<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 second quarterly period ended June 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 August 18, 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 Six-Month Periods Ended June 30, 2000 and 1999 3
Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999 4
Consolidated Statements of Cash Flows -
Six-Month Periods Ended June 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 11-15
PART II. OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
(a) Exhibits
(b) Reports on Form 8-K
Signature 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three and six-month periods ended June 30, 2000 and 1999
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three-months ended Six-months ended
June 30, June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 20,260 $ 17,630 $ 47,389 $ 36,992
Cost of sales 20,850 13,881 43,145 28,558
------------- -------------- --------------- -------------
Gross profit (loss) (590) 3,749 4,244 8,434
------------- -------------- --------------- -------------
Operating expenses:
Selling and shipping 2,146 2,051 4,825 3,967
General and administrative 1,456 1,943 2,603 3,401
Depreciation 72 100 132 195
Litigation 1,026 - 1,026 -
Amortization of goodwill - 171 - 343
------------- -------------- --------------- -------------
4,700 4,265 8,586 7,906
------------- -------------- --------------- -------------
Income (loss) from operations (5,290) (516) (4,342) 528
------------- -------------- --------------- -------------
Other income (expense):
Investment and other income 49 137 59 649
Gain on sale of marketable securities 6 391 23 419
Gain on sale of property and equipment - - - 269
Factoring and financing costs (1,129) (741) (2,036) (1,302)
------------- -------------- --------------- -------------
(1,074) (213) (1,954) 35
------------- -------------- --------------- -------------
Income (loss) before provision (benefit) for income taxes (6,364) (729) (6,296) 563
Provision (benefit) for income taxes - ( 186) - 402
------------- -------------- --------------- -------------
Net income (loss) $ (6,364) $ (543) $ (6,296) $ 161
============= ============== =============== =============
Basic earnings (loss) per common share $ (1.59) $ (0.14) $ (1.58) $ 0.04
============= ============== =============== =============
Diluted earnings (loss) per common share $ (1.59) $ (0.14) $ (1.58) $ 0.04
============= ============== =============== =============
Weighted average shares - basic 3,990,000 3,927,000 3,990,000 3,927,000
============= ============== =============== =============
Weighted average shares - diluted 3,990,000 3,927,000 3,990,000 4,028,000
============= ============== =============== =============
</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>
June 30, December 31,
2000 1999
--------------- --------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,633 $ 1,248
Marketable securities 5,321 8,932
Note receivable from related party 1,915 -
Note and other receivables, net 605 365
Inventories 6,480 9,661
Prepaid expenses and other assets 576 663
Income tax receivable 171 171
--------------- --------------
Total current assets 16,701 21,040
Note receivable from related party - 1,747
Property and equipment, net 1,028 758
Other assets 3,111 114
--------------- --------------
Total assets $ 20,840 $ 23,659
=============== ==============
LIABILITIES
Current liabilities:
Due to factor $ 12,215 $ 9,105
Accounts payable 4,800 5,540
Note payable to related party 1,747 -
Accrued expenses 2,793 2,462
Income taxes payable 490 490
Deferred income taxes 332 -
--------------- --------------
Total current liabilities 22,377 17,597
Capital lease obligations 157 188
Note payable to related party - 1,747
Deferred income taxes 7 7
--------------- --------------
Total liabilities 22,541 19,539
--------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 2,000,000 shares, none issued - -
Class A common stock, $.01 par value; authorized 5,000,000 shares, none issued - -
Common stock, $.01 par value; authorized 12,500,000 shares, 7,266,000 shares issued 73 73
Capital in excess of par value 35,008 35,008
Accumulated other comprehensive income - unrealized gains on marketable
securities, net 497 22
Retained deficit (8,977) (2,681)
--------------- --------------
26,601 32,422
Less 3,276,000 shares of Common stock in treasury, at cost (28,302) (28,302)
--------------- --------------
Total stockholders' equity (deficiency) (1,701) 4,120
--------------- --------------
Total liabilities and stockholders' equity (deficiency) $ 20,840 $ 23,659
=============== ==============
</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 six-month periods ended June 30, 2000 and 1999
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------------
2000 1999
----------- ----------
<S> <C> <C>
Operating Activities:
Net income (loss) $ (6,296) $ 161
Adjustments to reconcile net income (loss) to net cash used by operating
activities:
Depreciation 133 230
Amortization of goodwill - 343
Gain on sale of property and equipment - (269)
Gain on sale of marketable securities (23) (419)
Accretion of discounts on investments - (310)
Changes in assets and liabilities:
(Increase) decrease in inventories 3,181 (2,263)
Increase in receivables and prepaid expenses and other assets (128) (1,928)
Increase in due to factor 3,110 344
Increase (decrease) in accounts payable and accrued expenses (412) 617
Increase in income tax payable - 138
----------- ----------
Net cash used by operating activities (435) (3,356)
----------- ----------
Investing Activities:
Sales of marketable securities 6,333 4,445
Purchases of marketable securities (1,915) (5,014)
Purchases of property and equipment, net (403) (133)
Net proceeds from sale of property and equipment - 284
----------- ----------
Net cash provided (used) by investing activities 4,015 (418)
----------- ----------
Financing Activities:
Proceeds from short-term loan - 1,662
Collateral deposited with factor (3,000) -
Principal payments on capital lease obligations (27) (25)
Increase in note receivable from related party (168) (169)
----------- ----------
Net cash provided (used) by financing activities (3,195) 1,468
----------- ----------
Increase (decrease) in cash and cash equivalents 385 (2,306)
Cash and cash equivalents:
Beginning of period 1,248 4,226
----------- ----------
End of period $ 1,633 $ 1,920
=========== ==========
Supplemental disclosure of cash paid for:
Income taxes $ 1 $ 323
Interest 1,689 893
</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 June 30, 2000, the results of operations for the three and six-
month periods ended June 30, 2000 and 1999 and cash flows for six-month periods
ended June 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. However, for interim periods, customer returns and allowances are accrued
based on expected annualized activity. Certain 1999 amounts have been
reclassified to conform to the 2000 presentation. Operating results for the
three and six-month periods ended June 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.
On June 30, 2000 and December 31, 1999, Periscope was not in compliance
with certain covenants under its Factoring Agreement, which allows for the
lender to demand repayment of the balance due at any time. This raises
substantial doubt about the Company's ability to continue as a going concern.
See Note 4 to these Consolidated Financial Statements. The Company's
Consolidated Financial Statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
2. Women and Children's Apparel Operations
----------------------------------------
Effective April 11, 2000, the Company entered into a management agreement
with Stone Investments Banking LLC ("SIB"). In connection with this agreement,
Ralph Stone was appointed interim Chief Executive Officer of Periscope and GIANT
paid a fee of $40,000 to SIB. In addition, effective April 11, 2000, Periscope
terminated the employment of Glenn Sands as president and chief executive
officer ("Mr. Sands") and appointed Scott Pianin, a long-time Periscope senior
executive, president of Periscope. The management change at Periscope has now
been completed and Mr. Stone is no longer the Chief Executive Officer of
Periscope and the SIB management agreement has ended.
In May 2000, Mr. Sands and Jeffrey W. Sirchio, a former employee of
Periscope, filed separate civil lawsuits against Periscope and the Company. On
May 18, 2000, the Company provided an answer and counterclaim to Sands'
complaint. On July 14, 2000, the Company settled both civil lawsuits (see note
10 to these Consolidated Financial Statements).
3. Inventories
-----------
At June 30, 2000 and December 31, 1999, the Company's inventories were as
follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Raw materials $ 1,256 $ 4,926
Work-in-process 648 971
Finished goods 4,576 3,764
-------- --------
Total inventories $ 6,480 $ 9,661
======== ========
</TABLE>
6
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
4. Factoring Agreement
-------------------
At June 30, 2000 and December 31, 1999, Periscope was not in compliance
with various financial and reporting covenants in the Factoring Agreement. The
violation of these covenants causes an event of default under the Factoring
Agreement which allows the factor to demand repayment of its outstanding balance
which was $10.1 million at June 30, 2000, and to discontinue any future funding
or advances. In addition, the factor has provided an overadvance in excess of
the amount provided for in the Factoring Agreement in the amount of $6.3 million
and the total outstanding under the Factoring Agreement, including letters of
credit of $4.2 million, was $33.2 million at June 30, 2000.
On April 26, 2000, the Company amended its Cash Pledge and Security
Agreement with Century Business Credit Corporation ("Century"), whereby Century
will continue to advance funds to Periscope pursuant to the Company's current
Factoring Agreement. As required by the amended Cash Pledge and Security
Agreement with Century, GIANT has provided collateral of $3 million and
guarantees of $2 million replacing the previous $4 million guarantee under the
Factoring Agreement. As part of a Settlement Agreement, effective July 14, 2000,
of the civil action between Mr. Sands, GIANT, Periscope and David Gotterer, Mr.
Sands assigned to the factor, for the benefit of Periscope, a guarantee of
approximately $1.97 million dollars including interest Mr. Sands had previously
provided to the factor.
On June 30, 2000 and December 31, 1999, the uncollected balance of
receivables held by the factor was approximately $18.4 million and $21 million,
respectively. Due to Factor includes amounts due under the factoring line of
$10.1 million and $7.1 million and reserve for sales returns, discounts and
allowances of $2.1 million and $2.0 million as of June 30, 2000 and December 31,
1999, respectively. The interest rate on the total outstanding debt was 9.75%
and 8.75% at June 30, 2000 and December 31, 1999, respectively.
5. 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 months ended June 30, 2000 and 1999 does not include
2,151,000 and 2,106,000 options and warrants at a range of $.406 to $8.25 and
$5.4375 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
six months ended June 30, 2000 does not include 2,151,000 options and warrants
at a range of $.406 to $8.25 because the effect would be anti-dilutive as the
Company recorded a loss for the period. The calculation of Diluted EPS for the
six months ended June 30, 1999 does not include an option to purchase 200,000
shares of the Company's common stock at an exercise price of $8.25 because the
exercise price exceeds the average market price of the Company's common stock
for the period and the effect would be anti-dilutive.
7
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
The following shows the reconciliation of Basic EPS and Diluted EPS for the
six-month period ended June 30, 1999:
<TABLE>
<CAPTION>
Net Income Shares Per Share
(Numerator) (Denominator) Amount
------------- --------------- -----------
<S> <C> <C> <C>
Basic Earnings per Share
------------------------
Income available to common stockholders $ 161 3,927,000 $ 0.04
Diluted Earnings per Share
--------------------------
Effect of dilutive securities:
Options issued to employees and non-employee directors
and warrants issued in connection with the Periscope acquisition 101,000
------------- --------------- -----------
Income available to common stockholders $ 161 4,028,000 $ 0.04
============= =============== ===========
</TABLE>
6. Comprehensive Income
--------------------
The changes in components of comprehensive income (loss), net of benefit
for income taxes, for the six-month periods ended June 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 income (loss):
Unrealized gains (losses) on
marketable securities, net $ 807 $ 332 $ 475 $ (255) $ (102) $ (153)
Net income (loss) (6,296) 161
------- ------
Comprehensive income (loss) $(5,821) $ 8
======= ======
</TABLE>
7. 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.
8. Information Concerning Business Segments
----------------------------------------
The Company's one reportable segment designs, manufactures and sells women
and children's clothing. The Company's current period consolidated statement of
operations reflects the segment's results of operations for the three and six
months ended June 30, 2000 and 1999. Women and children's clothing sales made
to three major customers represented approximately 61% and 62% and 70% and 66%,
of net sales for the three and six-month periods ended June 30, 2000 and 1999,
respectively.
8
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
9. 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.
10. 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 June 30, 2000. In addition
to these actions, the Company is also involved in lawsuits as described in the
following paragraphs.
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
effectively 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
agreed to pay and in fact has paid to Periscope $1 million dollars and promises
to pay $528 related to the amount Mr. Sands owes Periscope on January 14, 2001
or
9
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
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. 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.
Since management does not believe that the previously mentioned lawsuits
and other claims and legal proceedings, in which the Company is a defendant,
contain meritorious claims, management believes that the ultimate resolution of
the lawsuits will not materially and adversely affect the Company's consolidated
financial position or results of operations.
On 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".
11. Subsequent Event
----------------
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 which if not resolved to the Company's auditors' satisfaction would
have caused it 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 second quarterly
period ended June 30, 2000, the Company has not retained new auditors. Because
of this, the Company's Form 10-Q has not been reviewed as required by the
Securities and Exchange Commission. The Company expects to retain new auditors
in the very near future and at that time will make all required filings on a
timely basis.
10
<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 Three Months Ended June 30, 2000 Versus June 30,
------------------------------------------------------------------------------
1999
-----
Net sales for the three months ended June 30, 2000 ("current period") were
$20,260 compared to $17,630 for the three months ended June 30, 1999 ("prior
period"), an increase of $2,630 or approximately 14.9%. Sales in the woven
product line for the current period were $9,949 compared to $5,320 in the prior
period, an increase of $4,629 or approximately 87.0%. This sales increase in the
woven product line was offset by a decrease in knit product sales of $1,619 to
$8,951 in the current period from $10,570 in the prior period and a decrease in
children's product sales of $380 to $1,360 in the current period from $1,740 in
the prior period.
Gross loss for the current period was $590 compared to gross profit of
$3,749 or 21.3% of net sales in the prior period. Subsequent to the termination
of Mr. Sands in April 2000, Periscope's management engaged an apparel consultant
to evaluate the inventory based on new information available to Periscope
resulting from the change in market conditions from the end of 1999 and the new
direction the business may be taking. Based on this evaluation, the Company made
the decision to record adjustments for the impairment of inventory related to
inventory obsolescence and markdowns and overstated vendor chargebacks.
Periscope also accrued in the current period approximately $500 related to
customs duties on goods shipped prior to the end of 1999. The 1999 quarterly
gross profit was calculated using estimates for sales adjustments and inventory
obsolescence. At year-end, actual adjustments related to sales adjustments and
inventory obsolescence were higher than estimated for the quarterly calculation.
In addition, higher late shipments caused by a reduced availability of credit to
obtain the raw materials to produce goods on a timely basis and an increase in
overstock charges reduced the 1999 estimated quarterly gross profit percentage
to an actual year-end gross profit of 13.5%.
Selling and shipping expenses for current period increased $95 or 4.6% to
$2,146 compared to $2,051 in the prior period. The increase in selling and
shipping expenses is due to higher freight out and related shipping costs of
$279 and higher advertising expenses of $77 related to the new customer base.
These increases in expenses were partially offset by reduced travel and
entertainment expenses of $181, lower office and other expenses of $65 and lower
selling and shipping salaries and related expenses of $15. Subsequent to the
termination of Mr. Sands in April 2000, Periscope's management has been
reviewing apparel expenses in an effort to cut costs; however, Periscope may
need to make changes to improve the apparel operations, which may result in some
additional expenses for the period. These additional expenses relate primarily
to the utilization of an outside shipping facility to expedite certain shipments
and provide timely delivery. The decrease in expenses was a result of
Periscope's management review of the apparel operations in an effort to cut
costs, including lowering salesman's commissions and the reduction of expenses
related to the termination of Mr. Sands and termination/resignation of other
personnel.
General and administrative expenses for current period decreased $487 or
25.1% to $1,456 compared to $1,943 in the prior period. GIANT's management
continues to review all expenses in an effort to cut costs. For the current
period, general and administrative expenses were reduced by $417 or 43%. In
January 2000, the Company's President and Chief Executive Officer voluntarily
authorized the Company to decrease his annual salary to $450 and voluntarily
cancel the termination payment due to him at the expiration of his employment
agreement, resulting in a quarterly cost savings of approximately $162 and $111,
respectively. In addition for the current period, GIANT's rent expense decreased
approximately $73 due to the move into a smaller office and travel expense
decreased $39. Periscope's general and administrative costs for the current
period decreased $70 to $910 from $980 for the prior period. The apparel
operations' salaries and related costs and travel and entertainment decreased
$140 and $102, respectively in the current period. However, these decreases in
expenses were partially offset by higher professional fees of $109 and EDP
expenses of $31 related to changes made by management to improve operations and
higher letter of credit charges of $33 related to increased imported goods.
Depreciation decreased $28 to $72 in the current period from $100 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
the move of GIANT's corporate office.
Litigation expenses relate to the civil suits and counterclaims, initiated
during the current period, primarily involving Mr. Sands, Mr. Sirchio, GIANT,
Periscope and David Gotterer. On July 14, 2000, all civil suits and
counterclaims were settled and the Company expects to record income before
litigation expenses of approximately $3.3 million dollars in the
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (cont.) (Dollars in thousands, except per share amounts)
third quarter of 2000. See note 10 to the Consolidated Financial Statements in
Part I, Item 1 of this Form 10-Q.
There is no goodwill amortization in the current period due to the write-
off of the Company's investment in Periscope, including goodwill in December
1999.
Other income (expense) for the current period increased $861 to an expense
of $1,074 from an expense of $213 in the prior period. Factor and financing
costs increased $388 due to higher interest rates and a higher balance due to
the factor in the current period. In addition, the Company recorded lower
investment income of $88 in the current period due to higher investments in debt
securities in 1999. In the prior period, the Company recorded higher gains of
$385 from the sales of marketable securities.
Results of Operations for the Six Months Ended June 30, 2000 Versus June 30,
----------------------------------------------------------------------------
1999
----
Net sales for the six months ended June 30, 2000 ("current period") were
$47,389 compared to $36,992 for the six months ended June 30, 1999 ("prior
period"), an increase of $10,397 or approximately 28.1%. Sales in the woven
product line for the current period were $28,480 compared to $11,660 in the
prior period, an increase of $16,820 or approximately 144.3%. This sales
increase in the woven product line was offset by a decrease in knit product
sales of $6,334 or approximately 28.0% to $16,318 in the current period from
$22,652 in the prior period and a decrease in children's product sales of $89 to
$2,591 in the current period from $2,680 in the prior period.
Gross profit for the current period was $4,244 or 9.0% of net sales compared
to $8,434 or 22.8% of net sales in the prior period. Subsequent to the
termination of Mr. Sands in April 2000, Periscope's management engaged an
apparel consultant to evaluate inventory based on new information available to
Periscope resulting from the change in market conditions from the end of 1999
and the new direction the business may be taking. Based on this evaluation, the
Company made the decision to record adjustments for the impairment of inventory
related to inventory obsolescence and markdowns and overstated vendor
chargebacks. Periscope also accrued in the current period approximately $500
related to customs duties on goods shipped prior to the end of 1999. The 1999
six-month gross profit was calculated using estimates for sales adjustments and
inventory obsolescence. At year-end, actual adjustments related to sales
adjustments and inventory obsolescence were higher than estimated for the
quarterly calculation. In addition, higher late shipments caused by a reduced
availability of credit to obtain the raw materials to produce goods on a timely
basis and an increase in overstock charges reduced the 1999 six-month estimated
gross profit percentage to an actual year-end gross profit of 13.5%.
Selling and shipping expenses for current period increased $858 or 21.6% to
$4,825 compared to $3,967 in the prior period. This increase is primarily due to
higher selling, including sales commissions and shipping salaries and related
expenses of $617 incurred mainly in the first quarter of 2000, higher freight
out and related shipping costs of $428, higher office and other expenses of $70
in the current period. These increases in expenses were partially offset by
lower travel and entertainment of $266. Increase in expenses occurred primarily
in the first quarter prior to Periscope's management assuming control in the
second quarter and included an increase in some commission rates. In addition,
Periscope is continuing to use an outside shipping facility to expedite certain
shipments and provide timely delivery.
General and administrative expenses for current period decreased $798 or
23.5% to $2,603 compared to $3,401 in the prior period. GIANT's management
continues to review all office expenses in an effort to cut costs. For the
current period, general and administrative expenses were reduced by $1,066 or
62%. 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 $223 for the current period.
In addition, in January 2000 GIANT's CEO voluntarily authorized the Company to
decrease his annual salary to $450, a cost savings of approximately $324 for the
current period. GIANT also incurred lower rent expense of approximately $73 due
to the move into a smaller office and lower travel expense of $59. These
decreases in expenses were slightly offset by higher professional fees of $68,
including legal of $49. The total decrease in GIANT's general and administrative
costs was partially offset by an increase in general and administrative expenses
of $268 for the apparel operations. For the current period, professional fees
increased by $328 mostly due to the utilization of an
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (cont.) (Dollars in thousands, except per share amounts)
outside consultant and an increase in EDP expenses of $47 to improve operations
and higher letter of credit charges of $53 related to increased imported goods.
These increases in expenses were partially offset by a decrease in travel and
entertainment expenses of $151 primarily related to the termination of Mr.
Sands and termination/resignation of other personnel.
Depreciation decreased $63 to $132 in the current period from $195 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
the move of GIANT's corporate office.
Other income (expense) for the current period decreased $1,989 to an
expense of $1,954 from income of $35 in the prior period. Factor and financing
costs increased $734 due to higher interest rates and a higher balance due to
the factor in the current period. In addition, the Company recorded higher
investment income of $590 in the prior period due to higher investments in debt
securities in 1999. In the prior period, the Company recorded higher gains of
$396 from the sales of marketable securities and recorded a gain on the sale of
land of $269.
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents and marketable securities at June 30, 2000
totaled $6,954 compared with $10, 180 at December 31, 1999. At June 30, 2000 the
Company had negative working capital of $5,676 primarily due the classification
of a $3,000 collateral deposit with Periscope's factor as a long-term asset and
adjustments for the impairment of inventory recorded in the current quarter. On
December 31, 1999, the Company had working capital of $3,443 with a current
ratio of 1.2 to 1.
At June 30, 2000 and December 31, 1999, Periscope was not in compliance
with various financial and reporting covenants in the Factoring Agreement. The
violation of these covenants causes an event of default under the Factoring
Agreement which allows the factor, to demand repayment of its outstanding
balance of $10.1 million at June 30, 2000, and to discontinue any future funding
or advances. In addition, the factor has provided an overadvance in excess of
the amount provided for in the Factoring Agreement in the amount of $6.3 million
and the total outstanding under the Factoring Agreement, including letters of
credit of $4.2 million, was $33.2 million at June 30, 2000. In addition to
funding provided by the factor, the Company's liquidity is provided by cash and
cash equivalents, marketable securities and investment income.
Net cash used by operating activities for the six months ended June 30,
2000 ("current period") was $435 compared to cash used by operating activities
of $3,356 for the six months ended June 30, 1999 ("prior period").
Net cash provided by investing activities for the current period increased
$4,433 to $4,015 compared to net cash used by investing activities of $418 for
the prior period. In the current period, the Company sold marketable securities,
net of purchases of $4,418 compared to purchases, net of sales of marketable
securities of $569 in the prior period. In the current period, the Company
purchased property and equipment for $403 compared to $133 in the prior period.
In addition, the Company sold land in the prior period.
Net cash used by financing activities for the current period was $3,196
compared to cash provided by financing activities of $1,468 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. During the prior period, cash of $1,662 was provided by short-term
borrowings, collateralized by marketable securities.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (cont.) (Dollars in thousands, except per share amounts)
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.
Based on discussions with its customers and vendors, 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. However,
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. To date,
there has been no material adverse effects on the Company's business due to any
Year 2000 issues with the Company's customers and vendors.
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 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 six-month period ended June 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.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (cont.) (Dollars in thousands, except per share amounts)
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 plan, domestic and
global economic conditions, manufacturing in 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.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
For information regarding legal matters, see Note 10 of the Notes to
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 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company's Annual Meeting of Stockholders was held on June 12,
2000. The stockholders elected a Board of five directors and ratified the
appointment of Arthur Andersen LLP as the Company's independent auditors.
Results of the voting in connection with each of the matters submitted
to the stockholders were as follows:
<TABLE>
<CAPTION>
Board of Directors For Against Abstain No Vote
------------------ --- ------- ------- -------
<S> <C> <C> <C> <C>
Terry Christensen 2,840,065 - - 63,942
David Gotterer 2,839,972 - - 64,035
David Malcolm 2,840,310 - - 63,697
Jeffrey Rosenthal 2,840,515 - - 63,492
Burt Sugarman 2,832,960 - - 71,047
Ratify appointment of Arthur Anderson LLP
as Company's Independent auditors 2,884,496 12,297 7,214 -
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
27 Financial Data Schedule
(b) During the quarter ended June 30, 2000, no reports on Form 8-K were
filed.
Items 2, 3 and 5 are not applicable.
16
<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: August 18, 2000
17
