<PAGE>
 
================================================================================

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549
                                 _____________

                                   FORM 10-K

(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
                 For the fiscal year ended September 30, 1995

                                      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 1-6123

                               CRAIG CORPORATION
            (Exact name of Registrant as specified in its charter)

              DELAWARE                                    95-1620188
      (State or other jurisdiction of          (IRS Employer Identification No.)
      incorporation or organization)
 
   550 South Hope Street 
   Suite 1825               Los Angeles  CA                  90071
   (Address of principal executive offices)               (Zip Code)
 
Registrant's telephone number, including area code:     (213) 239-0555

Securities Registered pursuant to Section 12(b) of the Act:

                                                        Names of exchanges on
           Title of each class                      which each class registered
-----------------------------------------------     ---------------------------

Common stock, $0.25 par value                       New York Stock Exchange and
Class A Common preference stock, $.01 par value       Pacific Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None

     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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  Yes         No  [X]
                                 -------     ______     

     The aggregate market value of voting stock held by non-affiliates of the
Registrant was $37,621,000 as of January 12, 1996.

     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. As of January 12, 1996 there
were 4,171,870 shares of Common Stock, $0.25 par value per share, and 1,622,000
shares of Class A Common Preference Stock, $0.01 par value per share
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's 1995 Proxy Statement, which will be filed with the
Securities and Exchange Commission in connection with the Company's Annual
Meeting of Stockholders, are incorporated by reference in Part III hereof.
<PAGE>
 
                                    PART I
                                    ------


ITEM 1.  BUSINESS


General
-------


Craig Corporation (the "Company") is a diversified corporation whose primary
business activity is the ownership and strategic management of its significant
holdings, which currently include a 50% economic ownership interest in the
common stock of Stater Bros. Holdings Inc. ("SBH" and, collectively with its
wholly owned subsidiaries, "Stater"), approximately 49% of the outstanding stock
of Reading Company ("Reading") and approximately 39.4% of the voting securities
of Citadel Holding Corporation ("CHC" and, collectively with its wholly owned
subsidiaries, "Citadel").

     Stater, established in 1936, is a leading supermarket chain that operates
110 retail supermarkets under the name "Stater Bros. Markets". Stater Bros.
supermarkets are located principally in the "Inland Empire" area of Southern
California, which includes the counties of San Bernardino and Riverside. Stater
also operates stores in eastern Los Angeles, Orange and Kern Counties in
Southern California. In addition to the Company's 50% ownership (48% voting),
SBH's remaining 50% ownership (52% voting) is held by La Cadena Investments (La
Cadena), a general partnership consisting of key management executives of
Stater. The interests of the Company in SBH are subject to certain agreements,
including an Option providing SBH the right to acquire the Company's 50% equity
interest in SBH. The Company has the right to designate one member of the SBH
Board of Directors, and this position is currently occupied by the Company's
Chairman. See "Stater Restructuring" below.

     Reading was organized under the laws of Pennsylvania in 1833. Over the past
several years, Reading has been divesting most of its major assets and building
up its working capital. In 1993, Reading determined to focus its attentions on
the "Beyond the Home" segment of the entertainment industry. Effective July 1,
1994, Reading acquired Theater Acquisitions of Puerto Rico, Inc. ("TAPR") for an
aggregate purchase price of approximately $22.7 million. At the time of
acquisition, TAPR operated six motion picture exhibition theaters with a total
of 36 screens in the Commonwealth of Puerto Rico. In December 1994, TAPR was
merged into its parent corporation and the operating name changed to Cine Vista.
Reading added a new multiplex with 8 screens in 1995 and currently has an
additional two complexes with 16 screens (inclusive of 6 replacement screens to
be reconstructed as part of an expanded complex in Mayaguez) under development.
At September 30, 1995, Reading's working capital included approximately $47.5
million in cash, cash equivalents and marketable treasury and federal agency
securities. Reading intends to utilize a portion of its cash balances and short-
term investments to continue and expand its existing theater exhibition business
domestically and internationally. In furtherance of Reading's business plan to
seek out foreign opportunities for the development and

                                                                               2
<PAGE>
 
operation of multiplex cinemas, in November 1995 Reading and the Company formed
Reading International Cinemas LLC (referred to herein collectively with its
subsidiaries and Australian affiliates as "Reading International"). Reading
International is owned in equal shares by Reading and the Company, and was
organized with an initial capitalization of $10 million.

     Five members of the seven member Reading Board of Directors are directors
of the Company. Two of these directors, the Chairman of the Board and President
of the Company, hold the same respective positions at Reading. See "Business -
Reading".

     Prior to August 1994, CHC owned 100% of Fidelity Federal Bank (Fidelity), a
federally chartered savings association located in southern California. In
August 1994, CHC and Fidelity completed a series of transactions (the "CHC
Restructuring") which resulted in the recapitalization of Fidelity, the transfer
to Citadel of certain real estate interests and the reduction of CHC's ownership
in Fidelity from 100% to approximately 16%. In April 1995, CHC sold
substantially all of its remaining 16% interest in Fidelity. Since the
restructuring, Citadel has been engaged primarily in the ownership and
management of commercial and residential property. At September 30, 1995, CHC's
balance sheet assets amounted to approximately $39.7 million and consisted
primarily of real estate and cash. CHC management is currently evaluating the
assets and opportunities available to CHC with a view to either developing a new
line of business, merger or sale of the entire Company, or liquidation. Such
alternatives may include the participation with the Company and or the Company's
affiliates in land based entertainment businesses, such as motion picture
exhibition.

     As of January 10, 1995, the Company owns 1,564,673 shares or approximately
26% of the CHC Common Stock and 1,329,114 shares of CHC 3% Cumulative Voting
Convertible Preferred Stock, which together with the common stock held by the
Company represent approximately 39.4% of the outstanding voting securities of
CHC. The Company also holds warrants exercisable at $3.00 per share, to purchase
an additional 666,000 shares of CHC Common Stock. Assuming full exercise of the
warrants and full conversion into CHC Common Stock of the 3% Cumulative Voting
Convertible Preferred Stock (assuming a market price of $2.25), the Company
would own approximately 50.7% of the then issued outstanding voting securities
of CHC.

     Three members of CHC's five member Board of Directors are directors of the
Company. The Company's Chairman of the Board is the Chairman of the Board of
CHC. The Company's President is the Vice-Chairman of the Board of CHC and the
Secretary, Treasurer and Principal Accounting Officer of CHC. See "Business -
Citadel".

Stater
------

General
-------

     Stater operates 110 retail supermarkets under the name Stater Bros.
Markets. For information with respect to a description of Stater's business,
property, legal proceedings and management see Part I to Stater Bros. Holdings

                                                                               3
<PAGE>
 
Inc. Report on Form 10-K for the period ended September 24, 1995 which is set
forth after Item 4 below.

Stater Restructuring
--------------------

     On March 8, 1994, the Company consummated several separate agreements with
SBH and La Cadena with respect to a series of restructuring transactions under
the terms of which the Company received from Stater pre-tax cash proceeds
approximating $42 million, including a dividend distribution of $20 million, an
option payment of $14.65 million, $5 million in connection with a Consulting
Agreement, and $2.2 million for the redemption of preferred stock plus cumulated
dividends.

     On the date of the restructuring, La Cadena elected to exchange its shares
of Common Stock of SBH for an equal number of shares of SBH Class A Common Stock
which are entitled to 1.1 vote per share for a period of five years, while the
Company elected to retain its shares of SBH Common Stock which are entitled to
one vote per share (representing upon issuance of the SBH Class A Common Stock
approximately 48% of the vote).

     The restructuring was funded through SBH's $165 million offering of 11%
Senior Notes due 2001, which notes were exchanged for a like amount of New Notes
in August 1994. The New Notes are listed and trade on the American Stock
Exchange. The proceeds of SBH's financing were used to (i) repay $75.5 million
SBH's 9.8% Senior Notes, (ii) repay outstanding bank loans and mortgages
amounting to approximately $21 million, (iii) pay restructuring fees and
expenses and (iv) pay the Company amounts due under the restructuring
agreements.

     The option payment of $14.65 million represents an option to purchase all,
but not less than all, the Common Stock held by the Company for a purchase price
of $60 million plus an adjustment factor equal to 8.833% per annum, exercisable
at any time prior to March 8, 1996. The option period may be extended for an
additional ten years, if SBH converts the Company's SBH Common Stock into SBH
Series B Preferred Stock on or prior to March 8, 1996. If SBH exercises its
right to convert the Company's Common Stock of SBH into Series B Preferred
Stock, the option will entitle SBH to purchase all issued and outstanding shares
of such Series B Preferred Stock for $69.4 million plus accrued and unpaid
dividends.

     Under the terms of the Option Agreement between Stater and the Company, in
the event that Stater were to exercise its option on or about March 8, 1996 to
purchase the Company's Stater stock for cash, the Company would receive gross
proceeds of approximately $69.4 million. Such gross proceeds would be subject to
income taxes which, assuming an effective combined federal and state tax rate of
40.1%, would result in net proceeds to the Company of $41.5 million. In
addition, upon the occurrence of the exercise by Stater of the option, the
$14.65 million option payment received in Fiscal 1994 would become taxable. Such
tax liability, assuming an effective combined federal and state tax rate of
40.1%, would amount to $5.9 million and has been included in the financial
statements as a deferred tax liability at September 30, 1995. While no
assurances can be given that Stater will determine to exercise its option on
March 8, 1996, or at

                                                                               4
<PAGE>
 
any other given time, the Company does anticipate that Stater will exercise its
right to extend the option by exchanging Series B Preferred Stock for the
Company's SBH Common Stock.

     The Series B preferred stock will have a liquidation preference of
approximately $69.4 million and a cumulative dividend beginning March 8, 1996
with the rate beginning at 10.5%, increasing to 12% after 78 months, and further
increasing every twelve months thereafter by an additional 1%, to a terminal
cumulative dividend rate of 15%. The Company would have the right to have the
preferred stock redeemed at any time following March 8, 2009. As long as the
Company holds the shares of the Series B Preferred Stock, it will have the right
to vote 20% of the total voting power of SBH and to elect one director to the
SBH Board. If dividends on the Series B Preferred Stock with respect to any two
or more quarterly periods are and remain unpaid, the Company will have a right
to elect a majority of SBH's Board of Directors.

     The Company has agreed to render consulting services to SBH through March
1999, in consideration for which SBH paid the Company $5 million on March 8,
1994 and agreed to pay $375,000 quarterly thereafter. As of September 30, 1995,
the Company has received all such payments due under the agreement. The
consulting services may be terminated by SBH in the event SBH exercises its
purchase option. As part of this agreement, the Company has agreed that, for a
period of five years from the date of the closing, it will not provide
consulting services or own any controlling interest in any business that
competes with SBH.

     Since May 1989 the Company has been a party to an Agreement of Stockholders
of Stater which, among other things, provided that for a period of twenty years
(i) neither party may sell or transfer its Stater shares without offering the
other party a right of first refusal; and (ii) either party may offer to
purchase the other party's interest, and the party receiving the offer has the
option to sell at the offer price or purchase the offering party's interest at
that price (the "Option Rights"). In connection with the Restructuring, the
Stockholders Agreement was amended to provide that, among other things, (a) the
Stockholders Agreement may be terminated by either party upon exercise by Stater
of its right to convert the Company's common stock in Stater into Preferred
Stock of Stater as described above, and (b) the "Option Rights" are suspended
until after the expiration of Stater's right to convert the Company's Stater
common stock into Stater Preferred Stock.

Reading
-------

General
-------

     Reading was organized under the laws of Pennsylvania in 1833. It operated
the Reading Railroad until April 1, 1976, when substantially all of its railroad
assets were conveyed to Consolidated Rail Corporation ("Conrail"). In 1993,
Reading determined to focus its activities on the "Beyond the Home" sector of
the entertainment industry. Effective July 1, 1994 Reading acquired all of the
outstanding common stock of Theater Acquisitions of Puerto Rico, Inc. (TAPR) for
an aggregate cash purchase price of approximately $22.7 million, inclusive of

                                                                               5
<PAGE>
 
acquisition costs of $.3 million. In December 1994, TAPR was merged into its
parent corporation and the operating name was changed to Cine Vista. Cine Vista
operates motion picture exhibition theaters in seven leased locations with a
total of 44 screens in the Commonwealth of Puerto Rico. Cine Vista currently has
16 screens under development in two locations. Ten of the new screens will
replace six screens presently operated by Cine Vista at one site. Accordingly,
based upon current development plans, Reading anticipates a net increase of 10
screens over the next 12 months.

     Reading has significant liquidity and no debt outstanding. At September 30,
1995, Reading had cash, cash equivalents, and marketable treasury securities of
approximately $47.5 million. In January 1996, Reading reached agreement with the
defendant in certain litigation pertaining to the clean up of certain property
previously used by Reading in its railroad operations, pursuant to which these
defendants have agreed, among other things, to pay to Reading $2.35 million,
which funds are anticipated to be received in 1996.

     Reading intends to expand Cine Vista's existing operations by developing
new multiplex theaters in the Commonwealth of Puerto Rico which will require the
expenditure of additional funds during the next several years. Reading is also
pursuing a number of motion picture theater acquisition and development
opportunities, both domestically and internationally. If Reading were to enter
into all the transactions currently being considered, Reading would not have
adequate working capital to fund all the proposals. Therefore, Reading has
obtained a commitment from a major money center bank for a $15 million line of
credit with respect to Cine Vista's operations which line of credit will provide
sufficient funds to complete Cine Vista's new theater development plans and
provide additional liquid funds for the parent Company. In addition, Reading and
the Company have formed Reading International to develop and operate multiplex
cinemas in Australia and authorized initial funding of $10 million.


Description of Business
-----------------------

     Theater Exhibition
     ------------------

     Cine Vista operates motion picture exhibition theaters in seven leased
locations in Puerto Rico. All of Cine Vista theaters are modern multi-screen
facilities.

<TABLE>
<CAPTION>
     Existing Theaters                      Location           Screens
     -----------------                      --------           -------
     <S>                                    <C>                <C>
     Plaza de las Americas Mall             San Juan              10
     El Senorial Shopping Center            San Juan               4
     Cinema Centro                          Bayamon                6
     Plaza del Norte Shopping Center        Hatillo                6
     Mayaguez (1)                           Hormigueros            6
     Cayey Shopping Center                  Cayey                  4
     Plaza Palma Real                       Humacao                8
</TABLE>

                                                                               6
<PAGE>
 
<TABLE>
<CAPTION> 
     Under Development
     -----------------
     <S>                                    <C>                   <C> 
     Mayaguez Shopping Center               Mayaguez               6
     Mayaguez Mall (1)                      Hormigueros           10
</TABLE>

     (1) Cine Vista intends to demolish a building housing four of the existing
     six screens at Mayaguez Mall and rebuild an 10 plex on this site. After
     completion of the 10-plex, the remaining two screens, will be returned to
     the Landlord.

     Puerto Rico is a self-governing Commonwealth of the United States with a
population of approximately 3.8 million. The Commonwealth exercises control over
internal affairs similar to states, however, the relationship with the United
States Government is different than that of a state. Residents of Puerto Rico
are citizens of the United States but do not vote in national elections, and
with certain exceptions, do not pay federal income taxes. Income taxes are
instead paid under a system established by the Commonwealth. In recent years
there have been two major views concerning the future relationship with the
United States Government, one favoring statehood and the other favoring
continuation of commonwealth status. In 1993, Puerto Rico voters were asked in a
plebiscite to express their preference for statehood (48.4%), commonwealth
status (46.2%) or independence (4.4%). The United States mainland is Puerto
Rico's largest trading partner.

     Since 1989, annual real gross national product growth of Puerto Rico has
exceeded the growth of the United States. During the most recent years the
Commonwealth has undergone significant retail shopping center development during
which period the number of multiplex theaters increased substantially. With
approximately one screen per 24,000 of population, versus approximately one
screen per 10,000 in the mainland United States, Reading believes that Cine
Vista has an opportunity to expand its operations through development of new
multiplex theaters and improvement of its existing operations.

     Cine Vista derives approximately 70% of its revenues from box office
receipts. Ticket prices vary by location, and provide for reduced rates for
senior citizens and children. Box office receipts are reported net of a 10%
excise tax imposed by the Commonwealth. Show times and features are placed in
advertisements in local newspapers with the costs of such advertisements paid by
Cine Vista. Film distributors may supplementally advertise certain feature films
with the costs generally paid by the distributors.

     Reading International Cinemas LLC
     ---------------------------------

     In November 1995, Reading and the Company formed Reading International to
develop and operate multiplex cinemas in Australia. Reading and Craig have each
committed to make an initial contribution of $5 million, on an as needed basis
for an aggregate initial capitalization of $10 million. The LLC agreement
provides, among other things, that each party will have preemptive rights with
respect to the provision of future capital and rights of first refusal regarding
any proposed disposition of the other's interest in Reading International.

                                                                               7
<PAGE>
 
     Reading International through its various Australian subsidiaries, has
retained the services of several executive employees who will be providing
services to Reading International on a full time or substantially full time
basis and has acquired a site in Melbourne, Australia, on which the Company
intends to develop a 25 screen multiplex theater, subject to obtaining the
necessary governmental land use entitlements and approvals. The contracts with
respect to the multiplex site provide for a total purchase price to Reading
International of approximately $6.5 million. In addition, corporate joint
venture agreements between Reading International and an existing owner and
operator of cinemas in Australia are currently being documented with respect to
the development and management of certain additional cinema sites. Reading
International is also in negotiation with several developers and landlords with
respect to other potential locations.

     Other theater development and acquisitions
     ------------------------------------------

     In November 1995, Reading acquired from a major bank, for approximately
$1,285,000, a judgement encumbering, among other things, a controlling interest
in a Manhattan multiplex theater. The judgement has been acquired as part of
Reading's plan to acquire, in conjunction with Manhattan based City Cinemas
(James J. Cotter, Chairman of the Company has an ownership interest in City
Cinemas), all or at least a controlling interest in that multiplex theater.

Employees
---------

     Cine Vista employment is seasonal and ranges from approximately 165 to 230
depending upon the time of the year. Approximately 15 projectionists are covered
by a collective bargaining agreement which expires in May 1997. In addition, to
Cine Vista employees, the Reading employs 10 persons, exclusive of those persons
who are officers or otherwise employed by the Company, and two part-time people
in various administrative positions. At the present time Reading International
has six employees. Reading believes relations with its employees at all levels
to be good.


Properties
----------

     Center City Philadelphia Properties
     -----------------------------------

     Properties in Center City Philadelphia, all of which are owned in fee,
consist of several parcels of vacant land near the site of the Pennsylvania
Convention Center in Center City Philadelphia, aggregating approximately .67
acres; the Viaduct north of Vine Street to Fairmont Avenue and adjacent parcels,
comprising approximately 6.75 acres; and properties owned by partnerships in
which Reading has interests.


                                                                               8
<PAGE>
      
     Partnership Properties
     ----------------------

     S.R. Developers: A subsidiary of the Reading is a general partner in S.R.
     Developers, a general partnership which owns one property in Center City
     Philadelphia.

     Parametric Garage Associates: A subsidiary of Reading is a general partner
     in Parametric Garage Associates, a partnership which owns the 750-car
     Gallery II Parking Garage ("Garage"). The Garage is adjacent to the
     Philadelphia Convention Center Complex. Reading has primary responsibility
     for the leasing and management of 19,000 gross rentable square feet of
     retail space on the ground level of the Garage pursuant to a management
     agreement and provides certain other management services to the partner
     ship.

     Other Domestic Real estate
     --------------------------

     When Reading's railroad assets were conveyed to Conrail, Reading retained
fee ownership of approximately 650 parcels of real estate located throughout
Pennsylvania, Delaware and New Jersey. In addition, Reading retained portions of
52 abandoned rights-of-way with about 200 more parcels abutting these rights-of-
way. Approximately 23 parcels and rights-of-way located outside of Center City
Philadelphia are still owned by Reading. The parcels consist primarily of vacant
land and buildings, some of which are leased to third parties.

     Cine Vista Properties
     ---------------------

     All of Cine Vista's real properties are leased. The seven theaters are
leased pursuant to long-term leases with remaining terms and renewal options
ranging from 17 to 38 years. The landlord of one of Cine Vista's theaters has
the right to terminate the lease relating to space presently housing two
theaters, subject to six months notice. All of Cine Vista's theater leases
provide for the payment of fixed rental payments, and, in certain cases, may
require additional payments based upon a percentage of theater revenues. Cine
Vista also leases approximately 6,300 square feet of warehouse space and office
space.

Legal Proceedings
-----------------

     Historical Railroad Operations
     ------------------------------

     Reading is a defendant in various personal injury legal actions relating to
its railroad operations prior to its reorganization and has insurance coverage
relating to such actions. In general,these actions also name Conrail, which
acquired substantially all of Reading's railroad assets in connection with
Reading's reorganization, as a defendant. Approximately 115 plaintiffs seek
damages under the Federal Employers Liability Act ("FELA") in varying amounts
for illnesses or death allegedly caused by exposure to asbestos fibers while
employed by the Reading Railroad and, in some cases by Conrail. The underlying
actions are preceding to trial.

                                                                               9
<PAGE>
 
     The eventual outcome of the above described litigation cannot be predicted
at this time, and Reading's liability, if any, cannot be accurately determined.
However, during 1990, Reading and its insurance carriers entered into an
agreement (the "Settlement Agreement") which provided Reading with reimbursement
for prior payments made to claimants in certain personal injury actions and
which provides for Reading to receive reimbursement of amounts expended in
conjunction with the matters described above or, if Reading elects, to receive
reimbursement from the parties to the Settlement Agreement prior to
expenditures. At September 30, 1995, $327,000 was reimbursable to Reading for
amounts expended in defense and settlement of such actions. Three participants
in the insurance settlement are insolvent. Unreimbursed claims insured by these
insolvent companies totaled $55,000 from 1992 through September 30, 1995.
Reading believes that it may be entitled to reimbursement of such amounts from
the other parties to the agreement and may file for an arbitration hearing on
such matters. Based on the backlog of pending personal injury cases and the
Company's experience in settling such cases, Reading has an accrual of $148,000
reflecting the potential effect of such insolvencies on future settlements if no
recovery is received from either the insolvent carriers or the other parties to
the insurance Settlement Agreement. Reading believes that the amounts available
under the Settlement Agreement are sufficient to prevent a materially adverse
effect on the financial position, results of operations, or liquidity of
Reading.

     Environmental
     -------------

     Reading Company and a wholly owned subsidiary, Reading Transportation
Company ("RTC"), have each been advised by the Environmental Protection Agency
(the "EPA") that they are potentially responsible parties ("PRPs") for a site
under environmental laws including Federal Superfund legislation ("Superfund").
The EPA issued an Administrative Order under Superfund against 34 PRP's
requiring the named parties to incinerate materials at the site pursuant to a
June 30, 1989 Record of Decision ("ROD"). The ROD estimated that the
incineration would cost approximately $53 million. Thirty-six PRPs were also
named in a civil action brought by the United States government which seeks to
recover alleged costs incurred at the site by the United States government of
approximately $22 million. Both Reading and RTC have been named in a third-party
action instituted by the 36 PRPs. The actions instituted against Reading and RTC
and approximately 300 PRPs seek to have the parties contribute to reimbursement
for past costs and any costs associated with further remediation at the site.

     During 1994, based upon the Reading's and counsel's evaluation of possible
outcomes in the matter, Reading increased its provision for environmental
matters by $1.2 million. On September 14, 1995 the federal district court judge
who presided over Reading's reorganization ruled that all liability asserted
against Reading relating to the site was discharged pursuant to the consummation
order issued in conjunction with Reading's amended plan of reorganization on
December 31, 1980. The United States Department of Justice and Consolidated Rail
Corporation have appealed the decision. The judge's decision did not affect the
potential liability of RTC for this site. RTC has no assets and therefore cannot
fund a settlement or judgement relating to this matter and Reading believes that
the potential liability of RTC, if any is not in excess of $300,000. Based upon

                                                                              10
<PAGE>
 
the appeals and possible alternate attempts by the PRPs to obtain Reading's
participation in funding for the site, Reading has not adjusted its provision
for environmental matters.

     Reading is a party to a consent decree relating to one Superfund site, a
portion of which is located on land owned by Reading. Apart from future
operation and maintenance expenses ("O&M), remediation is complete. During 1994,
Reading paid $106,000 as its estimated share of ten years of O&M and charged
such amount to provision for environmental expenses. Reading believes that the
amounts expended to date will be adequate to fund O&M at the site. If additional
amounts were required, such amounts are not expected to be material.

     Reading was named as a defendant in an action seeking recovery of $3.8
million of alleged environmental cleanup costs from five defendants under
various provisions of New Jersey law. The action alleged that certain
contamination at the site relates in part to the prior railroad operations of
the Pennsylvania Reading Seashore Lines in which Reading has a 33% ownership
interest. In May 1995, Reading and the involved parties agreed to settle this
matter. Reading's share of the settlement totalled $235,000, which approximated
the amount previously accrued by Reading to provide for its share of the
liability.

     Reading has undertaken remediation activities at the site of a former
gasoline filing station owned by Reading. In accordance with an agreement
between Reading and a major oil company, Reading is responsible for 20% of the
remediation cost and the balance of such cost is being paid by the oil company.
Reading believes that the amounts accrued related to this matter are adequate to
fund the required remediation.

     In 1991 Reading filed a lawsuit against the Southeastern Pennsylvania
Transportation Authority, Consolidated Rail Corporation, the City of
Philadelphia, and other parties which seeks to recover costs of approximately $9
million expended by the Company in conjunction with the cleanup of PCBs in the
Reading Terminal Train Shed and a portion of the Viaduct south of Vine Street.
The action also seeks declaratory judgment as to future costs which may be
incurred in cleaning up the remaining portions of the Viaduct owned by Reading.
In January 1996, Reading and the parties agreed in principle to settle all
outstanding litigation with respect to this matter, As part of the settlement,
Reading will receive $2.35 million which under the terms of the proposed
settlement is expected to be paid during fiscal 1996.

     Prior to Reading's reorganization, it had extensive railroad and related
operations. Such operations could have contributed to environmental
contamination of properties now owned, previously sold or leases by Reading, or
to which Reading, prior to reorganization, sent waste. The ultimate extent of
liabilities, if any, with respect to such matters, as well as the timing of cash
disbursements, if any, cannot be determined. However, Reading management is of
the opinion that while the ultimate liability resulting from such matters could
have a material effect on the results of operation in a given year, they will
not have a material adverse effect on the financial position or liquidity of
Reading.

                                                                              11
<PAGE>
 
     Cine Vista
     ----------

     A landlord of Cine Vista has alleged that Cine Vista underpaid rent by
approximately $180,000 for the twelve months ended June 30, 1994. Reading is
contesting the landlord's claim and believes the claim is without merit. If the
landlord were to prevail in his assertion, Reading is indemnified by the seller
of the theaters. However, the landlord has asserted a similar argument
concerning the computation of rent subsequent to June 30, 1994, which amount
would total approximately $240,000 to September 30, 1995.

Restrictions on Reading Class A Common Stock
--------------------------------------------

     As of September 30, 1995, Reading had available approximately $167 million
in tax loss carryforwards. In order to preserve these carryforwards, Reading in
1989 in essence replaced its Common Stock with a like number of shares of a
newly created Class A Common Stock. Substantially all of Reading's outstanding
capital stock is now comprised of Class A Common Stock, which limits the ability
of a holder of thereof to acquire more than 4.75% of Reading's outstanding
capital stock unless waived by the Board of Directors of Reading. The Board of
Director of Reading has waived certain restrictions on the transfer of Class A
Common Stock in order to permit the Company to acquire up to approximately 49.9%
of Reading's outstanding shares. The Company's current holdings in Reading
Company approximate 49% of Reading's outstanding capital stock. The Class A
common stock is traded on the NASDAQ National Market System.


Citadel
-------

General
-------

     CHC, a Delaware corporation, was incorporated in 1983 to serve as the
holding company for Fidelity Federal Bank (Fidelity), a federally chartered
savings bank located in Southern California. In August 1994, CHC completed a
series of transactions which resulted in the restructuring and recapitalization
of Fidelity, the transfer to Citadel of certain real estate interests and the
reduction of CHC's ownership in Fidelity from 100% to approximately 16%. During
fiscal 1995, substantially all such remaining interest by Citadel in Fidelity
was sold. In January 1996, Citadel received notice from the Office of Thrift
Supervision that it had been deregistered as a savings and loan holding company.

     Since the restructuring, Citadel has been engaged primarily in the
ownership and management of commercial and residential property. At September
30, 1995, CHC's balance sheet assets amounted to approximately $39.7 million and
consisted primarily of real estate and cash. CHC management is currently
evaluating the assets and opportunities available to CHC with a view to
developing a new line of business. Such opportunities may include the
participation with the Company and or the Company's affiliates in land based
entertainment businesses such as motion picture exhibition.

                                                                              12
<PAGE>
 
     At September 30, 1994, the Company owned 592,712 shares of CHC Common
Stock, which stock is traded on the American Stock Exchange under the symbol
CDL. The Company has increased its common equity ownership in Citadel to
1,564,673 shares or 26%, as of December 31, 1995. The common shares, together
with the 1,329,114 3% Cumulative Voting Convertible Preferred Stock described
below, represent 39.4% of the outstanding voting power of Citadel. The Company
also holds warrants exercisable at $3.00 per share, to purchase an additional
666,000 shares of CHC Common Stock. Assuming full exercise of the warrants and
full conversion into CHC Common Stock of the 3% Cumulative Voting Convertible
Preferred Stock (assuming a market price of $2.25), the Company would own
approximately 50.7% of the then issued outstanding voting securities of CHC.

     As described above, at the time of the Citadel restructuring, Citadel
Realty Inc., a wholly owned subsidiary of Citadel, purchased four REO properties
from Fidelity, at a bulk sale transfer price of approximately $19.8 million. The
property acquisitions were financed by $13.9 million in mortgage loans from
Fidelity and $6.2 million borrowed from the Company under a credit agreement. On
November 10, 1994, the Company acquired from CHC, in satisfaction of $5.25
million of the $6.2 million outstanding indebtedness due under the Credit
Agreement, 1,329,114 shares of newly issued CHC 3% Cumulative Voting Convertible
Preferred Stock. The preferred shares represent approximately 18.1% of the
voting power of CHC. In connection with this transaction, the credit available
under the credit agreement was reduced to approximately $950,000, all of which
was repaid during 1995. The 1,329,114 preferred shares ($3.95 per share) were
issued to the Company pursuant to a Stock Purchase Agreement and a Certificate
of Designation which provide, among other things, that (i) the preferred shares
carry a liquidation preference equal to their stated value and bear a cumulative
(noncompounded) annual dividend equal to 3% of the stated value, payable
quarterly, (ii) are convertible under certain circumstances into shares of
common stock of CHC at an exercise price equal to the average closing price of
CHC Common Stock over the preceding 60 business days, (iii) are redeemable at
the option of CHC at any time after November 10, 1997, and (iv) are redeemable
(subject to Delaware limitations upon distributions to shareholders) at the
option of the Company in the event of a change of control of CHC.

     In November 1994, an action was filed by a shareholder of CHC against the
Company, CHC and the directors of CHC in the Delaware Court of Chancery claiming
that the individual defendants, directors of CHC (two of which were, at that
time, directors of the Company),breached their duties by causing CHC to issue
shares of common and preferred stock to the Company for purposes of perpetuating
the individual defendants as directors of CHC. In April 1995, the Company, CHC
and entered into settlement agreement with the plaintiff to resolve the
litigation. Under the settlement agreements, all existing litigation was
terminated and the plaintiff purchased from CHC 1,295,000 shares of Fidelity
stock owned by CHC in exchange for which CHC received from the plaintiff
$2,220,000 and 666,000 shares of CHC common stock owned by the plaintiff.
Additionally, pursuant to an agreement by the Company and the plaintiff the
Company agreed not to exercise the conversion feature of its preferred stock
prior to February 4, 1996, without the prior approval of CHC shareholders. In
exchange for such concession by the Company, CHC granted the Company a two year

                                                                              13
<PAGE>
 
option to purchase the 666,000 shares of CHC common stock at $3.00 per share and
agreed to reimburse the Company for its litigation costs, which amounted to
approximately $62,000.

     The Company's right to convert its preferred stock of CHC into Common Stock
of CHC is subject to CHC's compliance with the rules of the American Stock
Exchange which generally requires shareholder approval if the number of shares
being issued exceeds 20% At the current time, this would permit the Company to
convert only that portion of its holdings of CHC Preferred Stock which would
convert into approximately 1.2 million shares of CHC Common Stock. If such
shareholder approval is not received, then CHC (subject to Delaware restrictions
on the making of distributions to stockholders) is obligated to repurchase the
remainder of the Company's CHC Preferred Stock at par plus accrued dividends and
premium. The premium is designed to put the Company, for a reasonable period of
time, in the same position as it would have been if it had not accepted such
redeemed CHC Preferred Stock in satisfaction of debt owed under the Line of
Credit. During the first four years following the issuance of CHC Preferred
Stock the premium is an amount equal to an accrual of 9% per annum, thereafter
declining 1% per year until November 2006. Second, in the event that the
exercise price of the conversion feature is less than $3.00 per share, CHC has
the right, but not the obligation, in the event of an election by the Company to
exercise its conversion feature, to redeem the CHC Preferred Stock at par, plus
accrued interest, plus premium.

Employees
---------

     Citadel currently has three employees, calculated exclusively of those
persons who are also officers or directly employed by the Company.

Properties
----------

     An overview of the four properties which constitute all of the real
properties owned by Citadel follows:

     Arboleda, Phoenix
     -----------------

     This office/restaurant property is 178,000 square feet and is located at
1661 Camelback Road in Phoenix, Arizona. Although this property was fully leased
at September 30, 1995, American Express, which occupies 58% (100,098 square
feet) of the property, has previously advised Citadel that it may not renew at
the expiration of the current term of its lease in February 1997. While Citadel
management believes that the leasing market in Phoenix will continue to
strengthen, it is anticipated that significant capital expenditures would be
necessary to relet the American Express space and that the space may remain
vacant for some time.

     Brand, Glendale
     ---------------

     As part of the Restructuring, Citadel acquired, by way of dividend, an
option to acquire at book value an 89,000 square foot office building located at

                                                                              14
<PAGE>
 
600 N. Brand, Glendale, CA which is 100% leased and used in part by Fidelity in
its operations. The Building was the headquarters building of Fidelity. Citadel
and Fidelity entered into a ten year, full service gross lease for four of six
floors of the building. The rental rate for the first five years of the lease
term is $26,000 per month for the ground floor and approximately $75,000 per
month for the fourth through sixth floors. The lease provides for annual rental
increases at a rate equal to the lower of the increase in the Consumer Price
Index or 3%. After the first five years of the lease term, the lease terms will
be adjusted to the higher of the then current market rate or the prevailing
rental rate in the fifth year with respect to the ground floor or $1.50 per
square foot with respect to the upper floors. Fidelity has an option to extend
the lease for two consecutive five year terms at a market rental and has an
option to purchase the Building at the market value at the expiration of the
lease term, provided Citadel then owns the Building. Fidelity is currently
attempting to sublease all or a portion of their leased premises.

     Public Storage occupies 30,879 square feet (two floors) on a lease that
expires in April 1996 with a total rental of $53,900 per month. Public Storage
has notified Citadel that it does not expect to renew their lease. Citadel
continues to have discussions with Public Storage and other potential tenants
for these premises.

     Parthenia
     ---------

     Parthenia is a 27 unit apartment complex located at 21028 Parthenia, Canoga
Park, CA which is 96% leased with lease terms of less than twelve months.

     Veselich
     --------

     Veselich is a 216 unit apartment complex, 95% leased located at 3939
Veselich Ave., Los Angeles, CA. As this property has reached a stabilized
occupancy, Citadel is currently seeking offers for its interest in this
building.

Legal Proceedings
-----------------

     Roven Litigation
     ----------------

     Citadel, Hecco Ventures I and James J. Cotter were defendants in a civil
action filed in 1990 by Alfred Roven in the United States District Court for the
Central District of California. The complaint alleged fraud by Citadel in a
proxy solicitation relating to Citadels's 1987 annual meeting of stockholders
and breach of fiduciary duty. The complaint also sought compensatory and
punitive damages in an amount alleged to exceed $40 million. The complaint grew
out of and was originally asserted as a counter claim in an action brought by
Citadel against Roven to recover alleged short swing profits. In October 1995,
Citadel, Hecco Ventures I and James J. Cotter were granted summary judgement on
all causes of action asserted in the 1990 complaint in federal court. Roven has
since filed a notice of appeal from that judgement.

                                                                              15
<PAGE>
 
     In 1995, Roven filed a complaint in the California Superior Court against
Citadel, Hecco Ventures I and James J. Cotter and, in addition, S. Craig
Tompkins and certain other persons, including Citadel's outside counsel and
certain former directors of Citadel (which directors are directors of the
Company), alleging malicious prosecution in connection with the short swing
profits litigation. Citadel believes that it has meritorious defenses to these
claims, and has not reserved any amounts with respect thereto. Defense of the
action has been accepted by Citadel's insurers, however, additional costs of
defense could be material to Citadel's future operating results considering
Citadel's limited revenue and operating profits.

     Fidelity Employee Claims
     ------------------------

     Following the Restructuring of Fidelity, Fidelity significantly reduced
staffing as part of its efforts to reduce costs. Certain terminated employees
have threatened, and in one case filed as detailed below, claims asserting that
Citadel is in some manner liable for what is asserted to be wrongful termination
of these individuals by Fidelity. In light of the fact that, among other things,
these employees were never employees of Citadel and were terminated only after
Citadel's interest in Fidelity had been reduced to 16% in essentially non-voting
interests in Fidelity, Citadel believes it has no liability to these
individuals. Citadel's insurers have offered to provide a defense to this
action.


     Restructuring Litigation
     ------------------------

     In July 1995, Citadel was named as a defendant in a lawsuit alleging
violations of federal securities laws in connection with the offering of common
stock of Citadel's then wholly owned subsidiary, Fidelity, in 1994 as part of
the Restructuring (the "Harbor Finance Litigation"). The suit was filed by
Harbor Finance Partners in an alleged class action complaint in the United
States District Court - Central District of California, and named as defendants
Citadel, Fidelity, Richard M. Greenwood (Fidelity's chief executive officer and
Citadel's former chief executive officer), J.P. Morgan Securities, Inc. and
Deloitte & Touche LLP. The suit alleges false and misleading information was
provided by the defendants in connection with Fidelity's stock offering and the
defendants knew and failed to disclose negative information concerning Fidelity.
Fidelity and Citadel have filed a Motion to Dismiss, and the plaintiff has filed
a notice that it doe not intend to defend that motion, but that it will file an
amended complaint by January 22, 1996. Fidelity and Citadel are advised that the
plaintiff has changed counsel, and that such new counsel is seeking one or more
new plaintiffs. Defense of the action has been accepted by Fidelity under the
terms of the Stockholders Agreement entered into between Citadel and Fidelity as
part of the CHC Restructuring, and Citadel to date has not retained separate
counsel with respect to this litigation and is not incurring outside costs of
defense. Since the filing of the Harbor Finance Litigation, Fidelity has
completed a second recapitalization transaction, in which it raised gross
proceeds of approximately $146 million, through the sale of common and preferred
stock. Citadel has been named in only two of the four alleged claims for relief 
and only in its capacity as an alleged controlling entity of Fidelity.

                                                                              16
<PAGE>
 
     The complaint filed by Harbor Finance Partners raises certain claims
previously made in a wrongful termination and defamation action brought by
William Strocco against Fidelity and Citadel, which was filed in Los Angeles
County Superior Court on March 9, 1995. The plaintiff in that case is the former
manager of Fidelity's REO Department who alleges that his employment was
terminated in violation of public policy and was a result of breaches of his
implied employment contract and the implied covenant of good faith and fair
dealing. The plaintiff alleges his termination was related to the fact that he
objected to various aspects of Fidelity's Restructuring, including the selling
of REO properties in bulk sales, as not in the interests of Fidelity, and he
asserted that the same was not fully disclosed to potential investors and the
Office of Thrift Supervision. The plaintiff also seeks damages for defamation
and interference with contractual relationship. Citadel has been named in only 
one of the five causes of action for allegedly inducing Fidelity to breach its 
employment agreement with its employee.

     Both the Harbor Finance Partners and Strocco complaints seek damages in an
unspecified amount. Citadel believes that these claims against it are without
merit and plans to vigorously contest them.

Company Employees
-----------------

     The Company operates in substantial part through its operating affiliates,
Stater, Reading, Reading International and Citadel. The Company has six
employees, inclusive of the Chairman of the Board. The Company believes
relations with its employees at all levels to be good.

     For information concerning Reading employees, see "Business-Reading-
Employees". For information concerning Stater employees, see "Business-Stater-
Employees". For information concerning Citadel, see "Business-Citadel-
Employees")


ITEM 2.   PROPERTIES

     The Company owns a condominium in a high rise located in Hollywood,
California, which the Company uses as executive offices and is used by the
directors of the Company (see "Item 11" below).

     For information concerning Stater properties, see Part I of Stater's Report
on Form 10-K set forth below. For information concerning Reading and Citadel see
"Business-Reading-Properties", and "Business-Citadel-Properties".

ITEM 3.   LEGAL PROCEEDINGS

     The Company is not a party to any material pending legal proceedings.

     For information concerning Reading legal proceedings, see 
"Business-Reading-Legal Proceedings". For information concerning Stater legal
proceedings see Part I to Stater's Report on Form 10-K set forth below. For
information concerning Citadel legal proceedings, see "Business-Citadel-Legal
Proceedings".

                                                                              17
<PAGE>
 
ITEM 4.   SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDINGS

     No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal period covered by this report.



Included on pages 19 through 25 are the relevant portions from Part I of the
Stater Bros. Holdings Inc. Report on Form 10-K for the fiscal year ended
September 24, 1995 as filed by Stater Bros. Holdings Inc. with the Securities
and Exchange Commission.

                                                                              18
<PAGE>
 
                                    PART I
                                    ------

ITEM 1.  BUSINESS


GENERAL

Stater Bros. Holdings Inc. was incorporated in Delaware in 1989 and together
with its wholly-owned subsidiaries, Stater Bros. Markets and Stater Bros.
Development, Inc., (collectively "Stater Bros." or the "Company") were founded
in 1936 when the first Stater Bros. Market opened in Yucaipa, California. The
Company is a leading supermarket chain in Southern California, operating 110
supermarkets in the Inland Empire Region of Southern California.

The Company has grown, primarily by constructing supermarkets in its primary
trading areas and through the enlargement of existing supermarkets. The Company
offers its customers a high level of customer service, broad selections of
grocery, meat, produce, liquor and general merchandise. All of the Company's
supermarkets have full-service meat departments and many of the supermarkets
have service delicatessens and service bakery departments. All of the Company's
supermarkets have expanded selections of produce merchandise.

The Company utilizes a central warehouse and distribution facility which
provides the Company's supermarkets with approximately 80% of the merchandise
they offer for sale. The Company's warehouse and distribution facilities
encompass approximately 955,000 square feet and include a 118,000 square foot
modern produce facility that was constructed in 1989 as well as facilities for
grocery, meat, frozen foods, health and beauty aids and bakery products.

                                                                              19
<PAGE>
 
BUSINESS STRATEGY

STORE PROFILE AND LOCATIONS

The Company's existing supermarkets have well-established locations and low
overhead expenses, including fixed rent payments in most stores. In addition,
the Company believes that its existing supermarkets are well-maintained and
generally require capital expenditures only for customary maintenance. An
average Stater Bros. supermarket is approximately 28,700 square feet, while
newly constructed Stater Bros. supermarkets range from approximately 35,300 to
40,600 square feet. Stater Bros. supermarkets typically utilize approximately
72% of total square feet for retail selling space. The Company operates its
supermarkets with minimal back-room storage space because of the close proximity
of its distribution facility to its store locations. Generally, all Stater Bros.
supermarkets are similarly designed and stocked thereby allowing Stater Bros.
customers to find items easily in any of the Company's supermarkets.

Substantially all of the Company's 110 supermarkets are located in neighborhood
shopping centers in well-populated residential areas.  The Company endeavors to
locate its supermarkets in growing areas that will be convenient to potential
customers and will accommodate future expansion.

Management actively pursues the acquisition of sites for new supermarkets. In an
effort to determine sales potential, new supermarket sites are carefully
researched and analyzed by management for population shifts, zoning changes,
traffic patterns, nearby new construction and competitive locations. Stater
Bros. works with developers to attain the Company's criteria for potential
supermarket sites, and to insure adequate parking and a complementary co-tenant
mix.

                                                                              20
<PAGE>

STORE EXPANSION AND REMODELING
 
The Company has historically focused its expansion in the Inland Empire.  Such
expansion has been accomplished through improving and remodeling existing stores
and constructing new supermarkets rather than by acquiring other supermarket
operations.  The number of supermarkets operated by the Company has grown from
82 in September 1979 to 110 as of September 24, 1995.  The Company intends to
continue to expand its existing supermarket operations by enlarging and
remodeling existing supermarkets and constructing new supermarkets.  The Company
may also make selective acquisitions of existing supermarkets within the Inland
Empire, if such opportunities arise.

The Company monitors sales and profitability of its operations on a store-by-
store basis and enlarges, remodels or replaces stores in light of their
performance and management's assessment of their future potential.
Approximately 60% of the Company's supermarkets have been either newly
constructed or remodeled within the last five years.  Minor remodels usually
include new fixtures, a change in decor, and the addition of one or more
specialty service departments such as a delicatessen or bakery.  Major remodels
typically involve more extensive refurbishment of the store's interior and often
increase the retail selling space per store.  Expansions entail enlargement of
the store building.  The primary objectives of remodelings and expansions are to
improve the attractiveness of supermarkets, increase sales of higher margin
product categories and, where feasible, to increase selling area.  The Company
conducts all of its new construction and remodeling through its wholly-owned
subsidiary, Stater Bros. Development, Inc., which serves as the general
contractor for all Company construction projects.

                                                                              21
<PAGE>
 
STORE EXPANSION AND REMODELING (CONTD.)

The following table sets forth certain statistical information with respect to
the Company's supermarket expansion and remodeling for the periods indicated.

<TABLE>
<CAPTION>
                                                          Fiscal Year Ended
                                       --------------------------------------------------------------
                                       Sept. 29,  Sept. 27,      Sept. 26,      Sept. 25,  Sept. 24,
                                         1991       1992           1993           1994       1995
                                       --------   --------       --------       --------   --------
<S>                        <C>        <C>        <C>                <C>        <C>
Number of supermarkets:
 Opened..........................          5          4              2              3          0
 Closed/Replaced.................          1          3              -              1          1
 Total at end of year............        106        107            109            111        110
 Minor Remodel...................         13         10             10              4          8
 Major Remodel...................          1          -              -              -          -
 Expansion.......................          -          -              -              -          1
</TABLE>

Beyond 1995, the Company plans to open approximately two to four new stores per
year, based upon a number of factors, including customer demand, market
conditions, profitability, costs of opening, and availability of financing for
such new stores.  The Company's plans with respect to major and minor remodels,
expansion and new construction are reviewed continually and are revised, if
appropriate, to take advantage of marketing opportunities.  The Company finances
its new store construction primarily from cash provided by operating activities
and short-term borrowings under its credit facilities.  Long-term financing of
new stores generally will be obtained through either sale/leaseback transactions
or secured long-term financings.  However, no assurances can be made as to the
availability of such financings.

WAREHOUSE AND DISTRIBUTION FACILITIES

The Company's warehouse and distribution facilities and administrative offices
are located in Colton, California, and encompass approximately 955,000 square
feet.  The facilities include warehouses for grocery, produce and deli products,
meats and frozen products, health and beauty aids and bakery merchandise.
Management believes that its existing warehouse and distribution facilities are
adequate to meet its currently identified expansion plans.  Approximately 80% of
the products offered for sale in the Company's supermarkets are processed
through the Company's warehouse and distribution facilities.

The Company's warehouse and distribution facilities are centrally located and
are an average distance of approximately 30 miles from its supermarkets.  Most
stores can be reached without using the most congested portions of the Southern
California freeway system.

The Company's transportation fleet consists of modern well-maintained vehicles.
As of September 24, 1995, the Company operated approximately 92 tractors and 261
trailers, approximately 31% of which were leased by the Company.  The Company
also operates a fuel and repair terminal at the Colton distribution facility.

PURCHASING AND MARKETING

The Company uses an Everyday Low Price ("EDLP") format as an integral part of
its purchasing and marketing strategy to provide its customers with the best
overall supermarket value in its primary market areas.  The Company supplements
its everyday low price structure with chain-wide temporary price reductions on
selected food and non-food merchandise.  The geographic location of the
Company's supermarkets allows it to reach its target consumers through a variety
of media and the Company aggressively advertises its everyday low prices through
local and regional newspapers, direct mail and printed circulars as well as
advertisements on radio and television.

                                                                              22
<PAGE>
 
PURCHASING AND MARKETING (CONTD.)

A key factor in the Company's business strategy is to provide its customers with
a variety of quality brand-name merchandise as well as alternative selections of
high-quality private label and generic brands of merchandise.  To meet the needs
of customers, most supermarkets are stocked with approximately 35,000 items.
The Company places particular emphasis on the freshness and quality of its meat
and produce merchandise and maintains high standards for these perishables by
processing and distributing the merchandise through its perishable warehouses
and distribution facilities.

RETAIL OPERATIONS

The Company's supermarkets are well maintained, have sufficient off-street
parking and generally are open from 7:00 a.m. until 10:00 p.m. or 11:00 p.m.,
seven days a week, including all holidays with the exception of Christmas Day.
Because Stater Bros. operates all its supermarkets under a single format,
management believes it is able to achieve certain operating economies.

   Store Management.  Each of the Company's supermarkets is managed by a store
manager and an assistant manager, each of whom receives a base salary and may
receive a bonus based on the individual supermarket's overall performance and
management of labor costs within the supermarket.  The store manager and
assistant manager are supported by their store management staff who have the
training and skills necessary to provide proper customer service, operate the
store and manage personnel in each department.  Additionally, the store manager
is supported by individual department managers for grocery, meat, produce, and
where applicable, bakeries and delicatessens.  Store managers report to one of
six district managers, each of whom is responsible for an average of 18
supermarkets.

   Customer Service.  The Company considers customer service and customer
confidence to be critical to the success of its business strategy.  This
strategy, to provide courteous and efficient customer service through specific
programs and training, is a focus of the executive officers and is implemented
at all levels of employees.  The Company maintains an intensive checker training
school to train prospective checkers and to provide a refresher program for
existing checkers.  All of the Company's supermarkets provide customers with
purchase carry-out service and have express check-out lanes for purchases of 10
items or less.

MANAGEMENT INFORMATION SYSTEMS

The Company's management information systems and point-of-sale scanning
technology reduce the labor costs attributable to product pricing and customer
check-out, and provide management with information that facilitates purchasing,
receiving and management of inventory and accounts payable.  The Company has
point-of-sale scanning checkout technology in all of its stores.  All stores use
electronic systems for employee time and attendance records and inventory
ordering.

Approximately one-half of the Company's supermarkets currently utilize
electronic labor scheduling, which assists store management in developing a more
efficient and customer-sensitive work schedule.

EMPLOYEES

The Company has approximately 8,300 employees, approximately 500 of whom are
management and administrative employees and approximately 7,800 of whom are
hourly employees.  Approximately 68% of the Company's employees work part-time.
Substantially all of the Company's hourly employees are members of either the
Retail Clerks, Meatcutters or Teamsters labor unions and are represented by
several different collective bargaining agreements.  The Company's collective
bargaining agreements, with the Meatcutters and Retail Clerks, which covers the
largest number of employees, were renewed in October 1995 and expire in October
1999.  The Teamsters collective bargaining agreement was renewed in September
1994 and expires in 1998.

                                                                              23
<PAGE>
 
EMPLOYEES (CONTD.)

The Company values its employees and believes its relationship with them is good
and that employee loyalty and enthusiasm are key elements of its operating
performance.

COMPETITION

The Company operates in a highly competitive industry characterized by narrow
profit margins.  Competitive factors include price, quality and variety of
products, customer service, and store location and condition.  The Company
believes that its competitive strengths include its specialty services, everyday
low prices, breadth of product selection, high product quality, one-stop
shopping convenience, attention to customer service, convenient store locations
and a long history of community involvement.

Given the wide assortment of products it offers, the Company competes with
various types of retailers, including local, regional and national supermarket
retailers, convenience stores, retail drug stores, national general
merchandisers and discount retailers, membership clubs and warehouse stores.
The Company's primary competitors include Lucky, Vons, Hughes, Albertson's,
Ralphs, Smith's Food & Drug and a number of independent supermarket operators.

GOVERNMENT REGULATION

The Company is subject to regulation by a variety of governmental authorities,
including federal, state and local agencies that regulate trade practices,
building standards, labor, health, safety and environmental matters and regulate
the distribution and sale of alcoholic beverages, tobacco products, milk and
other agricultural products and other food items.

ENVIRONMENTAL

Environmental remediation costs incurred over the past five years have been
approximately $100,000 in the aggregate including remediation costs of
approximately $30,000 in 1994 and $8,000 in 1995.  Management believes that any
such future remediation costs will not have an adverse material effect on the
financial condition or results of operations of the Company.



ITEM 2.  PROPERTIES


The Company leases its warehouse and distribution facilities located in Colton,
California, and management believes that its warehouse and distribution
facilities are well maintained and are adequate to serve the currently
identified expansion plans of the Company.  The following schedule presents the
Company's warehouse and distribution facilities by product classification and
the size of each such facility as of September 24, 1995.

<TABLE>
<CAPTION>
 
                                                      Square
      Facility                                         Feet 
      --------                                         ----- 
<S>                                                   <C>   
      Grocery...................................      416,000
      Forward-buy grocery.......................      175,000
      Produce/deli..............................      118,000
      Meat/frozen...............................      116,000
      Health and beauty aids....................       35,000
      Bakery....................................       21,000
      Support and administrative offices........       74,000
                                                      -------
         Total..................................      955,000
                                                      =======
</TABLE>

                                                                              24
<PAGE>
 
ITEM 2.  PROPERTIES (CONTD.)


The Company owns 31 of its supermarkets and leases the remaining 79
supermarkets. Management believes that its supermarkets are well maintained and
adequately meet the expectations of its customers. The Company operates 110
supermarkets in the Southern California counties of San Bernardino, Riverside,
Orange, Los Angeles and Kern. The following schedule reflects the Company's
store counts by size, county, and the number of stores that are either leased or
owned as of September 24, 1995.

<TABLE>
<CAPTION>
 
                        No. of Stores                     Total Square Feet
                   -----------------------    -----------------------------------------
<S>               <C>      <C>      <C>      <C>      <C>     <C>       <C>      <C>
                                              Under 25,000-              30,001-
                 35,001-              40,001-
County            Total    Owned    Leased    25,000  30,000    35,000   40,000  45,000
------            -----    -----    ------    ------  ------    ------   ------  ------
San Bernardino..     45       13        32         6      18         7       11       3 
Riverside.......     35       10        25        10      14         5        5       1
Orange..........     14        5         9         3      10         -        1       -
Los Angeles.....     14        2        12         3      10         -        1       -
Kern............      2        1         1         -       -         1        1       -
                  -----    -----    ------    ------  ------    ------   ------  ------
                                                                                      
Total...........    110       31        79        22      52        13       19       4
                  =====    =====    ======    ======  ======    ======   ======  ======
</TABLE>


ITEM 3.  LEGAL PROCEEDINGS


In the ordinary course of its business, the Company is party to various legal
actions which the Company believes are incidental to the operation of the
business of the Company and its subsidiaries.  The Company has recorded reserves
for loss contingencies based on the specific circumstances of each case.  Such
reserves are recorded when the occurrence of loss is probable and can be
reasonably estimated.  The Company believes that the outcome of such legal
proceedings to which the Company is currently a party will not have a material
adverse effect upon its results of operations or its consolidated financial
condition.

On May 2, 1993, the Company was named as a defendant along with all of the other
major supermarket chains located in the Los Angeles County area in a class
action complaint filed in the California Superior Court in Los Angeles,
California, alleging among other things that the milk pricing policies of each
of the defendants violate certain antitrust laws and regulations under
California law.  In this class action lawsuit, Barela et al. v. Ralphs Grocery
Co. et al., plaintiffs seek unspecified damages.  The principal allegations of
the complaint are that milk prices of the defendants operating in the Los
Angeles County area are higher than milk prices for the same products in the San
Francisco Bay area and that the prices for such products in Los Angeles County
are higher than the prices charged in Riverside and San Bernardino counties.
Because the Company does not conduct business in the San Francisco Bay area and
its prices for milk are generally consistent throughout all of its supermarkets
in the Los Angeles County area and Riverside and San Bernardino counties, the
Company believes the claim is without merit with respect to the Company and the
Company intends to vigorously defend such litigation.  The Company believes that
the ultimate outcome of this litigation will not have a material adverse effect
on the Company's results of operations or its consolidated financial condition.

ENVIRONMENTAL MATTERS

Environmental remediation costs incurred during the last five years have been
approximately $100,000 in the aggregate including remediation costs of
approximately $30,000 in 1994 and $8,000 in 1995.  Management believes that any
such future remediation costs will not have an adverse material effect on the
financial condition or results of operations of the Company.

                                                                              25
<PAGE>
 
                                    PART II
                                    -------
ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 
          MATTERS


     The Common Stock and the Class A Common Preference Stock of the Company are
traded on the New York and Pacific Stock Exchanges. Set forth below are
quarterly high and low closing prices on the NYSE for the following periods:

<TABLE>
<CAPTION>
                             Fiscal Year Ended                       Fiscal Year Ended
                            September 30, 1995                      September 30, 1994
                     ---------------------------------     -----------------------------------
                        Class A                               Class A
                        Common                                Common
                       Preference                            Preference
                          Stock          Common Stock           Stock            Common Stock
                     --------------     --------------     ---------------     ---------------
Quarter Ended        High       Low     High       Low     High        Low     High        Low
-------------        ----       ---     ----       ---     ----        ---     ----        ---
<S>                  <C>      <C>       <C>      <C>       <C>      <C>        <C>      <C>
 
December 31          10 7/8   8 6/8     11 1/4   8 2/8     12 1/2   11 1/8     13 1/8   11 1/2

March 31              9 1/2   8 1/2     10 1/4   8 3/4     12 1/2   11         12 7/8   11 3/8

June 30               9 3/8   8 6/8     10 3/8   9 3/4     12 3/4   10 7/8     12 7/8   11 6/8

September 30          9 1/2   8 3/4     10 3/8   9 3/8     12       10 1/4     12 7/8   10 6/8
</TABLE>

     The approximate number of holders of record of the Company's Common Stock
and Class A Common Preference Stock as of January 4, 1995 was 820 and 11,
respectively. No cash dividends were declared or paid on the Company's Common
Stock or Class A Common Preference Stock during the fiscal years ended September
30, 1995 and 1994. It is the current intention of the Board of Directors not to
declare cash dividends, due to the Company's intention to use its excess cash in
connection with the operation of the Company.

                                                                              26
<PAGE>
 
ITEM 6.  SELECTED FINANCIAL DATA

     The following table sets forth certain historical financial information for
the Company. This table is based on, and should be read in conjunction with, the
Consolidated Financial Statements included elsewhere herein and the related 
notes thereto.
     
<TABLE>
<CAPTION>
                                            Year Ended September 30,
                              1995        1994        1993        1992        1991
                            --------    --------    --------    --------    --------
 
                                        (In thousands, except per share data)
<S>                         <C>         <C>         <C>         <C>         <C> 
Net revenues                $ 7,338     $13,591     $ 2,616     $ 6,479     $ 9,167
 
Earnings (loss) before
  extraordinary items         3,458       1,030      (5,915)     (7,954)      4,435
 
Extraordinary items              --      (2,408)         --        (735)        378
 
Earnings (loss)               3,458      (1,378)     (5,915)     (8,689)      4,813
 
Earnings (loss) per
  common share before
  extraordinary items          0.58        0.16       (0.93)      (1.26)       0.70
 
Extraordinary items              --       (0.38)         --       (0.12)       0.06
 
Earnings (loss) per
  share                        0.58       (0.22)      (0.93)      (1.38)       0.76
 
Total assets                 84,669      80,027      84,181      71,282      93,836
 
Long-term obligations         5,436       3,889      18,452       3,292      21,358
 
Cash dividends declared          --          --          --          --          --
</TABLE>

                                                                              27
<PAGE>
 
ITEM 7.   MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS


Results of Operations
---------------------

     The Company's investments in Stater Bros. Holdings Inc. ("SBH" and,
together with its wholly owned subsidiaries, "Stater"), Reading Company
("Reading") and Citadel Holding Corporation ("CHC" and together with its wholly
owned subsidiaries, "Citadel") are included in the Company's Consolidated
Financial Statements on the equity method of accounting. See Note 1 of Notes to
the Consolidated Financial Statements.


Year Ended September 30, 1995 ("Fiscal 1995") Versus Year Ended September
-------------------------------------------------------------------------
30, 1994 ("Fiscal 1994")
------------------------


     The Company's net earnings for the year ended September 30, 1995 was
$3,458,000 or $0.58 per share, as compared with a net loss of $1,378,000 or
$0.22 per share for the year ended September 30, 1994. The net loss for Fiscal
1994 includes an extraordinary charge amounting to $2,408,000 or $0.38 per share
representing the Company's equity ownership share of refinancing costs included
in Stater's operating results, after an income tax benefit of $1,610,000.

     The Company's operating results have varied significantly reflecting the
Company's share of the operating results of its affiliates, Stater, Reading and
Citadel. Comparisons between the fiscal years is difficult due to (i) the Stater
restructuring that occurred in March 1994, (ii) the 1994 acquisition by Reading
of Cine Vista, its Puerto Rico based cinema chain, (iii) the increase by the
Company of its voting interest in Citadel, after its 1994 restructuring, to the
position where it is required to report such interest on the equity method of
accounting.

     The increase in the Fiscal 1995 net earnings as compared to Fiscal 1994
losses is principally a result of the Fiscal 1994 inclusion of a $8,792,000
writedown of the Company's investment in CHC. The impact of the Fiscal 1994
writedown of CHC was reduced, in part, by $5 million of revenue reported with
respect to proceeds received from SBH pursuant to a consulting agreement
executed in March 1994, and a gain of $1.3 million on the sale of property. In
addition, Fiscal 1995 includes a $935,000 increase in reported interest and
dividend income from $695,000 in Fiscal 1994 as compared to $1,630,000 in Fiscal
1995. This increase was due to higher investable operating cash balances
received as part of the Stater restructuring in March 1994.

Service income
--------------

     In connection with the SBH restructuring consummated in March 1994, the
Company entered into a consulting agreement with SBH pursuant to which the
Company has agreed, among other things, to render consulting services for a five

                                                                              28
<PAGE>
 
year period. In accordance with this agreement, SBH paid the Company $5 million
in March 1994 and committed to remit $1.5 million a year, payable quarterly,
through the five year term of the agreement. SBH has the right to terminate the
agreement without refund of any amounts paid, if it exercises the option
discussed below and acquires the Company's interest in SBH. Included in service
income for the 1995 and 1994 fiscal years is $1,500,000 and $5,849,000,
respectively.

Equity in earnings of affiliates
--------------------------------

     Equity in earnings of affiliates reflects the Company's share of net
earnings and losses of Stater, Reading and Citadel before extraordinary items
and after preferred dividends. The following table sets forth the contribution
by affiliate of the equity in earnings of affiliates.

<TABLE>
<CAPTION>
                                          Year Ended September 30,
                                             1995          1994
                                           --------      --------
     <S>                                  <C>           <C>
     SBH - reported as equity
     earnings of affiliate                $  3,693      $  6,422
 
     Reading - reported as equity
     earnings of affiliate                     989          (678)
 
     CHC - reported as equity
     losses of affiliate                      (474)           --
                                           -------       -------
       Equity earnings                       4,208         5,744
 
     SBH - reported by Company
     as extraordinary item                      --        (4,018)
                                           -------       -------
 
       Contribution by affiliates         $  4,208      $  1,726
                                           =======       =======
</TABLE>

Stater
------

     On March 8, 1994, the Company and Stater consummated a series of
restructuring transactions. Concurrently with the closing of the restructuring
transactions, Stater obtained $165 million in new debt, the proceeds of which
were primarily used to retire outstanding indebtedness together with a
prepayment premium, pay a dividend to the holders of SBH Common Stock, and to
acquire an option from the Company to purchase the SBH Common Stock held by the
Company. The significant increase in debt resulted in Stater interest expense
increasing in the 1995 Fiscal Year as compared to the 1994 Fiscal Year. SBH
reported net income of $6.7 million for Fiscal 1995 as compared to $1.1 million
for Fiscal 1994.

     Stater sales amounted to $1.580 billion in Fiscal 1995 as compared to
$1.540 billion in Fiscal 1994. Stater operated 110 supermarkets at September 24,
1995 as compared to 111 supermarkets at September 25, 1994. Like store sales
increased 1.2% in Fiscal 1995 compared to a decrease of 0.7% in Fiscal 1994. The
increase in like store sales in Fiscal 1995 compared to decreases in Fiscal 1994
is due to a variety of factors including decreases in competitor openings,
slight
                                                                              29
<PAGE>
 
improvements in the Southern California economy and favorable customer response
to Stater's introduction of prepackaged gourmet vegetables and fresh cut
flowers.

     Stater's gross profits increased to $352.5 million or 22.31% of sales in
Fiscal 1995 compared to $339.9 million or 22.08% of sales in Fiscal 1994. The
increase in gross profits in Fiscal 1995 was due to continued increased
efficiencies in Stater's warehousing and transportation departments, the
introduction of higher gross margin products such as prepackaged gourmet
vegetables and fresh cut flowers and a decrease in the number of competitive new
store openings.

     Operating expenses include selling, general and administrative,
depreciation and amortization and consulting fee expenses. Selling, general and
administrative expenses were $308.3 million or 19.52% of sales as compared to
$297.5 million or 19.32% for Fiscal 1994. Selling, general and administrative
expenses in 1995 include reductions in expense categories such as worker's
compensation and general liability self insurance expenses of $2.8 million,
which was offset by increases in direct labor, store supplies and advertising
expenses. Additional expenses were incurred in 1995 to operate the new stores
opened in June and August of 1994. Selling, general and administrative expenses
for Fiscal 1994 included certain non-recurring expenses including a $4 million
charge for the 311,404 shares of common stock paid to the Company as part of the
Restructuring and a one-time payment of $3.4 million to members of the Retail
Clerks collective bargaining unit. Such non-recurring expenses were offset, in
part by a non-recurring reduction in employer contributions to a collective
bargaining unit health and welfare benefit trust of $13.6 million.

     Interest expense amounted to $20.1 million in Fiscal 1995 as compared to
$15.5 million for Fiscal 1994. The increase in Fiscal 1995 is due to the
issuance of additional debt in March 1994 as part of the Stater restructuring
transaction.

     Stater's income before the cumulative effect of a change in accounting for
income taxes and extraordinary loss amounted to $6.7 million in Fiscal 1995 as
compared to $8.8 million in Fiscal 1994. In connection with the March 8, 1994
Restructuring, Stater entered into a series of transactions that included the
sale of $165 million of 11% Senior Notes due 2001, the early retirement of the
outstanding 9.8% Senior Notes due 2001 and certain bank financings. The early
retirement of debt resulted in an after tax extraordinary charge to earnings,
net of income tax benefit, of $8 million. Accordingly, the Company reported its
50% share of Stater's debt retirement costs amounting to $4,018,000, after an
income tax benefit of $1,610,000, as an extraordinary item.

     Stater's net income for Fiscal 1995 amounted to $6.7 million compared to
$1.1 million in Fiscal 1994. Such Fiscal 1994 results include a credit of
approximately $.4 million resulting from Stater's adoption of the Statement of
Financial Accounting Standard No. 109 "Accounting for Income Taxes".

     At September 24, 1995, Stater was in compliance with the restrictive
covenants of its Bank Facility and 11% Senior Notes due 2001 and had a current
ratio of 1.40:1; tangible net worth and debt subordinated to the bank of $176.4
million; a ratio of total liabilities to tangible net worth and debt subordinat-

                                                                              30
<PAGE>
 
ed to the Bank of 0.76:1 and a fixed charge ratio (as defined in the Bank
Facilities) of 1.30:1. However, there can be no assurance that Stater Bros.
Markets will be able to achieve the expected operating results or implement the
capital expenditure strategy upon which the covenants in the Bank Facilities are
based. If for any reason Stater Bros. Markets is unable to comply with the terms
of the Bank Facilities, including the covenants contained therein, such
noncompliance would result in an event of default under the Bank Facilities, and
could result in the acceleration of the payment of outstanding indebtedness or,
in certain situations, the prohibition of dividends to SBH, which is SBH's
primary source of anticipated cash to pay interest on the 11% Senior Notes and
if converted, dividends on Preferred Stock.

Reading
-------

     On August 17, 1994, Reading acquired Theater Acquisitions of Puerto Rico,
Inc. ("Cine Vista") for an aggregate purchase price of approximately $22.7
million, inclusive of acquisition costs of $.3 million. For accounting purposes,
the acquisition was effective July 1, 1994. Cine Vista operates motion picture
exhibition theaters in seven leased locations with a total of 44 screens in the
Commonwealth of Puerto Rico. Accordingly, the operating results of Cine Vista
are only included in the operating results of Reading for six months of Fiscal
1994 as compared to twelve months in Fiscal 1995.

     For the twelve month period ended September 30, 1995, Reading reported net
income of approximately $2,097,000 (the Company's share amounting to
approximately $989,000), as compared to a net loss of $1,437,000 (the Company's
share amounting to $678,000) for the twelve month period ended September 30,
1994. The net income for the twelve month period ended September 30, 1995
includes $1,890,000 from the settlement of various litigation claims. The net
loss from the twelve months 1994 includes (i) a provision for environmental
matters of $1,306,000 and (ii) a development expense charge of approximately
$795,000 related to Reading's investment in Oz Resorts and Entertainment, Inc.

     Revenues for the twelve months ended September 30, 1995 amounted to
$19,533,000 as compared to $8,193,000 for the twelve month period ending
September 30, 1994. As discussed above, Reading's significant increase in
revenues during 1995 reflects the inclusion of the operating results of Cine
Vista for twelve months as compared to six months during the 1994 twelve months,
as well as, the inclusion of the litigation settlements amounting to $1,890,000
in the 1995 twelve months.

     Reading's general and administrative expenses amounted to approximately
$4,454,000 for the twelve months ended September 30, 1995 as compared to
$3,423,000 for the twelve months ended September 30, 1994. This was due to the
addition of (i) approximately $973,000 associated with Cine Vista's general and
administrative expenses and (ii) the inclusion of certain expenses related to
diligence performed with respect to acquisition opportunities, as well as,
theater development activities in Australia. The 1994 general and administrative
costs include a development expense charge of approximately $795,000 related to
Reading's investment in Oz Resorts and Entertainment Inc. and a $1,306,000
provision for environmental matters.

                                                                              31
<PAGE>
 
     At September 30, 1995, Reading had significant liquidity including cash,
cash equivalents, and marketable treasury securities of approximately $47.5
million and no debt outstanding. Reading intends to expand Cine Vista's existing
operations by developing new multiplex theaters in the Commonwealth of Puerto
Rico which will require the expenditure of additional funds during the next
several years. Reading is also pursuing a number of motion picture theater
development opportunities, both domestically and internationally. If Reading
were to enter into all the transactions currently being considered, Reading
would not have adequate working capital to fund all the proposals. Therefore,
Reading has obtained a commitment from a major money center bank for a $15
million line of credit with respect to Cine Vista's operations which line of
credit will provide sufficient funds to complete Cine Vista's new theater
development plans and provide additional liquid funds for the parent Company. In
addition, Reading and the Company in November 1995 formed Reading International,
to develop and operate multiplex theaters in Australia, and authorized initial
funding of $10 million.

Citadel
-------

     At September 30, 1994, the Company reported its common stock investment in
CHC at $2.625 or share or $1,556 million. During fiscal 1995, the Company
increased its common stock ownership in CHC from 592,712 shares (9%) at
September 30, 1994 to 993,112 shares (16.5%) at September 30, 1995, through the
purchase of 400,400 shares of CHC stock for approximately $1,013,000. In
addition, in November 1994 the Company acquired, in satisfaction of $5.25
million of a $6.2 million outstanding indebtedness of Citadel to the Company,
1,329,114 shares of a newly issued CHC 3% Cumulative Voting Convertible
Preferred Stock. The preferred shares represent approximately 18.1% of the
voting power of CHC at September 30, 1995, and together with the common shares
owned by the Company represent approximately 31.6% of the voting power of CHC at
September 30, 1995.

     Based on the increase in voting ownership in November 1994 through the
acquisition of Preferred Stock, the investment in CHC met the criteria for using
the equity method of accounting. As a result of the Company's previous
writedowns of the CHC common stock investment below the underlying book value no
retroactive adjustment to the results of operations was required. In accordance
with accounting for this investment under the equity method of accounting, the
Company has reclassified its investment in CHC to investment in equity
affiliates.

     CHC, whose common stock is traded on the American Stock Exchange, was prior
to the recapitalization of Fidelity, the holding company for Fidelity. CHC is
referred to collectively with its wholly owned subsidiaries as "Citadel". As a
consequence of a recapitalization and restructuring of Fidelity in August 1994,
Citadel's interest in Fidelity was reduced to approximately 16%. During fiscal
1995, substantially all such remaining interest of Citadel in Fidelity was sold.
Since the restructuring Citadel has been engaged primarily in the ownership and
management of commercial and residential property. At September 30, 1995,
Citadel's balance sheet assets amounted to approximately $39.7 million and
consisted principally of real estate and cash.

                                                                              32
<PAGE>
 
     CHC reported a net loss for the three months ended December 31, 1994 of
$8,898,000, including a writedown of its remaining investment in Fidelity of
$7,081,000 and net earnings of $1,282,000 for its nine months ended September
30, 1994. The Company has included its share of such losses amounting to a loss
of $474,000 for the twelve months ended September 30, 1995 as earnings (losses)
from equity affiliates.

     Included in CHC's earnings for the nine month period ended September 30,
1995 is approximately $1,541,000 from the sale of two properties. In addition,
during this period CHC sold substantially all of its investment in Fidelity,
which resulted in the CHC receiving net cash proceeds of $11,938,000 and the
return of 666,000 shares of CHC common stock. The net proceeds, when combined
with the amount ascribed to the common stock received, approximated the carrying
value of such Fidelity stock held at the date of sale. The sale of the
properties and the Fidelity stock attributed to the significant increase in cash
and cash equivalents at September 30, 1995.

Interest income and expense
---------------------------

     Interest and dividend income increased in the Fiscal 1995 to $1,630,000
compared to $695,000 in Fiscal 1994. The increase was due to higher investable
operating cash balances which occurred in March 1994 upon the Stater
restructuring. As part of the restructuring, the Company received approximately
$42 million from Stater which was used in part to repay all outstanding debt of
the Company amounting to $14 million thereby eliminating interest costs in
Fiscal 1995. Included in interest and dividend income in Fiscal 1995 and Fiscal
1994 is $301,000 and $140,000, respectively, earned pursuant to a credit
agreement between the Company, as lender, and Citadel, as borrower, which was
paid in full in May 1995. The initial loan to Citadel made in August 1994
amounted to $6.2 million. In November 1994, the Company agreed to acquire $5.25
million of 3% Cumulative Voting Convertible Preferred Stock in CHC in partial
satisfaction of $5.25 million of the $6.2 million loan to Citadel. Included in
interest and dividend income is dividend income from the Company's holdings in
CHC Preferred Stock amounting to approximately $140,000.

Operating, general and administrative expenses
----------------------------------------------

     Operating, general and administrative expenses decreased slightly to
$2,230,000 in Fiscal 1995 from $2,404,000 in Fiscal 1994. Included in operating,
general and administrative expenses in Fiscal 1994 is a $500,000 bonus awarded
by the Board of Directors to the Chairman of the Board, based largely upon
Chairman's contribution to the success of the Stater Restructuring, offset in
part by a reduction in goodwill amortization of $200,000 and the receipt of
insurance proceeds amounting to $144,000. Fiscal 1995 wages increased
approximately $200,000 due to the hiring of an additional employee in the last
six months of 1994 and bonus awards of $125,000.

Income taxes
------------

     The provision for income taxes from continuing operations amounted to
$1,650,000 in Fiscal 1995 as compared to $1,010,000 in Fiscal 1994. As of

                                                                              33
<PAGE>
 
September 30, 1995, deferred tax assets amounting to $8,362,000 have been
recognized to offset deferred tax liabilities of $13,742,000.

Year Ended September 30, 1994 ("Fiscal 1994") Versus Year Ended September
-------------------------------------------------------------------------
30, 1993 ("Fiscal 1993")
------------------------

     The Company's net loss for the year ended September 30, 1994 was $1,378,000
or $0.22 per share (including an extraordinary loss of approximately $2,408,000
or $0.38 per share), as compared with a net loss for Fiscal 1993 of $5,915,000
or $0.93 per share. The Fiscal 1993 loss includes a $4,900,000 provision for
income taxes as compared to a $1,010,000 provision in Fiscal 1994. The Fiscal
1994 loss of $1,378,000 includes a charge of $8,792,000 attributable to a
further writedown of the Company's investment in Citadel Holding Corporation
(Citadel) and the Company's portion of equity losses from its investment in
Reading amounting to $678,000 in Fiscal 1994 as compared to equity losses of
$348,000 in Fiscal 1993. The impact of these charges in Fiscal 1994 was offset
by various factors including (i) $5,849,000 of revenue reported with respect to
proceeds received from Stater pursuant to a consulting agreement which became
effective upon the closing of the Stater restructuring, (ii) a gain of
approximately $1,303,000 on the sale of property, and (iii) a reduction in
interest expense.

Service income
--------------

     In connection with the SBH restructuring consummated in March 1994, the
Company entered into a consulting agreement with SBH pursuant to which the
Company has agreed, among other things, to render consulting services for a 
five-year period and has agreed not to provide consulting services or own any
controlling interest in any business that competes with Stater. Under this
agreement SBH paid the Company $5 million in March 1994, and has committed
thereafter $1.5 million a year, payable quarterly through the term of the
Consulting Agreement. Included in service income for the year ended September
30, 1994 is approximately $5.849 million earned pursuant to this agreement.

Equity in Earnings of Affiliates
--------------------------------

     Equity in earnings of affiliates reflects the Company's share of net
earnings or losses of its affiliates before extraordinary items and after
preferred dividends. The following table sets forth the contribution by
affiliate of the equity in earnings of affiliates:

        Equity in Earnings of Affiliates - Contribution by Affiliates
        -------------------------------------------------------------
                           (In thousands of dollars)

<TABLE>
<CAPTION>
                                         Year Ended September 30,
                                              1994        1993
                                           ---------    --------
          <S>                            <C>           <C>
          SBH - reported as equity
            earnings of affiliate           $ 6,422     $ 2,685
          SBH - reported by Company
            as extraordinary item            (4,018)         --
                                             ------      ------
          SBH - Company share of SBH
            operating results                 2,404       2,685
          Reading - equity losses              (678)       (348)
                                             ------      ------
 
                                            $ 1,726     $ 2,337
                                             ======      ======
</TABLE>

                                                                              34
<PAGE>
 
Stater
------

     As previously described, in March 1994, the Company and Stater consummated
several a series of restructuring agreements which resulted in the Company
receiving from Stater pre-tax cash proceeds approximating $42 million including
a dividend distribution of $20 million, an option payment of $14.65 million, $5
million in connection with a Consulting Agreement, and $2.2 million for the
redemption of existing preferred stock plus outstanding dividends. The Company
recorded the dividend proceeds received in connection with the Restructuring as
a reduction of the carrying amount of its investment and the amount previously
recorded as excess of cost over the net assets acquired. The $14.65 million
received in connection with the option granted by the Company to Stater is
included in the balance sheet as a deferred credit under the caption "Option to
sell investment in affiliate".

     In addition to the cash proceeds described above, the Company received in
Fiscal 1994, 311,404 Company common shares previously held by Stater. The
Company recorded the receipt of these shares as a reduction of shareholder's
equity in the amount of $3.658 million. In addition, the Company has recorded
50% of the value ascribed to the shares returned net of expected income taxes,
(representing the La Cadena portion of Stater's ownership), as a contribution to
paid in capital in the amount of $1.024 million.

     Stater sales amounted to $1.540 billion in Fiscal 1994 as compared to
$1.526 billion in Fiscal 1993. Sales from like stores (stores that have been
open at least one year) decreased 0.7% in Fiscal 1994 compared to a decrease of
1.9% in Fiscal 1993. Stater operated 111 stores at September 30, 1994, including
three new stores that were opened in Fiscal 1994, one of which replaced a
smaller, less efficient store.

     Stater's gross profits increased to $339.9 million or 22.08% of sales in
Fiscal 1994 compared to $330.6 million or 21.66% of sales in Fiscal 1993. The
increase in gross profits in Fiscal 1994 was due to increased efficiencies in
Stater's warehousing and transportation departments, the introduction of higher
gross margin products such as prepackaged gourmet vegetables and cut flowers and
a decrease in the number of competitive new store openings in the current fiscal
year when compared to prior years.

     General and administrative expenses was $297.5 million in Fiscal 1994 as
compared to $300.8 million in Fiscal 1993. The decrease in general and
administrative expenses reflects a $13.6 million non-recurring reduction in
employer contributions to a collective bargaining unit and health and welfare
benefit trust offset in part by reductions in expense categories such as
workers' compensation and general liability self insurance expenses, advertising
and store supply expenses.

     Stater's income before income taxes and the cumulative effect of a change
in accounting for income taxes and extraordinary loss amounted to $14.6 million
in Fiscal 1994 as compared to $10.1 million for Fiscal 1993. In connection with
the March 8, 1994 Restructuring, Stater entered into a series of transactions
that included the sale of $165 million of 11% Senior Notes due 2001, the early

                                                                              35
<PAGE>
 
retirement of the outstanding 9.8% Senior Notes due 2001 and certain bank
financings. The early retirement of debt resulted in an after tax extraordinary
charge to earnings, net of income tax benefit, of $8 million. Accordingly, the
Company has reported its 50% share of Stater's debt retirement costs amounting
to $4,018,000, before an income tax benefit of $1,610,000, as an extraordinary
item.

     Stater's net income for Fiscal 1994 amounted to $1.1 million compared to
$5.7 million in Fiscal 1993. Such results include a credit of approximately $.4
million resulting from Stater's adoption of the Statement of Financial
Accounting Standard No. 109 "Accounting for Income Taxes".

Reading
-------

     On August 17, 1994, Reading acquired Theater Acquisitions of Puerto Rico,
Inc. ("TAPR") for an aggregate purchase price of approximately $22.7 million,
inclusive of acquisition costs of $.3 million. For accounting purposes, the
acquisition was effective July 1, 1994. TAPR operated motion picture exhibition
theaters in six leased locations with a total of 36 screens in the Commonwealth
of Puerto Rico and three additional theaters representing an additional 18
screens, were under development at the time of the acquisition.

     For the twelve month period ended September 30, 1994, Reading reported a
net loss of approximately $1,437,000 (the Company's share amounting to
approximately $678,000), as compared to a net loss of $817,000 (the Company's
share amounting to $348,000) for the twelve month period ended September 30,
1993. The loss for the twelve month period ended September 30, 1994 includes (i)
a provision for environmental matters of $1.306 million, (ii) a development
expense charge of approximately $.8 million related to Reading's investment in
Oz Resorts and Entertainment, Inc. and (iii) a reduction of interest and
dividend revenue due to lower investable balances as a result of the TAPR
acquisition, as well as lower realized interest yields as compared to the twelve
month period ended September 30, 1993. The impact of these charges was offset by
a contribution to earnings from TAPR of approximately $1 million for the three
months ended September 30, 1994.

Citadel
-------

     Prior to the restructuring of Citadel in August 1994, the Company's
investment in CHC was accounted for at the lower of cost or market. Changes in
net unrealized losses were included in shareholders' equity or, if a decline in
market value was considered other than temporary, were included in the
determination of net income. In light of a significant restructuring completed
by CHC in August 1994 and a decline in the trading price of CHC shares, the
Company recorded a loss on its investment in CHC of $8,792,000 for Fiscal 1994.
As of September 30, 1994 the Company held 592,712 shares of CHC, or
approximately 9% of CHC's outstanding securities. Included in the consolidated
balance sheet at September 30, 1994, the Company's common stock investment in
Citadel was reported at $1,556,000 or $2.625 per share. On October 21, 1994, the
Company purchased in a private acquisition from CHC, 74,300 shares of CHC common
stock for a

                                                                              36
<PAGE>
 
purchase price of approximately $286,000. This acquisition increased the
Company's common stock ownership in October 1994 to slightly more than 10%.

     In addition to its common stock investment as of September 30, 1994, the
Company had loaned Citadel $6.2 million pursuant to a credit agreement dated
August 4, 1994. On November 10, 1994, the Company agreed to acquire in
satisfaction of $5.25 million of the $6.2 million outstanding indebtedness due
under the credit agreement 1,329,114 shares of newly issued CHC 3% Cumulative
Convertible Preferred Stock. The preferred shares represent approximately 18.1%
of the voting power of CHC and, together with the common shares owned by the
Company at that time, represented approximately 24.9% of the voting power of CHC
as of December 31, 1994. In connection with this transaction, the credit
available under the $8.2 million credit agreement was reduced to approximately
$950,000. The 1,329,114 preferred shares ($3.95 per share) were issued to the
Company pursuant to a Stock Purchase Agreement and Certificate of Designation
which provide, among other things, that (i) the preferred shares carry a
liquidation preference equal to their stated value and bear a cumulative
(noncompounded) annual dividend equal to 3% of the stated value, payable
quarterly, (ii) are convertible under certain circumstances into shares of
common stock of CHC at an exercise price equal to the average closing price of
Citadel shares over the preceding 60 business days, (iii) are redeemable at the
option of CHC at any time after November 10, 1997 and (iv) are redeemable
(subject to Delaware limitations upon distributions to shareholders) at the
option of the Company in the event of a change of control of CHC.

Operating, general and administrative expenses
----------------------------------------------

     Operating, general and administrative expenses increased slightly from
$2,383,000 in Fiscal 1993 to $2,404,000 in Fiscal 1994. Included in operating,
general and administrative expenses in Fiscal 1994 is approximately $610,000 due
to increased compensation and consulting expenses, principally attributable to a
$.5 million bonus awarded by the Board of Directors to the Chairman of the
Board, based largely upon Chairman's contribution to the success of the Stater
Restructuring. These increases were offset in part, by a reduction in goodwill
amortization of $300,000 and the receipt of insurance proceeds amounting to
$144,000.

Interest expense
----------------

     Interest expense was eliminated in the fourth quarter of Fiscal 1994 as a
result of the expiration of the Company's credit agreement upon the repayment of
$14 million in debt obligations in March 1994. Interest expense amounted to
$355,000 in Fiscal 1994 compared to $1,248,000 in Fiscal 1993. The decline in
interest expense in Fiscal 1994 was attributable to the repayment of debt in
March 1994 as well as the expiration in March 1993 of an Interest Rate and
Currency Exchange Agreement which required the Company to pay the difference
between the three month LIBOR rate and 8%, determined quarterly on $30 million
through March 1993. Included in interest expense in Fiscal 1993 is $648,000
attributable to this agreement.

                                                                              37
<PAGE>
 
Income taxes
------------

     The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" effective October 1, 1992, without restating prior
years financial statements. There was no cumulative effect on prior years from
this change in accounting principle. The provision for income taxes from
continuing operations amounted to $1,010,000 in Fiscal 1994 as compared to
$4,900,000 in Fiscal 1993. As of September 30, 1994, deferred tax assets
amounting to $8,275,000 had been recognized to offset deferred tax liabilities
of $12,060,000. The reported deferred tax assets are expected to be realized as
an offset against reversing temporary differences which create net future tax
liabilities.

     Prior to 1993, no provision had been made by the Company on the accrued
undistributed earnings of equity investments (Stater and Reading) because such
earnings were expected to remain invested indefinitely. In the fourth quarter of
Fiscal 1993, the Company no longer anticipated having such Stater earnings
remain invested indefinitely. Accordingly, the Company recorded a $4,900,000
provision in Fiscal 1993 to record deferred income taxes with respect to the
cumulative undistributed equity earnings, net of applicable operating/capital
loss carryforwards, available for financial statement purposes.


Liquidity
---------

     At September 30, 1995, the Company had cash and cash equivalents totaling
approximately $21.1 million and no debt outstanding. Cash and cash equivalents
decreased $146,000 from $21,205,000 at September 30, 1994 to $21,059,000 at
September 30, 1995. Principal sources of funds during Fiscal 1995 included
service income from SBH of $1,500,000 and interest and dividend income of
approximately $1,630,000. During Fiscal 1995 the Company received interest
earnings and dividend income from CHC amounting to $192,000 as a result of its
ownership of preferred stock and loans made to Citadel. In addition, the Company
received $950,000 from Citadel in repayment of all outstanding loans.

     In addition to operating expenses, principal uses of funds during Fiscal
1995 were $320,000 for the acquisition of Reading Class A Common Stock and
$1,011,000 for the acquisition of CHC common stock. Subsequent to September 30,
1995 the Company purchased an additional 77,800 shares of Reading Class A Common
Stock for approximately $708,000 and 571,361 shares of CHC Common Stock for
$1,281,000.

     During Fiscal 1995, the Board of Directors provided authorization to the
management of the Company to spend up to $3 million to purchase from time to
time shares of the Company's Common and/or Class A Common Preference Stock. In
connection with this authorization the Company repurchased 90,000 shares of the
Company's Common Stock for approximately $823,000. Subsequent to September 30,
1995, the Company has repurchased and additional 118,100 shares of Common Stock
and 23,000 shares of Class A Common Preference Stock at a purchase price of
approximately $1,342,000.

                                                                              38
<PAGE>
 
     Cash and cash equivalents increased by approximately $20.5 million from
September 30, 1993 to September 30, 1994. During March 1994, the Company
received approximately $42 million from SBH in connection with the
Restructuring. The proceeds received are reflected in the statement of cash
flows for Fiscal 1994 as $5.4 million ($5 million reported as service income and
$.4 million of outstanding dividend and interest income) in net income provided
by operating activities, $1.8 million as investing activities from the
redemption of long-term investment in SBH, and financing activities of $34.65
million (reported as $20 million and $14.65 million as a dividend from equity
affiliate and the sale of option to affiliate, respectively).

     Net cash provided by (used in) financing activities amounted to $21.2
million and $10.3 million in Fiscal 1994 and Fiscal 1993. Concurrently, with the
receipt of proceeds from SBH in Fiscal 1994, the Company repaid its outstanding
debt obligation to its lenders of $14 million. In addition, during Fiscal 1994
the Company loaned Citadel $6.2 million. During Fiscal 1995, the Company agreed
to acquire in satisfaction of $5.25 million of such loan, $1,329,114 shares of
newly issued CHC 3% Cumulative Voting Convertible Preferred Stock. Net cash
provided by financing activities during Fiscal 1993 consisted primarily of bank
borrowings used to finance the Company's acquisition of stock of Reading and CHC
amounting to approximately $9.2 million.

     In November 1995, the Company committed to make an initial contribution of
$5 million to Reading International. The Company has significant liquidity and
believes that the Company's sources of funds will be sufficient to meet its cash
flow requirements for the foreseeable future.

                                                                              39
<PAGE>
 
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE> 
<CAPTION> 
INDEX                                                                     PAGE
-----                                                                     ----
<S>                                                                       <C>
Report of Independent Auditors............................................  41
 
Consolidated Balance Sheets
  Years Ended September 30, 1995 and 1994.................................  42
 
Consolidated Statements of Operations
  Years Ended September 30, 1995, 1994 and 1993...........................  43
 
Consolidated Statements of Shareholders' Equity
  Three Years Ended September 30, 1995....................................  44
 
Consolidated Statements of Cash Flows
  Years Ended September 30, 1995, 1994 and 1993...........................  45
 
Notes to Consolidated Financial Statements.............................. 46-59
</TABLE>

All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes therein.

                                                                              40
<PAGE>
 
                        REPORT OF INDEPENDENT AUDITORS



The Board of Directors
Craig Corporation


We have audited the accompanying consolidated balance sheets of Craig
Corporation and subsidiaries as of September 30, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended September 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Craig
Corporation and subsidiaries at September 30, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1995, in conformity with generally
accepted accounting principles.



                                             ERNST & YOUNG LLP


Los Angeles, California
January 11, 1996

                                                                              41
<PAGE>
 
                      CRAIG CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30,
                                                             1995            1994
                                                           ---------------------------
                                                            (In thousands of dollars)
<S>                                                       <C>           <C>
ASSETS
--------------------------------------------------
 
CURRENT ASSETS
Cash and cash equivalents                                 $   21,059    $   21,205
Other current assets                                             323           150
                                                           ---------     ---------
      Total current assets                                    21,382        21,355
Investments in affiliates                                     60,171        49,131
Note receivable from affiliate                                    --         6,200
                                                           ---------     ---------
Excess of cost over net assets acquired, net                   2,201         2,347
                                                           ---------     ---------
Other assets                                                     915           994
                                                           ---------     ---------
 
      Total assets                                        $   84,669    $   80,027
                                                           =========     =========
 
LIABILITIES AND SHAREHOLDERS' EQUITY
--------------------------------------------------
 
CURRENT LIABILITIES
Accounts payable                                          $      362    $       77
Accrued expenses                                                 330           326
                                                           ---------     ---------
      Total current liabilities                                  692           403
 
Other long-term liabilities                                       56           104
Option to sell investment in affiliate                        14,650        14,650
Deferred tax liabilities                                       5,380         3,785
 
Commitments and contingencies
 
SHAREHOLDERS' EQUITY
Preferred stock, par value $.25,
 1,000,000 shares authorized, none issued                         --            --
Class A common preference stock, par value
 $.01, 10,000,000 shares authorized,
 1,645,000 issued and outstanding                                 16            16
Class B common stock, par value $.01,
 20,000,000 shares authorized, none issued                        --            --
Common stock, par value $.25,
 7,500,000 shares authorized, 5,444,065
 shares issued                                                 1,361         1,361
Additional paid-in capital                                    30,793        30,793
Affiliate's unrealized security loss                              --          (171)
Retained earnings                                             43,858        40,400
Cost of treasury shares, 1,154,095 and 1,064,095             (12,137)      (11,314)
                                                           ---------     ---------
      Total shareholders' equity                              63,891        61,085
                                                           ---------     ---------
 
Total liabilities and shareholders' equity                $   84,669    $   80,027
                                                           =========     =========
</TABLE>
          See accompanying notes to consolidated financial statements.

                                                                              42
<PAGE>
 
                      CRAIG CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE> 
<CAPTION> 
                                                        Years Ended
                                                       September 30,
                                               1995        1994         1993
                                             ---------------------------------
                                                 (In thousands of dollars,
                                                 except per share amounts)
 
<S>                                         <C>         <C>          <C>
Service income from affiliate               $   1,500   $   5,849    $      --
Equity in earnings of affiliates                4,208       5,744        2,337
Interest and dividend income                    1,630         695          260
Other income                                       --       1,303           19
                                             --------    --------     --------
 
                                                7,338      13,591        2,616
                                             --------    --------     --------
 
 
Costs and expenses:
  Loss from writedown of
    investment in affiliate                        --       8,792           --
  Operating, general and
    administrative expenses                     2,230       2,404        2,383
  Interest expense                                 --         355        1,248
                                             --------    --------     --------
 
                                                2,230      11,551        3,631
                                             --------    --------     --------
 
Earnings (loss) before taxes and
  extraordinary items                           5,108       2,040       (1,015)
Provision for income taxes                      1,650       1,010        4,900
                                             --------    --------     --------
 
Net earnings (loss) before
  extraordinary items                           3,458       1,030       (5,915)
Extraordinary item:
  Debt refinancing - equity in earnings
    of affiliate, net of income tax
    benefit of $1,610 in 1994                              (2,408)          --
                                             --------    --------     --------
 
Net earnings (loss)                         $   3,458   $  (1,378)   $  (5,915)
                                             ========    ========     ========
 
Earnings (loss) per common and
  common equivalent share
    Continuing operations                   $    0.58   $    0.16    $  (0.93)
    Extraordinary items                            --       (0.38)          --
                                             --------    --------     --------
 
    Net earnings (loss)                     $    0.58   $ (0.22)     $  (0.93)
                                             ========    ========     ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                                                              43
<PAGE>
 
                      CRAIG CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                     THREE YEARS ENDED SEPTEMBER 30, 1995
                           (IN THOUSANDS OF DOLLARS)

<TABLE> 
<CAPTION> 
                    Common Stock     Class A
                    Outstanding      Common Stock
                    -----------      ------------
                                                                                       Treasury
                   Shares    Par     Shares    Par    Paid-In   Valuation   Retained     Stock
                            Value             Value   Capital    Reserve    Earnings    At Cost

-----------------------------------------------------------------------------------------------
<S>                <C>      <C>      <C>      <C>     <C>       <C>         <C>        <C>
Balances at
October 1, 1992     5,444   $1,361    1,645   $ 16    $29,769   $ (3,536)   $47,693    $(7,656)

Net (loss)                                                                   (5,915)
Investment valu-
  ation reserve                                                    3,536
                    -----   ------    -----   ----    -------   --------    -------    ------- 
Balances at
Sept. 30, 1993      5,444    1,361    1,645     16     29,769         --     41,778     (7,656)
 
Treasury stock                                          1,024                           (3,658)
Net (loss)                                                                   (1,378)
Investment valu-
  ation reserve                                                     (171)
                    -----   ------    -----   ----    -------   --------    -------    -------  
Balances at
Sept. 30, 1994      5,444    1,361    1,645     16     30,793       (171)    40,400    (11,314)
 
Repurchase stock                                                                          (823)
Net (loss)                                                                    3,458
Investment valu-
ation reserve                                                        171
                    -----   ------    -----   ----    -------   --------    -------    ------- 
 
Balances at
Sept. 30, 1995      5,444   $1,361    1,645   $ 16    $30,793   $     --    $43,858   $(12,137)
                    =====   ======    =====   ====    =======   ========    =======    ======= 
</TABLE>


         See accompanying notes to consolidated financial statements.
                                                                              44
<PAGE>
 
                      CRAIG CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                   Fiscal Years Ended
                                                                      September 30,
                                                           1995            1994            1993
                                                         -----------------------------------------
                                                                 (In thousands of dollars)
<S>                                                      <C>             <C>             <C> 
OPERATING ACTIVITIES
 Net (loss)                                              $  3,458        $ (1,378)       $ (5,915)        
  Adjustments to reconcile net earnings (loss) to                                                         
   net cash provided (used) by operating activities:                                                      
    Loss on long-term investment                               --           8,792              --         
    Depreciation                                              100             100              99         
    Amortization of excess cost over assets acquired           66             266             563         
    Amortization of deferred finance costs                     --              24              40         
    Undistributed earnings of affiliates                   (4,208)         (1,726)         (2,337)        
    Increase (decrease) in deferred tax liability           1,595          (2,575)          4,900         
    Changes in operating assets and liabilities:                                                          
     Decrease (increase) in other assets                     (176)            231            (220)        
     Increase (decrease) in accrued liabilities               289             (58)            119         
                                                         --------        ---------       --------
 Net cash provided by (used in) operating activities        1,124           3,676          (2,751)        
                                                                                                          
INVESTING ACTIVITIES                                                                                      
 Increase in note receivable to affiliates                     --          (6,200)             --         
 Proceeds from note receivable pay-off                        950                                      
 Purchase of property and equipment                           (18)             --             (12)        
 Redemption of investment in affiliate                         --           1,800              --         
 (Acquisition) of stock of affiliate                       (1,331)             --          (9,199)        
                                                         ---------       --------        ---------
 Net cash provided by (used in) investing activities         (399)         (4,400)         (9,211)        
                                                                                                          
FINANCING ACTIVITIES                                                                                      
 Proceeds from issuance of long-term debt                      --             600          10,300         
 Payments of long-term debt and other liabilities             (48)        (14,048)            (40)        
 Dividend received from equity affiliate                       --          20,000              --         
 Proceeds from sale of option to affiliate                     --          14,650              --         
 Common stock repurchase                                     (823)             --              --         
                                                         ---------       --------        --------
 Net cash provided by (used in) financing activities         (871)         21,202          10,260         
                                                                                                          
Increase (decrease) in cash and cash equivalents             (146)         20,478          (1,702)        
Cash and cash equivalents at beginning of year             21,205             727           2,429         
                                                         --------        --------        --------
Cash and cash equivalents at end of year                 $ 21,059        $ 21,205        $    727          
                                                         ========        ========        ========
</TABLE>

SUPPLEMENTAL DISCLOSURES:
 Interest paid during the periods ended September 30, 1995, 1994 and 1993 was
 $0, $450,000 and $1,130,000, respectively. During fiscal 1995, the Company
 acquired $5.25 million of Citadel 3% Cumulative Convertible Preferred Stock in
 satisfaction of $5.25 million of outstanding indebtedness. With respect to non-
 cash financing activities, in September 1993, the Company received preferred
 stock of Stater Bros. Holdings Inc. in exchange for the early retirement of a
 note receivable amounting to $1,000,000.


         See notes to accompanying consolidated financial statements.

                                                                              45
<PAGE>
 
                      CRAIG CORPORATION AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------


Basis of Presentation and Principle of Consolidation
----------------------------------------------------

The consolidated financial statements include the accounts of Craig Corporation
(the "Company") and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. Investments in
affiliates in which the Company holds a 20 to 50 percent ownership interest are
accounted for using the equity method (Note 3).

Depreciation and Amortization
-----------------------------

Depreciation and amortization of property and leasehold improvements is
generally provided using the straight-line method over the estimated useful
lives of the assets or the shorter of the estimated lives or lease term for
leasehold improvements.

The excess of cost over net assets acquired is amortized using the straight-line
method over 40 years. Accumulated amortization at September 30, 1995 and 1994
was approximately $585,000 and $519,000, respectively.

Income Taxes
------------

The Company and its subsidiaries file consolidated federal and state tax
returns. During the fourth quarter of the year ended September 30, 1993, the
Company adopted the Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes" without restating prior years' financial
statements. There was no cumulative effect on prior years from this change in
accounting principle. Under SFAS No. 109, deferred income taxes reflect the net
tax effect of temporary differences between the financial statement carrying
amount of assets and liabilities and the amounts used for income tax purposes.

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. Cash equivalents are
stated at cost plus accrued interest, which approximates market value, and
consist primarily of federal agency securities. Included in cash and cash
equivalents at September 30, 1995 is approximately $19.8 million, which is held
in government securities having maturities of three months or less.

                                                                              46
<PAGE>
 
                      CRAIG CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)


NOTE 2 - PER SHARE DATA
-----------------------

Earnings per share is based on 5,969,585, 6,310,424, and 6,336,374, the weighted
average number of shares of common stock outstanding during the years ended
September 30, 1995, 1994 and 1993, respectively. Fully diluted earnings per
share have been omitted because the effect of such computation was not
significant or anti-dilutive in the years reported.


NOTE 3 - INVESTMENTS IN AFFILIATES
----------------------------------


The Company's investments in affiliates at September 30, 1995 and 1994 consist
of the following (in thousands):

<TABLE>
<CAPTION>
                                                          1995      1994
                                                         ------    ------
<S>                                                     <C>       <C>
Stater Bros. Holding, Inc. (Stater)                     $20,160   $16,467
Reading Company ("Reading")                              32,725    31,108
Citadel Holding Corporation ("CHC")                       7,286     1,556
                                                         ------    ------
                                                        $60,171   $49,131
                                                         ======    ======
</TABLE>

Consolidated retained earnings represented by undistributed earnings of
investments reported on the equity method amounted to approximately $21.8
million at September 30, 1995.

Stater
------

Investments in affiliates include the Company's 50% interest (48% voting
interest) in Stater Bros. Holdings Inc. ("SBH" and collectively with its
operating subsidiaries, "Stater"). The remaining 50% interest (52% voting) in
Stater is owned by La Cadena Investments ("La Cadena"), a general partnership
consisting of key management executives of Stater.

During March 1994, the Company consummated several separate agreements with SBH
and La Cadena with respect to a series of restructuring transactions under the
terms of which the Company received from Stater pre-tax cash proceeds
approximating $42 million, including a dividend distribution of $20 million, an
option payment of $14.65 million, $5 million in connection with a Consulting
Agreement, and $2.2 million for the redemption of existing preferred stock plus
outstanding dividends. In connection with reporting the dividend proceeds
received in the restructuring, the Company reduced the carrying amount of its
investment by $5.2 million and the amount previously recorded as excess of cost
over the net assets acquired related to Stater by $14.8 million. The $14.65
million received in connection with the option to sell the Company's investment
in SBH is included in the balance sheet as a deferred credit under the caption
"Option to sell investment in affiliate".

                                                                              47
<PAGE>
 
                      CRAIG CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)


NOTE 3 - INVESTMENTS IN AFFILIATES (CONT'D)
-------------------------------------------

The Company expects to account for the deferred option proceeds amounting to
$14.65 million at the earlier of the exercise of the option or its expiration.
The option payment to the Company of $14.65 million pertains to an option
granted by the Company to SBH, which in turn provides the means by which the
Company's continuing 50% economic interest in SBH may, in the future, be
acquired by SBH, at SBH's option. The option exercise price at March 8, 1994
amounted to $60 million, adjusting upwards at an annual rate of approximately
8.833%. The option has an initial term of two years, but may be extended for ten
additional years if SBH converts the Company's common stock interest in SBH to
preferred stock prior to the expiration of the initial two year option period.
The reciprocal option rights held by the Company and La Cadena Investments under
the existing Shareholder Agreement have been suspended. The preferred stock, if
issued at the end of two years, or March 8, 1996, will have a liquidation
preference of approximately $69.4 million and a cumulative dividend preference
beginning at 10.5%, increasing to 12% after 78 months, and further increasing
every twelve months thereafter by an additional 1%, to a maximum cumulative
dividend rate of 15%. In the event dividends on the preferred stock for two or
more quarterly dividend periods remain unpaid by SBH, the Company will have a
right to elect a majority of SBH's directors. The Company has the right to have
the preferred stock redeemed at any time following the fifteenth anniversary of
the granting of the option.

Since May 1989, the Company has been a party to an Agreement of Stockholders of
SBH which, among other things, provided that for a period of twenty years (i)
neither party may sell or transfer its Stater shares without offering the other
party a right of first refusal; and (ii) either party may offer to purchase the
other party's interest, and the party receiving the offer has the option to sell
at the offer price or purchase the offering party's interest at that price (the
"Option Rights"). Pursuant to an amendment of this agreement dated as of
September 3, 1993, the Company agreed to standstill under its Option Rights
during the period of time Stater pursued consummation of the restructuring
described above, but no later than March 31, 1994 if such restructuring was not
successful. In consideration for such provision, Stater was obligated to return
to the Company 311,404 shares of the Company's common stock transferred to
Stater in May 1989. The Company recorded the 311,404 Company common shares,
which were received in August 1994, as a reduction of shareholder's equity in
the amount of $3.658 million, representing the closing stock market of the
shares on the agreement date of September 3, 1993. In addition, the Company has
recorded 50% of the value of the shares returned (representing the La Cadena
portion of Stater's ownership), net of expected income taxes, as a contribution
to paid in capital in the amount of $1.024 million. As of the date of the
restructuring, the Amended Stockholders Agreement provides that, among other
things, (a) the Stockholders Agreement may be terminated by either party upon
exercise by Stater

                                                                              48
<PAGE>
 
                      CRAIG CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)


NOTE 3 - INVESTMENTS IN AFFILIATES (CONT'D)
-------------------------------------------

of its right to convert the Company's common stock in SBH into preferred stock
of SBH as described above, and (b) the "Option Rights" shall be suspended until
after the expiration of Stater's right to convert the Company's SBH common stock
into SBH Preferred Stock.

Also in connection with the Stater restructuring, the Company entered into a
subsequent consulting agreement with Stater pursuant to which the Company has
agreed, among other things, to render consulting services for a five-year period
and has agreed not to provide consulting services or own any controlling
interest in any business competing with Stater. In consideration for such
agreement, SBH paid the Company $5 million in March 1994, and agreed to pay $1.5
million a year, payable quarterly, through the term of the agreement. Included
in service income for the years ended September 30, 1995 and 1994, is
approximately $1.5 million and $5.849 million, respectively, earned pursuant to
this agreement. SBH has the right to terminate its obligations under the
Consulting Agreement, in the event it exercises its option to purchase the
Common Stock of SBH from the Company.

The Company loaned Stater $1,800,000 as evidenced by a seven year interest
bearing note in the fiscal year ended 1991. In September 1993 and September
1992, the Company exchanged $1,000,000 and $800,000 of the $1,800,000 note due
in September 1998 for 40,000 and 32,000 shares of Stater preferred stock In
connection with the Stater restructuring, the Company received $2.2 million in
consideration for the redemption of the preferred stock and outstanding interest
and dividends due thereon.

Stater files the required periodic reports with the Securities and Exchange
Commission (SEC). Copies of these reports are available from the SEC. Summarized
financial information of Stater is as follows:

<TABLE>
<CAPTION>
                                                 September 24,  September 25,
                                                     1995            1994
                                                 ----------------------------
                                                        (In thousands)
     <S>                                         <C>            <C>
     CONDENSED BALANCE SHEET
 
       Current assets                                $158,647       $151,108
       Property, plant and equipment, net             118,627        111,645
       Other assets                                    36,808         43,736
       Current liabilities                            113,633        109,686
       Long-term debt                                 173,099        174,187
       Other liabilities                               13,772         15,765
       Shareholders' common equity                     13,578          6,851
</TABLE>

The payment of dividends by Stater to the Company are restricted subject to
various financial covenants in the Stater credit agreements.

                                                                              49
<PAGE>
 
                      CRAIG CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)


NOTE 3 - INVESTMENTS IN AFFILIATES (CONT'D)
-------------------------------------------

<TABLE>
<CAPTION>
                                            52 Weeks     52 Weeks     52 Weeks
                                             Ended        Ended        Ended
                                           Sept. 24,    Sept. 25,    Sept. 26,
                                              1995        1994          1993
                                           -----------------------------------
                                                      (In thousands)
     <S>                                    <C>         <C>          <C>
     CONDENSED STATEMENT OF INCOME
 
       Sales                               $1,579,895   $1,539,717   $1,526,002
       Cost of goods sold                   1,227,355    1,199,794    1,195,399
                                           ----------   ----------   ----------
       Gross profit                           352,540      339,923      330,603
       General and administrative             308,332      297,474      300,826
       Depreciation and amortization           11,756       11,656        9,910
       Consulting costs                         1,500          830           --
                                           ----------   ----------   ----------
       Income from operations                  30,952       29,963       19,867
       Interest expense, net                   20,076       15,501       10,292
       Other income                                69          183          543
                                           ----------   ----------   ----------
       Income before provision for taxes
         and extraordinary item                10,945       14,645       10,118
       Income taxes                             4,218        5,856        4,218
                                           ----------   ----------   ----------
       Income before extraordinary
         item and accounting change             6,727        8,789        5,692
       Change in accounting for taxes              --          372           --
       Extraordinary loss                          --       (8,036)          --
                                           ----------   ----------   ----------
       Net income                          $    6,727   $    1,125   $    5,692
                                           ----------   ----------   ----------
</TABLE>

In connection with the Restructuring, Stater completed a debt financing of $165
million which occurred in March 1994. The net proceeds from the debt refinancing
were used to consummate the Stater Restructuring and replace outstanding debt of
$96.7 million. In connection with the early redemption of outstanding debt,
Stater recorded an extraordinary charge of approximately $8.036 million, net of
tax benefits amounting to $5.9 million, for costs related to the redemption
premium to holders of the previous outstanding debt securities. Accordingly, the
Company has reported its 50% share of Stater's debt retirement costs amounting
to $4.018 million, before income tax benefits of $1.610 million, as an
extraordinary item.

Reading
-------

At September 30, 1995 and 1994, the Company held 2,367,976 and 2,334,957 shares
with a purchase price of $31,954,000 and $31,635,000, respectively. Based on the
closing price per share of Reading at September 30, 1995 of $10, the aggregate
market value of the Company's investment in Reading at was approximately
$23,680,000. Subsequent to September 30, 1995, the Company increased its
ownership in Reading to 2,445,776 or 49.2% of the outstanding Reading
securities,

                                                                              50
<PAGE>
 
                      CRAIG CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)


NOTE 3 - INVESTMENTS IN AFFILIATES (CONT'D)
-------------------------------------------

through the purchase of an additional 77,800 shares for a total purchase price
of approximately $708,000.

Summarized financial information of Reading at September 30, 1995 and 1994 and
for the three years then ended is as follows:

<TABLE>
<CAPTION>
                                                          September 30,
                                                        1995         1994
                                                    ------------------------
                                                         (In thousands)
     <S>                                              <C>          <C>
     CONDENSED BALANCE SHEET
       Current assets                                 $50,263      $46,706
       Property and equipment                           7,118        7,037
       Intangible assets                               15,770       16,640
       Other assets                                     2,111        2,213
       Current liabilities                              3,596        3,414
       Other long-term liabilities                      2,907        2,884
       Shareholders' equity                            68,759       66,298
</TABLE>

At September 30, 1994, Reading included as a separate component of shareholders'
equity $364,000 reflecting the net adjustment for unrealized holding losses on
available for sale securities. Accordingly, the Company reflected its 47%
ownership allocation of such valuation reserve as a separate component of
shareholders' equity, titled affiliate's unrealized security losses, at
September 30, 1994.

<TABLE>
<CAPTION>
                                                            Years Ended September 30,
                                                        1995          1994           1993
                                                      -------------------------------------
                                                                  (In thousands)
     <S>                                              <C>            <C>           <C>
     CONDENSED STATEMENT OF INCOME
       Revenue:
        Theatre                                       $ 14,878       $ 4,908       $    --
        Interest and dividend                            2,194         2,367         2,959
        Other                                            2,461           918           401
                                                      --------       -------       -------
                                                        19,533         8,193         3,360
       Theater costs                                    11,451         3,433            --
       Depreciation and amortization                     1,339           339            --
       General and administrative                        4,457         3,769         4,068
       Provision for environmental                          --         1,306           241
       Development expense                                  --           795            --
                                                      --------       -------       -------
       Earnings (Loss) before income
         taxes and accounting change                     2,286        (1,449)         (949)
       Income taxes (benefit)                              189           (12)           --
       Cumulative effect of
         accounting change                                  --            --           132
                                                      --------       -------       -------
       Net income (loss)                              $  2,097       $(1,437)      $  (817)
                                                      --------       -------       -------
</TABLE>

                                                                              
                                                                              51
<PAGE>
 
                      CRAIG CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)


NOTE 3 - INVESTMENTS IN AFFILIATES (CONT'D)
-------------------------------------------

Reading files the required periodic reports with the Securities and Exchange
Commission (SEC). Copies of these reports are available from the SEC.

In November 1995, Reading and the Company formed Reading International LLC to
develop and operate multiplex cinemas in Australia. Reading and Craig have each
committed to make an initial contribution of $5 million, on an as needed basis
for an aggregate initial capitalization of $10 million. The LLC agreement
provides, among other things, that each party will have rights of first refusal
regarding any proposed disposition of the other's interest in Reading
International.

Citadel ("CHC")
---------------

CHC, whose common stock is traded on the American Stock Exchange, was prior to
the recapitalization of Fidelity Federal Bank, ("Fidelity"), the holding company
for Fidelity. CHC is referred to collectively with its wholly owned subsidiaries
as "Citadel". As a consequence of a recapitalization and restructuring of
Fidelity in August 1994, Citadel's interest in Fidelity was reduced to
approximately 16%. During fiscal 1995, substantially all such remaining interest
by Citadel in Fidelity was sold. At September 30, 1995, Citadel's assets
amounted to approximately $39.7 million and consisted principally of real estate
and cash.

As of September 30, 1995 and 1994, the Company's investment in CHC is as
follows:

<TABLE>
<CAPTION>
 
                                                    1995         1994
                                                  -------      -------
<S>                                               <C>          <C>
Common Stock                                      $ 2,036      $ 1,556
3% Cumulative Convertible Preferred Stock           5,250           --
                                                  -------      -------
  Total investment                                $ 7,286      $ 1,556
                                                  -------      -------
</TABLE>

During fiscal 1995, the Company increased its common stock ownership in CHC from
592,712 shares (9%) at September 30, 1994 to 993,112 shares (16.5%) at September
30, 1995, through the purchase of 400,400 shares of CHC stock for approximately
$1,013,000. In addition, in November 1994 the Company acquired, in satisfaction
of $5.25 million of a $6.2 million outstanding indebtedness of Citadel to the
Company, 1,329,114 shares of a newly issued CHC 3% Cumulative Voting Convertible
Preferred Stock. The preferred shares represent approximately 18.1% of the
voting power of CHC at September 30, 1995, and together with the common shares
owned by the Company represent approximately 31.6% of the voting power of CHC at
September 30, 1995. Based on the closing price of CHC's common stock of $2.25 at
September 30, 1995, the aggregate market value of the Company's common stock
interest in CHC was approximately $2,234,000.
                                                                              52

<PAGE>
 
                      CRAIG CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)


NOTE 3 - INVESTMENTS IN AFFILIATES (CONT'D)
-------------------------------------------

Subsequent to September 30, 1995, the Company acquired an additional 571,361
common shares for approximately $1,281,000, increasing the Company's common
stock ownership in CHC to 1,564,673 or 26% which, together with the preferred
stock, represents 39.4% of the outstanding voting power of CHC.

The 3% Cumulative Voting Convertible Preferred Stock was issued to the Company
pursuant to a stock purchase Agreement and Certificate of Designation which
provides, among other things, that (i) the preferred shares carry a liquidation
preference equal to their stated value and bear a cumulative (noncompounded)
annual dividend equal to 3% of the stated value, (ii) are convertible under
certain circumstances into shares of common stock of CHC, (iii) are redeemable
at the option of CHC at any time after November 1997 and (iv) are redeemable
(subject to Delaware limitations upon distributions to shareholders) at the
option of the Company in the event of a change of control of CHC. Subject to
certain limitations, the Preferred Stock is convertible into common shares of
CHC at a conversion price equal to the "market price" per share of CHC common
stock, calculated as the per share stated value of $3.95 divided by the average
of the closing price per share of the CHC common stock for each of the 60 days
preceding the conversion. Assuming a market price of $2.25, the Company's
preferred stock if converted would be at 2,333,333 shares, resulting in an
increase in the Company's voting ownership in CHC to 46.8% at December 31, 1995.
For financial statement purposes the Company carries its preferred stock
investment at cost amounting to $5.25 million as of September 30, 1995.
Dividends earned and included in dividend and interest income for the year ended
September 30, 1995 amounted to approximately $140,000.

In November 1994, an action was filed against the Company, CHC and the directors
of CHC in the Delaware Court of Chancery claiming that the individual
defendants, directors of CHC (two of which are also directors of the
Company),breached their duties by causing CHC to issue shares of common and
preferred stock to the Company for purposes of perpetuating the individual
defendants as directors of CHC. On April 12, 1995, the Company entered into a
Settlement Agreement with the plaintiff pursuant to which the Company agreed not
to exercise the conversion feature of its preferred stock prior to February 4,
1996, without the prior approval of CHC shareholders. In consideration of this
agreement by the Company, CHC granted the Company a two year option to purchase
666,000 shares of CHC common stock at $3.00 per share and agreed to reimburse
the Company for its litigation costs, which amounted to approximately $62,000.

At September 30, 1994, the carrying value of CHC common stock, as adjusted for
market declines considered to be other than temporary, amounted to $1,556,000 or
$2.625 per share. After CHC determined to cease its role as a thrift holding
company, the Company increased, as described above, its voting interest in CHC
to 31.6% through the purchase of common stock and convertible preferred stock as

                                                                              53
<PAGE>
 
                      CRAIG CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)


NOTE 3 - INVESTMENTS IN AFFILIATES (CONT'D)
-------------------------------------------

of September 30, 1995. As a result of the increase, the Company's investment in
CHC met the criteria for using the equity method of accounting, which the
Company has adopted in Fiscal 1995. Prior writedowns of the Company's investment
in CHC continued to be reflected as "Loss from writedown of investment in
affiliate. Included in equity earnings from affiliates is the Company's portion
of CHC's operating results, less preferred dividends, amounting to a loss of
$474,000 for the year ended September 30, 1995.

CHC's fiscal year end is December 31. Summarized financial information of CHC
for the three months ended December 31, 1994 and the nine months ended September
30, 1995 follows:

<TABLE>
<CAPTION>
                                                        September 30, December 31,
                                                             1995        1994
                                                           --------    --------
         <S>                                            <C>           <C>
         Cash and cash equivalents                          $15,913     $ 4,805
         Investment in Fidelity Federal Bank                     11      13,405
         Rental Properties                                   21,832      19,858
         Other assets                                         1,965       1,844
         Mortgage liabilities                                16,204      13,896
         Other liabilities                                    5,913       8,178
         Stockholders' equity                                17,604      17,838
</TABLE>

Stockholders' equity includes 1,329,114 outstanding shares of 3% Cumulative
Voting Convertible Preferred Stock with a stated value of $5,250,000 issued to
the Company. At September 30, 1995, cumulative dividends not yet declared by the
Board of CHC amounted to $39,375. Pursuant to the terms of a settlement
agreement with a stockholder in April 1995, the stockholder purchased from CHC
1,295,000 shares of Fidelity stock in exchange for which CHC received $2.22
million and 666,000 shares of CHC stock held by the stockholder. CHC reflected
the return of the CHC common stock as treasury stock in the amount of $1.415
million, or $2.125 per share.

<TABLE>
<CAPTION>
 
                                                Nine Months Ended   Three Months Ended
                                                   September 30,          December 31,
                                                      1995                  1994
                                                -----------------    -----------------
<S>                                             <C>                  <C>
Rental and other income                             $ 4,357              $ 1,303
Real estate operating expenses                       (1,922)                (899)
Depreciation                                           (343)                (162)
Interest expense                                       (889)                (365)
General and administrative expenses                  (1,423)              (1,694)
Loss from Fidelity                                      (39)              (7,081)
Gain on sale of rental property                       1,541                   --
                                                    --------             --------
Net earnings (loss)                                 $ 1,282              $(8,898)
                                                    --------             --------
</TABLE> 

                                                                              54
<PAGE>
 
                      CRAIG CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)


NOTE 4 - NOTE RECEIVABLE FROM AFFILIATE
---------------------------------------

On August 4, 1994, CHC completed a series of transactions which resulted in the
restructuring of Citadel and the recapitalization of Fidelity. In connection
with CHC restructuring, Citadel Realty Inc., a wholly owned subsidiary of
Citadel, purchased four REO properties from Fidelity, at a transfer price of
approximately $19.8 million. The property acquisitions were financed by $13.9
million in mortgage loans and $6.2 million borrowed from the Company. Such funds
were loaned by the Company to Citadel Realty Inc. in August 1994 pursuant to the
terms of a credit agreement between the Company, Citadel Realty Inc., as
borrower, and CHC, as guarantor. In November 1994, the Company acquired, in
satisfaction of $5.25 million of the $6.2 million outstanding indebtedness of
Citadel to the Company, 1,329,114 shares of a newly issued CHC 3% Cumulative
Voting Convertible Preferred Stock. During May 1995, the note was canceled upon
the repayment of the remaining $950,000 outstanding. Included in dividend and
interest income for the year ended September 30, 1995 and 1994 is approximately
$301,000 and $140,000, respectively, earned pursuant to the loan.


NOTE 5 - TAXES ON INCOME
------------------------


At September 30, 1995 and 1994, the components of the deferred tax liabilities
and assets are as follows (in thousands):

<TABLE>
<CAPTION>
 
                                                    September 30,
                                                   1995     1994
                                                 -------   -------
<S>                                              <C>       <C>
           Deferred tax liabilities:
             Undistributed earnings from
               equity investments                $13,742   $12,060
                                                 -------   -------
               Total deferred tax liabilities     13,742    12,060
                                                 -------   -------
           Deferred tax assets:
             Unrealized capital loss from
               writedown of equity securities     (7,680)   (7,680)
             Federal benefit of state taxes         (450)     (545)
             Other                                  (232)      (50)
                                                 -------   -------
               Total deferred tax assets          (8,362)   (8,275)
                                                 -------   -------
           Net deferred tax liabilities          $ 5,380   $ 3,785
                                                 -------   -------
 
</TABLE>

                                                                              55
<PAGE>
 
                      CRAIG CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)


NOTE 5 - TAXES ON INCOME (CONT'D)
---------------------------------

SFAS No. 109 requires that a valuation allowance be recognized if, based on the
weight of information available at the time of preparing financial statements,
it is more likely than not that some portion or all of the deferred asset may
not be realized. As of September 30, 1995 and 1994, the reported deferred tax
assets are expected to be realized as an offset against reversing temporary
differences which create net future tax liabilities.

The provision for income taxes attributable to continuing operations are as
follows:

<TABLE>
<CAPTION>
                                   Year Ended September 30,
                                  1995      1994      1993
                                -----------------------------
                                        (In thousands)
                                          Liability
                                           Method
                            -----------------------------------
<S>                              <C>       <C>      <C>
         Current          
               Federal           $   85    $ (170)  $   --
               State                (30)      685       --
                                 ------    ------   ------
                                     55       515       --
                                 ------    ------   ------
         Deferred         
               Federal            1,090     1,185    2,900
               State                505      (690)   2,000
                                 ------    ------   ------
                                  1,595       495    4,900
                                 ------    ------   ------
                                 $1,650    $1,010   $4,900
                                 ======    ======   ======
</TABLE>

Prior to 1993, no provision for income taxes was made by the Company on the
undistributed earnings of equity investments (Stater and Reading) because such
earnings were expected to remain invested indefinitely. Pursuant to a series of
agreements entered into in the fourth quarter of 1993 regarding a restructuring
of the Company's investment in Stater, the Company no longer expected to have
such Stater earnings remain invested indefinitely. Accordingly, during the
fourth quarter ended September 30, 1993, the Company recorded a provision for
deferred income taxes on the cumulative undistributed equity earnings
(approximately $30 million) of Stater.

The provision for income taxes is different from amounts computed by applying
the U.S. statutory rate to earnings before taxes and extraordinary item. The
reason for these differences follows:

                                                                              56
<PAGE>
 
                      CRAIG CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)

<TABLE>
<CAPTION>
                                       Year Ended September 30,
                                      1995       1994      1993
                                   --------------------------------
                                            (In thousands)
                                           Liability Method
                                   --------------------------------
<S>                                 <C>       <C>       <C>
Expected tax provision (benefit)    $ 1,737   $  (695)  $  (345)
(Increase) reduction in benefit
resulting from:
  Unremitted earnings of equity
    investments                          --        --    10,133
  Previously unrecognized tax
    benefits                           (365)       --    (3,035)
  Unrealized capital loss
    carryforwards                        --        --    (3,040)
  State taxes provided, net of
    Federal tax benefit                 313        --     1,298
  Excess purchase price of net
    assets acquired                      --        --        --
  Dividend exclusion                     --        --       (43)
  Other                                 (35)     (315)      (68)
                                     ------   -------    ------
      Actual tax provision          $ 1,650   $ 1,010    $4,900
                                     ======   =======    ======
</TABLE>
Taxes paid during the years ended September 30, 1995, 1994 and 1993 were
approximately $0, $2,050,000 and $3,000, respectively.


NOTE 6 - COMMITMENTS AND CONTINGENCIES
--------------------------------------


The Company leases certain office space under a lease agreement expiring in
October 2001. Pursuant to the lease, the Company has the right to terminate the
lease between the February and July 1998 for a cancellation fee of $45,000. The
lease agreements require that the Company pay for its share of building
operating costs and taxes, which together with the base rent is estimated at
$67,000. Rental expense for the years ended September 30, 1995, 1995 and 1993
was $69,000, $100,000 and $153,000, respectively; subrental income was $7,000,
$0 and $120,000, for the same respective years.

Prior to a lease expiration in June 1994, the Company leased office and
warehouse space in New Jersey, which lease included a purchase option of said
property. During 1994, the Company exercised the purchase option and sold the
property to a third party. Included in other income for the year ended September
30, 1994 is a gain of approximately $1,303,000 resulting from such sale.

The Company has a consulting contract with the Chairman of the Board for a term
expiring on September 30, 1997 providing for annual payments of $350,000.

                                                                              57
<PAGE>
 
                      CRAIG CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)


NOTE 7 - STOCK OPTIONS
----------------------

A stock option plan adopted in 1984, as amended, provided for granting options
to purchase a maximum of 200,000 shares of common stock at exercise prices not
less than the market price at the date of grant. Under terms of the plan which
expired in 1995, options could be granted to officers, directors and other key
employees who own 10% or less of the voting power and value of all classes of
the Company's stock. Options granted under the plan expire, unless extended,
after five years and may be exercisable in installments, generally beginning one
year after the date of grant.

Information regarding this option plan is as follows:


<TABLE>
<CAPTION>
 
 
                                                      September 30,
                                             1995          1994           1993
                                        -----------------------------------------
<S>                                     <C>           <C>            <C>
 
     Outstanding, October 1                 30,000         30,000         30,000
     Granted                                    --             --             --
     Exercised                                  --             --             --
                                          --------       --------       --------
     Outstanding, September 30              30,000         30,000         30,000
                                          --------       --------       --------
     Exercisable, September 30              25,000         25,000         25,000
                                          --------       --------       --------
     Exercise price per share           $12.75-$13.88 $12.75-$13.88  $12.75-$13.88
 
</TABLE>

On February 9, 1993, the shareholders approved a proposal to grant the Chairman
of the Board an option to acquire 175,000 shares of the Company's Class A Common
Preference Stock at an exercise price of $10.50 per share, with options on
87,500 shares vesting on September 30, 1993 and on 87,500 shares vesting on
September 30, 1994. In June 1995, in consideration of, among other things, the
Chairman's agreement to cancel his previously vested option rights and to extend
his consulting agreement with the Company for an additional year with no
increase in compensation, the Board canceled the option to purchase the 175,000
shares of Class A Common Preference Stock and approved the grant of an option to
acquire 300,000 shares of the Company's common stock at an exercise price of
$11.75 per share. At September 30, 1995, such 300,000 shares are currently
exercisable. In March 1993, the Board of Directors granted the President of the
Company an option to acquire 17,500 shares of the Company's Class A Common
Preference Stock, subject to a four year vesting schedule (25 percent of such
options vesting at the end of each anniversary of such employment) at an
exercise price of $10.50. At September 30, 1995, 8,750 shares are currently
exercisable.
<PAGE>
 
                      CRAIG CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)


NOTE 8 - COMMON AND CLASS A COMMON PREFERENCE STOCK
---------------------------------------------------

The rights of the holders of Class A common stock and the common stock differ
with respect to dividend, voting and liquidation rights. Holders of Class A
common stock are entitled to receive such dividends as may be declared thereon
exclusively and, in addition, such dividends as may be paid on the common stock
in equal amounts as if a single class of securities; they will be entitled to
one vote per share, while holders of the common stock are entitled to 30 votes
per share; and, in the event of a liquidation, they will be entitled to receive
a liquidation preference of $5.00 per share.

In December 1994, the Board provided authorization to the Company to repurchase
up to $3 million of the Company's currently outstanding Common or Class A Common
preference stock. In connection with such authorization the Company purchased
90,000 shares of the Common stock at a purchase price of approximately $823,000.
Subsequent to September 30, 1995, the Company repurchased an additional 118,100
and 23,000 shares of the Company's Class A Common Stock at a purchase price
amounting to approximately $1,342,000.



NOTE 9 - QUARTERLY OPERATING DATA (UNAUDITED)
---------------------------------------------

<TABLE>
<CAPTION>
 
                                                 Income
                                                 Before
                                                 Extra-
                                      Net       ordinary      Net        Earnings
                                    Revenues      Item      Earnings    Per Share
                                    --------    --------    --------    ---------
                                      (In thousands except per share amounts)
<S>                                 <C>         <C>         <C>         <C>
 
     1995
     Quarter ended December 31      $ 1,506      $   421    $   421      $ 0.07
     Quarter ended March 31           1,229          447        447        0.07
     Quarter ended June 30            2,144          990        990        0.17
     Quarter ended September 30       2,459        1,600      1,600        0.27
                                     ------       ------     ------       -----
                                    $ 7,338      $ 3,458    $ 3,458      $ 0.58
                                     ======       ======     ======       =====
     1994                                   
     Quarter ended December 31      $ 1,862      $(3,277)   $(3,277)     $(0.52)
     Quarter ended March 31           9,243        5,473      3,335        0.53
     Quarter ended June 30            1,647         (171)      (171)      (0.03)
     Quarter ended September 30         839       (1,265)    (1,265)      (0.20)
                                     ------       ------     ------       -----
                                            
                                    $13,591      $(1,030)   $(1,378)     $(0.22)
                                     ======       ======     ======       =====
</TABLE>

During the first, third and fourth quarter of fiscal 1994, the Company provided
a $6,495,000, $889,000 and $1,408,000, respect loss on long-term investments to
reflect a decline in market value, to be other than temporary.

                                                                              59
<PAGE>
 
ITEM 9.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                AND FINANCIAL DISCLOSURE

     None.

                                   PART III
                                   --------


ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information required by this item is incorporated herein by reference
to the Company's Proxy Statement to be filed for its 1995 Annual Meeting of
Stockholders.


ITEM 11.       EXECUTIVE COMPENSATION

      The information required by this item is incorporated herein by reference
to the Company's Proxy Statement to be filed for its 1995 Annual Meeting of
Stockholders.


ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The information required by this item is incorporated herein by reference
to the Company's Proxy Statement to be filed for its 1995 Annual Meeting of
Stockholders.


ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by this item is incorporated herein by reference
to the Company's Proxy Statement to be filed for its 1995 Annual Meeting of
Stockholders.
                                                                              60
<PAGE>
 
                                    PART IV

ITEM 14.       EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

(a)(1)         Consolidated Financial Statements. See Financial Statements and
               Supplementary Data Index included in Item 8 of Part II of the
               Form 10-K.

(a)(2)         Consolidated Financial Statements of Stater Bros. Holdings Inc.
               See Exhibit 28.

(a)(3)         Exhibits.  See Item 14(c) for Index of Exhibits.

(b)            Registrant did not file any Reports on Form 8-K with the
               Securities and Exchange Commission during the quarter ended
               September 30, 1995.

(c)            Exhibits (Items denoted by * represent management or compensatory
contract)

               3.1     Restated Certificate of Incorporation of the Company
                       (incorporated by reference to the Company's Registration
                       Statement on Form S-1; No. 33-34297, dated May 15, 1990).

               3.2     Bylaws of the Company, as amended to date (i)
                       incorporated by reference to the Company's Registration
                       Statement on Form S-1; No. 33-34297, dated May 15, 1990;
                       (2) incorporated by reference to the Company's Form 10-Q
                       Report for the Quarter ended December 31, 1992; (iii)
                       amended on November 10, 1994 and incorporated by
                       reference to the Company's Form 10-K Report for the year
                       ended September 30, 1994.

               10.1    Stock Agreement dated as of May 10, 1989 among Craig
                       Corporation, Stater Bros. Holdings Inc., La Cadena
                       Investments and James J. Cotter (incorporated by
                       reference to the Company's Form 8-K Report, dated May 25,
                       1989).

               10.2    Agreement of Stockholders of Stater Bros. Holdings Inc.
                       dated May 10, 1989 among Craig Corporation, La Cadena
                       Investments, Stater Bros. Holdings Inc. and Stater Bros.
                       Inc. (incorporated by reference to the Company's Form 8-
                       K Report dated May 25, 1989.

               10.4*   Amendment to 1984 Stock Option Plan (incorporated by
                       reference to the Company's Registration Statement on
                       Form S-1; No. 33-34297, dated May 15, 1990).

               10.5    Consulting Agreement between Craig Management, Inc.,
                       Craig Corporation and Stater Bros. Holdings Inc. dated as
                       of

                                                                              61
<PAGE>
 
                       February 1, 1992 (incorporated by reference to the
                       Company's Form 10-K Report for the year ended September
                       30, 1992).

               10.6*   Stock Option Agreement dated as of June 8, 1992 between
                       James J. Cotter and Craig Corporation (incorporated by
                       reference to the Company's Form 10-K Report for the year
                       ended September 30, 1992).

               10.7*   Employment Agreement dated as of October 7, 1991 between
                       Robin W. Skophammer and Craig Corporation (incorporated
                       by reference to the Company's Form 10-K Report for the
                       year ended September 30, 1991).

               10.8    Reclassification Agreement dated September 3, 1993
                       between Stater Bros. Holdings Inc., the Company and La
                       Cadena Investments (incorporated by reference to the
                       Company's Form 10-K Report for the year ended September
                       30, 1993).

               10.9    Amendment to Agreement of Stockholders dated September 3,
                       1993 between Stater Bros. Holdings Inc., the Company and
                       La Cadena Investments (incorporated by reference to the
                       Company's Form 10-K Report for the year ended September
                       30, 1993).

               10.10   Option Agreement dated September 3, 1993 between Stater
                       Bros. Holdings Inc. and the Company (incorporated by
                       reference to the Company's Form 10-K Report for the year
                       ended September 30, 1993).

               10.11   Consulting Agreement dated September 3, 1993 between
                       Stater Bros. Holdings Inc. and the Company (incorporated
                       by reference to the Company's Form 10-K Report for the
                       year ended September 30, 1993).

               10.12   Second Amended and Restated Stock Agreement of
                       Stockholders dated January 12, 1994 between Stater Bros.
                       Holdings Inc., the Company, La Cadena Investments and
                       James J. Cotter (incorporated by reference to the
                       Company's Form 10-K/A Amendment No. 1 for the year ended
                       September 30, 1993).

               10.13   Amendment to Option Agreement dated January 12, 1994
                       between Stater Bros Holdings Inc. and the Company
                       (incorporated by reference to the Company's Form 10-K/A
                       Amendment No. 1 for the year ended September 30, 1993).

               10.14   Credit Agreement among Citadel Realty, Inc. Citadel
                       Holding Corporation and Craig Corporation (incorporated
                       by reference to the Company's Form 10-Q Report for the
                       quarter ended June 30, 1994).

                                                                              62
<PAGE>
 
               10.15*  Consulting Agreement dated as of October 1, 1994 between
                       James J. Cotter and Craig Corporation (incorporated by
                       reference to the Company's Form 10-K Report for the year
                       ended September 30, 1994).

               10.16   Stock Purchase Agreement dated as of October 21, 1994
                       between Citadel Holding Corporation and Craig Corporation
                       (incorporated by reference to the Company's Form 10-K
                       Report for the year ended September 30, 1994).

               10.17   Preferred Stock Purchase Agreement dated as of November
                       10, 1994 between Citadel Holding Corporation and Craig
                       Corporation (incorporated by reference to the Company's
                       Report on Form 10-K for the year ended September 30,
                       1994).

               10.18   Amendment to Credit Agreement among Citadel Realty, Inc.
                       Citadel Holding Corporation and Craig Corporation
                       (incorporated by reference to the Company's Report on
                       Form 10-K for the year ended September 30, 1994).
 
               10.19   Limited Liability Company Agreement of Reading
                       International Cinemas LLC.
 
               10.20   Certificate of Formation of Reading International Cinemas
                       LLC.
 
               10.21*  Amendment to Consulting Agreement between James J. Cotter
                       and Craig Corporation.
 
               10.22*  Stock Option Agreement between James J. Cotter and Craig
                       Corporation.
 
               10.23   Conversion Deferral, Warrant and Reimbursement Agreement
                       dated April 11, 1995 between Citadel Holding Corporation
                       and Craig Corporation (incorporated by reference to the
                       Company's Report on Form 10-Q for the quarter ended March
                       31, 1995).

               10.24   Settlement Agreement dated April 3, 1995 between Craig
                       Corporation, Dillon Investors L.P., Roderick H. Dillon,
                       Jr.

               22      Subsidiaries of the Registrant.

               24      Consent of Ernst & Young.

               27      Financial Data Schedule, Article 5.

               28      Financial Statements of Unconsolidated Affiliate.

(d)            All other schedules are omitted because they are not applicable
               or because the required information is shown in the financial
               statements or the notes thereto.

                                                                              63
<PAGE>
 
                                  SIGNATURES
                                  ----------


      Pursuant to the requirements of Section 13 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.


                               CRAIG CORPORATION
                               -----------------



By:   /s/ S. Craig Tompkins             By:       /s/ Robin W.Skophammer
     ----------------------------                ------------------------
     S. CRAIG TOMPKINS                           ROBIN W. SKOPHAMMER
     President                                   Chief Financial Officer
     January 12, 1996                            Treasurer & Secretary
                                                 January 12, 1996


     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capabilities and on the dates indicated.



By:   /s/ James J. Cotter               By:
     ----------------------------                ------------------------
     JAMES J. COTTER                             EDWARD L. KANE
     Director                                    Director
     January 12, 1996                            January 12, 1996



By:   /s/ William D. Gould              By:       /s/ Ralph B. Perry III
     ----------------------------                -------------------------
     WILLIAM D. GOULD                            RALPH B. PERRY III
     Director                                    Director
     January 12, 1996                            January 12, 1996


                                                                     
By:                                     By:       /s/ S. Craig Tompkins 
     ----------------------------                -------------------------
     GERARD P. LAHENEY                           S. CRAIG TOMPKINS
     Director                                    Director                 
     January 12, 1996                            January 12, 1996         

                                                                              64