<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 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 (IRS Employer Identification No.)
incorporation or organization)
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 November 10, 2000, there
were 7,958,379 shares of Class A Nonvoting Common Stock, $0.01 par value per
share and 1,989,585 shares of Class B Voting Common Stock, $0.01 par value per
share outstanding.
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<PAGE>
CITADEL HOLDING CORPORATION AND SUBSIDIARIES
INDEX
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<TABLE>
<CAPTION>
Page
----
PART I. Financial Information
------
Item 1. Financial Statements
<S> <C> <C>
Consolidated Balance Sheets
as of September 30, 2000 (Unaudited) and December 31, 1999....... 1
Consolidated Statements of Operations
for the Three and Nine Months Ended
September 30, 2000 and 1999 (Unaudited)......................... 3
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2000 and 1999 (Unaudited) 4
Notes to Consolidated Financial Statements........................ 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.................. 20
PART II. Other Information
-------
Item 1. Legal Proceedings.................................................. 24
Item 2. Changes in Securities.............................................. 24
Item 3. Defaults Upon Senior Securities.................................... 24
Item 4. Submission of Matters to a Vote of Security Holders................ 24
Item 5. Other Information.................................................. 24
Item 6. Exhibits and Reports on Form 8-K................................... 25
Signatures......................................................... 26
</TABLE>
<PAGE>
PART I - Financial Information
------------------------------
Item 1 - Financial Statements
Citadel Holding Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents (Note 1) $15,522 $24,732
Investment in Gish Biomedical, Inc. (Note 1) 1,217 1,831
Investment in National Auto Credit, Inc. (Note 1) 792 214
Other receivables 886 95
Deferred tax asset, net 1,312 1,125
---------------------------------------------------------------------------------------------------------------------
Total current assets 19,729 27,997
Rental property, net (Note 2) 8,336 7,731
Property and equipment, net (Note 2) 10,577 --
Investment in shareholder affiliate (Note 3) 7,000 7,000
Investment in Angelika Film Center LLC (Note 11) 3,254 --
Equity investment in and advances to
Agricultural Partnerships (Note 4) -- 2,669
Intangible assets, net (Note 1) 6,778 944
Other assets 5,879 865
---------------------------------------------------------------------------------------------------------------------
Total assets $61,553 $47,206
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</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
Citadel Holding Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable and accrued liabilities $ 5,674 $ 2,282
Current portion of mortgage note payable (Note 5) 1,035 128
------------------------------------------------------------------------------------------------------------------------
Total current liabilities 6,709 2,410
Minority interest in consolidated affiliate (Note 4) 53 50
Note payable to Sutton Hill Associates (Note 11) 4,500 --
Long-term portion of mortgage notes payable (Note 5) 9,873 10,872
Other liabilities 441 391
------------------------------------------------------------------------------------------------------------------------
Total liabilities 21,576 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 7) -- 67
Class A Nonvoting Common Stock, par value $0.01, 100,000,000
shares authorized, 7,958,379 issued and outstanding 80 --
Class B Voting Common Stock, par value $0.01, 20,000,000
shares authorized, 1,989,585 issued and outstanding 20 --
Additional paid-in capital 69,571 59,603
Accumulated deficit (27,493) (24,444)
Accumulated other comprehensive (loss) income (Note 10) (203) 255
Note receivable from stockholder (1,998) (1,998)
--------------------------------------------------------------------------------------------------------------
Total stockholders' equity 39,977 33,483
--------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 61,553 $ 47,206
---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- ------------
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues
Theater $ 1,317 $ -- $ 1,317 $ --
Real estate 602 551 1,720 3,152
Farm management fee 1 -- 21 10
Consulting income from shareholder 35 49 104 204
-------------------------------------------------------------------------------------------------------------------------
1,955 600 3,162 3,366
-------------------------------------------------------------------------------------------------------------------------
Operating expenses
Theater (1,680) -- (1,680) --
Real estate (202) (178) (552) (1,096)
Depreciation and amortization (161) (66) (310) (272)
General and administrative (324) (265) (767) (1,016)
-------------------------------------------------------------------------------------------------------------------------
(2,367) (509) (3,309) (2,384)
-------------------------------------------------------------------------------------------------------------------------
Operating (loss) earnings (412) 91 (147) 982
Other revenues (expenses)
Interest income 325 196 1,026 326
Dividends on Reading
preferred stock (Note 3) 227 113 341 341
Interest income from shareholder 79 41 179 119
Equity earnings of Angelika 15 -- 15 --
Interest expense (257) -- (706) (556)
Loss from investment in and advances to
Agricultural Partnerships (Note 4) (2,647) (109) (3,754) (175)
Gain on sale of property -- -- -- 13,337
-------------------------------------------------------------------------------------------------------------------------
(Loss) earnings before minority interest
and income taxes (2,670) 332 (3,046) 14,374
Minority interest -- 1 (3) (2)
-------------------------------------------------------------------------------------------------------------------------
(Loss) earnings before income taxes (2,670) 333 (3,049) 14,372
Income tax benefit (expense) (Note 6) 76 422 -- (5,143)
-------------------------------------------------------------------------------------------------------------------------
Net (loss) earnings $(2,594) $ 755 $(3,049) $ 9,229
-------------------------------------------------------------------------------------------------------------------------
Basic and diluted (loss) earnings per share
(Note 1) $ (0.38) $ 0.11 $ (0.45) $ 1.38
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------
2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net (loss) earnings $ (3,049) $ 9,229
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for loss on advances to Agricultural 2,601 (1,096)
Partnerships
Depreciation and amortization 310 272
Change in deferred income taxes 59 3,967
Other, net 123 212
Minority interest 3 2
Equity in the earnings of the Angelika Film Center LLC (15) --
Gain on sale of property -- (13,337)
Changes in assets and liabilities:
(Increase) decrease in other receivables (791) 462
Decrease (increase) in other assets 41 (31)
Increase in intangible assets, net (1,233) --
Increase (decrease) in other liabilities 2,652 (425)
----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 701 (745)
----------------------------------------------------------------------------------------------------------------
Investing activities
Payment of City Cinemas option fee (5,000) --
Purchase of the Royal George Theatre (2,908) --
Payment of acquisition costs (829) --
Purchase of National Auto Credit, Inc. common stock (703) --
Purchase of Angelika Dallas development (356) --
Purchase of Gish Biomedical, Inc. securities (23) (309)
Proceeds from sale of property -- 19,683
Purchase of equipment -- (55)
----------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (9,819) 19,319
----------------------------------------------------------------------------------------------------------------
Financing activities
Repayment of long-term borrowings (92) (9,224)
Lease contract proceeds -- 199
----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (92) (9,025)
----------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (9,210) 9,549
Cash and cash equivalents at beginning of period 24,732 4,367
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period 15,522 $ 13,916
----------------------------------------------------------------------------------------------------------------
Supplemental Disclosures
Interest paid $ 796 $ 572
Income taxes paid $ -- $ --
Non-Cash Transactions -See Note 11
Purchase of Angelika Interest
Issuance of Common Stock Issuance for OBI
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
Citadel Holding Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2000
________________________________________________________________________________
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Citadel
Holding Corporation and its consolidated subsidiaries ("Citadel" or the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
In September 2000, the Company acquired Off-Broadway Theatres, Inc.
("OBI"), issuing $10,000,000 of the Company's Class A and Class B common stock
to effect the acquisition, and merged OBI into a wholly-owned subsidiary of the
Company. The Company also purchased a 1/6th membership interest in the Angelika
Film Center LLC ("AFC") and acquired leasehold and management rights to operate
eight cinemas (collectively referred to as the "City Cinemas") from Sutton Hill
Associates ("SHA") for $4,500,000. The Company accounted for its acquisition of
OBI in accordance with the purchase method of accounting, with the operations of
OBI included in the Company's operations from the date of acquisition, September
20, 2000. The Company accounts for its interest in AFC using the equity method.
The Company accounts for the City Cinemas' leaseholds as a ten year operating
sub-lease (see Note 11), with an annual rent of $3,217,500.
During the nine months ended September 30, 2000, the Company increased its
ownership of the common stock of National Auto Credit, Inc, Inc. ("NAC") to
1,055,100 shares (3.04% of such shares outstanding) from 342,500 shares (1.25%
of such shares outstanding) at December 31, 1999, at an additional cost of
approximately $703,000. At September 30, 2000, the closing price of NAC common
stock was $0.75 per share. On November 3, 2000, NAC repurchased 21,141,239
shares of its common stock and 100 shares of its preferred stock, resulting in
an increase in the Company's percentage ownership of that company to 7.75% of
the shares outstanding. The Company's investment in NAC common stock is
classified as available-for-sale.
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 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 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 Agricultural Partnerships utilizing the
equity method of accounting (see Note 4).
In October 1996, the Company contributed cash in the amount of $7,000,000
to Reading Entertainment, Inc. ("REI" and collectively, with its consolidated
affiliates, "Reading") in exchange for 70,000 shares of REI Series A Voting
Cumulative Convertible Preferred Stock ("REI Preferred Stock") and
-5-
<PAGE>
a now expired option to transfer all, or substantially all of its assets,
subject to certain limitations, to REI for REI Common Stock. The Company
accounts for its investment in REI at cost (see 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 September 30,
2000 and December 31, 1999, and the results of its operations and its cash flows
for the three and nine months ended September 30, 2000 and 1999. The results of
operations for the three and nine month periods ended September 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 of the information and footnotes required to be in conformity with
generally accepted accounting principles. The financial information provided
herein, including the information under the heading, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," is written with
the presumption that the users of the interim financial statements have read, or
have access to, the most recent Annual Report on Form 10-K which contains the
latest audited financial statements and notes thereto, together with
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 believes
that the Company is in compliance with the requirements of SAB 101, and
therefore does not expect that the adoption of SAB 101 will 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 September 30, 2000 is approximately $14,638,000, 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", the
securities holdings in Gish Biomedical, Inc. ("Gish") and NAC are recorded at
their respective fair values at each reporting date, and are classified as
available-for-sale. Accordingly, any unrealized gains/losses, net of tax, are
reported as a separate component of shareholders' equity.
Intangible Assets
The Company's intangible assets consist of (1) $5,105,000 of goodwill
arising from the OBI purchase, (2) $844,000 of capitalized leasing costs, and
(3) $829,000 of capitalized acquisition costs relating to the OBI and City
Cinemas Transactions. The Company amortizes its capitalized acquisition
-6-
<PAGE>
costs and goodwill over 10 years, and amortizes its capitalized leasing costs
over the term of the underlying tenant lease.
Basic and Diluted Earnings per 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 nine
months ended September 30, 2000 were 7,026,195 and 6,789,520, 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
163,000 and 2,000 shares of Class A and Class B common stock were outstanding at
September 30, 2000, respectively, at a weighted average exercise price of $2.76
and $3.00 per share, respectively (see Note 8). Options to purchase an average
of 31,000 and 45,666 shares of common stock were outstanding during the three
and nine months ended September 30, 1999, respectively. During the three and
nine months ended September 30, 2000, however, the Company recorded a net loss
and therefore, the effect of these stock options was anti-dilutive. Accordingly,
the diluted earnings per share for the three and nine months ended September 30,
2000 were calculated using 7,030,111 and 6,789,958, respectively, the weighted
average number of shares outstanding for the three and nine months ended
September 30, 2000.
Note 2 - Rental Property and Property and Equipment
The table below sets forth the Company's investment in rental property and
property and equipment as of the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Rental Property
Land $ 2,951 $ 2,951
Building and improvements 6,320 5,532
--------------------------------------------------------------------------------------------------------
9,271 8,483
Less accumulated depreciation (935) (752)
--------------------------------------------------------------------------------------------------------
Rental property, net $ 8,336 $ 7,731
--------------------------------------------------------------------------------------------------------
Property and Equipment
Land $ 4,575 $ --
Building 4,148 --
Leasehold interest 1,322 --
Construction-in-progress 380 --
Fixtures and equipment 219 --
--------------------------------------------------------------------------------------------------------
10,644 --
Less accumulated depreciation (67) --
--------------------------------------------------------------------------------------------------------
Property and equipment, net $ 10,577 $ --
--------------------------------------------------------------------------------------------------------
</TABLE>
-7-
<PAGE>
Rental Property
At September 30, 2000 and December 31, 1999, the Company owned one rental
property, an office building located in Glendale, California. This property does
not house any of the Company's operations and is not a part of the Company's
cinema exhibition or live theater businesses. The building's rental space was
subject to long-term leases at each reporting date. Under the existing lease for
a majority of the rental space, the Company is obligated to fund certain
tenant improvements, amounting to approximately $1,985,000. Through September
30, 2000, approximately $788,000 of the Company's commitment had been accrued.
The Company's capitalized basis in the property includes the cost of the land
and improvements. The building improvements are being depreciated over 39 years,
the tenant improvements are being depreciated over the remaining lease term of 7
years, and the capitalized transaction costs are being amortized over 10 years,
or the term of the primary lease.
Property and Equipment
As a result of the OBI acquisition, the City Cinemas Transactions, and the
Royal George Theater acquisition, the Company now owns three live theaters and
has leasehold interests in four cinemas and one live theater (see Notes 1 and
11). During the three months ended September 30, 2000, the Company acquired the
leasehold interest in an 8-screen Angelika cinema currently under construction
in Dallas ("Angelika-Dallas"), and recorded the project as construction-in-
progress, at cost (see Note 11). The land, building and leasehold interests
arising from the OBI and Royal George Theatre acquisitions were recorded at
their fair values.
Note 3 - Investment in Shareholder Affiliate
At September 30, 2000 and December 31, 1999, the Company owned 70,000
shares of REI Preferred Stock. The REI Preferred Stock has (1) a liquidation
preference of $100 per share, or $7,000,000 ("Stated Value"), (2) bears a
cumulative dividend of 6.5%, payable quarterly, and (3) is convertible into
shares of REI Common Stock at a conversion price of $11.50 per share. The
closing price of REI common stock on September 30, 2000 was approximately $3.875
per share. REI may, at its option, redeem the REI 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, or in the event of a change of control of REI, to
require REI to repurchase the REI Preferred Stock for an amount equal to its
Stated Value plus accumulated dividends. In addition, if REI fails to pay
dividends for four consecutive quarters, the Company has the option to require
REI to repurchase the REI Preferred Stock at an amount equal to its Stated Value
plus accumulated dividends.
The Company accounts for its investment in REI at cost, and records as
revenue dividends declared by REI on the REI Preferred Stock. For the three and
nine months ended September 30, 2000, the Company recorded as revenue dividends
of $227,000 and $341,000, respectively, from its investment in REI Preferred
Stock. Due to the absence of symmetry between the Company's reporting and
dividend declaration dates, dividends for the six months ended September 30,
2000 are included in the results for the three months ended September 30, 2000.
However, dividends for the nine months ended September 30, 2000 and 1999 reflect
dividends for each of the three calendar quarters in each period.
-8-
<PAGE>
As of September 30, 2000, the Company and Craig Corporation ("Craig"), a
shareholder affiliate of the Company, owned securities of Reading which afforded
them an aggregate 83% voting interest in Reading, of which Craig's holdings
represented approximately 78% of the voting power of Reading and the Company's
holdings represented approximately 5% of such voting power. As of September 30,
2000, Reading owns 1,690,938 shares of the Company's Class A Nonvoting Common
Stock and 422,734 shares of the Company's Class B Voting Common Stock, or
approximately 21% of the Company's outstanding common stock, and Craig owns
876,885 shares of the Company's Class A Nonvoting Common Stock and 230,521
shares of Class B Voting Common Stock, or approximately 11% of the Company's
outstanding common stock.
Note 4 - Equity Investment and Note Receivable from Agricultural Partnerships
As described in Note 1, the Company has a 40% interest in the Agricultural
Partnerships, which own and manage a 1,600-acre citrus farm in California. In
addition to its equity investment, 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 matured on August 1, 2000, accrue interest
at the Prime Rate plus 100 basis points, payable quarterly. The Company has
extended the Crop Financing Line on a day-to-day basis pending its full review
of its aggregate investments in and commitments to this business.
In December 1998, the Agricultural Partnerships suffered a devastating
freeze which resulted in a loss of its 1998-1999 crop and, as a result, the
Agricultural Partnerships had no funds with which to repay the Crop Financing
Line nor the funds necessary to cover its operating expenses. Big 4 Ranch,
Inc., a 40% owner spun off by the Company in 1997 to its stockholders, likewise
had no funds with which to make further contributions. Accordingly, the Company
wrote off its equity investment in the Agricultural Partnerships in 1998, and
together with Visalia, have since funded the Agricultural Partnerships' expenses
on an 80/20 basis, with the assumption that the Agricultural Partnerships would
become self-sufficient when the 1999 - 2000 crop was harvested and sold. In
addition, the Company has guaranteed the obligations of the Agricultural
Partnerships under certain equipment leases, up to $197,000.
Big 4 Farming LLC ("Farming"), which is owned 80% by the Company and 20% by
Visalia, provides farm operation services to the Agricultural Partnerships and
is paid 5% of the gross agricultural receipts, less certain expenses and
reimbursement of its costs. Farming also has a contract with Cecelia Packing
Corporation ("Cecelia"), an entity owned by James J. Cotter, for certain
consulting, purchasing and bookkeeping services, for which Cecelia receives 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. For the three and nine months ended September 30, 2000, Cecilia
earned fees of $18,000 and $54,000, respectively, none of which had been paid at
September 30, 2000. Included astride the caption "Due to Citadel and Farming"
in the condensed balance sheets of the Agricultural Partnerships which are set
forth below, are $754,000 and $263,000 of expenses paid by Farming on behalf of
the Agricultural Partnerships that were not drawn down on the Crop Financing
Line at September 30, 2000 and at December 31, 1999, respectively. The Visalia
ownership of Farming is included in the Consolidated Balance Sheets at September
30, 2000 and December 31, 1999 as "Minority interest", in the amounts of $53,000
and $50,000, respectively. Visalia's portion of Farming's net earnings for the
-9-
<PAGE>
three and nine months ended September 30, 2000 amounted to $0 and $3,000,
respectively, and is included in the Consolidated Statements of Operations as
"Minority interest".
At December 31, 1999, the Company had a net investment in and advances to
the Agricultural Partnerships of $2,669,000, which amount included advances
under the Crop Financing Line, advances from Farming, and the Company's equity
investment in the Agricultural Partnerships, adjusted for the Company's share of
losses to date. During the nine months ended September 30, 2000, the Company
advanced $662,000 under the Crop Financing Line and, separately, $491,000 from
Farming. Based upon the historically poor financial performance of the
Agricultural Partnerships, the current negative cash flow being generated by the
Agricultural Partnerships, the uncertain prospects for the current harvest, and
uncertainty about the prospects for the Agricultural Partnerships to generate
positive cash flow in the future, management determined, in September 2000, to
fully-reserve its outstanding advances to the Agricultural Partnerships, thereby
reducing to zero the Company's net investment therein at September 30, 2000.
The tables below set forth condensed financial information for the
Agricultural Partnerships for the periods indicated.
<TABLE>
<CAPTION>
September 30, December 31,
Condensed Balance Sheets 2000 1999
----------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Inventory $ 899 $ 1,188
Property and equipment, net 5,407 5,716
Deferred loan costs 56 68
-----------------------------------------------------------------------------------------------------------------
Total assets $ 6,362 $ 6,972
-----------------------------------------------------------------------------------------------------------------
Accounts payable 195 --
Due to Citadel and Farming 4,146 2,993
Loans payable 4,608 4,452
Partners' deficit (2,587) (473)
-----------------------------------------------------------------------------------------------------------------
Total liabilities and partners' deficit $ 6,362 $ 6,972
-----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------ ------------
Condensed Statements of Operations 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenue $ 220 $ 95 $ 1,762 $ 945
Cost of sales (625) (96) (2,612) (538)
-----------------------------------------------------------------------------------------------------------------
Gross margin (405) (1) (850) 407
General and administrative expenses (169) (67) (356) (231)
Depreciation (134) (127) (402) (380)
Interest expense (186) (124) (505) (352)
-----------------------------------------------------------------------------------------------------------------
Net loss $ (894) $(319) $(2,113) $(556)
-----------------------------------------------------------------------------------------------------------------
Components of Citadel's share of net losses
-------------------------------------------
40% of net loss (357) (127) (845) (222)
Loan loss provision (2,324) -- (3,002) --
Interest income 34 18 93 47
-----------------------------------------------------------------------------------------------------------------
Net loss from the Agricultural Partnerships $(2,647) $(109) $(3,754) $(175)
-----------------------------------------------------------------------------------------------------------------
</TABLE>
-10-
<PAGE>
Included in the "Loans Payable" above is the Prudential Purchase Money Loan
in the amount of $4,050,000. The loan is secured by a lien on the property and
certain other assets, has a ten-year maturity and accrues interest, payable
quarterly, at a fixed rate of 7.7%. The Agricultural Partnerships are required
to make capital improvements totaling $500,000 by December 31, 2000 and an
additional $200,000 in improvements by December 31, 2001 in order to defer loan
payments until January 1, 2002. The purchase money mortgage also imposes a
prepayment penalty. As of September 30, 2000, the Agricultural Partnerships
have made the required capital expenditures for Fiscal 2000, totaling
approximately $555,000, and consisting primarily of new tree plantings and
improvements to the irrigation systems.
The general and administrative expenses of ($356,000) and ($231,000) for
the nine months ended September 30, 2000 and 1999, reflect reimbursement of
expenses and fees paid to Big 4 Farming.
Note 5 - Mortgage Note Payable
On December 14, 1999, the Company entered into an $11,000,000, ten-year
loan agreement with an institutional lender. The loan is secured with the deed
of trust to a rental 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. At September 30, 2000, the Company was in compliance with each of
the debt covenants and payments were current.
Note 6 - Taxes on Income
The benefit (provision) for income taxes for the three and nine months
ended September 30, 2000 amounted to approximately $76,000 and $0, respectively,
representing a provision for estimated federal and state taxes.
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,
or $1,998,000. Such exercise was consummated pursuant to delivery by Craig of
its secured promissory note ("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 is included in the Balance Sheet as a contra equity account under the
caption "Note Receivable from shareholder" at September 30, 2000 and December
31, 1999. Interest is payable quarterly in arrears at the Prime Rate.
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 $48,000 and $41,000
for the three months ended September 30, 2000 and 1999, and amounted to
approximately $139,000 and $119,000 for the nine months ended September 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.
-11-
<PAGE>
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. On September 20, 2000, the
Company issued 2,622,466 shares of Class A Nonvoting Common Stock and 655,616
shares of Class B Voting Common Stock, respectively, to acquire OBI.
Note 8 - Employee Stock Option Plans
Pursuant to the Citadel Holding Corporation 1996 Nonemployee Director Stock
Option Plan effective October 1996 ("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 a former director, there are no outstanding options under the 1996 Plan.
When the director was elected to the Board, he received options to acquire
10,000 shares of the Company's Common Stock under the 1996 Plan. These 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.
The 1999 Stock Option Plan of Citadel Holding Corporation ("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 to be administered by an Administrator who
will determine the persons to whom the options should be granted, will set the
number and timing of any options granted, and will prescribe the rules and
regulations applicable to the options. The Board of Directors has formed the
"Stock Option Committee", to be 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. As of September 30, 2000, no change has occurred
in the number of options outstanding and vested under the 1999 Plan.
-12-
<PAGE>
Note 9 - Business Segments
The table below sets forth certain information concerning the Company's
theater, rental real estate, and agricultural operations for the three and nine
months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Rental
Theater Real Estate Agricultural Corporate Consolidated
---------------------------------------------------------------------------------------------------------------------
Three months (dollars in thousands)
2000
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,317 $ 602 $ 1 $ 35 $ 1,955
(Loss) earnings before taxes (474) 411 (2,745) 138 (2,670)
1999
---------------------------------------------------------------------------------------------------------------------
Revenues $ -- $ 551 $ -- $ 49 $ 600
Earnings (loss) before taxes -- 212 (141) 261 332
Nine months
2000
---------------------------------------------------------------------------------------------------------------------
Revenues $ 1,317 $ 1,720 $ 21 $ 104 $ 3,162
(Loss) earnings before taxes (474) 1,183 (3,738) (17) (3,046)
1999
---------------------------------------------------------------------------------------------------------------------
Revenues $ -- $ 3,152 $ 10 $ 204 $ 3,366
Earnings (loss) before taxes -- 14,810 (211) (225) 14,374
</TABLE>
Corporate revenues include consulting fee income from Reading and interest
and dividend income earned with respect to the Company's cash balances and its
investment in REI Preferred Stock.
Note 10 - 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 and to disclose such as other
comprehensive (loss) income. The following sets forth the Company's
Comprehensive (loss) income for the three and nine months ended September 30,
2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net (loss) income $(2,594) $ 755 $(3,049) $9,229
Other comprehensive (loss) income (160) (114) (458) 17
----------------------------------------------------------------------------------------------------------------
Comprehensive (loss) income $(2,754) $ 641 $(3,507) $9,246
----------------------------------------------------------------------------------------------------------------
</TABLE>
-13-
<PAGE>
Note 11 - Acquisitions of Cinema and Live Theatre Assets
In September 2000, the Company acquired certain cinema and live theatre
assets, located principally in the Borough of Manhattan, New York. As a result
of these acquisitions, the Company now operates a total of 10 cinemas (40
screens), including (1) 8 cinemas (27 screens) in Manhattan; (2) one cinema (8
screens) in Houston; and (3) one cinema (5 screens) in Minneapolis. In addition,
the Company has leased and is in the process of fitting out an 8-screen cinema
in Dallas. Also, as a result of these transactions, the Company now operates
three live theatres in Manhattan and a four auditorium live theatre complex in
Chicago. Included within these assets are two fee properties in Manhattan and
one fee property in Chicago, options to purchase two fee properties in
Manhattan, and a right of first refusal to purchase a further fee property in
Manhattan. In October 2000, the Company exercised its right of first refusal and
anticipates acquiring this fee interest in the fourth quarter of 2000, for a
purchase price of approximately $7,700,000. The Company's acquisitions are
further described below.
The Angelika Film Center and the City Cinemas Acquisition On September 1,
---------------------------------------------------------
2000, the Company acquired, in each instance from entities owned by James
J. Cotter and Michael Forman (either Sutton Hill Capital, LLC ("SHC") or
City Cinemas Corporation ("CCC"), collectively, "Sutton"), (1) a 1/6/th/
interest in the Angelika Film Center LLC ("AFC"), the owner of the
Angelika Film Center and Cafe located in the Soho district of Manhattan
("Angelika New York"), and (2) certain rights and interests comprising the
City Cinemas cinema chain currently consisting of 27 screens in eight
Manhattan locations ("City Cinemas Transaction"). The remaining interests
in AFC are owned by Reading (33.3%) and by NAC (50.0%). Included in the
City Cinemas cinema chain are the rights to manage an additional 11 screens
at four locations, including the Angelika New York ("Managed Cinemas").
The acquisition of the AFC interest was accounted for as a purchase,
in which the Company issued an interest-bearing note to Sutton, in the
amount of $4,500,000, bearing interest at 8.25%, and maturing in July 2002.
The City Cinemas Transaction is structured as an operating lease,
under which the Company is obligated to make annual lease payments to
Sutton totaling $3,217,500, subject to certain cost of living and other
adjustments. In addition to its obligation under the operating lease, the
Company is also obligated to make rental and other payments due under
various underlying property leases, totaling approximately $900,000 per
year. In exchange for these payments, the Company is, generally speaking,
entitled to the cash flows generated from operation of the theaters that
comprise the City Cinemas chain, and the management fees associated with
the Managed Cinemas. At the end of the ten-year term of the operating
lease, the Company will have separate options, for which it paid an
aggregate option fee of $5,000,000 to Sutton, to acquire (1) the underlying
leases and physical improvements owned by Sutton for a purchase price of
$4,000,000, and (2) the fee interests in two cinemas for a purchase price
of $4,000,000. Alternatively, the Company can extend the operating lease at
the then fair market rental. The option fee will be credited against the
purchase price should the purchase option be exercised by the Company. The
Company is amortizing the option fee over the ten-year term of the
operating lease.
In connection with the City Cinemas Transaction, the Company is
obligated to lend Sutton up to $28,000,000, commencing in July 2007. This
credit facility is intended to provide
-14-
<PAGE>
Sutton with liquidity pending acquisition by the Company of the various
assets subject to option. Any amounts outstanding under this credit
facility at the date the option is exercised will be a credit against the
purchase price otherwise payable by the Company.
Operating results from the City Cinemas chain and payments under the
operating lease for the period from June 1, 2000 through July 31, 2000 have
been accounted for as a purchase price adjustment. Operating results
totaling approximately ($462,000) from August 1, 2000 through September 30,
2000, are included in the Company's Condensed Consolidated Statements of
Operations.
OBI Acquisition On September 20, 2000, the Company acquired OBI pursuant to
---------------
a stock-for-stock merger of OBI with a wholly owned subsidiary of Citadel
("OBI Merger"). In the OBI Merger, 2,322,466 shares of Class A Non-Voting
Common Stock and 655,616 shares of Class B Voting Common Stock were issued
to the stockholders of OBI. OBI was owned by Messrs. Cotter and Forman. As
a result of the OBI Merger, the Company now operates three live theatres in
Manhattan. Two of these theatres, the Minetta Lane and the Orpheum, are
owned in fee. The third, the Union Square Theatre, is leased. However, the
Company has exercised its right of first refusal under that lease, and
anticipates that it will acquire the fee interest in the property in which
the Union Square Theatre is located for approximately $7,700,000 in the
fourth quarter of 2000. The OBI Merger has been accounted for as a purchase
of the underlying assets of OBI. The table below sets forth components of
the purchase price and preliminary allocation (dollars in thousands).
Purchase price and acquisition costs
-----------------------------------------------------------------
Value of Citadel's Class A and B common stock issued $10,000
Acquisition costs 312
-----------------------------------------------------------------
$10,312
-----------------------------------------------------------------
Preliminary allocation of the purchase price
-----------------------------------------------------------------
Current assets $ 17
Property, plant and equipment 5,995
Goodwill 3,991
Acquisition costs 312
Other (3)
-----------------------------------------------------------------
$10,312
-----------------------------------------------------------------
The operations of OBI are included in the Company's accounts from the
date of the acquisition (September 20, 2000). The pro forma results
presented below are not necessarily indicative of what the actual financial
results would have been had the OBI Merger taken place on January 1, 2000.
Unaudited pro forma operating results for the Company, assuming that the
OBI Merger had occurred on January 1, 2000, are set forth below (dollars in
thousands, except for the per share amount).
Revenues $ 4,292
Net loss (2,023)
Basic earnings per share $ (0.20)
-15-
<PAGE>
the Royal George Theatre Complex Acquisition On September 22, 2000, the
--------------------------------------------
Company acquired the Royal George Theatre, a four-auditorium complex
Theatre Complex located in Chicago. The transaction was structured as the
acquisition of all of the membership units Acquisition of the Royal George
Theatre, LLC ("RGT"), and entailed a purchase price of $3,000,000, less an
amount equal to the sum of (1) the long-term liabilities of RGT, and (2)
the difference between the short-term assets and liabilities of RGT, or a
net amount of $1,708,000. The Royal George Theatre was initially acquired
by Reading in February 1999 for approximately $3,000,000, and was
transferred to the Company at its approximate book value, which
approximates its fair value, to complement its other live theatre assets.
The table below sets forth components of the purchase price and preliminary
allocation (dollars in thousands).
Purchase price
-----------------------------------------------------------
Cash $1,708
Short term assets less liabilites 92
Assumed note payable to the seller 1,200
-----------------------------------------------------------
$3,000
-----------------------------------------------------------
Preliminary allocation of the purchase price
-----------------------------------------------------------
Current assets $ 279
Property, plant and equipment 2,912
Liabilities assumed, net of the $1,200,000 note (191)
-----------------------------------------------------------
$3,000
-----------------------------------------------------------
The Angelika-Dallas Acquisition On September 22, 2000, the Company acquired
-------------------------------
the leasehold interest in an 8-screen Angelika cinema currently under
construction in Dallas ("Angelika-Dallas"). The lease was initially entered
into by Reading, and was transferred to the Company to complement its U.S
theater focus. In consideration of the lease, the Company has paid Reading
$356,000 in reimbursement of its costs to date in acquiring the leasehold
and fitting out the cinema, and has assumed Reading's obligations under the
lease to the landlord and under various agreements relating to the fitting
out of the cinema. Reading has agreed that, in the event that the cinema's
EBITDA during the last twelve of the first twenty-four months following the
opening of the cinema is less than an amount producing a 20% cinema level
return on the Company's investment in the cinema, then Reading will
reimburse to the Company that amount of the Company's investment necessary
to produce such a 20% return for that twelve-months period. The Angelika-
Dallas acquisition has been accounted for as a purchase of the leasehold
interest.
Mr. James J. Cotter is the Chairman of the Board of Directors of each of
the Company, Craig and Reading. As a result of the OBI Merger, Mr. Cotter and
Mr. Michael Forman own directly approximately 33% of the Company's Class A
common stock and Class B common stock. In addition, Messrs. Cotter and Forman
are, directly or indirectly, the principal stockholders of Craig and, through
Craig, are the principal stockholders of Reading. Craig and Reading collectively
own an additional 32.3% of the Class A common stock and 32.8% of the Class B
common stock of the Company. Accordingly, on a collective basis, Messrs. Cotter
and Forman, Craig and Reading own approximately 66% of the Company's Class A
common stock and Class B common stock. Messrs. Cotter and Forman are the sole
members of SHC and the sole stockholders of CCC, and, prior to the OBI Merger,
were the sole stockholders of OBI.
-16-
<PAGE>
Note 12 - Subsequent Event
On November 3, 2000 the Company, together with Craig, Reading, and FA, Inc.
(a wholly owned subsidiary of Reading) entered into a stock purchase and
standstill agreement (the "Standstill Agreement") with NAC. NAC is a public
company, whose shares are traded in the OTC market under the symbol NAKD. The
Standstill Agreement grows out of the settlement of a lawsuit brought by NAC
against Mr. Sam Frankino ("Frankino") the former Chairman, Chief Executive
Officer and controlling stockholder of NAC, which litigation included certain
cross claims by Frankino against Reading, FA, Inc., certain directors of NAC,
and the financial advisor to NAC ("Frankino Litigation"). The Company was not a
party to the Frankino Litigation, but was included as a party to the Standstill
Agreement due to the cross-ownership of Craig, Reading and the Company and the
fact that the Company owns NAC common shares currently representing
approximately 7.75% of the outstanding common stock of that company.
Prior to the closing of the transactions contemplated by the Standstill
Agreement, the Company owned 1,055,100 shares of NAC common stock, Reading owned
8,999,900 shares of NAC common stock, par value $0.05, and 100 shares
representing the entirety of the Convertible Preferred Stock, par value $0.05,
of NAC (the "NAC Preferred Stock"), and Frankino and certain of his affiliates
(collectively the "Frankino Parties") owned 15,863,360 shares of NAC common
stock. These holdings represented approximately 3%, 26%, and 46%, respectively
of the equity of NAC. The NAC common stock held by the Company was acquired in
open market transactions. The NAC common stock and NAC preferred stock held by
Reading was acquired directly from NAC in consideration of the transfer from
Reading to NAC of a 50% membership interest in AFC.
As a consequence of the closing of the transactions provided for or
contemplated by the Standstill Agreement,
. NAC repurchased all of the NAC Common Stock held by the Frankino Parties
(the "Frankino Shares") for $35,520,522 and 5,277,879 of the shares of NAC
common stock and all 100 shares of NAC preferred stock held by Reading, for
$8,468,770.
. The Frankino Litigation was dismissed with prejudice, and
. The Company, Craig, and Reading (collectively referred to in the Standstill
Agreement as the "Stockholders"), have agreed to certain limitations and
restrictions on their rights as stockholders of NAC, in consideration of
contractual assurances that a) the Stockholders will, at their election,
have representation upon the NAC Board of Directors, b) that related party
transactions will be subject to approval by the disinterested members of
the NAC Board of Directors and c) that certain material transactions will
be subject to the approval of the stockholders generally of NAC.
The Standstill Agreement, subject to earlier termination under certain
circumstances, continues through and including August 31, 2003, and provides
that:
. Representation on the NAC Board of Directors The Stockholders will be
--------------------------------------------
entitled to two nominees on the NAC Board of Directors (the "Stockholder
Nominees").
-17-
<PAGE>
. Election of Directors In connection with the election of directors, the
---------------------
Stockholders will vote their shares in the same manner and in the same
proportion as the shares by all stockholders of the Company other than the
Stockholders are voted in connection with such election. The Stockholders
will not solicit proxies with respect to any such election, and will not
seek to change the composition of the Board of Directors.
. Restrictions on Acquisition and Transfer The Stockholders will not increase
----------------------------------------
their holdings in NAC common stock beyond 33%, calculated on a fully
diluted basis, other than pursuant to a tender offer for all of the
outstanding NAC common stock, made on an any and all basis. Also, the
Stockholders will not transfer their NAC common stock except in as
specified in the Standstill Agreement. These transfer provisions were
specified by NAC, generally speaking, to prevent a transfer which would
cause a change of control of NAC, except in case of a transfer in response
to a tender offer.
. Restrictions on Solicitation of Proxies Through and including August 31,
---------------------------------------
2001, the Stockholders will not solicit proxies with respect to any
proposal brought before the stockholders of NAC.
. Certain NAC Covenants (1) that until such time as the NAC Board of
---------------------
Directors has prepared, adopted and publicly disclosed a five-year business
plan, NAC will not make any material acquisition or issue any material
amount of securities, (2) NAC will comply with the stockholder approval
requirements imposed upon companies listed on the NASDAQ/NMS with respect
to transactions involving the issuance of Securities, and will, in
addition, put to a vote of the stockholders of NAC any transaction pursuant
to which any person is to acquire more than 33% of the NAC's assets; and
(3) all related party transactions will be subject to the review and
approval of the disinterested directors.
. Termination The Standstill Agreement can be terminated by (1) mutual
-----------
written agreement, or (2) by either party (i) in the event of permanent
injunction prohibiting the transactions contemplated by the Standstill
Agreement, (ii) by vote of a majority of the outstanding shares (calculated
without reference to any shares held by the Stockholders), (iii) by vote of
a majority of the independent directors of the Board of Directors of NAC to
terminate the Standstill Agreement, (iv) in the event of a third party
tender offer for more than 15% of the NAC common stock, (v) in the event
the NAC Board of Directors propose a Change of Control Transaction (as
defined in the Standstill Agreement), or (vi) by the Stockholders, in the
event NAC fails to appoint or to continue the Stockholder Nominees as
directors of NAC. In the event of termination under clauses (b)(iii) or
(b)(v), above, the NAC Covenants discussed immediately above, will survive
such termination until immediately following the first annual meeting of
stockholders held more than 120 days after such termination, and in the
event of termination under clause (b)(v) above, NAC covenants described in
subclauses (2) and (3) above and the provision for proportional voting with
respect to the election of directors will likewise continue until
immediately following such annual meeting of stockholders. The Standstill
Agreement automatically terminates in the event that the ownership
interests of the Stockholders in NAC should fall below 10% or exceed 90% of
the outstanding NAC common stock.
The parties have agreed in the Standstill Agreement, however, that the
limitations set out in the second and fourth bullets above, are not to be
construed to prevent any of the Stockholders from communicating with any other
holder or holders of NAC common stock, including, without limitation, the
expression of the opinion of the Stockholders from with respect to any third
party solicitation of proxies, provided that such Stockholders does not (1)
provide to any holder of NAC common stock a
-18-
<PAGE>
proxy or other authorization permitting the Stockholder (or its designee) to
vote any NAC common stock on such holder's behalf or (2) accept from any holder
of NAC any NAC common stock on such holder's behalf.
The Standstill Agreement is attached as Exhibit 10.38 to the Company's
Report on Form 10Q for the period ended September 30, 2000. The above
description is necessarily summary in nature, and is qualified by reference to
the Standstill Agreement as set forth in that exhibit.
-19-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
As further described in the Notes to the Condensed Consolidated Financial
Statements, during 2000 the Company completed a series of transactions that
cause reported results for the three and nine month periods ended September 30,
2000 and 1999 to lack comparability.
. In September 2000, the Company acquired certain leasehold and management
rights in connection with the City Cinemas circuit in Manhattan.
Accordingly, the three months ended September 30, 2000 include the results
from operation of the acquired interests and the related lease payment to
the seller.
. In September 2000, the Company acquired the Royal George Theatre.
Accordingly, the three months ended September 30, 2000 include the results
of the Royal George Theatre from the date of acquisition, although such
results are not material.
. In September 2000, the Company acquired OBI. Accordingly, the three months
ended September 30, 2000 include the results of OBI from the date of
acquisition, although such results are not material.
In addition to the foregoing, the Company sold a property during 1999,
realizing a substantial gain thereon and subsequently reducing revenues and
expenses from real estate operations. Further, the Company's remaining
investment in and advances to the Agricultural Partnerships were written off
during the three months ended September 30, 2000.
Results of Operations
The tables below summarize the results of operations for each of the
Company's principal business for the periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
Three months ended
September 30, 2000 Theater Real Estate Agriculture Corporate Total
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,317 $ 602 $ 1 $ 35 $ 1,955
Expenses (1,746) (297) -- (324) (2,367)
------------------------------------------------------------------------------------------------------------------
(Loss) income before charges (429) 305 1 (289) (412)
Other (expense) income (45) 106 (2,746) 427 (2,258)
------------------------------------------------------------------------------------------------------------------
(Loss) income from operations $ (474) $ 411 $(2,745) $ 138 $(2,670)
------------------------------------------------------------------------------------------------------------------
Three months ended
September 30, 1999
------------------------------------------------------------------------------------------------------------------
Revenues $ -- $ 551 $ -- $ 49 $ 600
Expenses -- (244) -- (265) (509)
------------------------------------------------------------------------------------------------------------------
Income (loss) before charges -- 307 -- (216) 91
Other (expense) income (95) (141) 477 241
------------------------------------------------------------------------------------------------------------------
Income (loss) from operations $ -- $ 212 $ (141) $ 261 $ 332
------------------------------------------------------------------------------------------------------------------
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
Nine months ended
September 30, 2000 Theater Real Estate Agriculture Corporate Total
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,317 $ 1,720 $ 21 $ 104 $ 3,162
Expenses (1,746) (796) (5) (762) (3,309)
--------------------------------------------------------------------------------------------------------------------
(Loss) income before charges (429) 924 16 (658) (147)
Other (expense) income (45) 259 (3,754) 641 (2,899)
--------------------------------------------------------------------------------------------------------------------
(Loss) income from operations $ (474) $ 1,183 $(3,738) $ (17) $(3,046)
--------------------------------------------------------------------------------------------------------------------
Nine months ended
September 30, 1999
--------------------------------------------------------------------------------------------------------------------
Revenues $ -- $ 3,152 $ 10 $ 204 $ 3,366
Expenses -- (1,368) -- (1,016) (2,384)
--------------------------------------------------------------------------------------------------------------------
Income (loss) before charges -- 1,784 10 (812) 982
Other income (expense) -- 13,026 (221) 587 13,392
--------------------------------------------------------------------------------------------------------------------
Income (loss) from operations $ -- $14,810 $ (211) $ (225) $14,374
--------------------------------------------------------------------------------------------------------------------
</TABLE>
Theaters
In connection with the City Cinemas Transaction, the Company was entitled
to receive theater cash flows from June 1, 2000 and was correspondingly
obligated to make the related lease payment and to pay certain operating costs
from that date. Operating results and the related lease payment for the period
June 1, 2000 through July 31, 2000 were capitalized in connection with the
Company's accounting for the transaction. Accordingly, operating results and the
related lease payment are included in the Company's consolidated results for the
period August 1, 2000 through September 30, 2000. The negative margin produced
from the Company's theater operations reflects the substantial decline in cinema
attendance during the 2000 period as compared with the same period in 1999
(before the Company had any interest in the cinemas). This decline in attendance
has afflicted the entire cinema exhibition industry and appears to be the result
of (1) generally poorly received films and (2) continued growth in the number of
theater screens. These two factors have contributed to the recent bankruptcy
filings by a number of large cinema exhibitors, including the owners of the
Edwards, General Cinema, Carmike, United Artists and Mann circuits. Further,
most other large exhibitors, including Loews (the principal exhibitor in
Manhattan and elsewhere), AMC and Regal, are reported to be suffering from poor
attendance, high debt costs and declining operating results.
Real Estate
As described above, the Company sold a property, located in Phoenix,
Arizona, during the first half of 1999, recording a gain thereon of $13.0
million. Following this sale, the Company is now left with one rental property,
an office building located in Glendale, California.
Agriculture
As more fully described in the Notes to the Condensed Consolidated
Financial Statements, management determined during the third quarter of 2000
that future collection on its remaining recorded investment in and advances to
the Agricultural Partnerships was unlikely. Accordingly, such remaining
-21-
<PAGE>
amounts were either written off or were fully reserved for as of September 30,
2000. The Company's decision to reduce the carrying value of its investment in
and advances to the Agricultural Partnerships was premised upon (1) the very
poor performance of the Agricultural Partnerships since 1997, (2) uncertainties
surrounding market conditions which may be extant when the current crop is
harvested and sold, and (3) uncertainty about the potential value of the
underlying net assets of the Agricultural Partnerships.
Business Plan, Capital Resources and Liquidity
Business Overview
During the past several years, the Company has been principally engaged in
the management of real estate assets acquired during the mid-1990's as part of
certain transactions involving the Company and its then subsidiary, Fidelity
Federal Bank. At September 30, 2000, the Company retained ownership in but one
of these properties (see Note 2). During the past year, management has
determined to re-deploy the Company's assets into the cinema exhibition and live
theater businesses, each of which are businesses familiar to the Company's
principal shareholder, its Chairman and its senior management. Consistent with
this strategic decision, during 2000, the Company (1) acquired a 1/6/th/
interest in AFC, (2) entered into various agreements under which it now operates
the City Cinemas cinema chain and three live theaters located in Manhattan, (3)
acquired the Royal George Theater in Chicago, and (4) acquired the rights,
previously held by Reading, to complete the fit out and to then operate a cinema
complex located in Dallas. Consistent with its current activities, the Company
may seek to deploy certain of its remaining liquidity to acquire one or more
cinema or live theater assets, either from Reading, or from non-affiliates.
Capital Resources and Liquidity
Since December 31, 1999, the Company's cash and cash equivalents have
decreased from $24,732,000 to $15,522,000 at September 30, 2000, principally due
to the Company's acquisition of various cinema and live theater assets. In the
near term, the Company expects to utilize a portion of its remaining liquidity
to complete the fit out of its Dallas cinema and to complete tenant improvements
required to be made to its remaining rental property (a combined $4,000,000). In
addition, in October 2000, the Company exercised its right of first refusal,
acquired in connection with the OBI transaction, to acquire a fee interest in
the property in which the Union Square Theater is housed. The Union Square
Theater is a live theater located in Manhattan, and it is one of the three live
theaters acquired by the Company from OBI during 2000. The purchase price for
the property is approximately $7,700,000. These scheduled or expected cash
outflows should be partially offset by the positive cash flows expected to be
generated from the Company's operation of its recently acquired cinema and live
theater assets. In addition, the Company intends to pursue financing for all or
a portion of the Union Square Theater acquisition price.
Though the Company has continued to fund operating losses and crop planting
costs with respect to the Agricultural Partnerships, management continues to
assess the Company's options in this regard, and no assurance can be given that
the Company will either continue to fund such costs or, alternatively, that the
funding of such costs will produce a self-sufficient operation.
At September 30, 2000, the Company does not maintain any credit facilities
with financial institutions, other than the mortgage secured by the Company's
rental property. It is unlikely that neither the Company's assets, nor the
aggregate cash flows reasonably expected to be generated there from, would
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<PAGE>
provide a reasonable basis for the Company to obtain meaningful financing to
fund its operations in the near term.
Forward-Looking Statements
From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing, including those contained
herein. Such forward-looking statements may be included in, without limitation,
reports to stockholders, press releases, oral statements made with the approval
of an authorized executive officer of the Company and filings with the
Securities and Exchange Commission. The words or phrases "anticipates,"
"expects," "will continue," "estimates," "projects," or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The results contemplated by the Company's forward-looking statements are
subject to certain risks, trends, and uncertainties that could cause actual
results to vary materially from anticipated results, including without
limitation, delays in obtaining leases, finalization of the sale of properties,
the impact of competition, market and other risks associated with the Company's
investment activities including the investment and advances to the Agricultural
Properties and other factors described herein.
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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
At the Company's 2000 Annual Meeting of Shareholders held on September 12,
2000, the shareholders (1) elected the Company's directors; (2) approved
the proposal to issue Class A and Class B stock to acquire the Off Broadway
Investments, Inc.; and (3) approved the proposal to adopt the Company's
1999 Stock Option Plan. The results of the votes were as follows:
(1)Election of Directors For Withheld
------------------------ --- --------
James J. Cotter 1,246,694 71,532
S. Craig Tompkins 1,245,494 72,732
William C. Soady 1,245,494 72,732
Alfred Villasenor, Jr. 1,245,494 72,732
Robert M. Loeffler 1,245,494 72,732
(2) Proposal to Issue
---------------------
Class A and Class B stock For Against Abstain/No-Vote
------------------------- --- ------- ---------------
to acquire Off Broadway
-----------------------
Investments, Inc. 765,737 224,660 1,755 / 326,074
-----------------
(3) Proposal by the
-------------------
Board of Directors to For Against Abstain/No-Vote
--------------------- --- ------- ---------------
Adopt the 1999 Stock
--------------------
Option Plan 764,165 225,575 2,412 / 326,074
-----------
Item 5 - Other Information
Not applicable.
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<PAGE>
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
10.38 Standstill Agreement
27 Financial Data Schedule (filed herewith)
(a) Reports on Form 8-K
Form 8-K dated September 19, 2000, reporting (1) the acquisition
via merger of the Off Broadway Investments, Inc., and (2) the
series of transactions referred to in the Proxy Statement as the
"Sutton Hill Transactions", was filed with the Securities and
Exchange Commission on October 5, 2000 and incorporated herein by
reference.
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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
---------------------------
Date: November 20, 2000 By: /s/ Scott Braly
------------------------
Scott Braly
Chief Executive Officer
Date: November 20, 2000 By: /s/ Andrzej Matyczynski
----------------------------
Andrzej Matyczynski
Chief Financial Officer
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