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, 1999
GIANT GROUP, LTD.
9000 Sunset Boulevard, 16/th/ Floor, Los Angeles, California 90069
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 12, 1999 the latest practicable date, there were 3,927,148 shares of
Common Stock outstanding.
GIANT GROUP, LTD.
INDEX
PART I. FINANCIAL INFORMATION
- -------------------------------
Page No.
--------
Item 1. Financial Statements
Consolidated Statements of Operations -
Three and Six-Month Periods Ended June 30, 1999 and 1998 3
Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 4
Consolidated Statements of Cash Flows -
Six-Month Periods Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-15
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
2
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, 1999 and 1998
(Unaudited)
(Dollars in thousands, except per share amounts)
Three-months ended Six-months ended
June 30, June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net sales $ 17,630 $ $ 36,992 $
Cost of sales 13,881 - 28,558 -
---------- ---------- ---------- ----------
Gross profit 3,749 - 8,434 -
---------- ---------- ---------- ----------
Operating expenses:
Selling and shipping 2,051 - 3,967 -
General and administrative 1,943 910 3,401 1,809
Depreciation 100 47 195 188
Amortization of goodwill 171 - 343 -
Co-ownership program, net of
charter income of $346 and $496 - 72 - 494
---------- ---------- ---------- ----------
4,265 1,029 7,906 2,491
---------- ---------- ---------- ----------
Income (loss) from operations (516) (1,029) 528 (2,491)
---------- ---------- ---------- ----------
Other income (expense):
Factoring and financing costs (741) (1) (1,302) (2)
Investment and other income 528 739 1,068 1,339
Gain on sale of property - 2,845 269 2,845
---------- ---------- ---------- ----------
(213) 3,583 35 4,182
---------- ---------- ---------- ----------
Income (loss) before provision (benefit)
for income taxes (729) 2,554 563 1,691
Provision (benefit) for income taxes (186) 697 402 697
---------- ---------- ---------- ----------
Net income (loss) $ (543) $ 1,857 $ 161 $ 994
========== ========== ========== ==========
Basic earnings (loss) per common share $ (0.14) $ 0.58 $ 0.04 $ 0.31
========== ========== ========== ==========
Diluted earnings (loss) per common share $ (0.14) $ 0.58 $ 0.04 $ 0.31
========== ========== ========== ==========
Weighted average shares - basic 3,927,000 3,181,000 3,927,000 3,181,000
========== ========== ========== ==========
Weighted average shares - diluted 3,927,000 3,181,000 4,028,000 3,181,000
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
GIANT GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
June 30, December 31,
1999 1998
----------- -----------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 1,920 $ 4,226
Marketable securities 11,551 7,797
Current portion of note receivable from related party 2,171 2,002
Note and other receivables 2,316 4,752
Inventories 14,701 12,438
Prepaid expenses and other assets 2,349 690
Deferred income taxes 993 892
----------- -----------
Total current assets 36,001 32,797
Note receivable from related party 543 499
Property and equipment, net 1,906 1,983
Deferred income taxes 1,748 1,748
Goodwill, net of amortization of $381 and $38 27,072 27,415
Other assets 94 118
----------- -----------
Total assets $ 67,364 $ 64,560
=========== ===========
LIABILITIES
Current liabilities:
Short-term loan $ 1,662 $ -
Due to factor 4,212 3,868
Accounts payable 7,855 7,134
Current portion of note payable to related party 400 400
Accrued expenses 1,199 1,297
Income taxes payable 692 554
----------- -----------
Total current liabilities 16,020 13,253
Capital lease obligations 221 252
Note payable to related party 1,287 1,227
Deferred income taxes 7 7
----------- -----------
Total liabilities 17,535 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 shares issued 73 73
Capital in excess of par value 35,196 35,196
Accumulated other comprehensive loss - unrealized losses on marketable securities, net (343) (190)
Retained earnings 43,744 43,583
----------- -----------
78,670 78,662
Less 3,339,000 shares of Common stock in treasury, at cost (28,841) (28,841)
----------- -----------
Total stockholders' equity 49,829 49,821
----------- -----------
Total liabilities and stockholders' equity $ 67,364 $ 64,560
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six-month periods ended June 30, 1999 and 1998
(Unaudited)
(Dollars in thousands)
Six-months ended
June 30,
-----------------------------------
1999 1998
------- --------
Operating Activities:
Net income $ 161 $ 994
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Depreciation 573 188
Gain on sale of land and property and equipment (269) (2,845)
Gain on sale of marketable securities (419) (125)
Accretion of discounts on investments, net (310) (355)
Changes in assets and liabilities:
Decrease in income tax receivables - 1,100
Increase in inventories (2,263) -
Increase in receivables and prepaid expenses and other assets (1,928) (76)
Increase in due to factor 344 -
Increase (decrease) in accounts payable and accrued expenses 617 (305)
Increase in income taxes payable 138 1,911
------- --------
Net cash (used) provided by operating activities (3,356) 487
------- --------
Investing Activities:
Sales of marketable securities 4,445 5,055
Purchases of marketable securities (5,014) (25,506)
Net proceeds from sale of assets 284 19,726
Debt payment - 74
Purchase of assets held-for-sale and related costs - (49)
Purchases of property and equipment (133) (39)
------- --------
Net cash used by investing activities (418) (739)
------- --------
Financing Activities:
Proceeds from short-term loan 1,662 -
Principal payments on capital lease obligations (25) -
Increase in note receivable from related party (169) -
------- --------
Net cash provided by financing activities 1,468 -
------- --------
(Decrease) in cash and cash equivalents (2,306) (252)
Cash and cash equivalents:
Beginning of period 4,226 1,137
------- --------
End of period $ 1,920 $ 885
======= ========
Supplemental disclosure of cash (paid) received for:
Income taxes $ (323) $ 2,282
Interest (893) (2)
The accompanying notes are an integral part of these consolidated financial
statements.
5
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 (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of June 30,
1999, the results of operations for the three and six-month periods ended June
30, 1999 and 1998 and cash flows for six-month periods ended June 30, 1999 and
1998. 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 1998 Annual Report on Form 10-K. However, for
interim periods, customer returns and allowances are accrued based on expected
annualized activity and cost of sales are computed using the gross profit
method. Certain 1998 amounts have been reclassified to conform to the 1999
presentation. Operating results for the three and six-month periods ended June
30, 1999 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 1998 Annual Report on Form 10-K.
2. Acquisition
-----------
On December 11, 1998 the Company acquired 100% of the outstanding common
stock of Periscope, which designs, sources and markets an extensive line of high
quality moderate priced, women and children's clothing to mass merchandisers and
major retailers, primarily for sale under private labels. Periscope uses only
outside manufacturers, primarily in Mexico, and then ships direct to its retail
customers. It also imports finished products primarily from China and Taiwan.
It only manufactures products based on firm orders and, once a product is
shipped to a customer, returns are not accepted unless the product is defective
or delivered late.
The acquisition has been accounted for by the purchase method of accounting
and, accordingly, Periscope's assets and liabilities have been recorded at their
fair value as of the date of acquisition. Periscope's results of operations are
included in the Company's consolidated statement of operations for the three and
six-month periods ended June 30, 1999. On December 11, 1998, prior to the
effective date of the acquisition, the Company made a gross advance of $28,500
in cash to Periscope, which Periscope used to reduce certain borrowings. On May
18, 1999, the Company's Board of Directors approved the capitalization of this
advance.
The cost of the acquisition included 953,093 shares of Company common
stock, which were held in treasury and valued at $6,493, 75,000 Company warrants
valued at $195 and exercisable at $7.25 over a five year period, and transaction
costs of $259. 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.
On July 23, 1999, the Company's Board of Directors approved an election
given to the Periscope stockholders. The election gave the Periscope
stockholders a choice of receiving their pro-rata portion of 62,500 shares of
the Company's common stock, which would be issued after July 31, 1999 and also
their pro-rata portion of an additional 62,500 shares of the Company's common
stock should Periscope's pre-tax profits for the twelve months ended June 30,
2000 exceed $13 million, instead of receiving up to 225,000 shares of the
Company's common stock (as described in the previous paragraph). If accepted by
less than 100% of the Periscope stockholders, the Company will issue an adjusted
amount of shares of its common stock. The Company will issue the appropriate
amount of shares of its common stock upon receipt of notice from all Periscope
stockholders.
6
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
3. Letter of Credit
----------------
On May 26, 1999, the Company signed an agreement with a new lender to
provide an additional letter of credit accommodation ("New LC") to collateralize
the Company's obligations to third parties for the purchase of goods and
inventory. The term of this agreement expires on January 31, 2000 and can be
terminated within 30 days of the Company receiving written notice from the
factor. The Company is subject to an interest rate equal to the greater of 6% or
prime plus one-quarter of one percent on any money paid in connection with the
New LC and other fees stated in the agreement. The Company provided a collateral
security deposit of $2,000 earning interest equal to prime rate less 3%. The
obligations under the New LC can never exceed the lesser of $4,000 or the
collateral security deposit times 200%. At June 30, 1999, the Company had
approximately $3,936 of open letters of credit outstanding.
On August 10, 1999, all outstanding obligations under the New LC agreement
were assumed by Periscope as part of the new factoring agreement entered into by
Periscope and a major factor (See Note 10 to these consolidated financial
statements). In connection with this assumption, all interest in the goods
shipped in connection with the New LC have been assigned to Periscope and the
factor. With the completion of the new factoring agreement, the $2,000
collateral security deposit, plus interest, was returned to the Company.
4. Earnings (Loss) Per Share
-------------------------
Basic earnings (loss) per common share ("Basic EPS") is computed by
dividing reported net earnings or loss available to common stockholders by the
weighted average shares outstanding. The computation of diluted earnings (loss)
per common share ("Diluted EPS") 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, 1999 does not include 2,206,000
options and warrants, at a range of $5.44 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.
Options to purchase 2,101,000 shares of the Company's common stock at a range of
$5.44 to $8.25 were outstanding during the prior year periods but were not
included in the computation of Diluted EPS because the options prices were
greater than the average market price of the Company's common stock and the
effect would be anti-dilutive.
The following shows the reconciliation of Basic EPS and Diluted EPS for the
six-month period ended June 30, 1999:
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- -----------
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 acquisition 101,000
----------- ------------- -----------
Income available to common stockholders $161 4,028,000 $0.04
=========== ============= ===========
7
GIANT GROUP, LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
5. Comprehensive Income
--------------------
The changes in components of comprehensive income (loss), net of benefit
for income taxes, for the six-month periods ended June 30, 1999 and 1998 are as
follows:
1999 1998
-------------------------------- ---------------------------------
Pre-tax Tax Net Pre-tax Tax Net
Amount Benefit Amount Amount Benefit Amount
------- ------- ------- -------- ------- ------
Other comprehensive loss:
Unrealized losses on
marketable securities, net $(255) $(102) $(153) $(1,658) $(663) $(995)
Net income 161 994
------- --------
Comprehensive income (loss) $ 8 $ (1)
======= =========
6. Affiliates' Transactions
------------------------
In March 1999, KCC signed an agreement with Santa Barbara Restaurant Group,
Inc. ("SBRG"). In accordance with the agreement, KCC exchanged its remaining
$2,995 of Checkers 13% restructured debt for 998,377 shares of SBRG's $.08 par
value common stock at a market price of $3.00. The Company recorded investment
income of approximately $129 equal to the remaining unamortized discount of the
13% restructured debt. The SBRG shares are not currently 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. After two years,
the shares will be fully transferable under Rule 144 of the Securities Act of
1933. Currently, SBRG is in the process of registering the shares through a
registration statement, which should be filed in the near term.
On August 5, 1999, the stockholders of both Checkers and Rally's approved
the merger agreement pursuant to which the two companies merged in an all-stock
transaction, previously announced on January 29, 1999. 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.
The effective date for the closing of the merger is August 9, 1999. In
addition, the Checkers stockholders approved a post-merger one-for-twelve
reverse stock split. Subsequent to the merger and reverse stock split, the
Company will own approximately 535,000 shares of Checkers common stock or 5.7%
of the outstanding shares of Checkers common stock and own warrants to purchase
approximately 237,000 shares of Checkers common stock. The new company will
continue to operate restaurants under both the Checkers and Rally's brand names
for the foreseeable future.
7. Information Concerning Business Segments
----------------------------------------
The Company's one reportable segment, the design, manufacture and sale of
women and children's clothing, was acquired through an acquisition, effective
December 11, 1998. 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, 1999. Women and children's clothing sales made to three
major customers represented approximately 70% and 66% of net sales, respectively
for the three and six month periods ended June 30, 1999.
8
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
8. Recent Accounting Pronouncements
--------------------------------
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The statement is intended to eliminate the diversity in practice
in accounting for internal-use software costs and improve financial reporting.
The statement is effective for fiscal years beginning after December 15, 1998.
The Company has adopted this statement in the first quarter of 1999 and has
determined that the effect of this statement on the Company's current
consolidated financial position and consolidated results of operations is not
material.
In June 1998, the Financial Accounting Standards Board issued FASB 133
"Accounting for Derivative Instruments and Hedging Activities" ("FASB 133").
This statement increases the visibility, comparability, and understanding of the
risks associated with holding derivatives by requiring all entities to report
all derivatives at fair value as assets or liabilities. It also provides
guidance and practice by providing companies with comprehensive rules for all
derivatives and hedging activities. FASB 133 is effective for fiscal quarters of
fiscal years that begin after June 15, 2000. The Company will follow the
disclosure requirements set forth in this statement; however, the Company does
not currently hold or issue derivative instruments or nonderivative instruments
that are designated and qualify as hedging instruments.
9. Commitments and Contingencies
-----------------------------
The Company is involved in lawsuits as described in the Company's 1998
Annual Report on Form 10-K and as further described in the following paragraphs.
Mittman/Rally's. In January and February 1994, two putative class action
----------------
lawsuits were filed, purportedly on behalf of the shareholders of Rally's in the
United States District Court for the Western District of Kentucky, against
Rally's, certain of Rally's present and former officers, directors and
shareholders and its auditors and GIANT. The complaints allege defendants
violated the Securities Exchange Act of 1934, as amended, among other claims, by
issuing inaccurate public statements about Rally's in order to arbitrarily
inflate the price of Rally's common stock, and seek unspecified damages,
including punitive damages. On April 15, 1994, GIANT filed a motion to dismiss
and a motion to strike. On April 5, 1995, the Court struck certain provisions
of the complaint but otherwise denied GIANT's motion to dismiss. In addition,
the Court denied plaintiffs' motion for class certification. On July 31, 1995,
the plaintiffs renewed this motion, and on April 16, 1996, the Court certified
the class. Two settlement conferences have been conducted, most recently on
December 7, 1998, but have been unsuccessful. Fact discovery is anticipated to
be completed by summer 1999. Expert discovery will be completed by late fall or
early winter of 1999. No trial date has been yet to be scheduled. Management is
unable to predict the outcome of this matter at the present time. Rally's and
GIANT deny all wrongdoing and intend to defend themselves vigorously in this
matter.
Harbor. In February 1996, Harbor Finance Partners ("Harbor") commenced a
-------
derivative action, purportedly on behalf of Rally's, against Rally's officers
and directors and GIANT, David Gotterer, and Burt Sugarman before the Delaware
Chancery Courts. Harbor named Rally's as a nominal defendant. Harbor claims
that directors and officers of both Rally's and GIANT, along with GIANT breached
their fiduciary duties to the public shareholders of Rally's by causing Rally's
to repurchase certain Rally's Senior Notes at an inflated price. The NASDAQ
closing price of the Senior Notes as of August 5, 1999 was $89, approximately
31% higher than the repurchase price of $67 7/8. Harbor seeks "millions of
dollars in damages", along with rescission of the repurchase transaction. In the
fall of 1996, all defendants moved to dismiss this action. On April 3, 1997,
the Chancery Court denied defendants' motion. In the second quarter 1999 the
plaintiffs filed document requests and interrogatories. No trial date has been
set. Rally's and GIANT deny all wrongdoing and intend to vigorously defend this
action. It is not possible to predict the outcome of this action at this time.
9
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
KCC/Pike Santa Monica Action. In October 1996, KCC filed a complaint, in
-----------------------------
the Los Angeles County Superior Court, against NeoGen Investors, L.P., N.D.
Management, Inc., NeoGen Holdings, L.P., Danco Laboratories, Inc. and NeoGen
Pharmaceutical, Inc. (collectively the "NeoGen Entities") and Joseph Pike,
stating causes of action for fraud, breach of fiduciary duty, fraudulent
concealment, breach of contract, unfair business practices and permanent and
preliminary injunctive relief and against the licensors of Mifepristone, the
Population Council, Inc. and Advances in Health Technology, Inc., on a
declaratory relief claim. The complaint seeks damages for the breach by Joseph
Pike and the NeoGen Entities of a July 24, 1996 agreement by which KCC agreed to
contribute $6,000, in return for a 26% equity interest in the entity producing
the drug, Mifepristone, in the United States and other parts of the world
("NeoGen Agreement"). The $6,000 contribution was not funded. On February 19,
1997, Joseph Pike and the NeoGen Entities filed an answer to the complaint,
denying its material allegations and raising affirmative defenses. On that
date, the NeoGen Entities also filed a cross-complaint against KCC, the Company,
and certain of the Company's directors, Terry Christensen, David Malcolm and
Burt Sugarman, which alleged causes of action for fraud, breach of contract,
intentional interference with prospective economic advantage, negligent
interference with prospective economic advantage and unfair business practices.
In October 1997, KCC settled their action with the licensors, the Population
Council, Inc. and Advances in Health Technology, Inc., and in November 1997, KCC
settled their action with Joseph Pike. On May 1, 1998, the court granted the
NeoGen Entities summary adjudication on KCC's cause of action for breach of
contract. Discovery in this action is complete. On October 2, 1998, the court
entered an order, which, among other things, effectively eliminates NeoGen
Entities' ability to obtain any money judgement from KCC and the other cross-
defendants. On February 23, 1999, the court entered judgement pursuant to a
Stipulation for Judgement, by which the parties' respective claims are dismissed
with prejudice, save and except for the right to appeal certain issues. On or
about April 22, 1999, NeoGen filed a notice of appeal of that judgement. On or
about June 8, 1999, KCC filed a notice of cross-appeal.
Neogen/ Danco v. KCC. This complaint for damages for trade libel was filed
---------------------
on October 30, 1998 in the Superior Court for the State of California for the
County of Los Angeles. The complaint alleged one cause of action for trade
libel against all defendants KCC, GIANT, Terry Christensen and Does 1 through
20, regarding defendants' alleged statements to the media concerning plaintiffs
Neogen Investors, L.P., and Danco Laboratories, Inc. and Joseph Pike. The
complaint was never served. On August 3, 1999 Neogen filed a request for
dismissal of the entire action without prejudice and the dismissal of this
action was entered on that date by the court.
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 July 23, 1999, the Company amended the employment contract with the
President and Chief Executive Officer of Periscope by increasing his annual base
salary to $950 from $500 for the second and third year of his current employment
term.
10
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
10. Subsequent Event
----------------
On August 10, 1999, Periscope signed an agreement ("Factoring Agreement")
with a major factor, who was the same lender who issued the Company the New LC,
to obtain a new factoring line which permits, as defined in the Factoring
Agreement, daily working capital borrowing of 90.0% of eligible accounts
receivable (non-recourse), 50.0% of letters of credit outstanding issued by
Periscope and 50% of eligible inventory. The maximum borrowings under the
Factoring Agreement is $36 million. The outstanding debt is collateralized by
Periscope's receivables, inventory and other assets as defined in the Factoring
Agreement. In addition, $4 million dollars is guaranteed by the Company and
$1million dollars is personally guaranteed by Glenn Sands, Periscope's President
and Chief Executive Officer. Borrowings are subject to a processing charge equal
to 0.45% on factor credit approved accounts receivable and .30% on non-factor
credit approved accounts receivable. In addition, an interest charge is applied
to the total outstanding debt equal to the greater of 6% or the prime rate plus
one-quarter of one percent. On October 1, 1999 this interest rate is subject to
a 3% increase on certain borrowings as defined in the Factoring Agreement.
Periscope is required under the Factoring Agreement to maintain certain
financial ratios and places certain limitations on capital expenditures,
indebtedness and dividend payments. The factoring line shall continue until the
last day of the 24th month from the date the Factoring Agreement was signed and
thereafter automatically renews from year to year unless terminated at the
option of Periscope with 60 days of acceptable written notice given to the
factor or terminated by the factor by giving 5 days written notice to Periscope.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Dollars in thousands, except per share amounts)
On December 11, 1998, the Company acquired 100% of the outstanding common
stock of Periscope, a designer and manufacturer of women and children's apparel.
The acquisition has been accounted for by the purchase method of accounting.
Periscope's results of operations for the three and six-month periods ended June
30, 1999 are included in the Company's consolidated statement of operations for
the current period. Periscope's unaudited results of operations for the three
and six-month periods ended June 30, 1998 are not included in the Company's
consolidated statement of operations for the prior period; however, the prior
period's unaudited results of operations for the Company and Periscope have been
combined for proforma comparative purposes in the discussions that follow.
Results of Operations for the Three Months Ended June 30, 1999 Versus June 30,
- ------------------------------------------------------------------------------
1998
- ----
Net sales for the three-month period ended June 30, 1999 were $17,630. On
a comparable basis this was a decrease of $4,424 from net sales of $22,054 in
the prior period. The net sales decrease, including $4,386 in ladies' knit
sportswear, was due to a reduction of Periscope's available credit by the
company's factor which resulted in the company's inability to purchase raw
materials to produce goods and to ship orders.
Gross profit for the three-month period ended June 30, 1999 was $3,749 or
21.3% of net sales. On a comparable basis the prior period was $ 5,006 or 22.7%
of net sales. The decrease in gross profit resulted from a year-to-date
adjustment, recorded in the second quarter, relating to higher returns and
allowances and higher cost of sales as projected for the year. These results
were impacted by the same factors causing the decrease in sales.
Operating expenses for the three-month period ended June 30, 1999 increased
$3,236 to $4,265 from $1,029 in the prior period. The increase is primarily due
to the inclusion in the current year of the operating expenses of the apparel
operation of $3,088 and goodwill amortization of $171, partially offset by an
overall decrease in corporate expenses. In addition, the prior period included
Co-Ownership and charter expenses of $72, net of $346 of charter income related
to the yachts that were sold in April and October of 1998. On a comparable
basis, operating expenses increased $262 to $4,265 from $4,003 in the prior
period reflecting the goodwill amortization of $171 and higher selling expenses
of $282, offset by lower shipping costs of approximately $206 resulting from the
move of the apparel production and distribution facilities to Mexico.
Other income (expense) for the three-month period ended June 30, 1999
decreased $3,796 to an expense of $213 from income of $3,583 in the prior
period. The decrease is primarily related to the inclusion in the current
period of the factoring and financing costs of the apparel operations of $752.
In addition, the Company recorded lower investment income of $211 in the current
period primarily due to lower interest income from the Company's investment in
debt securities of $597, partially offset by higher gains in the current period
on the sales of marketable securities of $384. In the prior period, a gain of
$2,845 was recognized on the sale of the Company's plane. On a comparable basis,
other income decreased $2,449 to an expense of $213 from income of $2,236 in the
prior period reflecting the items previously discussed in this paragraph, offset
by the decrease in financing costs of $595 after the Company advanced funds in
December 1998 to the apparel operations to reduce certain borrowings.
Results of Operations for the Six Months Ended June 30, 1999 Versus June 30,
- ----------------------------------------------------------------------------
1998
- ----
Net sales for the six-month period ended June 30, 1999 were $36,992. On a
comparable basis this was a decrease of $1,510 from net sales of $38,502 in the
prior period. The net sales decrease, included a decrease of $7,797 in ladies'
knit sportswear and children's apparel, substantially offset by an increase of
$6,287 in wovens and imported apparel and was primarily due to a reduction of
Periscope's available credit by the company's factor which resulted in the
company's inability to purchase raw materials to produce goods and to ship
orders.
Gross profit for the six-month period ended June 30, 1999 was $8,434 or
22.8% of net sales. On a comparable basis the prior period was $8,740 or 22.7%
of net sales.
Operating expenses for the six-month period ended June 30, 1999 increased
$5,415 to $7,906 from $2,491 in the prior period. The increase is primarily due
to the inclusion in the current period of the operating expenses of the apparel
operations of $5,762 and goodwill amortization of $343, partially offset by an
overall decrease in corporate expenses in the current period. In addition, the
prior period included Co-Ownership and charter expenses of $494, net of $496 in
charter income earned prior to the sale of the yachts in April and October of
1998. On a
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (cont.) (Dollars in thousands, except per share amounts)
comparable basis, operating expenses decreased $129 to $7,906 from $8,035 in the
prior period reflecting the items previously discussed and higher selling
expenses of $559, offset by lower shipping costs of approximately $378 resulting
from the move of the apparel production and distribution facilities to Mexico.
Other income (expense) for the six-month period ended June 30, 1999
decreased $4,147 to $35 from $4,182 in the prior period. The decrease is
primarily related to the inclusion in the current period of the factoring and
financing costs of the apparel operations of $1,313. In addition, the Company
recorded lower investment income of $271 in the current period primarily due to
lower interest income from the Company's investment in debt securities of $569,
partially offset by higher gains on the sales of marketable securities of $294
in the current period. The Company also recognized a gain of $269 on the sale of
land not used in the Company's operations in the current period compared to a
gain of $2,845 on the sale of the Company's plane recorded in the prior period.
On a comparable basis, other income decreased $2,834 to $35 from income of
$2,869 in the prior period reflecting the items previously discussed in this
paragraph, partially offset by a decrease in financing costs of $1,172 after the
Company advanced funds in December 1998 to the apparel operations to reduce
certain borrowings.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents and marketable securities at June 30, 1999
totaled $13,471 compared with $12,023 at December 31, 1998. At June 30, 1999
and December 31, 1998, the Company had working capital of $19,981 and $19,544
with current ratios of 2.2 and 2.5 to 1, respectively.
The existing factoring line permits daily working capital borrowing of
90.0% of accounts receivable (non-recourse), plus 50.0% of letters of credits
outstanding issued by the Company not to exceed $10.0 million. At June 30,
1999, the Company had no obligations outstanding under this letter of credit
agreement. 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. The Company had a net outstanding balance of $4.2 and $3.9 million
under the factoring line at June 30, 1999 and December 31, 1998, respectively,
at an interest rate of prime plus 0.5% or 8.25%.
On May 26, 1999, the Company signed an agreement with a new lender to
provide an additional letter of credit accommodation ("New LC") to collateralize
the Company's obligations to third parties for the purchase of goods and
inventory. The term of this agreement expires on January 31, 2000 and can be
terminated within 30 days of the Company receiving written notice from the
factor. The Company is subject to an interest rate equal to the greater of 6%
or prime plus one-quarter of one percent on any money paid in connection with
the New LC and other fees stated in the agreement. The Company provided a
collateral security deposit of $2,000 earning interest equal to prime rate less
3%. The obligations under the New LC can never exceed the lesser of $4,000 or
the collateral security deposit times 200%. At June 30, 1999, the Company had
approximately $3,936 of open letters of credit outstanding.
On August 10, 1999, Periscope signed an agreement ("Factoring Agreement")
with a major factor, who was the same lender who issued the Company the New
LC, to obtain a new factoring line which permits, as defined in the Factoring
Agreement, daily working capital borrowing of 90.0% of eligible accounts
receivable (non-recourse), 50.0% of letters of credit outstanding issued by
Periscope and 50% of eligible inventory. The maximum borrowings under the
Factoring Agreement is $36 million. The outstanding debt is collateralized by
Periscope's receivables, inventory and other assets as defined in the Factoring
Agreement. In addition, $4 million dollars is guaranteed by the Company and
$1million dollars is personally guaranteed by Glenn Sands, Periscope's President
and Chief Executive Officer. Borrowings are subject to a processing charge equal
to 0.45% on factor credit approved accounts receivable and .30% on non-factor
credit approved accounts receivable. In addition, an interest charge is applied
to the total outstanding debt equal to the greater of 6% or the prime rate plus
one-quarter of one percent. On October 1, 1999 this interest rate is subject to
a 3% increase on certain borrowings as defined in the Factoring Agreement.
Periscope is required under the Factoring Agreement to maintain certain
financial ratios and places certain limitations on capital
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (cont.) (Dollars in thousands, except per share amounts)
expenditures, indebtedness and dividend payments. The factoring line shall
continue until the last day of the 24th month from the date the Factoring
Agreement was signed and thereafter automatically renews from year to year
unless terminated at the option of Periscope with 60 days of acceptable written
notice given to the factor or terminated by the factor by giving 5 days written
notice to Periscope. On August 10, 1999, all outstanding obligations under the
New LC agreement (disclosed on the previous page) were assumed by Periscope as
part of the new factoring agreement entered into by Periscope and a major
factor. In connection with this assumption, all interest in the goods shipped in
connection with the New LC has been assigned to Periscope and the factor. With
the completion of the new factoring agreement, the $2,000 collateral security
deposit, plus interest, was returned to the Company.
Net cash used by operating activities for the six months ended June 30,
1999 was $3,356 compared to cash provided by operating activities of $487 for
the prior period. This increase in cash used for operations resulted from a
decrease in net income of $833 to $161 compared to a net income of $994 in the
prior period and by higher liquidity requirements in the current period,
including a collateral security deposit of $2,000 for the Company's new letter
of credit agreement.
Net cash used by investing activities for the six months ended June 30,
1999 decreased $321 to $418 compared to $739 for the prior period. In the
current period, the Company purchased marketable securities, net of sales of
marketable securities of $569 compared to $20,451 in the prior period. This
higher use of cash of $19,882 was offset by proceeds of $19,726 from the sale of
one of the Company's luxury yachts and the sale of the corporate plane in the
prior period.
Net cash provided by financing activities for the six months ended June 30,
1999 was $1,468 compared with no financing activities for the prior period.
During the current period, net borrowings of $1,662, collateralized by
marketable securities, were reduced by advances of $169 to Periscope's President
and Chief Executive Officer and principal payments on capital lease obligations
of $25.
The Company's current liquidity is provided by cash and cash equivalents,
marketable securities, investment income, cash flow from operations, 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.
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
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (cont.) (Dollars in thousands, except per share amounts)
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 March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The statement is intended to eliminate the diversity in practice
in accounting for internal-use software costs and improve financial reporting.
The statement is effective for fiscal years beginning after December 15, 1998.
The Company has adopted this statement in the first quarter of 1999 and has
determined that the effect of this statement on the Company's consolidated
financial position and consolidated results of operations is not material.
In June 1998, the Financial Accounting Standards Board issued FASB 133
"Accounting for Derivative Instruments and Hedging Activities" ("FASB 133").
This statement increases the visibility, comparability, and understanding of the
risks associated with holding derivatives by requiring all entities to report
all derivatives at fair value as assets or liabilities. It also provides
guidance and practice by providing companies with comprehensive rules for all
derivatives and hedging activities. FASB 133 is effective for fiscal quarters of
fiscal years that begin after June 15, 2000. The Company will follow the
disclosure requirements set forth in this statement; however, the Company does
not currently hold or issue derivative instruments or nonderivative instruments
that are designated and qualify as hedging instruments.
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, 1999, 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 1998 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
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 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.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
For information regarding legal matters, see Note 9 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, 1998.
Item 4. Submission of Matters to a Vote of Security holders
---------------------------------------------------
The Company's Annual Meeting of Stockholders was held on May 18, 1999.
The stockholders elected a Board of six directors, ratified the
appointment of Arthur Andersen LLP as the Company's independent
auditors and voted to amend the Company's 1996 Employee Stock Option
Plan.
Results of the voting in connection with each of the matters submitted
to the stockholders were as follows:
Board of Directors For Against Abstain No Vote
- ------------------ --- ------- ------- -------
Terry Christensen 2,447,845 341,752 - -
David Gotterer 2,447,640 341,957 - -
David Malcolm 2,447,845 341,752 - -
Jeffery Rosenthal 2,447,845 341,752 - -
Glenn Sands 2,447,845 341,752 - -
Burt Sugarman 2,445,327 344,270 - -
To Amend the Company's 1996 Employee
Stock Option Plan 1,628,003 595,916 5,067 560,611
Ratify appointment of Arthur Anderson LLP
as Company's Independent auditors 2,743,178 44,610 1,809 -
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
10.1 Letter of Credit Security Agreement between the Company and
Century Business Credit Corporation, dated May 26, 1999.
10.2 Factor Agreement between Periscope Sportswear, Inc. and
Century Business Credit Corporation, dated August 10, 1999
10.3 Assignment and Assumption Agreement between the Company (as
assignor), Periscope Sportswear, Inc. (as assignee) and
Century Business Credit Corporation, dated August 10, 1999.
10.4 Limited Guaranty by the Company of up to $4 million dollars in
connection with the Factor Agreement between Periscope
Sportswear, Inc. and Century Business Credit Corporation,
dated August 10, 1999.
27 Financial Data Schedule
(b) During the quarter ended June 30, 1999, no reports on Form 8-K were
filed.
Items 2,3,4 and 5 are not applicable.
16
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/ William H. Pennington
----------------------------------------
William H. Pennington
Vice President, Chief Financial Officer,
Secretary and Treasurer
Date: August 12, 1999
17