<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the third quarterly period ended September 30, 2000
GIANT GROUP, LTD.
9440 Santa Monica Blvd. Suite 407, Beverly Hills, CA 90210
Registrant's telephone number: (310) 273-5678
Commission File Number: 1-4323
I.R.S. Employer Identification Number: 23-0622690
State of Incorporation: Delaware
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. Yes X
---
On November 14, 2000 the latest practicable date, there were 3,220,957
shares of Common Stock outstanding.
<PAGE>
GIANT GROUP, LTD.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
------------------------------
Page No.
--------
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Operations -
Three and Nine-Month Periods Ended September 30, 2000 and 1999 3
Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 4
Consolidated Statements of Cash Flows -
Nine-Month Periods Ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-13
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
(a) Exhibits
(b) Reports on Form 8-K
Signature 15
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three and nine-month periods ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
Three-months ended Nine-months ended
September 30, September 30,
------------------------------ ---------------------------
2000 1999 2000 1999
--------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Revenue:
Investment and other income $ 41 $ 20 $ 140 $ 864
Gain on sale of marketable securities 89 - 112 419
--------------- ------------- -------------- -----------
130 20 252 1,283
--------------- ------------- -------------- -----------
Costs and expenses:
General and administrative 412 910 1,060 2,624
Depreciation 9 43 24 130
Interest expense - 12 - 24
--------------- ------------- -------------- -----------
421 965 1,084 2,778
--------------- ------------- -------------- -----------
Loss from operations (291) (945) (832) (1,495)
Gain on sale of property and equipment - - - 269
--------------- ------------- -------------- -----------
Loss from continuing operations before benefit for income taxes (291) (945) (832) (1,226)
Benefit for income taxes - (265) - (407)
--------------- ------------- -------------- -----------
Loss from continuing operations (291) (680) (832) (819)
Discontinued operations:
Loss from operations less (benefit) provision for income
taxes of ($240) and $304 (317) (356) (6,072) (56)
Loss on disposition less benefit for income taxes of $294 (687) - (687) -
--------------- ------------- -------------- -----------
Net loss $ (1,295) $ (1,036) $ (7,591) $ (875)
=============== ============= ============== ===========
Basic & diluted income (loss) per common share from:
Continuing operations $ (0.09) $ (0.17) $ (0.23) $ (0.21)
Discontinued operations:
Income (loss) from operations (0.09) (0.09) (1.64) 0.01
Loss on disposition (0.20) - (0.19) -
--------------- ------------- -------------- -----------
Net loss $ (0.38) $ (0.26) $ (2.06) $ (0.22)
=============== ============= ============== ===========
Weighted average shares - basic 3,422,000 3,960,000 3,693,000 3,938,000
=============== ============= ============== ===========
Weighted average shares - diluted 3,422,000 3,960,000 3,693,000 3,938,000
=============== ============= ============== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
GIANT GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,441 $ 955
Marketable securities 4,530 8,932
Note and other receivables, net 756 891
Prepaid expenses and other assets 324 252
Income tax receivable 423 171
--------- ---------
Total current assets 7,474 11,201
Property and equipment, net 133 40
Other assets 1,810 15
--------- ---------
Total assets $ 9,417 $ 11,256
========= =========
LIABILITIES
Current liabilities:
Net liabilities from discontinued operations $ 11,386 $ 5,313
Accounts payable 218 187
Accrued expenses 493 1,137
Income taxes payable 449 492
Deferred income taxes 143 -
--------- ---------
Total current liabilities 12,689 7,129
Deferred income taxes 7 7
--------- ---------
Total liabilities 12,696 7,136
--------- ---------
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 shares issued 73 73
Capital in excess of par value 35,546 35,008
Accumulated other comprehensive income - unrealized gains on marketable
securities, net 214 22
Retained deficit (10,272) (2,681)
--------- ---------
25,561 32,422
Less 4,045,000 shares and 3,276,000 shares of Common stock in treasury, at cost (28,840) (28,302)
--------- ---------
Total stockholders' equity (3,279) 4,120
--------- ---------
Total liabilities and stockholders' equity $ 9,417 $ 11,256
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine-month periods ended September 30, 2000 and 1999
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------------------
2000 1999
--------------- --------------
<S> <C> <C>
Operating Activities:
Net loss $ (7,591) $ (875)
Adjustments to reconcile net loss to net cash used
by continuing operating activities:
Loss from discontinued operations 6,072 56
Depreciation 24 130
Gain on sale of property and equipment - (269)
Gain on sale of marketable securities (112) (419)
Accretion of discounts on investments - (323)
Changes in assets and liabilities:
Decrease (increase) in receivables, prepaid expenses and other assets 984 (456)
(Decrease) increase in accounts payable and accrued expenses (613) 165
Decrease in income tax payable - (700)
---------- ----------
Net cash used by operating activities (1,236) (2,691)
Investing Activities:
Sales of marketable securities 6,754 4,445
Purchases of marketable securities (1,915) (5,111)
Purchases of property and equipment, net (117) -
Net proceeds from sale of property and equipment - 284
---------- ----------
Net cash provided (used) by investing activities 4,722 (382)
---------- ----------
Financing Activities:
Proceeds from short-term loan - 1,662
Principal payment on short-term loan - (1,662)
Collateral deposited with factor (3,000) -
---------- ----------
Net cash used by financing activities (3,000) -
---------- ----------
Increase (decrease) in cash and cash equivalents 486 (3,073)
Cash and cash equivalents:
Beginning of period 955 4,147
---------- ----------
End of period $ 1,441 $ 1,074
========== ==========
Supplemental disclosure of cash paid by discontinued operations for:
Income taxes $ (1) $ (23)
Interest (2,358) (1,635)
Supplemental disclosure of cash paid by continuing operations for:
Income taxes $ - $ (300)
Interest - (24)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-Q instructions and in the opinion of
management contain all adjustments necessary to present fairly the financial
position as of September 30, 2000, the results of operations for the three and
nine-month periods ended September 30, 2000 and 1999 and cash flows for nine-
month periods ended September 30, 2000 and 1999. These results have been
determined on the basis of generally accepted accounting principles and
practices applied consistently with those used in the preparation of the
Company's 1999 Annual Report on Form 10-K. Certain 1999 amounts have been
reclassified to conform to the 2000 presentation. Operating results for the
three and nine-month periods ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the full year. It is
suggested that the accompanying unaudited consolidated financial statements be
read in conjunction with the financial statements and notes in the Company's
1999 Annual Report on Form 10-K.
2. Discontinued Women and Children's Apparel Operations
----------------------------------------------------
On September 25, 2000, the Company's Board of Directors approved a plan for
the disposition of Periscope's operations. Periscope manufactured and sold women
and children's apparel. Periscope's assets and liabilities at September 30, 2000
and December 31, 1999 are reported on the Company's Consolidated Balance Sheets
as net liabilities from discontinued operations. Periscope's operating results
for the three and nine months ended September 30, 2000 and 1999 are reported as
discontinued operations in the Company's Consolidated Statements of Operations.
The loss on the disposition of Periscope's operations that is estimated to be
incurred subsequent to September 30, 2000 up to and including the final
disposition of the company is estimated to be approximately $2,000.
On October 31, 2000, Periscope executed and delivered a letter delivering
peaceful possession of its assets to Century Business Credit Corporation
("Century"). Pursuant to the letter, all Periscope's receivables, inventory,
fixed assets and other assets listed as collateral in their August 1999
Factoring Agreement with Century were transferred to Century. At the time of the
transfer and as previously been discussed, Periscope was in default under its
Factoring Agreement. GIANT, as a guarantor of $2 million of Periscope's
obligations to Century, consented to this transaction. In return, Century
released GIANT from its $2 million guarantee. In addition, Scott Pianin resigned
as president of Periscope.
On October 31, 2000, simultaneously with the completion of the above
transaction, Century licensed certain Periscope trademarks in connection with
the manufacture and sale of Periscope products to Alarmex Holdings, L.L.C.
("Alarmex"). Century will receive a royalty equal to 5% of net sales of licensed
products constituting current orders and 2% on all net sales on new orders. This
agreement will remain in effect until Century has received $7 million dollars in
royalties from Alarmex. Century will remit 50% of all royalty fees received from
Alarmex to GIANT, not to exceed $3 million, representing the cash collateral
GIANT deposited with the Century during the second quarter pursuant to the April
2000 amended Cash Pledge and Security Agreement.
The Company evaluated the recoverability of the $3 million from Century
under the guidelines of FASB 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be disposed of". Accordingly, the Company
adjusted the carrying value of this receivable to its estimated fair value of
$2,500 resulting in a noncash impairment pre-tax loss of $500 which is reflected
in loss on disposition of discontinued operations on the Company's Consolidated
Statements of Operations. The estimated fair value was based on anticipated cash
flows discounted at an interest rate which approximates the Company's interest
rate on money market funds. In addition, the pre-tax write-off of the Periscope
intercompany receivable of $481 is reflected in the loss on disposition of
discontinued operations on the Company's Consolidated Statements of Operations.
6
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
Net assets and liabilities of the Company's discontinued apparel operations
are as follows:
<TABLE>
<S> <C> <C>
September 30, December 31,
2000 1999
---- ----
Cash $ 185 $ 293
Due from related party - 1,747
Inventories 1,964 9,661
Property and Equipment-net 838 718
Other assets 772 563
Due to factor (8,755) (9,105)
Accounts payable and accrued expenses (5,909) (6,864)
Due to related party - (1,747)
Due to Company (481) (579)
-------- --------
$(11,386) $ (5,313)
======== ========
</TABLE>
3. Earnings (Loss) Per Share
-------------------------
Basic earnings (loss) per common share ("Basic EPS") are computed by
dividing reported net earnings or loss available to common stockholders by the
weighted average shares outstanding. The computation of diluted earnings (loss)
per common share ("Diluted EPS") using the treasury stock method includes shares
to be issued upon the assumed exercise of those stock options and warrants for
which the average market price of the Company's common stock for the period
exceeds the exercise price of the options and warrants. The calculation of
Diluted EPS for the three and nine months ended September 30, 2000 does not
include 2,141,000 options and warrants at a range of $.406 to $8.25
respectively, because the effect would be anti-dilutive as the Company recorded
a loss for the periods. The calculation of Diluted EPS for the three and nine
months ended September 30, 1999 does not include 2,211,000 options and warrants
at a range of $5.4375 to $8.25 respectively, because the effect would be anti-
dilutive as the Company recorded a loss for the periods.
4. Comprehensive Income
--------------------
The changes in components of comprehensive (loss), net of benefit for
income taxes, for the nine-month periods ended September 30, 2000 and 1999 are
as follows:
<TABLE>
<CAPTION>
2000 1999
---------------------------------- --------------------------------------
Pre-tax Tax Net Pre-tax Tax Net
Amount Benefit Amount Amount Benefit Amount
------ ------- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Other comprehensive (loss):
Unrealized gains (losses) on
marketable securities, net $ 335 $ 143 $ 192 $ (2,325) $(930) $ (1,395)
Net loss (8,385)
(875)
-------- --------
Comprehensive loss $ (8,193) $ (2,270)
======== ========
</TABLE>
7
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
5. Affiliate Transactions
----------------------
On June 15, 2000, the Company's affiliate Checkers retired the remaining
$39.5 million dollars of its 9 7/8 percent senior notes. The senior notes were
originally issued by Rally's in 1993 in connection with an $85 million bond
financing transaction. Checkers used proceeds from recent market sales and from
a recently completed $35 million line of credit to retire the senior notes.
On August 29, 2000, the Company purchased 251,469 shares of Checkers common
stock directly from Santa Barbara Restaurant Group ("Santa Barbara') for
consideration consisting of 1,005,877 of Santa Barbara $.08 par value common
stock. The Company recorded the 251,469 shares of Checkers common stock acquired
at the book value of the Santa Barbara common stock given up and recorded no
gain or loss. On July 10, 2000, the Company sold in the open market 29,100
shares of Checkers par value $.001 common stock, receiving proceeds after
expenses of $154 and recognizing a gain of $89.
On September 30, 2000, the Company owns approximately 8% of Checkers common
stock, based on Checkers common stock outstanding shares of 9,436,094 reported
in the company's Form 10-Q for the third quarter ended September 11, 2000.
6. Recent Accounting Pronouncements
--------------------------------
In June 1998, the Financial Accounting Standards Board issued FASB 133
"Accounting for Derivative Instruments and Hedging Activities" ("FASB 133").
This statement increases the visibility, comparability, and understanding of the
risks associated with holding derivatives by requiring all entities to report
all derivatives at fair value as assets or liabilities. It also provides
guidance and practice by providing companies with comprehensive rules for all
derivatives and hedging activities. FASB 133 is effective for fiscal quarters of
fiscal years that begin after June 15, 2000. The Company will follow the
disclosure requirements set forth in this statement; however, the Company does
not currently hold or issue derivative instruments or nonderivative instruments
that are designated and qualify as hedging instruments.
7. Dismissal of Independent Accountants
------------------------------------
On July 19, 2000, the Company dismissed Arthur Andersen LLP as its
auditors. The dismissal was approved by the Audit Committee of the Board of
Directors. The Company filed Form 8-K on July 26, 2000 reporting this event. For
the fiscal years ended December 31, 1999 and 1998 and subsequent periods, there
were no disagreements with Arthur Andersen LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure. These matters, if not resolved to the Company's auditors'
satisfaction, would have caused Arthur Andersen, LLP to make reference to the
subject matter of the disagreement in connection with their audit reports.
As of the date of the filing of this Form 10-Q for the third quarterly
period ended September 30, 2000, the Company has not retained new auditors.
Because of this, the Company's Form 10-Q for the quarters ended June and
September 30, 2000 has not been reviewed as required by the Securities and
Exchange Commission. The Company will refile the 2000 2nd and 3rd quarter Form
10-Q on a timely basis when new auditors are retained.
8. Commitments and Contingencies
-----------------------------
The Company is involved in various claims and legal proceedings of a nature
considered normal to its business which have been described in the Company's
1999 Annual Report on Form 10-K. There have been no material changes to these
claims and proceedings during the three months ended September 30, 2000. In
addition to these actions, the Company is also involved in lawsuits as described
in the following paragraphs.
8
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
Jeffrey W. Sirchio, plaintiff, v. Periscope Sportswear, Inc. and GIANT
----------------------------------------------------------------------
GROUP, LTD. On or about May 4, 2000, Mr. Jeffrey Sirchio, a former vice
----------
president for operations at Periscope, filed a civil action in the United States
District Court for the Southern District of New York, Case No. 00 Civ. 3391,
alleging claims against Periscope and GIANT for breach of contract and tortious
interference with contract, allegedly arising from Periscope's termination of
Mr. Sirchio's employment with Periscope on or about April 11, 2000. Periscope
and GIANT did not respond formally to the Complaint and deny the material
allegations of the Complaint and contend that Mr. Sirchio was terminated for
cause and that he is entitled to no damages pursuant to the matters alleged in
the Complaint.
Effective July 14, 2000, a general release signed by Mr. Sirchio ended this
action. (see next paragraph).
Glenn Sands, plaintiff, v. GIANT GROUP, LTD., Periscope Sportswear, Inc.
-----------------------------------------------------------------------
and David Gotterer. On or about May 8, 2000, Mr. Sands filed a civil action in
------------------
the United States District Court for the Southern District of New York, Case No.
00 Civ. 3472, alleging claims against GIANT, Periscope and David Gotterer (a
current director of GIANT and Periscope) for breach of contract, negligent
misrepresentation and fraudulent misrepresentation, allegedly arising from
Periscope's termination of Mr. Sands's employment with Periscope on or about
April 11, 2000, and from a claimed breach by GIANT of a proposed "reacquisition
agreement" with Mr. Sands. On May 18, 2000, the Company filed a motion for a
preliminary injunction in conjunction with an answer and counterclaim to Sands'
complaint. The answer denies all of the material allegations of the complaint
and asserts that Mr. Sands is entitled to no damages pursuant to the matters
alleged in the complaint. The counterclaim asserts, among other things, that Mr.
Sands is violating his employment agreement, interfering with Periscope's
relationship with its customers, suppliers and employees and has grossly
misappropriated Periscope funds for his personal use. On July 6, 2000, the court
granted a preliminary injunction order to temporarily bar Mr. Sands from
competing in the women's apparel business.
On July 11, 2000, Mr. Sands, GIANT, Periscope and David Gotterer signed a
Memorandum of Understanding, which settled the above civil lawsuit. On July 14,
2000, a Settlement Agreement was signed by all the parties, which superseded
this Memorandum of Understanding. As part of this Settlement Agreement, among
other things, Mr. Sands filed a stipulation of dismissal of his complaint with
prejudice, assigned to the factor for the benefit of Periscope the guarantee of
approximately $1.97 million dollars including interest Mr. Sands had previously
provided to the factor, forgave $2 million owed by Periscope to him and returned
768,691 shares of GIANT common stock issued to him. In addition, Mr. Sands paid
to Periscope $1 million dollars and promises to pay $528 related to the amount
Mr. Sands owes Periscope on January 14, 2001 or on the date Mr. Sands sells his
airplane whichever date is earlier. A security interest of $706 has been
attached to Mr. Sands Challenger 600 airplane by the United States District
Court for the Southern District of New York, for the benefit of Periscope. Mr.
Sands cannot hire any Periscope personnel on or after July 14, 2000 and cannot
reveal confidential business information stated in the Settlement Agreement. As
part of this Settlement Agreement, among other things, GIANT, Periscope and
David Gotterer agreed to request the court to vacate the July 6, 2000
preliminary injunction order, void Mr. Sands' employment agreement with
Periscope and dismiss their counterclaims and extinguish all loans owed to them
by Mr. Sands except for amounts becoming due as part of this Settlement
Agreement.
In July 2000, Mr. Sands paid $150 related to his $528 note receivable owed
to Periscope, which is included in net liabilities from discontinued operations
on the Company's Consolidated Balance Sheets. In addition, in early November
2000, Mr. Sands' airplane was repossessed by the company that financed the plane
and is in the process of being sold. Periscope has a security interest in the
plane and has made a request to the finance company for payment of this amount.
Until the sale is completed, which is expected in a couple of weeks, the amount
of proceeds that Periscope will receive cannot be determined.
Since management does not believe that the previously mentioned lawsuits
and other claims and legal proceedings, in which the Company is a defendant,
contain meritorious claims, management believes that the ultimate resolution of
the lawsuits will not materially and adversely affect the Company's consolidated
financial position or results of operations.
9
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
GIANT GROUP, LTD., Plaintiff against Glenn Sands; Arthur Andersen LLP; L.H.
--------------------------------------------------------------------------
Friend, Weinress, Frankson & Presson, Inc.; and Friedman, Alpren & Green LLP. On
----------------------------------------------------------------------------
or about October 6, 2000, the Company filed a civil action in the United States
District Court for the Southern District of New York, Case No. 00 Civ. 7578,
alleging claims under the United States securities laws against Glenn Sands,
Arthur Andersen LLP ("AA"), L.H. Friend, Weinress, Frankson & Presson, Inc.
("LHF") and Friedman, Alpren & Green LLP ("Friedman"). The Company alleges that
Mr. Sands, while acting as principal officer and shareholder of Periscope, made
false and misleading representations about Periscope to the Company prior to the
Company's acquisition of Periscope in December 1998. The Company also alleges
that AA, LHF and Friedman failed to make necessary disclosures of material
information related to Periscope and failed to fulfill their contractual and
fiduciary obligations to the Company in connection with the Company's
acquisition of Periscope. The Company has requested a jury trial. To date, no
defendants have formally responded.
On April 18, 2000, the Company was notified by the NYSE, prior to the
opening on April 25, 2000, that trading of its Common Stock would be suspended.
In addition, the NYSE will file an application with the SEC to delist this
security. The suspension resulted from the Company failing to meet the recently
effective continued listing standards requiring total market capitalization of
not less than $50 million and total stockholders' equity of not less than $50
million. On April 27, 2000, the Company announced that its Common Stock is
trading on the OTC Bulletin Board under symbol "GPOL".
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (in thousands, except per share amounts)
Discontinued Women and Children's Apparel Operations
----------------------------------------------------
On September 25, 2000, the Company's Board of Directors approved a plan for
the disposition of Periscope's operations. Periscope manufactured and sold women
and children's apparel. Periscope's assets and liabilities at September 30, 2000
and December 31, 1999 are reported on the Company's Consolidated Balance Sheets
as net liabilities from discontinued operations. Periscope's operating results
for the three and nine months ended September 30, 2000 and 1999 are reported as
discontinued operations in the Company's Consolidated Statements of Operations.
The loss on the disposition of Periscope's operations that is estimated to be
incurred subsequent to September 30, 2000 up to and including the final
disposition of the company is estimated to be approximately $2,000.
On October 31, 2000, Periscope executed and delivered a letter delivering
peaceful possession of its assets to Century Business Credit Corporation
("Century"). Pursuant to the letter, all Periscope's receivables, inventory,
fixed assets and other assets listed as collateral in their August 1999
Factoring Agreement with Century were transferred to Century. At the time of the
transfer and as previously been discussed, Periscope was in default under its
Factoring Agreement. GIANT, as a guarantor of $2 million of Periscope's
obligations to Century, consented to this transaction. In return, Century
released GIANT from its $2 million guarantee. In addition, Scott Pianin resigned
as president of Periscope.
On October 31, 2000, simultaneously with the completion of the above
transaction, Century licensed certain Periscope trademarks in connection with
the manufacture and sale of Periscope products to Alarmex Holdings, L.L.C.
("Alarmex"). Century will receive a royalty equal to 5% of net sales of licensed
products constituting current orders and 2% on all net sales on new orders. This
agreement will remain in effect until Century has received $7 million dollars in
royalties from Alarmex. Century will remit 50% of all royalty fees received from
Alarmex to GIANT, not to exceed $3 million, the cash collateral GIANT deposited
with the Century during the respresenting second quarter pursuant to the April
2000 amended Cash Pledge and Security Agreement.
The Company evaluated the recoverability of the $3 million from Century
under the guidelines of FASB 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be disposed of". Accordingly, the Company
adjusted the carrying value of this receivable to its estimated fair value of
$2,500 resulting in a noncash impairment pre-tax loss of approximately $500
which is reflected in loss on disposition of discontinued operations on the
Company's Consolidated Statements of Operations. The estimated fair value was
based on anticipated cash flows discounted at an interest rate which
approximates the Company's interest rate on money market funds. In addition, the
pre-tax write-off of the Periscope intercompany receivable of $481 is reflected
in the loss on disposition of discontinued operations on the Company's
Consolidated Statements of Operations.
Results of Operations for the Three Months Ended September 30, 2000 Versus
--------------------------------------------------------------------------
September 30, 1999
------------------
General and administrative expenses for current period decreased $498 or
54.7% to $412 compared to $910 in the prior period. GIANT's management continues
to review all expenses in an effort to cut costs. Major expense reductions in
the current period included officer salaries of $198 and deferred executive
compensation of $121, rent of $60 and travel of $40.
Depreciation decreased $34 to $9 in the current period from $43 in the prior
period primarily due to the write-off of the leasehold improvements and sale of
certain office equipment in the fourth quarter of 1999 as a result of GIANT's
corporate office move.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (cont.) (Dollars in thousands, except per share amounts)
Results of Operations for the Nine Months Ended September 30, 2000 Versus
-------------------------------------------------------------------------
September 30, 1999
------------------
Revenue for nine-month period ended September 30, 2000 ("current period")
decreased $1,031 to $252 compared to $1,283 for the nine-month period ended
September 30, 1999 ("prior period"). Interest income related to investments in
debt securities decreased $652 in the current period due to lower debt security
investments in the current period. In addition, the Company recorded lower gains
on the sale of marketable securities of $307 in the current period.
General and administrative expenses for current period decreased $1,564 or
59.6% to $1,060 compared to $2,624 in the prior period. GIANT's management
continues to review all expenses in a continuing effort to cut costs. GIANT's
President and Chief Executive Officer voluntarily agreed to retroactively cancel
the termination payment due to him at the expiration of his employment
agreement. As a result of this action, the Company reversed the accrued
liability of $482 recorded at December 31, 1999, related to the termination
payment and provides a cost savings of $344 for the current period. In addition,
in January 2000 GIANT's President and Chief Executive Officer voluntarily
authorized the Company to decrease his annual salary to $450, a cost savings of
approximately $486 for the current period. GIANT also incurred lower rent
expense of approximately $133 due to the move into a smaller office and lower
travel expense of $99. These decreases in expenses were slightly offset by
higher legal expenses of $87.
Depreciation decreased $106 to $24 in the current period from $130 in the
prior period primarily due to the write-off of the leasehold improvements and
sale of certain office equipment in the fourth quarter of 1999 as a result of
of GIANT's corporate office move.
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents and marketable securities at September 30, 2000
totaled $5,971 compared with $9,887 at December 31, 1999. At September 30, 2000,
the Company's negative working capital was $5,215. On December 31, 1999, the
Company had working capital of $4,072 with a current ratio of 1.57 to 1.
Net cash used by operating activities for the nine months ended September
30, 2000 ("current period") was $1,236 compared to cash used by operating
activities of $2,691 for the nine months ended September 30, 1999 ("prior
period").
Net cash provided by investing activities for the current period increased
$5,104 to $4,722 compared to net cash used by investing activities of $382 for
the prior period. In the current period, the Company sold marketable securities,
net of purchases of $4,839 compared to purchases, net of sales of marketable
securities of $666 in the prior period. In the current period, the Company
purchased property and equipment for $117 compared to no purchases of property
and equipment in the prior period. In addition, the Company sold land and
recorded proceeds of $284 in the prior period.
Net cash used by financing activities for the current period was $3,000
compared to $0 used for the prior period. During the current period, the Company
deposited $3,000 in collateral with the factor in connection with the amended
Cash Pledge and Security Agreement dated April 26, 2000 pursuant to the
Company's current Factoring Agreement. See discussion at the beginning of
Management's Discussion and Analysis of Financial Condition and Results of
Operations on page 11 of this Form 10-Q. During the prior period, cash of
$1,662, which was provided in the prior 6 month period ended June 30, 1999 by
short-term borrowings collateralized by marketable securities, was repaid.
Year 2000
---------
The Company's information technology is Year 2000 compliant. The cost to
modify its information technology infrastructure to be Year 2000 compliant was
not material to its consolidated financial condition or results of operations
and costs were expensed as incurred.
Personal Holding Company
------------------------
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (cont.) (Dollars in thousands, except per share amounts)
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 and therefore has not been 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 June 1998, the Financial Accounting Standards Board issued FASB 133
"Accounting for Derivative Instruments and Hedging Activities" ("FASB 133").
This statement increases the visibility, comparability, and understanding of the
risks associated with holding derivatives by requiring all entities to report
all derivatives at fair value as assets or liabilities. It also provides
guidance and practice by providing companies with comprehensive rules for all
derivatives and hedging activities. FASB 133 is effective for fiscal quarters of
fiscal years that begin after June 15, 2000. The Company will follow the
disclosure requirements set forth in this statement; however, the Company does
not currently hold or issue derivative instruments or nonderivative instruments
that are designated and qualify as hedging instruments.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company's primary financial instruments consist of money market funds
paying interest at varying interest rates and 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.
For the nine-month period ended September 30, 2000, the Company believes
there was no material change in the Company's primary financial instruments and
related market risk as disclosed in the Company's 1999 Annual Report on Form
10-K.
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 but
are not limited to the development of a new Company business plan, changes in
the value of the Company's investments and changes in federal and state tax laws
and of the administration of such laws.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
For information regarding legal matters, see note 8 to the
Consolidated Financial Statements on page 9 of this Form 10-Q and Item 3
"Legal Proceedings" as reported in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
27 Financial Data Schedule
(b) On July 26, 2000, the Company filed a Form 8-K reporting the
dismissal of their independent accountants.
Items 2, 3, 4 and 5 are not applicable.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GIANT GROUP, LTD. - Registrant
By: /s/ Pasquale A. Ambrogio
-----------------------------
Pasquale A. Ambrogio
Vice President, Chief Financial Officer,
Secretary and Treasurer
Date: November 14, 2000
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