<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-Q
(Mark One)
[x]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 2000
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to ___________
Commission file number 1-8625
CITADEL HOLDING CORPORATION
(Exact name of Registrant as specified in its charter)
NEVADA 95-3885184
(State or other jurisdiction of incorporation or (IRS Employer Identification
organization) 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 July 17, 2000, there
were 5,335,913 shares of Class A Nonvoting Common Stock, $0.01 par value per
share and 1,333,969 shares of Class B Voting Common Stock, $0.01 par value per
share outstanding.
<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
INDEX
-----
<TABLE>
<CAPTION>
Page
----
PART 1. Financial Information
------
Item 1. Financial Statements
<S> <C> <C>
Consolidated Balance Sheets
as of June 30, 2000 (Unaudited) and December 31, 1999................ 3
Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2000 and 1999 (Unaudited).......... 5
Notes to Consolidated Financial Statements........................... 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations..................... 19
PART 2. Other Information
------
Item 1. Legal Proceedings.................................................... 25
Item 2. Changes in Securities................................................ 25
Item 3. Defaults Upon Senior Securities...................................... 25
Item 4. Submission of Matters to a Vote of Security Holders.................. 25
Item 5. Other Information.................................................... 25
Item 6. Exhibits and Reports on Form 8-K..................................... 25
Signatures..................................................................... 26
</TABLE>
<PAGE>
Citadel Holding Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------------------------------------------
ASSETS (In thousands, except per share amounts)
<S> <C> <C>
Assets
Cash and cash equivalents $ 21,440 $ 24,732
Investment in Gish Biomedical, Inc. 1,372 1,831
Investment in National Auto Credit, Inc. 897 214
Other receivables 221 95
Deferred tax asset, net 1,154 1,125
-------- --------
Total current assets 25,084 27,997
Note receivable from Royal George LLC 1,200 --
Rental property, less accumulated depreciation 7,624 7,731
Investment in shareholder affiliate 7,000 7,000
Equity investment in and advances to Agricultural Partnerships 2,206 2,669
Capitalized leasing costs, net 878 944
Other assets 2,158 865
-------- --------
Total assets $ 46,150 $ 47,206
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Security deposits payable $ 27 $ 28
Accounts payable and accrued liabilities 1,990 2,254
Current portion of mortgage note payable 145 128
-------- --------
Total current liabilities 2,162 2,410
Minority interest in consolidated affiliate 53 50
Lease contract payable 212 196
Deferred rental revenue 195 195
Long-term portion of mortgage notes payable 10,798 10,872
-------- --------
Total liabilities 13,420 13,723
Commitments and contingencies
Stockholders' Equity
Preferred stock, par value $0.01, 20,000,000 shares
authorized, none outstanding -- --
Common stock, par value $0.01, 20,000,000 shares authorized,
none outstanding (Note 8) -- 67
Class A Nonvoting Common Stock, par value $0.01, 100,000,000
shares authorized, 5,335,913 issued and outstanding
54 --
Class B Voting Common Stock, par value $0.01, 20,000,000
shares authorized, 1,333,969 issued and outstanding 13 --
Additional paid-in capital 59,603 59,603
Accumulated deficit (24,899) (24,444)
Accumulated other comprehensive (expense) income (43) 255
Note receivable from stockholder upon common stock issuance (1,998) (1,998)
-------- --------
Total stockholders' equity 32,730 33,483
-------- --------
Total liabilities and stockholders' equity $ 46,150 $ 47,206
======== ========
</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,
2000 1999 2000 1999
----------------------------------------------------------------------------
(In thousands of dollars, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 555 $ 1,186 $ 1,118 $ 2,601
Farming management fee 16 9 20 10
Consulting fees from shareholder 34 77 69 155
------- ------- ------- -------
605 1,272 1,207 2,766
------- ------- ------- -------
Operating Expenses:
Real estate 201 410 350 918
General and administrative expenses 212 501 443 751
Depreciation and amortization 75 97 149 206
------- ------- ------- -------
488 1,008 942 1,875
------- ------- ------- -------
Operating income 117 264 265 891
------- ------- ------- -------
Non-operating income (expense):
Interest income 351 86 701 130
Interest expense (224) (324) (449) (556)
Dividends on Reading preferred stock -- 114 114 228
(Loss) earnings from investment in and
advances to Agriculture Partnerships (1,007) 34 (1,107) (66)
Interest income from shareholder 56 39 100 78
Gain on sale of property -- 13,337 -- 13,337
------- ------- ------- -------
(Loss) earnings before minority interest and (707) 13,550 (376) 14,042
taxes
Minority interest (2) (3) (3) (3)
------- ------- ------- -------
(Loss) earnings before income taxes (709) 13,547 (379) 14,039
(Provision) benefit for income taxes 23 (5,543) (76) (5,565)
------- ------- ------- -------
Net (loss) earnings $ (686) $ 8,004 $ (455) $ 8,474
======= ======= ======= =======
Basic and diluted (loss) earnings per share $(0.10) $1.20 $(0.07) $1.27
======= ======= ======= =======
</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,
2000 1999
---------------------------------------------
(In thousands of dollars)
<S> <C> <C>
Operating Activities
Net (loss) earnings $ (455) $ 8,474
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 149 206
Gain on sale of property -- (13,337)
Equity in loss from Agriculture Partnerships 1,107 66
Amortization of deferred leasing costs 66 119
Amortization of deferred loan costs 16 58
Minority interest 3 3
Change in deferred income tax asset (liabilities) 175 4,009
Changes in operating assets and liabilities:
(Increase) decrease in other receivables (126) 403
(Increase) decrease in other assets (1,293) 105
(Decrease) in security deposits (1) (71)
(Decrease) increase in liabilities and deferred rent (248) 554
------- --------
Net cash (used in) provided by operating activities (607) 589
------- --------
Investing activities
Purchase of Gish Biomedical, Inc. securities (23) (289)
Purchase of National Auto Credit, Inc. securities (703) --
Proceeds from sale of property -- 19,683
Capital expenditure on tenant leasehold improvement (2) --
------- --------
Net cash (used in) provided by investing activities (728) 19,394
------- --------
Financing activities
Loans and advances to Agriculture Partnerships (711) (442)
Note receivable from Royal George LLC (1,200) --
Repayment of long-term borrowings (46) (9,224)
------- --------
Net cash used in financing activities (1,957) (9,666)
------- --------
(Decrease) increase in cash and cash equivalents (3,292) 10,317
Cash and cash equivalents at beginning of period 24,732 4,367
------- --------
Cash and cash equivalents at end of period $21,440 $ 14,684
======= ========
Supplemental Disclosures:
Interest paid $ 299 $ 478
Income taxes paid $ 190 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2000
________________________________________________________________________________
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 (the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
During the six months ended June 30, 2000, the Company increased its
available-for-sale securities holding in National Auto Credit, Inc, Inc. ("NAC")
to 1,055,100 shares (3.04%) from 342,500 shares (1.25%) at December 31, 1999 at
an additional cost of approximately $703,000. At June 30, 2000, the closing
price of NAC common stock was $0.85 per share.
The Company owns, through its interest in three general partnerships (the
"Agricultural Partnerships"), a 40% interest in approximately 1,600 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 Agricultural Partnerships are Visalia LLC ("Visalia," a limited liability
company 1% owned by Mr. James J. Cotter, the Chairman of the Board and Chief
Executive Officer of the Company, and 99% owned by 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 5).
In October 1996, the Company contributed cash in the amount of $7,000,000
to Reading Entertainment, Inc. ("REI" and collectively with its consolidated
affiliates, "Reading") in exchange for 70,000 shares of Reading Series A Voting
Cumulative Convertible Preferred Stock (the "REI Preferred Stock") and an option
to transfer all or substantially all of its assets, subject to certain
limitations, to Reading for Reading Common Stock (the "Asset Put Option"). The
Asset Put Option has since expired. The Company accounts for its investment in
Reading at cost (Note 4).
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, 2000
and December 31, 1999, the results of operations and its cash flows for the six
months ended June 30, 2000 and 1999. The results of operations for the three
and six month periods ended June 30, 2000 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
June 30, 2000
________________________________________________________________________________
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, 1999 and for the year then ended.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company
is required to adopt SAB 101 in the fourth quarter of 2000. Management does not
expect the adoption of SAB 101 to have a material effect on the Company's
results of operations or on its financial position.
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, 2000 is approximately $21,147,000 which is
being held in institutional money market mutual funds.
Available-for-Sale securities
-----------------------------
In accordance with Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"),
the securities holdings in Gish Biomedical, Inc. ("Gish") and NAC are recorded
at fair value as available-for-sale securities. The unrealized gains/losses, net
of tax, are reported as a separate component of shareholders' equity.
Basic and Diluted Earnings per Common Share
-------------------------------------------
Basic earnings per share is calculated by dividing net earnings applicable
to common shareholders by the weighted average shares outstanding during the
period. The weighted average number of shares outstanding for the three and six
months ended June 30, 2000 and 1999 was 6,669,882 and 6,669,924, respectively.
Diluted earnings per share is calculated by dividing net earnings
applicable to common shareholders by the weighted average common shares
outstanding plus the dilutive effect of stock options. Options to purchase
115,000 and 165,000 shares of common stock were outstanding during the three and
six months ended June 30, 2000, respectively, at a weighted average exercise
price of $3.44 and $2.76 per share, respectively (Note 9). During the second
quarter of 2000, however, the Company recorded a net loss and therefore, the
stock options were anti-dilutive. Accordingly, the diluted earnings per share
for the six months ended June 30, 2000 was calculated using 6,669,882, the
weighted average number of shares outstanding for the six months ended June 30,
2000. Diluted earnings per share is based on 6,689,493 and 6,685,937 shares for
the three and six months ended June 30, 1999, respectively, and includes the net
effect of the options to purchase 53,000 shares of common stock at a weighted
average price of $2.81 per share.
-7-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2000
________________________________________________________________________________
Note 2 - Note Receivable from Royal George LLC
----------------------------------------------
On June 1, 2000, the Company entered into an agreement to loan $1,200,000
to the Royal George LLC ("$1.2M Note"), a wholly owned subsidiary of Reading
Entertainment, Inc. The $1.2M Note earns interest at a fixed rate of 10% and
the balance of the outstanding principal plus any accrued interest becomes
payable on February 28, 2001.
Note 3 - Rental Property and Property Held for Sale
---------------------------------------------------
The Company's rental property and property held for sale at June 30, 2000
and December 31, 1999 consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
------- -----------
2000 1999
---- ----
(In thousands)
-----------------------------------------
<S> <C> <C>
Rental Property:
Land $2,951 $2,951
Building and improvements 5,534 5,532
------ ------
Total 8,485 8,483
Less accumulated depreciation (861) (752)
------ ------
Rental property, net $7,624 $7,731
====== ======
</TABLE>
At June 30, 2000 and December 31, 1999, the Company's sole rental
property consisted of an office building located in Glendale, California (the
"Brand Property"). With the exception of the ground floor which is leased to
Fidelity Bank, the Brand Property is leased 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 and
approximately $164,000 for the remaining five-year term, excluding parking.
Disney has the option to renew the lease for two consecutive five-year
periods. The lease provides that the Company contribute towards tenant
improvements and common area upgrades. In December 1999, Disney notified the
Company of its intent to occupy the building in 2000 and requested tenant
improvements amounting to approximately $1,501,000. To date, while fulfilling
their lease obligations to the Company, Disney has not moved into the building
and accordingly, the amount spent on the Disney tenant improvement projects to
date has been minimal.
Costs to obtain the lease inclusive of commissions, legal fees and a
$450,000 payment to the previous lessor, approximating $878,000 are included in
the Balance Sheet as "Capitalized leasing costs". At June 30, 2000 and December
31, 1999, accumulated amortization with respect to the Glendale Building
capitalized leasing costs were $456,000 and $389,000, respectively.
-8-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2000
________________________________________________________________________________
Note 4 - Investment in Shareholder Affiliate
--------------------------------------------
At June 30, 2000 and December 31, 1999, the Company owned 70,000 shares of
REI Preferred Stock. The REI Preferred Stock has (i) a liquidation preference
of $100 per share or $7,000,000 ("Stated Value"), (ii) bears a cumulative
dividend of 6.5%, payable quarterly, and (iii) is convertible into shares of REI
Common Stock at a conversion price of $11.50 per share. The closing price of
REI stock on June 30, 2000 was approximately $5.75 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,
2000, 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 Company accounts for its investment in REI at cost and records the
dividend income earned pursuant to the terms of the REI Series A Preferred Stock
as "Dividends from Investment in Reading" in the Statement of Operation. The
Company has received approximately $114,000 in dividends from Reading for the
for the six months ended June 30, 2000, earned pursuant to the terms of the REI
Series A Preferred Stock. Included in the Statements of Operations for the three
and six months ended June 30, 1999 is the dividend income earned pursuant to the
REI Series A Preferred Stock of approximately $114,000 and $228,000,
respectively. The second quarter dividend accrued on the REI Series A Preferred
Stock amounting to approximately $114,000 was paid in July 2000. Accordingly,
such dividend income will be reflected in the Statement of Operations for the
three and nine months ended September 30, 2000.
As of June 30, 2000, the Company and Craig Corporation collectively with
wholly owned subsidiaries ("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 June 30, 2000, Reading holds 1,690,938 shares of Class A Nonvoting Common
Stock and 422,734 shares of Class B Voting Common Stock, or approximately 32% of
the Company's outstanding common stock and Craig holds 876,885 shares of Class A
Nonvoting Common Stock and 230,521 shares of Class B Voting Common Stock or
approximately 17% of the Company's Common Stock.
Summarized financial information of REI and subsidiaries as of June 30,
2000 and December 31, 1999 and for the three and six months ended June 30, 2000
and 1999 is as follows:
-9-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2000
________________________________________________________________________________
Condensed Balance Sheets (In Thousands, except per share amounts):
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 3,214 $ 13,277
Other current assets 4,166 3,604
Investment in unconsolidated affiliates 24,641 13,098
Property held for sale 3,566 5,740
Property held for development 29,223 31,624
Property and equipment, net 64,418 57,854
Other assets 4,051 3,324
Intangible assets 112 9,975
-------- --------
Total assets $133,391 $138,496
======== ========
Current liabilities $ 25,922 $ 19,796
Other liabilities 7,495 6,953
Minority interests 434 2,064
Series A Preferred stock held by Citadel 7,000 7,000
Shareholders' equity 92,540 102,683
-------- --------
Total liabilities and equity $133,391 $138,496
======== ========
</TABLE>
Condensed Statement of Operations (In Thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
------- ------- -------- --------
Total revenue $10,961 $ 9,274 $ 22,182 $ 16,792
Theater costs (9,452) (7,669) (19,206) (13,839)
Depreciation and amortization (675) (1,091) (1,434) (2,077)
General and administrative (2,659) (2,971) (5,224) (5,333)
Write-down of assets held for sale (1,725) -- (1,725) --
------- ------- -------- --------
Loss from operations (3,550) (2,457) (5,407) (4,457)
Interest/dividend income 117 700 283 1,438
Equity in (loss) earnings of (878) 2,524 (977) 2,614
affiliates
Gain on exchange of Angelika 3,555 -- 3,555 --
Other income (expense), net 340 (121) 209 (119)
------- ------- -------- --------
(Loss) Income before income taxes (416) 646 (2,337) (524)
Income taxes (253) (266) (471) (488)
Minority interest (25) (113) (92) (178)
------- ------- -------- --------
Net (loss) income (694) 267 (2,900) (1,190)
Less preferred stock dividends (1,034) (1,082) (2,120) (2,165)
------- ------- -------- --------
Net income available to shareholders $(1,728) $ (815) $ (5,020) $ (3,355)
======= ======= ======== ========
Basic and diluted loss per share $(0.23) $(0.11) $(0.67) $(0.45)
======= ======= ======== ========
</TABLE>
Included in "Equity in (loss) earnings of affiliates" is Reading's share of
Citadel's (loss) earnings of approximately ($205,000) and ($144,000) for the six
months ended June 30, 2000 and 1999, respectively.
-10-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2000
________________________________________________________________________________
Note 5 - Equity investment and Note Receivable from Agricultural Partnerships
------------------------------------------------------------------------------
At June 30, 2000 and December 31, 1999, "Investments in and advances to
Agricultural Partnerships" consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------- ------
(In Thousands)
<S> <C> <C>
Equity investment in Agricultural Partnerships $(1,498) $ (324)
Note receivable and advances to Agricultural Partnerships 3,704 2,993
------- ------
$ 2,206 $2,669
======= ======
</TABLE>
As described in Note 1, the Company has a 40% interest in the Agricultural
Partnerships. In addition, the Company has provided a $3,250,000 line-of-credit
("Crop Financing Line") to the Agricultural Partnerships. Drawdowns under the
Crop Financing Line, which matures on August 1, 2000, accrued interest at prime
plus 100 basis points, payable quarterly.
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 had no funds with
which to repay the drawdowns on the Crop Financing Line nor the funds necessary
to cover expenses needed for production of the 1999-2000 crops. Big 4 Ranch,
Inc., a 40% owner spun off by the Company in 1997 to its stockholders, likewise
has no funds with which to make further contributions. Accordingly, the
Agricultural Partnerships generally had no sources of funding other than the
Company and Visalia, for the cultural expenses needed for production of the
1999-2000 crops, or to fund the capital improvements for the 540 acres of
undeveloped land owned by the Agricultural Partnership. The Company and Visalia
continued to fund the Agricultural Partnerships' operating and cultural costs on
an 80/20 basis with the assumption that the Agricultural Partnerships would
become self-sufficient when the 1999 - 2000 crop is harvested and sold in Fiscal
2000. Citadel's portion of such funding is provided through the Crop Financing
Line.
However, the Agricultural Partnerships reported a net loss for the three
and six months ended June 30, 2000 of approximately $903,000 and $1,219,000,
respectively, primarily due to the glut of citrus fruit on the market which
severely depressed the fruit prices. As a result of the unfavorable second
quarter operating results of the Agricultural Partnerships, the Company has
recorded a loan loss reserve of approximately $678,000 which is reflected in the
Statement of Operations at June 30, 2000. In addition, the Company has agreed to
guarantee the obligations of the Agricultural Partnerships under certain
equipment leases, up to $220,000. At June 30, 2000, total loans incurred by the
Agricultural Partnerships totaled approximately $3,620,000.
In December 1997, Big 4 Farming LLC ("Farming", owned 80% by the Company
and 20% by Visalia) entered into a farming services agreement (the "Farming
Contract") with each of the Partnerships, pursuant to which it provides farm
operation services on a year-to-year basis. The farm operation services provided
by Farming include contracting for the picking, packing, and hauling of the
crops. The Visalia minority interest ownership of Farming is included in the
Consolidated Balance Sheet at June 30, 2000 and December 31, 1999 as "Minority
interest" in the amount of $53,000 and $50,000, respectively. Visalia's portion
of Farming's net earnings for the three and six months ended June 30, 2000
amounted to $2,000 and $3,000, respectively, and is included in the Consolidated
Statement of Operations as "Minority interest".
-11-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2000
________________________________________________________________________________
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. In addition, Farming 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 term 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, 2000, Cecilia received a fee of $18,000 and 36,000, which was accrued but
not paid at June 30, 2000. The $534,000 and $263,000 reflected below as "Due to
Big 4 Farming LLC" at June 30, 2000 and at December 31, 1999 represent expenses
paid by Farming on behalf of the Agricultural Partnerships not yet drawn down on
the Crop Financing Line.
Summarized financial information of the Agricultural Partnerships as of
June 30, 2000 and December 31, 1999 and the results of operation for the six
months ended June 30, 2000 and 1999 follows:
Condensed Balance Sheet (In thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------- ------
<S> <C> <C>
Accounts receivable $ 163 $ --
Inventory (cultural costs) 813 1,188
Property and equipment, net 5,532 5,716
Deferred loan costs 60 68
------- ------
Total assets $ 6,568 $6,972
======= ======
Accounts payable $ -- $ --
Due to Big 4 Farming LLC 534 263
Line of Credit with Citadel 3,170 2,730
Loans payable to Visalia LLC 449 339
Loans payable to Suburban 57 63
Mortgage note payable 4,050 4,050
Partners deficit (1,692) (473)
------- ------
Total liabilities and partners deficit $ 6,568 $6,972
======= ======
</TABLE>
The Prudential Purchase Money Loan in the amount of $4,050,000 is secured
by, among other things, a first priority mortgage lien on the property, has a
ten-year maturity and accrues interest, payable quarterly, at a fixed rate of
7.7%. In order to defer principal payments until January 1, 2002, the
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, 2000, the Agricultural Partnerships have
made the required capital expenditures of approximately $550,000 consisting
primarily of new tree plantings and improvements to irrigation systems.
-12-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2000
________________________________________________________________________________
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
------- -----
(In thousands)
<S> <C> <C>
Sales of crops $ 1,408 $ 646
Costs of sales (1,987) (442)
------- -----
Gross margin (579) 204
General and administrative expense (1) (187) (164)
Depreciation (268) (253)
Income from Federal grants 134 204
Interest expense (319) (228)
------- -----
Net (loss) $(1,219) $(237)
======= =====
Equity loss - 40% Citadel $ (488) $ (95)
Loan loss provision for the Crop Financing Line (678) --
Interest income from the Crop Financing Line (2) 59 29
------- -----
Net (loss) from investment in and advances to
Agriculture Partnership $ (100) $(100)
======= =====
Agricultural Partnerships $(1,107) $ (66)
======= =====
</TABLE>
___________________________
(1) Reflects reimbursement of expenses and fees to Big 4 Farming LLC, an 80%
owned subsidiary.
(2) Interest income earned amounted to approximately $145,000 and $72,000
during the six months ended June 30, 2000 and 1999, respectively, and
amounted to $78,000 and $40,000 for the three months ended June 30, 2000
and 1999, respectively. 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 amounting to approximately $87,000 and $43,200 for the
six months ended June 30, 2000 and 1999, respectively, and $46,800 and
$24,000 for the three months ended June 30, 2000 and 1999, respectively,
for financial statement purposes.
Note 6 - Mortgage Note Payable
------------------------------
On December 14, 1999, the Company entered into an $11,000,000 ten-year loan
agreement with Nationwide Life Insurance Company. The loan is secured with the
deed of trust to the Brand property and accrues interest at 8.18% per annum.
Under the terms of the loan agreement, the Company began making monthly payments
of approximately $86,200 per month starting February 2000 and any unpaid
principal and accrued interest will become due in January 2010. The loan
agreement contains various non-financial covenants regarding the use and
maintenance of the property.
-13-
<PAGE>
Note 7 - Taxes on Income
------------------------
The provision (benefit) for income taxes for the three and six months ended June
30, 2000 amounted to approximately ($23,000) and $76,000, respectively,
representing a provision for estimated federal and State taxes.
Note 8 - 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
or $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, 2000 and December 31, 1999. 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 or 120 days following
the Company's written demand for payment. Interest income from the Craig
Secured Note amounted to approximately $56,000 and $40,000 for the three months
ended June 30, 2000 and 1999, and amounted to approximately $100,000 and $78,000
for the six months ended June 30, 2000 and 1999, respectively. The Craig
Secured Note may be prepaid, in whole or in part, at any time by Craig without
penalty or premium.
On January 4, 2000, the Company reorganized under a new Nevada holding
company. In that transaction, the outstanding shares of the Company's Common
Stock were converted into 5,335,913 shares of Class A Nonvoting Common Stock and
1,333,200 shares of Class B Voting Common Stock as of January 4, 2000.
Note 9 - Employee Stock Option Plans
------------------------------------
Pursuant to the Citadel Holding Corporation 1996 Nonemployee Director Stock
Option Plan effective October 1996 (the "1996 Stock Option Plan"), each director
of the Company who is not an employee or officer of the Company was granted,
upon being named a director of Citadel, immediately vested options to purchase a
total of 10,000 shares of Citadel Common Stock at an exercise price as defined
in the 1996 Stock Option Plan. The 1996 Plan has been amended to provide that
no further options can be granted under the 1996 Plan. Except for the options
held by former director, Ronald I. Simon, there are no outstanding options under
the 1996 Plan. When Mr. Simon was elected to the Board, he received options to
acquire 10,000 shares of the Company's Common Stock under the 1996 Plan. Mr.
Simon's options are currently valid and exercisable and, as a result of the
restructure of the Company's capital stock into two classes on January 4, 2000,
have automatically converted into options to acquire 8,000 and 2,000 shares,
respectively, of the Non-Voting and Voting Common Stock.
-14-
<PAGE>
The 1999 Stock Option Plan of Citadel Holding Corporation (the "1999 Stock
Option Plan") authorizes the grant of options to certain employees and directors
of the Company or any Company "affiliate" (as defined in the 1999 Plan) at
exercise prices not less than the market price at the date of grant. Employees
are eligible for incentive stock options ("ISOs") and employees and directors
are eligible for what are commonly known as "nonqualified options" ("NQOs").
Options may only be granted for ten years from the date of the plan's adoption,
and options granted under the 1999 Plan expire after ten years unless extended.
The options are exercisable in installments, generally beginning one year after
the date of grant, except for shares granted to directors which vest
immediately.
The 1999 Stock Option Plan is administered by an Administrator who
determines the persons to whom the options should be granted, sets the number
and timing of any options granted, and prescribes the rules and regulations
applicable to the options. The Board of Directors has formed the "Stock Option
Committee", comprised entirely of independent non-employee directors, to be the
Administrator of the 1999 Plan. The Board has appointed directors William C.
Soady and Alfred Villasenor Jr. as the initial members of the Stock Option
Committee.
On April 13, 2000, the Stock Option Committee granted each of the Citadel
directors, other than Messrs. Cotter and Tompkins, options to acquire 20,000
shares of the Class A Non-Voting Common Stock. In addition, certain officers of
the Company (including Mr. Tompkins) were granted options to acquire shares of
Class A Non-Voting Common Stock. The Options were granted with the support of
the Board of Directors and on the condition that the recipients surrender any
options held under the 1996 Stock Option Plan. The options granted on April 13,
2000 total 155,000 option shares, of which 71,000 are vested. All stock options
granted on April 13, 2000 have an exercise price of $2.76 per share which was
determined as the average stock trading price for the ten days immediately
preceding the issuance date. None of these options are exercisable until
appropriately approved by the stockholders entitled to vote on such issue. As
of June 30, 2000, no change has occurred in the number of options outstanding
and vested under the 1999 Plan.
Note 10 - 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, 2000 and 1999 (in thousands).
<TABLE>
<CAPTION>
Rental Agricultural
Three Months Ended June 30: Real Estate Operations Corporate (1) Consolidated
---------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
2000:
----
Revenues $ 555 $ 16 $ 34 $ 605
Earnings (losses) before taxes 374 (1,007) (76) (709)
1999:
----
Revenues $ 1,186 $ 9 $ 77 $ 1,272
Earnings (losses) before taxes 13,663 41 (157) 13,547
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30:
<S> <C> <C> <C> <C>
2000:
----
Revenues $ 1,118 $ 20 $ 69 $ 1,207
Earnings (losses) before taxes 813 (1,107) (85) (379)
1999:
----
Revenues $ 2,601 $ 10 $ 155 $ 2,766
Earnings (losses) before taxes 14,257 (59) (159) 14,039
</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.
Note 11 - Comprehensive Income
------------------------------
The Company adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes rules for
the reporting and presentation of comprehensive income and its components. SFAS
130 requires the Company to classify unrealized gains and/or losses on
available-for-sale securities as comprehensive income.
For the three and six months ended June 30, 2000, the Company's
comprehensive loss amounted to ($753,000) indusive of ($298,000) of other
comprehensive loss and to ($897,000) indusive of ($211,000) of other
comprehensive loss, respectively.
Note 12 - Subsequent Events
---------------------------
In December 1998, Reading Entertainment, a principal stockholder of the
Company, James, J. Cotter, the Chairman of the Board of the Company, Craig
Corporation and Michael R. Forman entered into an Agreement in Principle (the
"Reading Agreement in Principle") providing for a series of transactions which
contemplated Reading Entertainment leasing or acquiring various cinemas and live
theatre properties held by entities owned by Messrs. Cotter and Forman. Through
their interest in Craig Corporation, Messrs. Cotter and Forman are principal
stockholders of both Reading and the Company.
In May 2000, the Company and Reading Entertainment entered into an
agreement ("Reading Assignment") in which Reading Entertainment assigned its
rights, and the Company assumed Reading Entertainment's obligations, under the
Reading Agreement in Principle, subject to certain modifications agreed to by
Messrs. Cotter and Forman. Under the Reading assignment, the Company reimbursed
Reading Entertainment for a deposit of $1,000,000 that Reading Entertainment had
made under the Reading Agreement in Principle.
-16-
<PAGE>
The modified Reading Agreement in Principle provided for the Company to
sublease, from Sutton Hill Associates ("Sutton Hill", a partnership owned
equally by Messrs. Cotter and Forman) and operate four cinemas, and manage three
other cinemas then managed by City Cinemas Corporation (a company also owned by
Messrs. Cotter and Forman), all of which are located in Manhattan (New York
City) and which together are known as the "City Cinemas Circuit". The Reading
Agreement in Principle also provided for the merger ("OBI Merger") with Off
Broadway Investments, Inc. ("OBI"), which is in the business of owning or
leasing off-Broadway style theatres in the New York City and leasing that space
to producers of off-Broadway theatrical presentations. OBI owns two live
theatres in New York City, the Orpheum and Minetta Lane Theatres, and leases a
third live theatre, the Union Square Theatre. OBI has a right of first refusal
to buy the property in which the Union Square Theatre is located, and the
landlord has informed OBI that it is currently marketing that property for sale.
The Company will consider exercising this right of first refusal if the price
for the property is commercially reasonable. In addition, the Reading Agreement
in Principle provided for certain other transactions, as described below.
On July 28, 2000, the Company and Sutton Hill reached agreement on
definitive documentation for the transactions contemplated by the modified
Reading Agreement in Principle (collectively, including the OBI Merger, the
"Sutton Hill Transactions"). The agreements and other documents relating to the
Sutton Hill Transactions (the "Sutton Hill Transaction Documents") will be
delivered on behalf of the parties upon receipt by Sutton Hill of certain third-
party consents. If Sutton Hill does not receive such consents by August 25,
2000, the Sutton Hill Transaction Documents will not become effective, unless
the partners agree to an extension of the delivery date. Absent a material
adverse change, it is likely that the partners would agree to such an extension
if the same should be required to obtain such consents. The Sutton Hill
Transactions, once effective, will include:
[a] An operating sublease ("Operating Lease") between a subsidiary of the
Company and Sutton Hill Capital, LLC ("SHC"), a wholly-owned subsidiary of
Sutton Hill. Under the Operating Lease, the Company will sublease from SHC
four Manhattan theatres (the "City Cinemas Theatres"), for a term of ten
years at an annual rent of $3,217,500, subject to certain cost-of-living
and other adjustments. In addition, the Company will be responsible for
the rent and other payments due under the underlying leases, which
currently aggregate approximately $990,000 per year (including $330,000
payable to affiliates of Mr. Forman). At the end of the initial ten-year
term, the Company will have options to either purchase the underlying
leases for the City Cinemas Theatres, for a cash purchase price of $44
million, or renew the Operating Lease at the then fair market rental. The
Company will pay $5,000,000 in cash (including the deposit referred to
above) in consideration of the option, which will be a credit against the
purchase price if the option is exercised. In addition, if the Company
exercises the purchase option, the Company will also have the option to
purchase from an affiliate of Mr. Forman, for an additional $4,000,000 in
cash, the fee interests underlying two of the City Cinemas Theatres.
[b] An agreement between the Company and City Cinemas, for the Company to
act as sub-manager for three cinemas for which City Cinemas is the manager.
Also, City Cinemas will assign to the Company management agreements,
between Reading Entertainment and City Cinemas, under which City Cinemas
manages the Angelika Film Center and Cafe and certain other theatres
controlled by Reading Entertainment.
-17-
<PAGE>
[c] The purchase by the Company from Messrs. Cotter and Forman of a one-
sixth interest in Angelika Film Centers, LLC ("AFC"), which owns and
operates the Angelika Film Center Cafe. In payment for that interest, the
Company will issue notes in the aggregate principal amount of $4,500,000,
which will bear interest at the rate of 8.25%, payable quarterly, and
mature two years from July 28, 2000.
[d] A credit facility (the "SHC Credit Facility"), under which SHC may
borrow up to $28,000,000 from the Company. Borrowings under the SHC Credit
Facility will bear interest at the rate of 8.25% (subject to certain
adjustments), payable quarterly, and will mature on December 1, 2010, or if
earlier, the closing of the Company's purchase of the leases for the City
Cinemas Theatres on exercise of its purchase option under the Operating
Lease. The Company will not be obligated to make such loans prior to July
28, 2007, although the Company has certain options to accelerate that date.
The indebtedness under the SHC Credit Facility will be secured by a pledge
of the membership interest in SHC and will be subordinate to $11 million of
indebtedness of SHC to an affiliate of Mr. Forman.
[e] The OBI Merger which will be consummated by merging OBI into Citadel
Off Broadway Theatres, Inc., a wholly-owned subsidiary of the Company,
which will be the surviving corporation, provided the holders of Class B
Voting Common Stock approve the issuance of shares of the Company's two
classes of stock to acquire OBI. The Company will issue up to 2,625,820
shares of Class A Non-Voting Common stock and 656,455 shares of Class B
Voting Common stock in the OBI Merger. If the issuance of shares is not
approved, the OBI Merger will be completed by the Company paying
$10,000,000 cash, less certain expense.
[f] A first right of negotiation to acquire the remainder of Reading
Entertainment's domestic cinema assets.
The Operating Lease, the AFC purchase agreement, the SHC Credit Facility,
the OBI Merger, and related matters were negotiated and approved by the
Conflicts Committee, which received an opinion from its financial advisor as to
the fairness of the transaction to the Company.
-18-
<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, 2000, ("2000 Three Months") with the three months ended
June 30, 1999 ("1999 Three Months") and a comparison of the results of
operations for the six months ended June 30, 2000 ("2000 Six Months") with the
six months ended June 30, 1999 ("1999 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 loss for the 2000 Three Months amounted to ($686,000) or
($0.10) per basic share as compared to net earnings of $8,004,000 or $1.20 per
basic share for the 1999 Three Months. Net loss for the 2000 Six Months
amounted to ($455,000) or ($0.07) per basic share as compared to net earnings of
$8,474,000 or $1.27 per basic share for the 1999 Six Months. The significant
decrease in net earnings in the 2000 periods as compared to the 1999 periods is
attributable to (1) approximately $13,337,000 of gain on sale of a rental
property being included in the Consolidated Statement of Operations for the 1999
period, (2) a decrease in the rental income, real estate operating expenses, and
depreciation in the 2000 periods as compared to the 1999 period as a result of
the rental property being sold in June 1999, (3) $678,000 of loan loss provision
recorded in the second quarter of 2000 as discussed below and (4) approximately
$114,000 of dividend income from the Reading Preferred Stock which was not
received until July 2000.
Rental income amounted to $555,000 and $1,118,000 for the 2000 Three and Six
Months, respectively, as compared to $1,186,000 and $2,601,000 for the 1999
Three and Six Months, respectively. Real estate operating expenses decreased to
$201,000 in the 2000 Three Months as compared to $350,000 in the 1999 Three
Months and decreased to $410,000 in the 2000 Six Months as compared to $918,000
in the 1999 Six Months, reflecting the sale of the building located in Phoenix,
Arizona, on June 2, 1999, as well as slightly lower operating costs at the
remaining rental property in Glendale, California.
Consulting income from shareholder amounted to $34,000 and $69,000 in the
2000 Three and Six Months as compared to $77,000 and $155,000 in the 1999 Three
and Six Months, respectively. The Company provides a substantial portion of its
executive's time providing real estate consulting services to Reading in
connection with the development by Reading of multiplex cinemas in the United
States, Australia and New Zealand. As a result of the significant decrease in
the number of new development projects for Reading, the Company's consulting
income decreased for the 2000 Three and Six Months and reflects the reduction in
services provided by Citadel to Reading as compared to the 1999 Three and Six
Months.
Included in the Statement of Operations as "(Loss) earnings from investment
in and advances to Agricultural Partnerships" is the loss in the 2000 Three and
Six Months amounting to ($1,007,000) and ($1,107,000), respectively, and the
earnings (loss) in the 1999 Three and Six Months of $34,000 and ($66,000),
respectively. Since the freeze in Fiscal 1998 that destroyed virtually all of
the Agricultural Partnerships' 1998-1999 citrus crop, the Company has funded the
Agricultural Partnerships on an 80/20 basis with Visalia LLC as the Agricultural
Partnerships had no funds to meet their operational expenses. The Big 4 Ranch,
Inc. ("BRI"), likewise, had no resources to make additional capital
contributions.
-19-
<PAGE>
Accordingly, the Company and Visalia LLC funded the Agricultural Partnerships
anticipating repayment on the advances to and interest income from the
Agricultural Partnerships when the 2000-2001 crop was harvested and sold during
the second and third quarters of Fiscal 2000.
During the second quarter of 2000, however, the citrus fruit prices
declined sharply due to the over-abundance of citrus products and as a result,
the Agricultural Partnerships recorded a net loss of ($903,000) and ($1,219,000)
for the Three and Six months ended June 30, 2000, respectively. Given the
unfavorable second quarter operating results of the Agricultural Partnerships,
the Company has recorded a loan loss reserve of approximately $678,000 in the
second quarter of 2000. The Company believes that such loan loss provision was
warranted based on the disappointing 1999-2000 results. In addition, the Company
has elected not to record the other partners' 60% portion of the interest income
(earned at prime plus 100 basis points) for the financial statements purposes
which amounted to approximately $40,000 and $87,000 for the Three and Six Months
2000, respectively. At June 30, 2000, the Agricultural Partnerships had deficit
partner's capital of approximately ($1,692,000).
Interest income (reflected in the Statement of Operations as "Interest
income" and "Interest income from shareholders") increased between the 2000 and
1999 periods and amounted to $407,000 and $801,000 for the Three and Six Months
2000, respectively, as compared to $125,000 and $208,000 for the Three and Six
Months 1999, respectively. The overall increase is a result of the increased
cash balances due to the $11,000,000 received from the refinancing agreement
with Nationwide in December 1999 as well as the rising interest rate during the
Three and Six Months 2000 as compared to the same periods in 1999.
Dividend income from investment in Reading decreased between the 2000 and
1999 periods and amounted to $0 and $114,000 for the Three and Six Months 2000,
respectively, as compared to $114,000 and $228,000 for the Three and Six Months
1999. The Board of Directors of Reading Entertainment, Inc. ("REI") had
approved the payment of the second quarter 2000 dividend on the REI Series A
Preferred Stock in July 2000, and the second quarter dividend received by the
Company in July 2000 will be recorded in the Statement of Operations for the
third quarter 2000. REI reported a net loss applicable to common shareholders of
approximately ($1,728,000) and ($5,020,000) for the Three and Six Months 2000,
respectively, as compared to net loss applicable to common shareholders of
approximately ($815,000) and ($3,355,000) in the Three and Six Months 1999.
General and administrative expenses decreased in the Three and Six Months
2000 and amounted to $212,000 and $443,000, respectively, as compared to
$501,000 and $751,000 in the Three and Six Months 1999, respectively. The Three
and Six Months 1999 includes a $250,000 charge for consulting fees payable over
the twelve month period beginning August 1, 1999 to the Company's former
President, who resigned effective August 1, 1999. In addition, the Company
experienced an overall decrease in general and administrative expenses during
the Three and Six Months 2000 primarily as a result of the Company disposal of
the rental property in Phoenix, Arizona in June 1999.
Interest expense was $224,000 and $449,000 for the Three and Six Months
2000 respectively, as compared to $324,000 and $556,000 for the Three and Six
Months 1999, respectively. Two mortgage loans that were outstanding during the
Three and Six Months 1999 were paid off in June 1999, concurrently with the sale
of the property in Phoenix, Arizona. In December 1999, however, the Company
entered into an $11,000,000 loan agreement with Nationswide Bank (the "$11M
Note"). The decrease in the interest expense is generally attributable to the
lower interest rate negotiated on the $11,000,000 loan, the effect of which was
slightly offset by an increase in the outstanding loan principal. The $11M Note
accrues interest at a fixed rate of 8.18% per annum. The terms of the mortgage
loans
-20-
<PAGE>
outstanding during the 1999 Three and Six Months provided for an adjustable rate
of interest, which rate amounted to approximately 9.44%.
Business Plan, Capital Resources and Liquidity
Business Plan
-------------
The Company has been engaged in recent periods primarily in the business of
owning and managing its real estate intensive assets and in the offering of
various real estate consulting services to its affiliates. The Company intends,
at least for the near term, to continue to manage its commercial real estate, to
provide real estate consulting services to its affiliates, and to explore
opportunities in the real estate-based segment of the entertainment industry. In
regards to the Company's investment in the Agricultural Partnerships, the
Company's management and the board of directors are reviewing the options
available to the Company.
In December 1998, Reading Entertainment, a principal stockholder of the
Company, James, J. Cotter, the Chairman of the Board of the Company, Craig
Corporation and Michael R. Forman entered into an
Agreement in Principle (the "Reading Agreement in Principle") providing for a
series of transactions which contemplated Reading Entertainment leasing or
acquiring various cinemas and live theatre properties held by entities owned by
Messrs. Cotter and Forman. Through their interest in Craig Corporation, Messrs.
Cotter and Forman are principal stockholders of both Reading and the Company.
In May 2000, the Company and Reading Entertainment entered into an
agreement ("Reading Assignment") in which Reading Entertainment assigned its
rights, and the Company assumed Reading Entertainment's obligations, under the
Reading Agreement in Principle, subject to certain modifications agreed to by
Messrs. Cotter and Forman. Under Reading assignment, the Company reimbursed
Reading Entertainment for a deposit of $1,000,000 that Reading Entertainment had
made under the Reading Agreement in Principle.
The modified Reading Agreement in Principle provided for the Company to
sublease, from Sutton Hill Associates ("Sutton Hill", a partnership owned
equally by Messrs. Cotter and Forman) and operate four cinemas, and manage three
other cinemas then managed by City Cinemas Corporation (a company also owned by
Messrs. Cotter and Forman), all of which are located in Manhattan (New York
City) and which together are known as the "City Cinemas Circuit". The Reading
Agreement in Principle also provided for the merger ("OBI Merger") with Off
Broadway Investments, Inc. ("OBI"), which is in the business of owning or
leasing off-Broadway style theatres in the New York City and leasing that space
to producers of off-Broadway theatrical presentations. OBI owns two live
theatres in New York City, the Orpheum and Minetta Lane Theatres, and leases a
third live theatre, the Union Square Theatre. OBI has a right of first refusal
to buy the property in which the Union Square Theatre is located, and the
landlord has informed OBI that it is currently marketing that property for sale.
The Company will consider exercising this right of first refusal if the price
for the property is commercially reasonable. In addition, the Reading Agreement
in Principle provided for certain other transactions, as described below.
On July 28, 2000, the Company and Sutton Hill reached agreement on
definitive documentation for the transactions contemplated by the modified
Reading Agreement in Principle (collectively,
-21-
<PAGE>
including the OBI Merger, the "Sutton Hill Transactions"). The agreements and
other documents relating to the Sutton Hill Transactions (the "Sutton Hill
Transaction Documents") will be delivered on behalf of the parties upon receipt
by Sutton Hill of certain third-party consents. If Sutton Hill does not receive
such consents by August 25, 2000, the Sutton Hill Transaction Documents will not
become effective, unless the partners agree to an extension of the delivery
date. Absent a material adverse change, it is likely that the partners would
agree to such an extension if the same should be required to obtain such
consents. The Sutton Hill Transactions, once effective, will include:
[a] An operating sublease ("Operating Lease") between a subsidiary of the
Company and Sutton Hill Capital, LLC ("SHC"), a wholly-owned subsidiary of
Sutton Hill. Under the Operating Lease, the Company will sublease from SHC
four Manhattan theatres (the "City Cinemas Theatres"), for a term of ten
years at an annual rent of $3,217,500, subject to certain cost-of-living
and other adjustments. In addition, the Company will be responsible for
the rent and other payments due under the underlying leases, which
currently aggregate approximately $990,000 per year (including $330,000
payable to affiliates of Mr. Forman). At the end of the initial ten-year
term, the Company will have options to either purchase the underlying
leases for the City Cinemas Theatres, for a cash purchase price of $44
million, or renew the Operating Lease at the then fair market rental. The
Company will pay $5,000,000 in cash (including the deposit referred to
above) in consideration of the option, which will be a credit against the
purchase price if the option is exercised. In addition, if the Company
exercises the purchase option, the Company will also have the option to
purchase from an affiliate of Mr. Forman, for an additional $4,000,000 in
cash, the fee interests underlying two of the City Cinemas Theatres.
[b] An agreement between the Company and City Cinemas, for the Company to
act as sub-manager for three cinemas for which City Cinemas is the manager.
Also, City Cinemas will assign to the Company management agreements,
between Reading Entertainment and City Cinemas, under which City Cinemas
manages the Angelika Film Center and Cafe and certain other theatres
controlled by Reading Entertainment.
[c] The purchase by the Company from Messrs. Cotter and Forman of a one-
sixth interest in Angelika Film Centers, LLC ("AFC"), which owns and
operates the Angelika Film Center Cafe. In payment for that interest, the
Company will issue notes in the aggregate principal amount of $4,500,000,
which will bear interest at the rate of 8.25%, payable quarterly, and
mature two years from July 28, 2000.
[d] A credit facility (the "SHC Credit Facility"), under which SHC may
borrow up to $28,000,000 from the Company. Borrowings under the SHC Credit
Facility will bear interest at the rate of 8.25% (subject to certain
adjustments), payable quarterly, and will mature on December 1, 2010, or if
earlier, the closing of the Company's purchase of the leases for the City
Cinemas Theatres on exercise of its purchase option under the Operating
Lease. The Company will not be obligated to make such loans prior to July
28, 2007, although the Company has certain options to accelerate that date.
The indebtedness under the SHC Credit Facility will be secured by a pledge
of the membership interest in SHC and will be subordinate to $11 million of
indebtedness of SHC to an affiliate of Mr. Forman.
[e] The OBI Merger which will be consummated by merging OBI into Citadel
Off Broadway Theatres, Inc., a wholly-owned subsidiary of the Company,
which will be the surviving corporation, provided the holders of Class B
Voting Common Stock approve the issuance of shares of the Company's two
classes of stock to acquire OBI. The Company will issue up to 2,625,820
shares of Class A Non-Voting Common Stock and 656,455 shares of Class B
Voting
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<PAGE>
Common Stock in the OBI Merger. If the issuance of shares is not approved,
the OBI Merger will be completed by the Company paying $10,000,000 cash,
less certain expenses.
[f] A first right of negotiation to acquire the remainder of Reading
Entertainment's domestic cinema assets.
The Operating Lease, the AFC purchase agreement, the SHC Credit Facility,
the OBI Merger, and related matters were negotiated and approved by the
Conflicts Committee, which received an opinion from its financial advisor as to
the fairness of the transaction to the Company.
Capital Resources and Liquidity
-------------------------------
Cash and cash equivalents decreased approximately $3,292,000 from
$24,732,000 at December 31, 1999 to $21,440,000 at June 30, 2000. Net cash used
in investing activities amounted to $728,000 in the 2000 Six Months and reflects
additional purchase of National Auto Credit, Inc. and Gish Biomedical, Inc.'s
common stock during this period, partially offset by unrealized loss on the
securities. Net cash used in financing activities amounted to $1,957,000 in the
2000 Six Months and resulted from (i) $711,000 in additional funding made to the
Agriculture Partnerships, (ii) a loan to Royal George LLC in the amount of
$1,200,000 at an interest rate of 10%, and (iii) the payments made on the $11M
Note.
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, and (iii) preferred stock dividend,
payable quarterly, from REI amounting to approximately $455,000, annually.
In the short term, uses of funds are expected to include (i) funding of the
Agricultural Partnerships under the Crop Financing Line, (ii) funding of the
Glendale Building leasehold and tenant improvements of approximately $1,501,000,
(iii) operating expenses, (iv) debt service pursuant to the $11,000,000 property
mortgage, and (v) the pending acquisition of the City Cinemas and Angelika Film
Center assets. In addition, the Company had agreed to provide a $200,000 line of
credit to the Big 4 Ranch, Inc. as part of its spin-off. 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.
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,"
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<PAGE>
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.
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<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, 1999.
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 (filed herewith)
A. Reports on Form 8-K
None
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<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
Chief Executive Officer
August 14, 2000
/s/ Andrzej Matyczynski
-----------------------
Andrzej Matyczynski
Chief Financial Officer
August 14, 2000
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