<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1999
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)
</TABLE>
550 South Hope Street 90071
Suite 1825 Los Angeles CA (Zip Code)
(Address of principal executive offices)
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 May 14, 1999, 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 March 31, 1999 (Unaudited)
and December 31, 1998........................................... 3
Consolidated Statements of Operations for the Three Months Ended
March 31, 1999 and 1998 (Unaudited)............................. 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998 (Unaudited)............................. 5
Notes to Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 14
PART 2. Other Information
- ------
Item 1. Legal Proceedings............................................... 17
Item 2. Changes in Securities........................................... 17
Item 3. Defaults Upon Senior Securities................................. 17
Item 4. Submission of Matters to a Vote of Security Holders............. 17
Item 5. Other Information............................................... 17
Item 6. Exhibits and Reports on Form 8-K................................ 17
Signatures................................................................ 18
</TABLE>
<PAGE>
Citadel Holding Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
---------------------------------------------------
(In thousands of dollars)
<S> <C> <C>
Assets
Cash and cash equivalents $ 4,031 $ 4,367
Property held for sale 5,900 5,908
Rental Properties, less accumulated depreciation 7,940 7,969
Investment in shareholder affiliate 7,000 7,000
Equity investment in and advances to Agricultural Partnerships 1,789 1,561
Investment in Gish Biomedical, Inc. 1,165 1,002
Capitalized leasing costs, net 1,527 1,592
Other receivables 639 577
Other assets 790 671
Deferred tax asset, net 4,398 4,398
-------- --------
Total assets $ 35,179 $ 35,045
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Security deposits payable $ 95 $ 98
Accounts payable and accrued liabilities 1,459 1,362
Deferred rental revenue 195 576
Mortgage notes payable 9,175 9,224
Minority interest in consolidated affiliate 44 44
-------- --------
Total liabilities 10,968 11,304
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) (33,461) (33,931)
Note receivable from stockholder upon common stock
issuance (1,998) (1,998)
-------- --------
Total stockholders' equity 24,211 23,741
-------- --------
Total liabilities and stockholders' equity $ 35,179 $ 35,045
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
-----------------------------------
(In thousands of dollars,
except per share amounts)
<S> <C> <C>
Revenues:
Rental income $1,415 $1,366
Farming management fee 1 4
Consulting fees from shareholder 78 100
------ ------
1,494 1,470
------ ------
Expenses:
Real estate operating expenses 508 519
Depreciation and amortization 109 86
Interest expense 232 249
General and administrative expenses 250 285
------ ------
1,099 1,139
------ ------
Dividends from investment in Reading 114 114
Interest income 44 52
Interest income from shareholder 39 43
Loss from investment in and advances to Agricultural
Partnerships (100) (95)
------ ------
Earnings before minority interest and taxes 492 445
Minority interest -- 6
------ ------
Earnings before income taxes 492 451
Provision for income taxes (22) (80)
------ ------
Net earnings $ 470 $ 371
====== ======
Basic earnings per share $0.07 $0.06
------ ------
Diluted earnings per share $0.07 $0.06
------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------------------------------
(In thousands of dollars)
<S> <C> <C>
Operating Activities
Net earnings $ 470 $ 371
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 109 86
Equity loss from Agriculture Partnerships 113 115
Amortization of deferred leasing costs 65 63
Amortization of deferred loan costs 9 9
Minority interest -- (6)
Changes in operating assets and liabilities:
Decrease (increase) in other receivables (62) (58)
Decrease (increase) in other assets (153) (156)
Increase (decrease) in security deposits (3) 7
Increase (decrease) in liabilities and deferred rent (284) 201
------ ------
Net cash provided by operating activities 264 632
Investing activities
Purchase of Gish securities (163) --
Purchase of and additions to real estate (60) (59)
------ ------
Net cash used in investing activities (223) (59)
Financing activities
Advances to Agriculture Partnerships (328) (242)
Capital contribution by Visalia of Big 4 Farming LLC -- 28
Repayments of long-term borrowings (49) (40)
------ ------
Net cash used in financing activities (377) (254)
Increase (decrease) in cash and cash equivalents (336) 319
Cash and cash equivalents at beginning of period 4,367 4,364
------ ------
Cash and cash equivalents at end of period $4,031 $4,683
====== ======
</TABLE>
Supplemental Disclosures: Interest paid during the three months ended March 31,
1999 and 1998 was $225,000 and $241,000, respectively.
See accompanying notes to consolidated financial statements
-5-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1999
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.
During the three months ended March 31, 1999 the Company increased its
common stock ownership in Gish Biomedical, Inc. ("Gish") to 459,560 shares
(13.3%) from 398,850 shares (11.6%) as December 31, 1998 for a purchase price of
approximately $163,000. At March 31, 1999, the closing price of Gish common
stock was $2.6875, which approximated cost. Subsequent to March 31, 1999, the
Company purchased an additional 23,100 shares for approximately $65,000.
The Company owns, 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 ("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. The Company accounts for its 40% investment in the Partnership
utilizing the equity method of accounting (Note 4).
In October 1996, the Company contributed cash in the amount of $7 million
to Reading Entertainment, Inc. ("REI" and collectively with its consolidated
affiliates, "Reading") in exchange for 70,000 shares of Reading 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 Reading for Reading Common Stock (the "Asset Put Option"). The Company
accounts for its investment in Reading at cost (Note 3).
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 March 31, 1999
and December 31, 1998, the results of operations and its cash flows for the
three months ended March 31, 1999 and 1998. The results of operations for the
three month period ended March 31, 1999 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
-6-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 1999
Management's Discussion and Analysis of Financial Condition and Results of
Operations as of December 31, 1998 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 March 31, 1999 is approximately $2,581,000 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 March 31, 1999 and
1998. Diluted earnings per share is based on 6,681,554 and 6,686,951, the
weighted average number of shares of common stock and potential common shares
outstanding during the three months ended March 31, 1999 and 1998, respectively.
Stock options to purchase 53,000 shares of Common Stock were outstanding during
the 1999 and 1998 periods at a weighted average exercise price of $2.81 per
share. The 1999 and 1998 calculations of the diluted weighted average number of
shares outstanding include the effect of such stock options amounting to 11,630
and 17,027 shares, respectively.
Note 2 - Rental Property and Properties Held for Sale
- -------------------------------------------------------
The Company's rental property and property held for sale at March 31, 1999
and December 31, 1998 consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
--------- -----------
1999 1998
---- ----
(In thousands)
------------------------------
<S> <C> <C>
Rental Property:
Land $2,951 $2,951
Building and improvements 5,582 5,564
------ ------
Total 8,533 8,515
Less accumulated depreciation (593) (546)
------ ------
Rental property, net $7,940 $7,969
====== ======
Property held for sale:
Commercial land and building $6,650 $6,608
Accumulated depreciation (750) (700)
------ ------
Net $5,900 $5,908
====== ======
</TABLE>
At March 31, 1999 and December 31, 1998 rental properties consisted of
two office buildings located in Glendale, California and Phoenix, Arizona.
During the fourth quarter of 1998, the Company entered into negotiations for the
sale of the Phoenix, Arizona building and, accordingly reclassified such
property as "Property held for sale". In addition, the Company has capitalized
certain lease costs associated with the Phoenix, Arizona building which are
included in the balance sheet as "Capitalized leasing costs, net" at March 31,
1999 in the amount of approximately $483,000. On March 4, 1999, the Company
entered into a Purchase and Sale
-7-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 1999
Agreement to sell the Phoenix, Arizona property. The Buyer agreed to purchase
the property for approximately $20 million. In April 1999, the Company amended
the Purchase and Sale Agreement to provide the Buyer an extension of the closing
date from May 5, 1999 to June 5, 1999. The Company received a nonrefundable
deposit to be applied against the purchase price of $750,000 for such extension.
As of March 31, 1999, this property was encumbered by a mortgage in the amount
of approximately $4,214,000. The $20 million sales price does not include
expected closing adjustments including property costs settled in escrow,
commissions and mortgage termination fees. In addition, the Company has
recognized for financial statement purposes a deferred income tax asset at March
31, 1998 amounting to approximately $4,398,000 which is comprised of tax
carryforward assets which are expected to be realized at the time of sale.
Accordingly, when such sale is recorded for financial statement purposes, an
income tax provision will be recorded against the deferred income tax asset at
an effective tax rate of approximately 40% on the anticipated gain from the sale
of the Phoenix, Arizona property.
Note 3 - Investment in Shareholder Affiliate
- --------------------------------------------
At March 31, 1999 and December 31, 1998, the Company owned 70,000 shares of
REI Preferred Stock and the Asset Put Option. The REI Preferred Stock has (i) a
liquidation preference of $100 per share or $7 million ("Stated Value"), (ii)
bears a cumulative dividend of 6.5%, payable quarterly, and (iii) is convertible
any time after April 1998 into shares of REI Common Stock at a conversion price
of $11.50 per share. The closing price of REI stock on March 31, 1999 was
approximately $7.875 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 their
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 Reading'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 Reading 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 million in aggregate appraised value of the Company's assets on the exercise
of the Asset Put Option, Reading is obligated to deliver to the Company that
number of shares of Reading 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 million, Reading is obligated to pay for the excess
by issuing Common Stock at the then fair market value up to a maximum of $30
million of assets. If the average trading price of Reading 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 Reading Common Stock
from time to time, unless the Company exercises the Asset Put within 120 days of
receipt of notice from Reading of the occurrence of such average trading price
over such 60 day period.
The Company accounts for its investment in REI at cost. Included in the
Statements of Operations for the three months ended March 31, 1999 and 1998 is
"Dividends from Investment in Reading" of approximately $114,000 earned pursuant
to the terms of the REI Series A Preferred Stock.
-8-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 1999
As of April 13, 1998, the Company and Craig Corporation ("Craig"), a
shareholder affiliate of the Company, hold in the aggregate approximately 83% of
the voting power of Reading, with Craig's holdings representing approximately
78% of the voting power of Reading and the Company's holdings representing
approximately 5% of such voting power. At April 14, 1999, Reading holds
2,113,673 shares or approximately 32% of the Company's outstanding 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 March 31,
1999 and December 31, 1998 and for the three months ended March 31, 1999 and
1998 follows:
Condensed Balance Sheets:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(In thousands)
-------------
<S> <C> <C>
Cash and cash equivalents $ 51,526 $ 58,593
Other current assets 2,702 2,247
Equity investment in Citadel 8,247 8,158
Property held for development 36,448 32,949
Property and equipment, net 38,635 32,534
Intangible assets 23,808 23,408
Other assets 14,012 14,398
-------- --------
Total assets $175,378 $172,287
======== ========
Current liabilities $ 17,661 $ 15,462
Other liabilities 6,946 5,526
Minority interests 1,887 1,927
Series A Preferred stock held by Citadel 7,000 7,000
Shareholders' equity 141,884 142,372
-------- --------
Total liabilities and equity $175,378 $172,287
======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
Condensed Statement of Operations: 1999 1998
---- ----
(In Thousands)
--------------
<S> <C> <C>
Revenue $ 7,518 $ 8,745
Theater costs (6,170) (6,664)
Depreciation and amortization (986) (848)
General and administrative (2,362) (2,117)
-------- --------
Loss from operations (2,000) (884)
Interest and dividends 738 1,328
Equity in earnings of affiliates 90 118
Other income (expense) 2 (632)
-------- --------
Loss before income taxes (1,170) (70)
Income taxes (222) (193)
Minority interest (65) (94)
-------- --------
Net loss (1,457) (357)
Less preferred stock dividends (1,083) (1,079)
-------- --------
Net loss applicable to common shareholders $ (2,540) $ (1,436)
======== ========
Basic and diluted losses per share $(0.34) $(0.19)
======== ========
</TABLE>
-9-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 1999
Note 4 - Equity investment and Note Receivable from Agricultural Partnerships
- ------------------------------------------------------------------------------
At March 31, 1999 and December 31, 1998, "Investments in and advances to
Agricultural Partnerships" consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Equity investment in Agricultural Partnerships $ (41) $ 59
Note receivable and advances to Agricultural Partnerships 1,830 1,502
------ ------
$1,789 $1,561
====== ======
</TABLE>
As described in Note 1, the Company has a 40% interest in the Agricultural
Partnerships. In addition, the Company provided a Crop Financing Line of Credit
to the Agricultural Partnerships. Drawdowns under the Line of Credit accrued
interest at prime plus 100 basis points, payable quarterly, and was due and
payable in August 1998. Upon its expiration, Citadel 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. In December
1998, the Agricultural Partnerships suffered a devastating freeze which resulted
in a loss of substantially all of its 1998-1999 crop. As a consequence of the
freeze, the Agricultural Partnerships have no funds with which to repay the
drawdowns on the Line of Credit. Big 4 Ranch, Inc. the other 40% owner likewise
has no funds with which to make further capital contributions. Furthermore, the
Agricultural Partnerships generally have no source of funding, other than the
Company, for the cultural expenses needed for production of the 1999-2000 crop,
as well as, funding of a crop planting program on the undeveloped acreage. In
addition, to the $1,850,000 line of credit, it is estimated that the
Agricultural Partnerships will need additional cash in the amount of $1,500,000
in order to cover cultural costs and approximately $125,000 in order to complete
the planting program through the end of the year. The Company has continued to
fund the Agricultural Partnerships operating and crop costs. No revenue is
expected to be realized by the Agricultural Partnerships until the 1999 2000
crop is harvested and sold. In addition to the current funding the Company is
considering making available long-term financing to the Agricultural
Partnerships to fund its future operating needs and future crop development
activities. The Agricultural Partnerships are also pursuing claims under
various disaster relief programs, however, no assurances can be given that such
funding will be forthcoming.
In December 1997, 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
March 31, 1999 and December 31, 1998 as "Minority interest" in the amount of
$44,000. Visalia's portion of Farming's net earnings for the three months ended
March 31, 1999 and 1998 amounted to $0 and $6,000 and is included in the
Consolidated Statement of Operations as "Minority interest".
In consideration of the services provided under the Farming Contract, Farming is
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. Due to the freeze no revenues are
expected in the 1999 fiscal year. In addition, Farming entered into a contract
with Cecelia Packing Corporation ("Cecelia" owned by James J. Cotter) for
certain management consulting, purchasing and
-10-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 1999
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 also packs a
portion of the fruit produced by the Agricultural Partnerships. During the three
months ended March 31, 1999 and 1998, Cecilia received a fee of $18,000.
Summarized financial information of the Agricultural Partnerships as of March
31, 1999 and December 31, 1998 and the results of operation for the three months
ended March 31, 1999 and 1998 follows:
Condensed Balance Sheet:
d<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(000's)
<S> <C> <C>
Current Assets $ 147 $ --
Property and equipment, net 5,548 5,645
Deferred loan costs 80 84
------- -------
Total assets $ 5,775 $ 5,729
======= =======
Accounts payable $ 30 $ 30
Due to Big 4 Farming LLC (1) 124 297
Line of credit with Citadel 1,706 1,206
------- -------
Current liabilities 1,860 1,533
Mortgage note payable 4,050 4,050
Partners capital (135) 146
------- -------
Total liabilities and partners capital $ 5,775 $ 5,729
======= =======
</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 $124,000 reflected as `Due to Big 4 Farming LLC" at March 31, 1999
represents expenses paid by Farming on behalf of the Agricultural
Partnerships not yet drawn down on the line of credit.
The Prudential Purchase Money Loan in the amount of $4.05 million 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 Agricultural
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 Agricultural
Partnerships will be required to make a mandatory prepayment of principal on
January 31, 2001 equal to difference between $500,000 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 March 31, 1999 the Agricultural Partnerships had made capital
expenditures of approximately $649,000 consisting primarily of new tree
plantings and improvements to irrigation systems.
-11-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
Statement of Operations:
-----------------------------
(000's)
1999 1998
---- ----
<S> <C> <C>
Sales of crops $ 43 $ 250
Costs of sales (17) (239)
----- -----
Gross profit 26 11
General and administrative expense (1) (72) (64)
Depreciation (126) (135)
Interest expense (110) (100)
----- -----
Net (loss) $(282) $(288)
===== =====
Equity loss - 40% Citadel $(113) $(115)
Interest income from partnership loan (2) 13 20
----- -----
Net (loss) from investment in and advances to
Agriculture Partnership $(100) $ (95)
===== =====
</TABLE>
___________________________
(1) Reflects reimbursement of expenses and fees to Big 4 Farming LLC, an
80% owned subsidiary.
(2) Interest income earned amounted to approximately $32,000. Until such
time as the other partners contribute capital or the partnership has
positive capital accounts, the Company is not recording interest
income with respect to the other partners 60% ownership interest, for
financial statement purposes.
Note 5 - Taxes on Income
- ------------------------
The provision for income taxes for the three months ended March 31, 1999
and 1998 amounted to approximately $22,000 and $80,000, respectively,
representing a provision for estimated federal alternative minimum tax and state
taxes.
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 March 31, 1999 and December 31, 1998. 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 $38,000 and $43,000 for the three months ended
March 31, 1999 and 1998. The Craig Secured Note may be prepaid, in whole or in
part, at any time by Craig without penalty or premium.
-12-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
March 31, 1999
Note 7 - Business Segments
- --------------------------
The following sets forth certain information concerning the Company's rental
real estate operations, agricultural operations and corporate activities for the
three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
Rental Agricultural
Real Estate Operations Corporate (1) Consolidated
----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
1999:
Revenues $ 1,415 $ 1 $ 78 $ 1,494
Earnings (losses) before taxes 594 (100) (2) 492
Identifiable assets 18,847 2,252 14,080 35,179
Capital expenditures 60 -- -- 60
1998:
Revenues $ 1,366 4 $ 100 $ 1,470
Earnings (losses) before taxes 551 (91) (9) 451
</TABLE>
(1) Includes consulting fee income from Reading and interest and dividend
income earned with respect to the Company's cash balances and investment in
Reading Preferred Stock. Identifiable assets includes the Company's
investment in Reading, Gish and cash and cash equivalents.
-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 March 31, 1999, ("1999 Quarter") with the three months ended March
31, 1998 ("1998 Quarter"). 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, and the operating results of the Agricultural
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 three months ended March 31, 1999
amounted to $470,000 or $0.07 per basic share as compared to the net earnings of
$371,000 or $0.06 per basic share for the three month period ended March 31,
1998.
Rental income amounted to $1,415,000 for the 1999 Quarter as compared to
$1,366,000 for the 1998 Quarter. Real estate operating expenses decreased to
$508,000 in the 1999 Quarter as compared to $519,000 in the 1998 Quarter
reflecting slightly lower operating costs. As of March 31, 1999 and 1998,
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. On March 4, 1999, the Company entered
into a Purchase and Sale Agreement to sell the Phoenix, Arizona property
included in "Property held for sale". Rental income and real estate operating
expenses for the three months ended March 31, 1999 with respect to the Phoenix,
Arizona property totaled approximately $864,000 and $346,000, respectively. The
Buyer agreed to purchase the property for approximately $20 million with an
outside closing date of May 5, 1999. In April 1999, the Purchase and Sale
Agreement was amended providing an extension to the closing date of June 5, 1999
and a release to the Company of a $750,000 non-refundable deposit which will be
applied to the sales price. As of March 31, 1999, this property was encumbered
by a mortgage in the amount of approximately $4,214,000. The $20 million sales
price does not include expected closing adjustments including property costs
settled in escrow, commissions and mortgage payoff fees. In addition, the
Company has recognized for financial statement purposes a deferred income tax
asset at March 31, 1999 amounting to approximately $4,398,000 which is
comprised of tax carryforward assets which are expected to be realized at the
time of sale. Accordingly, when such sale is recorded for financial statement
purposes, an income tax provision will be recorded against this deferred tax
benefit at an effective tax rate of approximately 40% on the anticipated gain
from the sale of the Phoenix, Arizona property.
Consulting income from shareholder amounted to $78,000 in the 1999 Quarter
as compared to $100,000 in the 1998 Quarter. The Company provides a substantial
portion of its executives time providing real estate consulting services to
Reading in connection with the development by Reading of multiplex cinemas in
Puerto Rico, Australia and the United States. The decrease in the 1999 Quarter
reflects a reduction in services provided by Citadel to Reading as compared to
the 1998 quarter.
Included in the Statement of Operations as "Earnings (loss) from investment
in and advances to Agricultural Partnerships" is a loss in the 1999 Quarter and
1998 Quarter of $100,000 and $95,000, respectively, representing the Company's
40% equity share of the Agriculture Partnerships operating results. At March 31,
1999 and December 31, 1998, Citadel and its subsidiaries had advanced
-14-
<PAGE>
approximately $1,830,000 and $1,502,000, respectively, under the Line of Credit.
As described below, the Agricultural Partnerships suffered a significant loss in
Fiscal 1998 resulting in the Agricultural Partnerships having deficit partners
capital of approximately $135,000 at March 31, 1999. The Company does not expect
to begin to recover its advances and interest income to the Agricultural
Partnerships until the 1999 crop harvest in 2000. In addition, to the continuing
operating losses expected to be reported, Big 4 Ranch, Inc. does not currently
have resources to make additional capital contributions. Accordingly, until such
time as the Agricultural Partnerships have operating earnings and positive
partners capital, the Company is not recording the other partner's 60% portion
of interest income (earned at prime plus 100 basis points) for the financial
statement purposes. Interest earned but not reported for the three months ended
March 31, 1999 amounted to approximately $20,000.
In December 1998, the Agricultural Partnerships suffered from a devastating
freeze which resulted in a loss of substantially all of its 1998-1999 crop. As
a consequence of the freeze, the Agricultural Partnerships have no funds with
which to repay the drawdowns on the Line of Credit. Big 4 Ranch, Inc. currently
has no funds with which to make further capital contributions. Furthermore, the
Agricultural Partnerships generally have no source of funding, other than the
Company, for the cultural expenses needed for production of the 1999-2000 crop,
as well as, funding of a crop planting program on the undeveloped acreage. In
addition, to the $1,850,000 line of credit, it is estimated that the
Agricultural Partnerships will need additional cash in the amount of $1,500,000
in order to cover cultural, administrative and interest costs and approximately
$125,000 in order to complete the planting program through the end of the year.
Subsequent to year end, the Company has continued to fund the Agricultural
Partnerships operating and crop costs. No revenue is expected to be realized by
the Agricultural Partnerships until the 1999 - 2000 crop is harvested and sold.
In addition to the current funding the Company is considering making available
long-term financing to the Agricultural Partnerships to fund its future
operating needs and future crop development activities.
Interest income (reflected in the Statement of Operations as "Interest
income" and "Interest income from shareholders") decreased between the 1999 and
1998 Quarters and amounted to $83,000 in the 1998 Quarter and $95,000 in the
1998 Quarter. Included in the Statements of Operations for the 1999 and 1998
Quarter is approximately $114,000 of dividend income earned with respect to 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 March 31,
1999 was $7.875 per share. REI reported net loss applicable to common
shareholders of approximately $2,540,000 for the 1999 Quarter as compared to net
loss applicable to common shareholders of approximately $1,436,000 in the 1999
Quarter.
General and administrative expenses decreased in the 1999 Quarter and
amounted to $250,000 as compared to $285,000 in the 1998 Quarter. The decrease
in general and administrative expenses is primarily a result of a decrease in
certain overhead costs associated with the operations of Big 4 Farming.
Interest expense was $232,000 in the 1999 Quarter as compared to $249,000
in the 1998 Quarter. Two mortgage loans were outstanding for both the 1999 and
1998 Quarter. The slight decrease in interest expense is generally attributable
to the reduction in the average mortgage balances outstanding. The terms of the
mortgage loans provide for an adjustable rate of interest, which rate amounted
to 9.439% at March 31, 1999.
-15-
<PAGE>
Business Plan, Capital Resources and Liquidity
Cash and cash equivalents decreased approximately $336,000 from $4,367,000
at December 31, 1998 to $4,031,000 at March 31, 1999. Net cash used in investing
activities amounted to $223,000 in the 1999 Quarter and reflects $60,000 of
leasehold improvements made to rental properties and additional purchases of
GISH common stock totaling $163,000. Net cash used in financing activities
amounted to $377,000 in the 1999 Quarter and resulted from (i) additional
borrowings by the Agriculture Partnerships of approximately $328,000 and (ii)
the amortization of long-term mortgage loans.
Cash and cash equivalents increased approximately $319,000 to $4,683,000 at
March 31, 1998. Net cash used in investing activities amounted to $59,000 in
the 1998 Quarter and reflects leasehold improvements made to rental properties.
Net cash used in financing activities amounted to $254,000 in the 1998 Quarter
and resulted from (i) additional borrowings by the Agricultural Partnerships of
approximately $242,000 and (ii) the repayment of long-term mortgage loans.
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 form 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.
In the short term, uses of funds are expected to include (i) funding of the
Agricultural Partnerships, (ii) funding of the Glendale Building leasehold and
tenant improvements of approximately $1,985,000, (iii) operating expenses, and
(iv) debt service or possible repayment of, pursuant to the property mortgages.
The Company does not expect to have cash flow from its investment in the
Agricultural Partnerships in the next several periods due to the results of the
freeze described above. 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.
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 Reading 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 Reading of its business plan and, if it approves of
the progress made by Reading, 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 Reading Common Stock. The Company has the right to
require Reading to redeem the Reading Preferred Stock after October 15, 2001 or
sooner if Reading fails to pay dividends on such securities for four quarters.
Year 2000 Compliance
As reasonably necessary and appropriate, the Company is conducting an audit
of the software and hardware components that it uses to assess whether such
components will properly recognize the dates beyond December 31, 1999 ("Year
2000 Compliance"). The Company is also continuing to conduct a review of its
major suppliers of goods and services ("service providers") to understand their
level of compliance with Year 2000 issues. Both of these reviews are expected
to be completed by June 30, 1999.
Based on its review to date, the Company does not believe that material
problems exist relative to the internal hardware and software utilized, as the
Company uses current versions of software provided by major software vendors,
and hardware that is less than a year old, for the most part. The Company has
adequate financial resources to replace any hardware and/or software that is
determined not to be Year 2000 compliant. The costs of addressing Year 2000
compliance has not been, nor is expected to be, material to the Company's
financial condition or results of operations.
Based on responses received to date, the Company believes that most of its
service providers will represent that they are Year 2000 compliant or that
formal programs are in place to ensure that they will be year 2000 compliant.
If in its survey of significant service providers, the Company becomes concerned
that one or more providers is not Year 2000 compliant or has what the Company
believes to be inadequate programs to become Year 2000 compliant, the Company
will take action to reduce or eliminate its reliance upon such service providers
or suppliers.
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 finalization of the sale of properties,
the impact of competition, market and other risks associated with the Company's
investment activities including the investment and advances to the Agricultural
Properties and other factors described herein.
-16-
<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, 1998.
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.
-17-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITADEL HOLDING CORPORATION
---------------------------
By: /s/ Steve Wesson
--------------------------------------
Steve Wesson
President and Chief Executive Officer
May 17, 1999
/s/ S. Craig Tompkins
--------------------------------------
S. Craig Tompkins
Principal Accounting Officer
May 17, 1999
-18-
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