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 first quarterly period ended March 31, 1996
GIANT GROUP, LTD.
150 El Camino Drive, Suite 303, Beverly Hills, California 90212
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 May 9, 1996, the latest practicable date, there were
4,072,896 shares of common stock outstanding.
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GIANT GROUP, LTD.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements
Consolidated Statements of Operations -
Three-Month Periods Ended March 31, 1996
and 1995 3
Consolidated Balance Sheets - March 31, 1996
and December 31, 1995 4
Consolidated Statements of Cash Flows -
Three-Month Periods Ended March 31, 1996
and 1995 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
(a) Exhibits
(b) Reports on Form 8-K
Signature 14
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three-month periods ended March 31, 1996 and 1995
(Unaudited)
($ in thousands, except per share amounts)
Three-months ended
--------------------------
March 31, March 31,
1996 1995
---------- ----------
Revenue:
Investment income $ 912 $ 1,107
Gain on sale of investments 531 ---
Other income 9 3
---------- ----------
Total revenue 1,452 1,110
Costs and expenses:
General and administrative 931 920
Exchange Offer expenses 388 ---
Interest expense 31 43
Depreciation 80 90
---------- ----------
Total costs and expenses 1,430 1,053
---------- ----------
Equity in earnings (loss)
of affiliate 397 (1,671)
---------- ----------
Income (loss) before income taxes 419 (1,614)
Provision (credit) for income taxes --- ---
---------- ----------
Net income (loss) $ 419 $(1,614)
========== ==========
Primary earnings (loss) per
common share and common
equivalent share $ 0.08 $ (0.31)
========== ==========
Weighted average shares 5,548,000 5,180,000
========== ==========
See accompanying notes to consolidated financial statements.
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GIANT GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1996 1995
------------ ------------
(Unaudited)
($ in thousands,
except per share amounts)
ASSETS
Current assets
Cash and cash equivalents $ 32,121 $ 16,991
Short-term investments available for sale 8,047 25,650
Note and other receivables 4,432 712
Prepaid expenses and other current assets 880 1,618
--------- ---------
Total current assets 45,480 44,971
Investment in affiliate 3,820 3,423
Property and equipment, net 3,278 3,267
Other assets 20 20
--------- ---------
Total assets $ 52,598 $ 51,681
========= =========
LIABILITIES
Current liabilities
Accounts payable and accrued expenses 991 706
Current maturities of long-term debt 46 1,671
Income taxes payable 3,219 3,469
Deferred gain on the sale of affiliate's
debt securities 2,927 ---
--------- ---------
Total current liabilities 7,183 5,846
Deferred income taxes 1,059 690
--------- ---------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized
2,000,000 shares, none issued
Common stock, $.01 par value; authorized
12,500,000 shares, issued 7,266,000 shares
at March 31 and 6,966,000 at December 31 73 69
Capital in excess of par value 35,530 33,508
Unrealized holdings gains (losses) on short-
term investments 660 (1,328)
Retained earnings 30,215 29,796
--------- ---------
66,478 62,045
Less common stock in treasury; 2,488,000 shares
at March 31 and 1,952,000 at December 31,
at cost 22,122 16,900
--------- ---------
Total stockholders' equity 44,356 45,145
--------- ---------
Total liabilities and stockholders' equity $ 52,598 $ 51,681
========= =========
See accompanying notes to consolidated financial statements.
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GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three-month periods ended March 31, 1996 and 1995
(Unaudited)
1996 1995
--------- ---------
($ in thousands)
CASH FLOWS USED BY OPERATING ACTIVITIES:
Net income (loss) $ 419 $ (1,614)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation 80 90
Gain on sale of investment (531) ---
Accretion of discounts on marketable securities (186) ---
Equity in (earnings) loss of affiliate (397) 1,671
Changes in operating assets and liabilities:
Other receivables (149) ---
Prepaid expenses and other assets (147) (100)
Accounts payable and accrued expenses 285 (788)
Income tax payable (250) ---
--------- ---------
Net cash used by operating activities (876) (741)
--------- ---------
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Sales of short-term investments, net of purchases 9,559 42,620
Proceeds from sale of affiliate's debt
securities 11,860 ---
Advances, net to affiliate under short-term line
of credit (500) ---
Tax payments relating to discontinued operations --- (22,238)
Purchases of property and equipment (91) (35)
--------- ---------
Net cash provided by investing activities 20,828 20,347
--------- ---------
CASH FLOWS USED BY FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 2,025 ---
Repayment of short-term borrowings (1,625) (1,914)
Purchase of treasury stock (5,222) ---
--------- ---------
Net cash used by financing activities (4,822) (1,914)
--------- ---------
Increase in cash and cash equivalents 15,130 17,692
Cash and cash equivalents:
Beginning of period 16,991 23,472
--------- ---------
End of period $ 32,121 $ 41,164
========= =========
Supplemental disclosure of cash paid for:
Income taxes $ 250 $ 22,238
Interest 31 43
See accompanying notes to consolidated financial statements.
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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
March 31, 1996 and the results of operations and the cash
flows for the three-month periods ended March 31, 1996 and
1995. 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 1995 Annual Report on Form 10-K. Certain 1995
amounts have been reclassified to conform to the 1996
presentation. Operating results for the three-month period
ended March 31, 1996 are not necessarily indicative of the
results that may be expected for the full year. It is
suggested that the accompanying consolidated financial
statements be read in conjunction with the financial
statements and notes in the Company's 1995 Annual Report on
Form 10-K.
2. EARNINGS PER SHARE
Primary earnings per share and common equivalent share
was computed in accordance with APB No. 15 using the
weighted average number of shares outstanding in all periods
presented and the dilutive effect of outstanding stock
options in periods when the Company is in a net income
position. During the three-months ended March 31, 1996, the
dilutive effect of stock options was an increase of
approximately 870,000 in the weighted average shares.
3. INVESTMENT IN AFFILIATE
GIANT's investment in Rally's Hamburgers, Inc.
("Rally's") of $3,820 and $3,423 at March 31, 1996 and
December 31, 1995, respectively, represents approximately 48%
of Rally's outstanding common stock. At March 31, 1996, the
Company owned 7,430,000 shares of Rally's, the quoted market
value of which was $14,860. On May 3, 1996, pursuant to a
Purchase and Standstill Agreement dated April 26, 1996 (the
"Agreement"), GIANT sold 768,000 shares of Rally's common
stock to Fidelity National Financial Corp. ("Fidelity") and
2,350,000 shares of Rally's common stock to CKE Restaurants,
Inc. ("CKE"), a Fidelity affiliate. GIANT received cash of
approximately $4,751 and will recognize a pre-tax gain, for
financial statement purposes, of approximately $3,000 in the
second quarter of 1996. Additionally, because of a higher
tax basis for the stock, the Company expects to recognize a
tax benefit for the refund of taxes paid in prior years, net
of current activity, of approximately $8.5 million which the
Company expects to receive during the middle of 1997. As a
result of this sale, the Company's investment in Rally's
outstanding common stock was reduced to approximately 28%.
In addition, GIANT granted irrevocable options to Fidelity
and CKE to each purchase an additional 1,175,214 shares, at
exercise prices ranging from $3.00 to $4.00 per share,
through April 1998. If all the options are exercised,
GIANT's investment percentage in Rally's would be reduced to
approximately 13%.
On January 22, 1996, GIANT disclosed that it intended to
offer to exchange a new series of GIANT participating, non-
voting preferred stock for Rally's common stock (the
"Exchange Offer"). Upon successful completion of the
Exchange Offer, GIANT would have owned 79.9% of Rally's
outstanding common stock. On April 22, 1996, Rally's board
of directors, after discussions between a special committee
of the Rally's board and Donald E. Doyle, president and chief
executive officer of Rally's, requested that GIANT terminate
the Exchange Offer. The termination was requested to retain
sufficient market capitalization to allow Rally's easier
access to the capital markets to raise capital in the future.
GIANT has agreed to the request and has terminated the
proposed Exchange Offer.
On January 29, 1996, Rally's purchased $22,000 principal
amount of its 9.875% Senior Notes directly from GIANT. The
Company had purchased $26,424 in principal during 1995 for
$14,051 and recorded these Senior Notes as investments
available-for-sale. GIANT received cash of $11,053,
including accrued interest of $266, and a $4,145 short-term
note bearing interest at prime rate. The Company has
deferred the resulting gain of approximately $2,900 in the
first quarter of 1996, and will recognize the gain as the
note is paid. As a result, the Company expects to recognize
approximately $850 and $2,050 in income in the second and
third quarters of 1996, respectively, as the note is paid
off. On March 29, 1996, before the required due date,
Rally's made their first installment on this short-term note
for $1,129, including $57 in interest.
On February 1, 1996, GIANT agreed to provide Rally's
with a short-term credit facility of up to $2,000 to provide
for certain seasonal financing requirements. This credit
facility bears interest at prime and accrued interest is
payable on a monthly basis. As of March 31, 1996, $500 was
advanced to Rally's under this credit facility. During
April, Rally's had no borrowings under this facility.
On February 23, 1996, GIANT entered into two letters of
credit, on behalf of Rally's, with a major bank. The balance
of the outstanding letters of credit cannot exceed $793. The
letters of credit have a maximum maturity date of 365 days
but cannot extend beyond the agreement's expiration date of
February 28, 1997. The letters of credit are secured by
certain cash equivalents of GIANT. GIANT is being reimbursed
for costs related to issuance of these letters of credit. As
of March 31, 1996, these letters of credit totalled $793.
Summarized financial information for Rally's is as follows:
Operating results for the 1st quarter 1996 1995
------------------------------------- --------- ---------
Revenues $ 41,912 $ 42,470
Loss from operations (3,369) (993)
Extraordinary gain, net of income
taxes 4,522 ---
Net income (loss) 838 (3,509)
GIANT's share of non-cash equity
gain (loss) in Rally's 397 (1,671)
4. EXERCISE OF STOCK OPTIONS
On February 7, 1996, the Chairman of the Board of GIANT
exercised 300,000 options to purchase GIANT common stock at
an exercise price of $6.75 per share. As a result of this
transaction, the Company received cash of $2,025.
5. STOCKHOLDERS RIGHTS PLAN
On January 4, 1996, GIANT declared a dividend of one
preferred share purchase right ("Right") for each share of
GIANT common stock outstanding on January 16, 1996 and
authorized the issuance of additional Rights for GIANT common
stock issued after that date.
Each Right will entitle the holder to buy 1/1,000th of a
share of Series A Junior Participating Preferred Stock at an
exercise price of $30 for each 1/1,000th share. The Rights
will be exercisable and will trade separately from the GIANT
common stock (1) ten days after a public announcement that a
person or group of persons has become the beneficial owner of
15% or more of the GIANT common stock (an "Acquiring Person")
or (2) ten business days (or such later date as may be
determined by the Board of Directors) after commencement or
announcement of an intention to make a tender or exchange
offer, the consummation of which would result in such person
or group of persons becoming the beneficial owner of 15% or
more of GIANT common stock; provided however, because Mr.
Sugarman beneficially owned in excess of 15% of GIANT common
stock on the date the Stockholders Rights Plan was adopted,
Mr. Sugarman will become an Acquiring Person only upon the
acquisition by Mr. Sugarman of additional shares of GIANT
common stock, other than acquisitions through stock
dividends, stock option plans, GIANT compensation or employee
benefit plans and other similar arrangements.
If any person does become an Acquiring Person (subject
to certain exceptions), the other holders of GIANT common
stock will be able to exercise the Rights and buy GIANT
common stock having twice the value of the exercise price of
the Rights. GIANT may, at its option, substitute fractional
interests of a share of Series A Junior Participating
Preferred Stock for each share of GIANT common stock to be
issued upon exercise of the Rights. Additionally, if GIANT
is involved in certain mergers where its shares are exchanged
or certain major sales of its assets occur, holders of GIANT
common stock will be able to purchase for the exercise price,
shares of stock of the Acquiring Person having twice the
value of the exercise price of the Rights.
The Rights may be redeemed by GIANT at any time prior to
the time any person becomes an Acquiring Person for a price
of $.01 per Right. Unless exercised, the Rights expire on
January 4, 2006.
The Rights could have the effect of discouraging a third
party from making a tender offer or otherwise attempting to
obtain control of GIANT. In addition, because the Rights may
discourage accumulations of large blocks of GIANT common
stock by purchasers whose objective is to take control of
GIANT, the Rights could tend to reduce the likelihood of
fluctuations in the market price of GIANT common stock that
might result from accumulations of large blocks of stocks.
6. TREASURY STOCK
During January of 1996, the Company acquired 536,000
shares of its common stock at an aggregate cost of $5,222.
On May 3, 1996, the Company purchased, directly from
Fidelity, 705,000 shares of its common stock for an aggregate
price of $6,085.
7. ACCOUNTING CHANGE
In October 1995, the Financial Accounting Standards
Board issued FASB 123, "Accounting for Stock-Based Compensa-
tion" ("SFAS 123"). SFAS 123 is effective for fiscal years
beginning after December 15, 1995 and encourages, but does
not require a fair value based method of accounting for
employee stock options or similar equity instruments. It also
allows an entity to elect to continue to measure compensation
cost under Accounting Principles Board Opinion No.25 ("APB
25"), but requires pro forma disclosures of net income and
earnings per share as if the fair value based method of
accounting had been applied. GIANT has adopted SFAS 123 in
1996 and has elected to continue to measure compensation cost
under APB 25 and comply with the pro forma disclosure
requirements. There is no adjustment required to reflect the
adoption of SFAS 123.
8. FIDELITY NATIONAL FINANCIAL INC. MERGER OFFER
On February 14, 1996, Fidelity made an offer to acquire
the Company in a friendly merger by which the Company's
stockholders would receive Fidelity common stock valued by
Fidelity at $12.00 for each outstanding share of GIANT common
stock. At that date, Fidelity had acquired an investment of
approximately 14.8% of the Company. The Company's Board of
Directors determined that the Company was not for sale and
unconditionally rejected the merger offer. On April 26,
1996, in connection with the settlement of all litigation
involving GIANT and Fidelity and pursuant to the Agreement
(see Notes 3 and 9 of the Notes to Consolidated Financial
Statements and Item 3 "Legal Proceedings" as reported in the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995), Fidelity agreed to sell their entire
investment in GIANT to the Company.
9. COMMITMENTS AND CONTINGENCIES
In January and February 1994, two putative class action
lawsuits were filed, purportedly on behalf of the stock-
holders of Rally's in the United States District Court for
the Western District of Kentucky, against Rally's, Burt
Sugarman and GIANT and certain Rally's present and former
officers and directors and its auditors. The complaints
allege certain violations of the Securities Exchange Act of
1934, among other claims, with respect to Rally's common
stock and seek unspecified damages, including punitive
damages. On April 15, 1994, Rally's 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 Rally's motion to dismiss. In addition, the Court
denied plaintiffs' motion for class certification; the
plaintiffs' renewed this motion, and, on April 16, 1996, the
Court certified the class. In October 1995, the plaintiffs
filed a motion to disqualify Christensen, White, Miller,
Fink, Jacobs, Glaser & Shapiro, LLP ("Christensen, White") as
counsel for defendants based on a purported conflict of
interest allegedly arising from the representation of
multiple defendants as well as Ms. Glaser's position as both
a Director of Rally's and a partner in Christensen, White.
Defendants filed an opposition to the motion. That motion is
currently pending. Management is unable to predict the
outcome of this matter at the present time or whether or not
certain available insurance coverages will apply. Rally's
and the Company deny all wrong-doing and intend to defend
themselves vigorously in this matter.
In December 1995, GIANT filed an action (the "Foley
Lawsuit") in the United States District Court for the Central
District of California against William P. Foley II ("Foley"),
CKE Restaurants, Inc., Fidelity National Financial, Inc.
("Fidelity"), William Davenport and Robert Martyn
("Defendants"). GIANT subsequently amended its complaint to
include additional allegations and to seek both injunctive
relief and damages. This action arose from an attempted
hostile takeover of Rally's and GIANT, by Fidelity and Foley,
which indirectly owns and/or controls "Carl's Jr.", a
competing fast-food restaurant chain. In January 1996, Foley
and Fidelity filed a counterclaim against GIANT and its board
of directors and subsequently amended the counterclaim.
Foley and Fidelity alleged, among other claims, that GIANT's
directors breached their fiduciary duties in conjunction with
certain enumerated transactions. The parties settled their
dispute on April 26, 1996. A request for dismissal of all
claims and counterclaims has been filed pursuant to the
Agreement executed in connection with the settlement, and
as a result, GIANT acquired 705,000 shares of its common
stock from Fidelity for $6,085; Fidelity and CKE acquired an
aggregate of 3,118,000 shares of Rally's common stock from
GIANT for approximately $4,751; GIANT granted Fidelity and
CKE options to each purchase 1,175,214 shares of Rally's at
prices ranging from $3.00 to $4.00 per share; Fidelity agreed
to a 10 year standstill with respect to GIANT and its common
stock; two designees of CKE and Fidelity were elected to
Rally's Board; and the parties exchanged mutual releases.
See Report on Form 8-K dated May 1, 1996, which is
incorporated herein by reference.
In February 1996, Harbor Finance Partners ("Harbor")
commenced a derivative action, purportedly on behalf of
Rally's, against GIANT, Burt Sugarman, David Gotterer, and
certain of Rally's other officers and directors before the
Delaware Chancery Courts. Harbor named Rally's as a nominal
defendant. Harbor claims that the directors and officers of
both Rally's and GIANT, along with GIANT, breached their
fiduciary duties to the public stockholders of Rally's by
causing Rally's to repurchase certain Rally's Senior Notes at
an inflated price. Harbor seeks unspecified damages, along
with rescission of the repurchase transaction. In April
1996, Rally's filed a Motion to Dismiss in which GIANT
intends to join. The Court should enter a briefing and
hearing schedule on that motion shortly. GIANT denies all
wrongdoing and intends to vigorously defend itself in this
action. It is not possible to predict the outcome of this
action at this time.
In February 1996, Michael Shores on behalf of himself
and purportedly all other stockholders of the Company
commenced a putative class action against the Company, and
the Company's directors, Burt Sugarman, David Gotterer, Terry
Christensen and Robert Wynn (the "Directors"). The
complaint, filed before the Los Angeles County Superior
Courts, alleges that the Directors breached their fiduciary
duties by adopting a stockholder rights plan, by causing
GIANT to sell certain Rally's Senior Notes back to Rally's,
by causing GIANT to repurchase certain amounts of its own
common stock pursuant to its stock repurchase program and by
agreeing to the Exchange Offer. The complaint claims that
these actions were undertaken to entrench management rather
than for the benefit of the Company and its stockholders.
The complaint seeks unspecified damages, injunctive relief
and a recovery of attorneys' fees and costs. Although the
Company and the Directors are not yet required to respond
formally to these allegations, the Company denies all
wrongdoing and intends to vigorously defend themselves in
this action. It is not possible to predict the outcome of
the action at this time.
Since management does not believe that the previously
mentioned lawsuits contain meritorious claims, management
believes that the ultimate resolution of the lawsuits will
not materially and adversely affect the Company's financial
condition or annual results of operations.
<page-10>
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
RESULTS OF OPERATIONS FOR THE THREE-MONTHS ENDED MARCH 31, 1996
VERSUS MARCH 31, 1995
Total revenue for the three-months ended March 31, 1996
increased $342 to $1,452 from $1,110 for the comparable period in
1995. This increase resulted from the gain on the sale of an
equity investment and higher income earned on the Company's debt
securities. This increase was offset by lower income earned on
short-term U.S. government obligations as the Company began to
shift funds from these government securities to higher yield
investments.
General and administrative expenses for the three-months
ended March 31, 1996 increased $11 to $931 in 1996 from $920 in
1995. In the first quarter of 1996, the Company incurred $388 in
one-time expenses relating to legal, accounting and administra-
tive expenses incurred in the Exchange Offer, which was
terminated on April 22, 1996.
Interest expense for the first quarter of 1996 was $31
compared to $43 in the first quarter of 1995. The decrease was
the result of the prepayment in February 1996 of the Company's
9.25% Term Note, due December 18, 1996.
Non-cash equity gain in GIANT's 48% owned investment in
Rally's was $397 for the first three months of 1996 compared to a
loss of $1,671 for the same period in 1995. Rally's reported net
income of $838 in for the first three months in 1996 compared
with a net loss of $3,509 in the first three months of 1995.
Rally's recorded an extraordinary gain, net of income tax, of
$4,522 related to the early retirement of $22,000 principal
amount of their 9.875% Senior Notes. On May 3, 1996, pursuant to
a Purchase and Standstill Agreement dated April 26, 1996 (the
"Agreement"), GIANT sold 2,350,000 shares of Rally's common stock
to CKE Restaurant, Inc. ("CKE") and 768,000 shares of Rally's
common stock to Fidelity National Financial, Inc. ("Fidelity")
reducing GIANT's investment percentage in Rally's to approxi-
mately 28%. In addition, GIANT granted irrevocable options,
which expire in April 1998, to Fidelity and CKE to each purchase
1,175,214 shares, which if exercised would reduce GIANT's
investment percentage to approximately 13%.
The Company recorded net income of $419 for the first three
months of 1996 compared to a net loss of $1,614 in the comparable
period of 1995 as a result of the non-cash equity gain in Rally's
in 1996 compared to a non-cash equity loss in 1995 and higher
total revenue in 1996. However, this increase in income was
lowered by one-time expenses of the terminated Exchange Offer and
expenses incurred in connection with the Fidelity litigation
settled in the second quarter.
The Company's financial statements reflect valuation
allowances of $19,538 and $19,697, at March 31, 1996 and December
31, 1995, respectively, as it is not more likely than not, as
defined in SFAS No. 109 "Accounting for Income Taxes" ("SFAS
109") that these tax benefits will be realized in the near
future.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, investments available-for-sale
and note and other receivables totaled $44,600 at March 31, 1996
compared with $43,353 at December 31, 1995. Certain cash
equivalents secure letters of credit which were entered into by
the Company, on behalf of Rally's, with a major bank. Note and
other receivables at March 31, 1996 consist of receivables due
from Rally's related to the sale of the 9.875% Senior Notes
discussed below, the short-term credit facility provided to
Rally's and interest income due from the Company's investments in
debt securities. At March 31, 1996 and December 31, 1995, the
Company had working capital of $38,297 and $39,125 with current
ratios of 6 to 1 and 8 to 1, respectively. In addition, as of
March 31, 1996, GIANT owned 7,430,000 shares of Rally's
outstanding common stock, which it acquired from 1987 to 1994.
At March 31, 1996 and December 31, 1995, GIANT's $3,820 and
$3,423 investment in Rally's represents approximately 48% of
Rally's outstanding common stock.
On May 3, 1996, pursuant to the Agreement, GIANT sold
768,000 shares of Rally's common stock to Fidelity for $638 in
cash. In addition, GIANT sold 2,350,000 shares of Rally's common
stock to CKE for $4,113 in cash. In connection with this
transaction, GIANT will recognize a pre-tax gain, for financial
statement purposes, of approximately $3,000 in the second quarter
of 1996. Additionally, the Company, because of a higher tax
basis for the stock, expects to recognize a tax benefit for the
refund of taxes paid in prior years, net of current year
activity, of approximately $8.5 million. This transaction
reduced GIANT's investment to approximately 28% of Rally's
outstanding common stock. In addition, GIANT granted irrevocable
options to Fidelity and CKE to purchase 2,350,428 shares in
total, at exercise prices ranging from $3.00 to $4.00 per share,
1,175,214 of these options expire in April 1997 and the remainder
expire in April 1998. If all the options were to be exercised,
GIANT's investment percentage would be reduced to approximately
13%. Management believes that the Company's liquidity, which is
provided by investment income and the liquidation of short-term
investments, and capital resources are sufficient to cover the
Company's cash requirements both on a short and long-term basis.
At March 31, 1996 and December 31, 1995, the Company's
consolidated balance sheets included a liability related to a
proposed assessment by the State of California made as a result
of their audit of the tax years 1989 through 1991. GIANT has
disputed this assessment and has provided documents to support
the Company's position during meetings with the California State
Franchise Tax Board ("Board") during 1995. The Company has
received a preliminary proposed adjustment which indicates that
the assessment will be reduced. The Company paid $250 in the
first quarter for California taxes, plus interest. The ultimate
resolution will be based on the Board's official notice, which
has not yet been received.
Net cash used by operating activities for the three-months
ended March 31, 1996 was $876 compared to cash used by operating
activities of $741 for the comparable period in 1995. This
increase in cash used was attributable to the changes in
operating assets and liabilities including the effect of the
expenses incurred related to the Exchange Offer and litigation.
Net cash provided by investing activities for the three-
months ended March 31, 1996 was $20,828 compared to cash provided
by investing activities of $20,347 for the comparable period in
1995. On January 29, 1996, Rally's purchased directly from GIANT
$22,000 principal amount of its 9.875% Senior Notes. The Company
had purchased $26,424 in principal during 1995 for $14,051 and
recorded these Senior Notes as investments available-for-sale.
GIANT received cash of $11,053, including accrued interest of
$266, and a $4,145 short-term note bearing interest at prime
rate. The Company has deferred the resulting gain of approxi-
mately $2,900 in the first quarter of 1996, and will recognize
the gain as the note is paid. As a result, the Company expects
to recognize approximately $850 and $2,050 in income in the
second and third quarters of 1996, respectively as the note is
paid. On March 29, 1996, before the required due date, Rally's
made their first installment on this short-term note for $1,129,
including $57 in interest. On February 1, 1996, GIANT agreed to
provide Rally's with a short-term credit facility of up to $2,000
to provide for certain seasonal financing requirements. This
credit facility bears interest at prime and accrued interest is
payable on a monthly basis. As of March 31, 1996, $500 was
advanced to Rally's under this credit facility. During April,
Rally's had no borrowings under its facility. Additionally, in
the first quarter of 1996, the Company sold an equity security
classified as an investment available-for-sale receiving proceeds
of $10,424 and recognizing a gain of $531. These proceeds were
reduced by the purchase of a debt security for $865. In 1995,
the Company paid income taxes in the amount of $22,238 related to
the profit on the sale of the Company's cement business and
received $42,620 from the sales and maturities, net of purchases,
of marketable securities.
Net cash used by financing activities for the three-months
ended March 31, 1996 was $4,822 compared to $1,914 for the
comparable period in 1995. On February 7, 1996, the Chairman of
the Board of GIANT exercised 300,000 options to purchase GIANT
common stock at an exercise price of $6.75 per share. As a
result of this transaction, the Company received cash of $2,025.
On February 29, 1996, the Company pre-paid in full its 9.25% Term
Note. The Company incurred no additional expenses in connection
with this prepayment. Additionally, the Company's Board of
Directors has reaffirmed its commitment to its ongoing stock
repurchase program through the open market and private purchases
of its common stock. In January of 1996, the Company acquired an
additional 536,000 shares of its common stock at an aggregate
cost of $5,222. During the first quarter of 1995, the Company
paid off certain margin borrowings.
On May 3, 1996, in connection with the general release given
to all parties in the lawsuit involving GIANT and Fidelity (see
Note 9 of the Notes to Consolidated Financial Statements and Item
3 "Legal Proceedings" as reported in the Company's Annual Report
on Form 10-K for the year ended December 31, 1995), the Company
purchased 705,000 shares of its common stock, directly from
Fidelity, for an aggregate price of $6,085.
Fidelity National Financial Inc. Merger Offer
On February 14, 1996, Fidelity made an offer to acquire the
Company in a friendly merger by which the Company's stockholders
would acquire Fidelity common stock valued by Fidelity at $12.00
for each outstanding share of GIANT common stock. At that date,
Fidelity had acquired an investment of approximately 14.8% of the
Company. The Company's Board of Directors determined that the
Company was not for sale and unconditionally rejected the merger
offer. In connection with the general release, pursuant to the
Agreement, given to all parties in the lawsuit involving GIANT
and Fidelity (see Notes 3 and 9 of the Notes to Consolidated
Financial Statements and Item 3 "Legal Proceedings" as reported
in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995), Fidelity agreed to sell their entire
investment in GIANT to the Company.
Exchange Offer
On January 22, 1996, the Company disclosed that it intended
to offer to exchange a new series of GIANT participating, non-
voting preferred stock for Rally's common stock. Upon successful
completion of the Exchange Offer, GIANT would have owned 79.9% of
Rally's outstanding common.
On April 22, 1996, Rally's board of directors, after
discussions between a special committee of the Rally's board and
Donald E. Doyle, president and chief executive officer of
Rally's, requested that GIANT discontinue the Exchange Offer.
The termination was requested to retain sufficient market
capitalization to allow Rally's easier access to the capital
markets to raise capital in the future. GIANT has agreed to the
request and has terminated the proposed exchange offer.
ACCOUNTING CHANGE
In October 1995, the Financial Accounting Standards Board
issued FASB 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). SFAS 123 is effective for fiscal years beginning after
December 15, 1995 and encourages, but does not require a fair
value based method of accounting for employee stock options or
similar equity instruments. It also allows an entity to elect to
continue to measure compensation cost under Accounting Principles
Board Opinion No.25 ("APB 25"), but requires pro forma
disclosures of net income and earnings per share as if the fair
value based method of accounting had been applied. GIANT has
adopted SFAS 123 in 1996 and has elected to continue to measure
compensation cost under APB 25 and comply with the pro forma
disclosure requirements. There is no adjustment required to
reflect the adoption of SFAS 123.
<page-13>
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 8 of this
Form10-Q and Item 3 "Legal Proceedings" as reported in the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement re computation of per share earnings
27 Financial Data Schedule
99 Additional exhibits:
99.1 Form 8-K dated May 1, 1996
99.2 Form 10-K Item 3. "Legal Proceedings"
(b) Reports on Form 8-K
The following reports, filed during the first quarter
of 1996, are incorporated by reference and are summarized below:
January 4, 1996 - Company's adoption of the Stock Rights Plan.
January 5, 1996 - Company's purchase of 536,000 shares of its
common stock.
January 14, 1996 - Amendment to Company's by-laws.
January 25, 1996 - Change in Company's accountants.
February 22, 1996 - Company's rejection of Foley's offer to merge
GIANT and Fidelity.
Items 2,3,4 and 5 are not applicable.
<page-14>
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\ Cathy L. Wood
---------------------------
Cathy L. Wood
Vice President & Treasurer
Chief Financial Officer
Date: May 14, 1996