Back to GetFilings.com
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, 1998
GIANT GROUP, LTD.
9000 Sunset Boulevard, 16th Floor, Los Angeles, California 90069
Registrants telephone number (310) 273-5678
Commission File Number 1-4323
I.R.S. Employer Identification Number 23-0622690
State of Incorporation Delaware
Name of Each Exchange
Title of Class on Which Registered
-------------- -------------------
Securities registered pursuant to 12(b) of the Act: Common Stock, New York
$.01 Par Value Stock Exchange
(Together with Preferred
Stock Purchase Rights)
Securities registered pursuant to 12(g) of the Act: None
----
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
x
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
--
As of March 24, 1999, 3,927,148 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 March 24, 1999 was $ 12.2 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 May 18, 1999 are incorporated by
reference into Part III of this Report.
Exhibit Index located at page 51 herein.
1
TABLE OF CONTENTS
PART I Page No.
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal proceedings 13
Item 4. Submission of matters to a vote of security holders 16
PART II
Item 5. Market for the registrant's common equity and
related stockholder matters 16
Item 6. Selected financial data 17
Item 7. Management's discussion and analysis of financial
condition and results of operations 18
Item 8. Financial statements and supplementary data 23
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
2
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. ("company" or "Periscope").
From 1985 through October 1994, GIANT's major operating subsidiaries were
Giant Cement Company ("Giant Cement") and Keystone Cement Company, which
manufactured portland and masonry cements sold to ready-mix concrete plants,
concrete product manufacturers, building material dealers, construction
contractors and state and local government agencies. From 1987 through October
1994, GIANT also owned Giant Resource Recovery Company, Inc., which was a
marketing agent for resource recovery services for Giant Cement. On October 6,
1994, KCC sold 100% of the stock of its wholly owned subsidiary, Giant Cement
Holding, Inc., through an initial public offering. The Company received net
proceeds of $125.8 million, which resulted in a gain of $77 million before
income taxes of $28.8 million. As a result of the transaction, GIANT has fully
divested its cement and resource recovery operations.
Beginning in 1987, the Company, through its equity investment in Rally's
Hamburgers, Inc. ("Rally's"), has been involved in the operation of double
drive-through hamburger restaurants and as of December 31, 1994 owned 48%
(7,430,000 shares) of Rally's outstanding common stock. From December 1995
through November 1996, the Company's equity interest in Rally's common stock
decreased to 15% primarily due to the sale of 4,293,000 shares to Fidelity
National Financial, Inc. ("Fidelity") and CKE Restaurants, Inc. ("CKE"), an
affiliate of Fidelity.
On January 22, 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. On April 22, 1996, GIANT agreed to the request of the Rally's
board of directors to terminate the proposed Exchange Offer.
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, along
with CKE and others, KCC purchased $29,900,000 of Checkers $36,100,000
restructured, 13% senior subordinated debt ("13% debt") from certain current
debt holders. These holders retained approximately $6,200,000 of the principal
amount. The total purchase price for the 13% debt was $29,100,000. KCC purchased
$5,100,000 principal amount of 13% debt for $5,000,000. The restructured credit
agreement extended the maturity date to July 31, 1999 and provided for 50% of
the aggregate net proceeds from the sale of assets to be paid to the holders of
the 13% debt. Since the restructured 13% debt was purchased in November 1996,
Checkers has made over $2,100,000 in principal payments to KCC, the funds coming
from a private placement of its common stock and sale of assets. Because of
these principal payments made by Checkers, the next scheduled principal payment
on the 13% debt is due on July 31, 1999, when the entire principal balance is
payable in full. The restructured credit agreement also provided for Checkers to
issue warrants ("Checkers Warrants") to all holders of the 13% debt, to purchase
an aggregate of 20,000,000 shares of Checkers common stock at an exercise price
of $.75 per share. KCC received 2,849,000 Checkers Warrants, which are
exercisable at any time until November 22, 2002. KCC initially assigned the
Checkers warrants a value of $1,168,000; 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 $1,168,000 in the current year.
In December 1997, Rally's acquired 19,100,960 shares of Checkers, 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 Checker's largest
stockholder. GIANT's ownership in Rally's after the transaction was concluded
amounted to 3,180,718 shares or approximately 13% as of December 31, 1997. 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
3
GENERAL DEVELOPMENT OF BUSINESS (cont.)
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
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 3,226,000 shares of Rally's common stock, 11% of the total
outstanding common stock.
On September 25, 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. On November 2, 1998, the Company, Rally's and Checkers announced the
termination of their proposed merger. The merger was terminated when the
definitive merger agreement could not be finalized.
On January 29, 1999, Checkers and Rally's announced that they have signed a
merger agreement pursuant to which the two companies will merge in an all-stock
transaction. The merger agreement provides that each outstanding share of
Rally's stock will be exchanged for 1.99 shares of Checkers stock. The Checkers
common stock owned by Rally's (approximately 26% of Checkers common stock) will
be retired after the merger. Checkers announced a one share for twelve shares
reverse stock split to take place immediately following the merger. Subsequent
to the merger, the new Company will continue to operate restaurants under both
the Checkers and Rally's brand names for the foreseeable future.
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. On November 4, 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").
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 17, 1997, when the Co-Ownership Program was ended. During
1998, GIANT MARINE chartered its two yachts until they were both sold. On
December 28, 1998, GIANT MARINE was dissolved and the remaining assets and
liabilities were transferred to the Company.
On December 11, 1998, the Company acquired 100% of the outstanding common
stock of Periscope, a manufacturer of women's 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's and children's clothing to mass
merchandisers and major retailers, primarily for sale under private labels.
4
NARRATIVE DESCRIPTION OF BUSINESS
Periscope-Women's and Children's Apparel
Operating Strategy
- -------------------
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 entire production process is company controlled to tailor products to a
customer's specific needs. The company offers customers rapid order turn around
time by maintaining flexible scheduling unconstrained by a finite production
capacity.
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 maintains long-term customer relationships by working closely
with its customers to develop coordinated products and distinctive product lines
at their particular price points. In addition, Periscope's sales force consults
with customers concerning optimal delivery schedules, floor presentation,
pricing and other merchandising considerations and provides customers with
competitive market intelligence gathered through discussions with its contract
manufacturers.
Growth Strategy
- ----------------
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.
The company also establishes test programs whereby new customers can
evaluate the quality of the company's products and sales success before placing
large orders.
Periscope seeks to increase sales by offering ladies' products in
categories outside of the company's traditional knit product offerings. The
company's goal is to be considered by its customers as providing a ''one-stop
shopping'' opportunity, where such customers can easily and quickly fill all of
their buying needs. Periscope has begun expansion of its ladies woven product
line from pants to skirts, tops, shorts and jumpers. Additionally, Periscope is
seeking to develop other ladies' lines, such as sweaters, and to import
moderately priced finished goods.
The children's lines will be expanded utilizing Periscope's strategy of
updating basic designs that will differentiate Periscope from typical children's
apparel producers.
GIANT will pursue the acquisition of apparel companies with significant
private label business and/or underdeveloped apparel brands or licensed
trademarks. The Company will primarily focus on acquisition candidates that
provide certain operational or manufacturing synergies in order to realize
enhanced economies of scale in Periscope's sales and production processes.
Presently, there are no current plans or agreements to acquire any other
companies.
Products
- --------
Periscope's products include moderately priced, high-quality women's 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
5
NARRATIVE DESCRIPTION OF BUSINESS (cont.)
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.
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. In addition to its standard production
garments, custom designed merchandise for certain of its customers are produced
on a limited basis. Periscope's product offerings also include children's
apparel.
Periscope sells its products primarily under private labels, however, it
also sells a limited number of products under its own labels.
Customers
- ---------
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. The company's five
largest customers accounted for approximately 66.4% and 48.6% of sales in 1998
and 1997, respectively. The company's largest customers include Kmart, Sears
and Charming Shoppes (Fashion Bug), which accounted for approximately 24.3%,
16.1% and 13.2%, respectively in 1998 and 9.4%, 12.1% and 13.4%, respectively in
1997. 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
- --------------------
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. Senior management actively participates in the
planning of marketing and selling efforts. Independent sales representatives
are not employed and regional sales offices are not operated, but the company
participates 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 four
to five months in advance of each of the company's selling seasons.
Each sales person is responsible for all aspects of a customer's needs,
including design assistance, developing product samples, obtaining orders,
coordinating fabric choices, monitoring production and delivering finished
products. During the production process, the salesperson is responsible for
informing the customer about the progress of an order, including any
difficulties that might affect delivery time. In this way, the company and its
customer can make appropriate arrangements regarding any delay or other change
in the order. Further, the company ensures that multiple salespersons are
familiar with each customer account so that they can work cooperatively to
assist one another on a reciprocal basis.
Periscope's sales force is in constant contact with its customers. They
develop an understanding of the customers' retail strategies, style preferences,
production requirements, and pricing and floor presentation, as well as to
identify prevailing fashion trends. This information is then utilized to provide
its customers with products that meet their particular requirements efficiently.
The sales and design team works with certain of its customers to custom design
garments which incorporate current industry fashion trends that will reflect the
style and image that a buyer intends to project to consumers. In order to
facilitate this process the company requires that its sales force be
knowledgeable about all aspects of the design and garment production process.
Periscope has an electronic data interchange ("EDI") system through which
certain order and shipping information is automatically placed by the customer
with the company.
6
NARRATIVE DESCRIPTION OF BUSINESS (cont.)
Trademarks
- ----------
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 the Company and
registered in its name.
PERISCOPE(R), which has been used in department and specialty stores and
for mass merchandisers.
ASHLY BRENT(R), which has been used on specialty store products.
JUST DAWN(R), which has been used mainly on discount store products.
ANOTHER NAME(R), which has been used on discount store products with
decreasing frequency since 1981.
CURIOSITY'S CAT(R), which has been used on import goods.
DIRECTIVES(R), which has been used on department and specialty store
products.
DNA(R), which has been used on a junior's/young women's apparel line.
Contract Manufacturing and Distribution
- ----------------------------------------
Periscope manufactures 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 consists primarily of woven products of the company's
design where the company purchases dyed and printed fabric and then controls all
cutting, sewing and finished goods production and imported finished knit and
woven products. A significant component of Periscope's operating strategy is the
utilization of third party contract manufacturers throughout the entire
production process from yarn purchasing through product delivery. Periscope does
not engage in any hedging activities intended to offset the risk of raw material
price fluctuations. The company supplies its main contractors with a high volume
of business on a consistent basis, making Periscope an important customer. In
certain instances, Periscope provides these contractors with 100% of their
business. This strategy enables 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 allows it to maximize
production flexibility, speed and efficiency without sacrificing product
quality.
During the first quarter of 1999, the company completed the shift of its
sewing and most of its cutting operations from the United States to Mexico. 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 believes that by having its products
sewn in Mexico, it can produce high-quality goods at significant cost savings
because labor costs in Mexico are significantly lower than in the United States.
Periscope has 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 occasionally
able to estimate their needs as much as six months to one year in advance for
products that do not change in style significantly from season to season.
7
NARRATIVE DESCRIPTION OF BUSINESS (cont.)
Yarn Sourcing
- -------------
The manufacturing process for knit products begins with yarn purchasing.
Periscope buys yarns of various qualities and characteristics from six primary
domestic suppliers as well as from overseas sources through brokers.
Knitting
- --------
By controlling the knitting process, the company can specify the exact
technical specifications and widths at which its fabrics are produced allowing
the company to design its patterns to maximize the yields it receives from each
yard of fabric produced. In addition, the mills convert the yarn into rolls of
fabric meeting the company's specifications as to yarn content weight, width and
knitting design. This allows the company to control the quality of the fabric
for flaws, weight deficiencies or other problems earlier in the production
process, thereby increasing customer satisfaction with its finished products.
Knitted fabric is sent to one of Periscope's finishers for dyeing, bleaching or
printing and preparing the fabric for cutting. Finished fabric (both dyed and
printed) for its woven products as well as, on an occasional basis, for its knit
products are also purchased from domestic sources.
Dyeing and Printing
- --------------------
Fabric rolls are delivered to the company's outside dyers and/or to the
company's outside printers who create, respectively, solid colors or print
patterns, as specified by the company. Periscope has developed an expertise in
fabric design, dyeing and printing by working closely with its manufacturers.
Currently, approximately 2,000 different styles of its printed fabrics are
catalogued in an extensive print library. If patterns from the print library are
not used, outside design studios are employed to create new printing patterns to
Periscope's specifications.
Cutting
- --------
Beginning in January 1999 substantially all cutting facilities for knits
are now located in Mexico. Woven goods are cut domestically as well as in
factories in Mexico. The duty on woven and knit fabrics cut in Mexico is
minimal, and, under NAFTA, duties on woven or knit goods cut in Mexico are to be
eliminated by January 1, 2002.
Periscope's technical production support staff, located in New York City,
produces patterns for cutting piece goods and, using state-of-the-art computer
equipment, marks and grades the patterns onto templates in a manner to minimize
fabric waste at approximately 10% compared to the industry average of
approximately 20%. This low level of waste is attributable to its sophisticated
computer grading equipment as well as to the fact that it can have fabric rolls
manufactured in customized widths, according to the garments to be produced from
the fabric.
Sewing
- -------
A finished product sample, including a stitching diagram as well as garment
specifications, are sent first to the sewing contractor, and then the cut
garments are delivered to these outside contractors, primarily in Mexico.
Approximately 90% of the sewing is currently performed in Mexico, with the
balance performed by domestic sewing contractors for product orders, which are
requested on an accelerated basis. The company does not own or operate any
manufacturing facilities and is therefore dependent on independent contractors
for the manufacture of its products.
Asian Production
- -----------------
In 1998, approximately 16% of Periscope's net sales were of finished
products imported primarily from China and Taiwan. 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. 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.
8
NARRATIVE DESCRIPTION OF BUSINESS (cont.)
Shipping and Delivery of Finished Products
- ------------------------------------------
Finished products produced in Mexico are shipped direct to the customer.
Other imported products are shipped from the contract manufacturers by sea, air
or land to either Periscope's distribution facility in North Bergen, New Jersey
or directly to customers. Products are packaged to the specifications of the
customer. Products shipped from the North Bergen distribution facility are
shipped primarily by common carrier. Most finished products are delivered to
the customer's consolidators, many of which are located in Northern New Jersey.
Periscope controls all shipping, bills of lading, invoices, etc. from its North
Bergen facility.
Quality Control
- ----------------
Periscope has in place comprehensive quality control procedures to ensure
that fabrics, materials and finished products meet the company's exacting
quality standards. Company personnel regularly visit and inspect each of its
domestic and foreign contract manufacturers to ensure compliance with the
company's quality standards. In January 1999, the quality control functions for
goods manufactured in Mexico was moved to Mexico. Products, which are
manufactured in other foreign countries, are tested at the foreign site to
ensure that they comply with customer specifications. Periscope verifies that
those products shipped from foreign manufacturers meet United States customs
import requirements.
Backlog
- --------
Periscope believes that all of its backlog of firm orders as of December
31, 1998 totaling approximately $50,000,000, will be filled within approximately
6 to 7 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. The company's orders typically contain cancellation
provisions relating only to the quality of the product and the delivery
deadlines. Historically, the company's experience has been that cancellations,
rejections or returns of firm orders have not materially reduced the amount of
sales realized from its backlog.
Management Information Systems
- -------------------------------
The company utilizes an ACS Optima computer system, which is widely used in
the apparel industry. It is a complete corporate system, which includes, among
other things, order entry, inventory, invoicing and shipping, sales and
management analysis, production scheduling systems and raw material management.
The new ACS operating system has been integrated with the company's new Stewart
Sinclair Warehouse Management system and will allow for scanning inbound bar-
coded finished goods inventory. The order information will then be used to
produce a master Bill of Lading, an Advanced Ship Notice and an invoice, which
will be transmitted via Electronic Data Interchange ("EDI") to the customer.
This technology allows the electronic exchange of purchase orders, invoices, and
advanced shipping notices. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for further discussion on Year
2000 matters.
Risk Factors
- ------------
In addition to the matters and risks set forth in the foregoing discussion
of Periscope's business, the operating and financial results of Periscope are
subject to the risks described below.
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,
9
NARRATIVE DESCRIPTION OF BUSINESS (cont.)
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 company's business 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, the company
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, the company may experience greater variations in operating
results from quarter to quarter. The variations in the operating results of the
company's business affects borrowings under the company's factoring agreement
and its level of backlog, which fluctuate in response to demand for the
company's products. Therefore, the results of any interim period are not
necessarily indicative of the 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 the company 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 the company'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.
Price and Availability of Raw Materials
- ----------------------------------------
The price and availability of the raw materials used to manufacture the
company's 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 the company's
products will be passed along to its customers.
Dependence upon Key Personnel
- ------------------------------
Periscope's success is dependent upon the personal efforts and abilities of
Glenn Sands, its President and Chief Executive Officer and Scott Pianin, its
Executive Vice President and Chief Operating Officer. Periscope has entered into
employment agreements with Mr. Sands and with Mr. Pianin for terms expiring
December 31, 2002. The company believes that the loss of the services of Mr.
Sands and Mr. Pianin may have an adverse effect on the company. Periscope
maintains key man life insurance on the life of Mr. Sands in the amount of $15
million of which Periscope is the beneficiary for $ 11 million. Periscope is in
the process of securing a $10 million key man life insurance policy on Mr.
Pianin.
10
NARRATIVE DESCRIPTION OF BUSINESS (cont.)
Dependent on Factoring of Accounts Receivable
- ---------------------------------------------
Historically, Periscope has sold nearly all of its trade accounts
receivable to a factor, which assumes the credit risk with respect to collection
of such accounts. The factor pays the company 90% of the receivable amount upon
receipt of the company's invoice to the customer and the balance when the
account is paid in full. The factor approves the credit of the company's
customers prior to sale. If the factor disapproves a sale to a customer and the
company decides to proceed with the sale, the company bears the credit risk. The
factoring agreement can be terminated by the factor upon 60 days prior notice.
Such termination could have a material adverse effect on the company's financial
condition and results of operations if the company could not replace the
factoring agreement within such period. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity".
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 company's products are manufactured to its specifications by the
manufacturers. The inability of a manufacturer to ship the company's products
in a timely manner or to meet the company's quality standards could adversely
affect the company'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 the company's products or could otherwise have an
adverse effect on the company's financial condition and results of operations.
There are no formal arrangements between the company and any of its contractors
or suppliers.
Foreign Operations
- ------------------
Beginning in 1999, substantially all of Periscope's products are being
manufactured in foreign countries, primarily Mexico, China and Taiwan. The
company's operations may be adversely affected by political instability
resulting in disruption of trade from foreign countries in which the company's
contractors and suppliers are located, the imposition of additional regulations
related to imports or duties, taxes and other charges on imports. In addition,
the company'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. The company'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 the company's cost
of imported goods. A substantial increase in customs duties or a substantial
reduction in quota limits applicable to the company's imports could have a
material adverse effect on the company'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 the company's results of operations from these import goods which are
approximately 10% of sales.
Because Periscope's manufacturers in China and Taiwan are located at
greater geographic distances from the company than its manufacturers in Mexico,
the company is generally required to allow greater lead time for these foreign
orders. This reduces the company's manufacturing flexibility and its ability to
accept some orders.
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"). 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.
11
NARRATIVE DESCRIPTION OF BUSINESS (cont.)
On November 17, 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.
On December 28, 1998, GIANT MARINE was dissolved and the remaining assets and
liabilities were transferred to the Company.
Double Drive-Through Hamburger Restaurants
The Company, through its ownership of common stock of Rally's and its debt
investment of Checkers is also involved in the operation and franchising of
double drive-through hamburger restaurants.
As of March 25, 1999, Rally's and Checkers, along with their franchisees,
operate 475 and 462 double drive-through restaurants, respectively. The Rally's
operations are located primarily in the MidAtlantic states while Checkers
operations are located primarily in the SouthEastern United 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.
On January 29, 1999, Rally's and Checkers signed a merger agreement
pursuant to which the two companies will merge in an all-stock transaction. The
merger agreement provides that each outstanding share of Rally's stock will be
exchanged for 1.99 shares of Checkers stock. The Checkers common stock owned by
Rally's (approximately 26% of Checkers common stock) will be retired after the
merger. Checkers announced a one share for twelve shares reverse stock split to
take place immediately following the merger. Subsequent to the merger, the new
Company will continue to operate restaurants under both the Checkers and Rally's
brand names for the foreseeable future.
Employees
At December 31, 1998, the Company employed approximately 140 persons on a
full-time basis, comprised of 5 executive employees, 13 management employees, 3
sales employees and 119 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
previously mentioned under Periscope, as well as those relating to the
development and implementation of the Company's business
12
NARRATIVE DESCRIPTION OF BUSINESS (cont)
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.
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, 60, 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 Rally's. He is also a
director of Checkers.
David Gotterer, 70, 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 Rally's.
William H. Pennington, 51, 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.
The Company has its executive office in leased premises consisting of
approximately 9,800 square feet at an annual base rent in 1998 of approximately
$258,000. The lease term is 60 months, expiring in April 2002, and the Company
has two, three-year renewal options. During the first quarter of 1999, the
Company's land in Pennsylvania, not deemed essential to operations, was sold.
Periscope's executive offices, showrooms and sales offices as well as its
design facilities are located in approximately 9,000 square feet on the sixth
and tenth floors at 1407 Broadway, New York, New York. The floors are leased
pursuant to a single lease for a term expiring in April 2002, at a current
annual base rent of $306,000. 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 new
leases, 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-
13
ITEM 3. LEGAL PROCEEDINGS
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.
A settlement conference occurred on December 7, 1998. Fact discovery is
not yet complete, but it is anticipated that a deadline for completion of fact
discovery will be set for summer 1999. No trial date has been set.
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. No trial date has been set.
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.
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,
14
3. LEGAL PROCEEDINGS (cont.)
-------------------------
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, the 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.
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 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 of the consummation of a merger
between Rally's and Checkers.
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.
15
ITEM 3. LEGAL PROCEEDINGS (cont.)
-------------------------
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 the consummation of a merger
between Rally's and Checkers.
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 alleges one cause of action for trade libel against all defendants
regarding defendants' alleged statements to the media concerning plaintiffs and
Joseph Pike. The complaint has not been served. According to the complaint, a
Status Conference is set in the action on July 1, 1999. The Company denies all
wrongdoing and, if served, intends to vigorously defend itself against the
complaint.
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, 1998.
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 March 24,1999 the approximate number of record holders of the
Company's Common Stock was 1,800. The high and low sale prices for such stock
during each quarter in 1998 and 1997 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.
SALE PRICES OF COMMON STOCK
---------------------------
1998 1997
QUARTER High Low High Low
- ------- ---- --- ----- ---
First.......... $ 7 $ 5 3/8 $ 8 3/8 $ 7 1/8
Second......... 6 15/16 5 1/2 7 1/4 6 1/2
Third.......... 7 7/8 5 11/16 6 13/16 6 1/2
Fourth......... 9 5/8 5 9/16 7 15/16 6 15/16
16
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, 1998 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.
Year Ended December 31, 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------------------------------------------------------
Income Statement Data: (Dollars in thousands, except per share amounts)
Revenue:
Investment income, including sales of
marketable securities $ 442 $ 3,988 $ 7,970 $ 1,922 $ 2,203
Net sales (1) - - - - 1,143
Charter and other income (2) 209 108 48 662 1,353
----------------------------------------------------------------------------------
651 4,096 8,018 2,584 4,699
----------------------------------------------------------------------------------
Cost and expenses:
Cost of sales, including selling and
shipping (1) - - - - 1,756
General and administrative 5,018 4,491 4,971 4,981 4,093
Co-ownership program and charter - - 24 5,615 1,655
One-time items (3) 1,343 - 1,270 - 165
Amortization of goodwill (1) - - - - 38
----------------------------------------------------------------------------------
6,361 4,491 6,265 10,596 7,707
----------------------------------------------------------------------------------
Operating income (loss) (5,710) (395) 1,753 (8,012) (3,008)
Gain on sale of property & equipment - - - - 2,855
Factoring and financing costs (4,007) (149) (34) (153) (107)
Gain on sale of investment in affiliate - - 6,177 - -
Equity in earnings (loss) of affiliate (8,898) (22,074) 367 (623) -
Loss on investment in affiliate (19,396) - - - (1,168)
----------------------------------------------------------------------------------
Income (loss) before benefit for income
taxes (38,011) (22,618) 8,263 (8,788) (1,428)
Benefit for income taxes 3,661 286 9,649 4,170 1,921
----------------------------------------------------------------------------------
Income (loss) from continuing opeations (34,350) (22,332) 17,912 (4,618) 493
Income from discontinued operations, net 6,598 - - - -
Gain on sale of discontinued operations, net 48,223 - - - -
----------------------------------------------------------------------------------
Net income (loss) $ 20,471 $ (22,332) $ 17,912 $ (4,618) $ 493
==================================================================================
Basic earnings per common share (4):
Net income (loss) from continuing opeations $ (6.63) $ (4.37) $ 4.40 $ (1.42) $ 0.15
Income and gain on sale from discontinued
operations, net 10.58 - - - -
Net income (loss) 3.95 (4.37) 4.40 (1.42) 0.15
Diluted earnings per common share (4):
Net income (loss) from continuing operations $ (6.63) $ (4.37) $ 4.07 $ (1.42) $ 0.15
Income and gain on sale from discontinuned
operations, net 10.58 - - - -
Net income (loss) 3.95 (4.37) 4.07 (1.42) 0.15
Weighted average shares outstanding:
Basic earnings per common share 5,180,000 5,110,000 4,074,000 3,260,000 3,184,000
Diluted earnings per common share 5,180,000 5,110,000 4,400,000 3,260,000 3,185,000
Balance sheet data at December 31:
Assets held-for-sale $ - $ - $ 21,485 $ 24,362 $ -
Working capital 42,867 39,125 45,420 42,021 19,544
Total assets 100,895 51,681 69,047 53,876 64,560
Short-term debt, related to assets held-
for-sale - - 10,500 - -
Long-term debt and capital lease obligations 1,816 - - - 1,479
Total stockholders' equity 69,942 45,145 52,815 48,498 49,821
(1) For the 20 day period ended December 31, 1998
(2) Charter income was earned only in 1997 and 1998
(3) In 1994, loss on extinguishment of debt, net of tax of $1,343, in 1996,
proxy contest for $752 and Exchange Offer for $518 and in 1998 $165 for
merger and related legal
(4) The calculation for the year ended December 31, 1994 excludes potentially
dilutive 7% convertible subordinated debentures as the effect of the
inclusion of common stock upon the conversion of these debentures would be
anti-dilutive because the stock conversion price exceeded the average price
of the common stock for the year. In addition, 45,000 options were not
included in the calculation as the effect would be anti-dilutive because
the exercise price of $11.00 exceeds the average market price of the common
stock for the year
17
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. The acquisition has been accounted for by the purchase
method of accounting and, accordingly, Periscope's assets and liabilities were
recorded at their fair market value at the date of acquisition. 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.
Results of Operations for 1998 versus 1997
Revenue for the twelve months ended December 31, 1998 increased $2,115 to
$4,699 from $2,584 in the prior period. In 1998, the Company recorded net sales
of $1,143 for the Company's women's and children's apparel operations and higher
charter income of $691. Accretion of discounts related to the Company's debt
investments, included in investment income, increased $460 to $822 from $362 in
the prior period primarily due to higher accretion of the discount related to
the Company's investment in Checkers debt.
Costs and expenses for the twelve months ended December 31, 1998 decreased
$2,889 to $7,707 from $10,596 in the prior period. Co-Ownership and charter
expenses decreased $3,960 to $1,655 in 1998 compared to $5,615 in 1997 due to
the sale of the yachts in April and October resulting in lower expenses for 1998
compared to a full year of expenses for two yachts in 1997. Included in Co-
Ownership and charter expenses for 1998 is a loss of $541 from the sale of one
of its yachts in October, partially offset by U.S. Custom's refunds of $294.
The Company sold its other luxury yacht in April 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 assets held-for-sale. The
Company's general and administrative expenses for the twelve months ended
December 31, 1998 decreased $888 to $4,093 from $4,981 in 1997 due to an overall
decrease in corporate expenses. 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 on November 2, 1998. In addition, the Company
incurred cost of sales of $1,469 and selling and shipping expenses of $ 287
related to the Company's women's and children's apparel operations in 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.
Other income for the twelve months ended December 31, 1998 increased $2,901
to $2,748 from an expense of $153 in the prior period. In 1998, the Company
recorded a gain of $2,855 on the sale of certain assets including the corporate
plane, a Gulfstream II SP acquired in 1991. 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 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.
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.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Dollars in thousands, except share and per share
amounts)
Results of Operations for 1997 versus 1996
Revenue for the twelve months ended December 31, 1997 decreased $5,434 to
$2,584 from $8,018 in the prior period. In 1997, the Company's investment income
decreased $730 to $2,006 compared to $2,736 in 1996, primarily due to a lower
investment in U.S. government obligations in 1997. In 1996, the Company had
gains of $5,234 compared to losses of $84 in 1997 from sales of the Company's
investment in marketable securities. These decreases were partially offset by
charter income of $614 in 1997.
Costs and expenses for the twelve months ended December 31, 1997 increased
$4,331 to $10,596 from $6,265 in the prior period. In 1997, the Company incurred
higher Co-Ownership Program and charter expenses of $5,591 related to a full
year of operations compared to $24 in the prior period. In the fourth quarter
of 1997, the Company provided a reserve of $1,500 for the impairment of assets
held-for-sale. In 1996, costs and expenses were higher due to one-time proxy
contest and related legal expenses of $752 and Exchange Offer and related legal
expenses of $518.
Other expense for the twelve months ended December 31, 1997 increased by
$119 to $153 from $34 in the prior period primarily due to higher factor and
financing costs of $150 associated with the financing of one of the luxury
yachts for two months during 1997. Factor and financing costs for the prior
period included $30 related to the Company's 9.25% Term Note, which was repaid
in February 1996.
The Company recorded an expense of $623 for the twelve months ended
December 31, 1997 related to affiliate transactions compared to income related
to affiliate transactions of $6,544 in the prior period. Effective December 18,
1997, the Company's equity investment in Rally's decreased to approximately 13%,
from 15% at December 31, 1996, and is now accounted for as a marketable
security. Prior to this, the Company accounted for its investment in Rally's
common stock under the equity method. The Company recorded a non-cash charge of
$623 compared to non-cash earnings of $367 for its share in Rally's net loss of
$4,516 and Rally's net income of $1,988 for 1997 and 1996, respectively. 1996
also included a gain on the sale of common stock of an investment in an
affiliate of $6,177.
The Company recognized a tax benefit of $4,170 for the twelve months ended
December 31, 1997 related to the reversal of a liability the Company previously
recorded for an assessment the CFTB made for the tax years 1989 through 1991 of
$3,100 and a federal net operating loss carryback of $1,100. In 1996, an income
tax benefit of $9,649 was recognized, related to the carryback of the tax loss
on the sale of Rally's common stock.
Liquidity and Capital Resources
The cost of the acquisition of Periscope included 953,093 shares of the
Company's common stock, which were held in treasury, valued at $6,493, 75,000
Company warrants, exercisable over a five year period at $7.25 and valued at
$195 and transaction costs of $259. The excess of the cost over the estimated
fair value of the net assets acquired of $27,453, based on the Company's
preliminary allocation of the purchase price, was allocated to goodwill and is
being amortized on a straight-line basis over 40 years. The Company will
finalize the allocation of the purchase price in 1999. The Company may issue up
to an additional 225,000 shares of its common stock to Periscope stockholders
based on the level of Periscope pre-tax profits, as defined in the merger
agreement, exceeding $13 million dollars for the year ended December 31, 1999.
At December 31, 1998 and 1997, the Company had working capital of $19,544
and $42,021 with current ratios of 2.5 and 11.0 to 1, respectively. The decrease
in working capital resulted primarily from the gross advance by the Company,
prior to the completion of the acquisition of $28.5 million to Periscope.
Net cash used by operating activities for the year ended December 31, 1998
was $2,806 compared to net cash of $5,273 provided by operating activities in
1997 and net cash used by operating activities of $3,387 in 1996. In 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. In 1996, cash used was to fund the
operating activities of the Company.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Dollars in thousands, except share and per share
amounts)
Liquidity and Capital Resources (cont.)
Net cash provided by investing activities for the year ended December 31,
1998 was $6,878 compared to net cash used by investing activities of $3,135 in
1997 and net cash provided by investing activities of $14,215 in 1996. 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 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 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 $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. In 1996,
Rally's purchased directly from GIANT $22,000 principal amount of its Senior
Notes. GIANT received cash of $11,053, including accrued interest of $266, and a
$4,145 short-term note bearing interest, which was paid in full. The Company
also sold an additional $3,500 face value Senior Notes, through the open market,
and received proceeds of $2,760. In addition, the Company received proceeds of
$8,277 from the sale of Rally's stock to CKE and Fidelity. The Company received
proceeds of $21,391 from sales, net of purchases of $15,373 of marketable
securities. In November 1996, the Company purchased Checkers Debt for $5,000 and
advanced $500 to Checkers. In 1996, the Company purchased assets, including
improvements, for $21,485. The Ocean Group incurred $598 related to the start-up
of the Co-Ownership Program. The Company paid cash of $11,583 and financed the
remaining balance of $10,500.
Net cash used by financing activities for the year ended December 31, 1998
was $983 compared to $14,138 for 1997 and $14,682 in 1996. 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. For
the three years ended December 31, 1998, the Company purchased 207,000 shares at
a cost of $1,483, 459,000 shares at a cost of $3,638 and 1,674,000 shares at a
cost of $15,079, respectively. In February 1996, the Chairman of the Board of
GIANT exercised 300,000 options to purchase GIANT Common Stock at an exercise
price of $6.75 per share. As a result of this transaction, the Company received
cash of $2,025. In 1998, the Company received proceeds of $500 on a note
receivable from a related party. 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 and
was paid in full in July 1997. In 1996, the Company pre-paid in full its
9.25% Term-Note in the amount of $1,622. The Company incurred no additional
expenses in connection with this prepayment.
The Company's factoring line permits daily working capital borrowing of
90.0% of account receivable (non-recourse), plus 50.0% of letters of credits
outstanding issued by the Company not to exceed $ 10.0 million. The outstanding
debt is collateralized by the Company's inventory, receivables and is partially
personally guaranteed by Glenn Sands, Periscope's President and Chief Executive
Officer. The factoring line expires on May 31, 2000, is subject to annual
renewal and may be terminated at the option of the factor with 60 days written
notice. Borrowings are subject to a monthly processing charge equal to 0.7% on
gross sales up to $25 million, 0.65% on gross sales between $25 million and $75
million and 0.6% of gross sales over $75 million. In addition, an interest
charge is applied on the total outstanding debt equal to prime plus 0.5% or
8.25% at December 31, 1998. The Company had a net outstanding balance of $3.9
million under the factoring line at December 31, 1998.
The Company's current liquidity is provided by cash and cash equivalents,
liquidation of marketable securities, investment income, and borrowings under
the factoring line. Management believes that this liquidity, plus the Company's
capital resources and its ability to obtain financing at favorable rates are
sufficient for the Company to properly capitalize its current and future
business operations, as well as fund its on-going operating expenses.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Dollars in thousands, except share and per share amounts)
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 has completed its evaluation of its information technology for
Year 2000 compliance. The Company does not expect that the cost to modify its
information technology infrastructure to be Year 2000 compliant will be material
to its consolidated financial condition or results of operations. The Company
does not anticipate any material disruption in its operations as a result of any
failure by the Company to be in compliance. The Company has purchased new
information technology platforms, which, among other things, are Year 2000
compliant. Hardware and software costs are capitalized by the Company and all
other costs associated with Year 2000 compliance are expensed as incurred. The
Company has had discussions with its customers and vendors and although the
Company believes that the information systems of its major customers and vendors
(insofar as they relate to the Company's business) comply with Year 2000
requirements, there can be no assurance that the Year 2000 issue will not affect
the information systems of such customers and vendors as they relate to the
Company's business, or that any such impact on such customers and vendors'
information systems would not have a material adverse effect on the Company's
business, consolidated financial condition or results of operations. The
remediation of Year 2000 issues involving the Company's information systems is
expected to be completed in time to prevent any material adverse consequences to
the Company's business, consolidated financial condition or results of
operations.
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 is in the process of determining the effect of this statement on the
Company's consolidated financial position and consolidated results of operations
and will follow the disclosure requirements set forth in this statement.
In June1998, 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, 1999. 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.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Dollars in thousands, except share and per share amounts)
Subsequent Event
- ----------------
During the first quarter of 1999, KCC signed an agreement with Santa Barbara
Restaurant Group ("SBRG"). The agreement called for the exchange of KCC's
investment in Checkers 13% restructured debt for 998,377 shares of $.08 par
value common stock of SBRG. These shares are currently not registered; however,
KCC has the right to demand that SBRG register the shares with the Securities
and Exchange Commission within 60 days of receipt of notice. The registration is
effective for two years at which time, those shares will be fully transferable
under Rule 144 of the Securities Act of 1933.
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, 1998. 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 the 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.
The carrying value of the Company's investment in marketable equity
securities is recorded at $3,912, including net unrealized losses of $201. The
estimated potential decrease in fair value resulting from the hypothetical 10%
decrease in prices quoted by the stock exchanges is $391, approximately 1% of
the Company's current assets.
The carrying value of the Company's investment in marketable fixed income
bonds are recorded at $3,885, including net unrealized losses of $116.
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
carrying value of bonds with maturities over 180 days, which would be included
in the calculation, is immaterial, and therefore no sensitivity analysis is
presented.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1996, 1997 and 1998
(Dollars in thousands, except per share amounts)
1996 1997 1998
----------- ---------- -----------
Revenue:
Investment income $ 2,736 $ 2,006 $ 2,955
Gain (loss) on the sale of marketable securities 5,234 (84) (752)
Net sales - - 1,143
Charter and other income 48 662 1,353
----------- ---------- -----------
8,018 2,584 4,699
----------- ---------- -----------
Costs and expenses:
Cost of sales - - 1,469
Selling and shipping - - 287
General and administrative 4,971 4,981 4,093
Co-ownership program and charter 24 5,615 1,655
Merger and related legal - - 165
Proxy contest and related legal 752 - -
Exchange offer and related legal 518 - -
Amortization of goodwill - - 38
----------- ---------- -----------
6,265 10,596 7,707
----------- ---------- -----------
Income (loss) from operations 1,753 (8,012) (3,008)
----------- ---------- -----------
Other income (expense):
Gain on sale of property and equipment - - 2,855
Factoring and financing costs (34) (153) (107)
----------- ---------- -----------
(34) (153) 2,748
Affiliate transactions:
Gain on sale of investment in affiliate 6,177 - -
Equity in earnings (loss) of affiliate 367 (623) -
Loss on investment in affiliate - - (1,168)
----------- ---------- -----------
6,544 (623) (1,168)
----------- ---------- -----------
Income (loss) before benefit for income taxes 8,263 (8,788) (1,428)
Benefit for income taxes 9,649 4,170 1,921
----------- ---------- -----------
Net income (loss) $ 17,912 $ (4,618) $ 493
=========== ========== ===========
Basic earnings (loss) per common share $ 4.40 $ (1.42) $ 0.15
=========== ========== ===========
Diluted earnings (loss) per common share $ 4.07 $ (1.42) $ 0.15
=========== ========== ===========
Weighted average shares - basic 4,074,000 3,260,000 3,184,000
=========== ========== ===========
Weighted average shares - diluted 4,400,000 3,260,000 3,185,000
=========== ========== ===========
The accompanying notes are an integral part of these financial statements.
23
GIANT GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1997 and 1998
(Dollars in thousands, except per share amounts)
1997 1998
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,137 $ 4,226
Marketable securities 18,874 7,797
Current portion of note receivable from related party - 2,002
Note and other receivables 332 4,752
Income tax receivables 1,100 -
Inventories - 12,438
Prepaid expenses and other assets 420 690
Deferred income taxes - 892
Assets held-for-sale 24,362 -
---------- -----------
Total current assets 46,225 32,797
Note receivable from related party - 499
Property and equipment, net 4,905 1,983
Goodwill, net of amortization of $38 - 27,415
Deferred income taxes - 1,748
Other assets 2,746 118
---------- -----------
Total assets $ 53,876 $ 64,560
========== ===========
LIABILITIES
Current liabilities:
Due to factor $ - $ 3,868
Accounts payable 329 7,134
Current portion of note payable to related party - 400
Accrued expenses 880 1,297
Income taxes payable 219 554
Deferred income taxes 2,776 -
---------- -----------
Total current liabilities 4,204 13,253
Capital lease obligations - 252
Note payable to related party - 1,227
Deferred income taxes 1,174 7
---------- -----------
Total liabilities 5,378 14,739
---------- -----------
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 36,767 35,196
Accumulated other comprehensive income - unrealized gains (losses)
on marketable securities, net 4,185 (190)
Retained earnings 43,090 43,583
---------- -----------
84,115 78,662
Less common stock in treasury, at cost; 4,085,000 shares in 1997 and
3,339,000 in 1998 (35,617) (28,841)
---------- -----------
Total stockholders' equity 48,498 49,821
---------- -----------
Total liabilities and stockholders' equity $ 53,876 $ 64,560
========== ===========
The accompanying notes are an integral part of these financial statements.
24
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1997 and 1998
(Dollars in thousands, except per share amounts)
1996 1997 1998
----------- ---------- -----------
Operating Activities:
Net income (loss) $ 17,912 $ (4,618) $ 493
Adjustments to reconcile net income (loss) to net cash (used) provided
by operating activities:
Depreciation 397 523 320
Provision for impairment of assets held-for-sale - 1,500 541
Gain on sale of property and equipment - - (2,855)
(Gain) loss on the sale of marketable securities (5,234) 84 752
Loss on investment in affiliate - - 1,168
Gain on sale of investment in affiliate (6,177) - -
Equity in (earnings) loss of affiliate (367) 623 -
Provision (benefit) for deferred taxes 483 - (1,127)
Accretion of discounts on investments (318) (362) (822)
Changes in assets and liabilities, net of effects of business acquired:
Decrease in inventories - - 125
Decrease (increase) in income tax receivables (10,335) 9,828 1,100
(Increase) decrease in receivables and prepaid expenses and other assets 75 662 (351)
Decrease in due to factor - - 376
Increase (decrease) in accounts payable and accrued expenses 284 176 (3,228)
(Decrease) increase in income tax payable (107) (3,143) 702
----------- ---------- -----------
Net cash (used) provided by operating activities (3,387) 5,273 (2,806)
----------- ---------- -----------
Investing Activities:
Proceeds from sale of affiliate's debt securities 17,692 - -
Proceeds from sale of investment in affiliate 8,277 - -
Sales of marketable securities 21,391 14,730 44,484
Purchases of marketable securities (15,373) (13,499) (42,507)
Debt (investment) payment and short-term (advance) repayment (5,500) 1,880 727
Net advances made in connection with business acquired - - (25,889)
Net proceeds from sale of property and equipment - - 30,178
Purchases of assets held-for-sale and related costs (11,583) (4,377) (49)
Purchases of property and equipment (689) (1,869) (66)
----------- ---------- -----------
Net cash provided (used) by investing activities 14,215 (3,135) 6,878
----------- ---------- -----------
Financing Activities:
Proceeds from the exercise of stock options 2,025 - -
Proceeds from short-term borrowings - 10,000 -
Proceeds from note-receivable - related party - - 500
Repayment of short-term borrowings (1,628) (20,500) -
Purchase of treasury stock (15,079) (3,638) (1,483)
----------- ---------- -----------
Net cash used by financing activities (14,682) (14,138) (983)
----------- ---------- -----------
(Decrease) increase in cash and cash equivalents (3,854) (12,000) 3,089
Cash and cash equivalents:
Beginning of period 16,991 13,137 1,137
----------- ---------- -----------
End of period $ 13,137 $ 1,137 $ 4,226
=========== ========== ===========
The accompanying notes are an integral part of these financial statements.
25
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1997 and 1998
(Dollars in thousands)
Capital in Common Other Total
Common Excess of Stock in Retained Comprehensive Comprehensive
Stock Par Value Treasury Earnings Income (Loss) Income (Loss)
---------- ---------- ----------- ---------- ------------- -------------
Balance as of December 31, 1995 $ 69 $ 33,508 $ (16,900) $ 29,796 $ (1,328)
Exercise of stock options 4 2,022
Company's share of increase in affiliate's
equity due to sale of rights, net 1,237
Purchase of treasury stock (15,079)
Net income for 1996 17,912 $ 17,912
Unrealized gains on marketable securities,
net of income tax provision of $1,049 1,574 1,574
---------- ---------- ----------- ---------- ------------- -------------
Balance as of December 31, 1996 73 36,767 (31,979) 47,708 246 $ 19,486
=============
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