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, 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 August 7, 1996, the latest practicable date, there were
3,849,255 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 and Six-Month Periods Ended
June 30, 1996 and 1995 3
Consolidated Balance Sheets - June 30, 1996
and December 31, 1995 4
Consolidated Statements of Cash Flows -
Six-Month Periods Ended June 30, 1996
and 1995 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
(a) Exhibits
(b) Reports on Form 8-K
Signature 16
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three and six-month periods ended June 30, 1995 and 1996
(Unaudited)
($ in thousands, except per share amounts)
Three-months ended Six-months ended
June 30, June 30,
1995 1996 1995 1996
--------- --------- --------- ---------
Revenue:
Investment income $ 906 $ 652 $ 2,013 $ 1,564
Gains from sale of investments --- 1,955 --- 2,486
Other income 9 5 12 14
--------- --------- --------- ---------
Total revenue 915 2,612 2,025 4,064
Costs and expenses:
General and administrative 1,032 1,057 1,952 1,988
Proxy contest and related legal --- 736 --- 736
Exchange Offer and related expenses --- 130 --- 518
Interest expense 41 1 84 32
Depreciation 92 97 182 177
--------- --------- --------- ---------
Total costs and expenses 1,165 2,021 2,218 3,451
--------- --------- --------- ---------
Gain on sale of investment in
affiliate --- 3,197 --- 3,197
Equity in income (loss) of
affiliate (611) (168) (2,282) 229
--------- --------- --------- ---------
Income (loss) from operations
before benefit for income taxes (861) 3,620 (2,475) 4,039
Benefit for income taxes --- (8,563) --- (8,563)
--------- --------- --------- ---------
Net income (loss) $ (861) $12,183 $(2,475) $12,602
========= ========= ========= =========
Earnings (loss) per common
share and common equivalent
share $ (0.17) $ 2.35 $ (0.48) $ 2.33
========= ========= ========= =========
Weighted average common
shares 5,120,000 5,217,000 5,150,000 5,427,000
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
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GIANT GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1995 1996
------------ ------------
(Unaudited)
($ in thousands,
except per share amounts)
ASSETS
Current assets
Cash and cash equivalents $ 16,991 $ 35,721
Short-term investments available for sale 25,650 2,105
Income tax receivables --- 8,977
Note and other receivables 712 2,137
Prepaid expenses and other current assets 1,618 610
--------- ---------
Total current assets 44,971 49,550
Investment in affiliate 3,423 2,098
Property and equipment, net 3,267 3,223
Other assets 20 20
--------- ---------
Total assets $ 51,681 $ 54,891
========= =========
LIABILITIES
Current liabilities
Accounts payable and accrued expenses $ 706 $ 874
Current maturities of long-term debt 1,671 46
Income taxes payable 3,469 3,210
Deferred gain on the sale of affiliate's
debt securities --- 2,072
--------- ---------
Total current liabilities 5,846 6,202
Deferred income taxes 690 789
--------- ---------
Total liabilities 6,536 6,991
--------- ---------
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 June 30 and 6,966,000 at December 31 69 73
Capital in excess of par value 33,508 35,530
Unrealized holdings gains (losses) on short-
term investments (1,328) 147
Retained earnings 29,796 42,398
--------- ---------
62,045 78,148
Less common stock in treasury; 3,417,000 shares
at June 30 and 1,952,000 at December 31,
at cost 16,900 30,248
--------- ---------
Total stockholders' equity 45,145 47,900
--------- ---------
Total liabilities and stockholders' equity $ 51,681 $ 54,891
========= =========
See accompanying notes to consolidated financial statements.
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GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six-month periods ended June 30, 1995 and 1996
(Unaudited)
1995 1996
--------- ---------
($ in thousands)
CASH FLOWS USED BY OPERATING ACTIVITIES:
Net income (loss) $ (2,475) $ 12,602
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation 182 177
Gain on sale of short-term investments --- (2,486)
Accretion of discounts on short-term investments --- (213)
Gain on sale of investment in affiliate --- (3,197)
Equity in (gain) loss of affiliate 2,282 (229)
Changes in operating assets and liabilities:
(Increases) decreases in assets
Income tax receivables --- (8,977)
Note and other receivables --- 564
Prepaid expenses and other 55 153
Increases (decreases) in liabilities
Accounts payable and accrued expenses (837) 168
Income tax payable 272 (259)
--------- ---------
Net cash used by operating activities (521) (1,697)
--------- ---------
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Sales of short-term investments, net of purchases 30,695 13,137
Proceeds from sale of affiliate's debt
securities --- 15,620
Proceeds from sale of investment in affiliate --- 4,751
Tax payments relating to discontinued operations (22,238) ---
Purchases of property and equipment (43) (133)
--------- ---------
Net cash provided by investing activities 8,414 33,375
--------- ---------
CASH FLOWS USED BY FINANCING ACTIVITIES:
Proceeds from the exercise of stock options --- 2,025
Repayment of short-term borrowings (1,962) (1,625)
Purchase of treasury stock (348) (13,348)
--------- ---------
Net cash used by financing activities (2,310) (12,948)
--------- ---------
Increase in cash and cash equivalents 5,583 18,730
Cash and cash equivalents:
Beginning of period 23,472 16,991
--------- ---------
End of period $ 29,055 $ 35,721
========= =========
Supplemental disclosure of cash paid for:
Income taxes $ 22,364 $ 459
Interest 84 32
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
June 30, 1996, the results of operations for the three and
six-month periods ended June 30, 1996 and 1995 and cash
flows for the six-months ended June 30, 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 and six-month
periods ended June 30, 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
Earnings (loss) per common share and common equivalent
share was computed in accordance with APB No. 15 using the
weighted average common 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 and six-month periods ended June
30, 1996, the dilutive effect of stock options was an
increase of approximately 1,016,000 and 948,000,
respectively, in weighted average common shares.
3. INVESTMENT IN AFFILIATE
GIANT's investment in Rally's Hamburgers, Inc.
("Rally's") of $2,098 and $3,423 at June 30, 1996 and
December 31, 1995, represents approximately 28% and 48%,
respectively, of Rally's outstanding common stock. At June
30, 1996 and December 31, 1995, the Company owned approxi-
mately 4,313,000 and 7,430,000 shares of Rally's common
stock, the quoted market value of which was approximately
$13,478 and $7,198. This decrease in the investment
percentage and shares resulted from the sale by GIANT, on
May 3, 1996, pursuant to a Purchase and Standstill Agreement
dated April 26, 1996 (the "Agreement"), of approximately
768,000 shares of Rally's common stock to Fidelity National
Financial Corp. ("Fidelity") and approximately 2,350,000
shares of Rally's common stock to CKE Restaurants, Inc.
("CKE"), a Fidelity affiliate. GIANT received cash of
$4,751 and recognized a pre-tax gain, for financial state-
ment purposes, of $3,197 in the second quarter of 1996.
Additionally, because of a higher tax basis for the stock,
the Company has recorded a tax benefit for the expected
refund of taxes paid in prior years, net of current
activity, of $8,563. This benefit would be received in cash
in 1997 and would be reduced by additional taxable income
generated during the remainder of 1996. In addition, GIANT
granted irrevocable options to Fidelity and CKE to each
purchase an additional 1,175,214 shares of Rally's common
stock, at exercise prices ranging from $3.00 to $4.00 per
share of Rally's common stock, 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
deferred the resulting gain of approximately $2,900 in the
first quarter of 1996 and will recognize the gain as the
note is paid. On June 30, 1996, the balance of the short-
term note was $2,072. Rally's first and second installment
payments were made before the respective due dates. The
Company recognized $886 of the resulting gain in the second
quarter of 1996 and expects to recognize the remaining gain
of approximately $2,072 in the third quarter of 1996 when
the remaining balance of the note is paid.
During the second quarter of 1996, GIANT sold $3,500
face value of its investment in Rally's 9.875% Senior Notes
through the open market, recognizing a pre-tax gain of $478.
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. In the first quarter of 1996,
$500 was advanced to Rally's under this credit facility. As
of June 30, 1996, 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. The Company
is being reimbursed by Rally's for costs related to issuance
of these letters of credit. As of June 30, 1996, these
letters of credit totaled $793.
Summarized financial information for Rally's is as follows:
Operating Results:
Three Months Ended Six Months Ended
----------------------- -----------------------
7/02/95 6/30/96 7/02/95 6/30/96
-------- -------- -------- --------
Revenues $ 49,843 $ 47,357 $ 92,313 $ 89,269
Income (loss) from
operations 1,205 2,413 212 (956)
Extraordinary gain, net of
income taxes of $1,817 --- --- --- (4,522)
Net income (loss) (1,244) 111 (4,753) 949
GIANT's share of non-cash
equity gain (loss) in
Rally's (611) (168) (2,282) 229
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 announce-
ment 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, Chairman and Chief
Executive Officer of the Company, beneficially owned in
excess of 15% of GIANT common stock on the date the Stock-
holders 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 the second quarter of 1996, the Company acquired
929,000 shares of its common stock at an aggregate cost of
$8,126, including 705,000 shares purchased pursuant to the
Agreement (see notes 3, 8 and 9 of the Notes to Consolidated
Financial Statements) at an aggregate cost of $6,085
directly from Fidelity.
7. ACCOUNTING CHANGE
In October 1995, the Financial Accounting Standards
Board issued FASB 123, "Accounting for Stock-Based Compen-
sation" ("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, among other
things, 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 defendants violated the Securities Exchange Act of
1934, 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.
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. ("CKE"), 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 approximately
3,118,000 shares of Rally's common stock from GIANT for
$4,751; GIANT granted Fidelity and CKE options to each
purchase 1,175,214 shares of Rally's common stock 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.
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
has joined. The Court should schedule a hearing 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 wrong-
doing and intends to vigorously defend itself in this
action. Parties are presently in settlement discussions.
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.
10. SUBSEQUENT EVENTS
STOCK OPTION PLANS
On July 12, 1996, GIANT's stockholders approved the
following two new stock option plans for the Company. The
following are certain features of the plans; these features
are explained fully in the plans' document which are
included in the Notice of the 1996 Annual Meeting of Stock-
holders filed with the Securities and Exchange Commission on
June 7, 1996.
The 1996 Employee Stock Option Plan (the "1996 Plan")
promotes the interest of GIANT and its subsidiary and
stockholders by encouraging selected key employees of the
Company to acquire a proprietary interest in GIANT. The
aggregate number of shares to be delivered upon the exercise
of all options granted under the 1996 Plan shall not exceed
250,000 shares of the Company's $.01 par value Common Stock.
The Option Committee of the Board of Directors will
determine, based on factors as stated in the plan document,
the employees that will receive the options, the number of
options and whether Incentive (as defined in section 422A of
the Internal Revenue Code) or Non-Qualified options will be
granted. The options, in general, maybe exercised in whole
or in part any time after the date of grant and terminate 10
years from the grant date. In most cases, options shall
have an exercise price equal to the fair market value of the
Common Stock on the date of grant. No options, to date,
have been granted under this plan.
The 1996 Stock Option Plan for Non-Employee Directors
(the "Director Plan") promotes the interest of Giant and its
subsidiary and stockholders by encouraging Non-Employee
directors of the Company to acquire a proprietary interest
in GIANT. The aggregate number of shares to be delivered
upon the exercise of all options granted under the Director
Plan shall not exceed 250,000 shares of the Company's $.01
par value Common Stock. Pursuant to the Director Plan, each
Non-Employee director is entitled to receive an option to
purchase 10,000 shares on May 20, 1996 (the adoption date),
10,000 shares upon the initial appointment to the Board and
an option to purchase 10,000 shares upon subsequent
reelection to the Board. Upon election to the Executive
Committee, the Non-Employee director will receive an
additional option to purchase 10,000 shares. The options
maybe exercised in whole or in part any time after the date
of grant and terminate five years from the grant date. All
options shall have an exercise price equal to the fair
market value of the Common Stock on the date of grant. To
date, 50,000 options were granted to the three Non-Employee
members of the current Board of Directors. The exercise
prices are $7.625 for 20,000 options and $7.75 for 30,000
options.
CLASS A COMMON STOCK, $.01 PAR VALUE
On July 12, 1996, GIANT's stockholders approved an
amendment to the Company's Certificate of Incorporation
which would authorize 5,000,000 shares of Class A Common
Stock, $.01 par value per share. This Class A stock is
identical in all respects to the $.01 par value Common Stock
except that the Class A Common Stock, except in limited
situations, have no voting rights. Presently, there are no
plans or commitments for this Class A Common Stock.
<page-11>
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 AND SIX-MONTHS ENDED JUNE 30,
1996 VERSUS THE COMPARABLE 1995 PERIOD
Total revenue for the three and six-month periods ended June
30, 1996 and 1995 increased to $2,612 from $915 and to $4,064
from $2,025, respectively. These increases resulted from the
gain on the sale of the Company's investments previously
classified as available-for-sale and higher income earned on the
Company's investment in debt securities. This increase was
offset by lower income earned on the reduced levels of investment
in short-term U.S. government obligations.
General and administrative expenses for the three and six-
months ended June 30, 1996 approximated expenses for the
comparable 1995 periods.
The Company's results from operations were impacted by
certain one-time expenses. The Company incurred, for the six-
month period ended June 30, 1996, legal and administrative
expenses of $736 consisting of proxy and related legal expenses
in connection with the Fidelity/Foley litigation (see note 9 of
the Notes to Consolidated Financial Statements). In addition,
for the three and six-months ended June 30, 1996, the Company
incurred $130 and $518, respectively, in legal, accounting and
administrative expenses incurred by the Exchange Offer, which was
terminated on April 22, 1996 (see page 13 of this Form 10-Q).
Interest expense for the three and six-month periods ended
June 30, 1996 and 1995 decreased to $1 from $41 and decreased to
$32 from $84, as a result of the prepayment in February 1996 of
the Company's 9.25% Term Note, due December 18, 1996.
GIANT's investment in Rally's Hamburgers, Inc. ("Rally's")
at June 30, 1996 and December 31, 1995, represents approximately
28% and 48%, respectively, of Rally's outstanding common stock.
This decrease in investment percentage resulted from the sale on
May 3, 1996, pursuant to a Purchase and Standstill Agreement
dated April 26, 1996 (the "Agreement"), of approximately
2,350,000 shares of Rally's common stock to CKE Restaurant, Inc.
("CKE") and approximately 768,000 shares of Rally's common stock
to Fidelity National Financial, Inc. ("Fidelity"). For the
three-months ended June 30, 1996 and 1995, GIANT's non-cash
equity loss in Rally's decreased to $168 from $611 in 1995.
Rally's net income for the three-months ended June 30, 1996 and
1995 increased to $111 from a loss of $1,244 in 1995. This
increase in net income resulted primarily from improved opera-
tions, the initial impact of product cost reduction strategies
and reduced advertising and interest expenses. For the six-
months ended June 30, 1996 and 1995, GIANT's non-cash equity
income in Rally's increased to $229 from a loss of $2,282 in
1995. Rally's net income for the six-months ended June 30, 1996
and 1995 increased to $949 from a loss of $4,753 in 1995. This
increase in Rally's net income resulted primarily from improved
operations and an extraordinary gain recorded in the first
quarter of 1996, net of income tax, of $4,522 related to the
early retirement of $22,000 principal amount of their 9.875%
Senior Notes (see note 3 of the Notes to Consolidated Financial
Statements).
The Company's net income for the three and six-months ended
June 30, 1996 and 1995 increased to $12,183 from a loss of $861
and to $12,602 from a loss of $2,475. For the six months ended
June 30, 1996, the increase in net income resulted primarily from
the gain of $3,197 on the sale of Rally's common stock and
related tax benefit of $8,563 and gains from the sales of invest-
ments previously classified as available-for-sale of $2,486. In
addition, GIANT recorded non-cash equity income in Rally's of
$229 in 1996 compared to a loss of $2,282 in 1995. However, this
increase in GIANT'S net income was lowered by one-time expenses
of the terminated Exchange Offer and expenses incurred in
connection with the Fidelity/Foley litigation settled in the
second quarter.
The Company's consolidated financial statements reflect
valuation allowances of $11,042 and $19,697, at June 30, 1996 and
December 31, 1995, respectively, as it is not likely, as defined
in SFAS No. 109 "Accounting for Income Taxes" ("SFAS 109") that
these tax benefits will be realized in the near future. The
decrease in the allowance relates primarily to the expected tax
benefit of $8,565 related to the sale of Rally's stock,
previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, investments available-for-sale,
income tax receivables and note and other receivables totaled
$48,940 at June 30, 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. Income tax receivables at June 30, 1996 primarily
consist of an expected refund of $8,563 applicable to GIANT's
sale of Rally's common stock, as previously discussed. Note and
other receivables at June 30, 1996 primarily consist of a
receivable of approximately $2,072 due from Rally's related to
the sale of Rally's 9.875% Senior Notes. At June 30, 1996 and
December 31, 1995, the Company had working capital of $43,348 and
$39,125 with current ratios of 8 to 1 in both periods. In
addition, as of June 30, 1996 and December 31, 1995, GIANT owned
approximately 4,313,000 and 7,430,000 shares, respectively, of
Rally's outstanding common stock, which it acquired from 1987 to
1994. At June 30, 1996 and December 31, 1995, GIANT's $2,098 and
$3,423 investment in Rally's represents approximately 28% and
48%, respectively, of Rally's outstanding common stock, the
quoted market value of which was $13,478 and $7,198. This
decrease in investment percentage resulted from the sale by
GIANT, on May 3, 1996 and subject to the Agreement, of approxi-
mately 768,000 shares of Rally's common stock to Fidelity for
$638 in cash and approximately 2,350,000 shares of Rally's common
stock to CKE for $4,113 in cash. Additionally, the Company,
because of a higher tax basis for the stock, has recorded a tax
benefit for the expected refund of taxes paid in prior years,
net of current year activity, of $8,563. This benefit would be
received in cash in 1997 and would be reduced by additional
taxable income generated during the remainder of 1996. In
addition, GIANT granted irrevocable options to Fidelity and CKE
to purchase 2,350,428 shares in total of Rally's common stock, at
exercise prices ranging from $3.00 to $4.00 per share of Rally's
common stock, 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 in Rally's would be
reduced to approximately 13%. Management currently 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 June 30, 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 New York office
of the California State Franchise Tax Board during 1995. The
Company has received a preliminary proposed adjustment from the
New York office which indicates that the assessment will be
reduced. The Company made payments of $259 during 1996 related
to this assessment. The ultimate resolution will be based on the
final review and official notice from the California office
Franchise Tax Board, which has not yet been received.
Net cash used by operating activities for the six-months
ended June 30, 1996 was $1,697 compared to cash used by operating
activities of $521 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 proxy
litigation.
Net cash provided by investing activities for the six-months
ended June 30, 1996 was $33,375 compared to cash provided by
investing activities of $8,414 for the comparable period in 1995.
On May 3, 1996, as previously discussed, GIANT received proceeds
of $4,751 from the sale of Rally's stock to CKE and Fidelity. 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. Proceeds from the sale of the Senior Notes directly to
Rally's include Rally's first and second installment payments,
made before the respective due dates, of $2,073. During the
second quarter of 1996, the Company sold an additional $3,500
face value Senior Notes, through the open market, and received
proceeds of $2,760. 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 June 30, 1996, the balance in this
facility was zero, as Rally's repaid the $500 that had been
advanced in the first quarter in 1996. During the six-months
ended June 30, 1996, the Company sold securities previously
classified as investments available-for-sale receiving proceeds
of $15,263 and also purchased securities, classified as invest-
ments available-for-sale at June 30, 1996, at a cost of $2,126.
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 $30,695 from the sales and maturities, net
of purchases, of marketable securities.
Net cash used by financing activities for the six-months
ended June 30, 1996 was $12,948 compared to $2,310 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 made a payment of $1,623 to
pre-pay in full its 9.25% Term Note. The Company incurred no
additional expenses in connection with this prepayment. Addi-
tionally, 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. During
the six-months ended June 30, 1996, the Company acquired
1,465,000 shares of its common stock at an aggregate cost of
$13,348. Included in these shares are 705,000 shares of its
common stock, purchased directly from Fidelity, for an aggregate
price of $6,085 in connection with the general release given to
all parties in the lawsuit involving GIANT and Fidelity (see
notes 3, 8 and 9 of the Notes to the 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). During the first quarter of 1995, the Company paid
off certain margin borrowings.
The Company's major objective continues to be the acquisi-
tion of an operating business that will provide increased
shareholder value. Although the Company has identified several
potential start-up acquisitions, prices have been too high to
provide an acceptable return on equity invested without
incurring dangerously high debt levels. GIANT's management
believes this is driven by the continuing strong stock market and
by high levels of cash in acquisition funds that are competing
for a relatively small supply of public and private companies.
As a result, the Company has been actively seeking business
opportunities for which it can bring unique value to GIANT's
stockholders, through the strength of its balance sheet.
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. On April 26, 1996, in connection with the general
release, pursuant to the Agreement, given to all parties in the
lawsuit involving GIANT and Fidelity (see notes 3, 8 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, among other
things, 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 (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 capitaliza-
tion 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.
SUBSEQUENT EVENTS
STOCK OPTION PLANS
On July 12, 1996, GIANT's stockholders approved the
following two new stock option plans for the Company. The
following are certain features of the plans; these features are
explained fully in the plans' document which are included in the
Notice of the 1996 Annual Meeting of Stockholders filed with the
Securities and Exchange Commission on June 7, 1996.
The 1996 Employee Stock Option Plan (the "1996 Plan")
promotes the interest of GIANT and its subsidiary and stock-
holders by encouraging selected key employees of the Company to
acquire a proprietary interest in GIANT. The aggregate number of
shares to be delivered upon the exercise of all options granted
under the 1996 Plan shall not exceed 250,000 shares of the
Company's $.01 par value Common Stock. The Option Committee of
the Board of Directors will determine, based on factors as stated
in the plan document, the employees that will receive the
options, the number of options and whether Incentive (as defined
in section 422A of the Internal Revenue Code) or Non-Qualified
options will be granted. The options, in general, may be
exercised in whole or in part any time after the date of grant
and terminate 10 years from the grant date. In most cases,
options shall have an exercise price equal to the fair market
value of the Common Stock on the date of grant. No options, to
date, have been granted under this plan.
The 1996 Stock Option Plan for Non-Employee Directors (the
"Director Plan") promotes the interest of Giant and its subsi-
diary and stockholders by encouraging Non-Employee directors of
the Company to acquire a proprietary interest in GIANT. The
aggregate number of shares to be delivered upon the exercise of
all options granted under the Director Plan shall not exceed
250,000 shares of the Company's $.01 par value Common Stock.
Pursuant to the Director Plan, each Non-Employee director is
entitled to receive an option to purchase 10,000 shares on May
20, 1996 (the adoption date), 10,000 shares upon the initial
appointment to the Board and an option to purchase 10,000 shares
upon subsequent reelection to the Board. Upon election to the
Executive Committee, the Non-Employee director will receive an
additional option to purchase 10,000 shares. The options maybe
exercised in whole or in part any time after the date of grant
and terminate five years from the grant date. All options shall
have an exercise price equal to the fair market value of the
Common Stock on the date of grant. To date, 50,000 options were
granted to the three Non-Employee members of the current Board of
Directors. The exercise prices are $7.625 for 20,000 options and
$7.75 for 30,000 options.
CLASS A COMMON STOCK, $.01 PAR VALUE
On July 12, 1996, GIANT's stockholders approved an amendment
to the Company's Certificate of Incorporation which would
authorize 5,000,000 shares of Class A Common Stock, $.01 par
value per share. This Class A stock is identical in all respects
to the $.01 par value Common Stock except that the Class A Common
Stock, except in limited situations, have no voting rights.
Presently, there are no plans or commitments for this Class A
Common Stock.
<page-15>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Amendment to Restated Certificate
of Incorporation to Authorize Non-Voting Common
Stock, dated July 20, 1996.
10.1 GIANT GROUP, LTD. 1996 Employee Stock Option Plan
(Exhibit A in the Notice of Annual Meeting of
Stockholders to be held on July 12, 1996, filed
with the Securities and Exchange Commission on
June 7, 1996 and incorporated herein by
reference).
10.2 GIANT GROUP, LTD. 1996 Stock Option Plan for Non-
Employee Directors (Exhibit B in the Notice of
Annual Meeting of Stockholders to be held on July
12, 1996, filed with the Securities and Exchange
Commission on June 7, 1996 and incorporated herein
by reference).
11. Statement re: computation of per share earnings
27. Financial Data Schedule
(b) Reports on Form 8-K
The following reports, filed during the second quarter
of 1996, are incorporated by reference and are summarized below:
April 9, 1996 - Press Release by Company responding
to William P. Foley II, Chairman
of the Board of Fidelity and CKE
Restaurant about GIANT's 1996
annual meeting.
April 22, 1996 - Press Release by Company with-
drawing Exchange Offer for Rally's
common stock.
April 26, 1996 - Company announces settlement of all
litigation with Fidelity and CKE
restaurants and the purchase of
Rally's common stock, owned by
GIANT, by Fidelity and CKE
restaurants.
Items 2,3,4 and 5 are not applicable.
<page-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\ Cathy L. Wood
---------------------------
Cathy L. Wood
Vice President and Treasurer
Chief Financial Officer
Date: August 7, 1996