<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] for calendar year ended December 31, 1995
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
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Class on Which Registered
-------------- ---------------------
<S> <C> <C>
Securities registered pursuant to 12(b) of the Act: Common Stock, New York
$.01 Par Value Stock Exchange
Securities registered pursuant to 12(g) of the Act: None
</TABLE>
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
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
X
---
As of March 6, 1996, 4,778,385 shares of the registrant's common stock,
par value $.01 per share, were outstanding, and the aggregate market value of
the registrant's common stock held by non-affiliates based on the closing price
on the New York Stock Exchange on March 6, 1996 was $31.5 million.
Exhibit Index located at page 78 herein.
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TABLE OF CONTENTS
PART I
Item 1. Business.
Item 2. Properties.
Item 3. Legal proceedings.
Item 4. Submission of matters to a vote of security holders.
PART II
Item 5. Market for the registrant's common equity and related
stockholder matters.
Item 6. Selected financial data.
Item 7. Management's discussion and analysis of financial condition
and results of operations.
Item 8. Financial statements and supplementary data.
Item 9. Changes in and disagreements with accountants on accounting
and financial disclosure.
PART III
Item 10. Directors and executive officers of the registrant.
Item 11. Executive compensation.
Item 12. Security ownership of certain beneficial owners and
management.
Item 13. Certain relationships and related transactions.
PART IV
Item 14. Exhibits, financial statement schedules and reports on Form
8-K.
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PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
GIANT GROUP, LTD. (herein referred to as the "Company" or "GIANT") is a
corporation which was organized under the laws of the State of Delaware in 1913.
GIANT is a holding company which has owned both majority and minority interests
in various operating subsidiaries. Currently, GIANT directly owns 7,430,002
shares (approximately 48% of the amount outstanding) of the common stock of
Rally's Hamburgers, Inc. ("Rally's") (NASDAQ:RLLY).
On January 22, 1996, GIANT disclosed that it intends to offer to
exchange a new series of GIANT participating, non-voting preferred stock for
Rally's outstanding common stock (the "Exchange Offer"). Upon successful
completion of the Exchange Offer, GIANT would own 79.9% of Rally's outstanding
common stock. The exchange ratio is to be 4.5 shares of Rally's outstanding
common stock for each share of GIANT preferred stock. The Exchange Offer will be
made only by prospectus.
From 1985 through October 1994, GIANT's major operating subsidiaries
were Giant Cement Company ("Giant Cement") and Keystone Cement Company
("Keystone"), which manufactured portland and masonry cements sold to ready-mix
concrete plants, concrete product manufacturers, building material dealers,
construction contractors and state and local government agencies. From 1987
through October 1994, GIANT also owned Giant Resource Recovery Company, Inc.
("GRR"), which was a marketing agent for resource recovery services for Giant
Cement. Effective October 6, 1994, KCC Delaware Company, Inc., a wholly owned
subsidiary of GIANT, sold 100% of the stock of its wholly owned subsidiary
Giant Cement Holding, Inc. through an initial public offering ("IPO"). The
net proceeds from the IPO were $125.8 million and resulted in a gain of
$77 million before income taxes of $28.8 million. As a result of the
transaction, GIANT has fully divested its cement and resource recovery
operations.
NARRATIVE DESCRIPTION OF BUSINESS
GIANT's assets consist primarily of cash and cash equivalents,
short-term liquid investments and its investment representing approximately
48% of the outstanding common stock of Rally's. GIANT's short-term investments
consist of corporate stocks and corporate bonds. GIANT has nine employees.
GIANT's management is actively pursuing long-term investment
opportunities to deploy the cash GIANT generated through the sale of the cement
operations discussed above.
GIANT, through its equity investment in Rally's, is involved in the
operation and franchising of double drive-thru hamburger restaurants. Rally's is
one of the largest chains of double drive-thru restaurants in the United States.
At March 6, 1996, the Rally's system included 481 restaurants in 19 states,
primarily in the Midwest and the Sunbelt, comprised of 238 Rally's-owned and 243
franchised restaurants. Rally's restaurants offer high quality fast food served
quickly and at everyday prices generally below the regular prices of the four
largest hamburger chains. Rally's serves the drive-thru and take-out segments of
the quick-service restaurant market. Rally's opened its first restaurant in
January 1985 and began offering franchises in November 1986.
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ITEM 1. BUSINESS. (CONT.)
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of the Company, together
with their ages, their positions with the Company and the year in which they
first became an executive officer of the Company.
Burt Sugarman, 57, Chairman of the Board, President and Chief Executive
Officer. Mr. Sugarman has been Chairman of the Board of the Company since 1983,
and President and Chief Executive Officer since May 1985. Mr. Sugarman has been
Chairman of the Board of Rally's since November 1994, having served as its
Chairman of the Board and Chief Executive Officer from 1990 through February
1994. Mr. Sugarman is also a Director of Rally's.
David Gotterer, 67, Vice Chairman and Director. Mr. Gotterer has been
Vice Chairman of the Company since May 1986 and Director of the Company since
1984. Mr. Gotterer is a senior partner in the accounting firm of Mason &
Company, LLP, New York, New York. Mr. Gotterer is also a Director of Rally's.
Cathy L. Wood, 48, Vice President, Chief Financial Officer, Secretary
and Treasurer. Ms. Wood joined the Company in January 1995. Prior to joining the
Company, Ms. Wood served in various capacities for Wherehouse Entertainment,
Inc. ("Wherehouse"), a specialty retail chain, including Senior Vice President
and Chief Financial Officer from 1993 to 1994. Wherehouse filed for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in August 1995.
ITEM 2. PROPERTIES.
GIANT leases executive offices in Beverly Hills, California.
ITEM 3. LEGAL PROCEEDINGS.
Jonathan Mittman, Steven Horowitz, Dina Horowitz and John Hannan v.
Rally's Hamburgers, Inc., Burt Sugarman, GIANT GROUP, LTD., Wayne M. Albritton,
Donald C. Moore, Edward C. Binzel, Gena L. Morris, Patricia L. Glaser and Arthur
Andersen LLP, (Civ. No. C-94-0039-L-(CS)).
This putative class action, purportedly on behalf of the stockholders'
of Rally's, alleging certain violations of the Securities Exchange Act of 1934,
among other claims, with respect to Rally's common stock was filed in the United
States District Court for the Western District of Kentucky on January 24, 1994
(Civ. No. C94-0039-L(CS)) against GIANT, Rally's, certain Rally's present and
former officers and directors and Rally's auditors. In this action, plaintiffs
allege certain violations of the Securities Exchange Act of 1934, as amended ,
among other claims, with respect to Rally's common stock and are seeking an
unspecified amount of damages, including punitive damages. On February 14, 1994,
a related lawsuit was filed by two other stockholders making the same
allegations before the same court, known as Edward L. Davidson and Rick Sweeney
v. Rally's Hamburgers, Inc., Burt Sugarman, GIANT GROUP, LTD., Wayne M.
Albritton, Donald C. Moore, Edward C. Binzel, Gena L. Morris, Patricia L. Glaser
and Arthur Andersen LLP, (Civ. No. C-94-0087-L-S). On March 23, 1994, all
plaintiffs filed a consolidated lawsuit known as Mittman, et al. v. Rally's
Hamburgers, Inc., et al., (Civ. No. C-94-0039-L(CS)) (the "Mittman Actions").
The Court denied plaintiffs' motion for class certification, "until
such time as the issue of typicality of claims is further developed and
clarified". The Court granted Mr. Sugarman's motion to strike certain scurrilous
and irrelevant allegations, and directed plaintiffs to amend their complaint to
conform to the Court's order. On April 15, 1994, Ms. Glaser and GIANT filed a
motion to dismiss the consolidated lawsuit for lack of personal jurisdiction.
The remaining defendants filed motions to dismiss for failure to state a claim
upon which relief can be granted. On April 5, 1995, the Court denied these
motions. (The Court struck plaintiffs' punitive damages allegations and required
plaintiffs to amend their claims under Section 20 of the Securities Exchange Act
of 1934, but otherwise the Court let stand the most recent version of
plaintiffs' complaint at this juncture).
Plaintiffs filed their second amended complaint on June 29, 1995,
joining additional plaintiffs pursuant to stipulation of the parties.
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ITEM 3. LEGAL PROCEEDINGS. (CONT.)
Plaintiffs renewed their motion for class certification on or about
July 31, 1995. Defendants filed in opposition to this motion on or about October
31, 1995. That motion is currently pending.
On or about October 3, 1995, 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 on October 27, 1995. That
motion is currently pending.
The Company 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.
GIANT GROUP, LTD. v. William P. Foley, II, CKE Restaurants, Inc., Fidelity
National Financial, Inc., William Davenport and Robert Martyn and related
counterclaim entitled Fidelity National Financial, Inc. and William P. Foley, II
v. GIANT GROUP, LTD., Burt Sugarman, Terry Christensen, David Gotterer and
Robert Wynn, (Case No. SACV 95-1095 LHM (EEx)).
On or about December 19, 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 (collectively, "defendants"). A First Amended Complaint was subsequently
filed on January 3, 1996. The First Amended Complaint alleges claims for federal
securities law violations, fraud, conspiracy, breach of fiduciary duty and
breach of contract and seeks both injunctive relief and damages.
This action arises from an attempted hostile takeover of Rally's and
GIANT, Rally's largest stockholder, by Fidelity and Foley, who indirectly own
and/or control "Carl's Jr.," a competing fast-food restaurant chain. GIANT's
complaint alleges that defendants engaged in various unlawful activities in
their bid for Rally's and GIANT, including trading on non-public confidential
and/or insider information, misappropriating confidential and proprietary
information from Rally's and GIANT, and violating the disclosure requirements of
Section 13(d) of the Securities Exchange Act of 1934. In particular, GIANT
alleges that defendants violated the federal securities law by failing to
identify all of the members of their "group" for purposes of disclosing the true
extent of their holdings of GIANT, and by failing to disclose that the true
purpose of their investment in GIANT is to obtain control of Rally's and GIANT,
among other claims.
In January 1996, Foley and Fidelity filed a counterclaim against GIANT
and its directors, Burt Sugarman, Terry Christensen, David Gotterer and Robert
Wynn, and subsequently amended their counterclaim to add additional allegations.
Foley and Fidelity allege that GIANT's directors breached their fiduciary duties
by adopting a stockholders 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 stock pursuant to its stock repurchase program and by agreeing to the
Exchange Offer. In addition, Foley and Fidelity allege claims for defamation
against GIANT and one board member based on disclosures of the Foley Lawsuit in
certain of GIANT's press releases. GIANT filed a motion to dismiss all
counterclaims. In response to GIANT's motion, the court has required Foley and
Fidelity to amend their counterclaim to attempt to cure the deficiencies raised
by the motion to dismiss. The court stated that, "the Court will be inclined to
consider the forthcoming Second Amended Counterclaims as counterclaim
plaintiffs' last and strongest pleading. Therefore, if counterclaim defendants
file a motion to dismiss the forthcoming Second Amended Counterclaims, and if
warranted, the Court will dismiss any subject claims without leave to amend."
On March 22, 1996, Foley and Fidelity filed Second Amended Counterclaims. GIANT
is currently filing a motion to dismiss.
GIANT and its directors deny all wrongdoing and intend to vigorously
defend themselves in this action. It is not possible to predict the outcome of
these actions at this time.
5
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ITEM 3. LEGAL PROCEEDINGS. (CONT.)
Harbor Finance Partners v. GIANT GROUP, LTD., Burt Sugarman, Mary Hart, Michael
M. Fleishman, David Gotterer, Patricia L. Glaser, Willie D. Davis and John A.
Roschman, (Civ. Act. No. 14834).
On February 13, 1996, Harbor Finance Partners ("Harbor") commenced a
derivative action, purportedly on behalf of Rally's, against GIANT, Burt
Sugarman, Mary Hart, Michael M. Fleishman, David Gotterer, Patricia L. Glaser,
Willie D. Davis and John A. Roschman in 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 the rescission of the repurchase transaction.
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.
Michael Shores, et al. v. Burt Sugarman, David Gotterer, Terry Christensen,
Robert Wynn and GIANT GROUP, LTD., (Case No. BC 145108).
On February 27, 1996, Michael Shores on behalf of himself and all other
purported 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 in the
Los Angeles County Superior Courts, alleges that the Directors breached their
fiduciary duties by adopting a stockholders 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 itself in this action. It is not possible to predict the
outcome of this action at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is traded on the New York Stock Exchange
(Symbol: GPO). On March 6, 1996, the approximate number of record holders of the
Company's common stock was 2,100. The high and low sale prices for such stock
during each calendar quarter in 1995 and 1994 are set forth below. No dividends
were paid on the common stock in either year. The Company expects that earnings
will be retained in its business, and no cash dividends will be paid on its
common stock for the foreseeable future.
<TABLE>
<CAPTION>
SALE PRICES OF COMMON STOCK
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1995 1994
CALENDAR QUARTER HIGH LOW HIGH LOW
- ---------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First ................... 7 1/4 6 14 5/8 10 3/8
Second .................. 7 3/4 5 3/4 14 1/8 10 1/2
Third ................... 7 1/2 6 1/2 11 1/8 9 1/4
Fourth .................. 9 1/8 6 3/8 10 3/4 6 3/4
</TABLE>
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ITEM 6. SELECTED FINANCIAL DATA.
FIVE-YEAR SUMMARY OF CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
For the years ended (Note 3) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Operating results:
Investment income $3,947 $1,507 $1,377 $1,887 $2,880
Gain (loss) on investments 41 (1,065) 542 841 2,164
General and administrative
expenses (4,123) (4,628) (3,574) (4,799) (3,704)
Interest expense (149) (4,007) (4,854) (4,948) (5,816)
Loss on extinguishment
of debt -- (1,343) -- -- --
Equity in earnings (loss)
of affiliate (22,074) (8,898) (3,855) 3,121 2,030
Write-down in carrying value
of investment in affiliate -- (19,396) -- -- --
Loss from continuing operations (22,332) (34,350) (7,161) (2,127) (3,161)
Income (loss) from
discontinued operations, net -- 6,598 4,522 (3,971) (3,752)
Gain on sale of discontinued
operations, net -- 48,223 -- -- --
Net income (loss) (22,332) 20,471 (2,639) (6,098) (6,913)
Per common share: (Note 1)
Loss from continuing operations $(4.37) $(5.26) $(1.38) $(0.41) $(0.60)
Net income (loss) (4.37) 3.22 (0.51) (1.18) (1.31)
Weighted average common shares (Note 1 and 2) 5,110,000 6,463,000 5,180,000 5,189,000 5,295,000
Financial position as of December 31:
Total assets $51,681 $100,895 $110,616 $113,683 $125,579
Long-term debt -- 1,816 44,489 44,532 54,574
Total stockholders' equity 45,145 69,942 47,467 50,313 57,095
</TABLE>
Note 1: Earnings (loss) per share are based upon the weighted average common
shares outstanding, adjusted for the dilutive effect of outstanding
stock options in 1994.
Note 2: On March 6, 1996, there were 4,778,385 shares of GIANT common stock
outstanding.
Note 3: Certain prior year amounts have been reclassified to conform to the
1995 presentation.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Dollars in thousands, except per share amounts)
RESULTS OF OPERATIONS FOR 1995 VERSUS 1994
Investment income increased $2,440 to $3,947 in 1995 as a result of
higher average levels of investments in marketable securities in 1995 versus
1994.
General and administrative expenses decreased $505 from $4,628 in 1994
to $4,123 in 1995. This resulted from a decrease in compensation including
bonuses, travel expenses and consulting due to the divestiture of the cement
operations partially offset by the increase in insurance expense incurred in
1995.
Interest costs decreased $3,858 from $4,007 in 1994 to $149 in 1995.
The decrease was the result of the prepayment in November 1994 of the Company's
7% Convertible Subordinated Debentures, due April 15, 2006 and 14.5%
Subordinated Notes, due April 15, 1995.
Non-cash equity loss in GIANT's 48% owned investment, Rally's,
increased to $22,074 in 1995 from $8,898 in 1994. Rally's reported a net loss of
$46,919 in 1995 compared with a net loss of $19,273 in 1994. Rally's results of
operations for 1995 included charges of approximately $12,900 related to certain
management actions and decisions recorded in the third quarter consisting of
asset write-downs, disposals and occupancy costs for closed stores.
Additionally, Rally's 1995 results include approximately $18,100 of certain
non-cash charges recorded in the fourth quarter related to (1) the adoption of
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS 121") and (2) other charges taken in
the fourth quarter related to the disposal and planned disposal of certain
excess properties. Rally's results in 1994 include non-cash charges of
approximately $17,300 primarily related to asset write-downs and costs of
slowing previously expected development.
The Company incurred a net loss of $22,332 in 1995 compared to net
income of $20,471 in 1994. The 1995 net loss was primarily the result of the
non-cash equity loss in GIANT's investment in Rally's. In 1994, the Company
earned $6,598, net of income taxes, from the discontinued cement operations and
recorded a gain of $48,223, net of income taxes, on the October 1994 sale of the
cement operations. These earnings were partially offset by the 1994 write-down
of the carrying value of Rally's, higher general and administrative expenses and
lower investment income.
In December 1994, as a result of market declines in the value of
Rally's outstanding common stock and Rally's continuing operating losses, GIANT
recognized a pre-tax loss of $19,396 on this investment. The amount of the
non-cash write-down represented GIANT's investment in excess of its share of the
underlying net assets of Rally's.
The income tax benefits recorded for 1995 and 1994 were $286 and
$3,661, respectively, and primarily related to federal income taxes. The
Company's consolidated financial statements reflected valuation allowances of
$19,697 and $9,070, at December 31, 1995 and 1994, 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.
GIANT's loss from operations for 1995 excluding the effect of Rally's
losses was $544. Of this amount, approximately $200 represents additional
expenses related to the 1994 sale of the cement operations in which GIANT
recognized an after-tax gain of $48,223.
On March 18, 1996, Rally's announced that Donald E. Doyle had been
appointed as the company's President, Chief Executive Officer and a member of
Rally's Board of Directors. Mr. Doyle has over twenty years of executive
experience in the Quick Service Restaurant Industry, most recently with
Hardee's Food Services, Inc.
RESULTS OF OPERATIONS FOR 1994 VERSUS 1993
Investment income increased $130 to $1,507 in 1994 as a result of
higher average levels of funds invested in 1994 versus 1993.
The Company recorded realized losses on the sale of marketable
securities of $1,065 compared to realized gains of $542 in 1993. The losses were
the result of the general decline in the value of fixed income securities in
early 1994, which was due to increase in prevailing interest rates.
9
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (cont.) (Dollars in thousands, except per share amounts)
RESULTS OF OPERATIONS FOR 1994 VERSUS 1993 (cont.)
General and administrative expenses increased from $3,574 in 1993 to
$4,628 in 1994. The increase in expenses related primarily to legal and
insurance costs incurred during the year as well as increased compensation
including bonuses.
Interest costs decreased $847 to $4,007 in 1994. The decrease was
primarily the result of the prepayment in November 1994 of the Company's 7%
Convertible Subordinated Debentures, due April 15, 2006 and 14.5% Subordinated
Notes, due April 15, 1995. The early retirement of debt resulted in a loss on
extinguishment of debt of $1,343.
Non-cash equity loss in GIANT's 48% owned investment, Rally's,
increased from $3,855 in 1993 to $8,898 in 1994 as a result of Rally's operating
losses, which included charges of approximately $17,300 in 1994 primarily
related to asset write-downs and costs of slowing previously expected
development and $12,600 in 1993 related to a major business restructuring
program and other restaurant closings.
In December 1994, as a result of market declines in the value of
Rally's outstanding common stock and Rally's continuing operating losses, GIANT
recognized a pre-tax loss of $19,396 on this investment. The amount of the
non-cash write-down represented GIANT's investment in excess of its share of the
underlying net assets of Rally's.
The income tax benefits recorded for 1994 and 1993 were $3,661 and
$3,689, respectively, and primarily related to federal income taxes. As of
December 31, 1994, the Company's deferred tax asset relating to its investment
in Rally's reflected a valuation allowance of $9,070 as it is not more likely
than not, as defined in SFAS 109, that these tax benefits will be realized in
the near future.
Income from the discontinued cement operations increased 46% to $6,598,
net of income taxes of $3,399, primarily as a result of improved cement pricing
in 1994 as compared to 1993. Results of discontinued operations are reflected
through the date of sale in 1994 and for the full year in 1993. The sale of
discontinued cement operations resulted in a gain of $48,223, net of income
taxes of $28,767.
LIQUIDITY AND CAPITAL RESOURCES
Cash and marketable securities totaled $42,641 at December 31, 1995
compared with $70,973 at December 31, 1994. Total current assets and income
taxes payable decreased at December 31, 1995 compared to December 31, 1994
primarily due to liquidation of marketable securities to pay income taxes
resulting from the 1994 sale of the cement operations. At December 31, 1995 and
1994, the Company had working capital of $39,125 and $42,867 with current ratios
of 7.7 to 1 and 2.5 to 1, respectively. In addition, GIANT owns 7,430,002 shares
of Rally's outstanding common stock, which it acquired from 1987 to 1994,
including 2,500,000 shares purchased in October 1994 for $10,000. At December
31, 1995 and 1994, GIANT's $3,423 and $25,497 investment in Rally's represents
approximately 48% of Rally's outstanding common stock. Since the sale of the
Company's cement operations in October 1994, liquidity has been provided by
investment income and the liquidation of short-term investments. Management
believes that the Company's liquidity and capital resources are sufficient
to cover its cash requirements both on a short and long-term basis.
At December 31, 1995 and 1994, 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. GIANT's management believes that the assessment will be
reduced. The Company has received a preliminary proposed adjustment from the
Board's examiners which indicates that the assessment will be reduced
substantially. However, the ultimate resolution will be based on the Board's
official notice, which has not yet been received.
10
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (cont.) (Dollars in thousands, except per share amounts)
LIQUIDITY AND CAPITAL RESOURCES (cont.)
Net cash used by operations for the year ended December 31, 1995 was
$1,699 compared to cash provided by operations of $3,419 in 1994, which included
$11,186 provided by discontinued operations. During 1995, cash was primarily
used to fund the daily operations of the Company and pay expenses which were
accrued from the 1994 sale of the cement operations. In addition, 1995 cash
flows reflected higher investment income and lower administrative expenses. In
1993, net cash provided by operating activities was $8,452, including cash
provided by discontinued operations of $11,435.
Net cash used by investing activities was $1,583 in 1995 compared to
cash provided by investing activities in 1994 of $75,942. In 1995, cash was used
to pay income taxes in the amount of $22,238 related to the profit on the sale
of the Company's cement business. This was partially offset by the sales and
maturities, net of purchases, of marketable securities. During 1995, GIANT
purchased $26,424 in principal amount of Rally's 9.875% Senior Notes at an
aggregate purchase price of $14,051. In 1994, cash provided by investing
activities included $125,822 from the sale of the cement operations partially
offset by higher purchases of marketable securities and equipment and an
additional investment in Rally's of approximately $10,000. In 1993, cash used by
investing activities was $4,023 and primarily resulted from purchases of cement
operations' property and equipment.
On January 29, 1996, Rally's purchased directly from GIANT $22,000
principal amount of its 9.875 % Senior Notes at an aggregate purchase price of
$14,051. The Company had recorded these Senior Notes as investments
available-for-sale. GIANT purchased these Senior Notes for approximately
$11,400 over the last two years. The Company received cash and cash
equivalents of $11,053 and a $4,145 short-term note bearing interest at prime
rate. During the first quarter of 1996, the Company sold certain equity
securities classified as available-for-sale and received approximately
$10,424 in cash and will recognize a gain of approximately $531 in the first
quarter of 1996. On January 22, 1996, GIANT disclosed that it intends to
offer to exchange a new series of GIANT participating, non-voting preferred
stock for Rally's outstanding common stock. Upon successful completion of the
Exchange Offer, GIANT would own 79.9% of Rally's outstanding common stock.
The exchange ratio is to be 4.5 shares of Rally's outstanding common stock
for each share of GIANT preferred stock. The Exchange Offer will be made
only by prospectus.
Net cash used by financing activities was $3,199 in 1995 compared to
$60,012 used in 1994. The cash used in 1995 by financing activities reflected
repayments of both short and long-term borrowings and purchases of treasury
stock. In 1994, the proceeds from the cement company sale were used to repay
borrowings, including the prepayment of the Company's 7% and 14.5% debt of
approximately $44,000. Net cash used by financing activities was $1,370 in 1993.
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 1995, the Company acquired 166,000 shares of its
common stock at an aggregate cost of $1,137. At December 31, 1995, the Company
had cash and marketable securities of approximately $42,641 to pursue stock
repurchases and other investment opportunities. In January of 1996, the Company
acquired an additional 536,000 shares of its common stock at an aggregate cost
of $5,221.
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.
Subsequent to year-end, 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 6, 1996, $600 was advanced to Rally's under this
credit 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 the
Company. GIANT is to be reimbursed by Rally's for its costs incurred in
connection with providing and maintaining the letters of credit. On February 29,
1996, the Company pre-paid in full its 9.25% Term
11
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (cont.) (Dollars in thousands, except per share amounts)
LIQUIDITY AND CAPITAL RESOURCES (cont.)
Note in the principal amount of approximately $1,594, net of 1996 principal and
interest of $39. The Company incurred no additional expenses in connection with
this prepayment.
During early 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. The Company's Board of Directors determined that the Company was
not for sale and unconditionally rejected the merger offer. Fidelity has
subsequently notified the Company it will seek at the Company's 1996 Annual
Meeting to elect four persons to the Board of Directors of the Company who would
vote in favor of the merger into Fidelity and who would also consider
liquidating the Company. It is anticipated that the Company will experience
increased legal and administrative expenses in 1996 due to the foregoing by an
amount which is not determinable at this time. However, the Company believes
these expenses will not have a material effect on the Company's financial
condition or results of operations.
GIANT's major operating investment is in Rally's. Management intends to
diversify its portfolio of investments into additional business enterprises.
Through the liquidity and capital generated by the Company's divestiture of the
cement operations, the Company intends to make investments that create increased
value for its stockholders. The Company is attempting to select the best
opportunities available, and will structure the appropriate financing of such
investments to ensure adequate capital and liquidity for the Company's ongoing
operations. It is management's opinion that the Company has sufficient financial
resources to properly capitalize its business operations.
ACCOUNTING CHANGES
In March 1995, the FASB issued SFAS 121 which requires impairment
losses to be recorded on long-lived assets used in operations when indications
of impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. GIANT
adopted SFAS 121 in the fourth quarter of 1995. No adjustment was required to
reflect the adoption of this statement.
In October 1995, the FASB issued SFAS No. 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 expects to
adopt SFAS 123 in 1996. The Company, while evaluating SFAS 123, expects to
elect to continue to measure compensation cost under APB 25 and comply with
the pro forma disclosure requirements. The Company believes there will be no
adjustment to reflect the adoption of SFAS 123.
12
<PAGE> 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1995, 1994 and 1993
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income:
Investment income $ 3,947 $ 1,507 $ 1,377
Gain on investments 41 -- 542
Other 108 209 41
-------- -------- --------
4,096 1,716 1,960
-------- -------- --------
Costs and expenses:
General and administrative
expenses 4,123 4,628 3,574
Interest expense 149 4,007 4,854
Loss on investments -- 1,065 --
Loss on extinguishment of debt -- 1,343 --
Depreciation 368 390 527
-------- -------- --------
4,640 11,433 8,955
-------- -------- --------
Operations of affiliate:
Equity in loss of affiliate (22,074) (8,898) (3,855)
Write-down in carrying value
of investment in affiliate -- (19,396) --
-------- -------- --------
(22,074) (28,294) (3,855)
-------- -------- --------
Loss from continuing operations
before income taxes (22,618) (38,011) (10,850)
Credit for income taxes (286) (3,661) (3,689)
-------- -------- --------
Loss from continuing operations (22,332) (34,350) (7,161)
Income from discontinued
operations, net of income taxes -- 6,598 4,522
Gain on sale of discontinued
operations, net of income taxes -- 48,223 --
-------- -------- --------
Net income (loss) $(22,332) $ 20,471 $ (2,639)
======== ======== ========
Earnings per common share:
Loss from continuing operation $(4.37) $(5.26) $(1.38)
Income from discontinued operations, net -- 1.02 0.87
Gain on sale of discontinued
operations, net -- 7.46 --
-------- -------- --------
Net income (loss) $ (4.37) $ 3.22 $ (0.51)
======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
13
<PAGE> 14
GIANT GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1995 and 1994
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1995 1994
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $16,991 $ 23,472
Investments available for sale 25,650 47,501
Prepaid expenses and other
current assets 2,330 690
------- --------
Total current assets 44,971 71,663
Investment in affiliate 3,423 25,497
Property and equipment, net 3,267 3,570
Other assets 20 165
------- --------
Total assets $51,681 $100,895
======= ========
LIABILITIES
Current liabilities:
Short-term borrowings $ -- $ 1,917
Accounts payable and accrued expenses 706 1,251
Income taxes payable 3,469 25,435
Current maturities of long-term debt 1,671 193
------- --------
Total current liabilities 5,846 28,796
Long-term debt, net of current maturities -- 1,623
Deferred income taxes 690 534
------- --------
Total liabilities 6,536 30,953
------- --------
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 6,966,000 shares 69 69
Capital in excess of par value 33,508 33,508
Unrealized losses on investments (1,328) --
Retained earnings 29,796 52,128
------- --------
62,045 85,705
Less common stock in treasury; 1,952,000 shares
in 1995 and 1,786,000 shares in 1994, at cost 16,900 15,763
------- --------
Total stockholders' equity 45,145 69,942
------- --------
Total liabilities and stockholders'
equity $51,681 $100,895
======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated balance sheets.
14
<PAGE> 15
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1995, 1994 and 1993
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Operations:
Net income (loss) $(22,332) $ 20,471 $ (2,639)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operations:
Discontinued operations -- (6,598) (4,522)
Gain on sale of discontinued operations -- (48,223) --
Loss on extinguishment of debt -- 1,343 --
Depreciation 368 390 527
(Gain) loss on investments (41) 1,065 (542)
Equity in loss of affiliate 22,074 8,898 3,855
Write-down in carrying value of investment
in affiliate -- 19,396 --
Provision (credit) for deferred taxes 156 (242) (1,672)
Amortization of deferred charges and other -- 249 175
Accretion of discounts on marketable securities (1,063) (571) --
Changes in operating assets and liabilities:
Other assets and liabilities (316) (375) 1,977
Accounts payable and accrued expenses (545) (3,570) (142)
-------- -------- --------
Net cash used by continuing operations (1,699) (7,767) (2,983)
Net cash provided by discontinued operations -- 11,186 11,435
-------- -------- --------
Net cash provided (used) by operations (1,699) 3,419 8,452
-------- -------- --------
Investing activities:
Sales of marketable securities 48,022 26,740 44,122
Purchases of marketable securities (27,302) (58,083) (42,683)
Proceeds from sale of discontinued operations -- 125,822 --
Tax payments related to sale of discontinued operations (22,238) -- --
Purchase of property and equipment:
Continuing operations (65) (656) --
Discontinued operations -- (5,845) (5,462)
Investment in affiliate -- (10,085) --
Restricted investments - discontinued
operations -- (1,951) --
-------- -------- --------
Net cash provided (used) by investing activities (1,583) 75,942 (4,023)
-------- -------- --------
Financing activities:
Proceeds from (repayment of)
short-term borrowings (1,917) (14,825) 165
Repayment of long-term debt (145) (43,957) (160)
Repayment of debt - discontinued operations -- (1,230) (1,375)
Purchase of treasury stock (1,137) -- --
-------- -------- --------
Net cash used by financing activities (3,199) (60,012) (1,370)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (6,481) 19,349 3,059
Cash and cash equivalents:
Beginning of period 23,472 4,123 1,064
-------- -------- --------
End of period $ 16,991 $ 23,472 $ 4,123
======== ======== ========
Supplemental disclosure of cash (paid) received for:
Income taxes $(22,364) (2,585) 1,365
Interest, net (138) $ (4,606) $ (4,736)
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
15
<PAGE> 16
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1995, 1994, and 1993
(Dollars in thousands)
<TABLE>
<CAPTION>
Reduction for
Capital in Unrealized Common Additional
Common Excess of Losses on Retained Stock in Pension
Stock Par Value Investments, Net Earnings Treasury Liability
-------- ---------- ---------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1992 $ 69 $32,736 $ 0 $34,296 $(15,763) $(1,025)
Net loss for 1993 (2,639)
Increase in equity in net assets of
affiliate from issuance of its common
stock, net of deferred income taxes of $398 772
Reduction in equity to reflect additional
minimum pension liability, net of deferred
income taxes of $505 (979)
-------- ------- ------- ------- -------- -------
Balance as of December 31, 1993 69 33,508 0 31,657 (15,763) (2,004)
Net income for 1994 20,471
Reversal of reduction in equity to reflect
additional minimum pension liability as a
result of the sale of the cement company 2,004
-------- ------- ------- ------- -------- -------
Balance as of December 31, 1994 69 33,508 0 52,128 (15,763) 0
Net loss for 1995 (22,332)
Purchase of treasury stock (1,137)
Unrealized losses on investments, net (1,328)
-------- ------- ------- ------- -------- -------
Balance as of December 31, 1995 $ 69 $33,508 $(1,328) $29,796 $(16,900) $ 0
======== ======= ======= ======= ======== =======
The accompanying notes are an integrated part of the consolidated financial statements.
</TABLE>
16
<PAGE> 17
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
GIANT GROUP, LTD. (herein referred to as the "Company" or "GIANT") is a
holding company whose assets consist primarily of cash and cash equivalents,
short-term liquid investments and its investment representing approximately
48% of the outstanding common stock of Rally's Hamburgers, Inc. ("Rally's").
GIANT's short-term liquid investments consist of corporate stocks and
corporate bonds. GIANT has nine employees.
GIANT, through its equity investment in Rally's, is involved in the
operation and franchising of double drive-thru hamburger restaurants. Rally's is
one of the largest chains of double drive-thru restaurants in the United States.
On March 6, 1996, the Rally's system included 481 restaurants in 19 states,
primarily in the Midwest and the Sunbelt, comprised of 238 Rally's-owned and 243
franchised restaurants. Rally's restaurants offer high quality fast food served
quickly and at everyday prices generally below the regular prices of the four
largest hamburger chains. Rally's serves the drive-thru and take-out segments of
the quick-service restaurant market. Rally's opened its first restaurant in
January 1985 and began offering franchises in November 1986.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In
management's opinion, these estimates and assumptions are reasonable and result
in the fair presentation of the financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of GIANT and
its wholly owned subsidiaries. Investments in affiliates (20% to 50% owned) are
accounted for by the equity method. The effects of changes in the Company's
equity in the net assets of affiliates resulting from the issuance of capital
stock are charged or credited to capital in excess of par value. All significant
intercompany accounts and transactions have been eliminated.
MARKETABLE SECURITIES
In 1994, the Company adopted SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". No adjustment was required to
reflect the adoption of the new standard. Investments in marketable equity
securities and corporate bonds are considered available-for-sale. These
investments are carried at market and adjustments for unrealized gains and
losses are reported as a separate component of stockholders' equity.
The amortized cost of debt securities classified as available-for-sale
is adjusted for amortization of premiums and accretion of discounts through
maturity. Such amortization and interest are included in investment income. The
cost of securities sold is based on the specific identification method.
PROPERTY AND EQUIPMENT
Depreciation for financial reporting purposes is provided by the
straight-line method over the estimated useful lives of the assets, ranging from
three to fifteen years.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of", ("SFAS
121") which requires impairment losses to be recorded on long-lived assets used
in operations when indications of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. GIANT adopted SFAS 121 in the fourth quarter of 1995. No
adjustment was required to reflect the adoption of this statement.
17
<PAGE> 18
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
SUPPLEMENTAL CASH FLOW INFORMATION
For purposes of the consolidated statements of cash flows, short-term
investments purchased with an original maturity date of three months or less are
considered to be cash equivalents. Cash equivalents are recorded at market value
and consist of short-term U.S. Government obligations.
EARNINGS PER SHARE
Primary earnings per share is based upon the weighted average common
shares outstanding during the respective periods, adjusted for the dilutive
effect of outstanding common stock options. For the years ended December 31,
1995, 1994 and 1993, the weighted average common shares outstanding were
5,110,000, 6,463,000 and 5,180,000, respectively. Fully diluted earnings per
share is not presented as it approximates primary earnings per share.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
1995 presentation.
2. DISCONTINUED OPERATIONS
On October 6, 1994, KCC Delaware Company, Inc., a wholly owned
subsidiary of the Company, sold 100% of the stock of its wholly owned subsidiary
Giant Cement Holding, Inc. ("GCHI") through an initial public offering. The net
proceeds of this transaction of $125,822 (net of $2,000 contributed to GCHI on
the date of sale) resulted in a gain of $76,990 before income taxes of $28,767.
GCHI is engaged in the manufacture and sale of portland and masonry
cements and construction aggregates. Its operating results through the date of
sale have been included as discontinued operations in the accompanying
consolidated statements of operations for 1994 and 1993.
The condensed statements of operations related to the discontinued
operations through the date of sale are as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Total operating revenues $69,352 $81,900
Less: costs and expenses 59,355 74,429
------- -------
Income before income taxes 9,997 7,471
Less: income tax expense 3,399 2,949
------- -------
Net income $ 6,598 $ 4,522
======= =======
</TABLE>
The effective tax rates varied from the federal tax rates primarily due
to state income taxes in both years offset by percentage depletion in 1994.
Post-retirement medical and life insurance was provided to
substantially all employees of GCHI. Effective January 1, 1993, the Company
adopted SFAS No. 106, "Employers' Accounting for Post-Retirement Benefits Other
Than
18
<PAGE> 19
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
2. DISCONTINUED OPERATIONS (cont.)
Pensions" ("SFAS 106"). Adoption of SFAS 106 resulted in a post-retirement
expense in 1993 of $2,147 versus $1,003 if the expense had been recorded on a
pay as you go basis.
3. MARKETABLE SECURITIES
At December 31, 1995, the unrealized losses on investments classified
as available-for-sale are as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Deferred Decrease
Investment Fair Value Cost Losses Tax Asset In Equity
- ---------- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Equity securities $ 9,218 $10,273 $(1,055) $ 422 $ (633)
Corporate bonds 16,432 17,590 (1,158) 463 (695)
------- ------- ------- ------ -------
Total $25,650 $27,863 $(2,213) $ 885 $(1,328)
======= ======= ======= ====== =======
</TABLE>
As of December 31, 1994, the Company had an investment of $47,501 in a
short-term U.S. Government obligation, with an original maturity of more than
three months, which matured in 1995.
Proceeds from the sale of available-for-sale investments totaled
approximately $48,022, $26,740 and $44,122 in 1995, 1994 and 1993, respectively.
Subsequent to December 31, 1995, the Company sold certain equity
securities classified as available-for-sale and received approximately $10,424
in cash and will recognize a gain of approximately $531 in the first quarter of
1996. In addition, the Company sold certain corporate bonds which were
classified as investments available-for-sale (see note 4).
4. INVESTMENT IN AFFILIATE
GIANT's investment in Rally's of $3,423 and $25,497 at December 31,
1995 and 1994, respectively, represents approximately 48% of Rally's
outstanding common stock. At December 31, 1995 the Company owns 7,430,002
shares of Rally's, the quoted market value of which was $7,198. On March 6,
1996, the market value of the 7,430,002 shares was $12,074.
In October 1994, GIANT purchased 2,500,000 shares of Rally's at a price
of $4 per share which increased its ownership to 48% from 38%.
In December 1994, as a result of the decline in the quoted market value
of Rally's common stock and Rally's continued operating losses, GIANT recognized
an impairment loss on this investment through a charge to operations of $19,396.
The amount of this non-cash write-down represented the unamortized portion of
GIANT's investment in excess of its equity in the underlying net assets of
Rally's.
Rally's has adopted SFAS 121 (see note 1 - Property and Equipment).
Based on Rally's review of their 238 company-owned restaurants, 37 restaurants
were deemed to be impaired based on current estimates of their underlying cash
flows and a non-cash impairment loss of approximately $13,700 was recorded in
the fourth quarter of 1995.
19
<PAGE> 20
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
4. INVESTMENT IN AFFILIATE (cont.)
On January 22, 1996, GIANT disclosed that it intends 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 own 79.9% of Rally's outstanding common stock. The
exchange ratio is to be 4.5 shares of Rally's outstanding common stock for each
share of GIANT preferred stock. The Exchange Offer will be made only by
prospectus.
During 1995, GIANT purchased $26,424 in principal amount of Rally's
9.875% Senior Notes at an aggregate purchase price of $14,051. On January 29,
1996, Rally's purchased $22,000 principal amount of its 9.875% Senior Notes
directly from GIANT. The Company had recorded these Senior Notes as investments
available-for-sale. GIANT purchased these Senior Notes for approximately
$11,400 over the last two years. GIANT received cash and cash equivalents of
$11,053 and a $4,145 short-term note bearing interest at prime rate.
Summarized financial information for Rally's is as follows:
<TABLE>
<CAPTION>
FINANCIAL POSITION AS OF DECEMBER 31, 1995 1994
- ------------------------------------- ---- ----
<S> <C> <C>
Current assets $ 22,182 $ 14,276
Less: current liabilities 42,276 21,076
--------- ---------
Working capital deficiency (20,094) (6,800)
Noncurrent assets 115,210 155,140
Long-term debt and other noncurrent liabilities (88,444) (94,853)
--------- ---------
Stockholders' equity $ 6,672 $ 53,487
========= =========
GIANT's investment in Rally's $ 3,423 $ 25,497
========= =========
<CAPTION>
OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1995 1994 1993
- ------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Revenues $ 188,859 $ 186,318 $ 174,346
Less: operating costs 225,329 200,954 181,396
--------- --------- ---------
Loss from operations $ (36,470) $ (14,636) $ (7,050)
Net loss $ (46,919) $ (19,273) $ (8,907)
GIANT's share of non-cash equity loss in Rally's $ (22,074) $ (8,898) $ (3,855)
</TABLE>
20
<PAGE> 21
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
4. INVESTMENT IN AFFILIATE (cont.)
Non-cash equity loss in Rally's includes amortization of $435 and $580
in 1994 and 1993, respectively, of the excess cost of the investment over
underlying equity in net assets.
Subsequent to year-end, 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 6, 1996, $600 was advanced
to Rally's 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 the
Company. GIANT is to be reimbursed by Rally's for its costs incurred in
connection with providing and maintaining the letters of credit.
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995 1994
- ------------------ ---- ----
<S> <C> <C>
Land $ 120 $ 120
Leasehold improvements 175 165
Equipment and furnishings 4,773 4,718
------ ------
5,068 5,003
Less: accumulated depreciation 1,801 1,433
------ ------
$3,267 $3,570
====== ======
</TABLE>
6. DEBT
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1994
- ------------------ ----
<S> <C>
Term note due December 18, 1996, interest at 9.25% $1,816
Less: current maturities 193
------
$1,623
======
</TABLE>
As of December 31, 1995, due to the maturity date of December 18, 1996,
the Term Note was classified as current on the Consolidated Balance Sheets. On
February 29, 1996, the Company prepaid in full its 9.25% Term Note in the
principal amount of approximately $1,594, net of 1996 principal and interest of
$39. The Company incurred no additional expenses in connection with this
prepayment.
21
<PAGE> 22
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
6. DEBT (cont.)
Equipment having a net book value of $2,990 and $3,322 at December 31,
1995 and 1994, respectively, was pledged as collateral for the Term Note.
In November of 1994, the Company prepaid its 7% Convertible
Subordinated Debentures, due April 15, 2006 and 14.5% Subordinated Notes, due
April 15, 1995. The early retirement of the debt required the use of
approximately $44,000 of the proceeds of the sale of the Company's cement
operations and resulted in a loss on extinguishment of debt of $1,343 in 1994.
Short-term margin borrowings from stockbrokers were $0 and $1,917 at
December 31, 1995 and 1994, respectively. Margin borrowings were collateralized
by marketable securities and a portion of the Rally's common stock owned by the
Company.
7. TREASURY STOCK
During 1995, the Company, with the approval of the Board of Directors,
acquired 166,000 shares of its common stock for an aggregate cost of $1,137.
In January of 1996, the Company, with the approval of the Board of
Directors, acquired 536,000 shares of its common stock for an aggregate cost of
$5,221.
8. COMMON STOCK OPTIONS
The Company had a 1985 Incentive Stock Option Plan (the "Incentive
Plan") and a 1985 Non-Qualified Stock Option Plan (the "Non-Qualified Plan").
Both the Incentive Plan and the Non-Qualified Plan were terminated in August
1995 and, thereafter, no further grants of options will be made under such
plans. The Incentive Plan had provided for the grant of options to purchase an
aggregate of 750,000 shares of GIANT common stock, of which no options are
presently outstanding and options for 6,000 shares have been exercised as of
December 31, 1995. The Non-Qualified Plan provided for the grant of options to
purchase 3,000,000 shares of GIANT common stock and options for 7,500 shares
have been exercised as of December 31, 1995. No options were exercised in 1995
under either plan.
In March 1995, 2,026,000 outstanding options held by certain officers
of the Company exercisable at $6.33 per share and expiring in 1996, were
canceled and an identical number of new options were issued to such persons.
Such new options have an exercise price of $6.75 per share, which was the fair
market value of the shares at the time of the grant, and will expire in 2005.
The new options (like the canceled options) are fully vested. At December 31,
1995 and 1994, 0 and 1,411,000 shares, respectively, were reserved for options
which may be granted under the plans.
In September 1995, the Company purchased 164,000 options at the
difference between the fair market value and the exercise price, from former
Company officers and directors for an aggregate cost of $110 which is included
in general and administrative expenses.
22
<PAGE> 23
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
8. COMMON STOCK OPTIONS (cont.)
A summary of options is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
---------- --------------
<S> <C> <C>
Balance, December 31, 1992 (all exercisable) 2,284,000 $6.33 - $11.00
Options granted 5,000 9.13
----------
Balance, December 31, 1993 (all exercisable) 2,289,000 6.33 - 11.00
Options granted 30,000 11.00
----------
Balance, December 31, 1994 (all exercisable) 2,319,000 6.33 - 11.00
Options granted 2,126,000 6.75 - 7.375
Options purchased (164,000) 6.33
Options canceled (2,155,000) 6.33 - 11.00
----------
Balance, December 31, 1995 2,126,000 6.75 - 7.375
==========
</TABLE>
At December 31, 1995, 2,054,000 options were exercisable.
On February 7, 1996, the Chairman of the Board of the Company 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.
In October 1995, the FASB issued SFAS No. 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 expects to
adopt SFAS 123 in 1996. The Company, while evaluating SFAS 123, expects to elect
to continue to measure compensation cost under APB 25 and comply with the pro
forma disclosure requirements. The Company believes there will be no adjustment
to reflect the adoption of SFAS 123.
9. PREFERRED STOCK
Authorized preferred stock consists of 2,000,000 shares, $.01 par
value, issuable in one or more series with such dividend rates, liquidation
preferences and redemption, conversion and voting right restrictions as may be
determined by the Company's Board of Directors. No preferred stock was issued at
December 31, 1995 or 1994.
GIANT's Board of Directors has authorized a new Series A Preferred
Stock as part of GIANT's stockholders rights plan (see note 13). Additionally,
in connection with the proposed Exchange Offer for Rally's common stock (see
note 4), the Company plans to issue a new series of GIANT participating,
non-voting preferred stock.
23
<PAGE> 24
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
10. INCOME TAXES
The credit for income taxes is comprised of the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31 1995 1994 1993
- ------------------------------ ---- ---- ----
<S> <C> <C> <C>
Current federal income tax benefit $ 413 $3,419 $2,017
Deferred federal income tax (provision) benefit (156) 242 1,672
Current state income tax benefit 29 -- --
----- ------ ------
Credit for income taxes $ 286 $3,661 $3,689
===== ====== ======
</TABLE>
The following is a reconciliation between the credits for income taxes
and the amounts computed by applying the Federal statutory rate of 34% to
pre-tax loss from continuing operations:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31 1995 1994 1993
- ------------------------------ ---- ---- ----
<S> <C> <C> <C>
Statutory federal tax credit on pre-tax loss $ 7,690 $ 12,924 $3,689
State income tax credit, net of federal income
taxes 1,388 -- --
Valuation allowance (8,898) (9,070) --
Other, net 106 (193) --
------- -------- ------
Credit for income taxes $ 286 $ 3,661 $3,689
======= ======== ======
</TABLE>
Effective January 1, 1993, the Company adopted SFAS No. 109 "Accounting
for Income Taxes ("SFAS 109"). No adjustment was required to reflect the
adoption of this new standard.
The deferred tax assets and (liabilities) of the Company consist of the
following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995 1994
- ------------------ ---- ----
<S> <C> <C>
Investment in Rally's $ 19,629 $ 9,070
Depreciation (690) (600)
Unrealized investment losses 885 --
Other, net 68 66
Valuation allowance (19,697) (9,070)
-------- -------
Net deferred tax assets (liabilities) $ 195 $ (534)
======== =======
</TABLE>
The valuation allowances at December 31, 1995 and 1994 were provided
because it is not more likely than not, as defined in SFAS 109, that the
deferred tax benefits will be realized through operations. The valuation
allowances recorded against deferred tax assets are based on management's
estimates related to the Company's ability to realize
24
<PAGE> 25
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
10. INCOME TAXES (cont.)
these benefits. Appropriate adjustments will be made to the valuation allowances
if circumstances warrant in future periods. Such adjustments may have a
significant impact on the Company's consolidated financial statements. As of
December 31, 1995, no valuation allowance was provided for the deferred tax
asset of $885 related to unrealized losses on certain investments classified as
available-for-sale. These investments were sold at a net gain, subsequent to
year-end, and the associated deferred tax benefit is expected to be realized
(see notes 3 and 4).
The income from the operations of the Company's cement business, until it
was sold in 1994, and the gain from the sale reflect income tax charges of
$3,399 and $28,767, respectively.
11. LEASES
The Company leases office and hangar space under operating leases with
variable terms. The leases generally include renewal options. Total rental
expense for the years 1995, 1994 and 1993 amounted to $231, $271 and $284,
respectively.
Future minimum rental commitments under noncancelable leases with a
remaining term in excess of one year as of December 31, 1995 are as follows:
1996 $193
1997 $ 64
12. COMMITMENTS AND CONTINGENCIES
In January and February 1994, two putative class action lawsuits were
filed, purportedly on behalf of the stockholders 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' have renewed this motion, and defendants again
have opposed class certification. That motion is currently pending. 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 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 seeks
both injunctive relief and damages. This action arises from an attempted
hostile takeover of Rally's and GIANT, by Fidelity and Foley, who indirectly
own and/or control "Carl's Jr.", a competing fast-food restaurant chain.
GIANT's complaint alleges that the Defendants engaged in various unlawful
activities in their bid for Rally's and GIANT, including trading on non-public
confidential and/or insider information, misappropriating confidential and
proprietary information from Rally's and GIANT, and violating the disclosure
requirements of Section 13(d) of the Securities and Exchange Act of 1934. In
particular, GIANT alleges that Defendants
25
<PAGE> 26
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
12. COMMITMENTS AND CONTINGENCIES (cont.)
breached the federal securities laws by failing to identify all of the members
of their "group" according to the amended complaint for purposes of disclosing
the true extent of their holdings of GIANT, and by failing to disclose that the
true purpose of their investment in GIANT is to obtain control of Rally's and
GIANT. In January 1996, Foley and Fidelity filed a counterclaim against GIANT
and its board of directors and subsequently amended the counterclaim to add
additional allegations. Foley and Fidelity allege that GIANT's directors
breached their fiduciary duties by adopting a stockholders 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. In addition,
Foley and Fidelity allege claims for defamation against GIANT and one board
member based on disclosures of the Foley Lawsuit in certain of GIANT's press
releases. GIANT has filed a motion to dismiss all counterclaims. In response to
GIANT's motion, the court has required Foley and Fidelity to amend their
counterclaim to attempt to cure the deficiencies raised by the motion to
dismiss. The court stated that, "the Court will be inclined to consider the
forthcoming Second Amended Counterclaims as counterclaim plaintiffs' last and
strongest pleading. Therefore, if counterclaim defendants file a motion to
dismiss the forthcoming Second Amended Counterclaims, and if warranted, the
Court will dismiss any subject claims without leave to amend." On March 22,
1996, Foley and Fidelity filed Second Amended Counterclaims. GIANT is currently
filing a motion to dismiss. GIANT and its directors deny all wrongdoing and
intend to vigorously defend themselves in this action. It is not possible to
predict the outcome of these actions at this time.
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 in 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. 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 in the
Los Angeles County Superior Courts, alleges that the Directors breached their
fiduciary duties by adopting a stockholders 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 previous mentioned lawsuits
contain meritorious claims, management believes that the ultimate resolution of
the lawsuits will not materially affect the Company's financial condition or
results of operations.
The Company has an employment contract with the Chairman of the Board,
President and Chief Executive Officer of the Company that expires on December
31, 1998. The contract calls for an annual base salary of $1,000,000 and annual
bonus determined, year to year, by the compensation committee of the Board of
Directors.
26
<PAGE> 27
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
13. SUBSEQUENT EVENTS
STOCKHOLDERS RIGHTS PLAN
On January 4, 1996, GIANT declared a dividend of one 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
Preferred Stock at an exercise price of $30 for each 1/1,000th share (subject to
adjustment). The Rights will be exercisable and will trade separately from the
GIANT common stock 10 days following a public announcement that a person or
group of persons has become the beneficial owner of 15% or more of GIANT common
stock (an "Acquiring Person") or 10 business days (or such later date as may be
determined by the Board of Directors) following the commencement of a tender or
exchange offer, the consummation of which would result in such person becoming
the beneficial owner of 15% or more of GIANT common stock; provided however,
that because Burt Sugarman, Chairman of the Board, President and Chief Executive
Officer of GIANT, beneficially owned in excess of 15% of the GIANT common stock
at the time the Rights were issued, Mr. Sugarman will become an Acquiring Person
only upon the acquisition by him of additional shares of GIANT common stock,
other than acquisitions through stock dividends, stock option plans, company
compensation 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 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, even though
such an attempt might be beneficial to GIANT and its stockholders. 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.
FIDELITY NATIONAL FINANCIAL, INC. MERGER OFFER
During early 1996, Fidelity made an offer to acquire GIANT 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.
The Company's Board of Directors determined that the Company was not for sale
and unconditionally rejected the merger offer. Fidelity has subsequently
notified the Company it will seek at the Company's 1996 Annual Meeting to elect
four persons to the Board of Directors of the Company who would vote in favor of
the merger into Fidelity and who would also consider liquidating the Company. It
is anticipated that the Company will experience increased legal and
administrative expenses in 1996 due to the foregoing by an amount which is not
determinable at this time. However, the Company believes these expenses will not
have a material effect on the Company's financial condition or results of
operations.
27
<PAGE> 28
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
13. SUBSEQUENT EVENTS (cont.)
EXCHANGE OFFER
On January 22, 1996, the Company disclosed that it intends to offer to
exchange a new series of GIANT participating, non-voting preferred stock for
Rally's outstanding common stock. Upon successful completion of the Exchange
Offer, GIANT would own 79.9% of Rally's outstanding common stock. The exchange
ratio is to be 4.5 shares of Rally's outstanding common stock for each share
of GIANT preferred stock. The Exchange Offer will be made only by prospectus.
28
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
GIANT GROUP, LTD.:
We have audited the accompanying consolidated balance sheet of GIANT GROUP, LTD.
(a Delaware Corporation) and subsidiary as of December 31, 1995, and the
related consolidated statement of operations, stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GIANT GROUP, LTD.
and subsidiary as of December 31, 1995, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 25, 1996
29
<PAGE> 30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
GIANT GROUP, LTD.:
We have audited the accompanying consolidated balance sheet of GIANT GROUP, LTD.
and subsidiaries as of December 31, 1994, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended December 31, 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. We did not audit
the financial statements of Rally's Hamburgers, Inc. for the years ended
December 31, 1994 or 1993, the investment in which is accounted for by the
equity method. The Company's equity in Rally's net assets of $25,497,000 at
December 31, 1994, and equity of ($8,463,000) and ($3,275,000) in the net loss
of Rally's for the years ended December 31, 1994 and 1993, respectively, are
included in the accompanying financial statements. Those financial statements of
Rally's were audited by other auditors whose report thereon has been furnished
to us, and our opinion expressed herein, insofar as it relates to the
aforementioned amounts included for Rally's, is based upon the report of other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based upon our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of GIANT GROUP, LTD. and subsidiaries as of
December 31, 1994, and the consolidated results of their operations and their
cash flows for each of the two years in the period ended December 31, 1994 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
March 10, 1995
30
<PAGE> 31
GIANT GROUP, LTD.
QUARTERLY FINANCIAL DATA
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
1995 QUARTER ENDED
- ---- -------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Income $ 1,110 $ 915 $ 859 $ 1,212
Costs and expenses 1,053 1,165 1,001 1,421
Equity in loss of affiliate (1,671) (611) (8,207) (11,585)
Net loss (1,614) (861) (8,349) (11,508)
Net loss per common share (.31) (.17) (1.64) (2.28)
</TABLE>
<TABLE>
<CAPTION>
1994 QUARTER ENDED
- ---- -------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Income $ 331 $ 138 $ 13 $ 1,234
Costs and expenses 2,862 2,696 2,245 3,630
Equity in loss of affiliate (850) (490) (1,845) (25,109)(1)
Loss from continuing operations (2,232) (2,011) (2,691) (27,416)
Income (loss) from discontinued
operations (397) 3,456 3,538 48,224(2)
Net income (loss) (2,629) 1,445 847 20,808
Per common share:
Loss from continuing operations (.43) (.30) (.40) (4.22)
Net income (loss) (.51) .23 .15 3.24
</TABLE>
(1) Includes an impairment loss of $19,396 on GIANT's investment in Rally's.
(2) Net of tax gain from the sale of discontinued operations.
31
<PAGE> 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On January 29, 1996, the Company engaged the accounting firm of Arthur
Andersen LLP as independent accountants for the registrant to perform all
procedures related to the 1995 year-end audit. Arthur Andersen LLP are the
independent accountants for Rally's. The work of Coopers & Lybrand L.L.P. was
terminated effective January 25, 1996. The decision to change accountants was
approved by the Audit Committee of the Company's Board of Directors.
During the two most recent fiscal years and subsequent interim periods
prior to January 25, 1996, there have been no disagreements with Coopers &
Lybrand L.L.P. on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure or any reportable events.
Coopers & Lybrand L.L.P.'s report on the financial statements for the past
two years contained no adverse opinion or disclaimer of opinion and was not
qualified or modified as to audit scope or accounting principles.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below are the directors and executive officers of the Company,
together with their ages, their positions with the Company, their business
experience during the past five years and the year in which they first became a
director or executive officer of the Company. All directors and executive
officers hold office until their respective successors are elected and
qualified, or until their earlier resignation or removal.
Burt Sugarman, 57, Chairman of the Board, President and Chief Executive
Officer. Mr. Sugarman has been Chairman of the Board of the Company since 1983,
and President and Chief Executive Officer since May 1985. Mr. Sugarman has been
Chairman of the Board of Rally's since November 1994, having served as its
Chairman of the Board and Chief Executive Officer from 1990 through February
1994. Mr. Sugarman is also a Director of Rally's.
David Gotterer, 67, Vice Chairman and Director. Mr. Gotterer has been Vice
Chairman of the Company since May 1986 and Director of the Company since 1984.
Mr. Gotterer is a senior partner in the accounting firm of Mason & Company, LLP,
New York, New York. Mr. Gotterer is also a Director of Rally's.
Cathy L. Wood, 48, Vice President, Chief Financial Officer, Secretary and
Treasurer. Ms. Wood joined the Company in January 1995. Prior to joining the
Company, Ms. Wood served in various capacities for the Wherehouse including
Senior Vice President and Chief Financial Officer from 1993 to 1994. Wherehouse
filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in August
1995.
Terry Christensen, 55, Director. Mr. Christensen has been a Director of the
Company since 1994. Mr. Christensen has been a partner in the law firm of
Christensen, White, Miller, Fink, Jacobs, Glaser & Shapiro, LLP, Los Angeles,
California, for more than the last five years. Mr. Christensen is a Director of
MGM Grand, Inc. (New York Stock Exchange).
Robert Wynn, 63, Director. Mr. Wynn has been a Director of the Company
since 1994. Mr. Wynn has been President and Chief Executive Officer of Mellodan
Productions, Inc., Los Angeles, California, which is engaged in the production
of television movies and series, for more than the last five years.
32
<PAGE> 33
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to the Company for the
three years ended December 31, 1995, 1994 and 1993 of those persons who were (1)
the Chief Executive Officer and (2) executive officers of the Company during
1995 and whose cash compensation exceeded $100,000, for services performed by
such persons for the Company during 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
------------------------------------------------- -------------------------------------------------
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME & PRINCIPAL SALARY BONUS COMPENSATION STOCK OPTIONS/SARS COMPENSATION (6)
POSITION YEAR $ $ $ AWARD(S) # $
- ---------------- ---- ------ ----- ------------ ---------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Burt Sugarman, 1995 1,000,000 -0- 26,774 (1) - 1,899,202(2) 25,000(3)
Chairman of The 1994 1,000,000 600,000 76,579 (1) - -0- 174,038(3)
Board, President 1993 998,000 -0- 78,121 (1) - -0- 275,000(3)
and Chief
Executive Officer
Cathy L. Wood, 1995 166,123 -0- -0- - 55,000(5) -0-
Vice President, (4)
Secretary and
Chief Financial
Officer
</TABLE>
(1) REPRESENTS INCOME IMPUTED TO MR. SUGARMAN FOR HIS PERSONAL USE OF COMPANY
AIRPLANE AND AUTOMOBILE.
(2) 1,899,202 OPTIONS HELD BY MR. SUGARMAN EXERCISABLE AT $6.33 PER SHARE AND
EXPIRING IN 1996, WERE CANCELED AND AN IDENTICAL NUMBER OF NEW OPTIONS WERE
ISSUED TO HIM AT $6.75, WHICH WAS THEN THE CURRENT MARKET PRICE.
(3) REPRESENTS THE FOLLOWING AMOUNTS PAID TO MR. SUGARMAN BY RALLY'S: $25,000,
$174,038 AND $275,000 FOR SERVICES AS CHAIRMAN AND CHIEF EXECUTIVE OFFICER
OF RALLY'S IN 1995, 1994 AND 1993, RESPECTIVELY. IN FEBRUARY 1994, MR.
SUGARMAN CEASED SERVING AS CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF RALLY'S,
HOWEVER, IN NOVEMBER 1994, MR. SUGARMAN REASSUMED THE DUTIES OF CHAIRMAN.
(4) MS. WOOD JOINED THE COMPANY IN JANUARY 1995.
(5) MS. WOOD WAS GRANTED 45,000 OPTIONS IN MARCH 1995 AND 10,000 OPTIONS IN
JULY 1995.
(6) PERSONAL BENEFITS PROVIDED TO MR. SUGARMAN AND MS. WOOD DID NOT EXCEED THE
DISCLOSURE THRESHOLDS ESTABLISHED UNDER SECURITIES AND EXCHANGE COMMISSION
("SEC") RULES AND THEREFORE ARE NOT INCLUDED IN THIS TABLE.
(7) LONG-TERM INCENTIVE PLAN ("LTIP") PAYOUTS ($) WERE OMITTED AS NO LTIP
PAYOUTS WERE MADE.
EMPLOYMENT CONTRACTS
Mr. Sugarman is employed as Chairman of the Board, President and Chief
Executive Officer of the Company pursuant to an Employment Agreement expiring
December 31, 1998 pursuant to which Mr. Sugarman receives an annual base salary
of $1,000,000, with an annual bonus in an amount determined from year to year by
the Compensation Committee of the Board of Directors, at its discretion, and
certain additional benefits. The Employment Agreement is terminable prior to
December 31, 1998 (1) by the Company for cause (as defined therein) and (2) by
Mr. Sugarman (a) for cause (as defined therein), (b) at any time for any reason,
after December 31, 1995 or (c) if Mr. Sugarman ceases
33
<PAGE> 34
ITEM 11. EXECUTIVE COMPENSATION. (cont.)
to own or control at least 10% of the common stock of the Company. Should the
Employment Agreement be terminated by the Company without cause or by Mr.
Sugarman for cause, Mr. Sugarman shall be entitled to continuation of all
compensation and benefits through December 31, 1998, or for 24 months from
termination, whichever period is longer.
COMPENSATION OF DIRECTORS
Non-employee directors of the Company are compensated at a rate of $10,000
per annum plus $500 for each meeting of the Board of Directors attended. Members
of the Audit Committee are compensated for their services thereon at the rate of
$250 per meeting attended.
OPTION PLANS
The Company had a 1985 Incentive Stock Option Plan (the "Incentive Plan")
and a 1985 Non-Qualified Stock Option Plan (the" Non-Qualified Plan"). Both the
Incentive Plan and the Non-Qualified Plan were terminated in August 1995 and,
thereafter, no further grants of options will be made under such plans. The
Incentive Plan had provided for the grant of options to purchase an aggregate of
750,000 shares of GIANT common stock. As of December 31, 1995, no options were
outstanding and options to purchase 6,000 shares have been exercised. The
Non-Qualified Plan had provided for the grant of options to purchase 3,000,000
shares of GIANT common stock. As of December 31, 1995, options to purchase
2,126,000 were outstanding and options for 7,500 shares have been exercised. No
options were exercised in 1995 under either plan. During 1995, 10 year options,
vesting over 30 months, for 100,000 shares of GIANT common stock were granted to
directors and officers of the Company under the Non-Qualified Plan and no
options were granted under the Incentive Plan. In addition, 2,026,000 options
held by Messrs. Sugarman and Gotterer, exercisable at $6.33 per share and
expiring in 1996, were canceled and an identical number of new options were
issued to such persons. Such new options have an exercise price of $6.75 per
share, which was the fair market value of the shares at the time of the grant,
and will expire in 2005. The new options (like the canceled options) are fully
vested.
FISCAL YEAR END OPTION VALUE
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-THE
SHARES MONEY OPTIONS AT
ACQUIRED VALUE NUMBER OF UNEXERCISED OPTIONS AT DECEMBER 31, 1995 (1)
NAME ON EXERCISE REALIZED($) DECEMBER 31, 1995 EXERCISABLE $
- ---- ----------- ----------- ---------------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE
----------- -------------
<S> <C> <C> <C> <C> <C>
Burt -0- -0- 1,899,202 -0- $4,510,605
Sugarman
CATHY L. -0- -0- 15,000 40,000 31,875
WOOD
</TABLE>
(1) BASED UPON THE CLOSING PRICE OF THE COMPANY'S COMMON STOCK ON DECEMBER 31,
1995, MINUS THE OPTION EXERCISE PRICE OF (1) $6.75 PER SHARE FOR MR.
SUGARMAN AND (2) $7.00 PER SHARE FOR MS WOOD. MR. SUGARMAN EXERCISED
OPTIONS TO PURCHASE 300,000 SHARES OF COMMON STOCK IN FEBRUARY 1996. THE
VALUE REALIZED, I.E., THE DIFFERENCE BETWEEN THE AGGREGATE CLOSING PRICE OF
SUCH SHARES ON THE EXERCISE DATE AND THE AGGREGATE EXERCISE PRICE WAS
$413,000.
34
<PAGE> 35
ITEM 11. EXECUTIVE COMPENSATION. (cont.)
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
GRANT DATE
PRESENT
INDIVIDUAL GRANTS VALUE ($)(1)
---------------------------------------------------------------- ------------
% OF TOTAL
OPTIONS/SARS
GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES BASE PRICE EXPIRATION
NAME GRANTED # FISCAL YEAR $/SH DATE
- ---- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Burt 1,899,202 97.2% 6.75 3/15/2005 8,319,000
Sugarman
Cathy L. 45,000 2.3% 7.00 2/28/2005 205,650
Wood 10,000 .5% 6.88 7/31/2005 43,600
</TABLE>
(1) Options are granted at market price on the day of the grant. The proxy
rules require that either potential realizable values at assumed annual
stock price appreciation rates or present values at the grant date be
assigned to options. GIANT has chosen a present value method known as the
"Black-Scholes option pricing model." The assumptions used to arrive at the
values shown were as follows: expected volatility-38.8%, risk-free rate of
return-7.4%, 7.3% and 6.6% for the February 28, 1995, March 15, 1995 and
July 31, 1995 issuances, respectively, dividend yield-0% and time of
exercise ten years. The choice of the Black-Scholes valuation method does
not reflect any belief by GIANT's management that such method, or any other
valuation method, can accurately assign a value to an option at the grant
date.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1995, the Compensation and Option Committee of the Board of
Directors consisted of David Gotterer and Terry Christensen. David Gotterer is a
senior partner in the accounting firm of Mason & Company, LLP, which received
$142,000 from the Company for rendering consulting, financial and accounting
services to the Company during 1995. Terry Christensen is a partner in the law
firm of Christensen, White, which represents the Company in certain corporate
and litigation matters.
35
<PAGE> 36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership as of March 6, 1996
of the common stock by each of the Company's Directors as well as all officers
and Directors as a group and the only stockholders who, to the knowledge of
management of the Company, based upon filings with the SEC, are the beneficial
owners of more than 5% of the outstanding shares of common stock.
<TABLE>
<CAPTION>
NAME & ADDRESS AMOUNT AND NATURE OF PERCENT OF CLASS (2)
- --------------- -------------------- ----------------
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1)
- ------------------- --------------------
<S> <C> <C>
Burt Sugarman 2,988,672 shares (3) 46.86%
150 El Camino Drive
Beverly Hills, CA 90212
Fidelity National Financial, Inc. 695,489 shares (4) 14.56%
17911 Von Karman Avenue
Irvine, CA 92714
The TCW Group, Inc. 382,700 shares (5 ) 8.0%
865 South Figueroa Street
Los Angeles, CA 90017
Dimensional Fund Advisors, Inc. 369,250 shares (6 ) 7.73%
1299 Ocean Avenue
Santa Monica, CA 90401
John A. Levin & Co. Inc. 325,200 shares (7 ) 6.8%
One Rockefeller Plaza
New York, NY 10020
David Gotterer 239,250 shares (8) 4.88%
400 Park Avenue
12th Floor
New York, NY 10022
Cathy L. Wood 16,000 shares (9) .34%
150 El Camino Drive
Beverly Hills, CA 90212
Terry N. Christensen 7,167 shares (10) .15%
2121 Avenue of the Stars
18th Floor
Los Angeles, CA 90067
Robert Wynn 7,167 shares (11) .15%
3115 Olive Avenue
Burbank, CA 91505
All Directors and Executive Officers 3,258,256 shares (12) 49.88%
as a group (5 persons)
</TABLE>
36
<PAGE> 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(cont.)
(1) Under the rules of the SEC, a person is deemed to be the beneficial
owners of a security if such person has or shares the power to vote or
to direct the voting of such security, or the power to dispose or to
direct the disposition of such security. A person is also deemed to be
the beneficial owner of any securities of which that person has the
right to acquire ownership within 60 days as well as any securities
owned by such person's spouse, children or other relatives living in
the same house. Unless otherwise indicated, the named person has sole
voting and investment power with respect to the share held by them.
(2) Computed on the basis of 4,778,385 shares of GIANT common stock issued
and outstanding as of March 6, 1996.
(3) Includes 1,599,202 shares underlying presently exercisable stock
options, does not include 20,550 shares owned by Mr. Sugarman's spouse
and 2,000 shares owned as custodian of his minor child, as to which
shares he disclaims beneficial ownership.
(4) As reported in an amendment, dated March 1, 1996, to the Schedule 13D
filed by Fidelity and Foley, (1) Mr. Foley, Chairman of the Board and
Chief Executive Officer of Fidelity and owner of 21.7% of the
outstanding common stock of Fidelity, disclaims beneficial ownership of
the 695,489 shares of the Company's common stock owned by Fidelity, and
(2) Mr. Foley owns 10,000 shares of the Company's common stock. See
ITEM 3. LEGAL PROCEEDINGS.
(5) As reported in a Schedule 13G, dated February 12, 1996, the TCW Group,
Inc. (formerly known as TCW Management Company), a parent holding
company, had, as of December 31, 1995, sole power to vote and to
dispose of 382,700 shares. The Company has reason to believe that these
shares were included in acquisitions of treasury stock subsequent to
year end. See ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Liquidity and Capital Resources.
(6) As reported in a Schedule 13G, dated February 7, 1996, Dimensional Fund
Advisor, Inc. ("Dimensional"), a registered investment advisor, is
deemed to have beneficial ownership of 369,250 shares of GIANT stock as
of December 31, 1995, all of which shares are held in portfolios of DFA
Investment Dimensions Group Inc., a registered open-end investment
company, or in series of the DFA Investment Trust Company, a Delaware
business trust, or the DFA Group Trust and DFA Participation Group
Trust, investment vehicles for qualified employee benefit plans, all of
which Dimensional Fund Advisors Inc. serves as investment manager.
Dimensional disclaims beneficial ownership of all such shares.
(7) As reported in a Schedule 13G, dated February 14, 1995, John A. Levin &
Co., Inc., a registered investment adviser, had, as of December 31,
1994 the power to vote and to dispose of 325,200 shares.
(8) Includes 126,750 shares that Mr. Gotterer may purchase pursuant to
presently exercisable stock options. Mr. Gotterer disclaims beneficial
ownership of 63,375 of those shares under option, as a business
partner is entitled to the beneficial ownership of the shares
underlying the options.
(9) Includes 15,000 shares underlying presently exercisable stock options.
(10)(11) Includes 6,667 shares underlying presently exercisable stock options.
(12) Includes 1,690,911 shares underlying presently exercisable stock
options.
37
<PAGE> 38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In July 1991, Mr. Sugarman, without admitting or denying the allegations in
a complaint filed by the SEC, consented to an Order of the United States
District Court, District of Columbia, permanently enjoining him from violating
Section 17(a)(2) of the Securities Act of 1933 and paid $.6 million, plus
prejudgment interest of $63,000. The SEC complaint had alleged that Mr. Sugarman
violated Section 17(a)(2) in connection with purchases in October 1989 made by
GIANT and others of shares of Rally's common stock. In 1991, GIANT indemnified
Mr. Sugarman for amounts paid by him to the SEC and for his expenses in
connection with the SEC investigation.
David Gotterer, Vice Chairman and a Director of GIANT and of Rally's, is a
senior partner in the accounting firm of Mason & Company, LLP, which received
$142,000 from the Company for rendering consulting, financial and accounting
services to the Company during 1995.
Terry Christensen, a director of the Company, is a partner in the law firm
of Christensen, White, which represents the Company in certain corporate and
litigation matters.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
The following financial statements and schedules of Rally's are
attached:
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Consolidated Balance Sheets as of January 1, 1995 and December 31, 1995
Consolidated Statements of Operations for each of the three fiscal
years in the period ended December 31, 1995
Consolidated Statements of Stockholders' Equity for each of the three
fiscal years in the period ended December 31, 1995
Consolidated Statements of Cash Flows for each of the three fiscal
years in the period ended December 31, 1995
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Schedule II - Valuation and Qualifying Accounts, for each of the three
fiscal years in the period ended December 31, 1995
(2) EXHIBITS
NO. DESCRIPTION OF EXHIBIT
- --- ----------------------
3.1.1 Restated Certificate of Incorporation of the Company, as amended
through May 21, 1987 (filed as Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1987, and
incorporated herein by reference).
3.1.2 Certificate of Amendment to Restated Certificate of Incorporation of
the Company, dated June 1, 1990 (filed as Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, and
incorporated herein by reference).
38
<PAGE> 39
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(CONT.)
(2) EXHIBITS (cont.)
NO. DESCRIPTION OF EXHIBIT
- --- ----------------------
3.1.3 Certificate of Amendment to Restated Certificate of Incorporation of
Company, dated November 9, 1992 (filed as Exhibit 1 to the Company's
Current Report on Form 8-K, dated November 10, 1992, and incorporated
herein by reference).
3.1.4 Certificate of Amendment to Restated Certificate of Incorporation,
dated May 9, 1994 (filed as Exhibit 3.1.4 to the Company's Annual
Report on Form 10-K, dated March 28, 1995, and incorporated herein by
reference).
3.1.5 Certificate of Designation of Series A Junior Participating Preferred
Stock, dated January 12, 1996.
3.2 By-laws of the Company, as amended (filed as Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1990, and incorporated herein by reference).
3.2.1 By-laws of the Company, as amended (filed as Exhibit 1 to the
Company's Current Report on Form 8-K, dated January 14, 1996, and
incorporated herein by reference).
4.1 Rights Agreement of the Company, dated January 4, 1996 (filed as
Exhibit 2.6 to the Company's Form 8-A, dated January 12, 1996, and
incorporated herein by reference.)
10.1 1985 Non-Qualified Stock Option Plan, as amended (filed as Exhibit
10.1.2 to the Company's Annual Report on Form 10-K, dated March 28,
1995, and incorporated herein by reference).
10.2 Employment Agreement dated July 24, 1993, between the Company and Burt
Sugarman (filed as Exhibit 10(d)(1) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993 and incorporated herein
by reference).
10.2.1 Stock Purchase Agreement, dated April 12, 1990, by and among KCC
Delaware Company, a Delaware corporation, Golden State Newsprint
Company, Inc., a Delaware corporation, and Smurfit International B.V.,
a Netherlands corporation ("Smurfit International") (filed as Exhibit 1
to the Company's Current Report on Form 8-K, dated May 8, 1990, and
incorporated herein by reference).
10.2.2 Guaranty, dated April 12, 1990 executed by the Company in favor of
Smurfit International (filed as Exhibit 2 to the Company's Current
Report on Form 8-K, dated May 8, 1990, and incorporated herein by
reference).
10.3 First Amendment to Loan and Security Agreement, dated October 6, 1994
between Giant Cement and CIT (filed as Exhibit 10.5.7 to the Company's
Annual Report on Form 10-K, dated March 28, 1995, and incorporated
herein by reference).
10.4 First Amendment to Credit Agreement, dated as of September 29, 1994,
among Giant Cement, Keystone Cement and GECC (filed as Exhibit 10.6.4
to the Company's Annual Report on Form 10-K, dated March 28, 1995, and
incorporated herein by reference).
10.5 Tax Sharing and Indemnification Agreement, dated as of September 27,
1994 between the Company and Giant Cement Holding, Inc. ("GCHI") (filed
as Exhibit 1 to the Company's Current Report on Form 8-K, dated October
14, 1994, and incorporated herein by reference).
39
<PAGE> 40
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(cont.)
(2) EXHIBITS (cont.)
NO. DESCRIPTION OF EXHIBIT
- --- ----------------------
10.6 Indemnification and Release Agreement, dated as of September 27, 1994,
among the Company, KCC Delaware Company and GCHI (filed as Exhibit 2 to
the Company's Current Report on Form 8-K, dated October 14, 1994 and
incorporated herein by reference).
10.7* Note purchase agreement ($16 million face value bonds) between GIANT
(seller) and Rally's (buyer), dated January 29, 1996.
10.8* Note purchase agreement ($6 million face value bonds) between GIANT
(seller) and Rally's (buyer), dated January 29, 1996.
10.9* Short-term promissory note ($4.1 million) between GIANT (payee) and
Rally's (maker), dated January 29, 1996.
10.10* Promissory note for advances of up to $2 million between GIANT (payee)
and Rally's (maker), dated February 1, 1996.
10.11* Letter of Credit Reimbursement Agreement between GIANT and Rally's,
dated February 1, 1996.
10.12* Letter of Credit Agreement between GIANT and Bank of America National
Trust and Savings Association, dated February 23, 1996.
10.13* Amendment Number 1, dated March 18, 1996, to Letter of Credit Agreement
between GIANT and Bank of America National Trust and Savings
Association, dated February 23, 1996.
11* Statement re: Computation of Per Share Earnings.
16 Letter from Coopers & Lybrand L.L.P. to the Securities and Exchange
Commission dated January 29, 1996 (filed as Exhibit 1 to the Company's
Current Report on Form 8-K, dated January 29, 1996, and incorporated
herein by reference).
21* Subsidiary List.
23.1* Consent of Arthur Andersen LLP
23.2* Consent of Arthur Andersen LLP
23.3* Consent of Coopers & Lybrand L.L.P.
27* Financial Data Schedules
* FILED HEREWITH
40
<PAGE> 41
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(cont.)
(2) EXHIBITS (cont.)
NO. DESCRIPTION OF EXHIBIT
- --- ----------------------
(b) REPORTS ON FORM 8-K:
During the quarter ended December 31, 1995, the Company did not file
any reports on Form 8-K
EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K:
Described in Item 14 (a) (1) of this Annual Report on Form 10-K.
(d) SEPARATE FINANCIAL STATEMENTS AND SCHEDULES
See Item 14 (a) (2) for financial statements for 50% or less owned
persons and schedules included.
41
<PAGE> 42
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) 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
Date: March 25, 1996 By: /S/ BURT SUGARMAN
-----------------
Burt Sugarman
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 25, 1996 By: /S/ BURT SUGARMAN
-----------------
Burt Sugarman
Chairman of the Board and
Chief Executive Officer
Date: March 25, 1996 By: /S/CATHY L. WOOD
----------------
Cathy L. Wood
Vice President, Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and Accounting Officer)
Date: March 25, 1996 By: /S/DAVID GOTTERER
-----------------
David Gotterer
Director
Date: March 25, 1996 By: /S/TERRY CHRISTENSEN
--------------------
Terry Christensen
Director
Date: March 25, 1996 By: /S/ ROBERT WYNN
---------------
Robert Wynn
Director
42
<PAGE> 43
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1995
ITEM 14(a)(2)
FINANCIAL STATEMENTS AND SCHEDULES
RALLY'S HAMBURGERS, INC.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company reported a net loss of $46.9 million or $3.00 per share for
the year ended December 31, 1995 compared with a net loss of $19.3 million or
$1.42 per share for the year ended January 1, 1995. Results of operations for
1995 include charges of $12.9 million related to certain management actions and
decisions recorded in the third quarter. Additionally, 1995 results include
approximately $18.1 million of certain charges recorded in the fourth quarter
related to (i) the adoption of Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (SFAS 121) and (ii) other charges taken in the fourth
quarter related to the disposal and planned disposal of certain excess
properties. Results of 1994 include charges of approximately $17.3 million
primarily related to asset writedowns and costs of slowing previously expected
development. Results for 1993 include charges of approximately $12.6 million
related to a major business restructuring program and other restaurant
closings. These charges for all years presented have been segregated in the
accompanying financial statements to enable clearer assessment of the
underlying business performance and are discussed more fully below in
"Restructuring Program, Other Restaurant Closures, and Other Charges." The
full year's results of operations for 1993 also include an unusual item of
approximately $2.0 million discussed in Note 11 to the accompanying financial
statements related to a litigation settlement.
As more fully discussed in Note 12 to the accompanying financial
statements, the Company's effective tax rate applied to its book operating
losses is significantly below statutory rates, due primarily to concerns as to
the ultimate realizability of net operating loss carryforwards. Until
operations improve or circumstances otherwise indicate that realization becomes
more likely than not, no additional benefit will be recognized relative to
these or to any future losses, if any.
Faced with declining same store sales and profitability over the past
three years, the Company has pursued a variety of options, including
replacement of senior management team members, changing advertising agencies
and significant use of outside consultants to formulate plans to stem the
decline in same store sales and return the Company to profitability. Based on
the facts and circumstances available at such different times, the Company's
plans have been changed and adjusted and have resulted in the significant
continuing charges reported in the caption, "Restructuring Program, Restaurant
Closures and Other Charges," discussed individually and chronologically below.
Despite the Company's actions to date, same store sales have been negative and
profits continued to decline. Advertising expenses for 1995 were up over 20%
year to year but failed to generate sufficient incremental revenues through
promotion of a variety of new product offerings in the premium sandwich/chicken
finger categories. The higher guest check averages of these product offerings
were more than offset by real declines in guest counts. Additionally, the
Company's new products had higher overall cost of sales than prior menu
offerings. Restaurant operating expenses also increased primarily due to
leverage issues in labor and semi-variable costs on lower unit volumes.
43
<PAGE> 44
During the third and fourth quarters, the Company attempted to increase
sales volumes with a significant discounting promotion tied to its ten-year
anniversary celebration. Although the Company believes this promotion
solidified the positioning of its premier one-third pound, fully dressed double
cheeseburger, the Big Buford(TM), the promotion exacerbated the margin and
leverage issues experienced prior to the beginning of the discount period.
The Company's current plans include four basic steps to stem the
operational performance trend. First, the Company is addressing the same store
sales declines by testing bold, new advertising and promotion strategies,
selectively modifying price/value relationships vs. the Company's competitors
and continuing to test co-branding. Second, the Company has closed many
underperforming restaurants and is aggressively attempting to sell all
non-productive assets. Third, the Company is reengineering its management and
decision-making processes to improve its consumer responsiveness. Fourth, the
Company is continuing to take actions to reduce its infrastructure costs to
more affordable levels.
The Company's decisions at various points in time over the last three
years to constrict its operations through store closures have resulted in
significant charges related primarily to disposable asset writedowns and
occupancy costs on non-productive sites. These charges, including those
recorded during the fourth quarter, 1995, are fully discussed below.
Management believes that such decisions (and the resultant charges) were
necessary steps to return the Company to a viable business base that can be
successfully grown. Management believes that its current plan, highlighted
above, is the most likely to return the Company to profitability and allow the
Company to begin to carefully grow its number of distribution points.
Subsequent to year-end, the Company has reduced its outstanding debt load by
repurchasing, in a private transaction, $22 million face amount of its 9 7/8%
Senior Notes due 2000 (see Note 16 to the accompanying financial statements).
As further discussed in "Liquidity and Capital Resources," aggressive actions
have been taken to sell non-productive assets.
The Company believes its brand is still strong, ranking fourth overall in
the August 1995 consumer perception rankings recently published by Restaurants
and Institutions magazine. The overall ranking was consistent with the prior
year ranking. The Company's value perception was the highest rated among the
13 rated entrants in the burger segment for the study as it has been for
several years.
Fourth quarter same store sales results were less negative than prior
quarters and the best since fourth quarter, 1994. Through February 1996, the
improvement in same store sales has continued in a majority of Company markets
aggregating to positive same store sales in the low single digits year to date.
The Company still faces intense competition and a significant debt load
(although the debt load has been reduced, as discussed in Note 16 to the
accompanying consolidated financial statements), as well as the challenge of
increasing revenues and reducing expenses.
As more fully discussed in Note 15 to the accompanying consolidated
financial statements, the Company has elected to early adopt SFAS 121 resulting
in a fourth quarter charge of $13.7 million. This charge represents impairment
of the carrying value of the assets of 37 stores based on management's future
cash flow estimates given current base lines and reasonable trend assumptions.
During 1995, the Company completed the acquisition of the common stock and
certain other assets of a ten store franchisee, Hampton Roads Foods, Inc., and
the disposition of the common stock of a wholly-owned subsidiary, Beaman
Corporation, its modular building manufacturer. These transactions are more
fully described in Note 2 of the Consolidated Financial Statements.
Further discussion of the factors affecting results of operations is
included below.
44
<PAGE> 45
RESTRUCTURING PROGRAM, OTHER RESTAURANT CLOSURES, AND OTHER CHARGES
The Company entered 1993 with plans to rapidly develop and open over 100
new Company restaurants. Many of these units were targeted for new or
underdeveloped markets. Under the Company's 1993 expansion strategy, the
Company believed that rapid penetration of new or underdeveloped markets would
result in the same favorable operating leverage and marketing efficiencies that
it had experienced in its more developed markets.
In late 1993, the Company decided to reassess the pace of its growth
strategy, as it became apparent that many of its new restaurants, primarily
those in certain of the new markets, were not performing at expected levels,
despite allocation of incremental advertising funds into those markets. This
allocation of advertising funds, the Company now believes, was unsuccessful in
driving incremental sales in those certain markets and, moreover, reduced the
Company's ability to maintain overall share of voice in its existing markets.
The impact of the poor performance of those certain markets, therefore,
decreased overall store level profitability while unfavorably impacting general
and administrative cost ratios.
As a result of these, and other factors, the Company decided in late 1993,
to (i) significantly slow down its development of new restaurants and
ultimately to close certain restaurants, (ii) exit certain markets and (iii)
not to enter other markets. The Company also began developing plans to reduce
restaurant operating expenses, general and administrative costs and costs
associated with the development of new restaurants. The Company believed these
strategies would help it maintain its everyday low price strategy for its
products in the future and provide the best opportunity for improved
profitability.
During 1994, the Company implemented strategies designed to increase sales
and profits at restaurant level. These strategies included, among others,
discounting its products for certain periods of time in certain markets to
respond to increased competition and the introduction of certain limited time
only products and premium quality sandwiches which the Company believed would
increase guest frequency and ticket averages. The Company's advertising
campaign was also reviewed during 1994 resulting in the replacement in late
1994 of the Company's advertising agency. In July 1994, the Board of Directors
reinstated a senior management team led by longtime Company restaurant
operators to increase focus on improved operations. Despite these strategies,
sales and profits of Company-owned restaurants, as a whole, did not adequately
respond.
Additionally, throughout 1994, the Company continued to monitor its growth
strategy in relation to operating performance and available financial and
management resources, and periodically made decisions to further reduce its
planned new restaurant openings. Due to the individual decisions made at
various times during the year, provisions of $9.3 million were made in the
accompanying financial statements for the write-off of assets related to the
previously incurred costs on construction projects to be abandoned, for the
expected occupancy-related costs until disposal of sites which will not be
developed, and for reduction to net realizable values of assets which, as a
result of such decisions, were then considered to be surplus or impaired.
These charges are discussed in more detail below.
In November 1994, the Board of Directors retained outside professional
consultants to assist the Board and management in a critical evaluation of the
Company's business. The culmination of this work was a plan designed to
improve earnings and cash flow which was adopted by management. Part of the
plan called for significant curtailment of new Company-owned restaurant
development in 1995 and concentration of the Company's management and resources
in certain of its existing Company markets. The plan also called for improving
cash flows through (i) building revenues through premium sandwich offerings and
limited time offers and (ii) selling all non-productive assets. The Company's
management, therefore, began efforts to franchise or selectively otherwise
divest of approximately 60 Company-owned stores. This strategy was expected to
allow the Company to concentrate on regaining sales, profit and cash flow
momentum in its other markets through stronger focus on a smaller number of
markets. The Company believed that franchisees would be better able to
concentrate
45
<PAGE> 46
on the units that had not been top performers and achieve near term improvement
in the performance of those units. Efforts to franchise or divest of these
stores were expected to encompass a combination of strategies such as sale,
joint venture, leasing arrangements and external management contracts. As a
result of this plan, the Company recorded a charge of $8.0 million in 1994,
representing an estimate of the difference between the estimated net realizable
value, given the then most likely divestiture/disposal plan, and the net book
value of these restaurants and markets. Given that plan, the write-off
included a charge of approximately $3.2 million which was reflected as a
reserve against identifiable goodwill, territory rights and other intangible
assets until final actions were consummated. The remaining $4.8 million was
recorded as a reserve against property and equipment.
Early in 1995, six of the 60 units, five of which were in one market, were
closed and sublet. During the third quarter, 1995, management concluded that
it was unlikely that much of the 1994 plan of disposal described above would be
executable. For this reason, the Company then intended to close up to 16 of
the remaining restaurants, resulting in an additional charge in the third
quarter, 1995 of approximately $400,000 to reflect additional writedown of the
property and equipment to currently estimated net realizable values and $2.3
million to record reserves for expected future occupancy related costs. Eight
of these restaurants were closed as of December 31, 1995. Five of the sixteen
restaurants that the Company had intended to close were in a single market.
When a proposed transaction for the sale of all five properties could not be
consummated early in 1996, the Company decided to continue to operate the
market. This decision was based upon significant input from division
operations management, who now have greater market level autonomy and decision
making authority relative to the design of marketing, promotional, pricing and
development strategies.
The Company now expects to continue to operate 43 of the stores previously
included in the original 60 restaurants. With the restaurant closings
discussed above and without the burden of impending closure associated with the
prior plan regarding these markets, management now believes that the markets
represent acceptable growth opportunities for future development.
Management also decided to close nine non-profitable restaurants in
certain of its core markets resulting in charges in the third quarter of
approximately $1.9 million related to the writedown of assets to their net
realizable values and $1.9 million to record expected future occupancy related
costs. Seven of these restaurants were closed as of December 31, 1995.
During the third quarter, 1995, charges were recorded of approximately
$3.3 million to dispose of the assets located on eight sites which had been
operated as Company units and then leased to a former franchisee. The Company
decided not to refranchise these units due to failure to identify a suitable
franchise candidate which management believes has adequate and evident
financial resources to successfully open the Houston market. This charge
consisted of a writedown of approximately $2.7 million of the assets to their
estimated net realizable values and reserves of approximately $600,000 for
expected future occupancy related costs. See Note 11 to the accompanying
consolidated financial statements.
At December 31, 1995, the Company had available 54 modular restaurant
buildings which were substantially completed, which were not expected to be
assigned to future Company development. At the end of 1994, the Company
estimated that it had available 52 excess modular buildings which were written
down to the then estimated recoverable amounts. During the current year,
expected Company development continued to be reduced and decisions were made
regarding other restaurant closures. As a result, 18 more buildings have
become excess. Additionally, 16 buildings have been sold, resulting in the
current number of available buildings referenced above. In order to recognize
the impact of the additional excess buildings and to more competitively price
all of the modular buildings, the Company recorded charges of approximately
$1.6 million in the third quarter, 1995 and $458,000 in the fourth quarter,
1995. Current expectations of net realizable value are based on the Company's
experience related to marketing the buildings. The charges related to third
quarter, 1995 closure decisions described above also included approximately
$1.5 million related to an additional writedown on modular buildings which were
previously utilized at those locations.
46
<PAGE> 47
The Company recorded approximately $1.5 million in charges in the third
quarter, 1995 related to further writedowns on excess land idled by slowdowns
in the Company's expansion plans. Such land had been scheduled to be auctioned
during the fourth quarter, 1995. These auctions occurred in the fourth quarter
and closed in the first quarter, 1996. The absolute auctions generated lower
than anticipated sales prices, and additional losses of $1.1 million have been
recorded in the fourth quarter, 1995. As further discussed in "Liquidity and
Capital Resources," these sales provided cash flow of approximately $2.4
million, primarily in the first quarter, 1996.
During the fourth quarter, 1995, the sublessee of five of the six sites
closed under the November 1994 plan to close or dispose of up to 60
restaurants, defaulted on the terms of the sublease agreements, resulting in
charges of $483,000 related to occupancy and $430,000 to reduce the carrying
value of the tangible assets to management's estimate of fair value less cost
to sell.
Due to concerns for obsolescence and abnormal wear and tear associated
with transport and storage of surplus equipment, management recorded an
$820,000 writedown in December, 1995 of the equipment's carrying value of
currently surplus equipment. Additionally, fourth quarter, 1995 charges
totaling approximately $1.1 million have been recorded to reflect changes in
estimates regarding the Company's remaining surplus assets and properties.
The $9.3 million of charges recorded in 1994, discussed above, included
the following.
The Company recorded charges of $2.6 million related to abandoned
projects, $300,000 related to the write-off of certain identifiable intangibles
which were not expected to be recoverable and $450,000 to increase reserves
previously provided on surplus assets due to the continued slowdown in the
development of new restaurants. The costs related to abandoned projects
represent writeoffs of recorded amounts not expected to be recovered ($1.6
million) and estimated occupancy costs until disposal ($1.0 million).
Management decided to exit one of its non-core, underperforming markets
and, at that time, recorded a charge of approximately $1.1 million primarily to
cover writedown of assets ($800,000) and occupancy exposure ($300,000).
Additionally, the Company wrote off intangible assets associated with an
abandoned project site ($131,000), provided for the estimated occupancy
exposure on abandoned project sites ($430,000) and provided for asset
write-offs on projects to be abandoned ($443,000).
Based upon the Company's estimates of the number of excess modular
buildings and the then current estimate as to recoverability, the Company
recorded a charge of $1.2 million in 1994. Included in the $2.6 million of
charges noted above is $300,000 related to an additional writedown on modular
buildings which had been assigned to projects subsequently abandoned after the
end of the third quarter.
During 1994, management determined that portions of the equipment,
training, and installation expenditures related to its point of sale and back
office restaurant systems' rapid installation resulted in higher costs or
overbillings and did not ultimately add to the value of the Company's systems.
Approximately $1.3 million of these costs were deemed to have no probable
future economic benefit and were written off. In addition, due to the further
curtailment of new store development, the writedown of the Company's point of
sale and back office software recorded in 1993 was increased (approximately
$300,000). Further, management also decided to remove from operation and not
pursue further deployment of its high tech video ordering technology and,
therefore, recorded a charge of $600,000 related to the hardware and software
costs of this endeavor.
The Company also recorded charges in 1994 of approximately $400,000
related to the recorded values of projects abandoned in 1994.
The $12.6 million of charges recorded in 1993 included the following.
47
<PAGE> 48
The Company recorded charges of $11.9 million related to a major business
restructuring program and other restaurant closings designed to improve the
Company's profitability. As a result of these actions, the Company closed 20
restaurants in 8 markets (including certain markets which the Company has
exited entirely), and abandoned its plans to build an additional 46 restaurants
then under development.
The restructuring program resulted in a charge against operations of
approximately $9.6 million. Approximately $8 million of the charge related to
asset writedowns, including writedowns to recoverable amounts of certain other
assets whose recovery was dependent on previous development plans and the
balance represented future occupancy-related expenses. The decision to close
other restaurants resulted in an additional charge against operations during
1993 of approximately $2.3 million, of which approximately $1.8 million related
to writedowns of assets, and the balance represented future occupancy-related
expenses.
In addition to the charges discussed above, the Company reached decisions
during 1993 to reduce the carrying value of certain underperforming assets in
non-core markets by approximately $700,000.
As described above, a substantial portion of the charges in fiscals 1993,
1994 and 1995 related to asset writedowns. The remainder of the charges
related substantially to the establishment of reserves for expected future
occupancy-related costs. As of December 31, 1995, approximately $9.5 million
remained in the reserve for expected future occupancy-related costs. Assets
held for sale at December 31, 1995 resulting from these actions consist mainly
of surplus land, buildings and equipment. The expected disposal dates for
these assets are over the next 18 to 24 months. The carrying amounts of such
assets to be disposed of are shown separately on the accompanying consolidated
balance sheets. Secured indebtedness related to surplus assets totaled
approximately $384,000 at December 31, 1995.
GENERAL
Rally's revenues are derived primarily from Company-owned restaurant sales
and royalty fees from franchisees. The Company also receives revenues from the
award of exclusive rights to develop Rally's restaurants in certain geographic
areas (area development fees) and the award of licenses to use the Rally's
brand and confidential operating system (franchise fees). Systemwide sales
consist of aggregate revenues of Company-owned and franchised restaurants.
Restaurant cost of sales, restaurant operating expenses, depreciation and
amortization, and advertising and promotion expenses relate directly to
Company-owned restaurants. Restaurant level margins represent Company-owned
restaurant sales less these expenses expressed as a percentage of such sales.
General and administrative expenses relate to both Company-owned restaurants
and franchise operations.
Until 1995, the growth in Company-owned and franchisee-owned restaurant
sales had been primarily attributable to the opening or acquisition of
restaurants because the number of restaurants opened or acquired in each period
had been very significant when compared with the restaurants open at the start
of each period. Changes in sales at individual restaurants between years have
historically been less significant in explaining period to period variations in
sales.
48
<PAGE> 49
The table below sets forth the percentage relationship to total revenues,
unless otherwise indicated, of certain items included in the Company's
consolidated statements of income and operating data for the periods indicated:
<TABLE>
<CAPTION> FISCAL YEARS ENDED
--------------------------------------------------------------
DECEMBER 29, JANUARY 3, JANUARY 2, JANUARY 1, DECEMBER 31,
1991 1993 1994 1995 1995
------------ ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Restaurant sales 92.2% 93.6% 95.1% 95.8% 96.2%
Royalty fees 5.7 5.5 4.4 3.9 3.6
Area development fees 1.7 .5 .2 .1 .1
Franchise fees .4 .4 .3 .2 .1
------ ------ ------- ------- --------
100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------- ------- --------
Costs and expenses:
Restaurant cost of sales (1) 37.5% 34.7% 35.2% 35.0% 35.7%
Restaurant operating expenses (1) 37.7 38.2 42.5 43.3 46.0
General and administrative expenses 10.4 9.8 10.5 10.1 10.4
Advertising and promotion expenses (1) 5.6 5.5 7.0 6.1 7.3
Depreciation and amortization (1) 4.5 4.8 6.1 7.9 7.2
Provision for restructuring program
and other restaurant closures - - 7.2 9.3 16.4
Income (loss) from operations 10.9 12.5 (4.0) (7.9) (19.3)
Net other expense (.5) (.7) (3.7) (5.1) (5.3)
------ ------ ------- ------- --------
Income (loss) before income taxes 10.4 11.8 (7.7) (13.0) (24.6)
Net income (loss) 6.4% 7.7% (5.1)% (10.3)% (24.8)%
====== ====== ======= ======= ========
Number of restaurants:
Restaurants open at the beginning
of period 275 333 450 520 542
------ ------ ------- ------- --------
Company restaurants opened (closed or
transferred), net during period 15 81 55 (2) (11)
Franchised restaurants opened (closed
or transferred), net during period 43 36 15 24 (50)
------ ------ ------- ------- --------
Total restaurants opened (closed or
transferred), net during period 58 117 70 22 (61)
------ ------ ------- ------- --------
Total restaurants open at end of period 333 450 520 542 481
====== ====== ======= ======= ========
</TABLE>
(1) As a percentage of restaurant sales.
RESULTS OF OPERATIONS
Fiscal Year Ended December 31, 1995 Compared With Fiscal Year Ended January 1,
1995
Systemwide sales declined 4% for 1995 to $355.7 million compared with
$370.1 million a year ago. This decrease was the result of store closings and
a decline of 5% in systemwide same store sales, offset in part by the full-year
impact of 1994 store openings.
Total revenue increased 1% from $186.3 million in 1994 to $188.9 million
in 1995. Company-owned restaurant sales increased 2% to $181.8 million. This
increase was primarily attributable to the impact of the acquisition of ten
units in Hampton Roads, Virginia from a franchisee as discussed above in Item
1, "Recent Acquisition and Disposition", offset in part by a 4% decline in
Company-owned same store sales. The ten units in Hampton Roads, Virginia have
been included in the Company's calculation of same store sales for the full
year of 1995. Royalty fees decreased 6% in 1995 due to a 6% decline in
franchise same store sales and the impact of the Hampton Roads, Virginia
acquisition.
Restaurant cost of sales, as a percentage of sales, increased to 35.7% for
1995 compared with 35.0% for 1994. This increase resulted primarily from the
dramatic shift of product mix sold, reflecting the impact of the introduction
of our Big Buford(TM) sandwich early in 1995. While this product carries a
significantly higher dollar profit per unit, it does carry a higher food cost
percentage than did the products formerly comprising its share of the total
product mix. Secondary factors include aggressive discounting during the
Company's tenth anniversary
49
<PAGE> 50
promotion, selective product repricing in the fourth quarter and significantly
higher paper cost in 1995 due to a higher commodity cost and improved product
packaging. The Company from time to time negotiates purchase contracts for
certain items used in its restaurants in the normal course of business.
Although some of these contracts contain minimum purchase quantities, such
quantities do not exceed expected usage over the term of such agreements.
Restaurant operating expenses were 46% of sales for 1995 compared with
43.3% for 1994. This increase as a percentage of sales is primarily
attributable to higher labor, occupancy and repair and maintenance costs and to
the decline in same store sales resulting in the Company's inability to
adequately leverage the non-variable components of lease costs and labor costs.
The higher labor costs were also impacted by an increased average wage rate,
higher levels of management staffing, and poor maintenance and execution of the
Company's store level labor management system. The Company has, late in the
fourth quarter, 1995, instituted process changes to better control its labor
costs.
General and administrative expenses in 1995, on both a dollar and a
percentage of sales basis, were higher than in 1994 primarily due to a charge
of approximately $1.5 million related to uncertainty of collection of certain
receivables, offset partly by cost reduction initiatives implemented during
1995. The Company will continue efforts to drive down its overhead costs to
more affordable levels.
Advertising expenses increased in 1995 to $13.2 million or 7.3% of sales,
as compared with $10.9 million or 6.1% of sales in 1994. This increase is
primarily attributable to higher levels of advertising expenditures related to
new product introductions, summer sweepstakes promotion and the tenth
anniversary promotion. Incremental advertising dollars were not effective in
driving incremental sales dollars at rates previously achieved.
Depreciation and amortization decreased in 1995 to $13.0 million as
compared to $14.1 million in 1994. This decrease is primarily due to a
decrease in the number of properties in operation in 1995 and asset writedowns
associated with the adoption of SFAS 121 at the beginning of the fourth
quarter, 1995.
Interest expense increased in 1995 to $10.7 million as compared to $9.7
million in 1994 primarily due to the debt incurred as part of the acquisition
of HRF, discussed above.
Interest income was higher in 1995 than in 1994 due primarily to a
significant increase in the average daily invested amounts. See "Liquidity and
Capital Resources".
The Company recognized other income of $200,000 in 1995 as compared with
other expense of $400,000 in 1994. The increase was primarily attributable to
the loss recorded in 1994 of approximately $300,000 related to the sale of
Beaman (see Note 1 to the consolidated financial statements). The remainder of
the increase is attributable to the difference in investment gains and losses
between years.
As more fully discussed in Note 12 to the accompanying financial
statements, the cumulative impact of the Company's book operating losses in the
last three fiscal years has resulted in management's evaluation that the
realizability of the tax benefits related to those operating losses may not be
fully realizable within the statutory carryforward period. The effective tax
rate applied to those losses in the accompanying income statement, therefore,
is significantly below statutory rates. Until operations improve or
circumstances otherwise indicate that realization becomes more likely than not,
no benefit will be recognized relative to these or to any future losses.
Fiscal Year Ended January 1, 1995 Compared With Fiscal Year Ended January 2,
1994
Systemwide sales grew 4% for 1994 to $370.1 million compared with $354.7
million for the same period of 1993. This increase was the result of
additional restaurants being open in 1994 versus 1993, offset in part by a
decrease in systemwide same store sales of 4.6% in 1994 compared with 1993.
The Company believes that the pricing strategies of certain of its competitors
had an adverse impact on systemwide sales in 1994.
50
<PAGE> 51
Company-owned restaurant sales grew 7.6% to $178.5 million in 1994
compared with $165.8 million for 1993. This increase was the result of store
weeks operated in each year offset by a decrease of 3% in Company-owned same
store sales.
Royalty fees declined 5% to $7.3 million in 1994 compared with $7.7
million for 1993. This decline is primarily attributable to a decline in
franchise same stores sales of approximately 6% for 1994. During 1994,
franchisees opened 36 units, acquired 12 units from the Company, and closed 24
units, 18 of which resulted from the Checker's transaction discussed in Note 2
of the consolidated financial statements.
Restaurant cost of sales decreased slightly as a percentage of sales to
35.0% for 1994 compared with 35.2% for 1993. This reflects lower overall costs
of commodities used in its operations.
Restaurant operating expenses were 43.3% of sales in 1994 compared with
42.5% in 1993. This increase was primarily attributable to higher level of
repair and maintenance due to the general aging of the store base and to
maintenance of the Company's technology investments, increased lease costs, and
higher property taxes expressed as percentages of sales. The impact of such
increased costs were exacerbated by same store sales declines. These increases
were offset, in part, by improved labor costs and by the reversal of the
remaining balance of an accrual established in the third quarter of 1993 for
the potential write-off of assets to be replaced in remodeling certain of its
restaurants (approximately $350,000). The Company decided not to pursue this
remodeling plan.
General and administrative expenses expressed as a percent of total
revenues were lower at 10.1% in 1994 versus 10.5% in 1993. This decline as a
percentage of revenues was primarily due to higher total revenues in 1994. In
September 1994, the Company further reduced the size of its corporate staff.
Advertising and promotion expenses were 6.1% of sales in 1994 compared
with 7.0% in 1993. This decline was primarily due to less media spending on
new product introductions in 1994.
Depreciation and amortization increased $4.1 million in 1994 compared with
1993, and represents 7.9% of sales in 1994 versus 6.1% of sales in 1993.
Substantially all of this increase was due to deployment of additional assets
combined with the impact of lower same store sales volumes. Additionally,
effective July 4, 1994, the Company revised its estimate of the future benefit
period of costs associated with opening its new restaurants from 12 months to 3
months, which the Company believes more closely matched the period benefited by
such expenditures. The impact of the change for the year ended January 1,
1995, was an increase in amortization expense of approximately $286,000 and was
adopted to more accurately account for the future benefit of preopening costs.
The impact of this revision was reflected in depreciation and amortization
expense in the accompanying consolidated financial statements.
Interest expense on the Senior Notes and other debt increased in 1994
compared with 1993 primarily due to the length of time the Senior Notes were
outstanding in the respective periods.
Interest income declined in 1994 compared with 1993 primarily due to the
lower average invested amounts of Senior Notes proceeds.
Other expense increased in 1994 compared with 1993 primarily due to the
realization of net investment losses in 1994 (approximately $227,000) versus
the realization of net investment gains in 1993 (approximately $595,000). In
addition, the Company recorded a loss of approximately $300,000 related to the
sale of Beaman. See Note 2 to Consolidated Financial Statements.
As more fully discussed in Note 12 to the accompanying financial
statements, the cumulative impact of its book operating losses in the last two
years has resulted in management's evaluation that the realizability of the tax
benefits related to those operating losses may not be fully realizable within
the statutory carryforward period. The effective tax rate applied to those
losses in the accompanying income statement, therefore, is significantly below
statutory rates. Until operations improve or circumstances otherwise indicate
that realization becomes more likely than not, no benefit will be recognized
relative to these or to any future losses.
51
<PAGE> 52
Liquidity and Capital Resources
The Company's cash flow from operating activity was approximately $8.2
million for 1995 compared with $8.8 million for 1994 and $10.0 million for
1993. The slight decrease in 1995 from 1994 resulted primarily from declining
net income, somewhat offset by higher accrued liabilities associated with
advertising, workers compensation costs, and other miscellaneous accruals. The
difference between 1994 and 1993 is primarily a result of declining net income
and working capital uses of cash as a result of increasing receivable balances
and lower deferred tax and other liabilities.
The Company's 1995 significant charges and writedowns of $31.0 million
further addressed in Note 3 to the accompanying consolidated financial
statements and in the caption "Restructuring Program, Other Restaurant Closures
and Other Charges" in "Management's Discussions and Analysis of Financial
Condition and Results of Operations," did not affect cash flow. The aggregate
anticipated impact on future net cash out flows related to all surplus
properties are approximately $9.5 million in future occupancy-related expenses,
the majority to occur over the next 24 months, and approximately $6.0 million
to be derived from the sale of surplus assets. However, the ability of the
Company to generate such cash flows cannot be assured, and the ultimate timing
of receipt cannot be predicted at this time. During the first quarter 1996,
the Company closed on eleven properties auctioned in the fourth quarter, 1995.
The amount realized from these closings, $2.4 million, was included in "Current
assets" in the accompanying financial statements.
Capital expenditures of approximately $3.4 million for 1995 were funded
primarily through operations and existing cash balances. These expenditures
were primarily devoted to new store construction (approximately $1.6 million),
which includes final payments on stores opened in the fourth quarter of 1994,
and three stores opened in 1995. The remainder of capital expenditures were
for the purchase and installation of certain equipment supporting the premium
sandwich strategy, co-branding and replacement capital.
The Company intends to open approximately ten new restaurants in fiscal
1996 and expects full year capital expenditures to be in the range of $5
million to $6 million, inclusive of replacement capital. This level of new
unit development is greater than that of 1995 (three units) but significantly
below the 1994 and 1993 levels of 36 and 56 new units, respectively.
During 1995, the Company received funds totaling approximately $783,000 on
land contracts covering four fee properties which are the subject of an
aggregate amount of $1.8 million of sale/leaseback financing. The interest
rate on such facility is approximately 12.5%. The Company may seek to obtain
additional such financing from the lender although there is no binding
commitment between the parties at this time.
As noted above, the Company is actively marketing the assets included in
the captions "Assets held for sale" in the accompanying consolidated balance
sheets and expects realization in cash over the next 18 to 24 months, although
actual timing of such cash flows cannot be predicted. The assets contained in
this caption are recorded at management's current estimate of fair market
values less costs to sell. There can be no assurances that these values will
be realized. Exclusive of the disposition of Beaman discussed below,
approximately $2.5 million was generated during fiscal 1995 from the sale of
such assets. Approximately $384,000 of future amounts to be generated from the
sale of certain of the remaining assets will be required to liquidate the
related remaining outstanding balances of certain secured indebtedness.
Subsequent to year-end, the Company reduced this outstanding indebtedness by
approximately $176,000 with proceeds from the sale of certain of these
properties. The Company is in default of certain covenants of this
indebtedness and has classified it in current liabilities in the accompanying
balance sheets. The debt instruments are not accelerated by the defaults
although proceeds of the sale of the secured assets must be applied against the
debt.
52
<PAGE> 53
In February 1995, the Company completed the acquisition of ten operating
Rally's restaurants in the Hampton Roads, Virginia market for a total
consideration of $9.1 million, including assumed notes to banks and other
liabilities of approximately $654,000 and capital lease obligations of
approximately $1.3 million. Approximately $1.9 million, net of cash acquired,
was paid for the acquisition of Hampton Roads Foods, Inc. The remainder of the
purchase price is to be paid over the next six years pursuant to a secured
promissory note, bearing interest at 9%.
Principal payments of debt and capital leases totaled approximately $2.7
million during fiscal 1995. Interest payments on the Senior Notes are due June
15 and December 15 and totaled approximately $8.4 million for 1995. The
Company is required to make a mandatory sinking fund payment on June 15, 1999
calculated to retire 33 1/3% in aggregate principal amount of the notes issued
with the balance maturing on June 15, 2000.
In January 1996, the Company repurchased, in two transactions, $22 million
face value of its 9 7/8% Senior Notes due in the year 2000. The Notes were
purchased from GIANT GROUP, LTD. ("GIANT") at a price of $678.75 per $1,000
principal amount, representing the market closing price on the last business
day prior to the repurchase date. As of March 6, 1996, GIANT beneficially owns
47.42% of the Company's Common Stock and may be deemed to be a "parent" of the
Company as such term is defined in the rules promulgated under the Securities
Exchange Act of 1934. The first transaction involved the repurchase of $16
million face value of the Notes for $11.1 million in cash. The second
transaction involved the purchase of $6 million face value of Notes in exchange
for a $4.1 million short-term note due in three installments of principal and
interest, bearing interest at prime. These purchases are expected to reduce
total interest expense by approximately $1.9 million during 1996, net of
interest expense incurred on the short-term note The repurchase reduces the
sinking fund requirement, noted above, by $22 million to approximately $6.3
million.
In February 1996, the Company obtained a one-year credit facility from
GIANT evidenced by a note payable for up to $2 million. The facility is
renewable for one or more years at the discretion of GIANT and GIANT is not
obligated to make any advance under this agreement. As of March 6, 1996,
approximately $600,000 was outstanding under this facility, currently bearing
interest at 8.25%. The note's interest rate fluctuates with the highest
publicly announced reference rate of interest maintained by a large banking
institution for commercial loans of short-term maturities to its most
credit-worthy large corporate borrowers. The maximum amount advanced under
this facility to date was $1.6 million.
The Company has not reported a profit in any quarter since June 1993.
Although the Company believes existing cash balances, cash flow from
operations, cash flow from the sale of assets and available tax refunds should
be sufficient to fund its operations and obligations for 1996, the ability of
the Company to satisfy its remaining obligations under the Senior Notes will be
dependent on the Company, among other factors, successfully increasing revenues
and returning the Company to profitability.
As further discussed in Note 15(e), a change in control of the Company's
most significant shareholder, GIANT, would trigger a call provision in the
Company's indenture requiring it to offer to repurchase the outstanding Senior
Notes at 101% of face value. Such a call, if triggered, would force the
Company to renegotiate the terms of the Senior Notes. The Company's ability to
successfully renegotiate the terms is not known at this time. Based on
information presently available, the Company believes it to be remote that the
change in control provision of the Senior Notes will be triggered.
53
<PAGE> 54
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 1, 1995 AND DECEMBER 31, 1995
(In thousands, except shares and per share amounts)
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1995 1995
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,707 $ 9,494
Investments 4,085 4,933
Royalties receivable, including $227 and $483 from related parties at January 1, 1995 and
December 31, 1995, respectively, net of a reserve for doubtful accounts of $402 and $922 at
January 1, 1995 and December 31, 1995, respectively 1,016 818
Accounts and other receivables, net of a reserve for doubtful accounts of $176 and $453 at
January 1, 1995 and December 31, 1995, respectively 3,893 2,131
Inventory, at lower of cost or market 943 1,056
Current portion of notes receivable, including $108 and $10 from related parties at
January 1, 1995 and December 31, 1995, respectively, net of a reserve for doubtful accounts
of $109 at December 31, 1995 250 113
Prepaid expenses and other current assets 1,382 1,131
Assets held for sale - 2,506
-------- --------
Total current assets 14,276 22,182
Assets held for sale 10,930 3,517
Net property and equipment, at historical cost 113,009 78,683
Notes receivable, less current portion, including $197 and $165 from related parties at
January 1, 1995 and December 31, 1995, respectively, net of a reserve for doubtful accounts
of $433 at December 31, 1995 441 676
Intangible and other assets, less accumulated amortization of $4,743 and $6,888 at
January 1, 1995 and December 31, 1995, respectively 30,760 32,334
-------- --------
Total assets $169,416 $137,392
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,263 $ 8,773
Accrued liabilities 10,319 15,959
Current maturities of long-term debt and obligations under capital leases 2,494 17,544
-------- --------
Total current liabilities 21,076 42,276
Senior notes, less current maturities, net of discount of $897 and $768 at January 1, 1995
and December 31 1995, respectively 84,103 69,034
Long-term debt, less current maturities 2,105 5,749
Obligations under capital leases, less current maturities 5,439 5,631
Other liabilities 3,206 8,030
-------- --------
Total liabilities 115,929 130,720
-------- --------
Commitments and contingencies (Note 11)
Shareholders' equity:
Common stock, $.10 par value, 50,000,000 shares authorized, 15,837,000 and 15,927,000 shares
issued at January 1, 1995 and December 31, 1995, respectively 1,584 1,593
Additional paid-in capital 60,610 60,804
Less: Treasury shares, 239,000 and 273,000 shares at January 1, 1995 and
December 31, 1995, respectively (2,009) (2,108)
Retained deficit (6,698) (53,617)
-------- --------
Total shareholders' equity 53,487 6,672
-------- --------
Total liabilities and shareholders' equity $169,416 $137,392
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
54
<PAGE> 55
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 2, 1994, JANUARY 1, 1995, AND DECEMBER 31, 1995
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 31,
1994 1995 1995
---------- ---------- -----------
<S> <C> <C> <C>
REVENUES:
Restaurant sales $165,829 $178,476 $181,778
Royalty fees 7,674 7,294 6,855
Franchise fees 571 328 106
Area development fees 272 220 120
-------- -------- --------
Total revenues 174,346 186,318 188,859
COSTS AND EXPENSES:
Restaurant costs of sales 58,345 62,518 64,813
Restaurant operating expenses exclusive of depreciation
and amortization and other operating expenses shown
separately below 70,504 77,292 83,671
General and administrative expenses 18,344 18,848 19,606
Advertising and promotion expenses 11,589 10,898 13,188
Depreciation and amortization 10,063 14,139 13,006
Provision for restructuring program, other restaurant
closures, and other charges 12,551 17,259 31,045
-------- --------- ---------
Total costs and expenses 181,396 200,954 225,329
-------- --------- ---------
Loss from operations (7,050) (14,636) (36,470)
-------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (7,270) (9,742) (10,682)
Interest income 2,186 477 538
Other 651 (354) 234
-------- --------- ---------
Total other (expense) (4,433) (9,619) (9,910)
-------- --------- ---------
Loss before unusual item and income taxes (11,483) (24,255) (46,380)
Litigation settlement (Note 11) 2,000 - -
-------- --------- ---------
Loss before income taxes (13,483) (24,255) (46,380)
PROVISION (BENEFIT) FOR INCOME TAXES (4,576) (4,982) 539
-------- --------- ----------
Net loss $ (8,907) $ (19,273) $ (46,919)
======== ========= =========
Loss per common and common equivalent share $ (0.67) $ (1.42) $ (3.00)
======== ========= =========
Weighted average shares outstanding 13,207 13,564 15,620
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
55
<PAGE> 56
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
TREASURY STOCK AND
COMMON STOCK CONTINGENT SHARES
--------------------------- -------------------
ADDITIONAL RETAINED
SHARES SHARES PAID-IN EARNINGS TOTAL
AUTHORIZED ISSUED AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
---------- ------ ------ ------ ------ ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at January 3, 1993 25,000 12,520 $1,252 (287) $(2,241) $40,790 $ 21,482 $ 61,283
Issuance of common stock - 235 24 - - 1,314 - 1,338
Acquisitions - 513 51 - - 8,475 - 8,526
Contingent shares earnout - - - 48 232 - - 232
Tax benefit of nonqualified
stock options - - - - - 55 - 55
Net loss - - - - - - (8,907) (8,907)
------ ------ ------ ----- ------- ------- -------- --------
Balances at January 2, 1994 25,000 13,268 1,327 (239) (2,009) 50,634 12,575 62,527
Issuance of common stock - 2,569 257 - - 9,976 - 10,233
Net loss - - - - - - (19,273) (19,273)
------ ------ ------ ----- ------- ------- -------- --------
Balances at January 1, 1995 25,000 15,837 1,584 (239) (2,009) 60,610 (6,698) 53,487
Amendment to the Charter (A) 25,000 - - - - - -
Issuance of common stock - 90 9 - - 194 - 203
Treasury stock acquired - - - (34) (99) - - (99)
Net loss - - - - - - (46,919) (46,919)
------ ------ ------ ----- ------- ------- -------- --------
Balances at December 31, 1995 50,000 15,927 $1,593 (273) $(2,108) $60,804 $(53,617) $ 6,672
====== ====== ====== ===== ======= ======= ======== ========
</TABLE>
(A) On May 13, 1995, stockholders of the Company approved a proposal to amend
the Certificate of Incorporation to increase the number of authorized
shares of Common Stock from 25,000,000 shares to 50,000,000.
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
56
<PAGE> 57
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 31,
1994 1995 1995
---------- ---------- ------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES:
Net (loss) $(8,907) $(19,273) $(46,919)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 10,063 14,139 13,006
Provision for restructuring program, other restaurant
closures and other charges 12,551 17,259 31,045
Provision for losses on receivables 207 377 1,507
Other 518 568 2,276
Changes in assets and liabilities net of effects from
business combinations:
(Increase) decrease in assets: Receivables (1,633) (1,810) 775
Inventory (187) (14) (63)
Prepaid expenses and other current assets (1,182) 752 185
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (600) 187 7,815
Deferred income taxes (1,490) (1,524) -
Other liabilities 717 (1,824) (1,424)
------- -------- --------
Net cash provided by operating activities 10,057 8,837 8,203
------- -------- --------
CASH FLOWS PROVIDED FROM (USED IN) INVESTING ACTIVITIES:
(Increase) decrease in investments (12,836) 9,022 (848)
Notes receivable 730 429 154
Preopening costs (2,068) (832) (45)
Capital expenditures (56,805) (19,808) (3,405)
Proceeds from the sale of property and equipment - 2,525 4,266
(Increase) decrease in other assets (8,245) (3,999) 181
Acquisition of businesses, net of cash acquired (2,321) (1,836) (1,931)
Proceeds from the sale of a business - - 2,730
Tax benefit of nonqualified stock options 55 - -
------- -------- --------
Net cash provided by (used in) investing
activities (81,490) (14,499) 1,102
------- -------- --------
CASH FLOWS PROVIDED FROM (USED IN) FINANCING ACTIVITIES:
Payment of organization and development costs (29) (4) (3)
Net borrowings (repayments) under line of credit (8,500) - -
Proceeds from debt 2,631 - -
Principal payments of debt (3,791) (5,538) (2,114)
Proceeds from the issuance of senior notes 83,899 - -
Issuance of common stock, net of costs of issuance 1,338 10,233 203
Principal payments on capital lease obligations (493) (393) (604)
------- -------- --------
Net cash provided from (used in) financing
activities 75,055 4,298 (2,518)
------- -------- --------
Net increase (decrease) in cash 3,622 (1,364) 6,787
CASH AND CASH EQUIVALENTS, beginning of period 449 4,071 2,707
------- -------- --------
CASH AND CASH EQUIVALENTS, end of period $ 4,071 $ 2,707 $ 9,494
======= ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
57
<PAGE> 58
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular dollars in thousands, except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) FINANCIAL STATEMENT PRESENTATION AND ORGANIZATION
The consolidated financial statements include Rally's Hamburgers,
Inc. and its wholly-owned subsidiaries, each of which is described below.
Rally's Hamburgers, Inc. and its subsidiaries are collectively referred
to herein as the context requires as "Rally's" or the "Company". All
significant intercompany accounts and transactions have been eliminated.
Rally's is one of the largest chains of double drive-thru
restaurants in the United States. At March 6, 1996, the Rally's system
included 481 restaurants in 19 states, primarily in the Midwest and the
Sunbelt, comprised of 238 Company-owned and 243 franchised restaurants.
The Company's restaurants offer high quality fast food served quickly and
at everyday prices generally below the regular prices of the four largest
hamburger chains. The Company serves the drive-thru and take-out
segments of the quick-service restaurant market. The Company opened its
first restaurant in January 1985 and began offering franchises in
November 1986.
Rally's Hamburgers, Inc., Rally's of Ohio, Inc., Self Service Drive
Thru, Inc. and Hampton Roads Foods, Inc. own and operate Rally's
restaurants in various states. Additionally, Rally's Hamburgers, Inc.
operates as franchisor of the Rally's brand. Rally's Management, Inc.
provides overall corporate management of the Company's businesses.
Rally's Finance, Inc. was organized for the purpose of making loans to
Rally's franchisees to finance the acquisition of restaurant equipment
and modular buildings. RAR, Inc. was organized for the purpose of
acquiring and operating a corporate airplane and is currently inactive.
The Company's wholly-owned subsidiary, ZDT Corporation, was formed to own
the Zipps brand and franchise system. MAC 1 was organized for the
purpose of acquiring a manufacturer of modular buildings. The
manufacturing business was sold in January 1995 (see Note 2).
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates, when actual transactions anticipated are consummated.
In addition, despite management diligence, changes in estimates do and
will continue to occur due to changes in available relevant data and
consummation of the events and transactions. The statements are prepared
on a going concern basis. Certain of the most significant estimates
include useful lives assigned to depreciable/amortizable assets, fair
value less costs to sell of long-lived assets held for sale, fair value
of long-lived assets held for use, future net occupancy costs related to
closed/disposable properties, accruals for the Company's self-insured and
high deductible insurance programs, and disclosures regarding commitments
and contingencies.
B) REVENUE RECOGNITION
The Company recognizes franchise fees as income on the date a
restaurant is opened, at which time the Company has performed its
obligations relating to such fees. Area development fees are generated
from the awarding of exclusive rights to develop, own and operate Rally's
restaurants in certain geographic areas pursuant to an Area Development
Agreement. Such fees are recognized as income on a pro rata basis
58
<PAGE> 59
as the restaurants are opened or upon the cancellation or expiration of
an Area Development Agreement. Both franchise fees and area development
fees are non-refundable. The Company also receives royalty fees from
franchisees in the amount of 4% of each franchised restaurant's gross
revenues, as defined in the Franchise Agreement. Royalty fees are
recognized as earned.
C) PROPERTY AND EQUIPMENT
Property and equipment are depreciated using the straight-line
method for financial reporting purposes and accelerated methods for
income tax purposes. The estimated useful lives for financial reporting
purposes are the shorter of 20 years or the lease life for buildings and
property held under capital leases, eight years for furniture and
equipment, five years for software and computer systems and the life of
the lease for leasehold improvements. Expenditures for major renewals
and betterments are capitalized while expenditures for maintenance and
repairs are expensed as incurred.
D) INTEREST COSTS
Interest costs incurred during the construction of restaurants are
capitalized as a component of the cost of the restaurants and are
amortized on a straight-line basis over the estimated useful lives of the
restaurants. The amounts capitalized for the fiscal years ended January
2, 1994, January 1, 1995 and December 31, 1995 were approximately $1.7
million, $490,000 and $30,000, respectively.
E) INVENTORY
Inventory is valued at latest invoice cost which approximates the
lower of first-in, first-out cost or market.
F) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 31,
1994 1995 1995
---------- ---------- ------------
<S> <C> <C> <C>
Interest paid (net of amount capitalized) $6,950 $9,760 $10,679
Income taxes paid 1,001 163 212
Capital lease obligations incurred - - 1,616
</TABLE>
The purchase of HRF described in Note 2 was recorded as follows:
<TABLE>
<CAPTION>
FISCAL
YEAR ENDED
------------
DECEMBER 31,
1995
------------
<S> <C>
Fair value of assets acquired $ 9,133
Cash paid (2,125)
-------
Liabilities assumed $ 7,008
=======
</TABLE>
As a result of the sale of Beaman discussed in Note 2, the Company
recorded a note receivable of approximately $347,000, discounted at
12.5%. This non-cash transaction has been excluded from the consolidated
statement of cash flows.
59
<PAGE> 60
During fiscal 1995, the Company accepted notes due within two years,
bearing interest at rates previously specified in the underlying
franchise agreements, for certain receivables from franchises in the
aggregate amount of approximately $542,000. Of this aggregate amount,
$140,000 has been classified under the caption "Current Portion of Notes
Receivable" in the accompanying consolidated financial statements with
the remainder included under the caption "Notes Receivable, Less Current
Portion."
For purposes of the consolidated statement of cash flows, the
Company considers all highly liquid debt instruments with an original
maturity of three months or less at the date of purchase to be cash
equivalents. Cash equivalents at January 1, 1995 and December 31, 1995
were $1.1 million and $6.8 million, respectively. Cash and cash
equivalents at December 31, 1995 include $683,000 of restricted cash.
This amount is held in various Certificates of Deposit as collateral for
Letters of Credit.
G) LOSS PER SHARE
Loss per share is calculated based upon the weighted average shares
and common equivalent shares outstanding during the periods.
H) INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, AMORTIZATION
1995 1995 PERIODS
---------- ----------- ------------
<S> <C> <C> <C>
Goodwill $12,964 $12,624 20-25 years
Reacquired franchise rights, franchised restaurant
conversion costs, location advantage, and other
intangible assets (Note 2) 14,521 20,438 10-25 years
Senior notes offering costs (Note 9) 2,960 2,960 7 years
Non-compete agreements 1,746 1,179 3-5 years
Workers' compensation deposits 1,785 1,116 N/A
Organization and development costs 449 444 5 years
Other 1,078 461 1-5 years
Less accumulated amortization (4,743) (6,888)
------- -------
Total $30,760 $32,334
======= =======
</TABLE>
Subsequent to the intangibles' acquisition, the Company evaluates
whether later events and circumstances have occurred that indicate the
remaining estimated useful life of goodwill and other intangibles may
warrant revision or that the remaining balance of goodwill and other
intangibles may not be recoverable. When factors indicate that goodwill
or other intangibles should be evaluated for possible impairment, the
Company uses an estimate of the related undiscounted cash flows over the
remaining life of the goodwill and other intangibles in measuring whether
the goodwill and other intangibles are recoverable.
I) RECLASSIFICATION
Certain items have been reclassified in the accompanying
consolidated financial statements for prior periods in order to be
comparable with the classification adopted for the fiscal year ended
December 31, 1995. Such reclassifications had no effect on previously
reported net income.
60
<PAGE> 61
2. ACQUISITIONS AND DISPOSITION
On February 13, 1995, the Company acquired all of the shares of common
stock of Hampton Roads Foods, Inc. (a Louisiana corporation) and certain of
the assets of HRF, Inc. (a Virginia corporation), collectively referred to
as "HRF", for approximately $7.2 million, of which approximately $2.1
million was paid in cash and the remainder will be paid over the next six
years pursuant to a secured promissory note, bearing interest at 9%. In
addition, the Company assumed approximately $654,000 of notes payable and
other liabilities and HRF's lease obligations, including capital lease
obligations of approximately $1.3 million. HRF owned and operated a total
of ten Rally's restaurants and owned the exclusive right to develop
additional Rally's restaurants in the Hampton Roads and Norfolk, Virginia
area. The acquisition of HRF was accounted for as a purchase.
The total purchase price of approximately $9.1 million has been
allocated in the accompanying balance sheet as net property and equipment
(approximately $2.1 million) and as intangible and other assets
(approximately $6.7 million). The remainder of the purchase price,
approximately $319,000, was allocated to various current assets. The
intangible and other asset amounts include a noncompete (approximately
$150,000) which is being amortized over five years and reacquired franchise
and territory rights (approximately $6.6 million) which are being amortized
over 15 years.
On December 17, 1992, the Company (through its wholly-owned subsidiary
MAC 1, Inc.) entered into an agreement for the acquisition of all the common
stock of Beaman Corporation ("Beaman"). Beaman is a manufacturer of modular
buildings and a supplier of Rally's modular restaurant buildings. At the
date of the agreement, Beaman was in reorganization under Chapter 11 of the
United States Bankruptcy Code. On January 19, 1994, the Bankruptcy Court
approved the Beaman Plan of Reorganization giving the Company control of
Beaman. On January 30, 1995, the Company sold all of the shares of common
stock of Beaman for approximately $3.1 million, of which approximately $2.7
million was paid in cash and the remainder to be paid pursuant to a
non-interest bearing, unsecured promissory note with two equal payments due
on January 30, 1997 and 1998. This sale resulted in a 1994 pre-tax loss of
approximately $300,000, recorded in the caption "Other." Rally's investment
in Beaman at January 1, 1995 has been included under the caption "Assets
held for sale" at its net realizable value in the accompanying consolidated
financial statements.
In May 1994, the Company entered into an agreement for exchange of
properties and waiver of certain rights with Checkers Drive-In Restaurants,
Inc. pursuant to which it acquired, leased, or received an assignment for
existing leases for five Checkers restaurants, converting them to Rally's
restaurants, and an additional 13 existing Checkers restaurant locations.
In exchange, Checkers acquired one Company-owned restaurant, two additional
Company-owned Rally's locations and Rally's agreement to allow three Rally's
franchisees operating 18 Rally's restaurants to sell such restaurants to
Checkers. The acquisition of these restaurants and locations has been
accounted for as a purchase. The purchase price of approximately $3.2
million has been allocated in the accompanying balance sheet as Net property
and equipment (approximately $600,000) and as Intangible and other assets
(approximately $2.6 million). The intangible and other asset amounts are
being amortized over the initial term of the underlying leases,
predominately ten years. This non-cash transaction has been excluded from
the consolidated statement of cash flows. Concurrent with the closing of
the property exchange described above, the parties entered into two
additional agreements. The first defined certain items of building and
other trade dress to be uniquely Checkers'. Rally's agreed to avoid such
trade dress in its future development, after completion of all of its then
current construction in process and utilization of all of its then current
supply of modular buildings. Such contemplated changes were in line with
Rally's pre-existing plans for its future development. The second agreement
between the parties obligated each to avoid certain actions of interference
for a defined period with regard to the other party's existing contractual
relationships.
On July 16, 1993, the Company acquired three Rally's restaurants
operating in Bakersfield, California and three restaurants in development in
Stockton and Fresno, California, from a franchisee in exchange for 100,000
shares of the Company's Common Stock, valued at approximately $1.4 million,
plus cash
61
<PAGE> 62
consideration of approximately $1.0 million and the assumption of a secured
note of approximately $300,000, to a bank bearing interest at prime plus
1/2%.
On January 8, 1993, the Company acquired West Coast Restaurants, a
general partnership which operated seven Rally's restaurants and owned the
exclusive right to develop additional Rally's restaurants in Los Angeles
County, California. The transaction was consummated through the issuance of
413,000 shares of the Company's Common Stock, valued at $7.2 million, and
cash of $266,000 in exchange for all of the common stock of the corporate
general partners of West Coast Restaurants, the assumption of $2.2 million
in notes payable to certain of West Coast Restaurants former partners and
the assumption of approximately $750,000 in Other liabilities. The notes
were subsequently paid on January 8, 1994.
The above acquisitions in California have been accounted for as
purchases in 1993. The purchase price paid for the assets acquired and the
liabilities assumed have been allocated in the accompanying balance sheet as
Net property and equipment (approximately $4.5 million) and as intangible
and other assets (approximately $8.6 million). The Other asset amounts
include reacquired franchise and territory rights which are being amortized
over 20 years.
The impact on operations of these acquisitions were not significant for
any of the periods presented, and, therefore, proforma amounts are not
presented giving effect to these acquisitions.
3. RESTRUCTURING PROGRAM, OTHER RESTAURANT CLOSURES, AND OTHER CHARGES
Certain charges in fiscal 1995, 1994 and 1993 have been aggregated and
segregated into the caption "Restructuring Program, Other Restaurant
Closures and Other Charges" in the accompanying Statements of Operations.
These charges represent the impact of management decisions which have been
made at various points in time in response to the Company's sales and profit
performance and the then-current revenue building and profit enhancing
strategies.
In summary and chronologically, the decisions that had been reached in
1993 were to reduce the carrying value of certain underperforming assets in
non-core markets ($.7 million) and to exit certain new markets and close
certain other underperforming restaurants ($11.9 million); in 1994 to
abandon additional real estate development projects and certain investment
in infrastructure ($5.3 million) and to abandon additional projects,
infrastructure and franchise or otherwise dispose of up to 60 Company
restaurants ($12.0 million). During 1995, the Company concluded that much
of its 1994 plan of disposal would not be executable. As a result, the
Company decided to (i) close up to 16 of the original 60 restaurants
included in the 1994 disposal plan, (ii) close nine poor performing
restaurants in its core markets, (iii) writeoff expected exposure resulting
from the default of a subleasee/franchisee in a former Company market, (iv)
record additional writedowns of modular building value, (v) record
writedowns to sales price less cost to sell of all properties auctioned in
fourth quarter, 1995 (vi) record asset writedowns and occupancy exposure
related to the default of a tenant for five of the units closed under the
1994 plan and (vii) record other changes in estimates related to the
Company's surplus properties. The charges for the above 1995 items totaled
approximately $17.3 million. See also "Management's Discussion and Analysis
of Financial Condition and Results of Operations" -- "Restructuring Program,
Other Restaurant Closures, and Other Charges".
Also reflected in this caption is a $13.7 million charge related to the
Company's adoption of Statement of Financial Accounting Standard No. 121
further discussed in Note 15.
4. RELATED PARTY TRANSACTIONS
A) ISSUANCE OF COMMON STOCK
On August 24, 1994, the Company entered into a restricted common
stock subscription agreement to sell to its significant shareholder,
GIANT GROUP, LTD. (GIANT) 2,500,000 shares of its common stock
62
<PAGE> 63
for $10,000,000, or $4.00 per share, a modest premium to the then current
market price of its common stock. Both companies obtained fairness
opinions from investment banking firms. The Company and GIANT completed
the transaction on October 25, 1994 and the Company subsequently issued
the common shares. This transaction increased GIANT'S investment in
Rally's from approximately 38% to approximately 47.4% of the Company's
outstanding common stock. There is no limitation on the Company's use of
these funds. The proceeds from this transaction were used for general
operating purposes. The underlying shares of the Company's common stock
have not been registered with the Securities and Exchange Commission and,
therefore, are not freely tradable.
B) OTHER TRANSACTIONS
The Company has dealt with certain companies or individuals which
are related parties by virtue of having stockholders in common, by being
officers/directors or because they are controlled by significant
stockholders or officers/directors of the Company. Such transactions are
summarized below. Information with respect to related party rent is
disclosed in Note 11. The Company and its franchisees each pay 1/2% of
sales to the Rally's National Advertising Fund (the "Fund"), established
for the purpose of creating and producing advertising for the chain. The
Fund is not included in the consolidated financial statements, although
the Company's contribution to it are included in the Advertising and
promotion expenses in the consolidated statements of operations.
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1995 1995
---------- -----------
<S> <C> <C> <C>
BALANCE SHEET AMOUNTS
Royalties receivable $ 227 $ 483
Accounts receivable 193 23
Notes receivable 305 175
Accounts payable 200 307
FISCAL YEARS ENDED
--------------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 31,
1994 1995 1995
--------- --------- -----------
REVENUE AMOUNTS
Royalty fees $2,049 $2,129 $2,407
Rental income 183 195 262
Interest income 100 93 16
------ ------ ------
$2,332 $2,417 $2,685
====== ====== ======
EXPENSE AMOUNTS
Legal $ 412 $ 923 $ 777
Other 134 14 -
------ ------ ------
$ 546 $ 937 $ 777
====== ====== ======
</TABLE>
See also Note 16, "Subsequent Events".
5. INVESTMENTS
Excess funds are being invested in U.S. Treasury and investment grade
corporate debt securities. These securities are deemed as
"available-for-sale" under SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities" effective for years beginning after December 15,
1993 and are reported at fair value. Unrealized holding gains and losses,
excluding those losses considered to be other than temporary, are reported
as a net amount in a separate component of shareholders' equity. No net
unrealized losses were reported for any period presented. Provisions for
declines in market value are made for losses considered to be
63
<PAGE> 64
other than temporary. No such provision was necessary for the years ended
January 2, 1994 and December 31, 1995. The provision for the year ended
January 1, 1995 was $95,000. The market value of the portfolio was
determined based on quoted market prices for these investments. Realized
gains or losses from the sale of investments are based on the specific
identification method.
The carrying value and market value of investments at January 1, 1995
and December 31, 1995 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
CARRYING HOLDING HOLDING MARKET
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- ------
<S> <C> <C> <C> <C>
January 1, 1995:
- ---------------
United States government and its agencies $3,131 $ - $ - $3,131
Corporate debt instruments 954 - - 954
------ ------ ------ ------
Total $4,085 $ - $ - $4,085
====== ====== ====== ======
December 31, 1995
- -----------------
United States government and its agencies $4,933 $ - $ - $4,933
Corporate debt instruments - - - -
------ ------ ------ ------
Total $4,933 $ - $ - $4,933
====== ====== ====== ======
</TABLE>
Contractually, all of these investments at December 31, 1995 mature in
1996.
The proceeds from the sale of investments and related gross gains and
losses for the twelve months ended January 1, 1995 and December 31, 1995
were as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------
JANUARY 1, DECEMBER 31,
1995 1995
--------- -----------
<S> <C> <C>
Proceeds from the sale of investments $ 17,798 $ 15,653
Gross gains realized 137 56
Gross losses realized (364) -
</TABLE>
6. NET PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1995 1995
--------- -----------
<S> <C> <C>
Land $ 16,830 $ 14,310
Buildings and leasehold improvements 66,331 46,516
Equipment, furniture and fixtures 52,144 45,036
-------- --------
135,305 105,862
Less accumulated depreciation (27,814) (32,049)
-------- --------
107,491 73,813
-------- --------
Property held under capital lease 7,243 6,212
Less accumulated amortization (1,725) (1,342)
-------- --------
5,518 4,870
-------- --------
Net property and equipment $113,009 $ 78,683
======== ========
</TABLE>
64
<PAGE> 65
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1995 1995
---------- ------------
<S> <C> <C>
Payroll and payroll taxes $ 2,429 $ 3,013
Closed store reserve 1,824 2,767
Workers compensation 1,231 2,102
Advertising 152 1,819
Other 4,683 6,258
------- -------
$10,319 $15,959
======= =======
</TABLE>
8. OTHER LIABILITIES
Other liabilities consist of the following:
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1995 1995
---------- ------------
<S> <C> <C>
Closed store reserve $ 1,389 $ 6,761
Unfavorable lease loss 1,278 890
Other 539 379
------- -------
$ 3,206 $ 8,030
======= =======
</TABLE>
9. SENIOR NOTES
On March 9, 1993, the Company sold $85 million of 9 7/8% Senior, Notes
due 2000 (the "Notes"). The Company is required to make a mandatory sinking
fund payment on June 15, 1999 to retire 33 1/3% in aggregate principal
amount of the Notes issued. The Notes are carried net of the related
discount, which is being amortized over the life of the Notes. Interest is
payable June 15 and December 15. The Notes include certain restrictive
covenants which, among other restrictions, limit the Company's ability to
obtain additional borrowings and to pay dividends as well as impose certain
change of control provisions, as defined. Due to the redemption of certain
of the Senior Notes in January 1996, the redemption price of approximately
$15.2 million has been classified in the caption "Current Maturities of
Long-Term Debt and Obligations Under Capital Leases" in the accompanying
consolidated balance sheet. See also Note 16, "Subsequent Events." The
Notes are publicly traded and at December 31, 1995 had a market value of
$43.5 million based on the quoted market price for such notes.
10. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1995 1995
---------- ------------
<S> <C> <C>
Notes payable to banks, maturing at various
dates through September 30, 2000, secured
by property and equipment, bearing interest
ranging from 1/2% above prime to 11.16%.
The notes are payable in monthly principal
and interest installments ranging from $848
to $41,033. $2,388 $1,470
</TABLE>
65
<PAGE> 66
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1995 1995
---------- ------------
<S> <C> <C>
Notes payable to finance companies due at
various dates through 1998, secured by
certain equipment, bearing interest at rates
ranging from 7.3% to 7.9%. The notes are
payable in monthly principal and interest
installments ranging from $6,762 to $7,928. $ 915 $ 384
Note payable to Company for acquisition of
certain markets, secured by certain property
and equipment, maturing November 30, 1998,
bearing interest of 8.3%. The note is
payable in monthly principal and interest
installments of $11,494. 468 205
Secured notes payable to a bank used to
finance equipment and/or modular buildings
for franchisees (the Franchisee Loans),
maturing at various dates through
July 15, 2000, bearing interest at prime plus
1/2%. The notes are payable in principal
installments of $6,432. Interest is payable
monthly. 338 261
Notes payable to former owners for acquisition
of market, secured by common stock of Hampton
Roads Foods, maturing March 13, 2001, with
outstanding balances due after last monthly
payments, bearing interest of 9.0%. The notes
are payable in monthly principal and interest
installments ranging from $4,742 to $50,211. - 4,814
Other - 413
------- -------
4,109 7,547
Less - Current portion (2,004) (1,798)
------- -------
$ 2,105 $ 5,749
======= =======
</TABLE>
At December 31, 1995, the prime rate was 8.5%. The weighted average
interest rate on short-term borrowings for the year ended January 1, 1995
was 7.7%. This rate was computed by using the daily weighted average
borrowings for each period. There were no short-term borrowings in the year
ended December 31, 1995.
The following are the maturities of long-term debt for each of the next
five years and thereafter:
<TABLE>
<CAPTION>
Year
----
<S> <C>
1996 $1,798
1997 973
1998 722
1999 727
2000 590
Thereafter 2,737
------
$7,547
======
</TABLE>
Included in "Current maturities" is certain mortgage financing related
to properties expected to be sold within the next year. The Company is also
in default of certain covenants of this indebtedness; however, such defaults
do not accelerate payment. Terms of such agreements do require that
proceeds be utilized to first liquidate balances outstanding. The Company
is subject to certain restrictive covenants under its debt agreements.
The market value of the Company's long-term debt approximated book value at
December 31, 1995. Debt related to the acquisition of Hampton Roads Foods
was entered into in 1995 and bears interest at rates which approximate
current rates for debt with similar terms. The majority of the remaining
long-term debt has contractual rates which vary based on fluctuations in
market rates.
66
<PAGE> 67
11. COMMITMENTS AND CONTINGENCIES
(A) LEASE COMMITMENTS
The Company leases certain land and buildings generally under
agreements with terms of or renewable to 15 to 20 years. Some of the
leases contain contingent rental provisions based on percentages of gross
sales. The leases generally obligate the Company for the cost of
property taxes, insurance and maintenance. Following is a schedule by
year of future minimum lease commitments under all leases at December 31,
1995:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR LEASES LEASES
---- ------- ---------
<S> <C> <C>
1996 $ 1,176 $ 8,602
1997 1,057 8,197
1998 981 7,454
1999 944 6,759
2000 877 6,001
Thereafter 6,700 32,798
------- -------
Total minimum lease commitments 11,735 $69,811
=======
Less amounts representing interest, discounted at
rates ranging from 10% to 12% (5,556)
-------
Present value of minimum lease payments 6,179
Current portion of capital lease obligations (548)
-------
Long-Term lease obligations $ 5,631
=======
</TABLE>
The discount rates applicable to the Company's capital leases
approximate currently available market rates.
Rent expense consists of:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 31,
1995 1994 1995
---------- ---------- ------------
<S> <C> <C> <C>
Minimum rentals - related parties $ 251 $ 261 $ 292
Minimum rentals - others 4,817 6,514 6,641
Contingent rentals - others 195 136 173
------ ------ -------
$5,263 $6,911 $ 7,106
====== ====== =======
</TABLE>
(B) OTHER COMMITMENTS
The Company is contingently liable on certain franchisee lease
commitments totaling approximately $400,000.
67
<PAGE> 68
(C) LITIGATION
In January and February 1994, two putative class action lawsuits
were filed, purportedly on behalf of the stockholders of Rally's in the
United States District Court for the Western District of Kentucky,
against Rally's, Burt Sugarman and GIANT and certain of Rally's present
and former officers and directors and its auditors. The complaints
allege certain violations of the Securities Exchange Act of 1994, 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 have renewed this motion, and
defendants again have opposed class certification. That motion is
currently pending. 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. The
Company and GIANT deny all wrongdoing and intend to defend themselves
vigorously in this matter. Because these matters are in a preliminary
stage, the Company is unable to determine whether a resolution adverse to
the Company will have a material effect on its results of operations or
financial condition. Accordingly, no provisions for any liabilities that
may result upon adjudication have been made in the accompanying financial
statements.
In July 1994, the Company entered into an agreement with Red Line
Burgers, Inc. ("Red Line") whereby Red Line leased from the Company all
of its assets being operated as Rally's restaurants in Houston, Texas.
Additionally, the agreement called for Red Line to convert Red Line's
eight competing units in the Houston market to the Rally's brand. Under
the terms of the agreement, the Company made certain payments to Red Line
to facilitate this conversion to the Rally's brand. The Company believes
that Red Line is in default of certain terms of its lease obligations
arising out of the agreement and, on June 20, 1995, filed an action in
the United States District Court for the Southern District of Texas,
Galveston Division, seeking recovery of damages from Red Line for its
breach of the leases and subleases entered into with the Company. The
Company also believes that Red Line has committed events of default under
the terms of all of its existing Franchise Agreements with the Company.
On August 3, 1995, the Company filed suit in the United States District
Court, Western District of Kentucky, alleging Breach of Contract due to
Red Line's failure to pay royalties and other payments required by the
Franchise Agreement and its failure to pay monies owed under certain
promissory notes. The Company also seeks accountability for the
conversion costs paid by the Company for conversion of Red Line's Houston
restaurants. Subsequent to the commencement of the foregoing actions,
Red Line filed for reorganization under Chapter 11 of the United States
Bankruptcy Code and in connection with such proceeding, Rally's action
against Red Line has been stayed.
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.
The Company and GIANT deny all wrongdoing and intend to vigorously
defend itself in this action. Management does not believe that this
litigation will have a material effect on the Company's results of
operations or financial condition.
68
<PAGE> 69
In September 1993, the Company recorded a charge of $2.0 million in
connection with the litigation and settlement of a lawsuit with
International Shortstop, Inc.
See also Note 16, "Subsequent Events."
The Company is involved in other litigation matters incidental to
its business. With respect to such other suits, management does not
believe the litigation in which it is involved will have a material
effect upon its results of operation of financial condition.
(D) CO-BRANDING AGREEMENT WITH GREEN BURRITO
In June 1995, the Company entered into a Development Agreement with
GB Foods Corporation (GB Foods) to jointly market their proprietary
products under a Co-Branding arrangement. The Development Agreement
provides for Rally's to enter into Franchise Agreements with GB Foods and
begin offering Green Burrito Mexican food products in its existing
Rally's Company-owned restaurants. The Company is required to serve the
Green Burrito products in 30 of its Company restaurants by May 31, 1996.
The Development Agreement thereafter provides generally that the
remaining Company-owned restaurants begin serving the Green Burrito
products at a rate of 40 units per year, contingent on, among other
things, certain formulas based on increases in sales of the co-brand
restaurants over the 12-month period preceding conversion.
The Development Agreement also provides for Rally's to serve as an
exclusive representative of GB Foods in offering the Green Burrito menu
to Rally's existing and future franchisees and in other double-drive
through and non-traditional venues, such as airports, office parks,
industrial complexes, colleges, universities, stadiums and arenas.
The Company is required to pay GB Foods a franchise fee of $5,000
per restaurant offering the Green Burrito products and a maximum royalty
of 3% of the Green Burrito products. As of December 31, 1995, 14
Company-owned restaurants had been converted to the co-branded format.
The Company is currently involved in discussions with GB Foods which
may substantially modify the nature of the existing relationship between
the two companies. The Company currently intends to continue to act in
conformity with the existing agreement between the two parties.
69
<PAGE> 70
12. INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes", (SFAS 109) prospectively as a change in
accounting principle effective January 4, 1993. Due to the nature of the
predominant cumulative differences in the Company's book and tax bases of
assets and liabilities, the cumulative impact of adoption was insignificant.
Prior business combinations were not restated as either financial reporting
and tax bases of acquired businesses were the same at inception or bases
differences relate to goodwill. The asset and liability method contemplated
by SFAS 109 requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of substantially all temporary
differences between the tax bases and financial reporting bases of assets
and liabilities (excluding goodwill).
The major components of the Company's computation of deferred tax
assets and liabilities at January 1, 1995 and December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31,
1995 1995
---------- -----------
<S> <C> <C>
Excess of tax depreciation over book depreciation $11,994 $11,390
Acquired intangibles with no tax basis 2,303 2,199
Other 47 8
------- -------
Gross deferred tax liabilities $14,344 $13,597
======= =======
Net operating loss carryforwards $ 8,885 $13,070
Amounts accrued for financial reporting
purposes not yet deductible for tax purposes 6,890 17,122
Alternative minimum tax and targeted jobs tax
credit carryforwards 1,181 937
Other 834 1,267
------- -------
Gross deferred tax assets 17,790 32,396
Less valuation allowance 3,446 18,799
------- -------
Net deferred tax asset $14,344 $13,597
======= =======
</TABLE>
The primary changes from January 1, 1995 in the components of the above
assets and liabilities relate to the Company's changes and business
strategies, restructuring, other restaurant closings (See Note 3) and
adoption of SFAS 121 (See Note 15) offset by current year tax depreciation
in excess of book depreciation. The alternative minimum tax credit
carryforward has no expiration. The net operating loss carryforwards will
expire $641,000 in 2008, $20.2 million in 2009 and $18.9 million in 2010.
The targeted jobs tax carryforward expires $118,000 in 2006, $184,000 in
2007 and $200,000 in 2008. A valuation allowance of $18.8 million has been
established due to the uncertainty of realizing the benefit associated with
the net operating loss carryforwards generated in the current and previous
year.
Income tax expense consists of the following:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 31,
1994 1995 1995
---------- ---------- ------------
<S> <C> <C> <C>
Current $ (76) $(3,458) $539
Deferred (4,500) (1,524) -
------- ------- ----
Total tax (benefit) expense $(4,576) $(4,982) $539
======= ======= ====
</TABLE>
70
<PAGE> 71
A reconciliation of the provisions for income taxes with the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 31,
1994 1995 1995
---------- ---------- ------------
<S> <C> <C> <C>
Provision (benefit) computed at statutory rate $(4,584) $(8,247) $(15,770)
State and local income taxes, net of federal
income tax benefit 162 162 736
Valuation allowance - 3,446 15,352
Other (154) (343) 221
------- ------- --------
$(4,576) $(4,982) $ 539
======= ======= ========
</TABLE>
13. STOCK OPTION PLANS
The Company currently has two stock option plans in effect, the 1990
Stock Option Plan (the "Employees' Plan") and the 1990 Stock Option Plan for
Non-Employee directors (the "1990 Directors' Plan"). Options to purchase an
aggregate of 3.8 million shares of the Company's Common Stock may be granted
under these plans, at a price not less than the market value on the date of
grant. Outstanding options expire either five years or ten years after
grant depending on their grant date. Options are exercisable over various
periods ranging from 30 months to five years after grant, depending on their
grant dates.
In September 1995, the Company's Board of Directors adopted, subject to
shareholder approval at the next annual meeting, a new plan: 1995 Stock
Option Plan for Non-Employee Directors (the "1995 Directors' Plan").
Options to purchase an aggregate of 900,000 shares of the Company's Common
Stock may be granted under this new plan. Upon shareholder approval, no new
grants will be made pursuant to the 1990 Directors' Plan. Options granted
under the 1995 Directors' Plan, when approved, will vest over 12 months and
expire in five years. In September 1995, 112,500 shares were granted,
subject to shareholder approval, pursuant to the 1995 Directors' Plan at
$2.625 per share, the closing price of the Company's Common Stock on the
date of grant. To the extent that the price of the Company's Common Stock
increases prior to the measurement date (the date of shareholder approval),
compensation expense would need to be recorded. Based on recent trends such
increase is not currently expected, therefore no provision for such expense
has been reflected in the accompanying Statement of Operations.
On August 26, 1994, the Board of Directors authorized an option
exchange program, subject to shareholder approval, pursuant to which options
to purchase 1,042,000 common shares at prices ranging from $8.00 to $21.50
per share were terminated. These options were reissued, subject to
shareholder approval, at $4.125 per share, which was the closing price of
the Company's Common Stock on August 26, 1994. The option exchange program
was approved by the shareholders at the annual meeting held on May 13, 1995.
71
<PAGE> 72
A summary of stock option transactions reflecting the stock option
exchange program is as follows:
<TABLE>
<CAPTION>
OPTION PRICE AGGREGATE
SHARES PER SHARE OPTION PRICE
------ ------------ ------------
<S> <C> <C> <C>
Options outstanding at January 3, 1993 1,793 $2.67 - $21.50 $ 17,882
Granted in 1993 487 $9.75 - $21.00 6,507
Exercised in 1993 (224) $2.67 - $12.33 (1,237)
Terminated in 1993 (146) $5.29 - $21.00 (1,947)
------ ---------
Options outstanding at January 2, 1994 1,910 $2.67 - $21.50 21,205
Granted in 1994 1,925 $2.875 - $11.25 10,600
Exercised in 1994 (34) $2.66 - $ 6.92 (169)
Terminated in 1994 (1,576) $4.125 - $21.50 (21,295)
------ ---------
Options outstanding at January 1, 1995 2,225 $2.67 - $ 9.333 10,341
Granted in 1995 676 $1.50 - $ 3.75 1,950
Exercised in 1995 - - -
Terminated in 1995 (682) $2.87 - $ 6.917 (2,892)
------ ---------
Options outstanding at end of year 2,219 $1.50 - $ 9.333 $ 9,399
====== =========
Options exercisable at end of year 1,048 $2.875 - $ 9.333 $ 5,330
====== =========
</TABLE>
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), issued in October 1995 and effective
for fiscal years beginning after December 15, 1995, 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, "Accounting for Stock Issued to Employees" ("APB No. 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. The Company
expects to adopt Statement No. 123 in 1996. While the Company is still
evaluating Statement No. 123, it currently expects to elect to continue to
measure compensation cost under APB No. 25 and comply with the pro forma
disclosure requirements. If the Company makes this election, this statement
will have no impact on the Company's results of operations or financial
position because the Company's plans are fixed stock option plans which have
no intrinsic value at the grant date under APB No. 25.
14. UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
<S> <C> <C <C> <C> <C>
YEAR ENDED JANUARY 1, 1995
Revenues $42,805 $48,464 $48,959 $46,090 $186,318
Income (loss) from operations (477) 884 (4,124) (10,919) (14,636)
Net loss (1,862) (931) (4,495 (11,985) (19,273)
Loss per share (.14) (.07) (.34 (.79) (1.42)
YEAR ENDED DECEMBER 31, 1995
Revenues $42,470 $49,843 $49,851 $46,695 $188,859
Income (loss) from operations (993) 1,205 (14,803 (21,879) (36,470)
Net loss (3,509) (1,244) (17,316) (24,850) (46,919)
Loss per share (.22) (.08) (1.11) (1.59) (3.00)
</TABLE>
15. IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed of " (SFAS 121), at the beginning of the fourth
quarter, 1995. This Statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used, and for long-
72
<PAGE> 73
lived assets and certain identifiable intangibles to be disposed of. SFAS
121 requires that impairment for long-lived assets and identifiable
intangibles to be held and used, if any, be based on the fair value of the
asset. Long-lived assets and certain identifiable intangibles to be
disposed of are to be reported at the lower of carrying amount or fair value
less cost to sell. For purposes of applying this statement, the Company
determines fair value utilizing the present value of expected future cash
flows using a discount rate commensurate with the risks involved.
Long-lived assets considered for impairment under SFAS 121 are required
to be grouped at the "lowest level for which there are identifiable cash
flows that are largely independent of the cash flows of other groups." The
Company believes the most correct application of this standard is obtained
by examining individual restaurants where circumstances indicate that an
impairment issue may exist. This belief is primarily based on the fact that
it is at individual restaurant level that most investment and closure
decisions are made on an ongoing basis.
Prior to the issuance of SFAS 121, the Company recorded impairment of
long-lived assets deemed to be permanently impaired. Generally, such
assessment of permanent impairment arose concurrent with a management
decision to dispose of such an asset at which time the asset was written
down to estimated net realizable value. In general, other long-lived assets
were reviewed for impairment only if there were dramatic changes in
operating results or cash flows of a segregable group of outlets, indicating
a likelihood that a permanent impairment has occurred.
The Company's past practices of estimating net realizable value for
assets to be disposed of are consistent with the Statement's requirements to
write down such assets to fair market value less costs to sell and no
adjustment regarding such assets was necessary upon adoption of the
Statement. The expected disposal dates for these assets are over the next
18 to 24 months and consist mainly of surplus land, buildings and equipment.
The carrying amounts of such assets to be disposed of are shown separately
on the accompanying balance sheets. The majority of assets held for sale
resulted from constriction of the Company's development plan and other
associated store closings further discussed in Note 3.
The Company's review relating to assets to be held and used indicated
that 37 of its 238 operating restaurants met the Company's criteria for
impairment review. All of the indicated restaurants were deemed to be
impaired based on current estimates of their underlying cash flows and a
provision for impairment was booked in the fourth quarter of $13.7 million
related to writedowns of the assets associated with these restaurants.
$825,000 of associated intangible assets is included in this writedown. The
writedown is included in the caption "Restructuring Program, Other
Restaurant Closures and Other Charges." The writedown of these assets
resulted in reduced depreciation and amortization expense in the fourth
quarter of approximately $351,000.
The magnitude of the writedown noted above resulted primarily from two
factors: (1) the review of assets to be held and used at individual
restaurant level, a lower level than used in the past and (2) the recent
historical and continuing poor operating performance of the restaurants
themselves (including the restaurant's 1995 full year performance).
16. SUBSEQUENT EVENTS
(A) REPURCHASE OF SENIOR NOTES
On January 29, 1996, the Company repurchased, in two transactions,
at a price of $678.75 per $1,000 principal amount, $22 million face value
of its 9 7/8% Senior Notes due in the year 2000 from GIANT. As of March
6, 1996, GIANT beneficially owns 47.42% of the Company's Common Stock and
may be deemed to be a "parent" of the Company as such term is defined in
the rules promulgated under the Securities Exchange Act of 1934. The
price paid in each transaction represented the market closing price on
January 26, 1996. The first transaction involved the repurchase of $16
million face value of the notes for $11.1 million in cash. The second
transaction involved the purchase of $6 million face value of notes
73
<PAGE> 74
in exchange for a $4.1 million short-term note due in three installments
of principal and interest issued by Rally's. This note bears interest at
the highest publicly announced reference rate of interest maintained by a
large banking institution for commercial loans of short-term maturities
to its most credit-worthy large corporate borrowers.
The purchases were approved by a majority of the independent
Directors of the Company. Prior to the purchases, the Company's
independent directors had received an opinion as to the fairness of the
transactions, from a financial point of view, from an investment banking
firm of national standing.
Such purchases are expected to reduce total interest expense by
approximately $1.9 million during 1996, net of interest expense incurred
on the short-term note.
(B) EXCHANGE OFFER FOR ADDITIONAL SHARES BY SIGNIFICANT SHAREHOLDER
On January 22, 1996, the Company announced that GIANT had informed
the Company of its intention to offer to exchange a new series of GIANT
participating, non-voting preferred stock for up to that number of shares
of the Company's common stock as would result in GIANT owning 81%
(subject to increase by GIANT to 84.9%) of the Company's outstanding
common stock, diluted for vested options. The exchange ratio is to be
4.5 shares of Rally's common stock for each share of GIANT preferred
stock.
The Company's Board of Directors, acting on the recommendation of a
Special Committee of its independent members and their financial advisor
who opined that the consideration to be received by the Company's
stockholders in the contemplated exchange is fair from a financial point
of view to the Company's stockholders other than GIANT and its
subsidiary, has agreed to recommend the exchange offer to Company
stockholders, subject to certain conditions. Those conditions include
the receipt of a written fairness opinion and execution of a written
agreement with GIANT obligating GIANT to (i) apply for listing of the
preferred stock on the New York Stock Exchange; (ii) maintain at least
two independent members on the Company's Board of Directors as long as
the stock of the Company is publicly held and (iii) not acquire in the
exchange offer shares which would result in GIANT owning, after the
exchange offer, more than 84.9% of the Company's outstanding common
stock, diluted for vested options.
GIANT currently owns, directly and indirectly, approximately 47.4%
of Rally's outstanding common stock. GIANT also informed the Company
that the offering of GIANT's preferred stock will only be made by means
of a prospectus.
(C) SHAREHOLDER DERIVATIVE SUIT SEEKING RECISION OF NOTE REPURCHASE
On February 13, 1996, a derivative lawsuit naming the members of the
Company's Board of Directors was filed in Delaware Chancery Court by a
shareholder, Harbor Finance Partners. The suit alleges breach of
fiduciary duty in connection with the Senior Note Repurchase transaction
discussed in (a) above, by alleging that GIANT artificially drove up the
price of the Company's Senior Notes by announcing its planned exchange
offer discussed in (b) above. The Company and its Directors deny all
allegations of wrongdoing made by the plaintiffs and intend to defend the
suit vigorously. Management does not believe that this litigation will
have a material effect on its results of operations or financial
condition.
(D) GIANT GROUP, LTD. CREDIT FACILITY AND LETTERS OF CREDIT
In early February 1996, GIANT entered into a one-year credit
facility with the Company. Such credit facility is evidenced by a note
payable to GIANT for up to $2 million. Any monies advanced under said
note agreement shall bear interest at the highest publicly announced
reference rate of interest maintained by a large banking institution for
commercial loans of short-term maturities to its most credit-worthy large
corporate borrowers. Interest is payable monthly. The facility is
renewable for one or more years at the
74
<PAGE> 75
discretion of GIANT. GIANT is not obligated to make any advance under
this agreement. As of March 6, 1996, approximately $600,000 has been
advanced under this facility. The interest rate in effect at that date
was 8.25%.
In addition, GIANT has issued certain irrevocable letters of credit
to secure the obligation of the Company under its large deductible
workers' compensation insurance program and to secure certain surety
bonds previously issued by the Company. In total, at March 6, 1996, such
letters of credit are approximately $500,000. Such letters of credit
replaced similar letters of credit previously issued by the Company,
which had been secured by certificates of deposit. Such certificates are
being liquidated to improve the overall liquidity of the Company.
(E) MATTERS CONCERNING SIGNIFICANT SHAREHOLDER
On February 14, 1996, Fidelity National Financial, Inc.
("Fidelity"), a holder of approximately 14.6% of the outstanding shares
of GIANT, proposed a merger with GIANT. Such proposal was formally
rejected by GIANT on February 22, 1996.
GIANT had previously sued Fidelity and its Chairman, William P.
Foley on January 3, 1996 alleging violation of certain securities
regulations in regard to Fidelity's takeover attempt and took certain
actions designed to discourage an unfriendly takeover of GIANT including
the adoption of a shareholders rights plan. Mr. Foley also serves as
Chairman of CKE Restaurants, Inc. Fidelity has stated an intent to
appeal directly to the shareholders of GIANT and to solicit proxies in
connection with the annual meeting of shareholders of GIANT to take
control of the board with individuals committed to facilitating
Fidelity's proposed transaction or, if such transaction cannot be
completed, considering a liquidation of GIANT.
There is a change in control provision within the indenture
governing the Senior Notes that is triggered by, among other actions, any
person or group (other than Mr. Sugarman and his affiliates) becoming a
beneficial owner of in excess of 35% of GIANT voting stock at a time when
GIANT is the beneficial owner of 25% or more of Rally's voting stock.
This provision, if triggered, would require the Company to offer to
repurchase any of its outstanding 9 7/8% Senior Notes due 2000 at $1,010
per $1,000 of face value. If this event occurred, the Company would be
forced to renegotiate the terms of the Senior Notes. The ability of the
Company to successfully renegotiate the terms is not known at this time.
Based on the information presently available, the Company believes it to
be remote that the change in control provision of the Senior Notes will
be triggered.
75
<PAGE> 76
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rally's Hamburgers, Inc.:
We have audited the accompanying consolidated balance sheets of Rally's
Hamburgers, Inc. (a Delaware corporation) and subsidiaries as of January 1,
1995 and December 31, 1995, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three fiscal
years in the period ended December 31, 1995. These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rally's Hamburgers, Inc.
and subsidiaries as of January 1, 1995 and December 31, 1995 and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not
part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
March 6, 1996
76
<PAGE> 77
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
ADDITIONS
--------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended January 2, 1994
Accounts receivable $ 8 $ 82 $ - $ - $ 90
Royalties receivable 71 125 - 27 169
---- ------ ----- ---- ------
$ 79 $ 207 $ - $ 27 $ 259
==== ====== ===== ==== ======
Year Ended January 2, 1995
Accounts receivable $ 90 $ 86 $ - $ - $ 176
Royalties receivable 169 291 - 58 $ 402
---- ------ ----- ---- ------
$259 $ 377 $ - $ 58 $ 578
==== ====== ===== ==== ======
Year Ended December 31, 1995
Accounts receivable $176 $ 376 $ 18 $117 $ 453
Royalties receivable 402 838 (267) 51 922
Note receivable - 293 249 - 542
---- ------ ----- ---- ------
$578 $1,507 $ - $168 $1,917
==== ====== ===== ==== ======
</TABLE>
77
<PAGE> 78
GIANT GROUP, LTD.
EXHIBITS TO FORM 10-K
FOR THE CALENDAR YEAR ENDED DECEMBER 31, 1995
EXHIBIT INDEX
NO. DESCRIPTION OF EXHIBIT
- --- ----------------------
3.1.5 Certificate of Designation of Series A Junior Participating Preferred
Stock, dated January 12, 1996.
10.7 Note purchase agreement ($16 million face value bonds) between GIANT
(seller) and Rally's (buyer), dated January 29, 1996.
10.8 Note purchase agreement ($6 million face value bonds) between GIANT
(seller) and Rally's (buyer), dated January 29, 1996.
10.9 Short-term promissory note ($4.1 million) between GIANT (payee) and
Rally's (maker), dated January 29, 1996.
10.10 Promissory note for advance of up to $2 million between GIANT (payee)
and Rally's (maker), dated February 1, 1996.
10.11 Letter of Credit Reimbursement Agreement between GIANT and Rally's,
dated February 1, 1996.
10.12 Letter of Credit Agreement between GIANT and Bank of America National
Trust and Savings Association, dated February 23, 1996.
10.13 Amendment Number 1, dated March 18, 1996, to Letter of Credit Agreement
between GIANT and Bank of America National Trust and Savings
Association, dated February 23, 1996.
11 Statement re: Computation of Per Share Earnings.
21 Subsidiary List.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedules.
78
<PAGE> 1
EXHIBIT 3.1.5
CERTIFICATE OF DESIGNATION
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
GIANT GROUP, LTD.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
GIANT GROUP, LTD., a corporation organized and existing under the
General Corporation Law of the State of Delaware, in accordance with the
provisions of Section 103 thereof, DOES HEREBY CERTIFY:
That pursuant to the authority vested in the Board of Directors in
accordance with the provisions of the Restated Certificate of Incorporation of
the said Corporation, the said Board of Directors on January 4, 1996 adopted
the following resolution creating a series of 12,500 shares of Preferred Stock
designated as "Series A Junior Participating Preferred Stock":
RESOLVED, that pursuant to the authority vested in the Board
of Directors of this Corporation in accordance with the provisions of
the Restated Certificate of Incorporation, a series of Preferred
Stock, par value $.01 per share, of the Corporation be and hereby is
created, and that the designation and number of shares thereof and the
voting and other powers, preferences and relative, participating,
optional or other rights of the shares of such series and the
qualifications, limitations and restrictions thereof are as follows:
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
1. Designation and Amount. There shall be a series of Preferred
Stock that shall be designated as "Series A Junior Participating Preferred
Stock," and the number of shares constituting such series shall be 12,500.
Such number of shares may be increased or decreased by resolution of the Board
of Directors; provided, however, that no decrease shall reduce the number of
shares of Series A Junior Participating Preferred Stock to less than the number
of shares then issued and outstanding plus the number of shares issuable upon
exercise of outstanding
1
<PAGE> 2
rights, options or warrants or upon conversion of outstanding securities issued
by the Corporation.
2. Dividends and Distribution.
(A) Subject to the prior and superior rights of the
holders of any shares of any series of Preferred Stock ranking prior and
superior to the shares of Series A Junior Participating Preferred Stock with
respect to dividends, the holders of shares of Series A Junior Participating
Preferred Stock, in preference to the holders of shares of any class or series
of stock of the Corporation ranking junior to the Series A Junior Participating
Preferred Stock as to the payment of dividends, shall be entitled to receive,
when, as and if declared by the Board of Directors out of funds legally
available for the purpose, quarterly dividends payable in cash on the 1st day
of January, April, July and October in each year (each such date being referred
to herein as a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or fraction
of a share of Series A Junior Participating Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b)
the Adjustment Number (as defined below) times the aggregate per share amount
of all cash dividends, and the Adjustment Number times the aggregate per share
amount (payable in kind) of all non-cash dividends or other distributions other
than a dividend payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise), declared
on the Common Stock, par value $.01 per share, of the Corporation (the "Common
Stock") since the immediately preceding Quarterly Dividend Payment Date, or,
with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series A Junior Participating
Preferred Stock. The "Adjustment Number" shall initially be 1000. In the
event the Corporation shall at any time after January 4, 1996 (the "Rights
Declaration Date") (i) declare any dividend on Common Stock payable in shares
of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine
the outstanding Common Stock into a smaller number of shares, then in each such
case the Adjustment Number in effect immediately prior to such event shall be
adjusted by multiplying such Adjustment Number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or
distribution on the Series A Junior Participating Preferred Stock as provided
in paragraph (A) above immediately after it declares a dividend or distribution
on the Common Stock (other than a dividend payable in shares of Common Stock).
2
<PAGE> 3
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Junior Participating Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of issue of such shares
of Series A Junior Participating Preferred Stock, unless the date of issue of
such shares is prior to the record date for the first Quarterly Dividend
Payment Date, in which case dividends on such shares shall begin to accrue from
the date of issue of such shares, or unless the date of issue is a Quarterly
Dividend Payment Date or is a date after the record date for the determination
of holders of shares of Series A Junior Participating Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend Payment
Date, in either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series A
Junior Participating Preferred Stock in an amount less than the total amount of
such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the
determination of holders of shares of Series A Junior Participating Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be no more than 60 days prior to the date
fixed for the payment thereof.
3. Voting Rights. The holders of shares of Series A Junior
Participating Preferred Stock shall have the following voting rights:
(A) Each share of Series A Junior Participating Preferred
Stock shall entitle the holder thereof to a number of votes equal to the
Adjustment Number on all matters submitted to a vote of the stockholders of the
Corporation.
(B) Except as required by law and by Section 10 hereof,
holders of Series A Junior Participating Preferred Stock shall have no special
voting rights and their consent shall not be required (except to the extent
they are entitled to vote with holders of Common Stock as set forth herein) for
taking any corporate action.
4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Junior Participating Preferred Stock as
provided in Section 2 are in arrears, thereafter and until all accrued and
unpaid dividends and distributions, whether or not declared, on shares of
Series A Junior Participating Preferred Stock outstanding shall have been paid
in full, the Corporation shall not
3
<PAGE> 4
(i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for consideration
any shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Junior Participating Preferred
Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Junior Participating Preferred Stock, except dividends paid ratably on the
Series A Junior Participating Preferred Stock and all such parity stock on
which dividends are payable or in arrears in proportion to the total amounts to
which the holders of all such shares are then entitled; or
(iii) purchase or otherwise acquire for
consideration any shares of Series A Junior Participating Preferred Stock, or
any shares of stock ranking on a parity with the Series A Junior Participating
Preferred Stock, except in accordance with a purchase offer made in writing or
by publication (as determined by the Board of Directors) to all holders of
Series A Junior Participating Preferred Stock, or to such holders and holders
of any such shares ranking on a parity therewith, upon such terms as the Board
of Directors, after consideration of the respective annual dividend rates and
other relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable treatment among
the respective series or classes.
(B) The Corporation shall not permit any subsidiary of
the Corporation to purchase or otherwise acquire for consideration any shares
of stock of the Corporation unless the Corporation could, under paragraph (A)
of this Section 4, purchase or otherwise acquire such shares at such time and
in such manner.
5. Reacquired Shares. Any shares of Series A Junior
Participating Preferred Stock purchased or otherwise acquired by the
Corporation in any manner whatsoever shall be retired promptly after the
acquisition thereof. All such shares shall upon their retirement become
authorized but unissued shares of Preferred Stock and may be reissued as part
of a new series of Preferred Stock to be created by resolution or resolutions
of the Board of Directors, subject to any conditions and restrictions on
issuance set forth herein.
6. Liquidation, Dissolution or Winding Up. (A) Upon any
liquidation (voluntary or otherwise), dissolution or winding up of the
Corporation, no distribution shall be made to the holders of shares of stock
ranking junior (upon liquidation, dissolution or winding up) to the Series A
Junior Participating Preferred Stock unless, prior thereto, the holders of
shares of Series A Junior Participating Preferred Stock shall have received an
amount per share (the "Series A Liquidation
4
<PAGE> 5
Preference") equal to the greater of (i) $100, plus an amount equal to accrued
and unpaid dividends and distributions thereon, whether or not declared, to the
date of such payment, or (ii) the Adjustment Number times the per share amount
of all cash and other property to be distributed in respect of the Common Stock
upon such liquidation, dissolution or winding up of the Corporation.
(B) In the event, however, that there are not sufficient
assets available to permit payment in full of the Series A Liquidation
Preference and the liquidation preferences of all other series of Preferred
Stock, if any, that rank on a parity with the Series A Junior Participating
Preferred Stock, then such remaining assets shall be distributed ratably to the
holders of such parity shares in proportion to their respective liquidation
preferences.
(C) Neither the merger or consolidation of the
Corporation into or with another corporation nor the merger or consolidation of
any other corporation into or with the Corporation shall be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
this Section 6.
7. Consolidation, Merger, Etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share equal to the Adjustment
Number times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is changed or exchanged.
8. No Redemption. Shares of Series A Junior Participating
Preferred Stock shall not be subject to redemption by the Company.
9. Ranking. The Series A Junior Participating Preferred Stock
shall rank junior to all other series of the Corporation's Preferred Stock as
to the payment of dividends and the distribution of assets, unless the terms of
any such series shall provide otherwise, and shall rank senior to the Common
Stock as to such matters.
10. Amendment. At any time that any shares of Series A Junior
Participating Preferred Stock are outstanding, the Restated Certificate of
Incorporation of the Corporation shall not be amended in any manner which would
materially alter or change the powers, preferences or special rights of the
Series A Junior Participating Preferred Stock so as to affect them adversely
without the affirmative vote of the holders of two-thirds of the outstanding
shares of Series A Junior Participating Preferred Stock, voting separately as a
class.
5
<PAGE> 6
11. Fractional Shares. Series A Junior Participating Preferred
Stock may be issued in fractions of a share that shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Junior Participating Preferred Stock.
IN WITNESS WHEREOF, the undersigned has executed this Certificate this
12th day of January, 1996.
GIANT GROUP, LTD.
By: CATHY WOOD
----------------------------------
Cathy Wood
Vice President and Secretary
6
<PAGE> 1
EXHIBIT 10.7
NOTE PURCHASE AGREEMENT
($16,000,000)
THIS NOTE PURCHASE AGREEMENT (this "Agreement") is made and entered
into as of the 29th day of January, 1996 by and between KCC Delaware Company, a
Delaware corporation, and GIANT GROUP, LTD., a Delaware corporation
(collectively, "Seller"), and Rally's Hamburgers, Inc., a Delaware corporation
("Buyer") with reference to the following facts and circumstances:
A. Seller is the owner of certain of the Buyer's outstanding
9-7/8% Senior Notes due June 15, 2000 (the "Notes"). Pursuant to this
Agreement, Buyer desires to purchase from Seller, and Seller desires to sell to
Buyer, $16,000,000 principal amount of such Notes (the "Purchased Notes") upon
and subject to the terms and conditions set forth herein.
NOW, THEREFORE, IN CONSIDERATION of the foregoing, and other valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. Purchase and Sale of Purchased Notes. Upon the terms and
conditions set forth herein, Seller hereby agrees to sell to Buyer, and Buyer
hereby agrees to purchase from Seller, the Purchased Notes. Buyer shall cause
the Purchased Notes to be delivered to the Trustee for cancellation.
2. Purchase Price. The purchase price (the "Purchase Price") for
the Purchased Notes shall be $678.75 per $1,000 principal amount of Purchased
Note, plus accrued and unpaid interest thereon through the Closing Date (as
defined herein) (an aggregate of $11,053,111.11). The Purchase Price shall be
paid to Seller by Buyer on the Closing Date in immediately available funds. At
the Closing (as defined herein), Seller shall deliver (or cause its nominee to
deliver), against payment of the Purchase Price, the Purchased Notes. Delivery
of the Purchased Notes may be effected by physical delivery of the Purchased
Notes, duly endorsed for transfer or accompanied by duly executed separate
assignment, or by book entry to the Buyer's account.
3. Closing. The consummation of the purchase and sale of the
Purchased Notes (the "Closing") shall take place at the offices of the Seller,
or at such other location as the parties may mutually agree, as of January 29,
1996, or on such other date and time as may be fixed by mutual agreement of the
parties (the "Closing Date").
<PAGE> 2
4. Representations and Warranties of Seller. Seller hereby
represents and warrants to Buyer as follows:
a. TITLE TO PURCHASED NOTES. Seller owns the Purchased
Notes free and clear of any liens, pledges, encumbrances, charges, agreements
or claims.
b. CORPORATE POWER AND AUTHORITY. Seller has the
corporate power and authority to execute and deliver this Agreement and to
perform its obligations contemplated hereby.
c. ENFORCEABLE AGREEMENT. This Agreement has been duly
authorized, executed and delivered and constitutes the legal, valid and binding
obligation of Seller, enforceable in accordance with its terms, except to the
extent that enforceability may be limited by applicable bankruptcy, insolvency
or other laws affecting the enforcement of creditors' rights generally or by
general principles of equity.
5. Representations and Warranties of Buyer. Buyer hereby
represents and warrants to Seller as follows:
a. CORPORATE POWER AND AUTHORITY. Buyer has the
corporate power and authority to execute and deliver this Agreement and to
perform its obligations contemplated hereby.
b. ENFORCEABLE AGREEMENT. This Agreement has been duly
authorized, executed and delivered and constitutes the legal, valid and binding
obligation of Buyer, enforceable in accordance with its terms, except to the
extent that enforceability may be limited by applicable bankruptcy, insolvency
or other laws affecting the enforcement of creditors' rights generally or by
general principles of equity.
c. PURCHASE OF PURCHASED NOTES. Buyer agrees that it
will not sell, dispose or otherwise transfer any Purchased Notes in violation
of the Securities Act of 1933, as amended, or applicable state securities laws.
d. COMPLIANCE. In connection with the
transactions provided for in this Agreement, Buyer has complied with its
articles of incorporation, by-laws, the Indenture dated as of March 1, 1993
relating to the Notes, and all other agreements of Buyer, to the extent
applicable.
6. Closing Costs. Each party hereto shall pay its own attorneys'
and other fees incurred in connection with the transactions contemplated
hereby.
2
<PAGE> 3
7. Miscellaneous.
a. NOTICES. Any notice or other communication required or
permitted hereunder shall be in writing and shall be either delivered in person
or sent by commercial courier service or United States mail, registered or
certified mail, postage prepaid, return receipt requested, and addressed as
follows:
Seller: KCC Delaware Company
150 El Camino Drive, Suite 303
Beverly Hills, California 90212
Attn: Ms. Cathy L. Wood
and
GIANT GROUP, LTD.
150 El Camino Drive, Suite 303
Beverly Hills, California 90212
Attn: Ms. Cathy L. Wood
Buyer: Rally's Hamburgers, Inc.
10002 Shelbyville Road, Suite 150
Louisville, Kentucky 40223
Attn: Mr. Michael E. Foss
or such other address as either party may from time to time specify in writing
to the other in the manner aforesaid. If personally delivered, such notices or
other communications shall be deemed delivered upon delivery. If sent by
commercial courier service or United States mail, registered or certified mail,
postage prepaid, return receipt requested, such notices or other communications
shall be deemed delivered upon delivery or refusal to accept delivery as
indicated on the return receipt.
b. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns.
c. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California, without regard to
conflict of laws principles.
d. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, and all of which
together shall comprise one and the same instrument.
e. CAPTIONS AND HEADINGS. The captions and headings of Sections
contained herein are for convenience of reference only.
3
<PAGE> 4
f. FURTHER ASSURANCES. The parties hereto agree to take such further
actions and execute such further instruments as may be reasonably necessary in
connection with the consummation of the transactions contemplated hereby.
g. AUTHORITY. The parties signing below represent they have the
requisite power and authority to bind the entity on whose behalf they are
signing.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
RALLY'S HAMBURGERS, INC.,
a Delaware corporation
By: MICHAEL E. FOSS
-----------------------------------
KCC DELAWARE COMPANY,
a Delaware corporation
By: CATHY L. WOOD
-----------------------------------
GIANT GROUP, LTD.,
a Delaware corporation
By: CATHY L. WOOD
-----------------------------------
5
<PAGE> 1
EXHIBIT 10.8
NOTE PURCHASE AGREEMENT
($6,000,000)
THIS NOTE PURCHASE AGREEMENT (this "Agreement") is made and entered
into as of the 29th day of January, 1996 by and between KCC Delaware Company, a
Delaware corporation, and GIANT GROUP, LTD., a Delaware corporation
(collectively, "Seller"), and Rally's Hamburgers, Inc., a Delaware corporation
("Buyer") with reference to the following facts and circumstances:
A. Seller is the owner of certain of the Buyer's outstanding
9-7/8% Senior Notes due June 15, 2000 (the "Notes"). Pursuant to this
Agreement, Buyer desires to purchase from Seller, and Seller desires to sell to
Buyer, $6,000,000 principal amount of such Notes (the "Purchased Notes") upon
and subject to the terms and conditions set forth herein.
NOW, THEREFORE, IN CONSIDERATION of the foregoing, and other valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. Purchase and Sale of Purchased Notes. Upon the terms and
conditions set forth herein, Seller hereby agrees to sell to Buyer, and Buyer
hereby agrees to purchase from Seller, the Purchased Notes. Buyer shall cause
the Purchased Notes to be delivered to the Trustee for cancellation.
2. Purchase Price. The purchase price (the "Purchase Price") for
the Purchased Notes shall be $678.75 per $1,000 principal amount of Purchased
Note, plus accrued and unpaid interest thereon through the Closing Date) (as
defined herein) (an aggregate of $4,144,916.67). The Purchase Price shall be
paid to Seller by Buyer on the Closing Date by delivery to Seller of Buyer's
Short-Term Note in the amount of the Purchase Price, in the form of Exhibit A
hereto (the "Short-Term Note"). At the Closing (as defined herein), Seller
shall deliver (or cause its nominee to deliver), against delivery of the
Short-Term Note, the Purchased Notes. Delivery of the Purchased Notes may be
effected by physical delivery of the Purchased Notes, duly endorsed for
transfer or accompanied by duly executed separate assignment, or by book entry
to the Buyer's account.
3. Closing. The consummation of the purchase and sale of the
Purchased Notes (the "Closing") shall take places at the offices of the Seller,
or at such other location as the parties may mutually agree, at 10:00 a.m. as
of January 29, 1996, or on such other date and time as may be fixed by mutual
agreement of the parties (the "Closing Date").
<PAGE> 2
4. Representations and Warranties of Seller. Seller hereby
represents and warrants to Buyer as follows:
a. TITLE TO PURCHASED NOTES. Seller owns the Purchased
Notes free and clear of any liens, pledges, encumbrances, charges, agreements
or claims.
b. CORPORATE POWER AND AUTHORITY. Seller has the
corporate power and authority to execute and deliver this Agreement and to
perform its obligations contemplated hereby.
c. ENFORCEABLE AGREEMENT. This Agreement has been duly
authorized, executed and delivered and constitutes the legal, valid and binding
obligation of Seller, enforceable in accordance with its terms, except to the
extent that enforceability may be limited by applicable bankruptcy, insolvency
or other laws affecting the enforcement of creditors' rights generally or by
general principles of equity.
5. Representations and Warranties of Buyer. Buyer hereby
represents and warrants to Seller as follows:
a. CORPORATE POWER AND AUTHORITY. Buyer has the
corporate power and authority to execute and deliver this Agreement and the
Short-Term Note and to perform its obligations contemplated hereby.
b. ENFORCEABLE AGREEMENT. Each of this Agreement and
the Short-Term Note has been duly authorized, executed and delivered and
constitutes the legal, valid and binding obligation of Buyer, enforceable in
accordance with its terms, except to the extent that enforceability may be
limited by applicable bankruptcy, insolvency or other laws affecting the
enforcement of creditors' rights generally or by general principles of equity.
c. PURCHASE OF PURCHASED NOTES. Buyer agrees that it
will not sell, dispose or otherwise transfer any Purchased Notes in violation
of the Securities Act of 1933, as amended, or applicable state securities laws.
d. COMPLIANCE. In connection with the
transactions provided for in this Agreement, Buyer has complied with its
articles of incorporation, by-laws, and the Indenture dated as of March 1, 1993
relating to the Notes, and all other agreements of Buyer, to the extent
applicable.
6. Closing Costs. Each party hereto shall pay its own attorneys'
and other fees incurred in connection with the transactions contemplated
hereby.
2
<PAGE> 3
7. Miscellaneous.
a. NOTICES. Any notice or other communication required or
permitted hereunder shall be in writing and shall be either delivered in person
or sent by commercial courier service or United States mail, registered or
certified mail, postage prepaid, return receipt requested, and addressed as
follows:
Seller: KCC Delaware Company
150 El Camino Drive, Suite 303
Beverly Hills, California 90212
Attn: Ms. Cathy L. Wood
and
GIANT GROUP, LTD.
150 El Camino Drive, Suite 303
Beverly Hills, California 90212
Attn: Ms. Cathy L. Wood
Buyer: Rally's Hamburgers, Inc.
10002 Shelbyville Road, Suite 150
Louisville, Kentucky 40223
Attn: Mr. Michael E. Foss
or such other address as either party may from time to time specify in writing
to the other in the manner aforesaid. If personally delivered, such notices or
other communications shall be deemed delivered upon delivery. If sent by
commercial courier service or United States mail, registered or certified mail,
postage prepaid, return receipt requested, such notices or other communications
shall be deemed delivered upon delivery or refusal to accept delivery as
indicated on the return receipt.
b. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns.
c. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California, without regard to
conflict of laws principles.
d. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, and all of which
together shall comprise one and the same instrument.
e. CAPTIONS AND HEADINGS. The captions and headings of Sections
contained herein are for convenience of reference only.
3
<PAGE> 4
f. FURTHER ASSURANCES. The parties hereto agree to take such further
actions and execute such further instruments as may be reasonably necessary in
connection with the consummation of the transactions contemplated hereby.
g. AUTHORITY. The parties signing below represent they have the
requisite power and authority to bind the entity on whose behalf they are
signing.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
RALLY'S HAMBURGERS, INC.,
a Delaware corporation
By: MICHAEL E. FOSS
-----------------------------------
KCC DELAWARE COMPANY,
a Delaware corporation
By: CATHY L. WOOD
-----------------------------------
GIANT GROUP, LTD.,
a Delaware corporation
By: CATHY L. WOOD
-----------------------------------
5
<PAGE> 1
EXHIBIT 10.9
SHORT-TERM PROMISSORY NOTE
$4,144,916.67 JANUARY 29, 1996
LOUISVILLE, KENTUCKY
FOR VALUE RECEIVED, Rally's Hamburgers, Inc., a Delaware corporation
("Maker"), promises to pay to the order of KCC Delaware Company, a Delaware
corporation, and GIANT GROUP, LTD., a Delawre corporation, at 150 El Camino
Drive, Suite 303, Beverly Hills, California 90212 ("Payee"), or at such other
place as may be designated by Payee, the principal sum of Four Million One
Hundred and Forty-Four Thousand Nine Hundred and Sixteen Dollars and Sixty
Seven Cents ($4,144,916.67), together with interest on the unpaid principal
balance hereof from time to time outstanding at the Reference Rate (as
hereinafter defined) in effect from time to time, in lawful money of the United
States. As used herein, the term "Reference Rate" shall mean and refer to the
highest publicly announced "reference" rate of interest of Bank of America
National Trust and Savings Association ("Bank of America") (or if such practice
of publicly announcing a "reference rate" is discontinued by Bank of America,
the highest rate of interest charged by Bank of America for commerical loans of
short term maturities to its most credit-worthy large corporate borrowers).
Each change in the Reference Rate shall change the rate at which interest
accrues hereunder, effective as of the date of such change in the Reference
Rate. Interest shall be calculated on the basis of a 360-day year and the
actual number of days elapsed in the period during which it accrues, in
accordance with the terms and conditions set forth below.
Principal and interest on this Note shall be paid as follows:
a. One Million Seventy Two Thousand Five Hundred Dollars
($1,072,500), together with all accrued and unpaid interest
hereon, shall be due and payable on April 1, 1996.
b. One Million Dollars ($1,000,000), together with all accrued
and unpaid interest hereon, shall be due and payable on July
1, 1996.
c. The remaining principal balance hereof, together with all
accrued and unpaid interest hereon, shall be due and payable
on September 30, 1996.
If any payment of principal or interest hereunder is not paid when
due: (a) such amount shall thereafter bear interest at
<PAGE> 2
a per annum rate equal to four percent (4%) above the rate otherwise applicable
under this Note (the "Default Rate"); and (b) the Payee may, on written notice
to Maker, declare the entire outstanding principal balance hereof, together
with all accrued and unpaid interest hereon (the "Acceleration Amount") shall
be immediately due and payable and the Default Rate shall thereafter apply to
the entire Acceleration Amount.
Unless expressly indicated to the contrary herein, all payments
received on account of this Note shall be applied first to accrued interest,
then to charges and fees payable hereunder and then to the unpaid principal
balance hereof.
This Note is made pursuant to that certain Note Purchase Agreement
dated as of January 29, 1996, by and between Maker and Payee.
Maker and any guarantors or endorsers hereof hereby waive diligence,
presentment, protest and demand, and notice of protest, notice of demand,
notice of dishonor and notice of nonpayment of this Note, and specifically
consent to and waive notice of any renewals or extensions of this Note. Maker
expressly waives the pleadings of any statute of limitations as a defense to
any demand hereunder against Maker.
Notwithstanding anything in this Note to the contrary, the obligations
of Maker under this Note shall be absolute and Maker expressly and
unconditionally waives any and all rights to offset, deduct or withhold any
payments or charges due under this Note for any reason whatsoever.
This Note may be prepaid in whole or in part at any time, at the
option of Maker, without premium or penalty.
Notwithstanding anything to the contrary contained in this Note, no
interest shall accrue or be payable hereunder that is in excess of the maximum
amount permitted under the applicable law relating to usury. Any interest that
is in excess of the maximum, amount permitted under the applicable law relating
to usury shall be applied to reduce the outstanding principal balance hereof
and shall be deemed to represent a prepayment of principal hereunder.
The acceptance by any holder of this Note of any payment that is less
than the total of all amounts due and payable at the time of such payment shall
not constitute a waiver of such holder's rights or remedies at the time or at
any subsequent time, without the express written consent of such holder.
If this Note or any part of the indebtedness represented hereby shall
not be paid as aforesaid, then the holder may place this Note or any part of
the indebtedness represented hereby in the hands of any attorney for
collection, and Maker agrees to pay, in addition to all other amounts due
hereunder, all costs of
2
<PAGE> 3
collection, including, without limitation, reasonable attorney's fees, whether
or not suit be brought.
This Note may be changed, modified or discharged (other than through
payment in full) only by an agreement in writing signed by the party against
whom enforcement of any waiver, change, modification or discharge is sought.
This Note shall be construed and enforced in accordance with, and
governed by, the laws of the State of California.
The times for the performance of any obligation hereunder shall be
strictly construed, time being of the essence. Whenever any payment to be made
hereunder shall be stated to be due on a day that is not a Business Day (as
hereinafter defined), the payment shall be made on the next day succeeding
Business Day and such extension of time shall be included in the computation of
the payment of interest hereunder. As used herein, the term "Business Day"
means any day excluding Saturday, Sunday and any day that is a legal holiday
under federal law or the laws of the State of California.
If any provisions of this Note, or the application thereof to any
circumstance, is found to be unenforceable, invalid or illegal, such provision
shall be deemed deleted from this Note or not applicable to such circumstance,
as the case may be, and the remainder of this Note shall not be affected or
impaired thereby.
The terms of this Note apply to, inure to the benefit of, and bind all
parties hereto, their successors and assigns.
RALLY'S HAMBURGERS, INC.,
a Delaware corporation
By: MICHAEL E. FOSS
------------------------------------
Name: Michael E. Foss
Title: SVP & Chief Financial Officer
3
<PAGE> 1
EXHIBIT 10.10
PROMISSORY NOTE
FEBRUARY 1, 1996
LOUISVILLE, KENTUCKY
FOR VALUE RECEIVED, Rally's Hamburgers, Inc., a Delaware corporation
("Maker"), promises to pay to the order of GIANT GROUP, LTD., a Delaware
corporation, at 150 El Camino Drive, Suite 303, Beverly Hills, California 90212
("Payee"), or at such other place as may be designated by Payee, the principal
sum of Two Million Dollars ($2,000,000.00), or such lesser amount as may be
advanced hereunder, together with interest on the unpaid principal balance
hereof from time to time outstanding at the Reference Rate (as hereinafter
defined) in effect from time to time, in lawful money of the United States. As
used herein, the term "Reference Rate" shall mean and refer to the highest
publicly announced "reference" rate of interest of Bank of America National
Trust and Savings Association ("Bank of America") (or if such practice of
publicly announcing a "reference rate" is discontinued by Bank of America, the
highest rate of interest charged by Bank of America for commercial loans of
short term maturities to its most credit-worthy large corporate borrowers).
Each change in the Reference Rate shall change the rate at which interest
accrues hereunder, effective as of the date of such change in the Reference
Rate. Interest shall be calculated on the basis of a 360-day year and the
actual number of days elapsed in the period during which it accrues, in
accordance with the terms and conditions set forth below.
Upon each advance of principal by Payee, Payee shall make a notation
of such advance onSchedule A attached hereto; provided, however, that Payee
shall not be obligated to make any further advances of principal hereunder.
Accrued interest on this Note shall be payable monthly and shall be
due and payable on the fifth (5th) day following the end of each month. All
outstanding principal of this Note shall be due and payable on the first
anniversary of the date hereof; provided however, that the maturity of this
Note shall automatically be extended until the next anniversary one or more
times unless Payee shall notify Maker of its intent not to extend the maturity
of this Note at least ninety (90) days prior to the applicable anniversary of
the date hereof.
If any payment of principal or interest hereunder is not paid when
due: (a) such amount shall thereafter bear interest at a per annum rate equal
to four percent (4%) above the rate otherwise applicable under this Note (the
"Default Rate"); and (b) the Payee may, on written notice to Maker, declare the
entire outstanding principal balance hereof, together with all accrued and
unpaid interest hereon (the "Acceleration Amount") shall be immediately due and
payable and the Default Rate shall thereafter apply to the entire Acceleration
Amount.
<PAGE> 2
Unless expressly indicated to the contrary herein, all payments
received on account of this Note shall be applied first to accrued interest,
then to charges and fees payable hereunder and then to the unpaid principal
balance hereof.
Maker and any guarantors or endorsers hereof hereby waive diligence,
presentment, protest and demand, and notice of protest, notice of demand,
notice of dishonor and notice of nonpayment of this Note, and specifically
consent to and waive notice of any renewals or extensions of this Note. Maker
expressly waives the pleadings of any statute of limitations as a defense to
any demand hereunder against Maker.
Notwithstanding anything in this Note to the contrary, the obligations
of Maker under this Note shall be absolute and Maker expressly and
unconditionally waives any and all rights to offset, deduct or withhold any
payments or charges due under this Note for any reason whatsoever.
This Note may be prepaid in whole or in part at any time, at the
option of Maker, without premium or penalty.
Notwithstanding anything to the contrary contained in this Note, no
interest shall accrue or be payable hereunder that is in excess of the maximum
amount permitted under the applicable law relating to usury. Any interest that
is in excess of the maximum, amount permitted under the applicable law relating
to usury shall be applied to reduce the outstanding principal balance hereof
and shall be deemed to represent a prepayment of principal hereunder.
The acceptance by any holder of this Note of any payment that is less
than the total of all amounts due and payable at the time of such payment shall
not constitute a waiver of such holder's rights or remedies at the time or at
any subsequent time, without the express written consent of such holder.
If this Note or any part of the indebtedness represented hereby shall
not be paid as aforesaid, then the holder may place this Note or any part of
the indebtedness represented hereby in the hands of any attorney for
collection, and Maker agrees to pay, in addition to all other amounts due
hereunder, all costs of collection, including, without limitation, reasonable
attorney's fees, whether or not suit be brought.
This Note may be changed, modified or discharged (other than through
payment in full) only by an agreement in writing signed by the party against
whom enforcement of any waiver, change, modification or discharge is sought.
This Note shall be construed and enforced in accordance with, and
governed by, the laws of the State of California.
2
<PAGE> 3
The times for the performance of any obligation hereunder shall be
strictly construed, time being of the essence. Whenever any payment to be made
hereunder shall be stated to be due on a day that is not a Business Day (as
hereinafter defined), the payment shall be made on the next day succeeding
Business Day and such extension of time shall be included in the computation of
the payment of interest hereunder. As used herein, the term "Business Day"
means any day excluding Saturday, Sunday and any day that is a legal holiday
under federal law or the laws of the State of California.
If any provisions of this Note, or the application thereof to any
circumstance, is found to be unenforceable, invalid or illegal, such provision
shall be deemed deleted from this Note or not applicable to such circumstance,
as the case may be, and the remainder of this Note shall not be affected or
impaired thereby.
The terms of this Note apply to, inure to the benefit of, and bind all
parties hereto, their successors and assigns.
RALLY'S HAMBURGERS, INC.,
a Delaware corporation
By: MICHAEL E. FOSS
------------------------------------
Name: Michael E. Foss
Title: SVP & Chief Financial Officer
3
<PAGE> 4
SCHEDULE A
<TABLE>
<CAPTION>
Date Principal Amount Advanced Principal Balance
---- ------------------------- -----------------
<S> <C> <C>
February 1, 1996 $1,600,000.00 $1,600,000.00
</TABLE>
4
<PAGE> 1
EXHIBIT 10.11
LETTER OF CREDIT REIMBURSEMENT AGREEMENT
This Letter of Credit Reimbursement Agreement (the "Agreement") dated
as of February 1, 1996 is by and between GIANT GROUP, LTD., a Delaware
corporation ("GIANT"), and Rally's Hamburgers, Inc., a Delaware corporation
("Rally's").
Recital
WHEREAS, GIANT has agreed to provide letters of credit (the "Letters
of Credit") for the benefit of Rally's in the approximate amount of $795,000.
The Letters of Credit will replace letters of credit provided by Rally's as
security for certain workers' compensation and other claims.
Agreement
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt of which is hereby acknowledged, the
parties hereby agree as follows:
1. Rally's shall, upon demand, reimburse GIANT for all costs and
expenses incurred by GIANT in connection with providing and maintaining the
Letters of Credit.
2. In the event that a draw shall be made upon the Letters of
Credit, Rally's shall, upon demand, reimburse GIANT for all amounts drawn
under the Letters of Credit.
3. Any notice or other communication required or permitted
hereunder shall be in writing and shall be either delivered in person or sent
by commercial courier service or United States mail, registered or certified
mail, postage prepaid, return receipt requested, and addressed as follows:
If to GIANT: GIANT GROUP, LTD.
150 El Camino Drive, Suite 303
Beverly Hills, California 90212
Attn: Ms. Cathy Wood
If to Rally's: Rally's Hamburgers, Inc.
10002 Shelbyville Road, Suite 150
Louisville, Kentucky 40223
Attn: Mr. Michael E. Foss
or such other address as either party may from time to time specify in writing
to the other in the manner aforesaid. If personally delivered, such notices or
other communications shall be deemed delivered upon delivery. If sent by
commercial courier service or United States mail, registered or certified mail,
postage prepaid, return receipt
<PAGE> 2
requested, such notices or other communications shall be deemed delivered upon
delivery or refusal to accept delivery as indicated on the return receipt.
4. This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns.
5. This Agreement shall be governed by and construed in accordance
with the laws of the State of California, without regard to conflict of laws
principles.
6. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original, and all of which together shall
comprise one and the same instrument.
7. The parties hereto agree to take such further actions and
execute such further instruments as may be reasonably necessary in connection
with the consummation of the transactions contemplated hereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
RALLY'S HAMBURGERS, INC.
a Delaware corporation
By: MICHAEL E. FOSS
____________________________
Name: Michael E. Foss
_______________________
Title: SVP & CFO
______________________
GIANT GROUP, LTD.,
a Delaware corporation
By: CATHY L. WOOD
____________________________
Name: Cathy L. Wood
_______________________
Title: CFO
______________________
2
<PAGE> 1
EXHIBIT 10.12
International Trade Bank #22621
333 South Beaudry Avenue, 19th Floor
Los Angeles, California 90017 February 23, 1996
Irrevocable Letter of Credit No. LASB-227886
Beneficiary;
Lumbermen's Underwriting Alliance
2501 N. Military Trail
Boca Raton, Florida 33431
Amount: USD $500,000.00 (Five Hundred Thousand and 00/100 United States
Dollars)
Expiry Date: February 28, 1997 at this office
We hereby establish our Clean Irrevocable Letter of Credit No. LASB-227886 in
your favor for the account of GIANT GROUP, LTD. issued for the benefit for:
Rally's Hamburgers, Inc. 10002 Shelbyville Road, Louisville, KY 40223 for
payment by your draft(s) at sight drawn on Bank of America NT & SA, 333 S.
Beaudry Ave, 19th Floor, Los Angeles, CA 90017.
This Letter of Credit will become operative upon receipt of notification from
GIANT GROUP, LTD. By Bank of America NT & SA that Letter of Credit No. 14199
from PNC Bank, Kentucky has been canceled.
This Letter of Credit shall be automatically extended without amendment for an
additional period of one year on FEBRUARY 28, 1997 to FEBRUARY 28, 1998,
unless at least forty five days prior to the present expiration date, we notify
you in writing by registered mail, return receipt requested or overnight
courier at the above address that this Letter of Credit shall not be extended
for any additional periods.
This Letter of Credit must accompany any drawing hereunder for endorsement of
the drawing and will be returned to the Beneficiary unless it is fully
utilized.
We hereby agree with the Beneficiary that the draft drawn under and in
compliance with the terms of this Letter of Credit will be duly honored upon
presentation, as specified herein.
This Letter of Credit is subject to the Uniform Customs and Practice for
Documentary Credits (1993 Revision) International Chamber of Commerce
Publications No. 500.
**************************************
Cheryl Jefferson Christine Purugganan
------------------------ ------------------------
Authorized Signature Authorized Signature
<PAGE> 2
International Trade Bank #22621
333 South Beaudry Avenue, 19th Floor
Los Angeles, California 90017
February 23, 1996
IRREVOCABLE LETTER OF CREDIT NO. LASB-227885
Beneficiary:
- ------------
United Pacific Insurance Company
4 Penn Central Plaza
Philadelphia, PA 19103
Attn: Surety Dept.
Amount: USD $293,448.00 (Two Hundred Ninety Three Thousand Four Hundred
- ------- Forty Eight and 00/100 U.S. Dollars)
Expiry Date: February 28, 1997 at this office
- ------------
We hereby establish our Clean Irrevocable Letter of Credit No. LASB-227885 in
your favor for the account of Giant Group, Ltd. issued for the benefit for:
Rally's Hamburgers, Inc. 10002 Shelbyville Road, Louisville, KY 40223 for
payment by your draft(s) at sight drawn on Bank of America NT & SA, 333 S.
Beaudry Ave., 19th Floor, Los Angeles, CA 90017.
This Letter of Credit will become operative upon receipt of notification from
Giant Group, Ltd. by Bank of America NT & SA that Letter of Credit No. 14191
from PNC Bank, Kentucky has been cancelled.
This Letter of Credit shall be automatically extended without amendment for an
additional period of one year on February 28, 1997 to February 28, 1998, unless
at least forty five days prior to the present expiration date, we notify you in
writing by registered mail, return receipt requested or overnight courier at
the above address that this Letter of Credit shall not be extended for any
additional periods.
This Letter of Credit must accompany any drawing hereunder for endorsement of
the drawing and will be returned to the Beneficiary unless it is fully
utilized.
We herebvy agree with the Beneficiary that the draft drawn under and in
compliance with the terms of this Letter of Credit will be duly honored upon
presentation, as specified herein.
This Letter of Credit is subject to the Uniform Customs and Practice for
Documentary Credits (1993 Revision) International Chamber of Commerce
Publication No. 500.
******************
/s/ CHERYL JEFFERSON /s/ CRISTINE PURUGGANAN
--------------------------- ----------------------------
Authorized Countersignature Authorized Signature
<PAGE> 1
EXHIBIT 10.13
International Trade Bank #22621
333 S. Beaudry Ave., 19th Floor
Los Angeles, CA 90017
AMENDMENT TO OUR IRREVOCABLE LETTER OF CREDIT NO. LASB-227885
Date: March 18, 1996
Beneficiary:
- ------------
United Pacific Insurance Company
4 Penn Central Plaza
Philadelphia, PA 19103
Attn: Surety Dept.
Applicant:
- ----------
GIANT GROUP, LTD. issued for benefit for:
Rally's Hamburgers, Inc.
10002 Shelby Road
Louisville, KY 40223
This is amendment number -1- and is to be considered as part of the above
mentioned Letter of Credit and must be attached thereto.
At the request of the applicant, we advise you that the above mentioned Letter
of Credit has been amended as follows:
1. Letter of Credit deleted in its entirety and replaced with the following:
"United Pacific Insurance Company
4 Penn Central Plaza
Philadelphia, PA 19103
Attn: Surety Dept.
Amount: US$ 293,448.00 (Two Hundred Ninety Three Thousand Four Hundred
Forty Eight and 00/100 United States Dollars)
Expiry Date: February 28, 1997 at this office
Gentlemen:
We hereby establish our Clean Irrevocable Letter of Credit No. LASB-227885 in
your favor for the account of GIANT GROUP, LTD. issued for benefit for: Rally's
Hamburgers, Inc. 10002 Shelbyville Road Louisville, KY 40223 for payment by
your sight draft(s) at sight drawn on Bank of America NT & SA 333 South Beaudry
Ave., 19th Floor, Los Angeles, CA 90017.
We warrant to you that all your drafts under this Clean Irrevocable Letter of
Credit will be duly honored upon presentation of your draft on us at 333 South
Beaudry Avenue, 19th Floor, Los Angeles, CA 90017 on or before the expiration
date or before any automatically extended date as set forth below.
Except as stated herein this Clean Irrevocable Letter of Credit is not subject
to any condition or qualification and is our individual obligation which is in
no way contingent upon reimbursement.
Furthermore, this Clean Irrevocable Letter of Credit shall not be subject to
amendment except by written acknowledgment and acceptance of any proposed
amendment by an officer of the beneficiary.
This Clean Irrevocable Letter of Credit is effective February 23, 1996 and
expires on February 28, 1997, but will be automatically extended without
amendment for successive one year periods from the current expiration date and
any future expiration dates unless at least 45 days prior to expiration date,
we notify you by registered mail, return receipt requested or overnight courier
service that we elect not to renew for such additional one year periods. Such
notification shall be to the attention of the Bond Department at the above
address.
This Letter of Credit is subject to the Uniform Customs and Practice for
Documentary Credits 1993 Revision, International Chamber of Commerce
Publication No. 500."
All other terms and conditions remain unchanged.
/s/ CHERYL JEFFERSON /s/ CRISTINE PURUGGANAN
--------------------------- -----------------------------
Authorized Countersignature Authorized Signature
<PAGE> 1
EXHIBIT 11
GIANT GROUP, LTD.
COMPUTATION OF PER SHARE EARNINGS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net income (loss) ($22,332) $20,471 ($2,639)
Interest expense reduction,
net of tax (2) - 342 -
-------- ------- -------
Income (loss) attributable
to common shares ($22,332) $20,813 ($2,639)
======== ======= =======
Weighted average number
of common shares (1) (2) 5,110,000 6,463,000 5,180,000
Primary earnings (loss)
per common share ($4.37) $ 3.22 ($0.51)
</TABLE>
(1) Assumes issuance of common shares for exercise of outstanding common stock
options in 1994.
(2) Reduction of interest expense, net of tax relates to assumed retirement of
debt with option exercise proceeds in excess of that amount required to
retire twenty percent of the Company's outstanding stock in 1994.
<PAGE> 1
EXHIBIT 21
GIANT GROUP, LTD.
SUBSIDIARY AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
CORPORATION STATE OF INCORPORATION OWNERSHIP
- ----------- ---------------------- ---------
<S> <C> <C>
KCC Delaware Company, Inc. Delaware 100%
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated March 6, 1996, on the Rally's Hamburgers, Inc., and subsidiaries'
consolidated financial statements included in this Form 10-K, into GIANT
GROUP, LTD.'s previously filed Registration Statement File No. 33-16848.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
March 25, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated March 25, 1996 on the GIANT GROUP, LTD. and subsidiary's
consolidated financial statements for the year ended December 31, 1995,
included in this Form 10-K, into GIANT GROUP, LTD.'s previously filed
Registration Statement File No. 33-16848.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 25, 1996
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference into the Registration Statement of
GIANT GROUP, LTD. on Form S-8 (File No. 33-16848) of our report dated March 10,
1995, on our audits of the consolidated financial statements of GIANT GROUP,
LTD. as of December 31, 1994 and for each of the two years in the period ended
December 31, 1994, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
March 27, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 16,991
<SECURITIES> 25,650
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 44,971
<PP&E> 5,068
<DEPRECIATION> 1,801
<TOTAL-ASSETS> 51,681
<CURRENT-LIABILITIES> 5,846
<BONDS> 0
<COMMON> 69
0
0
<OTHER-SE> 45,076
<TOTAL-LIABILITY-AND-EQUITY> 51,681
<SALES> 0
<TOTAL-REVENUES> 4,096
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,491
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 149
<INCOME-PRETAX> (22,618)
<INCOME-TAX> (286)
<INCOME-CONTINUING> (22,332)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,332)
<EPS-PRIMARY> (4.37)
<EPS-DILUTED> 0
</TABLE>