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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the third quarterly period ended September 30, 1998
GIANT GROUP, LTD.
9000 Sunset Boulevard, 16th 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 November 2, 1998 the latest practicable date, there were 2,974,055
shares of Common Stock outstanding.
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GIANT GROUP, LTD.
INDEX
Page No
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations -
Three and Nine-Month Periods Ended September 30, 1998 and 1997 3
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 4
Consolidated Statements of Cash Flows -
Nine-Month Periods Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
(a) Exhibits
(b) Reports on Form 8-K
Signature 15
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Three-months ended Nine-months ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Revenue:
Investment income $ 513 $ 365 $ 1,718 $ 1,713
Gain on the sale of marketable securities 3 106 128 198
Gain on sale of property and equipment 10 -- 2,855 --
Charter and other income 814 238 1,319 247
----------- ----------- ----------- -----------
1,340 709 6,020 2,158
----------- ----------- ----------- -----------
Costs and expenses:
Co-ownership and charter 458 1,684 1,448 2,698
General and administrative 794 1,152 2,603 3,510
Merger agreement and related legal 325 -- 325 --
Interest expense 0 75 2 153
Depreciation 46 165 234 382
----------- ----------- ----------- -----------
1,623 3,076 4,612 6,743
Equity in loss of affiliate -- (172) -- (301)
----------- ----------- ----------- -----------
Income (loss) before benefit for income taxes (283) (2,539) 1,408 (4,886)
Benefit for income taxes (1,047) (3,100) (350) (3,100)
----------- ----------- ----------- -----------
Net income (loss) $ 764 $ 561 $ 1,758 $ (1,786)
=========== =========== =========== ===========
Basic and diluted earnings (loss) per common share (Note 1) $ 0.24 $ 0.18 $ 0.55 $ (0.54)
=========== =========== =========== ===========
Weighted average shares for basic and diluted
earnings (loss) per common share (Note 1) 3,181,000 3,181,000 3,181,000 3,287,000
=========== =========== =========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
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GIANT GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
September 30, December 31,
1998 1997
------- -------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,689 $ 1,137
Marketable securities 30,961 18,874
Income tax receivables -- 1,100
Other receivables 4,175 332
Assets held-for-sale (note 6) 10,335 24,362
Prepaid expenses and other assets 463 420
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Total current assets 47,623 46,225
Property and equipment, net 1,264 4,905
Receivable and other assets 1,194 2,746
------- -------
Total assets $50,081 $53,876
======= =======
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 1,052 $ 1,209
Income taxes payable 1,193 219
Deferred income taxes (note 4) 317 2,776
------- -------
Total current liabilities 2,562 4,204
Deferred income taxes 973 1,174
------- -------
Total liabilities 3,535 5,378
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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 issued 73 73
Capital in excess of par value 36,767 36,767
Accumulated other comprehensive income - unrealized gains on
marketable securities, net 475 4,185
Retained earnings 44,848 43,090
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82,163 84,115
Less common stock in treasury; 4,085,000 shares at September 30 and
December 31, at cost 35,617 35,617
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Total stockholders' equity 46,546 48,498
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Total liabilities and stockholders' equity $50,081 $53,876
======= =======
The accompanying notes are an integral part of
these consolidated financial statements.
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GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(Dollars in thousands) Nine-months ended
September 30,
---------------------------
1998 1997
-------- --------
Operating Activities:
Net income (loss) $ 1,758 $ (1,786)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation 234 382
Provision for impairment of asset held-for-sale 541 --
Gain on sale of property and equipment (2,855) --
Gain on the sale of marketable securities (128) (198)
Equity in loss of affiliate -- 301
Deferred income taxes (450) --
Accretion of discounts on investments, net (532) (406)
Changes in assets and liabilities:
Decrease in income tax receivables 1,100 10,886
Decrease (increase) in prepaid expenses and other assets (455) 131
Increase (decrease) in accounts payable and accrued expenses (157) 25
Increase (decrease) in income taxes 1,224 (3,173)
-------- --------
Net cash provided by operating activities 280 6,162
-------- --------
Investing Activities:
Sales of marketable securities 22,362 19,308
Purchase of marketable securities (41,937) (19,039)
Debt payment and short-term advance repayment 99 1,865
Net proceeds from sale of assets 19,843 --
Purchase of assets held-for-sale and related costs (49) (4,272)
Purchases of property and equipment (46) (1,828)
-------- --------
Net cash provided (used) by investing activities 272 (3,966)
-------- --------
Financing Activities:
Proceeds from short-term borrowings -- 10,000
Repayment of short-term borrowings -- (20,500)
Purchase of treasury stock -- (3,638)
-------- --------
Net cash used by financing activities -- (14,138)
-------- --------
Increase (decrease) in cash and cash equivalents 552 (11,942)
Cash and cash equivalents:
Beginning of period 1,137 13,137
-------- --------
End of period $ 1,689 $ 1,195
======== ========
Supplemental disclosure of cash received (paid) for:
Income taxes, net $ 2,193 $ 10,813
Interest (2) (153)
The accompanying notes are an integral part of
these 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 September 30,
1998 and the results of operations for the three and nine-month periods ended
September 30, 1998 and 1997 and cash flows for the nine-months ended September
30, 1998 and 1997. 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 1997 Annual Report on Form 10-K.
Certain 1997 amounts have been reclassified to conform to the 1998 presentation.
For the nine-months ended September 30, 1997, the Company corrected weighted
average shares and basic loss per share, which was previously reported as
3,375,000 and $(.53), respectively. Operating results for the three and
nine-month periods ended September 30, 1998 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 1997 Annual Report on
Form 10-K.
2. INVESTMENT IN AFFILIATE
As of September 30, 1998 and December 31, 1997, the Company's
investment in Rally's common stock consists of approximately 3,226,000 and
3,181,000 shares, respectively. On June 11, 1998, the Rally's stockholders
approved the conversion of Rally's series A participating preferred stock into
common stock. As a result, the Company's 449 shares of Rally's series A
participating preferred stock was converted into 44,900 shares of Rally's common
stock. As a result of this conversion, the Company's ownership decreased to
approximately 11%. This investment is accounted for as a marketable security
classified as an investment available-for-sale. The quoted market value of
Rally's common stock owned by the Company on September 30, 1998 was
approximately $3,226.
On December 18, 1997, the Company's ownership decreased to
approximately 13%. The decrease in the Company's ownership resulted from the
exchange by the Company of approximately 200,000 shares of Checkers common stock
for Rally's securities. In addition, certain of the Company's related parties,
CKE and Fidelity also participated in the exchange of Checkers' securities.
In June 1997, Rally's and Checkers ended talks for a proposed merger
between the two companies, which was announced on March 25, 1997. However, as a
result of the exchange of securities in December 1997, Rally's now owns
approximately 27% of Checkers. Rally's Chairman of the Board and Chief Executive
Officer have both been appointed to the same positions in Checkers and further
consolidations of management and operations have taken place.
In March 1997, 1,175,000 options granted to Fidelity and CKE by GIANT
to purchase Rally's common stock at $4.00 per share were canceled. These options
had been granted pursuant to the 1996 Purchase and Standstill Agreement between
GIANT and Fidelity.
As of September 30, 1997, the Company accounted for its 15% investment
in Rally's common stock, which consisted of 3,137,000 shares, under the equity
accounting method. The quoted market value on September 30, 1997 of this
investment was $10,393.
On September 25, 1998, the Company agreed in principle to a merger
transaction with Rally's and Checkers. On November 2, 1998 the proposed merger
was terminated. See Note 3.
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GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
2. INVESTMENT IN AFFILIATE (CONT.)
Summarized unaudited financial information for Rally's is as follows:
Three Months Ended Nine Months Ended
Operating results: 9/28/97 9/28/97
- ------------------ ------- -------
Revenues $ 38,522 $ 109,207
Income from operations 543 3,364
Net loss (1,148) (2,008)
GIANT's share of non-cash equity loss
in Rally's net loss (172) (301)
3. MERGER TRANSACTION
On September 25, 1998, the Company agreed in principle to a merger
transaction pursuant to which Rally's would merge with the Company and Checkers.
Rally's, together with its franchisees, operates approximately 482 double
drive-through restaurants primarily in the Midwest and the Sunbelt and Checkers,
together with its franchisees, operates approximately 483 double drive-through
restaurants primarily in the southeastern United States. Under the terms of the
merger transaction, each share of the Company's common stock would be converted
into 10.48 shares of Rally's common stock and each share of Checkers common
stock would be converted into 0.5 shares of Rally's common stock upon
consummation of the merger. The transaction was subject to negotiation of
definitive agreements, receipt of fairness opinions by each party, receipt of
stockholder and other required approvals and other customary conditions.
On November 2, 1998, the Company, Rally's and Checkers announced the
termination of their proposed merger. The merger was terminated when the
definitive merger agreement could not be finalized within the allowed time
period.
4. CURRENT DEFERRED INCOME TAXES
Current deferred income taxes represent the tax effect of the
unrealized gains and losses on marketable securities included in accumulated
other comprehensive income as part of Stockholders' Equity.
5. NEW ACCOUNTING PRONOUNCEMENTS
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income", which established standards for reporting and
displaying comprehensive income or loss and its components in a full set of
general-purpose financial statements. The changes in components of comprehensive
loss, net of provision (benefit) for income taxes, for the nine-month periods
ended September 30, 1998 and 1997 are as follows:
1998 1997
------------------------------------ ----------------------------------------
Pre-Tax Tax Net Pre-tax Tax Net
Amount Benefit Amount Amount Provision Amount
------ ------- ------ ------- --------- ------
Other comprehensive income (loss):
Unrealized gains (losses) on
marketable securities, net $(6,183) $(2,473) $(3,710) $ 653 $ 261 $ 392
Net income (loss) 1,758 (1,786)
------- --------
Comprehensive loss $(1,952) $ (1,394)
======= ========
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GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
6. SALE OF ASSETS
During the three months ended September 30, 1998, the Company sold
corporate assets for cash of $117. The Company used part of the proceeds to pay
off an existing mortgage and recognized a net gain of $10 from the sale of these
assets.
On April 17, 1998, the Company sold for cash one of its two luxury
yachts for $14,500, less selling expenses. At December 31, 1997, the Company
reduced the carrying value, in total, of the yachts to their approximate net
realizable value. The net sales price equaled the Company's carrying value. The
Company continued to market the remaining yacht for sale, and continued to
charter it until October 1998, when it was sold for a cash sales price of
$10,875 less selling expenses. The Company recognized a loss related to this
sale equal to the selling costs and has recorded a charge of $541 which is
included in Co-ownership and charter expenses in the consolidated statements of
operations for the quarter ended September 30, 1998.
On April 28, 1998, the Company sold for cash its plane, a Gulfstream II
SP acquired in 1991, for $6,293, less selling expenses, and recognized a pre-tax
gain of $2,845.
7. COMMITMENTS AND CONTINGENCIES
The Company is involved in lawsuits as 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, Wayne Albritton, Donald Moore, Charles Klausman, Edward Binzel,
Gena Morris, Patricia Glaser and Burt Sugarman, present and former officers,
directors and shareholders of Rally's 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 but have been unsuccessful. A further settlement conference is
now scheduled for December 7, 1998. Fact discovery is not yet complete, but the
parties anticipate that a cut-off date will be set should the settlement
conference prove unsuccessful. No trial date has been scheduled yet. 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 Burt Sugarman,
Mary Hart, Michael Fleishman, David Gotterer, Patricia Glaser, Willie Davis,
John Roschman, Jeffrey Rosenthal, officers and directors of Rally's and GIANT,
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 itself, 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
October 30, 1998 was $84 1/2, approximately 24% 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. There has been limited document discovery. No trial date has been
scheduled yet. 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.
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
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GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
7. COMMITMENTS AND CONTINGENCIES (CONT.)
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. Trial is rescheduled for December 7, 1998. The Company denies
all wrongdoing and intends to vigorously defend itself against the
cross-complaint. It is not possible to predict the outcome of this action at
this time.
First Albany Corp., as custodian for the benefit of Nathan Suckman v.
Checkers Drive-In Restaurant, Inc., et al., Case No. 1667. ("Suckman") This
putative class action was filed on September 29, 1998 in the Delaware Chancery
Court in and for New Castle County, Delaware by First Albany Corp., as custodian
for the benefit of Nathan Suckman, an alleged stockholder of 500 shares of the
common stock of Checkers Drive-In Restaurants, Inc. ("Checkers"). The complaint
names Checkers, the Company, Rally's, and certain of Rally's current and former
officers and directors as defendants, including William P. Foley II, James J.
Gillespie, Joseph N. Stein, James T. Holder, Terry N. Christensen, Burt
Sugarman, Harvey Fattig, Richard A. Peabody, Frederick E. Fisher, Clarence V.
McKee, C. Thomas Thompson and Peter C. O'Hara. The complaint arises out of the
proposed merger announced on September 28, 1998 between the Company, Rally's and
Checkers (the "Proposed Merger"), and alleges generally that certain of
defendants engaged in an unlawful scheme and plan to permit Rally's to acquire
the public shares of Checkers' stock in a "going private" transaction for
grossly inadequate consideration and in breach of the defendants' fiduciary
duties. The plaintiff allegedly initiated the complaint on behalf of all
stockholders of Checkers as of September 28, 1998, and seeks, among other
things, certain declaratory and injunctive relief against the consummation of
the Proposed Merger, or in the event the Proposed Merger is consummated,
rescission of the Proposed Merger and costs and disbursements incurred in
connection with bringing the action, including attorneys' fees, and such other
relief as the court may deem proper. The Company denies all wrongdoing and
intends to vigorously defend the action. It is not possible to predict the
outcome of this action at this time.
David J. Steinberg and Chaile B. Steinberg, individually and on behalf
of those similarly situated, v. Checkers Drive-In Restaurants, Inc., et al.,
Case No. 16680. This putative class action was filed on October 2, 1998 in the
Delaware Chancery Court in and for New Castle County, Delaware by David J.
Steinberg and Chaile B. Steinberg, alleged stockholders of an unspecified number
of shares of the common stock of Checkers. The complaint names Checkers, the
Company, Rally's, and certain of Rally's current and former officers and
directors as defendants, including William P. Foley II, James J. Gillespie,
Joseph N. Stein, James T. Holder, Terry N. Christensen, Burt Sugarman, Harvey
Fattig, Richard A. Peabody, Frederick E. Fisher, Clarence V. McKee, C. Thomas
Thompson and Peter C. O'Hara. As with the complaint detailed herein above in
Suckman, the complaint arises out of the Proposed Merger, and alleges generally
that certain of defendants engaged in an unlawful scheme and plan to permit
Rally's to acquire the public shares of Checkers' stock in a "going private"
transaction for grossly inadequate consideration and in breach of the
defendants' fiduciary duties. The plaintiffs allegedly initiated the complaint
on behalf of all stockholders of Checkers and seek, among other things, certain
declaratory and injunctive relief against the consummation of the Proposed
Merger, or in the event the Proposed Merger is consummated, rescission of the
Proposed Merger and costs and disbursements incurred in connection with bringing
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GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
7. COMMITMENTS AND CONTINGENCIES (CONT.)
the action, including attorneys' fees, and such other relief as the court may
deem proper. The Company denies all wrongdoing and intends to vigorously defend
the action. It is not possible to predict the outcome of this action at this
time.
8. SUBSEQUENT EVENT
In October 1998, the Company acquired 206,600 shares of its Common
Stock for an aggregate cost of $1,482.
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ITEM 2. 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 SEPTEMBER 30, 1998 VERSUS
SEPTEMBER 30, 1997
Total revenue for the three-month period ended September 30, 1998
increased $631 to $1,340 from $709 for the comparable period in 1997. Interest
income earned from the Company's investments in debt securities increased $142
to $501 from $359 for the comparable period. In the third quarter of 1998,
charter income increased $578 to $812 from $234 in the comparable period.
The Co-Ownership and charter expenses for the three months ended
September 30, 1998 decreased $1,226 to $458 from $1,684 for the comparable
period in 1997. In 1998 there were operating and maintenance expenses for only
one yacht compared to two in the prior year and the Company recorded a refund of
$294 related to U.S. Customs' fees paid in 1997. These decreases in expense were
partially offset by a charge of $541 related to a decline in the value of the
remaining yacht that was sold in October 1998.
General and administrative expenses for the three months ended
September 30, 1998 decreased $358 to $794 from $1,152 for the comparable period
in 1997 due to an overall decrease in corporate expenses.
Merger agreement and related legal expense for the three months ended
September 30, 1998 was $325 related to the proposed merger with Rally's and
Checkers that was terminated on November 2, 1998. There were no such expenses in
the comparable period of 1997.
Interest expense for the three months ended September 30, 1997 was
associated with the financing of one of the Company's luxury yachts for one
month in 1997.
Depreciation expense for the three-months ended September 30, 1998
decreased $119 to $46 from $165 for the comparable period in 1997 due to the
sale of the Company plane in April 1998.
Benefit for income taxes for the three months ended September 30, 1998
decreased $2,053 to $1,047 from $3,100 for the comparable period in 1997. In
1998 the benefit resulted from a reduction in the tax valuation allowance based
on management's estimates related to the Company's ability to realize these
benefits, primarily related to a Federal net operating loss carryback. In 1997
the Company recognized a tax benefit of $3,100 when it won a dispute with the
California State Franchise Tax Board ("CFTB") over taxes assessed for 1989
through 1991 for which it had accrued a liability prior to 1997.
RESULTS OF OPERATIONS FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 VERSUS
SEPTEMBER 30, 1997
Total revenue for the nine-month period ended September 30, 1998
increased $3,862 to $6,020 from $2,158 for the comparable period in 1997. Total
revenue for the nine-month period ended September 30, 1998 included a pre-tax
gain from the sale of property and equipment of $2,855, primarily due to the
sale of the Company plane. As a result of the Company ending the Co-Ownership
Program in November 1997, the Company sold one of its luxury yachts for its net
book value during the current year. The Company's charter income increased
$1,074 to $1,308 from $234 in the comparable 1997 period, however, no additional
income for the year will be recorded due to the sale of the remaining luxury
yacht in October 1998.
The Co-Ownership and charter expenses for both of the yachts for the
nine-months ended September 30, 1998 decreased $1,250 to $1,448 from $2,698 for
the comparable period in 1997. Contributing to the decrease was lower
advertising of $433 and refunds of U.S. Customs' fees of $294, partially offset
by a charge of $541 related to a decline in the value of the remaining yacht
that was sold in October 1998.
General and administrative expenses for the nine-months ended September
30, 1998 decreased $907 to $2,603 from $3,510 for the comparable period in 1997
due to an overall decrease in corporate expenses.
Merger agreement and related legal expense for the nine months ended
September 30, 1998 was $325 related to the proposed merger with Rally's and
Checkers that was terminated on November 2, 1998. There were no such expenses in
the comparable period of 1997.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 VERSUS
SEPTEMBER 30, 1997 (CONT.)
Interest expense for the nine months ended September 30, 1997 was
associated with the financing of one of the Company's luxury yachts for two
months in 1997.
Depreciation expense for the nine months ended September 30, 1998
decreased $148 to $234 from $382 for the comparable period in 1997. The decrease
related to the sale of the Company plane, partially offset by the higher expense
related to the Company's move into its new office space in April 1997.
Benefit for income taxes for the nine months ended September 30, 1998
decreased $2,750 to $350 from $3,100 for the comparable period in 1997. In 1998
the benefit resulted from a reduction in the tax valuation allowance based on
management's estimates related to the Company's ability to realize these
benefits, primarily related to a Federal net operating loss carryback, partially
offset by the tax provision for the current year pretax income. In 1997 the
Company recognized a tax benefit of $3,100 when it won a dispute with the CFTB
over taxes assessed for 1989 through 1991 for which it had accrued a liability
prior to 1997.
Effective December 1997, the Company records its investment in Rally's
common stock as a marketable security classified as an investment
available-for-sale because of a reduction of its ownership. In 1997, the Company
accounted for its investment in Rally's common stock under the equity method.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, marketable securities, income tax
receivables and other receivables at September 30, 1998 totaled $36,825 compared
with $21,443 at December 31, 1997. At September 30, 1998 and December 31, 1997,
the Company had working capital of $45,061 and $42,021 with current ratios of
18.6 to 1 and 11.0 to 1, respectively. At September 30, 1998, the Company
reclassified its investment in Checkers subordinated debt of $3,623, net of
unamortized discount of $519, to short-term receivables, as the maturity date of
this investment is July 1999. The Company's liquidity also increased due to
certain transactions described in the following paragraphs.
Net cash provided by operating activities for the nine months ended
September 30, 1998 was $280 compared to cash provided by operating activities of
$6,162 for the comparable period in 1997. The nine-month periods ended September
30, 1998 and 1997 included the receipt of income tax refunds of $2,291 and
$10,813, respectively. The 1998 receipt related to the 1997 net operating loss
carryback claim, and the 1997 receipt related to the realization of capital
losses on the 1996 sales of Rally's common stock and the 1996 net operating loss
carryback claim. These increases were lowered by cash used for the funding of
the Company's operations.
Net cash provided by investing activities for the nine months ended
September 30, 1998 was $272 compared to cash used by investing activities of
$3,966 for the comparable period in 1997. In 1998, the Company received cash of
$19,843 from the sale of one of the Company's yachts and the sales of its
company plane and other corporate assets. These proceeds plus proceeds from the
sales of marketable securities of $22,362 were the primary source of funds for
the purchases of $41,937 of marketable securities. The comparable 1997 purchases
were $19,039 and proceeds from sales were $19,308. In 1998, the Company invested
$49 in assets held-for-sale compared to $4,272 in 1997. The Company received
principal payments on its investment in Checkers subordinated debt of $99 and
$1,865 in 1998 and 1997, respectively, including payment in full of the 1996
short-term advance of $500 in 1997. Finally, during the current year, the
Company paid $46 for property and equipment compared to $1,828 for the
comparable period in 1997.
The Company's financing activities for the nine months ended September
30, 1998 did not use or provide cash compared to a use of cash of $14,138 for
the comparable 1997 period. In 1997, the Company repaid the $10,500 note, which
financed assets purchased in 1996 for the Co-Ownership Program. In May 1997, the
Company borrowed $10,000 on a loan that was secured by one of its luxury yachts
and in July 1997, the loan was paid in full. In addition, in 1997, the Company,
with the approval of the Board of Directors, purchased 459,000 shares of its own
Common Stock at an aggregate cost of $3,638.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
LIQUIDITY AND CAPITAL RESOURCES (CONT.)
The Company's current liquidity is provided by cash and cash
equivalents, marketable securities, other investments, and investment income. In
addition, in the nine months of 1998, the Company's liquidity was provided by
the sale of certain assets and in October 1998 by the sale of the Company's
remaining luxury yacht. Management believes that this liquidity, plus the
Company's capital resources, is sufficient for the Company to fund its current
business operations and operating expenses. The Company continues to review
operating companies to acquire, but has not yet entered into any definitive
agreements. It is expected that the Company's current assets would be sufficient
to fund possible future acquisitions and, if necessary, the Company believes
that it would have the ability to obtain financing at favorable rates.
In October 1998, the Company acquired 206,600 shares of its Common
Stock for an aggregate cost of $1,482.
YEAR 2000
Based on the Company's existing operations, the Company believes that
it will achieve the Year 2000 compliance through the modification of its
existing programs and systems which was completed as of June 30, 1998 at a
minimal cost.
PERSONAL HOLDING COMPANY
Under the Internal Revenue Code, in addition to the regular corporate
income tax, an additional tax may be levied upon an entity that is classified as
a "personal holding company". In general, this tax is imposed on corporations
which are more than 50% owned, directly or indirectly, by 5 or fewer individuals
(the "Ownership Test") and which derive 60% or more of their income from
"personal holding company" sources, generally defined to be passive income (the
"Income Test"). If a corporation falls within the Ownership Test and the Income
Test, it is classified as a personal holding company, and will be taxed on its
"undistributed personal holding company income" at a rate of 39.6%. The Company
currently meets the stock ownership test. The Company has not met the income
requirement in recent years, therefore is not subject to this additional tax;
however no assurance can be given that the income test will not be satisfied in
the future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements: Certain information included in this
document (as well as information included in oral statements or other written
statements made or to be made by the Company) contains statements that are
forward-looking, such as statements relating to plans for future activities.
Such forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and uncertainties include, but
are not limited to, those relating to the development and implementation of the
Company's business plan, domestic and global economic conditions, activities of
competitors, changes in federal or state tax laws and of the administration of
such laws.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For information regarding legal matters, see Note 7 of the Notes to
Consolidated Financial Statements on page 8 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, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) The Registrant filed no reports on Form 8-K during the third
quarterly period ended September 30, 1998.
ITEMS 2,3, 4 AND 5 are not applicable.
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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: November 3, 1998
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