<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1999
GIANT GROUP, LTD.
9440 Santa Monica Boulevard, Suite 407, Beverly Hills, California, 90210
Registrant's telephone number (310) 273-5678
Commission File Number 1-4323
I.R.S. Employer Identification Number 23-0622690
State of Incorporation Delaware
Name of Each Exchange
Title of Class on Which Registered
-------------- -------------------
Securities registered pursuant Common Stock, New York
to 12(b) of the Act: $.01 Par Value Stock Exchange
(Together with
Preferred Stock
Purchase Rights)
Securities registered pursuant None
to 12(g) of the Act: ----
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 12 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.
x
-------
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.
x
-------
As of April 11, 2000, 3,989,648 shares of the registrant's common stock,
par value $.01 per share, were outstanding, and the aggregate market value of
the registrant's common stock held by non-affiliates based on the closing price
on the New York Stock Exchange on April 11, 2000 was $4 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement for the annual meeting
of stockholders of the Company to be held June 12, 2000, are incorporated by
reference into Part III of this Report.
Exhibit Index located at page 51 herein.
1
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1997, 1998 and 1999
(Dollars in thousands, except per share amounts
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1998 1999
---------- ---------- ----------
Net sales $ - $ 1,143 $ 72,631
Cost of sales - 1,469 62,845
---------- ---------- ----------
Gross profit (loss) - (326) 9,786
---------- ---------- ----------
Costs and expenses:
Selling and shipping - 287 9,342
General and administrative 4,458 3,810 7,313
Depreciation and other 523 283 1,250
Co-ownership program, net of charter income 4,996 347 -
Writedown of apparel investment, including goodwill - 38 27,999
Reserve for other receivables - - 3,029
Merger and related legal - 165 -
---------- ---------- ----------
9,977 4,930 48,933
---------- ---------- ----------
Loss from operations (9,977) (5,256) (39,147)
---------- ---------- -----------
Other income (expense):
Investment and other income 2,049 3,000 928
Gain (loss) on the sale of marketable securities (84) (752) 426
Gain on sale of property and equipment - 2,855 239
Factoring and financing costs (153) (107) (3,187)
---------- ---------- ----------
1,812 4,996 (1,594)
---------- ---------- ----------
Affiliate transactions:
Equity in loss of affiliate (623) - -
Loss on affiliate transactions - (1,168) (2,981)
---------- ---------- ----------
(623) (1,168) (2,981)
---------- ---------- ---------
Loss before benefit (provision) for income taxes (8,788) (1,428) (43,722)
Benefit (provision) for income taxes 4,170 1,921 (2,542)
---------- ---------- ----------
Net income (loss) $ (4,618) $ 493 $ (46,264)
========== ========== ==========
Basic earnings (loss) per common share $ (1.42) $ 0.15 $ (11.71)
========== ========== ==========
Diluted earnings (loss) per common share $ (1.42) $ 0.15 $ (11.71)
========== ========== ==========
Weighted average shares outstanding - basic 3,260,000 3,184,000 3,951,000
========== ========== ==========
Weighted average shares outstanding - diluted 3,260,000 3,185,000 3,951,000
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
GIANT GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and 1999
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1999
------------------ ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,226 $ 1,248
Marketable securities 7,797 8,932
Current portion of note receivable from related party, net 2,002 -
Note and other receivables, net 4,752 365
Inventories 12,438 9,661
Prepaid expenses and other assets 690 663
Income tax receivable - 171
Deferred income taxes 892 -
------------------ ------------------
Total current assets 32,797 21,040
Note receivable from related party 499 1,747
Property and equipment, net 1,983 758
Deferred income taxes 1,748 -
Goodwill, net of amortization of $38 in 1998 and $27,767 in 1999 27,415 -
Other assets 118 114
------------------ ------------------
Total assets $ 64,560 $ 23,659
================== ==================
LIABILITIES
Current liabilities:
Due to factor $ 3,868 $ 9,105
Accounts payable 7,134 5,540
Current portion of note payable to related party 400 -
Accrued expenses 1,297 2,462
Income taxes payable 554 490
------------------ ------------------
Total current liabilities 13,253 17,597
Capital lease obligations 252 188
Note payable to related party 1,227 1,747
Deferred income taxes 7 7
------------------ ------------------
Total liabilities 14,739 19,539
------------------ ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 2,000,000 shares, none issued - -
Class A common stock, $.01 par value; authorized 5,000,000 shares, none issued - -
Common stock, $.01 par value; authorized 12,500,000 shares, 7,266,000 issued 73 73
Capital in excess of par value 35,196 35,008
Accumulated other comprehensive income (loss) - unrealized (losses) gains on marketable
securities, net (190) 22
Retained earnings (deficit) 43,583 (2,681)
------------------ ------------------
78,662 32,422
Less common stock in treasury, at cost; 3,339,000 shares in 1998 and 3,276,000 in 1999 (28,841) (28,302)
------------------ ------------------
Total stockholders' equity 49,821 4,120
------------------ ------------------
Total liabilities and stockholders' equity $ 64,560 $ 23,659
================== ==================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
22
<PAGE>
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1998 and 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1998 1999
---------- --------- ---------
<S> <C> <C> <C>
Operating Activities:
Net income (loss) $ (4,618) $ 493 $ (46,264)
Adjustments to reconcile net income (loss) to net cash (used) provided
by operating activities:
Depreciation and amortization 523 320 1,322
Provision for impairment of assets held-for-sale 1,500 541 -
Write-down of apparel investment, including goodwill - - 27,999
Reserve for other receivables - - 3,029
Accretion of discounts on investments (362) (822) (340)
(Gain) loss on the sale of marketable securities 84 752 (426)
Gain on sale of property and equipment - (2,855) (239)
Equity in loss of affiliate 623 - -
Loss on affiliate transactions - 1,168 2,981
Provision (benefit) for deferred taxes - (1,127) 2,513
Changes in assets and liabilities, net of effects of business acquired:
Decrease in inventories - 125 2,777
Decrease (increase) in income tax receivables 9,828 1,100 (171)
(Increase) decrease in receivables and prepaid expenses and other assets 662 (347) 320
Increase in due to factor - 376 5,237
Increase (decrease) in accounts payable and accrued expenses 176 (3,228) (664)
(Decrease) increase in income tax payable (3,143) 702 (65)
---------- --------- ---------
Net cash provided (used) by operating activities 5,273 (2,802) (1,991)
---------- --------- ---------
Investing Activities:
Sales of marketable securities 14,730 44,484 4,808
Purchases of marketable securities (13,499) (42,507) (5,129)
Proceeds from debt investment and repayment of advance 1,880 727 -
Purchases of property and equipment (1,869) (66) (302)
Net proceeds from sale of property and equipment - 30,178 284
Purchases of assets held-for-sale and related costs (4,377) (49) -
Net advances made in connection with business acquired - (25,889) -
---------- --------- ---------
Net cash (used) provided by investing activities (3,135) 6,878 (339)
---------- --------- ---------
Financing Activities:
Proceeds from short-term borrowings 10,000 - 1,662
Repayment of short-term borrowings (20,500) - (1,662)
Proceeds (payment) from note-receivable - related party - 500 (589)
Purchase of treasury stock (3,638) (1,483) -
Payment of capital lease obligations - (4) (59)
---------- --------- ---------
Net cash used by financing activities (14,138) (987) (648)
---------- --------- ---------
(Decrease) increase in cash and cash equivalents (12,000) 3,089 (2,978)
Cash and cash equivalents:
Beginning of period 13,137 1,137 4,226
---------- --------- ---------
End of period $ 1,137 $ 4,226 $ 1,248
========== ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
23
<PAGE>
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1997, 1998 and 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Capital in Common Retained Other Total
Common Excess of Stock in Earnings Comprehensive Comprehensive
Stock Par Value Treasury (Deficit) Income (Loss) Income (Loss)
------- --------- --------- --------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1996 $ 73 $ 36,767 $ (31,979) $ 47,708 $ 246
Purchase of treasury stock (3,638)
Net loss for 1997 (4,618) $ (4,618)
Unrealized gains on marketable securities, net
of income tax provision of $2,612 3,939 3,939
------- --------- --------- --------- -------------- -------------
Balance as of December 31, 1997 73 36,767 (35,617) 43,090 4,185 $ (679)
Treasury stock issued in connection with business
acquired 8,259
Difference between cost and value assigned to
treasury
stock issued in connection with business acquired (1,766)
Warrants issued in connection with business acquired 195
Purchase of treasury stock (1,483)
Net income for 1998 493 $ 493
Unrealized losses on marketable securities, net
of income tax benefit of $2,903 (4,375) (4,375)
------- --------- --------- --------- -------------- -------------
Balance as of December 31, 1998 73 35,196 (28,841) 43,583 (190) $ (3,882)
=============
Treasury stock issued to former stockholders of
business acquired (188) 539
Net loss for 1999 (46,264) $ (46,264)
Unrealized gains on marketable securities 212 212
------- --------- --------- --------- -------------- -------------
Balance at December 31, 1999 $ 73 $ 35,008 $ (28,302) $ (2,681) $ 22 $ (46,052)
------- --------- --------- --------- -------------- -------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
24
<PAGE>
1. Nature of Operations
--------------------
GIANT GROUP, LTD. (herein referred to as the "Company" or "GIANT") is a
corporation, which was organized under the laws of the State of Delaware in
1913. As of December 31, 1999 and 1998, the Company's wholly-owned subsidiaries
include KCC Delaware Company ("KCC") and Periscope Sportswear, Inc.
("Periscope" ). On December 28, 1998, GIANT MARINE GROUP, LTD. ("GIANT MARINE")
was dissolved and the remaining assets and liabilities were transferred to the
Company.
Periscope was acquired by the Company in December 1998 (See Note 3 to these
Consolidated Financial Statements). Periscope was organized under the laws of
the State of Delaware in 1998 and is the successor, by merger, to Periscope I
Sportswear, Inc., a New York corporation organized in 1975. Periscope provides
an extensive line of high-quality women and children's clothing in the moderate
price category to mass merchandisers and major retailers, primarily for sale
under private labels. Effective April 11, 2000, Periscope terminated the
employment of Glenn Sands as president and chief executive officer ("Mr. Sands")
and appointed Ralph Stone Chief Executive Officer and Scott Pianin, a long-time
Periscope senior executive, president of the company.
GIANT MARINE was organized under the laws of the State of Delaware in
November 1996. GIANT MARINE started and operated the Luxury Yacht Co-Ownership
Program (the "Co-Ownership Program") with two yachts until November 1997, when
the Co-Ownership Program was ended. During 1998, GIANT MARINE chartered its two
yachts until they were both sold (See Note 5 to these Consolidated Financial
Statements).
For the year ended December 31, 1999, the Company had a net loss of $46,264
which included an impairment loss of $27,078 and non-cash charges of $6,010. In
addition, the Company was not in compliance with certain covenants under its
factoring agreement (See Note 10 to these Consolidated Financial Statements)
which allows for the lender to demand repayment of the balance due at any time.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The Company's Consolidated Financial Statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern. The Company
is in discussions with the factor to amend the factoring agreement. Subsequent
to December 31, 1999, the factor has continued to make advances to Periscope.
However, there are no assurances the factor will continue to provide advances to
Periscope in the future and not demand payment on the loan. The Company is
currently reviewing several strategies concerning Periscope's operations and
cash flows but has not yet decided on a course of action. Effective April 11,
2000, the Company entered into an agreement with Stone Investments Banking LLC
("SIB"). Management representation provided by SIB will include, but is not
limited, to the management of Periscope's operations on a daily basis and
representing Periscope regarding the negotiation of debt with all creditors,
including the factor. Giant paid a $40,000 fee upon the execution of this
agreement and will pay $40,000 per 30 day period, plus reasonable expenses.
2. Significant Accounting Policies
-------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of GIANT and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
The Company recorded an equity non-cash loss in its affiliate investment
under the equity method of accounting for the period ended December 18, 1997.
Subsequent to this date, the Company accounts for its affiliate investment as a
marketable security classified as available-for-sale. (See Note 7 to these
Consolidated Financial Statements.)
Revenue Recognition
- --------------------
Revenue is recognized upon shipment of merchandise to its customers.
25
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
Yacht Organization Costs
- ------------------------
Certain Co-Ownership Program costs, related to the preparation of the
yachts for use and organization costs, including legal and professional fees,
were originally deferred and would have been amortized to income over a period
of not more than one year, beginning with the start of operations in February
1997. However, because the Co-Ownership Program ended in November 1997, all
costs were charged to expense in 1997. The Company included income, upon the
completion of the charter of the yachts, in Co- Ownership Program costs and
expenses.
Supplemental Cash Flow Information
- ----------------------------------
For purposes of the consolidated statements of cash flows, short-term
investments purchased with an original maturity date of three months or less are
considered to be cash equivalents. Cash equivalents are recorded at market
value and consist of short-term U.S. government obligations.
Comprehensive Income
- --------------------
Effective in the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 established new rules for the reporting and display of
total comprehensive income and its components; however, the adoption of this
statement has no impact on the Company's net income or loss and stockholders'
equity. SFAS 130 requires the change in the Company's unrealized gains and
losses on marketable securities, net of deferred income taxes, be included in
total comprehensive income. Prior year's consolidated statements of
stockholders' equity have been reclassified to conform to these requirements.
Marketable Securities
- ---------------------
Investments in equity securities and corporate bonds are classified as
available-for-sale or trading securities. Investments available-for-sale are
carried at market and adjustments for unrealized gains and losses are reported
as a separate component of stockholders' equity, net of deferred income taxes.
Trading securities are carried at market and unrealized gains and losses on
trading securities are included in investment income. The amortized cost of
debt securities is adjusted for amortization of premiums and accretion of
discounts through maturity. Such amortization and accretion are included in
investment income. The cost of securities sold is based on the specific
identification method. See Note 6 to these Consolidated Financial Statements.
Inventories
- ------------
Inventories are stated at the lower of cost (first-in, first-out) or
market. See Note 8 to these Consolidated Financial Statements.
Fair Value of Financial Instruments
- ------------------------------------
Due to the short maturities of the Company's cash, receivables and
payables, the carrying value of these financial instruments approximates their
fair value. The fair value of the Company's debt, excluding note payable to
related party, is estimated based on the current rates offered to the Company
for debt with similar remaining maturities. The note receivable from and note
payable to related party has been discounted at an interest rate of 8%. See Note
14 to these Consolidated Financial Statements.
26
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
Depreciation and Amortization
- -----------------------------
Depreciation for financial reporting purposes is provided by the straight-
line method over the estimated useful lives of the assets, ranging from three to
seven years. Amortization of leasehold improvements for financial reporting
purposes is provided by the straight-line method over the life of the lease (See
Note 9 to these Consolidated Financial Statements). Maintenance and repairs are
charged against results of operations as incurred.
The estimated useful lives of the Company's property and equipment are as
follows:
Machinery and equipment 5-7 years
Furniture and fixtures 7 years
Automobiles 5 years
Computer equipment and software 3-5 years
Long-Lived Assets
- ------------------
The Company follows the guidelines set forth in SFAS No. 121, "Accounting
for the Impairment of Long-lived Assets and Long-lived Assets to be Disposed of"
(`'SFAS 121'') when reviewing its long-lived assets and certain related
intangibles for impairment whenever changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. The measurement of
impairment losses to be recognized is based on the difference between the fair
value and the carrying amount of the assets. Impairment would be recognized in
operating results if a diminution in value occurred. See Note 3 to these
Consolidated Financial Statements.
Amortization of Goodwill
- -------------------------
Goodwill is amortized on a straight-line basis over 40 years. See Note 3
to these Consolidated Financial Statements.
Transactions with International Suppliers
- ------------------------------------------
All transactions with international suppliers currently are denominated in
U.S. dollars and are not subject to exchange rate fluctuations.
Concentration of Risk
- ---------------------
The Company places its temporary cash and cash investments with high
quality financial institutions. Management monitors the financial
creditworthiness of these financial institutions. At times, such investments
may be in excess of insured limits.
A substantial portion of Periscope's net sales and gross profits are
derived from a small number of large customers. Periscope does not currently
have any long-term contracts with any of its customers and can provide no
assurance that these customers will continue to place orders with Periscope or
that orders by such customers will continue at their previous levels. (See Note
20 to these Consolidated Financial Statements).
Periscope sells nearly all of its trade accounts receivable to a factor,
which assumes the credit risk with respect to collection of such accounts. The
factor approves the credit of Periscope's customers prior to sale. If the
factor disapproves a customer sales order, Periscope bears the credit risk if
the sale is completed. The factor may terminate the factoring agreement after
giving Periscope notice as stated in the factoring agreement. Such termination
could have a material adverse effect on the Company's consolidated financial
condition and results of operations if Periscope could not replace the factoring
agreement within such period. See Note 10
27
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
to these Consolidated Financial Statements.
Periscope does not own or operate any manufacturing facilities and is
therefore dependent on independent contractors for the manufacture of its
products. The manufacturers manufacture Periscope's products to its
specifications. The inability of a manufacturer to ship Periscope's products in
a timely manner or to meet Periscope's quality standards could adversely affect
the ability to deliver products to its customers in a timely manner. Delays in
delivery could result in missing certain retailing seasons with respect to some
or all of Periscope's products or could otherwise have an adverse effect on the
Company's consolidated financial condition and results of operations. There are
no formal arrangements between Periscope and any of its contractors or
suppliers.
Beginning in 1999, substantially all of Periscope's products are being
manufactured in foreign countries, primarily Mexico, China and Taiwan.
Operations may be adversely affected by political instability resulting in
disruption of trade from foreign countries in which Periscope's contractors and
suppliers are located, the imposition of additional regulations related to
imports or duties, taxes and other charges on imports. In addition, Periscope's
import operations are subject to constraints imposed by bilateral textile
agreements between the United States and a number of foreign countries. These
agreements impose quotas on the amount and type of goods, which can be imported
into the United States from these countries and can limit or prohibit
importation of products on very short notice. Periscope's imported products,
excluding goods from Mexico which are subject to the North American Free Trade
Agreement , are also subject to United States customs duties which are a
material portion of Periscope's cost of imported goods. A substantial
increase in customs duties or a substantial reduction in quota limits applicable
to Periscope's imports could have a material adverse effect on the Company's
consolidated financial condition and results of operations.
Use of Estimates
- ----------------
The preparation of consolidated financial statements in conformity with
accounting principles accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. In management's opinion, these estimates and assumptions are
reasonable and result in the fair presentation of the consolidated financial
statements.
Recent Accounting Pronouncements
- --------------------------------
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The statement is intended to eliminate the diversity in practice
in accounting for internal-use software costs and improve financial reporting.
The statement is effective for fiscal years beginning after December 15, 1998.
The Company has adopted this statement in the first quarter of 1999 and has
determined that the effect of this statement on the Company's consolidated
financial position and consolidated results of operations is not material.
In June 1998, the Financial Accounting Standards Board issued FASB 133
"Accounting for Derivative Instruments and Hedging Activities" ("FASB 133").
This statement increases the visibility, comparability, and understanding of the
risks associated with holding derivatives by requiring all entities to report
all derivatives at fair value as assets or liabilities. It also provides
guidance and practice by providing companies with comprehensive rules for all
derivatives and hedging activities. FASB 133 is effective for fiscal quarters of
fiscal years that begin after June 15, 2000. The Company will follow the
disclosure requirements set forth in this statement; however, the Company does
not currently hold or issue derivative instruments or nonderivative instruments
that are designated and qualify as hedging instruments.
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform to the 1999
presentation.
28
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
3. Acquisition
-----------
In December 1998, the Company acquired 100% of the outstanding common stock
of Periscope. The acquisition has been accounted for by the purchase method of
accounting, and, accordingly, Periscope's assets and liabilities have been
recorded at their fair market value as of the date of acquisition. Periscope's
results of operations for the 20 day period beginning December 12, 1998 were
included in the Company's consolidated statement of operations for the year
ended December 31, 1998.
The initial cost of the acquisition included 953,093 shares of Company
common stock, which were held in treasury and valued at $6,493, 75,000 Company
warrants valued at $195 and exercisable at $7.25 over a five year period, and
transaction costs of $259. In addition, prior to the effective date of the
acquisition, the Company made a gross advance of $28,500 in cash to Periscope,
which Periscope used to reduce certain borrowings. On May 18, 1999, the
Company's Board of Directors approved the capitalization of this advance. In
August 1999, the Company issued an additional 62,500 shares of common stock,
valued at $352, to former Periscope stockholders (see next paragraph). The
excess of the total cost over the estimated fair value of the net assets
acquired of $27,805, based on the Company's allocation of the purchase price,
was allocated to goodwill and is being amortized on a straight-line basis over
40 years (see subsequent paragraph).
The Company was under an obligation to issue up to 225,000 shares of
additional Company common stock to the former Periscope stockholders based on
the level of Periscope pre-tax profits, as defined in the merger agreement,
which exceeded $13 million dollars for the year ended December 31, 1999. On May
18, 1999, the Company's Board of Directors approved an election that was given
to the former Periscope stockholders on July 23, 1999. The election gave the
former Periscope stockholders a choice of receiving their pro-rata portion of
62,500 shares of the Company's common stock and also their pro-rata portion of
an additional 62,500 shares of the Company's common stock should Periscope's
pre-tax profits for the twelve months ended June 30, 2000 exceed $13 million,
instead of receiving 225,000 shares of the Company's common stock, as previously
discussed. On August 13, 1999 ("Election Date"), all former Periscope
stockholders elected to receive their pro-rata portion of 62,500 shares of the
Company's common stock. The Company valued the stock at $352, which represented
the fair market value of the common stock on the Election Date. The former
Periscope stockholders received the common stock, which was held in treasury, in
September 1999.
During the third quarter of 1999 the Company determined that a receivable
acquired in the acquisition would not be collected within one year. The Company
recorded a discount of $139 and reclassified $602 to long-term other assets. The
Company subsequently determined that this receivable was uncollectable and
recorded a provision for loss of $1,525 for the year ended December 31, 1999.
Effective April 11, 2000, Periscope entered into an agreement with Stone
Investment Banking, LLC ("SIB"). Management representation provided by SIB will
include, but is not limited, to the management of Periscope's operations on a
daily basis and representing Periscope regarding the negotiation of debt with
all creditors, including the factor. GIANT paid a $40,000 fee upon the execution
of this agreement and will pay $40,000 per 30-day period, plus reasonable
expenses. Effective April 11, 2000, the Company announced that Periscope
terminated the employment of Mr. Sands as president and chief executive officer
and appointed Ralph Stone of SIB as chief executive officer. In addition, Scott
Pianin, a long-time Periscope senior executive was named president of the
company.
The following unaudited proforma financial information reflects the
Company's consolidated results of operations as if the acquisition of Periscope
had taken place on January 1, 1997. This unaudited consolidated pro forma
information is not necessarily indicative of the combined results that would
have occurred had the merger occurred on those dates, nor is it indicative of
the results
29
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
that may occur in the future.
Year Ended Year Ended
12/31/97 12/31/98
---------- ----------
Net sales $ 87,957 $ 76,043
Net loss 5,872 3,544
========== ==========
Net loss per share:
Basic $ 1.39 $ 0.85
========== ==========
Diluted $ 1.39 $ 0.85
========== ==========
4. Earnings (Loss) Per Share
The Company adopted SFAS No. 128, "Earnings per Share" ("SFAS 128"),
effective for the year ending December 31, 1997. Basic earnings (loss) per
common share ("Basic EPS") is computed by dividing reported net earnings or loss
available to common stockholders by the weighted average shares outstanding.
The computation of diluted earnings (loss) per common share ("Diluted EPS")
includes the application of the treasury stock method. The dilution for options
and warrants is calculated by using the securities' exercise price for the
period.
The following shows the reconciliation of Basic EPS and Diluted EPS for the
years-ended 1997, 1998 and 1999:
30
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
For the year ended 1997
-----------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic Loss per Share
- --------------------
Loss available to common stockholders $ (4,618) 3,260,000 $ (1.42)
=========== ============= =========
For the year ended 1999
-----------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic Earnings per Share
- ------------------------
Income available to common stockholders $ 493 3,184,000 $ 0.15
=========== =========
Diluted Earnings per Share
- --------------------------
Effect of dilutive securities:
Options issued to employees and non-employee
directors and warrants issued in connection
with the merger 1,000
Income available to common stockholders $ 493 3,185,000 $ 0.15
=========== ============= =========
For the year ended 1999
-----------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic Loss per Share
- --------------------
Loss available to common stockholders $ (46,264) 3,951,000 $ (11.71)
=========== ============= =========
</TABLE>
The Company's 2,101,000 stock options and 75,000 warrants are not included
in the Diluted EPS calculation for 1998 since in each case the securities
exercise price is greater than the average market price of the Company's common
stock. In 1997 and 1999, the Company did not include 2,076,000 and 2,136,000
stock options and 0 and 75,000 warrants in the calculation of loss per share as
the effect would be anti-dilutive as losses were reported for both years.
5. Sale of Co-Ownership Yachts
---------------------------
At December 31, 1997, the Company reduced the carrying value, in total, of
the luxury yachts to their approximate net realizable value, estimated by the
Company based on comparable market prices of similar yachts and broker
estimates. In April 1998, the Company sold for cash one of its two luxury yachts
for $14,500, less selling expenses. The net sales price equaled the Company's
current carrying value. In October 1998, the Company sold the remaining luxury
yacht for a cash sales price of $10,875 less selling expenses. The Company
recognized a loss of $541 and recorded revenue related to refunds of
approximately $294 from the U.S. Customs Services for amounts previously
deposited with this agency. The loss and related revenue are included in Co-
ownership Program and charter expenses in the consolidated statements of
operations for the year ended December 31, 1998.
6. Marketable Securities
---------------------
31
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
At December 31, 1998 and 1999, investments classified as available-for-sale
and trading securities are as follows:
<TABLE>
<CAPTION>
Unrealized Deferred Tax Inc (Dec)
Available for Sale (1999) Fair Value Cost Gain (Loss) Liability, Net In Equity
- ------------------------ ---------- --------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Equity Securities $ 3,630 $ 3,596 $ 34 $ 34
Corporate bonds 634 646 (12) - (12)
---------- --------- ----------- -------------- ---------
Total $ 4,264 $ 4,242 22 $ - $ 22
========== ========= =========== ============== =========
Trading Securities (1999) Fair Value Cost
- ------------------------ ---------- --------
Corporate Bonds $ 4,668 $ 4,711
========== ========
Unrealized Deferred Tax Decrease
Available for Sale (1998) Fair Value Cost (Loss) Asset, Net In Equity
- ------------------------ ---------- --------- ----------- -------------- ---------
Equity Securities $ 3,912 $ 4,113 $ 201 $ 81 $ 120
Corporate Bonds 1,276 1,392 116 46 70
---------- --------- ----------- -------------- ---------
Total $ 5,188 $ 5,505 $ 317 $ 127 $ 190
========== ========= =========== ============== =========
Trading Securities (1998) Fair Value Cost
- ------------------------ ---------- --------
Corporate Bonds $ 2,609 $ 2,605
========== ========
</TABLE>
The maturities for corporate and U.S. government bonds at December 31, 1998
and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
------------------------- ------------------------
Fair Value Cost Fair Value Cost
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one through five years $ 3,885 $ 3,997 $ 3,737 $ 3,763
Due after five through 10 years - - 1,565 1,594
---------- ---------- ---------- ----------
$ 3,885 $ 3,997 $ 5,302 $ 5,357
========== ========== ========== ==========
</TABLE>
During 1999, interest expense was $24 at a weighted average interest rate
of 6% on short-term margin borrowings that were collateralized by certain
marketable securities.
For the years ended December 31, 1998 and 1999, the Company recorded a
loss on the decline in the market values of certain equity securities of $1,168
and $2,981, respectively. The cost basis reflects the decline in the value
of these securities.
7. Affiliates' Transactions
------------------------
32
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDTED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
At December 31, 1999, the Company accounted for its investment of
approximately 1,006,000 and 535,000 common shares in Santa Barbara Restaurant
Group, Inc. ("SBRG") and Checkers Drive-In Restaurants, Inc. ("Checkers") as
marketable securities, classified as investments available-for-sale. The
Company's Chairman of the Board, President and Chief Executive Officer of the
Company ("CEO") serves on the board of directors of each affiliate company.
In November 1996, KCC obtained $5,100 of Checkers 13% restructured debt for
$5,000 along with 2,849,000 Checkers warrants to purchase Checkers common stock
at an exercise price of $.75 per share, exercisable at any time until November
22, 2002. Over the years, Checkers repaid a portion of the principal with
proceeds Checkers received from the sale of assets and funds coming from a
private placement of its common stock. KCC recorded the Checkers Warrants at
$1,168 equal to the difference between the ending market price of Checkers
common stock on November 22, 1996 and the exercise price of $.75 per share
multiplied by the number of Checkers Warrants. Due to the trend during 1997 and
1998 of Checkers' common stock to trade below $.75, the Company, at December 31,
1998, wrote off the entire value of the warrants and recorded a loss of $1,168
in 1998.
In March 1999, KCC exchanged its remaining $2,995 face value of Checkers
13% restructured debt for 998,377 shares of SBRG's $.08 par value common stock
valued at a market price of $3.00. The additional shares were purchased by the
Company in the open market during 1998. The Company recorded investment income
of approximately $129 equal to the remaining unamortized discount of the 13%
restructured debt. In October 1999, the SBRG shares were registered under the
Securities Act of 1933. As a result of the continuing decline in the market
value of the SBRG common stock and the company's operating losses the Company
recorded a loss of approximately $1.6 million on this investment for the year
ended December 31, 1999.
The Company's investment in Rally's Hamburgers, Inc. (Rally's) common stock
was converted into Checkers stock on August 9, 1999 as a result of Checkers and
Rally's merging in an all-stock transaction, which was previously announced on
January 29, 1999. The merger agreement, approved by the stockholders of both
Checkers and Rally's, provided that each outstanding share of Rally's stock be
exchanged for 1.99 shares of Checkers stock. The Checkers common stock owned by
Rally's (approximately 26% of Checkers common stock) was retired after the
merger. In addition, the Checkers stockholders approved a post-merger one-for-
twelve reverse stock split. Subsequent to the merger and reverse stock split,
the Company owns approximately 535,000 shares of Checkers common stock or
approximately 6% of the outstanding shares of Checkers common stock and owns
warrants to purchase approximately 237,000 shares of Checkers common stock at a
strike price of $3.00. Checkers will continue to operate restaurants under both
the Checkers and Rally's brand names for the foreseeable future. As of December
31, 1998 and prior to the August 1999 merger, the Company owned approximately
3,226,000 shares of Rally's which were accounted for as a marketable security
classified as investment available-for-sale. The Company began its investment in
Rally's in 1987, its highest investment equal to 7,430,000 shares or 48% of
Rally's outstanding common stock as recent as December 31, 1995. In 1996, the
Company's investment decreased primarily due to the sale of 4,293,000 shares to
Fidelity National Financial, Inc. ("Fidelity") and CKE Restaurants Inc., an
affiliate of Fidelity. Prior to December 18, 1997, the date the Company's equity
ownership percentage decreased to approximately 13% from 15% (as of December 31,
1996), the Company accounted for this investment under the equity accounting
method.
Operating results for Rally's for the year ended December 31, 1997
- ------------------------------------------------------------- ----------
Revenues $ 144,930
Less: operating costs 141,610
----------
Income from operations $ 3,320
==========
Net loss $ (4,516)
==========
GIANT'S share of non-cash equity loss $ (623)
==========
As a result of the continuing decline in the market value of the
Checkers common stock and the company's operating losses, the Company recorded
a loss of approximately $1.4 million on this investment for the year ended
December 31, 1999.
33
<PAGE>
8. Inventories
------------
At December 31, 1998 1999
- --------------- ----------- -----------
Raw materials $ 6,686 $ 4,926
Work in progress 2,218 971
Fininshed goods 3,534 3,764
----------- -----------
Total inventories $ 12,438 $ 9,661
=========== ===========
9. Property and Equipment
----------------------
At December 31, 1998 1999
- --------------- ----------- -----------
Land $ 16 $ -
Machinery and equipment 250 159
Furniture and fixtures 370 220
Automobiles 34 93
Computer equipment and software 797 838
Leasehold improvements 1,240 1,294
----------- -----------
2,707 2,604
Less: accumulated depreciation and
amortization (724) (1,846)
----------- -----------
$ 1,983 $ 758
=========== ===========
During the first quarter of 1999, the Company's land in Pennsylvania, not
deemed essential to operations, was sold and a gain of $268 was recognized. In
November 1999, the Company signed an agreement to sublease its corporate office
for two years beginning in February 2000 (See Note 13 to these Consolidated
Financial Statements). As a result of this sublease, the Company expensed the
remaining unamortized leasehold improvements of $863 and included it in
depreciation expense for the year ended December 31, 1999. In March 2000, the
Company sold substantially all of its furniture and equipment to the
sublessee for cash of $120. As a result, the Company recognized a loss of
$29 on the sale of the furniture and equipment for the year ended December 31,
1999.
During 1998, the Company sold certain assets, including the corporate
plane, a Gulfstream II SP acquired in 1991. The Company received cash of $6,308,
net of selling expenses. The Company used part of the proceeds from the sale of
the assets to pay off an existing mortgage and recognized a net gain of $2,855.
During 1997, the Company retired certain fully depreciated leasehold
improvements and equipment, due to the Company's move into its new office in
April 1997.
10. Factor and Financing Arrangements
----------------------------------
On August 10, 1999, Periscope signed an agreement ("Factoring Agreement")
with a new, major factor to obtain a new
34
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
factoring line. This Factoring Agreement replaced the Company's May 1999
letter of credit agreement and the former factoring agreement. The May 1999
agreement and the new agreement were both with the same factor. Upon the
termination of May letter of credit agreement, the Company received back from
the factor its collateral security deposit of $2,000, plus interest. As defined
in the Factoring Agreement, daily working capital borrowing of up to 90% of
eligible accounts receivable (currently 85%), 50% of letters of credit
outstanding issued by Periscope and 50% of eligible inventory are permitted.
The maximum borrowings under the Factoring Agreement are $36 million. The
outstanding debt is collateralized by Periscope's receivables, inventory and
other assets as defined in the Factoring Agreement. In addition, the Company
guarantees $4 million and $1million is personally guaranteed by Mr. Sands.
Borrowings are subject to a processing charge equal to 0.45% on factor credit
approved accounts receivable and .30% on non-factor credit approved accounts
receivable. In addition, an interest charge is applied to the total outstanding
debt equal to the greater of 6% or the prime rate plus one-quarter of one
percent. On October 1, 1999 this interest rate is subject to a 3% increase on
certain borrowings as defined in the Factoring Agreement. Periscope is required
under the Factoring Agreement to maintain certain financial ratios and places
certain limitations on capital expenditures, indebtedness and dividend payments.
The factoring line shall continue until the last day of the 24th month from the
date the Factoring Agreement was signed and thereafter automatically renews
from year to year unless terminated at the option of Periscope with 60 days of
acceptable written notice given to the factor or terminated by the factor by
giving 5 days written notice to Periscope.
The uncollected balance of receivables held by the factor was approximately
$21 million and $12 million for the periods ended December 31, 1999 and 1998,
respectively. Due to Factor includes amounts due under the Factoring line of
$7.1 million and $2.8 million and reserve for sales, returns, discounts and
allowances of $2.0 million and $1.1 million as of December 31, 1999 and 1998,
respectively. Interest on the total outstanding debt was 8.75% and 8.25% at
December 31, 1999 and 1998, respectively. Total charges including interest
expense, factoring fees and commissions were $3,221 and $105 for 1999 and for
the 20-day period ended December 31,1998, respectively, and are included in
factoring and financing costs in the Company's consolidated financial
statements.
At December 31, 1999 and through March 31, 2000, Periscope was not in
compliance with various financial and reporting covenants in the Factoring
Agreement. These financial covenants included not maintaining a tangible net
worth of $7,500 as defined in the Factoring Agreement, not maintaining a
current ratio of 1.4 to 1.0 as defined in the Factoring Agreement and not
maintaining a minimum working capital of $5,500 as defined in the Factoring
Agreement The violation of these covenants causes an event of default under the
Factoring Agreement which allows the factor, to demand repayment of its
outstanding gross balance, $7.1 million at December 31, 1999, and to discontinue
any future funding or advances. In addition, the factor has provided an
overadvance in excess of the amount provided for in the Factoring Agreement in
the amount of $1.2 million and the total outstanding, including letters of
credit of $2.7 million, was $31.2 million at December 31, 1999. Currently, the
factor has restricted the borrowing by Periscope, availability being based only
on new shipments of goods, and is limiting the issuance of additional letters of
credit. It is expected that these restrictions will continue until the default
conditions have been resolved, and the overadvance has been reduced to amounts
acceptable to the factor. The Company is in discussions with the factor to amend
the factoring agreement and renegotiate its credit facility, including its
factoring agreement. Subsequent to December 31, 1999, the factor has continued
to make advances to Periscope under the existing agreement. However, there are
no assurances the factor will continue to provide advances to Periscope in the
future and not demand payment on the loan. To date, no formal demand to
Periscope has been made by the factor. Periscope is having on-going discussions
with the factor to resolve these issues.
11. Capital Lease Obligations
-------------------------
35
<PAGE>
The Company, through its subsidiary, Periscope, has capital lease
obligations that consist of the following:
At December 31, 1998 1999
- --------------- ---------- ----------
Capital lease obligations due through
August 2003 with interest ranging from
8.3% to 12.3% and secured by related
equipment $ 311 $ 252
Less-Current maturities of capital
lease obligation (59) (64)
---------- ----------
$ 252 $ 188
========== ==========
Minimum annual payments under the capital leases, including interest, at
December 31, 1999, are as follows:
2000 $ 85
2001 85
2002 85
2003 39
2004 and thereafter -
------
Present value of future minimum
payments 294
Less-Amount representing interest (42)
------
Net minimum payments 252
Less-Current maturities of capital lease obligations (64)
------
Capital lease obligations $ 188
======
12. Income Taxes
------------
The benefit (provision) for income taxes is comprised of the following:
36
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATE FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
For the year ended December 31, 1997 1998 1999
- ------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
Current federal income tax benefit $ 1,066 $ 764 $ -
Deferred federal income tax benefit (provision) - 927 (2,335)
Current state income tax benefit 3,104 30 -
Deferred state income tax benefit - 200 (207)
---------- ---------- -----------
Benefit (provision) for income taxes $ 4,170 $ 1,921 $ (2,542)
========== ========== ===========
</TABLE>
The following is a reconciliation between the benefit (provision) for
income taxes and the amounts computed by applying the federal statutory rate of
34% to pre-tax income or loss.
<TABLE>
<CAPTION>
For the year ended December 31, 1997 1998 1999
- ------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
Statutory federal tax benefit on pre-tax loss $ 2,988 $ 486 $ 14,865
State tax benefit, net of federal taxes 270 44 1,311
Permanent items (36) (76) (375)
State tax reversal 3,100 - -
(Increase) decrease in valuation allowance (2,401) 1,530 (18,752)
Other net 249 (63) 409
---------- ---------- -----------
Benefit (provision) for income taxes $ 4,170 $ 1,921 $ (2,542)
========== ========== ===========
</TABLE>
Deferred tax assets and [liabilities] of the company consists of the following:
<TABLE>
<CAPTION>
At December 31, 1998 1999
- --------------- ---------- ----------
<S> <C> <C>
Operating losses $ 2,010
Reserves and other, net 503
-------
Subtotal 2,513
Unrealized investment losses, net 127
--------
Net deferred tax assets $ 2,640
Investment in Rally's/Checkers $ 2,562 $ 2,562
State capital loss carryforward 2,310 2,764
Operating losses 842 4,890
Depreciation (112) (146)
Loss on affiliate transactions - 1,186
Goodwill write-off - 10,878
Reserves and other, net - 4,108
Other, net 58 (1,830)
Valuation allowance (5,667) (24,419)
-------- ----------
Net deferred tax long-term liability $ (7) $ (7)
-------- ----------
</TABLE>
At December 31, 1999, the Company has a net operating loss carryforward
("NOL") for Federal income tax purposes of $15,547 and $12,982 for state income
tax purposes which expire in various dates through 2019. Upon the occurrence of
certain
37
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
events, such as a change in ownership, the use of future NOL's may be
limited,
The valuation allowance at December 31, 1998 and 1999 is provided because
it is not likely, as defined in SFAS 109, "Accounting for Income Taxes", that
the deferred tax benefits will be realized through operations. The valuation
allowances recorded against deferred tax assets are based on management's
estimates related to the Company's ability to realize these benefits.
Appropriate adjustments will be made to the valuation allowance if circumstances
warrant in future periods. Such adjustments may have a significant impact on
the Company's consolidated financial statements.
At December 31, 1996, the Company's consolidated balance sheets included a
liability related to a proposed assessment by the State of California, made as a
result of their audit of the tax years 1989 through 1991. GIANT had disputed
this assessment and had provided documents to support the Company's position
during meetings with the New York office of the California State Franchise Tax
Board ("CFTB") during 1995 and 1996. As a result of a preliminary proposed
adjustment in December 1995, the Company made payments of $259 during 1996. In
the third quarter of 1997, the CFTB concluded the audit and accepted the
combined reports as originally filed by the Company, with only minor
adjustments. The Company's consolidated financial statements had reflected a
liability associated with the CFTB proposed assessment. As a result of settling
this dispute with the CFTB, the Company recognized a tax benefit of $3,100 in
1997.
Under the Internal Revenue Code, in addition to the regular corporate
income tax, an additional tax may be levied upon an entity that is classified as
a Personal holding company. In general, this tax is imposed on corporations
which are more than 50% owned, directly or indirectly, by 5 or fewer individuals
(the Ownership Test) and which derive 60% or more of their income from Personal
holding company sources, generally defined to be passive income (the Income
Test). If a corporation falls within the Ownership Test and the Income Test, it
is classified as a personal holding company, and will be taxed on its
undistributed personal holding company income at a rate of 39.6%. The Company
currently meets the stock ownership test. The Company has not met the income
requirement in recent years, therefore is not subject to this additional tax;
however no assurance can be given that the income test will not be satisfied in
the future.
13. Leases
------
On November 3, 1999, the Company signed an agreement to sublease its
current executive space beginning in February 2000 at the same annual rental and
for the remaining period under the lease agreement signed in October 1996
("Master Lease"). The sublessee paid the Company $49 representing a security
deposit of $25 and the first month's rent. The Company will continue to account
for the Master Lease and account for the sublease as operating leases. The
Company remains primarily liable for the annual rent due to the original lessor
under the Master Lease. The sublessee is subject to all the terms of the Master
Lease which are applicable to the sublessor as tenant.
The Company is obligated under noncancelable operating leases, with
variable terms and renewal options, for automobiles, warehouse, showroom and
administrative facilities. Approximate future minimum annual lease payments,
exclusive of required payments for increases in real estate taxes and operating
costs, under noncancelable leases with a remaining term in excess of one year at
December 31, 1999 are as follows:
38
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
Sublease
Year Consolidated GIANT Income Periscope
- ------------- --------------- ----------- ----------- -------------
2000 $ 1,109 $ 346 $ (243) $ 1,006
2001 996 389 (305) 912
2002 699 188 (101) 612
2003 538 88 450
2004 and thereafter 832 148 684
Total rental expense for the years 1997, 1998 and 1999 amounted to $316,
$313 and $1,000, respectively.
On February 11, 2000, the Company signed a lease agreement to move its
executive office to leased premises consisting of approximately 1,900 square
feet at an annual base rent of approximately $59. The lease period for the
Company's new executive office is 60 months, expiring in 2005, with one, five-
year renewal option. The Company moved into its new executive office space in
March 2000.
14. Related Party Transactions
--------------------------
For the years ended December 31, 1997, 1998 and 1999, the Company paid
fees of approximately $ 453, $ 548, and $225 for legal and accounting services
to members of its Board of Directors.
At December 31, 1998 and 1999, Periscope was the holder of a non-interest
bearing note for $2,606 from Mr. Sands payable in installments of $2,002 on
December 31, 1999 and $302 on December 31, 2000 and 2001, respectively.
Periscope is also the maker of a non-interest-bearing note for $2,000 payable to
Mr. Sands in five annual installments of $400, commencing on December 1, 1999.
The note receivable from and the note payable to related party have been
discounted at 8% and have unamortized discounts of $105 and $253, respectively,
at December 31, 1998 and 1999. No payments were made on either note in 1999. The
Company recorded a reserve of $1,395 on the note receivable in 1999.
At December 31, 1998 and 1999, advances of approximately $1,421 and $1,524
were due from a manufacturing contractor located in Mexico and utilized by
Periscope. The advances were due on demand and were non-interest bearing. After
a re-evaluation of this asset, Periscope concluded that these advances may not
be collected and recorded a provision for loss of $1,524 for the year ended
December 31, 1999. During 1999, Periscope paid this contractor approximately
$5.8 million for cutting and sewing services.
Periscope purchased transportation-related services of $267 from Global
Air, Inc., which is controlled by Mr. Sands, during the year ended December
31,1999. No services were purchased from Global Air, Inc. during the 20-day
period ended December 31, 1998. In addition, Periscope paid $20 for performance
compensation for the 20-day period ended December 31, 1998 to S.R.P. Sales, Inc.
(''S.R.P.''), which is controlled by Scott Pianin, a Periscope executive.
Effective January 1, 1999, all performance-based compensation was paid directly
to Scott Pianin in accordance with his employment agreement and was no longer
paid to S.R.P.
39
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
15. Preferred Stock
---------------
Authorized preferred stock consists of 2,000,000 shares, $.01 par value,
issuable in one or more series with such dividend rates, liquidation preferences
and redemption, conversion and voting right restrictions as may be determined by
the Company's Board of Directors. No preferred stock has been issued.
16. Class A Common Stock, $.01 Par Value
------------------------------------
On July 12, 1996, GIANT's stockholders approved an amendment to the
Company's Certificate of Incorporation which authorized 5,000,000 shares of
Class A Common Stock, $.01 par value per share. This Class A Common Stock is
identical in all respects to the $.01 par value Common Stock except that the
Class A Common Stock, except in limited situations, have no voting rights.
Presently, there are no plans or commitments for this Class A Common Stock.
17. Treasury Stock
--------------
For the two years ended December 31, 1997 and 1998 , the Company, with
the approval of the Board of Directors, purchased 459,000 shares at a cost of
$3,638, and 207,000 shares at a cost of $1,483, respectively.
In September 1999 and December 1998, the Company issued 62,500 and 953,000
treasury shares to former Periscope stockholders (see Note 3 to these
Consolidated Financial Statements).
18. Common Stock Options
--------------------
Under the 1996 Employee Stock Option Plan (the"1996 Plan"), 1,000,000
shares of the Company's $.01 par value common stock were reserved for future
options. The options, in general, can be issued as either incentive or non-
qualified options in accordance with the 1996 Plan and may be exercised in whole
or in part any time after the date of grant and terminate 10 years from the
grant date. In most cases, options shall have an exercise price equal to the
fair market value of the $.01 par value common stock on the date of grant. In
1996, 200,000 options, at an exercise price of $8.25, which were exercisable in
1997 and terminate in five years, had been granted to the Company's Chief
Executive Officer. In December 1998, these 200,000 options were cancelled and
reissued at $8.25, are exercisable immediately and terminate in December 2005.
In addition, 15,000 options at an exercise price of $7.81 had been granted to
the Company's Chief Financial Officer in 1997 and terminate 10 years from the
grant date. The options vest at a rate of 5,000 a year, beginning in 1998.
Under the 1996 Stock Option Plan for Non-Employee Directors, as amended on
March 20, 1998, (the "Amended Director Plan"), 400,000 shares of the Company's
$.01 par value common stock were reserved for future options. Pursuant to the
Amended Director Plan, each Non-Employee Director was entitled to receive an
option to purchase 10,000 shares on May 20, 1996 (the "Adoption Date") or 5,000
(10,000 in 1997) shares upon the subsequent initial appointment to the Board of
Directors. On each anniversary of the Adoption Date or the subsequent
appointment date, respectively, each Non-Employee Director will receive an
additional option to purchase 5,000 (10,000 in 1997) shares. Upon election to
the Executive Committee on or after July 12, 1996, and on each anniversary
thereafter, the Non-Employee Director will receive an additional option to
purchase 5,000 (10,000 in 1997) shares. The options may be exercised in whole
or in part any time after the date of grant and terminate five years from the
grant date. All options shall have an exercise price equal to the fair market
value of the $.01 par value common stock on the date of grant. At December 31,
1999, 170,000 options had been granted to four of the Non-Employee members of
the current Board of Directors. The exercise prices are $5.438 for 5,000
options, $6.4375 for 5,000 options, $6.688 for 10,000 options, $6.750 for
25,000, $6.813 for 20,000 options, $6.875 for 40,000 options, $7.25 for 5,000
options, $7.625 for 20,000 options and $7.75 for 40,000 options. No options
under the Amended Director Plan have been exercised.
40
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
Prior to August 1995, the Company had a 1985 Incentive Stock Option Plan
(the "Incentive Plan") and a 1985 Non-Qualified Stock Option Plan (the "Non-
Qualified Plan"). The Incentive Plan had provided for the grant of options to
purchase an aggregate of 750,000 shares of GIANT $.01 par value common stock, of
which no options are presently outstanding and options for 6,000 shares have
been exercised under this plan as of December 31, 1999. The Non-Qualified Plan
provided for the granting of options to purchase 3,000,000 shares of GIANT $.01
common stock and terminate 10 years from date of grant. As of December 31, 1999,
1,750,952 options are exerciseable at prices ranging from $6.75 to $7.38 and
terminate in 2005. Options for 307,500 shares have been exercised under this
plan as of December 31, 1999. No options under Non-Qualified Plan were exercised
during the three-year period ended December 31, 1999.
The Company measures compensation expense for all stock option plans under
Accounting Principles Board Opinion No. 25 ("APB 25"). The Company has not
recognized compensation expense because the exercise price of the options issued
is equal to the fair market value of the options on the date of the grant. If
the Company recognized compensation expense under SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), net income (loss) would have been
impacted as shown in the following pro forma amounts:
<TABLE>
<CAPTION>
Year ended December 31,
1997 1998 1999
-------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) As reported $ (4,618) $ 493 $ (46,264)
Proforma (4,789) $ 264 $ (46,373)
Basic earnings (loss) per share As reported $ (1.42) $ 0.15 $ (11.71)
Proforma (1.47) 0.08 $ (11.74)
Diluted earnings (loss) per share As reported $ (1.42) $ 0.15 $ (11.71)
Proforma (1.47) 0.08 $ (11.74)
</TABLE>
The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1997, 1998 and 1999 respectively: no dividend yield for any years;
expected volatility of 37 % for 1997, 36% for 1998 and 38% for 1999; risk-free
rate of return of 6.4% for 1997, 5.6% for 1998 and 5.6% for 1999; and expected
lives of 5 and 10 years for 1997, 5,7 and 10 years for 1998 and 5,7 and 10 years
for 1999. The SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1996 therefore, the resulting pro forma compensation
costs may not be representative of that to be expected in future years.
A summary of options is as follows:
41
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
1997 Exercise 1998 Exercise 1999 Exercise
Shares Price Shares Price Shares Price
--------- --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance 2,056,000 $ 6.93 2,076,000 $ 6.93 2,106,000 $ 6.93
Granted 75,000 7.18 230,000 8.03 30,000 6.78
Exercised - - -
Canceled (55,000) 6.98 (200,000) 8.25 -
--------- --------- --------- --------
Ending balance 2,076,000 6.93 2,106,000 6.93 2,136,000 6.93
========= ========= ========= ========
Options exercisable
at end of year 2,059,000 2,096,000 2,131,000
========= ========= =========
Weighted average price of fair
value of options granted $ 3.03 $ 2.71 $ 2.87
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------- ---------------------------------
Outstanding Wtd. Avg. Wtd. Avg. Exercisable Wtd. Avg.
Range of at Remaining Exercisable at Exercisable
Exercise Prices Dec. 31, 1999 Contractual Life Price Dec. 31, 1999 Price
- ----------------- --------------- ------------------ ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
$5.44 to $6.88 1,851,000 5.1 years $6.75 1,851,000 $6.75
$7.25 to $7.81 85,000 3.1 years $7.68 80,000 $7.67
$8.25 200,000 5.9 years $8.25 200,000 $8.25
--------------- ---------------
$5.44 to $8.25 2,136,000 5.1 years $6.93 2,131,000 $6.92
--------------- ---------------
</TABLE>
19. Stockholders Rights Plan
------------------------
On January 4, 1996, GIANT declared a dividend of one preferred share
purchase right ("Right") for each share of GIANT Common Stock outstanding on
January 16, 1996 and authorized the issuance of additional Rights for GIANT
Common Stock issued after that date.
42
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
Each Right entitles the holder to buy 1/1,000th of a share of Series A
Junior Participating Preferred Stock at an exercise price of $30 for each
1/1,000th share. The Rights will be exercisable and will trade separately from
the GIANT Common Stock (1) ten days after a public announcement that a person or
group of persons has become the beneficial owner of 15% or more of the GIANT
Common Stock (an "Acquiring Person"), or (2) ten business days (or such later
date as may be determined by the Board of Directors) after commencement or
announcement of an intention to make a tender or exchange offer, the
consummation of which would result in such person or group of persons becoming
the beneficial owner of 15% or more of GIANT Common Stock; provided however,
because Mr. Sugarman, Chairman and Chief Executive Officer of the Company,
beneficially owned in excess of 15% of GIANT Common Stock on the date the
Stockholders Rights Plan was adopted, Mr. Sugarman will become an Acquiring
Person only upon the acquisition by Mr. Sugarman of additional shares of GIANT
Common Stock, other than acquisitions through stock dividends, stock option
plans, GIANT compensation or employee benefit plans and other similar
arrangements.
If any person does become an Acquiring Person (subject to certain exceptions),
the other holders of GIANT Common Stock will be able to exercise the Rights and
buy GIANT Common Stock having twice the value of the exercise price of the
Rights. GIANT may, at its option, substitute fractional interests of a share of
Series A Junior Participating Preferred Stock for each share of GIANT Common
Stock to be issued upon exercise of the Rights. Additionally, if GIANT is
involved in certain mergers where its shares are exchanged or certain major
sales of its assets occur, holders of GIANT Common Stock will be able to
purchase for the exercise price, shares of stock of the Acquiring Person having
twice the value of the exercise price of the Rights.
The Rights may be redeemed by GIANT at any time prior to the time any person
becomes an Acquiring Person for a price of $.01 per Right. Unless exercised,
the Rights expire on January 4, 2006.
The Rights could have the effect of discouraging a third party from making a
tender offer or otherwise attempting to obtain control of GIANT. In addition,
because the Rights may discourage accumulations of large blocks of GIANT Common
Stock by purchasers whose objective is to take control of GIANT, the Rights
could tend to reduce the likelihood of fluctuations in the market price of GIANT
Common Stock that might result from accumulations of large blocks of stocks.
Effective December 4, 1998, in connection with the acquisition of Periscope,
the Rights Agreement was amended to exclude Mr. Sands, from the definition
of an Acquiring Person thereunder with respect to shares of the Company's Common
Stock he was to acquire solely pursuant to the merger agreement.
20. Information Concerning Business Segments
----------------------------------------
During 1998, the Company has adopted SFAS 131 ("SFAS 131"), "Disclosures
About Segments of an Enterprise and Related Information," which introduces a
new model for segment reporting, called the "management approach." The
management approach is based on the way that management organizes segments
within a company for making operating decisions and assessing performance.
Reportable segments can be based on products and services, geography, legal
structure, management structure--any manner in which management desegregates a
company. The management approach replaces the notion of industry and geographic
segments in current accounting standards.
The Company has one reportable segment, women and children's clothing,
which was acquired through an acquisition, effective December 11, 1998.
Periscope's five largest customers accounted for approximately 69.1% of sales
in 1999 and include Kmart, Sears and Charming Shoppes (Fashion Bug), which
accounted for approximately 30.7%, 14.5% and 10.7%. Other customers include
Costco Wholesale, Cato Stores, Montgomery Ward, Wal-Mart and Shopko Stores of
its customers. On January 1, 1999, Periscope's allowance for bad debts was $59,
increased by a provision for bad debts of $69 and reduced by write-offs of bad
debts of $28 during 1999 resulting in an ending balance in Periscope's allowance
for bad debts of $100 at December 31, 1999. The Company's consolidated statement
of operations reflects the net sales, cost of goods sold and selling and
shipping expenses for the 20-day period ended December 31, 1998 and for the year
ended December 31, 1999. Periscope's depreciation and amortization was $43 and
$285, factor and financing costs were $105 and $3,221, income tax benefit
(expense) was $327 and $(2,849) and capital expenditures were $0 and $302 for
the 20-day
43
<PAGE>
period ended December 31, 1998 and for the year ended December 31, 1999,
respectively. Periscope's total assets at December 31, 1998 and 1999 were
$47,765 and $12,982, respectively. The accounting policies for this segment are
the same as those described in the Company's significant accounting polices (see
Note 2 to these Consolidated Financial Statements).
21. Supplemental Disclosures of Cash Flow Information
-------------------------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash paid for income taxes $ 10,855 $ 2,193 $ 323
Cash paid for interest 153 87 2,532
Financing of Co-ownership program assets
Fair value of assets of business acquired 23,226
Liabilities assumed of business acquired (43,732)
Fair value of common stock issued for
business acquired 6,947
Cash advanced to business acquired $ 28,500
Cash received by Company from business acquired (2,611)
--------
Net cash advanced by Company for business acquired $ 25,889
========
</TABLE>
22. Commitments and Contingencies
-----------------------------
The Company is involved in various claims and legal proceedings of a nature
considered normal to its business. In addition to these actions, the Company is
also involved in lawsuits as described in the following paragraphs.
Mittman/Rally's. In January and February 1994, two putative class action
----------------
lawsuits were filed, purportedly on behalf of the shareholders of Rally's in the
United States District Court for the Western District of Kentucky, against
Rally's, certain of Rally's present and former officers, directors and
shareholders and its auditors and GIANT. The complaints allege defendants
violated the Securities Exchange Act of 1934, as amended, among other claims, by
issuing inaccurate public statements about Rally's in order to arbitrarily
inflate the price of Rally's common stock, and seek unspecified damages,
including punitive damages. On April 15, 1994, GIANT filed a motion to dismiss
and a motion to strike. On April 5, 1995, the Court struck certain provisions
of the complaint but otherwise denied GIANT's motion to dismiss. In addition,
the Court denied plaintiffs' motion for class certification. On July 31, 1995,
the plaintiffs renewed this motion, and on April 16, 1996, the Court certified
the class. Two settlement conferences have been conducted, most recently on
December 7, 1998, but have been unsuccessful. Fact discovery was completed by
summer 1999. Expert discovery will be completed by early spring of 2000. No
trial date has been scheduled. Management is unable to predict the outcome of
this matter at the present time. Rally's and GIANT deny all wrongdoing and
intend to defend themselves vigorously in this matter.
Harbor. In February 1996, Harbor Finance Partners ("Harbor") commenced a
-------
derivative action, purportedly on behalf of Rally's, against Rally's officers
and directors and GIANT, David Gotterer, and Burt Sugarman before the Delaware
Chancery Courts. Harbor named Rally's as a nominal defendant. Harbor claims
that directors and officers of both Rally's and GIANT, along with GIANT breached
their fiduciary duties to the public shareholders of Rally's by causing Rally's
to repurchase certain Rally's Senior Notes at an inflated price. The NASDAQ
closing price of the Senior Notes as of August 5, 1999 was $89, approximately
31% higher
44
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
than the repurchase price of $67 7/8. Harbor seeks "millions of dollars in
damages", along with rescission of the repurchase transaction. In the fall of
1996, all defendants moved to dismiss this action. On April 3, 1997,
the Chancery Court denied defendants' motion. In the second quarter of 1999, the
plaintiffs filed document requests and interrogatories. Because of the merger of
Rally's 8into Checkers (See Note 7 to these Consolidated Financial Statements),
plaintiffs lost their standing to maintain this action, and voluntarily
dismissed the action on September 10, 1999.
KCC/Pike Santa Monica Action. In October 1996, KCC filed a complaint, in
-----------------------------
the Los Angeles County Superior Court, against NeoGen Investors, L.P., N.D.
Management, Inc., NeoGen Holdings, L.P., Danco Laboratories, Inc. and NeoGen
Pharmaceutical, Inc. (collectively the "NeoGen Entities") and Joseph Pike,
stating causes of action for fraud, breach of fiduciary duty, fraudulent
concealment, breach of contract, unfair business practices and permanent and
preliminary injunctive relief and against the licensors of Mifepristone, the
Population Council, Inc. and Advances in Health Technology, Inc., on a
declaratory relief claim. The complaint seeks damages for the breach by Joseph
Pike and the NeoGen Entities of a July 24, 1996 agreement by which KCC agreed to
contribute $6,000, in return for a 26% equity interest in the entity producing
the drug, Mifepristone, in the United States and other parts of the world
("NeoGen Agreement"). The $6,000 contribution was not funded. On February 19,
1997, Joseph Pike and the NeoGen Entities filed an answer to the complaint,
denying its material allegations and raising affirmative defenses. On that
date, the NeoGen Entities also filed a cross-complaint against KCC, the Company,
and certain of the Company's directors, Terry Christensen, David Malcolm and
Burt Sugarman, which alleged causes of action for fraud, breach of contract,
intentional interference with prospective economic advantage, negligent
interference with prospective economic advantage and unfair business practices.
In October 1997, KCC settled their action with the licensors, the Population
Council, Inc. and Advances in Health Technology, Inc., and in November 1997, KCC
settled their action with Joseph Pike. On May 1, 1998, the court granted the
NeoGen Entities summary adjudication on KCC's cause of action for breach of
contract. Discovery in this action is complete. On October 2, 1998, the court
entered an order, which, among other things, effectively eliminates NeoGen
Entities' ability to obtain any money judgement from KCC and the other cross-
defendants. On February 23, 1999, the court entered judgement pursuant to a
Stipulation for Judgement, by which the parties' respective claims are dismissed
with prejudice, save and except for the right to appeal certain issues. On or
about April 22, 1999, NeoGen filed a notice of appeal of that judgement. On or
about June 8, 1999, KCC filed a notice of cross-appeal. The parties have
reached a full and complete settlement of this action pursuant to which the
appeal was dismissed by stipulation on or about March 30, 2000.
First Albany Corp. v. Checkers. This putative class action was filed on
-------------------------------
September 29, 1998 in the Delaware Chancery Court in and for New Castle County,
Delaware by First Albany Corp., as custodian for the benefit of Nathan Suckman,
an alleged stockholder of 500 shares of the common stock of Checkers. The
complaint names Checkers, the Company, Rally's, and certain of Rally's current
and former officers and directors as defendants, including William P. Foley II,
James J. Gillespie, Joseph N. Stein, James T. Holder, Terry N. Christensen, Burt
Sugarman, Harvey Fattig, Richard A. Peabody, Frederick E. Fisher, Clarence V.
McKee, C. Thomas Thompson and Peter C. O'Hara. The complaint arises out of the
proposed merger announced on September 28, 1998 between the Company, Rally's and
Checkers (the "Proposed Merger"), and alleges generally that certain of
defendants engaged in an unlawful scheme and plan to permit Rally's to acquire
the public shares of Checkers' stock in a "going private" transaction for
grossly inadequate consideration and in breach of the defendants' fiduciary
duties. The plaintiff allegedly initiated the complaint on behalf of all
stockholders of Checkers as of September 28, 1998, and seeks, among other
things, certain declaratory and injunctive relief against the consummation of
the Proposed Merger, or in the event the Proposed Merger is consummated,
rescission of the Proposed Merger and costs and disbursements incurred in
connection with bringing the action, including attorneys' fees, and such other
relief as the court may deem proper. In view of a decision by the Company,
Rally's and Checkers not to implement the transaction that had been announced on
September 28, 1998, plaintiffs have agreed to provide the Company and all other
defendants with an open extension of time to respond to the complaint, and
plaintiffs have indicated that they will probably file an amended complaint in
the event of that they choose to proceed.
Steinberg (s) v. Checkers. This putative class action was filed on October
--------------------------
2, 1998 in the Delaware Chancery Court in and for New Castle County, Delaware by
David J. Steinberg and Chaile B. Steinberg, alleged stockholders of an
unspecified number of shares of the common stock of Checkers. The complaint
names Checkers, the Company, Rally's, and certain of Rally's current and former
officers and directors as defendants, including William P. Foley II, James J.
Gillespie, Joseph N. Stein, James T. Holder, Terry N. Christensen, Burt
Sugarman, Harvey Fattig, Richard A. Peabody, Frederick E. Fisher, Clarence V.
McKee, C. Thomas Thompson and Peter C. O'Hara. As with the complaint detailed
herein above in Suckman, the complaint arises out of the Proposed Merger, and
alleges generally that certain of defendants engaged in an unlawful scheme and
plan to permit Rally's to acquire the public shares
45
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
of Checkers' stock in a "going private" transaction for grossly inadequate
consideration and in breach of the defendants' fiduciary duties. The
plaintiffs allegedly initiated thecomplaint on behalf of all stockholders of
Checkers and seek, among other things, certain declaratory and injunctive
relief against the consummation of the Proposed Merger, or in the event the
Proposed Merger is consummated,rescission of the Proposed Merger and costs and
disbursements incurred in connection with bringing the action, including
attorneys' fees, and such other relief as the court may deem proper. For the
reasons stated above in the Suckman action, plaintiffs have agreed to provide
the Company and all other defendants with an open extension of time to respond
to the complaint, and plaintiffs have indicated that they will probably file
an amended complaint in the event of that they choose to proceed.
Neogen/ Danco v. KCC. This complaint for damages for trade libel was filed
---------------------
on October 30, 1998 in the Superior Court for the State of California for the
County of Los Angeles. The complaint alleged one cause of action for trade
libel against all defendants KCC, GIANT, Terry Christensen and Does 1 through
20, regarding defendants' alleged statements to the media concerning plaintiffs
Neogen Investors, L.P., and Danco Laboratories, Inc. and Joseph Pike. The
complaint was never served.
Since management does not believe that the previously mentioned lawsuits
and other claims and legal proceedings, in which the Company is a defendant,
contain meritorious claims, management believes that the ultimate resolution of
the lawsuits will not materially and adversely affect the Company's consolidated
financial position or results of operations.
On September 20, 1999, the Company was notified by the New York Stock
Exchange ("NYSE") that it fails to meet the recently effective continued listing
standards requiring total market capitalization of not less than $50 million and
total stockholders' equity of not less than $50 million ("continued listing
standards"). The Company has responded with a business plan, to the Listings
and Compliance Committee of NYSE for review, that demonstrates compliance with
these standards within 18 months of receipt of the NYSE notice. On March 20,
2000, the Company received notice that the business plan had been accepted.
However, because Periscope's operations incurred significant losses from its
operations for the year ended December 31, 1999, the Company expects to submit
a new plan that demonstrates compliance with the NYSE listing standards, but is
also exploring other alternatives for the public trading of its common stock.
The Company has employment contracts with the Chairman of the Board,
President and Chief Executive Officer of the Company ("CEO") providing for an
annual base salary of $1,000 increased annually by 10% over the prior year to a
maximum of $1.6 million, life insurance in the face amount of $5 million, and
upon expiration of this agreement a termination payment equal to twice the then
base compensation, and an annual bonus determined, year to year, by the
Incentive Compensation Committee of the Board of Directors within specified
guidelines of the Incentive Compensation Plan, expiring on December 31, 2005. In
January 2000, the CEO voluntarily authorized the Company to decrease his annual
salary to $450. No change to his benefits was made.The CEO, at his discretion,
at any time may increase his salary to the current level as stated in his
current contract. No retroactive salary adjustment will be made. In addition,
Periscope has an employment contract with Mr. Sands providing for an annual base
salary of $950 in the second and third years of the agreement (adjusted in July
1999) and an annual salary of $500 in the fourth and fifth year and a
performance based bonus, determined year to year, of $450 in the fourth and
fifth years of the agreement, plus an annual nonaccountable $50 business expense
allowance. This contract expires on December 31, 2002. Effective April 11, 2000,
Periscope terminated Mr. Sands for cause and management believes ths Company
will not be required to pay any salary subsequent to his dismissal. Persicope
also has employment contracts with its operations executive providing for an
annual base compensation of $184 and additional compensation based on achieving
certain performance criteria, expiring on December 31, 2002 and with the
accounting and finance executive providing for annual compensation of
approximately $168, expiring on April 30, 2003.
Periscope has a noncompetition agreement with a former Periscope
stockholder. The agreement calls for an annual fee of $75, payable in weekly
installments, through May 2001.
Periscope had approximately $2.7 and $3.3 million of open letters of credit
outstanding at December 31, 1999 and 1998, respectively.
46
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
47
<PAGE>
Report of Independent Public Accountants
To the Board of Directors of GIANT GROUP, LTD.:
We have audited the accompanying consolidated balance sheets of GIANT GROUP,
LTD. (a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1999, 1998 and 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 financial position of GIANT GROUP, LTD.
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years ended December 31, 1999, 1998 and
1997, in conformity with accounting principles generally accepted in the United
States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has suffered losses from
operations and is in default of their factoring arrangement that raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
ARTHUR ANDERSEN LLP
Los Angeles, California
April 12, 2000
48
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated April 12, 2000, which included a paragraph concerning substantial
doubt about the Company's ability to continue as a going concern, on GIANT
GROUP, LTD. and subsidiaries consolidated financial statements for the year
ended December 31, 1999, included in the Form 10-K, into GIANT GROUP, LTD's,
previously filed Registration Statement File No. 33-16848.
ARTHUR ANDERSEN LLP
Los Angeles, California
April 12, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,248
<SECURITIES> 8,932
<RECEIVABLES> 365
<ALLOWANCES> 0
<INVENTORY> 9,661
<CURRENT-ASSETS> 21,040
<PP&E> 758
<DEPRECIATION> 1,846
<TOTAL-ASSETS> 23,659
<CURRENT-LIABILITIES> 17,597
<BONDS> 0
0
0
<COMMON> 73
<OTHER-SE> 4,047
<TOTAL-LIABILITY-AND-EQUITY> 23,659
<SALES> 72,631
<TOTAL-REVENUES> 72,631
<CGS> 62,845
<TOTAL-COSTS> 62,845
<OTHER-EXPENSES> 47,292
<LOSS-PROVISION> 3,029
<INTEREST-EXPENSE> 3,187
<INCOME-PRETAX> (43,722)
<INCOME-TAX> (2,542)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (46,264)
<EPS-BASIC> (11.71)
<EPS-DILUTED> (11.71)
</TABLE>
