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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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
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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
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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
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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.
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TABLE OF CONTENTS
PART I Page No.
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal proceedings 10
Item 4. Submission of matters to a vote of security holders 13
PART II
Item 5. Market for the registrant's common equity and related
stockholder matters 12
Item 6. Selected financial data 14
Item 7. Management's discussion and analysis of financial
condition and results of operations 15
Item 8. Financial statements and supplementary data 21
Item 9. Changes in and disagreements with accountants on
accounting and financial disclosure 50
PART III
Item 10. Directors and executive officers of the registrant 50
Item 11. Executive compensation 50
Item 12. Security ownership of certain beneficial owners and
management 50
Item 13. Certain relationships and related transactions 50
PART IV
Item 14. Exhibits, financial statement schedules and reports
on Form 8-K 50
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PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
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. The Company's wholly-owned subsidiaries include KCC Delaware Company
("KCC") and Periscope Sportswear, Inc. ("Periscope").
WOMEN AND CHILDREN'S APPAREL (1998 TO PRESENT)
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In December 1998, the Company acquired 100% of the outstanding common stock
of Periscope Sportswear, Inc. ("Periscope"), a manufacturer of women and
children's clothing. 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 designs, sources and
markets an extensive line of high quality, moderate priced, women and children's
clothing to mass merchandisers and major retailers, primarily for sale under
private labels. Immediately prior to the effective date of the acquisition, the
Company made a gross advance of $28.5 million in cash to Periscope, which
Periscope used to reduce certain borrowings. In May 1999, the Company's Board of
Directors approved the capitalization of this advance.
The Company was under an obligation to issue up to an additional 225,000
shares of GIANT common stock to the former Periscope stockholders based on the
level of Periscope pre-tax profits, as defined in the merger agreement,
exceeding $13 million 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, all former Periscope stockholders elected to receive their
pro-rata portion of 62,500 shares of the Company's common stock. In September
1999, the stockholders received the common stock, which was held in treasury.
The Company's Board of Directors reevaluated its women and children's
clothing operations. Based on the significant losses from operations for 1999
and because Periscope would need additional working capital to continue
operations, the Company's Board of Directors determined the investment in
Periscope was not realizable from future operations. Therefore, the Company
determined there was an impairment in the value of this asset in 1999 and
accordingly wrote-off its investment in Periscope, including goodwill.
Effective April 11, 2000, Periscope entered into an agreement with Stone
investment Banking, LLC ("SIB"). Management representation provided by SIB will
include, but no 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 Glenn Sands as president and chief executive officer. ("Mr.
Sands") 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.
RESTAURANT OPERATIONS (1987 TO PRESENT)
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Since 1987, through its equity investment in Rally's Hamburgers, Inc.
("Rally's"), the Company has been involved in the operation of double drive-
through hamburger restaurants and as of December 31, 1995 owned 48% (7.4 million
shares) of Rally's outstanding common stock. In January 1996, the Company
announced that it intended to offer to exchange a new series of GIANT
participating, non-voting preferred stock for Rally's outstanding common stock
("Exchange Offer"). Upon successful completion of the Exchange Offer, GIANT
would have owned 79.9% of Rally's outstanding common stock. In April 1996,
GIANT agreed to the request of the Rally's board of directors to terminate the
proposed Exchange Offer. By November 1996, the Company's equity interest in
Rally's common stock decreased to 15% primarily due to the sale
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of 4.3 million shares to Fidelity National Financial, Inc. ("Fidelity") and CKE
Restaurants, Inc. ("CKE"), an affiliate of Fidelity.
During 1996, the Company added to its involvement in the operation of
double drive-through hamburger restaurants by purchasing 200,000 shares of the
common stock of Checkers Drive-In Restaurants ("Checkers"). In addition, KCC,
along with CKE and others, purchased approximately $29.9 million of Checkers
$36.1 million 13.75% senior subordinated debt ("13.75% debt") from certain
current 13.75% debt holders in November 1996. The total purchase price for the
13.75% debt was $29.15 million,of which KCC purchased $5.1 million principal
amount of 13.75% debt for $5 million. Soon thereafter, the 13.75% debt was
restructured. As a result, among other things, the 13.75% debt's interest rate
was reduced to 13%, the maturity date of the restructured 13% debt was extended
to July 31, 1999 and 50% of the aggregate net proceeds from the sale of assets
were to be paid to the holders of the restructured 13% debt. Since November
1996, Checkers has made over $2.1 million in principal payments to KCC. The
restructured credit agreement also provided for Checkers to issue warrants
("Checkers Warrants") to all holders of the restructured 13% debt, to purchase
an aggregate of 20 million shares of Checkers common stock at an exercise price
of $.75 per share. KCC received 2.8 million Checkers Warrants, which are
exercisable at any time until November 22, 2002. KCC initially assigned the
Checkers warrants a value of $1.2 million; however, due to the continued trend
of the Checkers' common stock price to trade below $.75, the Company, as of
December 31, 1998, wrote off the entire value of the warrants and recorded a
loss of $1.2 million in 1998.
In December 1997, Rally's acquired 19.1 million shares of Checkers common
stock from GIANT, CKE, Fidelity and other parties in exchange for securities of
Rally's, including convertible preferred stock. This transaction gave Rally's
an approximate 26% ownership in Checkers and made Rally's the largest
stockholder of Checkers. GIANT's ownership in Rally's after the transaction was
concluded amounted to 3.2 million shares or approximately 13% of Rally's
outstanding common stock. GIANT had accounted for the investment in Rally's
common stock under the equity method of accounting up through December 1997 when
the Checkers exchange transaction occurred. As of December 31, 1997, GIANT
accounted for the investment as a marketable security classified as an
investment available-for-sale. In connection with the exchange of Rally's stock
for Checkers stock, William P. Foley II, Chairman of CKE and Fidelity was
elected Chairman of both Rally's and Checkers. Mr. Foley replaced GIANT's Chief
Executive Officer who had been Chairman of Rally's Board of Directors, and who
currently remains as a Rally's director.
In June 1998, with the approval of Rally's stockholders, the Rally's
preferred stock was converted into Rally's common stock. After the conversion,
the Company owned 3.2 million shares or approximately 11% of Rally's total
outstanding common stock.
In September 1998, the Company agreed in principle to a merger transaction
pursuant to which Rally's would merge with the Company and Checkers. Under the
terms of the merger transaction, each share of the Company's common stock would
be converted into 10.48 shares of Rally's common stock and each share of
Checkers common stock would be converted into 0.5 shares of Rally's common stock
upon consummation of the merger. The transaction was subject to negotiation of
definitive agreements, receipt of fairness opinions by each party, receipt of
stockholder and other required approvals and other customary conditions. In
November 1998, the Company, Rally's and Checkers announced the termination of
their proposed merger because the definitive merger agreement could not be
finalized.
In March 1999, KCC exchanged its remaining $3.0 million restructured 13%
debt for 998,377 shares of $.08 par value common stock of Santa Barbara
Restaurant Group, Inc. ("SBRG") at a market price of $3.00 per share. The
Company recorded investment income of approximately $129,000 equal to the
remaining unamortized discount of the restructured 13% debt. As a result of the
continuing decline in the market value of the SBRG $.08 par value 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.
On August 9, 1999, Checkers and Rally's merged 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,
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the Company owns approximately .5 million shares of Checkers common stock or
5.7% of the outstanding shares of Checkers common stock and owns warrants to
purchase approximately .2 million shares of Checkers common stock at a strike
price of $3.00. Subsequent to the merger, Checkers will continue to operate
restaurants under both the Checkers and Rally's brand names for the foreseeable
future. Checkers has undergone certain management changes, including the hiring
of Daniel J. Dorsch as CEO and president in December 1999 and who also serves on
the company's board of directors. Mr. Dorsch has over 30 years in the industry,
operating successful franchised quick serve restaurants, including Papa John's
Pizza, Taco Bell and KFC restaurants. In addition, SBRG's General Counsel-
Secretary and Chief Financial Officer will serve similar positions at Checkers.
Checkers' direction is to focus on menu simplification, increase stores operated
by franchisees and an advertising campaign targeting the 18-35 year-old serious,
fast food customer emphasizing speed and quality.
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.
LUXURY YACHT CO-OWNERSHIP AND CHARTER (1996 TO 1998)
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GIANT MARINE GROUP, LTD. ("GIANT MARINE") was organized under the laws of
the State of Delaware on November 22, 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. In
December 1998, GIANT MARINE was dissolved and the remaining assets and
liabilities were transferred to the Company.
OTHER (1996)
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In July 1996, KCC entered into an agreement ("NeoGen Agreement") with
Joseph Pike and his company, NeoGen Investors, L.P. ("NeoGen"), to participate
in the development, manufacturing and marketing of Mifepristone in the United
States and other parts of the world. Under the NeoGen Agreement, KCC for a cash
payment of $6 million would have obtained a 26% interest in NeoGen, the entity
that held the sublicenses for all potential uses of Mifepristone. Subsequent to
the signing of this contract, in October 1996, KCC filed suit against Joseph
Pike and NeoGen for fraud and breach of the NeoGen Agreement and also filed suit
against the licensors of Mifepristone, the Population Council, Inc. and Advances
in Health Technology, Inc. In November 1996, the Population Council and
Advances in Health Technology, filed suit against Joseph Pike and NeoGen. The
suit claimed Joseph Pike had concealed information that he had been, among other
things, convicted of forgery. Under a settlement reached in 1996 with the
Population Council, Joseph Pike agreed to sell most of his financial stake in
Mifepristone and relinquish his management of the distribution company that was
set up to sell and distribute this drug. In February 1997, a new company called
Advances for Choice was established to oversee the manufacturing and
distribution of Mifepristone. In October 1997, KCC settled their litigation
with the Population Council, Inc. and Advances in Health Technology, Inc. and in
November 1997, KCC, GIANT and Joseph Pike announced the settlement of their
litigation. KCC's action against NeoGen continues. (See Item 3, "Legal
Proceedings").
NARRATIVE DESCRIPTION OF BUSINESS
Women and Children's Apparel
Strategy
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Periscope's operating strategy is to maintain complete control over the
entire production process. Raw materials are purchased and goods are produced
only upon receipt of a firm commitment from a customer. Periscope uses only
outside manufacturers to provide production flexibility and capacity and to
eliminate the significant capital investment requirements. Once a product is
shipped to a customer, returns are not accepted unless the product is defective
or delivered late. These practices minimize the need to carry unsold
inventories. The company also imports significant quantities of finished
products that are manufactured to the company's specifications.
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Periscope does not own any manufacturing facilities. Outsourcing of
manufacturing allows quicker response to changing production requirements, while
eliminating the significant capital investment requirements, potential labor
problems and other risks associated with owning manufacturing facilities. Cost-
efficiency and flexibility are maintained by outsourcing nearly all stages of
production to the lowest cost provider.
Periscope's growth strategy is to increase sales to existing customers by
expanding sales to buyers of additional products within a particular product
line and selling to other buyers within the same organization. Periscope's
broad product line enables it to pursue many of these cross-selling
opportunities.
Products
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Periscope's products include moderately priced, high-quality women and
children's clothing. Periscope designs its products based on updated versions of
basic, recurring styles ("updated basics" strategy) that are less susceptible to
fashion obsolescence and less seasonal in nature than fashion styles.
Merchandisers and designers are employed to regularly update these basic styles
to reflect current fashion trends by using new color schemes, fabrics, and
decorative trim and by incorporating nuances of existing popular styles.
Periscope sells its products primarily under private labels; however, it also
sells a limited number of products under its own labels.
An extensive product line has been developed in its primary market, ladies'
casual wear, which includes knit tops, bottoms, related separates, dresses and
short sets, and woven (e.g., corduroy, twill, denim) bottoms, jumpers, dresses,
coordinates, short sets and tops. Periscope's product offerings also include
children's apparel.
Customers
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The products are sold nationwide in an estimated 11,000 stores operated by
approximately 154 department and specialty store chains, mass merchandisers,
other retail outlets and through mail order catalogues. Periscope's five largest
customers accounted for approximately 69.1% and 66.4% of sales in 1999 and 1998,
respectively and include Kmart, Sears and Charming Shoppes (Fashion Bug), which
accounted for approximately 30.7%, 14.5% and 10.7% of sales, respectively in
1999 and 24.3%, 16.1% and 13.2% of sales, respectively in 1998. Other customers
include Costco Wholesale, Cato Stores, Montgomery Ward, Wal-Mart and Shopko
Stores. Periscope does not currently have any long-term commitments or contracts
with any of its customers. Periscope's sales outside the United States are
insignificant.
Sales and Marketing
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Periscope's selling operation is highly centralized. An in-house sales
force of generally 5 people, primarily through the New York City showrooms,
makes sales to customers. Periscope employs one independent sales
representative but does not operate any regional sales offices. It does,
however, participate in various regional merchandise marts, industry
marketplaces at which numerous vendors rent space in order to display their
products to regional buyers. This sales structure enables management to
effectively control the sales effort and to deal directly with, and be readily
accessible to, major customers. Products are generally marketed to department
and specialty store customers three to five months in advance of each of
Periscope's selling seasons.
Trademarks
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Periscope's primary business has been the production of private label goods
for its customers. However, long-term trade marks and trade names, which have
been used by the company, are listed below. Each is owned by Periscope.
PERISCOPE (TM), which has been used in department and specialty stores and
for mass merchandisers.
ASHLY BRENT (TM), which has been used on specialty store products.
JUST DAWN (TM), which has been used mainly on discount store products.
ANOTHER NAME (TM), which has been used on discount store products with
decreasing frequency since 1981.
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CURIOSITY'S CAT (TM), which has been used on import goods.
DIRECTIVE(R), which has been used on department and specialty store
products.
DNA (TM), which has been used on a junior's/young women's apparel line.
Directive Sports(R)
DNA Fibergenics It's In Your Genes ((R) applied for)
Contract Manufacturing and Distribution
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Until the latter part of 1999, Periscope was manufacturing substantially
all of its knit products by purchasing the yarn, designing and creating fabric
and contracting with select manufacturers at every stage of both fabric and
finished goods production. The balance of its products consisted primarily of
woven products of the company's design where the company purchased dyed and
printed fabric and then controlled all cutting, sewing and finished goods
production and imported finished knit and woven products. A significant
component of Periscope's operating strategy was the utilization of third party
contract manufacturers throughout the entire production process from yarn
purchasing through product delivery. Periscope did not engage in any hedging
activities intended to offset the risk of raw material price fluctuations.
Periscope supplied its main contractors with a high volume of business on a
consistent basis, making Periscope an important customer. In certain instances,
Periscope provided these contractors with 100% of their business. This strategy
enabled the company to leverage its position as a key customer to negotiate
favorable pricing, and to receive production priority and preferential
treatment. This manufacturing model allowed it to maximize production
flexibility, speed and efficiency without sacrificing product quality. In the
latter part of 1999, Periscope's strategy was changed to rely primarily on
imports of finished products, both knits and wovens, primarily from Asia.
During the first quarter of 1999, Periscope completed the shift of its
sewing and most of its cutting operations from the United States to Mexico,
however, in the latter part of 1999, production in Mexico was significantly
reduced. Imports from Asia were increased and most of the sewing and cutting
operations that continued were shifted back to the United States. As a result of
the enactment of The North American Free Trade Agreement ("NAFTA") which became
effective on January 1, 1994, goods produced in Mexico are generally exempt from
U.S. import duties as long as they meet certain guidelines. NAFTA made it
economically feasible to take advantage of Mexico's large and skilled labor
pool. Periscope believed that by having its products sewn in Mexico, it could
produce high-quality goods at significant cost savings because labor costs in
Mexico were significantly lower than in the United States.
Periscope has had the ability, through its contract manufacturers, to
operate on production schedules with lead times ranging from as few as 30 days
to several months to accommodate its customers' requirements. Typically
specialty retail customers attempt to respond quickly to changing fashion trends
and are increasingly less willing to assume the risk that goods ordered on long
lead times will be out of fashion when delivered. Sewing facilities are
maintained in New Jersey for orders with shorter lead times. While mass
merchandisers such as Kmart are beginning to operate on shorter lead times, they
are also able to estimate their needs as much as six months in advance for
products that do not change in style significantly from season to season.
Asian Production
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In 1998, approximately 16% of Periscope's net sales were of finished
products imported primarily from China and Taiwan. During 1999 the percentage of
goods produced in Asia increased and by the end of 1999 substantially all of the
finished goods were being imported from Asia. Periscope believes that foreign
contract manufacturing allows it to take advantage of lower manufacturing costs
for products which require more labor to produce and to avail itself of a
skilled labor force which is better equipped and trained to produce certain
products, particularly certain kinds of knitwear.
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Compared to production in the United States or Mexico, foreign sourcing of
products requires a significant lead time between order and receipt, ranging
from six to ten months in the case of Far Eastern sourced manufacturing.
Backlog
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Periscope believes that all of its backlog of firm orders as of December
31, 1999 totaling approximately $31,000,000, will be filled within
approximately 4 months. Firm orders include purchase orders placed but not yet
filled. The amount of unfilled firm orders at a particular time is affected by a
number of factors, including the scheduling of manufacture and shipment of
finished goods, which, in some instances, is dependent on the desires of the
customer. Accordingly, a comparison of unfilled firm orders from period to
period is not necessarily meaningful and may not be indicative of eventual
actual shipments or the ability to fill orders. Periscope's orders typically
contain cancellation provisions relating only to the quality of the product and
the delivery deadlines. Historically, Periscope's experience has been that
cancellations, rejections or returns of firm orders have not materially reduced
the amount of sales realized from its backlog.
Double Drive-Through Hamburger And Other Restaurants
The Company, through its ownership of common stock of Checkers and SBRG is
also involved in the operation and franchising of double drive-through hamburger
restaurants and variety menu restaurants.
As of January 3, 2000, Checkers and Rally's, along with their franchisees,
operate 443 and 464 double drive-through restaurants, respectively. Checkers
restaurants are located in 22 different states including the West Bank in the
Middle East and Rally's restaurants are located in 18 different states.
Rally's and Checkers' restaurants offer high quality fast food served
quickly at everyday prices generally below the regular prices of the four
largest hamburger chains. They serve the drive-through and take-out segments of
the quick-service restaurant market. They develop, own, operate and franchise
quick service "double drive-through" restaurants. The restaurants feature a
limited menu of high quality hamburgers, cheeseburgers and bacon cheeseburgers,
specially seasoned french fries, hot dogs, chicken sandwiches, as well as
related items such as soft drinks and old fashioned premium milk shakes.
SBRG is a Delaware company, engaged in the food service industry. SBRG
along with its franchisees operate JB's restaurants, Timber Lodge Steakhouse
restaurants, Galaxy Diner restaurants and Green Burrito restaurants. SRRG's
common stock is traded on the Nasdaq Small Market Cap tier of the Nasdaq Stock
Market under the symbol SBRG. GIANT's Chief Executive Officer serves on SBRG's
board of directors.
The Co-Ownership Program and Yacht Charter
In 1996, the Company started a new business, which offered the world's
first Luxury Yacht Co-Ownership Program of this type. The Co-Ownership Program
provided individuals and companies the opportunity for a Co-Ownership Program of
a minimum of one-fourth interest in large ocean cruising yachts. In addition, a
100% ownership in the luxury yacht was available with the Company managing the
yacht for a fee. This program also provided for the management of these yachts
by GIANT MARINE resulting in a practical and economical way to own these yachts.
In 1996, in furtherance of this Co-Ownership Program, the Company purchased two
yachts.
In November 1997, the Company announced that GIANT MARINE would end the Co-
Ownership Program. The advertising in national newspapers and yachting magazines
and presentations at major yacht shows attracted many interested people, but
only one, one-quarter interest was sold. The sale was rescinded when management
and the Board of Directors, after reviewing the amount of time required to sell
the quarter interests in the yachts, concluded that the potential return on the
capital invested did not justify continuing the Co-Ownership Program.
During 1998, the Company chartered its two yachts until they were both
sold. One yacht was sold at its then net book value and the other was sold at a
loss of $541,000 that was partially offset by U.S. Customs' refunds of $294,000.
In December 1998, GIANT MARINE was dissolved and the remaining assets and
liabilities were
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transferred to the Company
Employees
At December 31, 1999, the Company employed approximately 122 persons on a
full-time basis, comprised of 7 executive employees, 10 management employees,
5 sales employees and 100 administrative and warehouse employees. The Company's
employees are not members of any labor union and are not subject to any
collective bargaining agreement. The Company considers its relations with its
employees to be good.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- --------------------------------------------------------------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
document (as well as information included in oral statements or other written
statements made or to be made by the Company) contains statements that are
forward-looking, such as statements relating to plans for future activities.
Such forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and uncertainties include
those relating to the availability of adequate working capital, the development
and implementation of the Company's business plan, domestic and global economic
conditions, manufacturing in Mexico and other foreign countries, changes in
consumer trends for apparel, acquisition strategy, activities of competitors,
changes in federal or state tax laws and of the administration of such laws and
as further discussed in Exhibit 99.
Executive Officers of the Registrant
Set forth below are the executive officers of the Company, together with
their ages, their positions with the Company and the year in which they first
became an executive officer of the Company.
Burt Sugarman, 61, Chairman of the Board, President and Chief Executive
Officer. Mr. Sugarman has been Chairman of the Board of the Company since 1983,
and President and Chief Executive Officer since May 1985. Mr. Sugarman was
Chairman of Rally's Board of Directors from November 1994 through October 1997,
having also served as its Chairman of the Board and Chief Executive Officer from
1990 through February 1994. He remains a director of Checkers after the
merger with Rally's. He is also a director of SBRG.
David Gotterer, 71, Vice Chairman and Director. Mr. Gotterer has been Vice
Chairman of the Company since May 1986 and Director of the Company since 1984.
Mr. Gotterer is a senior partner in the accounting firm of Mason & Company, LLP,
New York, New York. Mr. Gotterer is also a Director of Checkers (formerly
Rally's).
William H. Pennington, 52, Vice President, Chief Financial Officer,
Secretary and Treasurer. Mr. Pennington joined the Company in October 1997.
Mr. Pennington served in senior financial positions as Vice President, Finance
for Earth Tech, Inc. from January to September 1997, Vice President, Finance for
BKK Corporation from 1993 to 1996, and as Vice President, Controller for
Beneficial Standard Life Insurance Company from 1984 to 1991 and through 1993
served as an independent consultant to the former parent company of Beneficial
Standard Life Insurance Company on Beneficial Standard Life Insurance Company
matters. In July 1996, Mr. Pennington personally commenced proceedings under
Chapter 7 of the Federal bankruptcy laws and was discharged in October 1996.
Mr. Pennington received an MBA from the University of Southern California and is
a CPA.
ITEM 2. PROPERTIES.
During the first quarter of 1999, the Company's land in Pennsylvania, not
deemed essential to operations, was sold.
During 1999, GIANT had its executive office in leased premises consisting
of approximately 9,800 square feet at an annual base rent of approximately
$275,000. The lease ("prior lease") term for this executive office is 60 months,
expiring in April 2002, with two, three-year renewal options. On November 3,
1999, GIANT signed a sublease agreement beginning in February 2000, to sublease
GIANT's executive space at the same annual rental and for the remaining period
under the prior
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lease agreement. GIANT remains primarily liable for the annual rent due to the
original lessor under the prior lease. The sublessee is subject to all the terms
of the prior lease, which are applicable to the sublessor as tenant under the
prior lease.
On February 11, 2000, Giant signed a lease agreement to move its executive
office to leased premises consisting of approximately 1,900 square feet,
including storage space, at an annual base rent of approximately $59,000. The
lease period for this new executive office is 60 months, expiring in 2005, with
one, five-year renewal option. GIANT moved into its new executive office on
March 20, 2000, and the sublessee moved into GIANT's prior executive office
shortly thereafter. In addition, the Company currently leases approximately 800
square feet of storage space at an annual rental of $5,400 at another location.
Periscope's executive offices, showrooms and sales offices as well as its
design facilities are located in approximately 11,600 square feet on the sixth,
tenth and eleventh floors at 1407 Broadway, New York, New York. The floors are
leased pursuant to leases for terms expiring in April 2002 and November 2004, at
a total current annual base rent of $474,000. The accounting offices, in-house
sample production facilities, fabric marking and grading facility, label making
facility, as well as its warehousing and distribution center are located in
approximately 50,000 square feet at 2075 91st Street, North Bergen, New Jersey.
The facility is leased for a term expiring September 2000, at a current annual
base rent of $266,000. Periscope believes that its existing facilities are
adequate to meet its current and foreseeable needs and that it can successfully
negotiate a new lease, if needed, when its current leases expire.
ITEM 3. LEGAL PROCEEDINGS.
Mittman, et al. V. Rally's Hamburgers, Inc., et al.
- ---------------------------------------------------
Jonathan Mittman, Steven Horowitz, Dina Horowitz and John Hannan v. Rally's
Hamburgers, Inc., Burt Sugarman, GIANT GROUP, LTD., Wayne M. Albritton, Donald
C. Moore, Edward C. Binzel, Gena L. Morris, Patricia L. Glaser and Arthur
Andersen & Co., a purported class action alleging certain violations of the
Securities Exchange Act of 1934, as amended, was filed in the United States
Western District Court of Kentucky on January 24, 1994 (Civ. No. C94-0039-L(CS))
against Rally's, certain of its officers, directors and shareholders, a former
officer of Rally's and Rally's auditors. In the action, plaintiffs seek an
unspecified amount of damages, including punitive damages. On February 14, 1994,
a related lawsuit was filed by two other shareholders making the same
allegations before the same court, known as Edward L. Davidson and Rick Sweeney
v. Rally's Hamburgers, Inc., Burt Sugarman, GIANT GROUP, LTD., Wayne M.
Albritton, Donald C. Moore, Edward C. Binzel, Gena L. Morris, Patricia L. Glaser
and Arthur Andersen & Co., (Civ. No. C-94-0087-L-S). On March 23, 1994, all
plaintiffs filed a consolidated lawsuit known as Mittman, et al. V. Rally's
Hamburgers, Inc., et al., (Civ. No. C-94-0039-L(CS)(the "Mittman Actions"). On
April 15, 1994, Ms. Glaser and the Company filed a motion to dismiss the
consolidated lawsuit for lack of personal jurisdiction. The remaining defendants
filed motions to dismiss for failure to state a claim upon which relief can be
granted. On April 5, 1995, the Court denied these motions. (The Court struck
plaintiffs' punitive damages allegations and required plaintiffs to amend their
claims under section 20 of the Securities Exchange Act of 1934, but otherwise
the Court let stand the most recent version of plaintiffs' complaint at this
juncture). The Court granted Mr. Sugarman's motion to strike certain scurrilous
and irrelevant allegations, and directed plaintiffs to amend their complaint to
conform to the Court's order. Finally, the Court denied plaintiffs' motion for
class certification, "until such time as the issue of typicality of claims is
further developed and clarified." Plaintiffs filed their second amended
complaint on June 29, 1995, joining additional plaintiffs pursuant to
stipulation of the parties. Plaintiffs renewed their motion for class
certification on July 31, 1995. Defendants filed their opposition on or about
October 31, 1995. On April 16, 1996, the Court granted plaintiffs' motion,
certifying a class from July 20, 1992 to September 29, 1993.
On October 3, 1995, plaintiffs filed a motion to disqualify Christensen,
Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP ("Christensen Miller") as
counsel for defendants based on a purported conflict of interest allegedly
arising from the representation of multiple defendants as well as Ms. Glaser's
association with Christensen Miller. The Court denied the motion and refused to
disqualify Christensen Miller.
Two settlement conferences have been conducted, 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 set.
10
<PAGE>
The Company denies all wrongdoing and intends to vigorously defend this
action. It is not possible to predict the outcome of this action at this time.
Harbor Finance Partners v. Rally's and GIANT GROUP, LTD., et al.
- ----------------------------------------------------------------
On February 13, 1996, Harbor Finance Partners ("Harbor") commenced a
derivative action, purportedly on behalf of Rally's, against the Company, Burt
Sugarman, Mary Hart, Michael M. Fleishman, David Gotterer, Patricia L. Glaser,
Willie D. Davis and John A. Roschman before the Delaware Chancery Courts.
Harbor named Rally's as a nominal defendant. Harbor claims that the directors
and officers of both the Company and Rally's, along with the Company, breached
their fiduciary duties to the public shareholders of the Company by repurchasing
certain of Rally's Senior Notes at an inflated price. Harbor seeks "millions of
dollars in damages," along with the rescission of the repurchase transaction.
In the fall of 1996, all defendants moved to dismiss this action. The Chancery
Court denied defendants' motions on April 3, 1997.
Because of the merger of Rally's into Checkers, plaintiffs lost their
standing to maintain this action, and voluntarily dismissed the action on
September 10, 1999.
KCC Delaware v. Joe Pike, et al.
- --------------------------------
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 million 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"). 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. On October 2, 1998, the court entered an order, which, among other
things, effectively eliminates the Neogen Entities' ability to obtain any money
judgment from KCC and the other cross-defendants.
On February 23, 1999, this court entered judgement pursuant to a
Stipulation for Judgment, 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., as custodian for the benefit of Nathan Suckman v. Checkers
- ------------------------------------------------------------------------------
Drive-In Restaurants, Inc. et al. Case No. 1667. ("Suckman")
- --------------------------------- ---------------------------
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, Rally's,
the Company, 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 Christensen, and Burt Sugarman. 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
11
<PAGE>
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 inadequately 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 that they choose to proceed.
The Company denies all wrongdoing and intends to vigorously defend the
action. It is not possible to predict the outcome of this action at this time.
David J. Steinberg and Chaile B. Steinberg, individually and on behalf of those
- -------------------------------------------------------------------------------
similarly situated, v. Checkers Drive-In Restaurants, Inc., et al., Case No.
- ----------------------------------------------------------------------------
16680
- -----
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, Rally's, the
Company, 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 Christensen, and Burt Sugarman. 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 of Checkers'
stock in a "going private" transaction for grossly inadequately consideration
and in breach of the defendants' fiduciary duties. The plaintiffs allegedly
initiated the complaint on behalf of all stockholders of Checkers and seek,
among other things, certain declaratory and injunctive relief against the
consummation 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 that they choose to proceed.
The Company denies all wrongdoing and intends to vigorously defend the
action. It is not possible to predict the outcome of this action at this time.
Neogen Investors, L.P., and Danco Laboratories, Inc. v. KCC Delaware, Inc.,
- ---------------------------------------------------------------------------
GIANT GROUP, LTD., Terry Christensen and Does 1 through 20, inclusive, Case No.:
- --------------------------------------------------------------------------------
SC 054760
- ---------
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. On
August 3, 1999 Neogen filed a request for dismissal of the entire action without
prejudice and the dismissal of this action was entered on that date by the
court.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the calendar
year ended December 31, 1999.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the New York Stock Exchange
(Symbol: GPO). On April 7, 2000 the approximate number of record holders of
the Company's Common Stock was 1,700. The high and low sale prices for such
stock during each quarter in 1999 and 1998 are set forth below. No dividends
were paid on the Common Stock in either year. The Company expects that earnings
will be retained in its business, and no cash dividends will be paid on its
Common Stock for the foreseeable future.
<TABLE>
<CAPTION>
SALE PRICES OF COMMON STOCK
------------------------------------------
1999 1998
Quarter High Low High Low
- -------------- -------- --------- -------- --------
<S> <C> <C> <C> <C>
First $ 9 5/8 $ 5 3/8 $ 7 $ 5 3/8
Second 7 1/2 5 3/8 6 15/16 5 11/16
Third 7 7/16 3 1/2 7 7/8 5 11/6
Fourth 4 11/16 2 11/16 9 5/8 5 9/16
</TABLE>
On September 20, 1999, the Company was notified by the New York Stock
Exchange ("NYSE") that it did not 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 submitted a business plan to the Listings and
Compliance Committee of NYSE for review that demonstrated that the Company
could comply with these standards within 18 months. 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. There
can be no assurances that the NYSE will accept a revised business plan or that
the Company will be able to list its Common Stock on another exchange
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for the five years ended December 31, 1999 and is derived from the
audited financial statements of the Company. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes included in this Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------------------------------------------------------
Income Statement Data: (Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales (1) $ - $ - $ - $ 1,143 $ 72,631
Cost of sales (1) - - - 1,469 62,845
--------------------------------------------------------------
Gross profit (loss) - - - (326) 9,786
--------------------------------------------------------------
Cost and expenses:
Selling and shipping - - - 287 9,342
General and administrative 4,123 4,574 4,458 3,810 7,313
Depreciation and other (2) 368 397 523 283 1,250
Co-ownership program, net of charter income (3) - 24 4,996 347 -
Writedown of apparel investment, including goodwill (4) - - - 38 27,999
Reserve for other receivables - - - - 3,029
One-time items (5) - 1,270 - 165 -
--------------------------------------------------------------
4,491 6,265 9,977 4,930 48,933
--------------------------------------------------------------
Loss from operations (4,491) (6,265) (9,977) (5,256) (39,147)
Other income (expense):
Investment and other income 4,055 2,784 2,049 3,000 928
Gain (loss) on the sale of marketable securities 41 5,234 (84) (752) 426
Gain on sale of property & equipment - - - 2,855 239
Factoring and financing costs (149) (34) (153) (107) (3,187)
--------------------------------------------------------------
3,947 7,984 1,812 4,996 (1,594)
--------------------------------------------------------------
Affiliates transactions:
Equity in earnings (loss) of affiliate (22,074) 367 (623) - -
Gain (loss) on affiliates transactions - 6,177 - (1,168) (2,981)
--------------------------------------------------------------
(22,074) 6,544 (623) (1,168) (2,981)
--------------------------------------------------------------
Income (loss) before benefit for income taxes (22,618) 8,263 (8,788) (1,428) (43,722)
Benefit (provision) for income taxes 286 9,649 4,170 1,921 (2,542)
--------------------------------------------------------------
Net income (loss) $ (22,332) $ 17,912 $ (4,618) $ 493 $ (46,264)
==============================================================
Basic earnings (loss) per common share $ (4.37) $ 4.40 $ (1.42) $ 0.15 $ (11.71)
==============================================================
Diluted earnings (loss) per common share $ (4.37) $ 4.07 $ (1.42) $ 0.15 $ (11.71)
==============================================================
Weighted average shares outstanding for basic earnings
(loss) per common share 5,110,000 4,074,000 3,260,000 3,184,000 3,951,000
Weighted average shares outstanding for diluted earnings
(loss) per common share 5,110,000 4,400,000 3,260,000 3,185,000 3,951,000
Balance sheet data at December 31:
Assets held-for-sale $ - $ 21,485 $ 24,362 $ - $ -
Working capital 39,125 45,420 42,021 19,544 3,443
Total assets 51,681 69,047 53,876 64,560 23,659
Short-term debt, related to assets held-for-sale - 10,500 - - -
Long-term debt and capital lease obligations - - - 1,479 1,935
Total stockholders' equity 45,145 52,815 48,498 49,821 4,120
</TABLE>
(1) For the 20 day period ended December 31, 1998 and the year ended December
31, 1999
(2) Includes $863 of fixed assets written off in 1999
(3) Charter income was earned only in 1997 and 1998
(4) In 1998, amortization of goodwill only
(5) In 1996, proxy contest for $752 and Exchange Offer for $518 and in 1998,
$165 for merger and related legal
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (Dollars in
thousands,except share and per share amounts)
On December 11, 1998, the Company acquired 100% of the outstanding common
stock of Periscope, a designer and manufacturer of women and children's apparel.
The acquisition has been accounted for by the purchase method of accounting. The
Company's consolidated statement of operations the year ended December 31, 1999
include Periscope's results of operations for all of 1999. Periscope's results
of operations for the 20-day period beginning December 12, 1998 are included in
the Company's consolidated statement of operations for the year ended December
31, 1998. The unaudited results of operations for the Company and Periscope for
all of 1998 have been combined for proforma comparative purposes in the
discussions that follow.
Results of Operations for 1999 versus 1998
- ------------------------------------------
Net sales for the twelve months ended December 31, 1999 were $72,631. On a
comparable basis this was a decrease of $3,412 or 4.5% from Periscope's net
sales of $76,043 in the comparable twelve months of 1998. The net sales decrease
was caused primarily by a decrease of approximately $7,300 in ladies' knit
sportswear due to the Company's inability to obtain new materials, a decrease of
approximately $6,700 in children's apparel due to a softening in demand for
children's clothing and an increase of approximately $1,800 in returns due to
late deliveries to customers. These decreases were partially offset by an
increase of approximately $12,500 in woven and imported apparel. The Company's
sales were adversely affected by the reduction of Periscope's available credit
by the Company's former factor, which resulted in the Company's inability to
purchase raw materials to produce goods and to ship orders. In August 1999,
Periscope signed a factoring agreement with a new major factor to obtain a
higher level of financing and lower interest rate than provided by the previous
factor. However, due to the timing of completing the agreement, there was no
significant impact on sales for the balance of the year.
Gross profit for the twelve months ended December 31, 1999 was $9,786 or
13.5% of net sales. On a comparable basis Periscope's 1998 gross profit was
$13,387 or 17.6% of net sales. The decrease in gross profit of $3,601 or 26.9%
compared to the twelve months of 1998 resulted from the following factors:
increase in sales returns, sales allowances and sales discounts in 1999 compared
to 1998 which resulted in lower net sales prices; late shipments and deliveries
which were caused by a reduced availability of credit to obtain the raw
materials to produce the goods on a timely basis; increase in inventory
obsolescence and overstock charges in 1999 compared to 1998 which were recorded
in third and fourth quarters of 1999 as the actual costs were determined to be
much higher than Periscope's earlier projections; and the same factors causing
the decrease in sales. The prior twelve months gross profit was also affected by
a year-to-date adjustment, recorded in the third quarter of 1998 relating to
higher returns and allowances than projected for the prior twelve months and an
adjustment related to inventory obsolescence.
Selling and shipping expenses were $9,342 or 12.9% of net sales in 1999. On
a comparable basis, Periscope's 1998 selling and shipping expenses were $9,309
or 12.2% of net sales. While the total costs remained approximately the same,
selling expenses increased approximately $1,000, which were offset by a decrease
in shipping expense of $950. Selling expenses increased due primarily to higher
salaries and travel expenses. Shipping expenses were lower due primarily to
reduced salaries and freight costs. The increase as of percentage of sales in
1999 of .7% was due to lower net sales.
General and administrative expenses increased $3,503 to $7,313 in 1999 from
$3,810 in 1998. Substantially all of the increase between years is related to
Periscope's operations. General and administrative expenses of the Company's
corporate office were approximately $3,600 in 1999 compared to approximately
$3,500 in 1998. On a comparable basis Periscope's general and administrative
expenses in 1999 were approximately $3,700 compared to approximately $4,500 in
1998. The decrease in Periscope's general and administrative expenses of $800
was due primarily to reductions in travel and entertainment of $280, charitable
contributions of product of $505 and professional fees of $175, partially offset
by higher salaries and wages of $210 due to an increase in staff.
Depreciation increased $967 to $1,250 in 1999 from $283 in 1998 primarily
due to the write-off for $863 of the leasehold improvements associated with the
Company's corporate office. This office was subleased to a third party effective
March 2000, as part of the Company's plan to reduce overhead expenses. The
relocation of the corporate offices to a smaller
15
<PAGE>
facility will result in a cash savings of approximately $267 in 2000, $246 in
2001 and $244 in 2002.
The Company's Board of Directors reevaluated its women and children's
clothing operations. Based on the significant losses from operations and because
Periscope would need additional working capital to continue operations , the
Company determined the investment in Periscope was not realizable from future
operations. Therefore, the Company determined there was an impairment in the
value of this asset in 1999 and accordingly wrote-off its investment in
Periscope, including goodwill.
The reserve for other receivables in 1999 of $3,029 represents $1,634
related to advances made to Periscope's major contract manufacturer and $1,395
related to a receivable due from Mr. Sands. The Company recorded these reserves
due to the uncertainty of collectibility of these amounts as the original
repayment terms for both receivables were not met in 1999. The receivables are
unsecured and the contract manufacturer is highly dependent upon Periscope's
business.
Other income (expense) for the twelve months ended December 31, 1999
decreased $6,590 to an expense of $1,594 in 1999 from income of $4,996 in 1998.
The decrease in income primarily resulted from the increase in factoring and
financing costs of the apparel operations of approximately $3,080. In addition,
the Company recorded lower investment income of $2,072 in 1999 primarily due to
a reduction in interest income from the Company's investment in debt securities
of $2,006 and lower gains of $2,616 on the sale of property equipment in 1999s.
The Company recognized a gain of $268 on the sale of land not used in the
Company's operations in the current period reduced by a loss of $29 related to
the sale of office furniture. In 1998, the Company recognized a gain of $2,855
on the sale of property and equipment, including the corporate plane, a
Gulfstream II SP, in 1998. In 1999 the Company has gains on the sales of
marketable securities of $426 compared to a loss of $752 in 1998.
In the current year, the Company recorded non-cash losses on its'
investments in the equity securities of two affiliated companies of $2,981 due
to the decline in the market prices of the entities' stock and the continued
losses experienced by both companies in 1999. The Company continues to hold
these investments as marketable securities available for sale and has adjusted
the cost basis of these securities reflecting their decline in value.
In 1998 the Company also recorded a non-cash loss on its investment in equity
securities of an affiliate because of the same reasons.
The provision for income taxes in 1999 is $2,542 compared to a tax benefit
of $1,921 in 1998. The increase in the provision is due to the establishment of
a valuation allowance for deferred tax assets of Periscope that existed at the
date of acquisition because it is currently not likely that these will be
realizable in the future. No income tax benefit was recorded in 1999 due to the
uncertainty in the Company's ability to generate taxable income in the future.
Results of Operations for 1998 versus 1997
Net sales for the twelve months ended December 31, 1998 were $1,143
compared to $0 in 1997. Sales of women and children's apparel in 1998
represented a 20-day period of operations following the Company's purchase of
Periscope on December 11, 1998.
Gross loss for the twelve months ended December 31, 1998 was $326 compared
to $0 in 1997. Gross loss for 1998 resulted from a 20-day period of operations
following the Company's purchase of Periscope on December 11, 1998. Cost of
sales included a charge of $216 for inventory turnover related to the step-up
adjustment of inventory to its fair market value at the date of acquisition.
Operating expenses for the twelve months ended December 31, 1998 decreased
$5,047 to $4,930 from $9,977 in 1997. Selling and shipping expenses for the
twelve months ended December 31, 1998 were $287 which resulted from a 20-day
period of operations following the Company's purchase of Periscope on December
11, 1998 compared to $0 in 1997. The Company's general and administrative
expenses for the twelve months ended December 31, 1998 decreased $648to $3,810
from $4,458 in 1997 due to an overall decrease in corporate expenses. In
addition, depreciation expense for the twelve months ended December 31, 1998
decreased $240 to $283 from $523 in 1997 primarily due to the sale of the
corporate plane, during the first quarter of 1998. These decreases in expenses
were partially offset by one-time expenses of $165 related to the proposed
merger with Rally's and Checkers that was terminated in November
16
<PAGE>
1998. Co-Ownership and charter expenses, net of charter income decreased $4,649
to $347 in 1998 compared to $4,996 in 1997 due to higher charter income of $691
in the current period and lower expenses for 1998 due to the sale of the
Company's luxury yachts in April and October 1998 compared to a full year of
expenses for two yachts in 1997. Included in Co-Ownership and charter expenses,
net of charter income for 1998 is a loss of $541 from the sale of one of the
Company's luxury yachts in October 1998, partially offset by U.S. Custom's
refunds of $294. The Company sold its other luxury yacht in April 1998 at a net
sales price equal to the yacht's current book value. In the fourth quarter of
1997, the Company provided a reserve of $1,500 for the impairment of the luxury
yachts that were classified as assets held-for-sale.
Other income for the twelve months ended December 31, 1998 increased $3,184
to $4,996 from $1,812 in the prior period. In 1998, the Company recorded higher
investment income of $878 from fixed income securities compared to 1997. In
addition, a gain of $2,855 on the sale of certain assets including the corporate
plane more than offset higher losses of $668 from the sales of marketable
securities in the current period. The Company recorded lower factoring and
finance costs in 1998 of $46 compared to 1997 due to the factor and financing
costs of $150 associated with the financing of one of the luxury yachts for two
months in 1997.
In 1998, the Company recorded a non-cash loss of $1,168 related to the
entire write-off of the Company's investment in Checkers warrants due to the
continued trend of the Checkers' common stock to trade below $.75, the exercise
price of the warrants. Effective December 18, 1997, the Company's ownership
percentage in Rally's common stock decreased to approximately 13%. As a result
of the Company's reduction in ownership, the Company's investment in Rally's is
now accounted for as a marketable security compared to its previous accounting
under the equity method. In 1997, the Company recorded a non-cash equity loss of
$623 related to its equity investment in Rally's common stock.
Benefit for income taxes for the twelve months ended December 31, 1998
decreased $2,249 to $1,921 from $4,170 in the prior period. In 1998, the
benefit primarily resulted from a reduction in the tax valuation allowance based
on management's estimates related to the Company's ability to realize these
benefits, primarily related to a Federal net operating loss carryback and the
Company's current year taxable income. In 1997, the Company recognized a tax
benefit of $3,100 when it settled a dispute with the California Franchise Tax
Board ("CFTB") over taxes assessed for 1989 through 1991 for which the Company
had accrued a liability prior to 1997 and a federal net operating loss carryback
of $1,100.
Liquidity and Capital Resources
At December 31, 1999 and 1998, the Company had working capital of $3,443
and $19,544 with current ratios of 1.2 and 2.5, respectively.
On August 10, 1999, Periscope signed an agreement ("Factoring Agreement")
with a new, major factor to obtain a new 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 the May letter of credit
agreement, the Company received back from the factor its collateral security
deposit of $2 million, 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.
17
<PAGE>
The uncollected balance of receivables held by the factor was
approximately $21 million and $12 million as of December 31, 1999 and 1998,
respectively. Due to factor includes amounts amounts due under the factoring
line of $7.1 million and $2.8 million and reserves 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 $7.5 million 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 $5.5 million 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 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.
The operations, cash flow and liquidity of Periscope are materially
dependent on having a source of working capital and borrowing facilities. In
1999, Periscope has a loss from operations of $4,201 (excluding the write-off of
goodwill of $ 27,078 and one-time charges of $3,029). It is uncertain as to
when, if ever, Periscope will generate positive cash flow from its operations
and if the Company will be able to secure a long term source of financing or
capital to fund Periscope's operations. These factors, among others, indicate
that there is substantial doubt about the Company's ability to continue as a
going concern. The Company's continuation as a going concern is dependent upon
its ability to (a) generate sufficient cash flow to meet its obligations on a
timely basis (b) obtain additional financing as may be required and (c) attain
profitability.
Under an amended and restated employment agreement Mr. Sands entered into
in July 1999 with Periscope, Mr. Sands was entitled to $500 for the first,
fourth and fifth years, of the employment term and $950, per year for the second
and third years of the employment term. In addition, during the first, fourth
and fifth years, Mr. Sands could have earned a bonus of $450, based on certain
sales targets. Mr. Sands was also entitled to a $50 annual expense allowance.
The Company had also agreed to indemnify Mr. Sands against any loss on the
collateral he has pledged to the factor and for a portion of the interest Mr.
Sands pays on a personal loan. On April 11, 2000, the Company terminated Mr.
Sands for cause and therefore does not believe it will be required to pay these
amounts.
Net cash used by operating activities for the year ended December 31, 1999
was $1,991 compared to net cash used by operating activities of $2,802 in 1998
and net cash provided by operating activities of $5,273 in 1997. In 1999 and
1998, cash was used to fund the operating activities of the Company. In 1997,
net cash was provided by the receipt of income tax refunds of $10,855 received
primarily related to the realization of capital losses on the 1996 sales of
Rally's common stock and net operating loss carryback claims, lowered by cash
used for the funding of the Company's operations.
Net cash used by investing activities for the year ended December 31, 1999
was $339 compared to net cash provided by investing activities of $6,878 in 1998
and net cash used by investing activities of $3,135 in 1997. During 1999, the
Company received proceeds of $4,808 from sales of marketable securities and
purchased marketable securities for $5,129. The Company purchased property and
equipment for $302, which was mostly offset from the net proceeds of $284 from
the sale of property and equipment.During 1998, the Company received proceeds of
$30,178 from the sale of its two luxury yachts and other assets, including the
corporate plane, a Gulfstream II SP acquired in 1991. The Company also received
proceeds
18
<PAGE>
of $44,484 from sales, net of purchases of $42,507 of marketable securities and
payments of $727 on its investment in Checkers Debt. On December 11, 1998,
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. The Company also paid $66 for property and equipment and $49 for
capital improvements for one of its yachts before it was sold in October.
During 1997, the Company received proceeds of $14,730 from sales, net of
purchases of $13,499 of marketable securities and payments of $1,880 on its
investment in Checkers Debt including payment in full of the 1996 short-term
advance. During 1997, the Company also paid $1,869 for furniture, equipment
and for leasehold improvements primarily for its new office space.
Net cash used by financing activities for the year ended December 31, 1999
was $648 compared to $987 for 1998 and $14,138 in 1997. During 1999, the Company
received proceeds of $1,662 from short-term margin borrowings which were repaid
in the current year. In addition, the Company made payments to a former related
party of $589 and for capital lease obligations of $59. The Company's Board of
Directors has reaffirmed its commitment to its ongoing stock repurchase program
through the open market and private purchases of its common stock. During 1998
and 1997, the Company purchased 207,000 shares and 459,000 shares, respectively.
In 1998, the Company received proceeds of $500 on a note receivable from a
former Periscope officer. During the first quarter of 1997, the Company paid the
remaining balance of $10,500 on the short-term note, which financed assets
purchased in 1996 for the Co-Ownership Program. In May 1997, the Company signed
an agreement to borrow $10,000, secured by one of its luxury yachts. The loan
was paid in full in July 1997.
Inflation
- ---------
Inflation has not had a material effect on the Company's revenues and
expenses from operations in the last three years and is not expected to have a
material effect on the Company's business.
Year 2000
- ----------
The Company completed its evaluation of its information technology for Year
2000 compliance. The cost incurred to modify its information technology
infrastructure to be Year 2000 compliant was not material to its consolidated
financial condition or results of operations. In addition, the remediation of
Year 2000 issues involving the Company's information systems was also completed.
No material disruption in its operations resulted from any failure by the
Company to be in compliance. The Company purchased new information technology
platforms, which, among other things, are Year 2000 compliant. The Company
capitalizes hardware and software costs and all other costs associated with Year
2000 compliance were expensed as incurred. The Company's business was not
materially affected by any Year 2000 issue.
Personal Holding Company
- ------------------------
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.
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.
19
<PAGE>
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
- -----------
The Company's primary financial instruments consist of money market funds
paying interest at varying interest rates, equity securities and bond
investments with fixed interest rates. The Company's market risk is the
potential decrease in the value of the Company's financial instruments resulting
from lower interest rates and lower market prices. The Company does not enter
into derivatives for trading or interest rate exposure. Rather, the Company
actively manages its investment portfolio to increase the returns on investment
and to ensure liquidity, invests in instruments with high credit quality
provided through major financial institutions. In addition, the Company
attempts to make prudent and informed business decisions before investing in
equity securities.
Sensitivity Analysis
- --------------------
The following analyses present the sensitivity of the market value, earnings
and cash flows of financial instruments to hypothetical changes in interest
rates and market prices as if these changes occurred at December 31, 1999. The
ranges of changes that are chosen for these analyses reflect a view of changes
that are reasonably possible over a one-year period. These forward-looking
disclosures are selective in nature and only address the potential impacts from
financial instruments. They do not include other potential effects, which could
impact business as a result of these changed rates and market prices. Actual
results could differ materially from those projected in these forward-looking
statements.
The Company's cash is invested in money market funds and short-term
investments purchased with an original maturity date of three months or less. A
hypothetical change in the weighted average interest rate of 10% would result in
an immaterial decrease in interest income having little or no adverse effect on
the Company's liquidity requirements. At times, however, such investments may be
in excess of insured limits.
At December 31, 1999, the carrying value of the Company's investment in
marketable equity securities is recorded at $3,630, including net unrealized
gains of $34. The estimated potential decrease in fair value resulting from a
hypothetical 10% decrease in prices quoted by the stock exchanges is $363,
approximately 1% of the Company's current assets.
At December 31, 1999, the carrying value of the Company's investment in
marketable fixed income bonds is recorded at $5,302, including net unrealized
losses of $12. Generally, the fair market value of an investment in fixed
interest rate debt will decrease as interest rates rise and increase as interest
rates fall. The net unrealized losses of $12 represent the decrease in the
carrying value of bonds due to the changes in interest rates and other factors.
The estimated potential decrease in fair value resulting from a hypothetical 10%
decrease in the carrying value of bonds due to the changes in interest rates and
other factors is $530, approximately 3% of the Company's current assets.
20
<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 (loss) 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 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) 323
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 (64)
---------- --------- ---------
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
("LLC"). Management representation provided by LLC 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 250 220
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 balance gross amount, $8.2 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 $2.2 million, was $30.4 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>
GIANT GROUP, LTD.
QUARTERLY FINANCIAL DATA
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended March 31 June 30 September 30 December 31
- ------------------------------------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C>
1999
Net sales $ 19,362 $ 17,630 $ 21,971 $ 13,668
Cost of sales 14,677 13,881 17,608 16,679
--------- -------- ---------- ---------
Gross profit (loss) 4,685 3,749 4,363 (3,011)
Costs and expenses, excluding apparel writedown 3,641 4,265 4,909 8,119
Writedown of apparel investment, including goodwill - - - 27,999
--------- -------- ---------- ---------
Income (loss) from operations 1,044 (516) (546) (39,129)
Other income (expense) 248 (213) (995) (634)
Loss on affiliate transactions - - - (2,981)
--------- -------- ---------- ---------
Income (loss) before benefit (provision) for income taxes 1,292 (729) (1,541) (42,744)
Benefit (provision) for income taxes (588) 186 505 (2,645)
--------- -------- ---------- ---------
Net income (loss) $ 704 $ (543) $ (1,036) $ (45,389)
========= ========= ========== =========
Basic earnings (loss) per common share $ 0.18 $ (0.14) $ (0.26) $ (11.38)
Diluted earnings (loss) per common share $ 0.17 $ (0.14) $ (0.26) $ (11.38)
Weighted average shares - basic earnings (loss) per
common share 3,927,000 3,927,000 3,960,000 3,990,000
========= ========= ========== ==========
Weighted average shares - diluted earnings (loss)
per common shared 4,128,000 3,927,000 3,960,000 3,990,000
========= ========= ========== ==========
</TABLE>
(1) The calculations for the quarters ended June 30, 1999, September 30, 1999
and December 31, 1999 do not include 2,131,000, 2,136,000 and 2,136,000
potentially dilutive stock options and 75,000 and potentially dilutive
warrants as the effect of these securities would be anti-dilutive because
the exercise prices of these options, ranging from a high of $8.25 to a
low of $5.44, exceed the the average market price of the Company's common
stock for the quarters.
<TABLE>
Quarter Ended March 31 June 30 September 30 December 31
- ------------------------------------------------------------- --------------------------------------------------
<S> <C>
1998
Net sales $ - $ - $ - $ 1,143
Cost of sales - - - 1,469
--------- -------- ---------- ---------
Gross loss - - - (326)
Costs and expenses 1,462 1,029 811 $ 1,583
--------- -------- ---------- ---------
Loss from operations (1,462) (1,029) (811) (1,909)
Other income 599 3,583 528 $ 241
Loss on affiliate transactions - - - (1,168)
--------- -------- ---------- ---------
Income (loss) before benefit (provision) for income taxes (863) 2,554 (283) (2,836)
Benefit (provision) for income taxes - (697) 1,047 1,571
--------- -------- ---------- ---------
Net income (loss) $ (863) $ 1,857 $ 764 $ (1,265)
========= ======== ========== =========
Basic earnings (loss) per common share $ (0.27) $ 0.58 $ 0.24 $ (0.40)
Diluted earnings (loss) per common share $ (0.27) $ 0.58 $ 0.24 $ (0.40)
Weighted average shares - basic earnings (loss) per common share 3,181,000 3,181,000 3,181,000 3,194,000
========= ======== ========== =========
Weighted average shares - diluted earnings (loss) per common
share 3,181,000 3,181,000 3,181,000 3,195,000
========= ======== ========== =========
</TABLE>
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10, 11, 12 and 13.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE
COMPENSATION; SECURITY OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; AND
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by these items, other than information set forth
in this Form 10-K under Item I, "Executive officers of registrant," is
omitted because the Company is filing a definitive proxy statement
pursuant to Regulation 14A not later than 120 days after the end of the
fiscal year covered by this report which includes the required
information. The required information contained in the Company's proxy
statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements - See Item 8 on page 21 for the Consolidated
Financial Statements of the Company and page 48 for the Report of
Independent Accountants.
2. Financial Statement Schedules - No financial statement schedules
of the Company for the three years ended December 31, 1999, 1998
and 1997 are filed as part of this Form 10-K because they are not
applicable or are not required or the information required to be
set forth therein is included in the Consolidated Financial
Statements or Notes thereto.
3. Exhibits - See Exhibit Index on page 51 of this Form 10-K.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(cont.)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
December 31, 1999.
(c) Exhibits Required by Item 601 of Regulation S-K:
See Item 14 (a) 3 of this Form 10-K.
50
<PAGE>
EXHIBIT INDEX
-------------
No. Description of Exhibit
- --- ----------------------
2.1 Agreement and Plan of Merger, dated as of December 4, 1998, among
GIANT, Acquisition Corp. and Periscope (filed as Exhibit 2.1 to the
Company's Form 8-K dated December 11, 1998, and incorporated herein by
reference).
2.2 Amendment to Agreement and Plan of Merger, dated as of December 9,
1998, among GIANT, Acquisition Corp. and Periscope (filed as Exhibit
2.2 to the Company's Form 8-K dated December 11, 1998, and incorporated
herein by reference).
3.0 Certificate of Merger, dated December 11, 1998 (filed as Exhibit 3.1 to
the Company's Form 8-K dated December 11, 1998, and incorporated herein
by reference).
3.1.1 Restated Certificate of Incorporation of the Company, as amended
through May 21, 1987 (filed as Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1987, and
incorporated herein by reference).
3.1.2 Certificate of Amendment to Restated Certificate of Incorporation of
the Company, dated June 1, 1990 (filed as Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, and
incorporated herein by reference).
3.1.3 Certificate of Amendment to Restated Certificate of Incorporation of
the Company, dated November 9, 1992 (filed as Exhibit 1 to the
Company's Current Report on Form 8-K, dated November 10, 1992, and
incorporated herein by reference).
3.1.4 Certificate of Amendment to Restated Certificate of Incorporation of
the Company, dated May 9, 1994 (filed as Exhibit 3.1.4 to the Company's
Annual Report on Form 10-K, dated March 28, 1995, and incorporated
herein by reference).
3.1.5 Certificate of Designation of Series A Junior Participating Preferred
Stock, dated January 12, 1996 (filed as Exhibit 3.1.5 to the Company's
Annual Report on Form 10-K, dated March 29, 1996, and incorporated
herein by reference).
3.1.6 Certificate of Amendment to Restated Certificate of Incorporation to
Authorize Non-Voting Common Stock, dated July 20, 1996 (Proposal No. 4
in the Notice of Annual Meeting of Stockholders held on July 12, 1996,
filed with the SEC on June 7, 1996 and incorporated herein by
reference).
3.2 Amendments dated January 14, 1996 to Restated By-laws of the Company
amended through July 27, 1990 (filed as Exhibit 1 to the Company's
Report on Form 8-K, dated January 7, 1996, and incorporated herein by
reference).
4.1 Rights Agreement between the Company and ChaseMellon Shareholder
Services, L.L.C. ("Chase"), dated January 4, 1996 (filed as Exhibit 1
to the Company's Form 8-K, dated January 4, 1996, and incorporated
herein by reference).
4.2 Amendment to Rights Agreement dated January 4, 1996, between the
Company and Chase, dated December 4, 1998 (filed as Exhibit 4 to the
Company's Form 8-K dated December 11, 1998, and incorporated herein by
reference).
10.1 1985 Non-Qualified Stock Option Plan, as amended (filed as Exhibit
10.1.2 to the Company's Annual Report on Form 10-K, dated March 28,
1995, and incorporated herein by reference).
51
<PAGE>
EXHIBIT INDEX (Cont.)
---------------------
No. Description of Exhibit
- --- ------------------------
10.2 GIANT GROUP, LTD. 1996 Employee Stock Option Plan (Exhibit A in the
Notice of Annual Meeting of Stockholders held on July 12, 1996, filed
with the SEC on June 7,1996, as amended by Exhibit B in the Notice of
Annual Meeting of Stockholders held on May 8, 1997, filed with the SEC
on April 7, 1997, and incorporated herein by reference).
10.3 GIANT GROUP, LTD. 1996 Stock Option Plan for Non-Employee Directors
(Exhibit B in the Notice of Annual Meeting of Stockholders held on July
12, 1996, filed with the SEC on June 7, 1996, as amended by Exhibit C
in the Notice of Annual Meeting of Stockholders held on May 8, 1997,
filed with the SEC on April 7, 1997, and incorporated herein by
reference).
10.4 GIANT GROUP, LTD. 1997 Incentive Compensation Plan (Exhibit D in the
Notice of Annual Meeting of Stockholders held on May 8, 1997, filed
with the SEC on April 7, 1997, and incorporated herein by reference).
10.5 Employment Agreement dated December 3, 1998, between the Company and
Burt Sugarman (filed as Exhibit 10.7 to the Company's Annual Report on
Form 10-K, dated March 29, 1999, and incorporated herein by reference).
10.6 Employment Agreement dated January 1, 1998, between Glenn Sands and
Periscope (filed as Exhibit 10.8 to the Company's Annual Report on Form
10-K, dated March 29, 1999, and incorporated herein by reference).
10.6.1 Amendment dated December 11, 1998, to Employment Agreement dated
January 1, 1998, between Glenn Sands and Periscope (filed as Exhibit
10.8.1 to the Company's Annual Report on Form 10-K, dated March 29,
1999, and incorporated herein by reference).
10.6.2* Employment Agreement dated March xx, 2000 between Glenn Sands and
Periscope.
10.7 Employment Agreement dated January 1, 1998, between Scott Pianin and
Periscope (filed as Exhibit 10.9 to the Company's Annual Report on Form
10-K, dated March 29, 1999, and incorporated herein by reference).
10.7.1 Amendment dated December 11, 1998, to Employment Agreement dated
January 1, 1998, between Scott Pianin and Periscope(filed as Exhibit
10.9.1 to the Company's Annual Report on Form 10-K, dated March 29,
1999, and incorporated herein by reference).
10.8 Promissory Note of Glenn Sands payable to the order of Periscope in the
principal amount of $2,606,000(filed as Exhibit 10.10 to the Company's
Annual Report on Form 10-K, dated March 29, 1999, and incorporated
herein by reference).
10.8.1 Periscope letter to Glenn Sands regarding deferral on Mr. Sands
promissory note(filed as Exhibit 10.10.1 to the Company's Annual Report
on Form 10-K, dated March 29, 1999, and incorporated herein by
reference).
10.9 Promissory Note of Periscope payable to the order of Glenn Sands in the
principal amount of $2,000,00(filed as Exhibit 10.11 to the Company's
Annual Report on Form 10-K, dated March 29, 1999, and incorporated
herein by reference).
52
<PAGE>
EXHIBIT INDEX (Cont.)
---------------------
No. Description of Exhibit
- --- ----------------------
10.10 Warrant issued to L.H. Friend to Purchase Common Stock of the Company,
dated December 11, 1999 (filed as Exhibit 10.12 to the Company's Annual
Report on Form 10-K, dated March 29, 1999, and incorporated herein by
reference).
10.12 Amended and Restated Credit Agreement dated as of November 22, 1996
among Checkers, CKE as Agent, and the lenders listed therein (filed as
Exhibit 4.1 to Checkers Current Report on Form 8-K dated November 22,
1996, and incorporated herein by reference).
10.13 Warrant to Purchase Common Stock of Checkers Drive-In Restaurants, Inc.
dated November 22, 1996 (filed as Exhibit 4.3 to Checkers Report on
Form 8-K dated November 22, 1996, and incorporated herein by
reference).
10.14 SETTLEMENT AND LIMITED RELEASE AGREEMENT between GIANT and Fidelity and
CKE, dated March 21, 1997 (filed as Exhibit 10.1 to the Company's Form
10-Q for the first quarterly period ended March 31, 1997, and
incorporated herein by reference).
10.15 Letter of Credit Security Agreement between the Company and Century
Business Credit Corporation, dated May 26, 1999 (filed as Exhibit 10.1
to the Company's Form 10-Q for the second quarterly period ended June
30, 1999, and incorporated herein by reference).
10.16 Factor Agreement between Periscope Sportswear, Inc. and Century
Business Credit Corporation, dated August 10, 1999 (filed as Exhibit
10.2 to the Company's Form 10-Q for the second quarterly period ended
June 30, 1999, and incorporated herein by reference).
10.17 Assignment and Assumption Agreement between the Company (as assignor),
Periscope Sportswear, Inc. (as assignee) and Century Business Credit
Corporation, dated August 10, 1999 (filed as Exhibit 10.3 to the
Company's Form 10-Q for the second quarterly period ended June 30,
1999, and incorporated herein by reference).
10.18 Limited Guaranty by the Company of up to $4 million dollars in
connection with the Factor Agreement between Periscope Sportswear, Inc.
and Century Business Credit Corporation, dated August 10, 1999. (filed
as Exhibit 10.4 to the Company's Form 10-Q for the second quarterly
period ended June 30, 1999, and incorporated herein by reference).
21* List of Subsidiaries.
23.1* Consent of Arthur Andersen LLP on GIANT's financial statements.
27* Financial Data Schedules.
99* Risk Factors
* Exhibit included with this Form 10-K.
53
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) 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.
GIANT GROUP, LTD.
Registrant
Date: April 12, 2000 By: /s/Burt Sugarman
--------------------------------------------
Burt Sugarman
Chairman
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 capacities and on the dates indicated.
Date: April 12, 2000 By: /s/ Burt Sugarman
--------------------------------------------
Burt Sugarman
Chairman of the Board and
Chief Executive Officer
Date: April 12, 2000 By: /s/William H. Pennington
--------------------------------------------
William H. Pennington
Vice President, Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and Accounting Officer)
Date: April 12, 2000 By: /s/David Gotterer
--------------------------------------------
David Gotterer
Director
Date: April 12, 2000 By: /s/Terry Christensen
--------------------------------------------
Terry Christensen
Director
Date: April 12, 2000 By: /s/ David Malcolm
--------------------------------------------
David Malcolm
Director
Date: April 12, 2000 By: /s/ Jeff Rosenthal
--------------------------------------------
Jeff Rosenthal
Director
54
<PAGE>
Exhibit 21
GIANT GROUP, LTD.
SUBSIDIARIES AS OF DECEMBER 31, 1999
Corporation State of Incorporation Ownership
----------- ---------------------- ---------
KCC Delaware Company Delaware 100%
Periscope Sportswear, Inc. Delaware 100%
<PAGE>
Exhibit 99
Risk Factors
In addition to the matters and risks set forth in the discussion of
Periscope's business in "Item I - Narrative Description of Business " in the
Company's 1999 Form 10-K, the operating and financial results of Periscope are
subject to the following risks:
Competition
- -----------
Periscope competes in a highly competitive apparel industry with numerous
manufacturers, including brand name and private label producers, and retailers,
which have established, or may establish, internal product development and
sourcing capabilities. Periscope's products also compete with a substantial
number of designer and non-designer product lines. Periscope believes that it
competes favorably on the basis of quality and value of its apparel lines and
products, price, the production flexibility, efficiency and speed that it enjoys
as a result of its control over the entire production process, and its long-term
relationships with contract manufacturers and customers. Nevertheless, increased
competition from manufacturers or retailers, or increased success by existing
competition, could result in reductions in unit sales or prices, or both, which
could have a material adverse effect on the Periscope's business, financial
condition and results of operations.
Seasonality of Business
- -----------------------
Periscope has not historically experienced seasonable variations in its
business with the exception of children's apparel; instead typically experiences
significant shifts in its net sales on a customer by customer and quarter by
quarter basis. Since most of the sales are derived from large bulk orders, a
change in the timing of receipt or shipment, or the number of orders received,
could result in a significant shift in the timing or amount of revenues.
Further, sales of children's apparel is seasonal with sales reaching their peak
during the ''back to school'' period. If sales of children's apparel increases,
greater variations maybe experienced in operating results from quarter to
quarter. The variations in the operating results of Periscope's business
affects borrowings under its' factoring agreement and its level of backlog,
which fluctuate in response to demand for its' products. Therefore, the results
of any interim period are not necessarily indicative of the operating results
that may be achieved for an entire year.
Cyclically and Trends in the Apparel Industry
- ----------------------------------------------
The apparel industry historically has been subject to substantial cyclical
variations. There can be no assurance that consumers will continue to favor the
products designed and produced by Periscope under private label relationships
or its own brands, and a significant shift in consumer preferences could have a
material adverse effect on Periscope's business, financial condition and results
of operations. The apparel industry is a cyclical industry heavily dependent
upon the overall level of consumer spending, with purchases of apparel and
related goods tending to decline during recessionary periods when disposable
income declines. A difficult retail environment could result in downward price
pressure, which could adversely impact gross profit margins. Additionally, all
of Periscope's customers are in the retail industry, which industry has
experienced significant changes and difficulties over the past several years,
including consolidation of ownership, increased centralization of buying
decisions, restructuring, bankruptcies and liquidations. Additionally, financial
problems of a retailer could cause Periscope's factor to limit the amount of
credit extended to such retailer. Periscope cannot predict what effect, if any
continued or additional changes within the retail industry will have on its
business, financial condition or results of operations.
<PAGE>
Exhibit 99
Risk Factors (cont.)
--------------------
Price and Availability of Raw Materials
- ---------------------------------------
The price and availability of the raw materials used to manufacture apparel
products may fluctuate significantly, depending on a variety of factors,
including crop yields and weather patterns. Periscope currently does not engage
in any hedging activities intended to offset the risk of raw material price
fluctuations. There also can be no assurance that any future increase in the
prices paid for the raw materials used in the manufacture of Periscope's
products will be passed along to its customers.
Dependence upon Key Personnel
- ------------------------------
Historically, Periscope's success was dependent upon the industry expertise
and knowledge of its prior management. 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.
Effective April 11, 2000, 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. Periscope has entered into an
employment agreement with Mr. Pianin for a term expiring December 31, 2002.
Periscope believes that the loss of the services of Mr. Pianin and Mr. Stone may
have an adverse effect on its' operations. Periscope maintains key man life
insurance on the life of Mr. Pianin in the amount of $10 million of which GIANT
GROUP, LTD. is the beneficiary for $9.25 million.
Dependent on Factoring of Accounts Receivable
- ---------------------------------------------
Periscope obtains substantially all its working capital by selling 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 up to 65 days prior
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. Periscope is not in compliance with various financial and
reporting covenants in the agreement with its factor. There can be no assurances
that the factor will continue to provide advances to Periscope in the future and
not demand payment on the loan.
Dependence on Unaffiliated Manufacturers
- ----------------------------------------
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 products in a timely
manner or to meet Periscope's quality standards could adversely affect
Periscope's 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 Periscope's financial condition and results of operations.
There are no formal arrangements between Periscope and any of its contractors or
suppliers.
<PAGE>
Exhibit 99
Risk Factors (cont.)
--------------------
Foreign Operations
- ------------------
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 the 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, 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 NAFTA, 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 imports could have a material adverse effect on
Periscope's financial condition and results of operations.
There have been a number of recent trade disputes between China and the
United States during which the United States has threatened to impose tariffs
and duties on some products imported from China and to withdraw China's "most
favored nation" trade status. The loss of most favored nation trade status for
China, changes in current tariff structures or the adoption by the United States
of trade policies of sanctions adverse to China could have a material adverse
effect on Periscope's results of operations from these import goods. At the end
of 1999 substantially all new orders were being manufactured and imported from
Asia.
Because Periscope's manufacturers in China and Taiwan are located at
greater geographic distances from the company than its manufacturers in Mexico,
Periscope is generally required to allow greater lead time for these foreign
orders. This reduces manufacturing flexibility and its ability to accept some
orders.
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