum until the percentage equals 100%). The Company has the
right for a 90-day period beginning October 15, 2001 (provided the Company has
not exercised the Asset Put Option), or in the event of change of control of REI
to require REI to repurchase the REI Series A Preferred Stock for its aggregate
Stated Value plus accumulated dividends. In addition, if REI fails to pay
dividends for four quarters, the Company has the option to require REI to
repurchase such shares at their aggregate liquidation value plus accumulated
dividends.
The Asset Put Option is exercisable any time through a date thirty days
after REI's Form 10-K is filed with respect to its year ended December 31, 1999,
and gives the Company the right to exchange, for shares of REI Common Stock, all
or substantially all of the Company's assets, as defined, together with any debt
encumbering such assets (the "Asset Put"). In exchange for up to $20,000,000 in
aggregate appraised value of the Company's assets on the exercise of the Asset
Put Option, REI is obligated to deliver to the Company that number of shares of
REI Common Stock determined by dividing the value of the Company's assets by
$12.25 per share. If the appraised value of the Company's assets is in excess
of $20,000,000, REI is obligated to pay for the excess by issuing Common Stock
at the then fair market value up to a maximum of $30,000,000 of assets. If the
average trading price of REI Common Stock exceeds 130% of the then applicable
exchange price for more than 60 days, then the exchange price will thereafter be
the fair market of the REI Common Stock from time to time, unless the Company
exercises the Asset Put within 120 days of receipt of notice from REI of the
occurrence of such average trading price over such 60 day period.
-8-
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
The Company accounts for its investment in REI at cost. Included in the
Statements of Operations for both the three months and nine month periods ended
September 30, 1998 and 1997 is "Dividends from investment in Reading" of
approximately $113,000 and $341,000, respectively.
As of September 30, 1998, the Company and Craig Corporation ("Craig"), a
shareholder affiliate of the Company, hold in the aggregate approximately 83% of
the voting power of REI, with Craig's holdings representing approximately 78% of
the voting power of REI and the Company's holdings representing approximately 5%
of such voting power. At September 30, 1998, REI holds 2,113,673 shares or
approximately 32% of the Company's Common Stock and Craig holds 1,096,106 shares
or approximately 16% of the Company's Common Stock.
Summarized financial information of REI and subsidiaries as of September
30, 1998 and December 31, 1997 and for the three and nine months ended September
30, 1998 and 1997 follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS: SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
(IN THOUSANDS)
------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 65,961 $ 92,870
Other current assets 1,995 7,433
Equity investment in Citadel 6,885 4,903
Property and equipment, net 52,997 40,312
Intangible assets 23,799 24,957
Other assets 11,403 7,537
-------- --------
Total assets $163,040 $178,012
======== ========
Current liabilities $ 5,015 $ 13,177
Other liabilities 5,810 5,344
Minority interests 1,969 2,006
Series A Preferred stock held by Citadel 7,000 7,000
Shareholders' equity 143,246 150,485
-------- --------
Total liabilities and equity $163,040 $178,012
======== ========
</TABLE>
-9-
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF OPERATIONS: THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
-------- -------- -------- --------
Revenue: (IN THOUSANDS)
<S> <C> <C> <C> <C>
Theater $ 8,775 $ 7,594 $ 25,867 $ 19,937
Real estate 45 40 257 140
------- ------- -------- --------
Total revenue 8,820 7,634 26,124 20,077
Theater costs (6,704) (5,765) (19,918) (15,533)
Depreciation and amortization (968) (660) (2,710) (1,893)
General and administrative (2,425) (2,428) (6,899) (6,660)
------- ------- -------- --------
(Loss) from operations (1,277) (1,219) (3,403) (4,009)
Interest and dividends 1,096 709 3,578 1,782
Earnings from Stater investment -- 2,086 -- 5,877
Equity in earnings of affiliates (114) 69 (4) 204
Other income, net (108) 611 (556) 851
------- ------- -------- --------
Income (loss) before income taxes (403) 2,256 (385) 4,705
Income taxes (355) (377) (762) (699)
Minority interest (105) (104) (263) (251)
------- ------- -------- --------
Net income (loss) (863) 1,775 (1,410) 3,755
Less preferred stock dividends (1,078) (1,078) (3,233) (3,231)
------- ------- -------- --------
Net income (loss) applicable to
common shareholders $(1,941) $ 697 $ (4,643) $ 524
======= ======= ======== ========
Basic (loss) earnings per share $(0.26) $0.09 $(0.62) $0.07
======= ======= ======== ========
</TABLE>
NOTE 4 - EQUITY INVESTMENT AND NOTE RECEIVABLE FROM AGRICULTURAL PARTNERSHIPS
- - ------------------------------------------------------------------------------
As described in Note 1, the Company acquired in December 1997 a 40% equity
interest in the Agricultural Partnerships. On December 31, 1997, the
Agricultural Partnerships acquired the Big 4 Properties. The assets acquired
included (i) approximately 560 acres of Navel oranges, 205 acres of Valencia
oranges, 145 acres of lemons, 32 acres of mineolas and 600 acres of open land
currently leased on a short term basis to a third party for the cultivation of
annual crops (the "Open Land"), (ii) irrigation systems, (iii) water rights,
(iv) frost prevention systems and (v) the fruit currently on the trees and
slated for harvest in 1998. Since December 31, 1997, the Agricultural
Partnerships have invested approximately $345,000 in capital improvements to the
Big 4 properties including $175,000 for the planting of additional orange trees.
The Big 4 Properties were acquired by the Partnerships (the "Ranch Acquisition")
from Prudential Insurance Company of America ("Prudential") on an arms length
basis for a purchase price of $6,750,000, plus reimbursement of certain cultural
costs approximating $831,000.
The Ranch Acquisition was financed by prorata capital contributions of the
partners (Citadel's 40% portion amounting to approximately $1,080,000), by a
$4,050,000 purchase money loan from Prudential, and by an initial crop finance
loan by Citadel to the Agricultural Partnerships of approximately $831,000. The
loan by Citadel was advanced pursuant to a $1,200,000 Line of Credit Agreement
(the "Line of Credit") extended by the Company to the Agricultural Partnerships.
Drawdowns under the Line of Credit accrue interest at prime plus 100 basis
points, payable quarterly, and were due and payable in August 1998. Included in
the Statement of Operations as "Earnings (loss) from investment in and advance
to Agriculture Partnerships" is interest income earned pursuant to the loan of
$30,000 and
-10-
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
$54,000 for the three and nine months ended September 30, 1998, respectively. At
September 30, 1998 and December 31, 1997, Citadel had advanced approximately
$458,000 and $831,000, respectively, under the Line of Credit. For financial
statement purposes, the note receivable is included in the Balance Sheet as Note
Receivable from Agriculture Partnerships, inclusive of the 40% advanced upon
Citadel's behalf amounting to $183,000 and $332,000 as of September 30, 1998 and
December 31, 1997, respectively. The Line of Credit expired on August 1, 1998 at
which time $458,000 was outstanding. Citadel has entered into an amended Line of
Credit, increasing the available line of credit to $1,850,000, under the same
terms and conditions for an additional twelve month period. The increase in the
line of credit of $650,000 is to principally fund certain capital expenditures
including the planting of additional citrus.
Prior to the spin-off, Big 4 Farming LLC ("Farming", owned 80% by the
Company and 20% by Visalia) entered into a two-year farming services agreement
(the "Farming Contract") with each of the Partnerships, pursuant to which it
provides farm operation services for an initial term of two years. The Visalia
minority interest ownership of Farming is included in the Consolidated Balance
Sheet at September 30, 1998 as "Minority Interest" in the amount of $43,000.
Visalia's portion of Farming's net earnings for the nine months ended September
30, 1998 amounting to $15,000 is included in the Consolidated Statement of
Operations as "Minority Interest."
In consideration of the services provided under the Farming Contract,
Farming is to be paid an amount equal to 100% of its costs plus a profit factor
equal to 5% of the gross agricultural receipts from the Big 4 Properties,
calculated after the costs of picking, packing and hauling. Farming has entered
into a contract with Cecelia Packing Corporation ("Ceceila") for certain
management consulting, purchasing and bookkeeping services for an initial terms
of two years at a fee of $6,000 per month plus reimbursement of certain out-of-
pocket expenses. Cecelia will also pack a portion of the fruit produced by the
Agricultural Partnerships. At September 30, 1998, the net earnings of Farming
were approximately $73,000.
The Prudential Purchase Money Loan in the amount of $4,050,000 is secured
by, among other things, a first priority mortgage lien on the property, has a
ten-year maturity and accrues interest, payable quarterly, at a fixed rate of
7.7%. In order to defer principal payments until January 1, 2002, the
Partnerships must make capital improvements to the real property totaling
$500,000 by December 31, 2000 and an additional $200,000 by December 31, 2001.
If the required capital expenditures are not made, then the Partnerships will be
required to make a mandatory prepayment of principal on January 31, 2001 equal
to difference between $200,000 and the amount of capital improvements made
through December 31, 2000. The purchase money mortgage also imposes a
prepayment penalty equal to the greater of (a) one-half of one percent of each
prepayment of principal and (b) a present value calculation of the anticipated
loss that the note holder will suffer as a result of such prepayment. As of
September 30, 1998, the Agricultural Partnerships had made capital expenditures
of approximately $345,000 consisting primarily of improvements to irrigation
systems and new trees.
Combined summarized financial information of the three Agricultural
Partnerships as of September 30, 1998 and for the three and nine months ended
September 30, 1998 follows:
-11-
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET: SEPTEMBER 30, 1998
------------------
(000'S)
<S> <C>
Inventories $ 943
Property and equipment, net 5,488
Deferred loan costs 93
------
Total assets $6,524
======
Accounts payable $ 5
Due to Big 4 Farming LLC (1) 25
Line of credit to Citadel 458
------
Current liabilities 488
Mortgage note payable 4,050
Partners capital 1,986
------
Total assets and liabilities $6,524
======
</TABLE>
(1) As described above, Farming provides all farming services to the
Agricultural Partnerships pursuant to the Farming Contract. Such services
include the contracting for the picking, packing and hauling of the crops. The
$25,000 reflected as "Due to Big 4 Farming LLC" at September 30, 1998 represents
the amounts due from packing houses on unsettled crop sales to Farming, offset
by expenses paid by Farming on behalf of the Agricultural Partnerships.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
STATEMENT OF OPERATIONS: ENDED ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ ------------------
(000's) (000'S)
<S> <C> <C>
Sales of crops $ 237 $5,124
Costs of sales 395 4,991
----- ------
Gross profit (158) 133
General and administrative expense (1) (76) (306)
Depreciation (111) (351)
Interest expense, including $30,000 and $54,000 paid to
Citadel (90) (288)
----- ------
Net (loss) $(435) $ (812)
===== ======
Equity loss - 40% Citadel $(174) $ (325)
Interest income from partnership loan 10 54
----- ------
Net (loss) from investment in and advances to
Agriculture Partnership $(164) $ (271)
Farm management fee, net of costs and minority interest 6 58
----- ------
Net contribution to Citadel $(158) $ (213)
===== ======
</TABLE>
___________________________
(1) Reflects reimbursement of Partnership fees ($4,000 and $105,000) and
expenses for the three and nine months ended September 30, 1998, respectively,
to the management company, Big 4 Farming LLC, an 80% owned subsidiary of the
Company.
-12-
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
NOTE 5 - TAXES ON INCOME
- - ------------------------
The provision for income taxes for three and nine months ended September
30, 1998 amounted to approximately $120,000 and $250,000, respectively,
representing a provision for estimated federal and state taxes. The provision
for income taxes for the three and nine months ended September 30, 1997 amounted
to $15,000 and $60,000, respectively, representing principally alternative
minimum tax.
NOTE 6 - COMMON STOCK
- - ---------------------
On April 11, 1997, Craig exercised its warrant to purchase 666,000 shares
of the Company's treasury common stock at an exercise price of $3.00 per share
of $1,998,000. Such exercise was consummated pursuant to delivery by Craig of
its secured promissory note (the "Craig Secured Note") in the amount of
$1,998,000, secured by 500,000 shares of REI Common Stock owned by Craig. The
Craig Secured Note in the amount of $1,998,000 is included in the Balance Sheet
as a contra equity account under the caption "Note Receivable from shareholders"
at September 30, 1998 and December 31, 1997. Interest is payable quarterly in
arrears at the prime rate computed on a 360 day-year. Principal and accrued but
unpaid interest is due upon the earlier of April 11, 2002 and 120 days following
the Company's written demand for payment. Interest income from the Craig
secured Note amounted to approximately $42,000 and $129,000 for the three and
nine months ended September 30, 1998 and amounted to $43,000 and $81,000 for
both the three and nine months ended September 30, 1997. The Craig Secured Note
may be prepaid, in whole or in part, at any time by Craig without penalty or
premium.
-13-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following is a comparison of the results of operations for the three
months ended September 30, 1998 ("1998 Quarter") with the three months ended
September 30, 1997 ("1997 Quarter") and a comparison of the result of operations
for the nine months ended September 30, 1998 ("1998 Nine Months") with the nine
months ended September 30, 1997 ("1997 Nine Months"). Due to the nature of the
Company's business activities, revenues and earnings have and will vary
significantly reflecting the results of real estate sales, the acquisition of
the Reading Entertainment, Inc. ("REI") Preferred Stock and the December 1997
acquisition of the Agriculture Partnerships. Accordingly, period to period
comparisons of operating results will not necessarily be indicative of future
financial results.
The Company's net earnings for the 1998 Quarter amounted to $245,000 or
$0.04 per basic share as compared to the net income of $407,000 or $0.06 per
basic share for the 1997 Quarter. Net earnings for the 1998 Nine Months
approximated $808,000 or $0.12 per basic share as compared to $1,066,000 or
$0.17 per basic share for the 1997 Nine Months. The decrease in net earnings in
the 1998 periods as compared to the 1997 periods is generally attributed to
increased rental, consulting and management fee income, offset by equity losses
from the Agricultural Partnerships and increased general and administrative
expenses as described below.
As of September 30, 1998 and 1997, rental properties consisted of two
office buildings located in Glendale, California and Phoenix, Arizona. The
Glendale property is leased to Disney Enterprises, Inc., and Fidelity Federal
Bank, and American Express leases approximately 56% of the Phoenix Building.
During the third quarter of 1998, the Company entered into negotiations to sell
the Arboleda building. While no assurances can be made, the Company hopes to
finalize a sale of the Arboleda building prior to December 31, 1998, for an
amount in excess of the carrying value of such property. Accordingly, rental
income and related operating expenses in future periods will decrease
significantly. Retail income from the Arboleda building amounted to
approximately $1,368,000 and $2,430,000 for the 1998 Quarter and 1998 Nine
Months, respectively and real estate operating expenses for the Arboleda
building amounted to $438,000 and $1,168,000 for the same respective periods.
Rental income amounted to $1,369,000 and $4,083,000 for the 1998 Quarter
and 1998 Nine Months as compared to $1,318,000 and $3,712,000 for the 1997
Quarter and Nine Months, respectively. Real estate operating expenses increased
to $579,000 in the 1998 Quarter as compared to $543,000 in the 1997 Quarter and
increased to $1,679,000 in the 1998 Nine Months as compared to $1,527,000 in the
1997 Nine Months reflecting slightly higher operating costs. The increase in
rental revenue of $51,000 between the 1998 Quarter and 1997 Quarter and the
increase of $371,000 between the 1998 and 1997 Nine Months is generally
attributable to the increased rental rates which commenced in the 1997 period.
The Disney lease commenced in February 1997 and the increase rental from the two
year extension of the American Express lease at increased rates commenced in
March 1997. Accordingly, the 1998 Nine Months includes the impact of such
increased rental rates for the entire period.
Consulting income from shareholder amounted to $100,000 and $300,000 in the
1998 Quarter and 1998 Nine Months as compared to $60,000 and $180,000 in the
1997 Quarter and the 1997 Nine Months, respectively. A substantial portion of
the time of the Company's executive officers is spent providing real estate
consulting services to REI in connection with the development by REI of
multiplex
-14-
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
cinemas for which the Company is paid a fee. The increase in the 1998 periods
reflects the additional costs charged by Citadel for such increased services.
On December 31, 1997, the Company acquired, through its interest in three
general partnerships (the "Agricultural Partnerships"), a 40% interest in
approximately 1,580 acres of agricultural land and related improvements, located
in Kern County, California, commonly known as the Big 4 Ranch (the "Property").
The other two partners in the Partnerships are Visalia LLC (a limited liability
company controlled by Mr. James J. Cotter, the Chairman of the Board of the
Company, and owned by Mr. Cotter and certain members of his family), which has a
20% interest, and Big 4 Ranch, Inc., a publicly held corporation, which has the
remaining 40% interest. The Company accounts for its 40% investment in the
Agricultural Partnerships utilizing the equity method of accounting. As the
acquisition did not occur until December 31, 1997, there was no impact in the
results of operations for the three months and nine months ended September 30,
1997.
The assets acquired included (i) approximately 560 acres of Navel oranges,
205 acres of Valencia oranges, 145 acres of lemons, 32 acres of mineolas and 600
acres of open land currently leased on a short term basis to a third party for
the cultivation of annual crops (the "Open Land"), (ii) irrigation systems,
(iii) water rights, (iv) frost prevention systems and (v) the fruit currently on
the trees and slated for harvest in 1998. The Big 4 Properties were acquired by
the Partnerships (the "Ranch Acquisition") from Prudential Insurance Company of
America ("Prudential") on an arms length basis for a purchase price of
$6,750,000, plus reimbursement of certain cultural costs approximating $831,000.
The Ranch Acquisition was financed by prorata capital contributions of the
partners (Citadel's 40% portion amounting to approximately $1,080,000), by a
$4,050,000 purchase money loan from Prudential, and by an initial crop finance
loan by Citadel to the Agricultural Partnerships of approximately $831,000. The
loan by Citadel was advanced pursuant to a $1,200,000 Line of Credit Agreement
(the "Line of Credit") extended by the Company to the Agricultural Partnerships.
Drawdowns under the Line of Credit accrue interest at prime plus 100 basis
points, payable quarterly, and were due and payable on August 1, 1998. The
Company has amended this loan with the Partnerships increasing the line of
credit to $1,850,000 under the same terms and conditions for an additional
twelve month period. The increase in the line of credit of $650,000 is to
principally fund certain capital expenditures including the planting of
additional citrus. At September 30, 1998 and December 31, 1997, Citadel had
advanced approximately $458,000 and $831,000, respectively, under the Line of
Credit. Since December 31, 1997 through September 30, 1998, the Agricultural
Partnerships have invested approximately $345,000 in capital improvements to the
Big 4 properties including $175,000 for the planting of additional orange trees.
For financial statement purposes, the note receivable is included in the Balance
Sheet as Note Receivable from Agriculture Partnerships, inclusive of the 40% or
$183,000 and $332,000 as of September 30, 1998 and December 31, 1997,
respectively, advanced upon Citadel's behalf.
The operations of the Agriculture Partnerships are impacted by the general
seasonal trends that are characteristic of the citrus industries. The
Agriculture Partnerships recognizes a majority of their crop sales during the
second calendar quarter following the harvest and sale of these citrus crops.
Due to this concentrated activity, the Agriculture Partnership expects net
losses in the first, third and fourth calendar quarters. Included in the
Statement of Operations as "Earnings (loss) from investment in and advances to
Agriculture Partnerships" is a loss of $271,000 representing the Company's 40%
equity share of the Agriculture Partnerships operating results for the nine
months ended September 30, 1998, net of $54,000 of interest income received
pursuant to loans made to the Agriculture Partnerships. The Agriculture
Partnerships reported a net loss for the three and nine months ended September
30, 1998 of $435,000 and $812,000, respectively, the Company's share for these
respective periods amounting to
-15-
<PAGE>
losses of approximately $174,000 and $325,000.
The Company provides farm operation services to the Agricultural
Partnerships for which Big 4 Farming LLC (80% owned by the Company) is paid an
amount equal to 5% of the agricultural receipts calculated after the costs of
picking, packing and hauling. Such farming management fees amounted to
approximately $4,000 and $105,000 for the three and nine months ended September
30, 1998.
Interest income (reflected in the Statement of Operations as "Interest
income" and "Interest income from shareholders") was comparable between the 1998
and 1997 periods and amounted to $101,000 in the 1998 Quarter and $108,000 in
the 1997 Quarter and amounted to $295,000 in the 1998 Nine Months and $319,000
in the 1997 Nine Months. Included in the Statements of Operations in each of
the 1998 and 1997 Quarters and each of the 1998 and 1997 Nine Months is dividend
income amounting to approximately $115,000 and $341,000, respectively, from the
Company's investment in REI Preferred Stock. The REI Series A Preferred Stock
is convertible at any time into shares of REI Common Stock at a conversion price
of $11.50 per share. The closing market price of REI Common Stock at September
30, 1998 was $8.375 per share. REI reported net loss applicable to common
shareholders of approximately $1,941,000 and $4,643,000 for the 1998 Quarter
and 1998 Nine Months as compared to a net income applicable to common
shareholders of approximately $697,000 and $524,000 in the 1997 Quarter and the
1997 Nine Months, respectively.
General and administrative expenses decreased in the 1998 Quarter and
amounted to $201,000 as compared to $284,000 in the 1997 Quarter. General and
administrative expenses amounted to $1,055,000 in the 1998 Nine Months as
compared to $821,000 in the 1997 Nine Months. The increase in general and
administrative expenses in the 1998 Nine Months as compared to the 1997 Nine
Months is primarily a result of second quarter bonuses paid to the Chairman and
Vice Chairman amounting to $250,000 and an increase in overhead costs associated
with providing farm management services to the Agricultural Partnerships, offset
by a reduction in legal expenses.
Interest expense remained constant in the 1998 periods as compared to the
1997 periods amounting to $244,000 in the 1998 Quarter and $249,000 in the 1997
Quarter and amounting to $739,000 in the 1998 Nine Months as compared to
$761,000 in the 1997 Nine Months, respectively. Two mortgage loans were
outstanding for both the 1998 and 1997 periods. The terms of the mortgage loans
provide for an adjustable rate of interest, which rate amounted to 10.125% at
September 30, 1998.
The provision for income taxes for three and nine months ended September
30, 1998 amounted to approximately $120,000 and $250,000, respectively,
representing a provision for estimated federal and state taxes. The provision
for income taxes for the three and nine months ended September 30, 1997 amounted
to $15,000 and $60,000, respectively, representing principally alternative
minimum tax.
BUSINESS PLAN, CAPITAL RESOURCES AND LIQUIDITY
Cash and cash equivalents increased approximately $1,107,000 from
$4,364,000 at December 31, 1997 to $5,471,000 at September 30, 1998. Net cash
used in investing activities amounted to $386,000 in the 1998 Nine Months and
includes leasehold improvements made to rental properties amounting to $233,000
and the purchase of farm equipment of $153,000 by Big 4 Farming, LLC, which was
purchased in order to provide services to the Agriculture Partnerships pursuant
to the Farming Contract described in Footnote 4 to the financial statements
included elsewhere herein. Net cash used in financing activities amounted to
$155,000 in the 1998 Nine Months and resulted from (i) additional borrowings by
the Agriculture Partnerships of approximately $242,000, offset by $615,000 of
-16-
<PAGE>
agricultural loan repayments, (ii) the amortization of long-term mortgage loans
of $125,000 and (iii) commissions amounting to approximately $431,000 paid at
the time of the extension of the American Express lease described above.
Cash and cash equivalents increased in the 1997 Nine Months by
approximately $659,000 to $7,015,000 at September 30, 1997. Net cash provided
by investing activities amounted to $295,000 in the 1997 Nine Months and was
comprised of approximately $1,128,000 provided from the sale of a rental
property, offset by $583,000 used to make leasehold improvements to real estate
properties and payment of $250,000 for a deposit with respect to the acquisition
of the Agricultural Partnerships. Net cash used in financing activities
amounted to $868,000 in the 1997 Nine Months and resulted from the repayment of
long-term mortgage loans, inclusive of the mortgage on the property sold in
January 1997.
The Company expects that its sources of funds in the near term will include
(i) cash on hand and related interest income, (ii) cash proceeds from the sale
of the Arboleda building net of the mortgage repayment and estimated federal and
state taxes, (iii) cash flow from the operations of its remaining real estate
properties, (iv) consulting fee income from REI, and (v) a preferred stock
dividend, payable quarterly, from REI amounting to approximately $455,000,
annually, and (vi) possible refinancing proceeds. The Company does not expect
to have cash flow from its investment in the Agriculture Partnerships in the
near future.
In the short term, uses of funds are expected to include (i) funding of the
Glendale Building leasehold and tenant improvements of approximately $1,950,000,
(ii) operating expenses, and (iii) debt service pursuant to the property
mortgages. As part of the Big 4 Ranch, Inc., spin off, the Company agreed to
provide a $200,000 line of credit to that company. To date, no loans have been
requested with respect to this commitment. In addition, the Company has
provided a line of credit to the Agriculture Partnerships of $1,850,000. As of
September 30, 1998, $458,000 was outstanding under the line of credit. The
Company expects over the terms of the facility to receive additional requests
for borrowings of up to the total $1,850,000 credit line.
Management believes that the Company's sources of funds will be sufficient
to meet its cash flow requirements for the foreseeable future. The October 1996
acquisition of the REI Series A Preferred Stock and the Asset Put Option,
provided the Company with the opportunity to make an initial investment in the
Beyond-the-Home segment of the entertainment industry, and the ability
thereafter, to review the implementation by REI of its business plan and, if it
approves of the progress made by REI, to make a further investment in this
industry through the exercise of its Asset Put Option to exchange all or
substantially all of its assets for REI Series A Common Stock. The Company has
the right to require REI to redeem the REI Preferred Stock after October 15,
2001 or sooner if REI fails to pay dividends on such securities for four
quarters.
-17-
<PAGE>
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, 1997.
ITEM 2 - CHANGE IN SECURITIES
- - -----------------------------
Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- - ----------------------------------------
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
- - --------------------------------------------------------------
Not applicable.
ITEM 5 - OTHER INFORMATION
- - --------------------------
Not applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- - -----------------------------------------
A. Exhibits
27. Financial Data Schedule.
B. Reports on Form 8-K
None.
-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
-------------------------------------
Steve Wesson
President and Chief Executive Officer
November 13, 1998
/s/ S. Craig Tompkins
-------------------------------------
S. Craig Tompkins
Principal Accounting Officer
November 13, 1998
-19-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,471
<SECURITIES> 0
<RECEIVABLES> 252
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,723
<PP&E> 14,768
<DEPRECIATION> (1,152)
<TOTAL-ASSETS> 30,032
<CURRENT-LIABILITIES> 1,900
<BONDS> 9,270
0
0
<COMMON> 67
<OTHER-SE> 18,795
<TOTAL-LIABILITY-AND-EQUITY> 30,032
<SALES> 4,083
<TOTAL-REVENUES> 4,488
<CGS> (1,679)
<TOTAL-COSTS> (3,041)
<OTHER-EXPENSES> 350
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (739)
<INCOME-PRETAX> 1,058
<INCOME-TAX> (250)
<INCOME-CONTINUING> 808
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 808
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
