<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
[ ] For the quarterly period ended: June 30, 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)
DELAWARE 95-3885184
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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 August 13, 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> <C>
PART 1. Financial Information
- ------
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999 (Unaudited)
and December 31, 1998............................................. 3
Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 1999 and 1998 (Unaudited).......................... 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 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......................................... 15
PART 2. Other Information
- ------
Item 1. Legal Proceedings................................................. 20
Item 2. Changes in Securities............................................. 20
Item 3. Defaults Upon Senior Securities................................... 20
Item 4. Submission of Matters to a Vote of Security Holders............... 20
Item 5. Other Information................................................. 20
Item 6. Exhibits and Reports on Form 8-K.................................. 20
Signatures........................................................................ 21
</TABLE>
<PAGE>
Citadel Holding Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
ASSETS 1999 1998
---------------------------------------------------
(In thousands of dollars)
<S> <C> <C>
Assets
Cash and cash equivalents $ 14,684 $ 4,367
Property held for sale -- 5,908
Rental Property, less accumulated depreciation 7,841 7,969
Investment in shareholder affiliate 7,000 7,000
Equity investment in and advances to Agricultural
Partnerships 1,937 1,561
Investment in Gish Biomedical, Inc. 1,510 1,002
Capitalized leasing costs, net 1,011 1,592
Other receivables 174 577
Other assets 454 671
Deferred tax asset, net 301 4,398
-------- --------
Total assets $ 34,912 $ 35,045
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Security deposits payable $ 27 $ 98
Accounts payable and accrued liabilities 2,445 1,362
Deferred rental revenue 47 576
Mortgage notes payable -- 9,224
Minority interest in consolidated affiliate 47 44
-------- --------
Total liabilities 2,566 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) (25,457) (33,931)
Unrealized gain on available-for-sale securities 131 --
Note receivable from stockholder upon common stock
issuance (1,998) (1,998)
-------- --------
Total stockholders' equity 32,346 23,741
-------- --------
Total liabilities and stockholders' equity $ 34,912 $ 35,045
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
----------------------------------------------------------------------------
(In thousands of dollars,
except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 1,186 $1,348 $ 2,601 $2,714
Farming management fee 9 97 10 101
Consulting fees from shareholder 77 100 155 200
------- ------ ------- ------
1,272 1,545 2,766 3,015
------- ------ ------- ------
Expenses:
Real estate operating expenses 410 581 918 1,100
Depreciation and amortization 97 91 206 177
Interest expense 324 246 556 495
General and administrative expenses 501 569 751 854
------- ------ ------- ------
Total expenses 1,332 1,487 2,431 2,626
------- ------ ------- ------
Dividends from investment in Reading 114 114 228 228
Interest income 86 55 130 107
Interest income from shareholder 39 44 78 87
Earnings (loss) from investment in and
advances to Agriculture Partnerships 34 (12) (66) (107)
Gain (loss) on sale of properties 13,337 -- 13,337 --
------- ------ ------- ------
Earnings before minority interest and taxes 13,550 259 14,042 704
Minority interest (3) (17) (3) (11)
------- ------ ------- ------
Earnings before income taxes 13,547 242 14,039 693
Provision for income taxes (5,543) (50) (5,565) (130)
------- ------ ------- ------
Net earnings $ 8,004 $ 192 $ 8,474 $ 563
======= ====== ======= ======
Basic earnings per share $ 1.20 $ 0.03 $ 1.27 $ 0.08
------- ------ ------- ------
Diluted earnings per share $ 1.20 $ 0.03 $ 1.27 $ 0.08
------- ------ ------- ------
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
-----------------------------------------------
(In thousands of dollars)
<S> <C> <C>
Operating Activities
Net earnings $ 8,474 $ 563
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 206 177
Gain (loss) on sale of property (13,337) --
Equity loss from Agriculture Partnerships 66 151
Amortization of deferred leasing costs 119 129
Amortization of deferred loan costs 58 17
Minority interest 3 (11)
Deferred income tax asset 4,009 --
Changes in operating assets and liabilities:
Decrease (increase) in other receivables 403 (2)
Decrease (increase) in other assets 105 (306)
Increase (decrease) in security deposits (71) 4
Increase (decrease) in liabilities and deferred rent 554 (34)
-------- ------
Net cash provided by operating activities 589 688
Investing activities
Purchase of Gish securities (289) --
Proceeds from sale of property 19,683 --
Purchase of equipment -- (140)
Purchase of and additions to real estate -- (178)
-------- ------
Net cash provided by (used in) investing activities 19,394 (318)
Financing activities
Loans and advances to Agriculture Partnerships (442) (242)
Commissions paid on lease -- (431)
Payment of loans by Agricultural Partnerships -- 615
Proceeds from minority interest in Big 4 Farming LLC -- 28
Repayments of long-term mortgage borrowings (9,224) (82)
-------- ------
Net cash used in financing activities (9,666) (112)
Increase (decrease) in cash and cash equivalents 10,317 258
Cash and cash equivalents at beginning of period 4,367 4,364
-------- ------
Cash and cash equivalents at end of period $ 14,684 $4,622
======== ======
Supplemental Disclosures:
Interest paid during the six months ended June 30, 1999 and 1998 was $572,000 and $478,000, respectively.
</TABLE>
See accompanying notes to consolidated financial statements
-5-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 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 six months ended June 30, 1999 the Company increased its common
stock ownership in Gish Biomedical, Inc. ("Gish") to 503,300 shares (14.6%) from
398,850 shares (11.6%) as December 31, 1998 for a purchase price of
approximately $289,000. The Gish securities are classified as available-for-
sale and are carried at fair value, with the unrealized holding gains and
losses, net of tax, reported as a separate component of stockholder's equity.
At June 30, 1999, the aggregate cost basis of the Gish securities was
approximately $1,291,000 and the closing price of Gish common stock was $3.00
resulting in a $131,000 unrealized gain on available-for-sale securities, net of
deferred income tax amounting to $89,000. Subsequent to June 30, 1999, the
Company purchased an additional 6,500 Gish shares for approximately $20,000.
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 June 30, 1999
and December 31, 1998, the results of operations and its cash flows for the
three and six months ended June 30, 1999 and 1998. The results of operations
for the three and six month periods ended June 30, 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
-6-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
June 30, 1999
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, 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 June 30, 1999 is approximately $14,394,000 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 and six month periods ended June
30, 1999 and 1998. Diluted earnings per share is based on 6,689,493 and
6,685,937, the weighted average number of shares of common stock and potential
common shares outstanding during the three and six months ended June 30, 1999,
and is based on 6,692,007 and 6,689,606 shares for the three and six months
ended June 30, 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 June 30, 1999 and 1998
calculations of the diluted weighted average number of shares outstanding
include the effect of such stock options.
Effective August 1, 1999, upon the resignation of the Company's President,
the Company cancelled stock options to exercise 33,000 common shares at $2.69
per share for a cash payment of approximately $66,000. In addition, pursuant to
the terms of an agreement with the President, the Company has agreed to pay
$250,000 over a twelve month period beginning August 1, 1999, which amount has
been included in accounts payable and accrued liabilities at June 30, 1999.
Note 2 - Rental Property and Property Held for Sale
- ---------------------------------------------------
The Company's rental property and property held for sale at June 30, 1999
and December 31, 1998 consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
--------- --------------
1999 1998
-------- -------
(In thousands)
-------------------------------------------
<S> <C> <C>
Rental Property:
Land $ 2,951 $ 2,951
Building and improvements 5,533 5,564
------ ------
Total 8,484 8,515
Less accumulated depreciation (643) (546)
------ ------
Rental property, net $7,841 $ 7,969
====== ======
Property held for sale:
Commercial land and building $ -- $ 6,608
Accumulated depreciation -- (700)
------ ------
Net $ -- $ 5,908
====== ======
</TABLE>
-7-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
June 30, 1999
At December 31, 1998 rental properties consisted of two office buildings
located in Glendale, California and Phoenix, Arizona. During the second
quarter of 1999, the Company sold the Phoenix, Arizona building which was
classified as "Property held for sale" at December 31, 1998. The sale of the
Phoenix, Arizona building for $20,000,000 resulted in a book gain of
approximately $13,337,000 after consideration of selling expenses approximating
$317,000. The write off of Capitalized lease costs related to the Phoenix,
Arizona property amounting to approximately $462,000 were included as a
component of the gain on sale. The proceeds from the sale were used, in part,
to pay-off all outstanding mortgage loans totaling $9,138,000 (see Note 5).
With the exception of the ground floor, the Glendale, California Building
was leased beginning February 1, 1997 to Disney Enterprises, Inc. ("Disney").
The rental rate for the first five years of the Disney lease term beginning
February 1, 1997 is approximately $148,000 per month (excluding parking) and
approximately $164,000 (excluding parking) for the remaining five year term.
Disney has the option to renew the lease for two consecutive five year periods.
The lease provided that the Company contribute towards tenant improvements and
common area upgrades. To date, while fulfilling their lease obligations to the
Company, Disney has not moved into the building. Accordingly, tenant
improvements required by the lease approximating $1,985,000 have not yet been
constructed. Costs to obtain the lease inclusive of commissions, legal fees and
a $450,000 payment to the previous lessor, approximating $1,326,000 are included
in the Balance Sheet as "Capitalized leasing costs". At June 30, 1999 and
December 31, 1998, accumulated amortization with respect to the Glendale
Building capitalized leasing costs were $315,000 and $256,000, respectively.
Note 3 - Investment in Shareholder Affiliate
- --------------------------------------------
At June 30, 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
into shares of REI Common Stock at a conversion price of $11.50 per share. The
closing price of REI stock on June 30, 1999 was approximately $7.50 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
-8-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
June 30, 1999
$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 each of the three and six months ended June 30,
1999 and 1998 is "Dividends from Investment in Reading" of approximately
$114,000 and $228,000, respectively, earned pursuant to the terms of the REI
Series A Preferred Stock.
As of August 13, 1999, 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. As of August 13, 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 June 30,
1999 and December 31, 1998 and for the three and six months ended June 30, 1999
and 1998 follows:
Condensed Balance Sheets:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(In thousands)
--------------
<S> <C> <C>
Cash and cash equivalents $ 36,388 $ 58,593
Other current assets 2,608 2,247
Equity investment in Citadel 10,723 8,158
Property held for development 30,080 32,949
Property and equipment, net 57,048 32,534
Intangible assets 24,065 23,408
Other assets 14,443 14,398
-------- --------
Total assets $175,355 $172,287
======== ========
Current liabilities $ 14,979 $ 15,462
Other liabilities 7,482 5,526
Minority interests 1,904 1,927
Series A Preferred stock held by Citadel 7,000 7,000
Shareholders' equity 143,990 142,372
-------- --------
Total liabilities and equity $175,355 $172,287
======== ========
</TABLE>
-9-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
June 30, 1999
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Total revenue 9,273 8,560 16,792 17,304
Theater costs (7,669) (6,550) (13,839) (13,214)
Depreciation and amortization (1,090) (894) (2,077) (1,742)
General and administrative (2,971) (2,358) (5,333) (4,474)
-------- ------- -------- --------
(Loss) from operations (2,457) (1,242) (4,457) (2,126)
Interest and dividends 701 1,154 1,438 2,482
Equity in earnings of affiliates 2,523 (9) 2,614 110
Other income, net (121) 186 (119) (447)
-------- ------- -------- --------
Income (loss) before income taxes 646 89 (524) 19
Income taxes (266) (214) (488) (407)
Minority interest (113) (65) (178) (159)
-------- ------- -------- --------
Net income (loss) (267) (190) (1,190) (547)
Less preferred stock dividends (1,082) (1,076) (2,165) (2,155)
-------- ------- -------- --------
Net income applicable to common $ (815) $(1,266) $ (3,355) $ (2,702)
shareholders ======== ======= ======== ========
Basic and diluted (losses) per share $ (0.11) $ (0.17) $ (0.45) $ (0.36)
======== ======= ======== ========
</TABLE>
Note 4 - Equity investment and Note Receivable from Agricultural Partnerships
- ------------------------------------------------------------------------------
At June 30, 1999 and December 31, 1998, "Investments in and advances to
Agricultural Partnerships" consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- -----------
(In Thousands)
<S> <C> <C>
Equity investment in Agricultural Partnerships $ (78) $ 59
Note receivable and advances to Agricultural Partnerships 2,015 1,502
------ ------
$ 1,937 $ 1,561
====== ======
</TABLE>
As described in Note 1, the Company has a 40% interest in the Agricultural
Partnerships. In addition, the Company has 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 through December 31, 1999
and approximately $125,000 in
-10-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
June 30, 1999
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. At
June 30, 1999 total loans and payables incurred on behalf of the Agricultural
Partnerships totaled $2,015,000. In addition, the Company has agreed to
guarantee the obligations of the Agricultural Partnerships under certain
equipment leases, up to $220,000. No revenue is expected to be realized by the
Agricultural Partnerships until the 1999-2000 crop is harvested and sold.
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
June 30, 1999 and December 31, 1998 as "Minority interest" in the amount of
$47,000 and $44,000, respectively. Visalia's portion of Farming's net earnings
for the three and six months ended June 30, 1999 amounted to $3,000 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 owned by the
Agricultural Partnerships, calculated after the costs of picking, packing and
hauling. However, due to the freeze, no significant revenues are expected in
the 1999 fiscal year and, accordingly, no material profit factor will be
realized. Farming has entered into a contract with Cecelia Packing Corporation
("Cecelia" owned by James J. Cotter) 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 also packs a portion of the fruit produced by the Agricultural
Partnerships. During each of the three and six months ended June 30, 1999 and
1998, Cecilia received a fee of $18,000 and $36,000, respectively.
Summarized financial information of the Agricultural Partnerships as of June 30,
1999 and December 31, 1998 and the results of operation for the three and six
months ended June 30, 1999 and 1998 follows:
Condensed Balance Sheet:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- -------------
(000'S)
<S> <C> <C>
Inventory $ 486 $ --
Property and equipment, net 5,418 5,645
Deferred loan costs 76 84
------ ------
Total assets $5,980 $5,729
====== ======
Accounts payable $ 5 $ 30
Due to Big 4 Farming LLC (1) 189 297
Line of credit with Citadel 1,826 1,206
------ ------
Current liabilities 2,020 1,533
Mortgage note payable 4,050 4,050
Partners capital (90) 146
------ ------
Total liabilities and partners capital $5,980 $5,729
====== ======
</TABLE>
(1) As described above, Farming provides all farming services to the
Agricultural Partnerships pursuant
-11-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
June 30, 1999
to the Farming Contract. Such services include the contracting for the
picking, packing and hauling of the crops. The $189,000 and $297,000
reflected as "Due to Big 4 Farming LLC" at June 30, 1999 and December 31,
1998, respectively, represents expenses incurred by Farming on behalf of the
Agricultural Partnerships not yet drawn down for payment 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 June 30, 1999 the Agricultural Partnerships had made capital
expenditures of approximately $650,000 consisting primarily of new tree
plantings and improvements to irrigation systems.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
------ ------
(000'S)
<S> <C> <C>
Sales of crops $ 646 $ 4,887
Costs of sales (442) (4,596)
------ --------
Gross profit 204 291
General and administrative expense (1) (164) (230)
Depreciation (253) (240)
Income from Federal grants 204 --
Interest expense (228) (198)
------ --------
Net (loss) $ (237) $ (377)
====== ========
Equity loss - 40% Citadel $ (95) $ (151)
Interest income from partnership loan (2) 29 44
------ --------
Net (loss) from investment in and advances to
Agricultural Partnerships $ (66) $ (107)
====== ========
</TABLE>
___________________________
(1) Reflects reimbursement of expenses and fees to Big 4 Farming LLC, an
80% owned subsidiary.
(2) Interest income earned amounted to approximately $72,000 during the
six months ended June 30, 1999. Until such time as the other partners
contribute additional 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.
-12-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
June 30, 1999
Note 5 - Mortgage Note Payable
- ------------------------------
Concurrent with the sale of the Phoenix, Arizona property the Company paid in
full the mortgage encumbering such property in the amount of $4,199,000. In
addition, the remaining mortgage encumbering the Glendale, California property
totaling approximately $4,939,000 was repaid. Included in interest expense is
$184,000 representing prepayment penalties paid of $126,000 and the write off of
deferred loan costs related to the mortgages totaling approximately $58,000.
Note 6 - Taxes on Income
- ------------------------
Significant components of the provisions for income taxes attributable to
operations are as follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1999 1998 1999 1998
------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
Income taxes (benefit)
Current:
Federal $ 580 $ -- $ 580 $ --
State 954 50 976 130
------ ----- ------ -----
Total current 1,534 50 1,556 130
------ ----- ------ -----
Deferred:
Federal 3,734 -- 3,734 --
State 275 -- 275 --
------ ----- ------ -----
Total deferred: 4,009 -- 4,009 --
------ ----- ------ -----
Total income taxes $5,543 $ 50 $5,565 $ 130
====== ===== ====== =====
</TABLE>
The deferred tax provision during the three and six months ended June 30, 1999
reflects the reversal of deferred tax assets included in the December 31, 1998
Balance Sheet resulting from the sale of the Phoenix, Arizona property. The tax
assets were generally comprised of federal capital loss and net operating loss
carryfowards which are expected to be utilized as a result of the property sale
to reduce the current tax liabilities upon the filing of the Company's
Consolidated federal tax return for December 31, 1999.
Note 7 - 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 June 30, 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 $39,000 and $44,000
-13-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
June 30, 1999
for the three months ended June 30, 1999 and 1998 and amounted to approximately
$78,000 and $87,000 for the six months ended June 30, 1999 and 1998,
respectively. The Craig Secured Note may be prepaid, in whole or in part, at any
time by Craig without penalty or premium.
Note 8 - Business Segments
- --------------------------
The following sets forth certain information concerning the Company's rental
real estate operations, agricultural operations and corporate activities for the
three and six months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Rental Agricultural
Three Months Ended June 30: Real Estate(2) Operations Corporate (1) Consolidated
------------------- ---------------- -------------- --------------
1999:
<S> <C> <C> <C> <C>
Revenues $ 1,186 $ 9 $ 77 $ 1,272
Earnings (losses) before taxes 13,663 41 (157) 13,547
1998:
Revenues $ 1,348 97 $ 100 $ 1,545
Earnings (losses) before taxes 391 74 (223) 242
Six Months Ended June 30:
1999:
Revenues $ 2,601 $ 10 $ 155 $ 2,766
Earnings (losses) before taxes 14,257 (59) (159) 14,039
1998:
Revenues $ 2,714 $101 $ 200 $ 3,015
Earnings (losses) before taxes 942 (17) (232) 693
</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., offset by general and administrative expenses.
(2) Earnings from rental real estate includes gain from sale of property in the
three and six months ended June 30, 1999 of $13,337,000.
-14-
<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 June 30, 1999, ("1999 Quarter") with the three months ended June
30, 1998 ("1998 Quarter") and a comparison of the results of operations for the
six months ended June 30, 1999 ("1999 Six Months") with the six months ended
June 30, 1998 a ("1998 Six 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, 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 1999 Quarter amounted to $8,004,000 or
$1.20 per basic share as compared to net earnings of $192,000 or $0.03 per basic
share for the 1998 Quarter. Net earnings for the 1999 Six Months amounted to
$8,474,000 or $1.27 per basic share as compared to $563,000 or $0.08 per basic
share for the 1998 Six Months. The significant increase in net earnings in the
1999 periods as compared to the 1998 periods is primarily attributable to the
sale of a rental property located in Phoenix, Arizona in June 1999, which
resulted in a gain of approximately $13,337,000 being included in the
Consolidated Statement of Operations for the 1999 three and six month periods.
As described below, the June 2, 1999 property sale resulted in a decrease to
1999 rental income, real estate operating expenses, and depreciation in the 1999
periods as compared to the 1998 periods.
Rental income amounted to $1,186,000 and $2,601,000 for the 1999 Quarter
and 1999 Six Months as compared to $1,348,000 and $2,714,000 for the 1998
Quarter and 1998 Six Months, respectively. Real estate operating expenses
decreased to $410,000 in the 1999 Quarter as compared to $581,000 in the 1998
Quarter and decreased to $918,000 in the 1999 Six Months as compared to
$1,100,000 in the 1998 Six Months, reflecting the sale of the building on June
2, 1999 as well as, slightly lower operating costs at the Glendale, California
building. Until June 2, 1999, rental properties consisted of two office
buildings located in Glendale, California and Phoenix, Arizona. On June 2, 1999,
the Company sold the Phoenix, Arizona property for $20,000,000 which resulted in
a financial statement gain of approximately $13,337,000, after consideration of
selling expenses totaling $317,000. The proceeds from the sale were used, in
part, to pay-off all outstanding mortgage loans totaling approximately
$9,138,000. As a result of the sale, future operating results from rental
properties will significantly decrease. The following summarizes rental income,
real estate operating expenses and depreciation from the Phoenix, Arizona
property included in the Statement of Operations for the three and six months
ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Rental income $ 620 $ 797 $1,484 $1,611
Real estate operating expenses 249 391 595 740
Depreciation 34 47 84 89
</TABLE>
The Glendale property is leased to Disney Enterprises, Inc., and Fidelity
Federal Bank. Rental income from the Glendale property remained consistent
during the 1999 Quarter and 1999 Six months as compared to the 1998 Quarter and
1998 Six Months.
-15-
<PAGE>
Consulting income from shareholder amounted to $77,000 and $155,000 in the
1999 Quarter and 1999 Six Months as compared to $100,000 and $200,000 in the
1998 Quarter and 1998 Six Months, respectively. 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 and 1999 Six Months reflects a reduction in services provided by
Citadel to Reading as compared to the 1998 Quarter and 1998 Six Months.
Included in the Statement of Operations as "Earnings (loss) from investment
in and advances to Agricultural Partnerships" is a loss in the 1999 Six Months
and 1998 Six Months of $66,000 and $107,000, respectively, representing the
Company's 40% equity share of the Agriculture Partnerships operating results.
The Company recorded earnings from investment in and advances to the
Agricultural Partnerships in the amount of $34,000 in the 1999 Quarter as
compared to a loss of $12,000 in the 1998 Quarter. In the 1999 Quarter the
Partnerships received federal relief grants of approximately $204,000 related to
the 1998 crop losses and reducing their operating loss. At June 30, 1999 and
December 31, 1998, Citadel and its subsidiaries had advanced on behalf of the
Agricultural Partnership approximately $2,015,000 and $1,502,000, respectively.
As described below, the Agricultural Partnerships suffered a significant loss in
Fiscal 1998 resulting in the Agricultural Partnerships having deficit partners
capital of approximately $90,000 at June 30, 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 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.
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 and six months ended June 30, 1999 amounted to approximately $24,000 and
$44,000, respectively.
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 on the same terms as the line of credit.
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") increased between the 1999 and
1998 periods and amounted to $125,000 in the 1999 Quarter and $99,000 in the
1998 Quarter, and amounted to $208,000 in the 1999 Six Months as compared to
$194,000 in the 1998 Six Months. The overall increase is a result of the
increased cash balances subsequent to June 2, 1999, the closing date of the
property sale. Included in the Statements of Operations for the 1999 and 1998
Quarter and the 1999 and 1998 Six Months is approximately $114,000 and $228,000,
respectively of dividend income earned with respect to the Company's investment
in REI
-16-
<PAGE>
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 June 30, 1999 was $7.50 per share.
REI reported net loss applicable to common shareholders of approximately
$815,000 and $3,355,000 for the 1999 Quarter and 1999 Six Months, respectively,
as compared to net loss applicable to common shareholders of approximately
$1,266,000 and $2,702,000 in the 1998 Quarter and 1998 Six Months.
General and administrative expenses decreased in the 1999 Quarter and
amounted to $501,000 as compared to $569,000 in the 1998 Quarter. General and
administrative expenses amounted to $751,000 in the 1999 Six Months as compared
to $854,000 in the 1998 Six Months. The 1999 Quarter and Six Months includes a
$250,000 charge for fees payable over the twelve month period beginning August
1, 1999 to the Company's former President, who resigned effective August 1,
1999. The 1998 Quarter and Six Months includes a charge for bonuses of $250,000
paid to the Chairman and Vice Chairman. The overall 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 $324,000 in the 1999 Quarter as compared to $246,000
in the 1998 Quarter. Until June 2, 1999, two mortgage loans were outstanding in
the amount of $9,224,000. Concurrent with the sale of the Phoenix, Arizona
property, the mortgage encumbering the property, as well as the mortgage
encumbering the Glendale, California property were paid in full, and
accordingly, the Company has no outstanding long term debt at June 30, 1999.
Included as interest expense for the three and six months ended June 30, 1999 is
a prepayment penalty and the write off of deferred loan costs relating to such
loans amounting to approximately $126,000 and $58,000, respectively.
Business Plan, Capital Resources and Liquidity
Cash and cash equivalents increased approximately $10,317,000 from
$4,367,000 at December 31, 1998 to $14,684,000 at June 30, 1999. Net cash
provided by investing activities amounted to $19,394,000 in the 1999 Six Months
and reflects proceeds of $19,683,000 received upon the sale of a rental
property, offset by additional purchases of GISH common stock totaling $289,000.
Net cash used in financing activities amounted to $9,666,000 in the 1999 Six
Months and resulted from (i) additional borrowings by the Agriculture
Partnerships of approximately $442,000 and (ii) repayment of long-term mortgage
loans totaling $9,224,000.
Cash and cash equivalents increased approximately $258,000 from $4,364,000
at December 31, 1997 to $4,622,000 at June 30, 1998. Net cash used in investing
activities amounted to $318,000 in the 1998 Six Months and includes leasehold
improvements made to rental properties amounting to $178,000 and the purchase of
farm equipment of $140,000 by Big 4 Farming, LLC, which was pruchsed in order to
provide services to the Agricultural 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 112,000 in the 1998
Six Months and resulted from (i) additional borrowings by the Agriculture
Partnerships of approximately $242,000, offset by $615,000 of agricultural loan
repayments, (ii) the amortization of long-term mortgage loans of $82,000 and
(iii) commissions amounting to approximately $431,000 paid at the time of the
extension of a lease at the Phoenix, Arizona building.
The Company expects that its sources of funds in the near term will include
(i) cash on hand and related interest income, (ii) cash flow from the operations
of its remaining real estate property, (iii) consulting fee income from REI,
(iv) a preferred stock dividend, payable quarterly, from REI amounting to
approximately $455,000, annually, and (v) possible refinancing proceeds.
-17-
<PAGE>
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, and (iii) operating expenses.
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 September 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
-18-
<PAGE>
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.
-19-
<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.
-20-
<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/ James J. Cotter
-------------------
James J. Cotter
President and Chief Executive Officer
August 16, 1999
/s/ S. Craig Tompkins
---------------------
S. Craig Tompkins
Principal Accounting Officer
August 16, 1999
-21-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 14,684
<SECURITIES> 0
<RECEIVABLES> 174
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,858
<PP&E> 8,484
<DEPRECIATION> (643)
<TOTAL-ASSETS> 34,912
<CURRENT-LIABILITIES> 2,566
<BONDS> 0
0
0
<COMMON> 67
<OTHER-SE> 32,279
<TOTAL-LIABILITY-AND-EQUITY> 34,912
<SALES> 2,601
<TOTAL-REVENUES> 2,766
<CGS> (918)
<TOTAL-COSTS> (1,875)
<OTHER-EXPENSES> 13,899
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (751)
<INCOME-PRETAX> 14,039
<INCOME-TAX> 5,565
<INCOME-CONTINUING> 8,474
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,474
<EPS-BASIC> 1.27
<EPS-DILUTED> 1.27
</TABLE>
