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
For fiscal year ended December 31, 1996
GIANT GROUP, LTD.
9000 Sunset Boulevard, 16th Floor, Los Angeles, California 90069
Registrant's telephone number (310) 273-5678
Commission File Number 1-4323
I.R.S. Employer Identification Number 23-0622690
State of Incorporation Delaware
Securities registered pursuant to 12(b) of the Act:
Title of Class Name of Each Exchange on Which Registered
- -------------- -----------------------------------------
Common Stock, New York Stock Exchange
$.01 Par Value
Securities registered pursuant to 12(g) of the Act: None
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. [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 24, 1997, 3,210,655 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 24, 1997 was $14.5 million.
Exhibit Index located at page 42 herein.
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TABLE OF CONTENTS
PART I
Page No.
Item 1. Business. 3
Item 2. Properties. 11
Item 3. Legal proceedings. 12
Item 4. Submission of matters to a vote
of security holders. 14
PART II
Item 5. Market for the registrant's common
equity and related stockholder matters. 14
Item 6. Selected financial data. 15
Item 7. Management's discussion and analysis
of financial condition and results
of operations. 16
Item 8. Financial statements and supplementary
data. 20
Item 9. Changes in and disagreements with
accountants on accounting and financial
disclosure. 42
PART III
Item 10. Directors and executive officers of
the registrant. 42
Item 11. Executive compensation. 42
Item 12. Security ownership of certain beneficial
owners and management. 42
Item 13. Certain relationships and related
transactions. 42
PART IV
Item 14. Exhibits, financial statement schedules
and reports on Form 8- K. 42
<page-3>
PART I
ITEM 1. BUSINESS.
NARRATIVE DESCRIPTION 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 MARINE GROUP, LTD. d/b/a THE OCEAN GROUP,
LUXURY YACHT CO-OWNERSHIP PROGRAM
FORMATION AND ORGANIZATION OF COMPANY
GIANT MARINE, d/b/a The Ocean Group ("GIANT MARINE"), is
a corporation organized under the laws of the state of Delaware
in November 1996. GIANT MARINE is a wholly-owned subsidiary of
the Company. GIANT's executive officers and Board of Directors
also serve in the same capacities for GIANT MARINE.
BUSINESS PLAN
ACQUISITION OF YACHTS
GIANT MARINE purchases large ocean cruising yachts for
inclusion in its Luxury Yacht Co-Ownership Program. Once
purchased or acquired, the yachts are completely scrutinized to
determine the necessary upgrades needed to bring the yachts up to
The Ocean Group's Luxury Yacht Co-Ownership Program's standards.
This process includes developing a scope of work that covers
every item from engine upgrade, interior renovations, exterior
upgrade, and replacement of equipment, including the possible
replacement of navigational and communication equipment. It also
includes upgrades of china, silver, linens and other accessories.
This scope of work is then completed, resulting in a yacht which
is newly designed and furnished to the highest standards of the
yachting community.
The Ocean Group then markets and sells these yachts in
its Co-Ownership program. Although no assurances can be given,
The Ocean Group's business plan is to sell these yachts at a
profit after recouping all costs and expenses relating to the
purchase and upgrade, and thereafter to derive revenues from the
operation and maintenance of the yachts on behalf of the owners.
CO-OWNERSHIP PROGRAM
Prior to The Ocean Group, individuals or companies, when
purchasing a luxury yacht, would assume 100% of the costs and
expenses of the yacht, even though typically the yacht is
utilized by the owners for only a small fraction of the time. In
addition, the capital outlay and interest costs adds to the
expense burden of owning the yacht. The day-to-day management of
the yacht and crew can be more than a full time job for the solo-
owners and their staff.
The Ocean Group's program offers Co-Ownership in
multiples of one-fourths. The Ocean Group believes its ownership
program will be attractive to buyers because Co-Ownership
represents a more efficient form of ownership for most users,
reducing the capital investment, interest costs, operating costs
and capital outlay for non-routine maintenance up to 75% (since
all costs are shared by co-owners) thus making large yachts more
affordable to the current market of yacht buyers. A critical
element of the marketing plan is The Ocean Group's belief that
its program opens the luxury yacht market to a new group of
buyers, due to the reduced capital outlay, interest carrying cost
and operating costs.
OPERATIONS
The owners contract with The Ocean Group to perform the
day-to-day maintenance and operation of the yachts for a monthly
fee. This includes the following services:
- Day to day operation and support of the vessel
- Inspect, service and test the vessel to keep her in
good operating condition
- Maintain records, logs and other documentation
- Hire, manage and disburse wages and gratuities to the
captain and crew, including applicable taxes, medical
insurance, training costs and employment insurance
related costs
- Investigate all complaints of any co-owner with regard
to performance of any crew members, and replace them if
necessary
- Pay fuel costs for the vessel at times when it is not
being used by a co-owner
- Pay routine costs associated with up to two (2)
transatlantic crossings per year
- Undertake provisioning and scheduling arrangements for
the vessel
- Pay routine maintenance costs
- Pay dockage, customs fees and port taxes at times when
the vessel is not being used by a co-owner
- Pay laundry and dry-cleaning expenses for crew uniforms
and vessel linens
- Pay costs of uniforms for the crew
- Pay communication costs (SATCOM and cellular) at times
when the vessel is not being used by a co-owner
- Pay costs of provisioning for the crew, and other
consumable vessel supplies (except the provisioning
needs of co-owner during a specific usage of the vessel
which remains the co-owner's responsibility)
Under the program, for the first twelve months of
operation, The Ocean Group guarantees the monthly operating costs
for these services. The Ocean Group believes that based on
industry research and investigation, an average yearly operating
expense can be estimated. After the first twelve months of
operation, The Ocean Group has reserved the right to adjust this
fee for the following twelve months. These operating costs will
be adjusted based upon the previous year's experience and a
projection of the next twelve months expenses.
All non-routine maintenance (as determined and defined by
The Ocean Group) will be allocated among the owners according to
their ownership interest percentage and the owner will be
responsible for such cost. While the yachts are being marketed
and until 100% ownership has been sold, The Ocean Group will pay
the cost of operation and maintenance for the unsold interest.
The Ocean Group anticipates that this cost will be recovered upon
the complete sale of the yacht.
In addition to the on-going operating costs, under the
program, owners pay to The Ocean Group a "per day Usage Fee"
while they are actually using the yacht. This Usage Fee will
provide seasonal bonuses and tips for the captain and crew and
additional revenue to The Ocean Group. Each twenty-five percent
owner will be allocated a minimum of six weeks usage and it is,
therefore, to the benefit of The Ocean Group to provide the most
number of useable days possible to the owners.
The Ocean Group has contracted with Bob Saxon Associates,
an established yacht charter and management company in Fort
Lauderdale, Florida, to assist The Ocean Group in the daily
management and maintenance of the yachts. The Ocean Group pays
Bob Saxon an annual fee for its services.
Each yacht has a captain and crew consisting of up to 12
people. The Company is currently developing and managing the
business with existing staff. It is expected that additional
staff will be required in 1997 as the business develops.
YACHT DESCRIPTION, AVAILABILITY AND MARKETING
DESCRIPTION
The Ocean Group has purchased two yachts to date for this
program:
The first yacht that was purchased in October 1996 for
The Ocean Group program was BRAVEHEART. This 163-foot (49.38
meters) 1989 jet-drive motor yacht was started in Sweden by the
Oskarshamn yard and completed at the Hakvoort yard in Holland to
Det Norske Veritas class. It has a cruising speed of 12 knots
and a top speed of 14 knots and a range of 3,900 nautical miles.
BRAVEHEART is currently undergoing a refit at Palmer Johnson's
Savannah shipyard and is being thoroughly updated mechanically,
and receiving a dramatic facelift inside and out to attain a
classical style. This yacht is expected to be available in late
June for sale and use in the Mediterranean this summer.
KAHALANI is a 141-foot (43 meters) oceangoing motor yacht
built in Holland by de Vries Feadship in 1993. This yacht was
purchased in November 1996. KAHALANI cruises at 12 knots and has
a maximum speed of 14 knots. At 11 knots, she has a range of
3,800 nautical miles. The yacht is classed to Lloyd's Maltese
Cross 100A1+LMC. The yacht was given a new exterior look with a
new paint scheme and new fashion plates at Palmer Johnson's
Savannah shipyard in January 1997.
AVAILABILITY
The Ocean Group believes that the success of the program
will be based on its ability to make available luxury yachts of
the highest quality at a fraction of the cost. The Ocean Group
believes that between the yachts generally in the market for sale
and its ability to contract with large luxury yacht builders that
a sufficient supply of yachts will continue to be available for
the program.
PROMOTION AND ADVERTISING
On February 6, 1997, The Ocean Group launched its new
Luxury Yacht Co-Ownership Program in Fort Lauderdale, Florida
with a presentation of the program to the luxury-yacht brokerage
community. The program offers brokers the chance to present
buying opportunities to current yacht owners who can move up to a
larger yacht without increasing (and possibly reducing) their
costs and to attract new yacht owners to the program.
In addition to using the luxury-yacht brokerage community
to promote the Co-Ownership program, The Ocean Group will run
print advertisements in such magazines as YACHTING, SHOWBOATS
INTERNATIONAL, ROBB REPORT, and in newspapers and trade magazines
such as DAILY VARIETY and the WALL STREET JOURNAL. Through both
the brokerage community and direct marketing, The Ocean Group
believes it will attract qualified buyers to the program.
COMPETITION
The competition for the Co-Ownership program is from both
the charter market and the ability of a buyer to purchase 100% of
a yacht in the general market. The Ocean Group believes that the
Co-Ownership program will be an attractive alternative to both
charter and solo-ownership. The Ocean Group believes its program
opens yacht ownership to a wider range of customers than are
currently active in the yachting community. This is due to the
lower investment and expense requirement in the Co-Ownership
program.
In conjunction with the benefit of stepping up to a
larger, more luxurious yacht, The Ocean Group believes it will
attract customers who, prior to the program, would not have
considered the purchase of a yacht due to the financial and
operational burden of solo-ownership. The Ocean Group believes
that Co-Ownership with the benefit of The Ocean Group's yacht
scheduling process and the certainty of "their personal yacht"
being available to them for cruising, has significant advantages
compared to the uncertainty of yacht chartering. Yacht
chartering can result in the unavailability of the requested
yacht and uncertainty of the quality and acceptability of the
crew and yacht.
FINANCING
The Ocean Group will either pay cash or negotiate terms
for each yacht placed into the program. Once the yacht is 100%
sold, all debt on the yacht incurred by The Ocean Group, if any,
will be paid in full. The Ocean Group currently has a $10
million financing commitment on KAHALANI with a major marine
lender who is also willing to finance, under its credit criteria,
potential buyers of the Co-Ownership program.
CONTRACTS
The Co-Ownership program requires the execution of five
separate agreements with each co-owner, which work together to
document the terms of the purchase from The Ocean Group, the
Co-Ownership arrangements among the owners and the maintenance of
the yacht by The Ocean Group. The Purchase Agreement provides
for a buy-back by The Ocean Group of the Co-Ownership interest,
upon the written request of the owner, after the first 24 months
of ownership based on the yacht's fair market value less a 10%
remarketing fee.
RISKS
The Company believes that there are certain factors that
affect the purchase of luxury yachts. Owners will primarily
consist of companies and individuals. Their decision to purchase
an interest in a yacht will be affected by, among other things,
the economy's effect on their business and the fluctuation of
interest rates. However, because of the lower cash outflow
required for the Co-Ownership purchase as compared to solo-
ownership, the importance of these factors should be mitigated.
In recent years, the Arab oil embargo, the United States luxury
tax and the Gulf war have slowed the interest in the ownership of
the luxury yachts. Because this is a new program, The Ocean
Group is unable to determine if there is sufficient interest in
Co-Ownership of luxury yachts to fully develop the business.
Since The Ocean Group has no operating performance or sales
experience, it cannot determine whether the program will prove to
be viable or profitable. If the market does not develop as
anticipated, The Ocean Group may sell the yachts to recoup its
costs. The Ocean Group can not be certain of its ability to
recover all the costs of the program or the yacht investments.
The total start-up, development and marketing costs are not yet
quantifiable and it is unknown at this time how long before the
program will become profitable, if at all.
As of March 25, 1997, the Company has not sold any
interests in the Co-Ownership program and there can be no
assurance that the Company will be able to do so in the future.
Also, the effect of the buyback cannot be totally assessed at
this time. The Ocean Group believes that in the case of a
repurchase of a Co-Ownership interest, it will have sufficient
liquidity and capital resources to enable it to satisfy its
obligations and continue the program.
Currently, the yachts carry $20 million each in liability
insurance with hull insurance covering what The Ocean Group
estimates to be the current market value of the yachts.
RALLY'S HAMBURGERS, INC.
GIANT, through its equity investment in Rally's Hamburgers,
Inc. ("Rally's") (NASDAQ:RLLY), 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 February 24, 1997, the Rally's system
included 471 restaurants in 19 states, primarily in the Midwest
and the Sunbelt, comprised of 214 Company-owned restaurants, 230
franchised restaurants and 27 company-owned restaurants in
Western markets which are operated as Rally's restaurants by CKE
Restaurants, Inc. ("CKE"), an owner of Carl's Jr., a competing
fast-food restaurant chain (see page 8 of this Form 10-K). One
additional company-owned restaurant has been converted to a Carl
Jr.'s format and is not included in the restaurant count.
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.
GIANT's investment in Rally's of $2,926,000 and $3,423,000
at December 31, 1996 and 1995, represents approximately 15% and
48%, respectively, of Rally's outstanding common stock. At
December 31, 1996 and 1995, the Company owned approximately
3,137,000 and 7,430,000 shares of Rally's outstanding common
stock, the quoted market price of which was approximately
$14,313,000 and $7,198,000. On March 24, 1997, the market price
of the Company's investment in Rally's outstanding common stock
was $10,195,000. The Company's equity investment percentage in
Rally's decreased because GIANT did not elect to participate in
Rally's Shareholder Rights Offering and because of the acquisi-
tion of 4,293,000 shares by CKE and Fidelity National Financial,
Inc. ("Fidelity") from the Company. The Company will continue to
account for the investment under the equity method of accounting
because of the Company's ability to exercise significant
influence over operating and financial policies of Rally's, due
to the Company's representation on the Rally's Board of
Directors, including GIANT's Chief Executive Officer as Chairman
of Rally's Board of Directors.
On January 22, 1996, the Company disclosed that it intended
to offer to exchange a new series of GIANT participating, non-
voting preferred stock for Rally's outstanding common stock (the
"Exchange Offer"). Upon successful completion of the Exchange
Offer, GIANT would have owned 79.9% of Rally's outstanding common
stock. On April 22, 1996, Rally's Board of Directors, after
discussions between a special committee of the Rally's Board of
Directors and Donald E. Doyle, President and Chief Executive
Officer of Rally's, requested that GIANT terminate the Exchange
Offer. The termination was requested to retain sufficient market
capitalization to allow Rally's easier access to the capital
markets in order to raise capital in the future. GIANT agreed to
the request and terminated the proposed Exchange Offer.
On January 29, 1996, Rally's purchased $22 million principal
amount of its 9.875% senior notes ("Senior Notes") directly from
GIANT for $14,932,000. The Company had purchased a total of
$26,424,000 in principal during 1995 for $14,051,000 and recorded
these Senior Notes as investments available-for-sale. The
Company recognized a gain of $2,958,000 on the sale of these
Senior Notes. In addition, during the second quarter of 1996,
GIANT sold an additional principal amount of $3,500,000 of its
investment in Rally's Senior Notes through the open market,
recognizing a pre-tax gain of $478,000.
On February 1, 1996, GIANT agreed to provide Rally's with a
short-term credit facility of up to $2 million to provide for
certain seasonal financing requirements. The interest on this
facility was calculated at prime and accrued interest was payable
on a monthly basis. As of March 31, 1996, $500,000 was advanced
to Rally's under this credit facility. This $500,000 advance was
repaid in the second quarter of 1996 and no other advances have
been made. This facility has now been canceled.
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 could not exceed $793,000. The
letters of credit had a maximum maturity date of 365 days but
could not extend beyond the agreement's expiration date of
February 28, 1997. The letters of credit were secured by certain
cash equivalents of GIANT. The Company was reimbursed by Rally's
for costs related to issuance of these letters of credit. In
October 1996, these letters of credit, on behalf of Rally's, were
canceled and the cash equivalents were reinvested by GIANT.
On May 3, 1996, pursuant to a Purchase and Standstill
Agreement between GIANT and Fidelity (see page 9 of Form 10-K),
GIANT sold approximately 768,000 shares of Rally's common stock
to Fidelity and approximately 2,350,000 shares of Rally's common
stock to CKE. The Company received cash of $4,751,000 and
recognized a pre-tax gain of $3,197,000. As part of this
transaction, GIANT granted irrevocable options to Fidelity and
CKE to each purchase an additional 1,175,000 shares of Rally's
common stock from GIANT, at exercise prices ranging from $3.00 to
$4.00 per share, through April 1998. In March 1997, 1,175,000
options granted to CKE and Fidelity by GIANT to purchase Rally's
common stock at $4.00 per share were canceled.
On July 1, 1996 Rally's and CKE entered into a ten-year
agreement ("Operating Agreement") pursuant to which 28 Rally's
owned restaurants, located in California and Arizona, are being
operated by Carl's Jr. At the discretion of CKE, certain
restaurants will be converted to Carl's Jr. At February 24,
1997, one restaurant has been converted. Under the Operating
Agreement, Carl's Jr. will be responsible for the conversion
expenses, as well as the operating expenses for all the
restaurants. Rally's will retain ownership of all the
restaurants and receive a percentage of gross revenues generated
by each restaurant. The Operating Agreement is cancelable, at
the discretion of CKE, after an initial five-year period.
On September 5, 1996, by prospectus, Rally's distributed
transferable subscription rights to holders of record of Rally's
common stock on July 31, 1996. For each 3.25 rights held, a
holder was entitled to purchase one unit for $2.25. A unit
consisted of one share of Rally's common stock and one warrant to
purchase an additional share of Rally's common stock for $2.25.
On September 16, 1996, GIANT elected to transfer its 4,312,000
available subscription rights to an unaffiliated third party,
which has subsequently exercised the rights. GIANT's increase in
Rally's shareholders' equity due to the Shareholder Rights
Offering has been reflected as an increase of $1,699,000 in
GIANT's investment in affiliate and an increase in capital in
excess of par value.
During the fourth quarter of 1996, CKE and Fidelity, in
total, exercised its option to purchase 1,175,000 shares of
Rally's common stock at the option price of $3.00 per share. The
Company received cash of $3,526,000 and recognized a pre-tax gain
of $2,518,000. The Company, because of this sale, recognized
$462,000 in income that was previously shown as an increase in
capital in excess of par value. This income is included in gain
on the sale of investment in affiliate.
On December 20, 1996, Rally's announced that it has issued
warrants ("Rally's Warrants") to CKE and Fidelity to purchase an
aggregate 1,500,000 restricted shares of its common stock at an
exercise price of $4.375 per share. The Rally's Warrants have a
3-year term and are not exercisable until December 20, 1997. If
all the warrants are exercised by CKE and Fidelity to purchase
Rally's common stock, the Company's equity ownership in Rally's
will be reduced to approximately 12%.
The Company's sale of Rally's common stock to CKE and
Fidelity, during 1996, generated a capital loss which was carried
back to prior years and was used to reduce capital gains taxes
paid on the sale of the cement operations. As of December 31,
1996, the Company recorded a tax benefit of $10,285,000 for this
carryback and refund of taxes paid in prior years. In January
1997, the Company received this refund in full.
CHECKERS DRIVE-IN RESTAURANTS, INC.
During 1996, the Company made several investments in debt
and equity securities of Checkers Drive-In Restaurants, Inc.
(NASDAQ:CHKR) ("Checkers"). At December 31, 1996, the Company
had investments of 200,000 shares of Checkers common stock valued
at $.4 million and 2,849,000 warrants valued at $1.2 million. In
addition, the Company had an investment in Checkers senior
subordinated debt valued at $5.1 million and an advance of $.5
million, both investments earning 13%. This $.5 million advance
was paid back in February 1997.
Checkers develops, produces, owns, operates and franchises
quick-service "double drive-thru" restaurants. The restaurants
are designed to provide fast and efficient automobile-oriented
service incorporating a 1950's diner and art deco theme with a
highly visible, distinctive and uniform look that is intended to
appeal to customers of all ages. The restaurants feature a
limited menu of high quality hamburgers, cheeseburgers and bacon
cheeseburgers, specially seasoned french fries, hot dogs, chicken
sandwiches, as well as related items such as soft drinks and old
fashioned premium milk shakes, at everyday low prices. At
December 31, 1996, the Checkers system included 478 restaurants
in 23 states and the District of Columbia and Puerto Rico,
comprised of 232 company-owned and 246 franchised restaurants.
RALLY'S AND CHECKERS PROPOSED MERGER
On March 25, 1997, Rally's and Checkers announced that they
have agreed in principle to a merger between the two companies.
Under the terms of the letter of intent signed by the parties,
each share of Rally's common stock will be converted on
completion of the merger into three shares of Checkers common
stock. Upon completion of the merger, Rally's will become a
wholly-owned subsidiary of Checkers. The transaction is subject
to negotiation of definitive agreements, receipt of opinions of
Rally's and Checker's investment bankers as to the fairness of
the transaction to Rally's and Checker's respective shareholders,
stockholder approvals and other customary conditions. The merger
is expected to close in the second or third quarter of 1997.
GENERAL DEVELOPMENT OF BUSINESS
From 1985 through October 1994, GIANT's major operating
subsidiaries were Giant Cement Company ("Giant Cement") and
Keystone Cement Company, 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., which was a marketing agent for resource recovery
services for Giant Cement. On October 6, 1994, KCC Delaware
Company, Inc., a wholly-owned subsidiary of GIANT ("KCC"), sold
100% of the stock of it's wholly-owned subsidiary Giant Cement
Holding, Inc. through an initial public offering. The Company
received net proceeds of $125.8 million which 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.
From October 1994 to October 1996, GIANT's assets consisted
primarily of cash and cash equivalents, short-term liquid
investments, which consisted of corporate stocks and corporate
bonds and its investment in the outstanding common stock of its
affiliate, Rally's. In addition, GIANT's management was actively
pursuing long-term investment opportunities to deploy the cash
GIANT generated through the sale of the cement operations.
In December 1995, GIANT filed an action against Fidelity,
CKE, an affiliate of Fidelity, and William P. Foley ("Foley"),
among others, arising from an attempted hostile takeover of
Rally's and GIANT, by Fidelity and Foley, which indirectly owns
and/or controls Carl's Jr., a competing fast-food restaurant
chain. In January 1996, Fidelity and Foley filed a counterclaim
against GIANT and its Board of Directors alleging, among other
claims, that GIANT's directors breached their fiduciary duties in
conjunction with certain enumerated transactions. On February
14, 1996, Fidelity made an offer to acquire the Company in a
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. In April, the parties settled their
disputes, pursuant to a Purchase and Standstill Agreement (the
"Agreement"). As a result, Fidelity sold its investment of
705,000 shares in GIANT to the Company for $6.1 million; Fidelity
and CKE acquired an aggregate of approximately 3,118,000 shares
of Rally's common stock from GIANT for $4.8 million and GIANT
recognized a pre-tax gain of $3.2 million; GIANT granted Fidelity
and CKE options to each purchase 1,175,000 shares of Rally's
common stock at prices ranging from $3.00 to $4.00 per share; two
designees of CKE and Fidelity were elected to Rally's Board and
Fidelity agreed to a 10 year standstill with respect to GIANT and
its Common Stock. In March 1997, 1,175,000 options granted to
CKE and Fidelity by GIANT to purchase Rally's common stock at
$4.00 per share were canceled.
On January 22, 1996, the Company announced that it intended
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
have owned 79.9% of Rally's outstanding common stock. On April
22, 1996, Rally's Board of Directors, after discussions between a
special committee of the Rally's Board and Donald E. Doyle,
President and Chief Executive Officer of Rally's, requested that
GIANT terminate the Exchange Offer. The termination was
requested to retain sufficient market capitalization to allow
Rally's easier access to the capital markets to raise capital in
the future. GIANT agreed to the request and terminated the
proposed Exchange Offer.
During the period May 1996 thru November 1996, GIANT's
investment in Rally's outstanding common stock decreased to
approximately 15% from 48% at December 31, 1995. The investment
percentage decreased because of the following three reasons: the
sale by GIANT, on May 3, 1996, of approximately 768,000 shares of
Rally's common stock to Fidelity and approximately 2,350,000
shares of Rally's common stock to CKE; GIANT did not elect to
participate in Rally's Shareholder Rights Offering, completed in
September 1996, and transferred its 4,312,000 available
subscription rights to purchase Rally's common stock to an
unaffiliated third party, which subsequently exercised the
subscription rights; and during the fourth quarter of 1996, the
election by CKE and Fidelity to exercise its options previously
granted by GIANT pursuant to the Agreement to purchase 1,175,000
shares of Rally's common stock at the option price of $3.00 per
share.
In July 1996, KCC entered into an agreement ("NeoGen
Agreement") with Joe Pike and his company, NeoGen Investors, L.P.
("NeoGen"), to participate in the development, manufacturing and
marketing of Mifepristone, an abortion inducing drug with other
significant potential uses, in the United States and other parts
of the world. The Federal Drug Administration had recently
approved Mifepristone as a safe and effective abortifacient.
Under the NeoGen Agreement, KCC for a cash payment of $6 million,
would have obtained a 26% interest in NeoGen, the entity which
held the sublicenses for all potential uses of Mifepristone.
Subsequent to the signing of this contract, on October 31, 1996,
KCC filed suit against Mr. Pike and NeoGen for fraud and breach
of the NeoGen Agreement. On November 4, 1996, the Population
Council and Advances in Health Technology, the licensors of this
drug, filed suit against Mr. Pike and NeoGen. The suit claimed
Mr. Pike had concealed information that he had been, among other
things, convicted of forgery. Under a recent settlement with the
Population Council, Mr. Pike has agreed to sell most of his
financial stake in Mifepristone and relinquish his management of
the distribution company that was set up to sell and distribute
this drug. In February 1997, a new company called Advances for
Choice was established to oversee the manufacturing and distri-
bution of Mifepristone. The Company's lawsuit against Mr. Pike
and his affiliates, as well as his claim against the Company for
defamation is still pending (see Item 3, "Legal Proceedings").
On October 31, 1996, the Company started a new business and
formed a new subsidiary, GIANT MARINE GROUP, LTD., which is
offering the world's first Luxury Yacht Co-Ownership Program of
this type. The Luxury Yacht Co-Ownership Program provides
individuals and companies the opportunity for a Co-Ownership of a
minimum of one-fourth interest in large ocean cruising yachts.
In addition, a 100% ownership in the luxury yacht is also
available. This program also provides for the management of
these yachts by The Ocean Group resulting in a practical,
economical and hassle-free way to own these mega-yachts. In
1996, in furtherance of this program, the Company purchased two
yachts.
On November 14, 1996, KCC, along with CKE and others
purchased an aggregate principal amount of $29.9 million of
Checkers $36.1 million 13.75% senior subordinated debt, due July
31, 1998, from certain current debt holders. These holders
retained approximately $6.2 million of the principal amount. The
total purchase price for the senior subordinated debt was $29.1
million. KCC purchased $5.1 million principal amount of this
senior subordinated debt for $5.0 million. On November 22, 1996,
the senior subordinated debt was restructured. As part of the
restructuring, the aggregate principal amount was reduced to
$35.8 million, the interest rate was reduced to 13%, the term of
the restructured credit agreement was extended one year,
scheduled principal payments were deferred to May 1997, certain
financial covenants were modified and, in return, Checkers issued
warrants ("Checkers Warrants") to all holders of the senior
subordinated debt, to purchase an aggregate of 20,000,000 shares
of Checkers common stock at an exercise price of $.75 per share.
KCC received 2,849,000 Checkers Warrants, which are currently
unregistered and are exercisable at any time until November 22,
2002. Checkers is obligated to register the common stock to be
issued under the Checkers Warrants by May 22, 1997. The new
lenders also agreed to provide a short-term revolving line of
credit up to $2.5 million to Checkers. As of December 31, 1996,
KCC advanced $.5 million. The interest rate on the advance was
13%. In February 1997, the Checkers Advance was subsequently
paid.
<page-11>
At December 31, 1996, the Company's assets consisted of two
yachts, 3,137,000 shares (approximately 15% of the amount
outstanding) of Rally's common stock, 200,000 shares of Checkers
common stock and 2,849,000 warrants to purchase Checkers common
stock, the Checkers Debt and Checkers Advance, investments in
U.S. Government short-term obligations and investments in debt
and other equity securities.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for forward-looking statements: Certain
information included in this document (as well as information
included in oral statements or other written statements made or
to be made by the Company) contains statements that are forward-
looking, such as statements relating to plans for future
activities. Such forward-looking information involves important
risks and uncertainties that could significantly affect antici-
pated results in the future and, accordingly, such results may
differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and uncertain-
ties include, but are not limited to, those relating to the
development and implementation of the Company's new business
plan, the acceptance of the Company's Luxury Yacht Co-Ownership
Program, conditions affecting the luxury yacht business
generally, domestic and global economic conditions, activities of
competitors, changes in federal or state tax laws and of the
administration of such laws.
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, 58, 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 Rally's Board of Directors since November 1994, having served
as its Chairman of the Board and Chief Executive Officer from
1990 through February 1994.
David Gotterer, 68, 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, 47, Vice President, Chief Financial Officer,
Secretary and Treasurer. Ms. Wood joined the Company in January
1995. From 1989, Ms. Wood served in various capacities for
Wherehouse Entertainment, Inc., a specialty retail chain,
including Senior Vice President and Chief Financial Officer from
1993 to 1994.
ITEM 2. PROPERTIES.
GIANT presently leases 4,500 square feet of executive office
space in Beverly Hills, California, at a monthly payment of
approximately $13,000. In addition, the Company leases approxi-
mately 5,500 square feet of hangar space at a local airport at a
monthly payment of approximately $5,000.
In April 1997, due to the lease expiration on the Company's
current office space and the start-up of The Ocean Group, the
Company will move its corporate headquarters to 9000 Sunset
Boulevard, 16th floor, Los Angeles, CA 90069. The Company will
lease approximately 9,800 square feet at a monthly payment of
approximately $21,000. The lease term is 60 months and the
Company has two, three-year renewal options.
<page-12>
ITEM 3. LEGAL PROCEEDINGS.
Jonathan Mittman, Steven Horowitz, Dina Horowitz and John
Hannan v. Rally's Hamburgers, Inc., GIANT GROUP, LTD., Burt
Sugarman, Wayne M. Albritton, Donald C. Moore, Edward C. Binzel,
Gena L. Morris, Patricia L. Glaser and Arthur Andersen LLP, a
purported class action alleging certain violations of the
Securities Exchange Act of 1934, as amended, was filed in the
United States Western District Court of Kentucky on January 24,
1994 (Civ. No. C94-0039-L(CS)) against the Company, certain of
its officers, directors and shareholders, a former officer of
Rally's and the Rally's auditors. In the action, plaintiffs seek
an unspecified amount of damages, including punitive damages. On
February 14, 1994, a related lawsuit was filed by two other
shareholders making the same allegations before the same court,
known as Edward L. Davidson and Rick Sweeney v. Rally's
Hamburgers, Inc.,GIANT GROUP, LTD., Burt Sugarman, Wayne M.
Albritton, Donald C. Moore, Edward C. Binzel, Gena L. Morris,
Patricia L. Glaser and Arthur Andersen LLP, (Civ. No. C-93-0087-
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).
On April 15, 1994, Ms. Glaser and GIANT filed a motion to
dismiss the consolidated lawsuit for lack of personal jurisdic-
tion. 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.) The court
granted GIANT's motion to strike certain scurrilous and
irrelevant allegations, and directed plaintiffs to amend their
complaint to conform to the court's order. Finally, the court
denied plaintiffs' motion for class certification, "until such
time as the issue of typicality of claims is further developed
and clarified."
Plaintiffs filed their second amended complaint on June 29,
1995, joining additional plaintiffs pursuant to stipulation of
the parties.
Plaintiffs renewed their motion for class certification on
July 31, 1995. Defendants filed their opposition on or about
October 31, 1995. On April 16, 1996, the court granted the
motion and certified a class period from July 20, 1992 to
September 29, 1993.
On October 3, 1995, plaintiffs filed a motion to disqualify
Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP
("Christensen Miller") 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
association with Christensen Miller. The court recently denied
the motion and refused to disqualify Christensen Miller.
Fact discovery is set to close on March 31, 1997. No trial
date has been scheduled yet.
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.
HARBOR FINANCE PARTNERS V. GIANT GROUP, LTD., ET AL.
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 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 the
Company by repurchasing certain of Rally's 9.875% Senior Notes at
an inflated price. Harbor seeks "millions of dollars in
damages," along with rescission of the repurchase transaction.
In the fall of 1996, all defendants moved to dismiss this action.
The Chancery Court conducted a hearing before the end of the
year, but has not yet ruled on the pending motions.
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.
MICHAEL SHORES, ET AL. V. GIANT GROUP, LTD., ET AL.
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 complaint, filed in the Los Angeles County
Superior Courts, alleges that these directors breached their
fiduciary duty by adopting a stockholder rights plan, selling
Rally's Senior Notes back to Rally's, agreeing to the Exchange
Offer, and engaging in an ongoing stock repurchase program. 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.
In February 1997, defendants filed a motion to dismiss for
failure to make a pre-litigation demand on the Board of Directors
to investigate the plaintiffs' claim. The motion asks the court,
in the alternative, to stay the litigation to permit the Company
to address plaintiffs' claims internally. Argument on this
motion is set for early April 1997.
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.
KCC DELAWARE V. JOSEPH D. PIKE, ET AL.
KCC filed this action on October 31, 1996. The complaint
states causes of action for fraud, breach of fiduciary duty,
fraudulent concealment, breach of contract, unfair business
practices, permanent and preliminary injunctive relief, and
declaratory relief. The complaint is seeking damages for the
breach by Mr. Pike and related entities of the July 24, 1996
NeoGen Agreement by which KCC agreed to contribute $6 million, in
return for a 26% equity interest in the entity producing the
abortion inducing drug, Mifepristone, in the United States and
other parts of the world. KCC has also sued the licensors of
Mifepristone, the Population Council, Inc. and Advances in Health
Technology, Inc., on a declaratory relief claim. The licensors
claim that their prior approval was necessary for the July 24,
1996 NeoGen Agreement between KCC and the Pike defendants.
On February 19, 1997, the Pike defendants filed an answer to
the complaint, denying its material allegations and raising
affirmative defenses. On that date, the Pike defendants filed a
cross-complaint against KCC, GIANT, Burt Sugarman, Terry
Christensen and David Malcolm alleging causes of action for
fraud, breach of contract, intentional interference with
prospective economic advantage, negligent interference with
prospective economic advantage and unfair business practices.
No discovery has yet been conducted. A status conference in
this matter is set for July 3, 1997. No trial date has been set.
JOSEPH D. PIKE V. GIANT GROUP, LTD., KCC DELAWARE, BURT
SUGARMAN, TERRY CHRISTENSEN, DAVID MALCOLM AND DOES 1 THROUGH 50.
Mr. Pike filed this complaint for defamation on November 12,
1996. The complaint seeks an unspecified amount of general,
special and exemplary damages.
The court denied KCC's motion to dismiss the complaint on
the grounds that it is a compulsory counterclaim to the Los
Angeles action, and the other defendants' motion to transfer the
matter to Los Angeles Superior Court. All defendants (except
KCC) have answered the complaint, denying its material allega-
tions and raising several affirmative defenses. KCC has filed a
demurrer to the complaint. KCC and the other defendants have
also filed a motion to stay certain and/or to reconsider ruling
on motion to strike the complaint. Both motions are scheduled to
be ruled upon on April 4, 1997.
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.
<page-14>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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 25, 1997, the approximate
number of record holders of the Company's Common Stock was 2,000.
The high and low sale prices for such stock during each fiscal
quarter in 1996 and 1995 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.
SALE PRICES OF COMMON STOCK
1996 1995
CALENDAR QUARTER High Low High Low
First................ $10 3/8 8 1/8 $ 7 1/4 6
Second............... 9 5/8 7 3/8 7 3/4 5 3/4
Third................ 8 1/4 7 1/4 7 1/2 6 1/2
Fourth............... 9 1/2 7 5/8 9 1/8 6 3/8
<page-15>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA.
<CAPTION>
FIVE-YEAR SUMMARY OF CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
For the fiscal years ended (Note 3) 1992 1993 1994 1995 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating results:
Investment income $1,887 $1,377 $1,507 $ 3,947 $2,736
Gain (loss) on sale of investments 841 542 (1,065) 41 5,234
General and administrative expenses (4,799) (3,574) (4,628) (4,123) (4,598)
Proxy contest and related legal - - - - (752)
Exchange Offer and related expenses - - - - (518)
Interest expense (4,948) (4,854) (4,007) (149) (34)
Loss on extinguishment of debt - - (1,343) - -
Gain on sale of investment in
affiliate - - - - 6,177
Equity in earnings (loss) of
affiliate 3,121 (3,855) (8,898) (22,074) 367
Write-down in carrying value of
investment affiliate - - (19,396) - -
Income (loss) from continuing
operations (2,127) (7,161) (34,350) (22,332) 17,912
Income (loss) from discontinued
operations, net (3,971) 4,522 6,598 - -
Gain on sale of discontinued
operations, net - - 48,223 - -
Net income (loss) (6,098) (2,639) 20,471 (22,332) 17,912
Per common share: (Note 1)
Income (loss) from continuing
operations ($0.41) ($1.38) ($5.26) ($4.37) $3.48
Net income (loss) (1.18) (0.51) 3.22 (4.37) 3.48
Weighted average common shares,
including common stock
equivalents (Notes 1 and 2) 5,189,000 5,180,000 6,463,000 5,110,000 5,209,000
Financial position as of
December 31:
Total assets $113,683 $110,616 $100,895 $ 51,681 $ 69,047
Long-term debt 44,532 44,489 1,816 - -
Total shareholders' equity 50,313 47,467 69,942 45,145 52,815
Note 1: Earnings (loss) per common share are based upon the weighted average common
shares outstanding, adjusted for the dilutive effect of outstanding stock
options in 1996 and 1994.
Note 2: On March 24, 1997, there were 3,210,655 shares of GIANT common stock
outstanding.
Note 3: Certain prior year amounts have been reclassified to conform to the 1996
presentation.
</TABLE>
<page-16>
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 1996 VERSUS 1995
Investment income decreased $1,211 to $2,736 in 1996
compared to $3,947 in 1995 primarily due to lower income of $859
earned on the reduced levels of investments in short-term U.S.
government obligations. Despite lower investment income, total
revenue increased $3,922 to $8,018 in 1996 compared to $4,096 in
1995 primarily due to gains of $5,234 on the sale of equity and
debt investments, previously classified as investments available-
for-sale.
General and administrative expenses increased $475 to $4,598
in 1996 compared to $4,123 in 1995 primarily due to higher legal
fees of $193, other professional fees of $132 and travel expenses
of $170. The increase in these expenses related primarily to the
Company's activities reviewing possible acquisitions. During the
fourth quarter of 1996, the Company incurred expenses of $23
related to its Luxury Yacht Co-Ownership Program.
The Company's results from operations for 1996 were impacted
by certain one-time expenses. The Company incurred legal and
administrative expenses of $752 consisting of proxy and related
legal fees in connection with the Fidelity/Foley litigation which
has now been settled. In addition, the Company incurred $518 in
legal, accounting and administrative expenses due to the Exchange
Offer which was terminated on April 22, 1996.
Interest expense decreased $115 to $34 in 1996 compared to
$149 in 1995 as a result of the prepayment in February 1996 of
the Company's 9.25% Term-Note, due December 18, 1996.
GIANT's investment in Rally's at December 31, 1996 and 1995,
represents approximately 15% and 48%, respectively, of Rally's
outstanding common stock. The investment percentage decreased
because of the following three reasons: the sale by GIANT, on May
3, 1996, of approximately 768,000 shares of Rally's common stock
to Fidelity and approximately 2,350,000 shares of Rally's common
stock to CKE; GIANT did not elect to participate in Rally's
Shareholder Rights Offering, completed in September 1996, and
transferred its 4,312,000 available subscription rights to
purchase Rally's common stock to an unaffiliated third party,
which subsequently exercised the subscription rights and CKE and
Fidelity, in total, exercised its option to purchase 1,175,000
shares of Rally's common stock at the option price of $3.00
previously granted to them by GIANT. The Company's non-cash
equity income was $367 in 1996 compared to a non-cash equity loss
of $22,074 in 1995. Rally's income from operations for 1996 was
$4,090 compared to a loss from operations of $36,470 in 1995.
This increase in operating income resulted primarily from
significant reductions in expenses across all major categories in
1996 and in 1995, non-cash charges of approximately $31,000
related to asset write-downs and costs for closed stores and the
adoption of Statement of Financial Accounting Standards ("SFAS")
No.121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" ("SFAS 121"). Rally's
reported net income of $1,988 in 1996 compared with a net loss of
$46,919 in 1995. Rally's net income for 1996 included an extra-
ordinary gain of $5,280, net of tax of $1,350, related primarily
to the early retirement of $22,000 principal amount of their
Senior Notes.
The Company's net income was $17,912 for 1996 compared to a
loss of $22,332 in 1995. This increase in net income resulted
primarily from the following: gains of $11,411 from the sale of
marketable securities previously classified as available-for-sale
and from the sale of Rally's common stock; non-cash equity income
in Rally's of $367 in 1996 compared to a loss of $22,074 in 1995
and an income tax benefit of $9,649 primarily related to the
realization of capital losses on sale of Rally's common stock.
These components of net income were lowered by one-time expenses
of the Fidelity/Foley litigation and terminated Exchange Offer of
$1,270, slightly higher general and administrative expenses of
$475 and lower income earned on the reduced levels of investments
in short-term U.S. government obligations of $859.
The Company's consolidated financial statements include
valuation allowances of $4,796 and $17,356, at December 31, 1996
and 1995, respectively, as it is not likely, as defined in SFAS
No. 109 "Accounting for Income Taxes" ("SFAS 109") that these tax
benefits will be realized in the near future. The decrease in
the allowance during 1996 relates primarily to the sale of
Rally's common stock.
RESULTS OF OPERATIONS FOR 1995 VERSUS 1994
Investment income increased $2,440 to $3,947 in 1995
compared to $1,507 in 1994 as a result of higher average levels
of investments in marketable securities in 1995 versus 1994.
General and administrative expenses decreased $505 to $4,123
in 1995 compared to $4,628 in 1994. This resulted primarily from
a decrease in compensation including bonuses of $650, travel
expenses of $100 and consulting fees of $60 due to the divesti-
ture of the cement operations partially offset by the increase in
insurance expense of $125 and professional fees of $123 incurred
in 1995.
Interest costs decreased $3,858 to $149 in 1995 compared to
$4,007 in 1994. 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; (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 had 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 and higher
general and administrative expenses.
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 $17,356 and $9,070, at December 31, 1995
and 1994, respectively, as it is not likely, as defined in SFAS
No. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, consisting of cash and cash
equivalents and marketable securities of $23,227 at December 31,
1996, decreased $19,414 from $42,641 at December 31, 1995. At
December 31, 1996, the Company's current assets include income
tax receivables of $10,928 primarily related to the realization
of capital losses on sale of Rally's common stock and net
operating loss carryback claims. In January 1997, the Company
received refunds of $10,716 related to these income tax
receivables. At December 31, 1996 and 1995, the Company had
working capital of $45,419 and $39,125 with current ratios of 4.0
and 7.7 to 1, respectively.
Net cash used by operating activities for the year ended
December 31, 1996 was $3,386 compared to net cash used by
operating activities of $1,699 for the comparable period in 1995
and cash provided by operations of $3,419 for 1994, which
included cash provided by the discontinued cement operations of
$11,186. In 1996 and 1995, cash was primarily used to fund the
daily operations of the Company and, in 1995, to pay expenses
which were accrued from the 1994 sale of the cement operations.
Net cash provided by investing activities for the year ended
December 31, 1996 was $13,721 compared to net cash used by
investing activities of $1,583 for the comparable period in 1995
and net cash provided by investing activities of $75,942 in 1994.
On January 29, 1996, Rally's purchased directly from GIANT
$22,000 principal amount of its Senior Notes. GIANT received
cash of $11,053, including accrued interest of $266, and a $4,145
short-term note bearing interest, which was paid in full. During
the second quarter of 1996, the Company sold an additional $3,500
face value Senior Notes, through the open market, and received
proceeds of $2,760. In addition during 1996, the Company sold
marketable securities receiving proceeds of $21,391 and also
purchased marketable securities at a cost of $15,867. In
November 1996, the Company purchased Checkers Debt for $5,000 and
advanced $500 to Checkers. In 1996, the Company purchased
assets, including improvements, for $21,485. The Ocean Group
incurred $598 related to the start-up of the Luxury Yacht
Co-Ownership Program. The Company paid cash of $11,583 and
financed the remaining balance of $10,500, which was paid in full
in March 1997. In May and November of 1996, the Company received
proceeds of $8,277 from the purchase of Rally's stock by CKE and
Fidelity. In 1995, the Company received $20,720 from the sales
and maturities, net of purchases, of marketable securities and
paid income taxes in the amount of $22,238 related to the profit
on the sale of the Company's cement business. In 1994, the
Company purchased marketable securities, net of sales of $31,343,
received proceeds of $125,822 from the sale of the cement
business, purchased property and equipment for $6,501, which
included $5,845 related to the discontinued cement operations and
invested $10,085 in Rally's.
Net cash used by financing activities for the year ended
December 31, 1996 was $14,682 compared to $3,199 and $60,012 for
the comparable periods in 1995 and 1994, respectively. In 1996,
the Company pre-paid in full its 9.25% Term-Note. The Company
incurred no additional expenses in connection with this
prepayment. 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. Additionally,
the Company's Board of Directors has reaffirmed its commitment to
its ongoing stock repurchase program through the open market and
private purchases of its common stock. During 1996, the Company
acquired 1,674,000 shares of its common stock at an aggregate
cost of $15,079. Included in these shares are 200,000 shares
acquired from the Company's Chairman of the Board in the third
quarter of 1996 at an aggregate cost of $1,652 and 705,000 shares
of its Common Stock, purchased directly from Fidelity, for an
aggregate price of $6,085. In 1995 and 1994, the Company repaid
debt, related to continuing operations, of $2,062 and $58,782
respectively, and purchased treasury stock for $1,137 in 1995.
The Company has adopted SFAS No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123") in 1996 and elected to continue
to measure compensation cost under Accounting Principles Board
Opinion No.25 ("APB 25") and show pro forma disclosures of net
income and earnings per share as if the fair value based method
of accounting had been applied.
Under the Internal Revenue Code, in addition to the regular
corporate income tax, an additional tax may be levied upon an
entity that is classified as a "personal holding company". In
general, this tax is imposed on corporations which are more than
50% owned, directly or indirectly, by 5 or fewer individuals (the
"Ownership Test") and which derive 60% or more of their income
from "personal holding company" sources, generally defined to be
passive income (the "Income Test)". If a corporation falls
within the Ownership Test and the Income Test, it is classified
as a personal holding company, and will be taxed on its
"undistributed personal holding company income" at a rate of
39.6%. The Company currently meets the stock ownership test.
The Company has not met the income requirement in recent years,
therefore is not subject to this additional tax; however no
assurance can be given that the income test will not be satisfied
in the future.
The Company's current liquidity is provided by investment
income, the liquidation of marketable securities and cash
received from income tax receivables. The Company's luxury yacht
business will have ongoing operating and overhead costs which
will be absorbed by the Company until the Co-Ownership program is
fully implemented for both yachts. Management believes that this
liquidity, plus the Company's capital resources and its ability
to obtain financing at favorable rates are sufficient for the
Company to properly capitalize its current and future business
operations, as well as fund its on-going operating expenses.
SUBSEQUENT EVENT
During the first quarter of 1997, the Company, with the
approval of the Board of Directors, acquired 429,000 shares of
its Common Stock for an aggregate cost of $3,431.
<PAGE>
<page-20>
<TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<CAPTION>
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1994, 1995 and 1996
(Dollars in thousands, except per share amounts)
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Income:
Investment income $ 1,507 $ 3,947 $ 2,736
Gain (loss) on sale of investments (1,065) 41 5,234
Other 209 108 48
--------- --------- ---------
651 4,096 8,018
Costs and expenses:
General and administrative expenses 4,628 4,123 4,598
Proxy contest and related legal - - 752
Exchange Offer and related legal - - 518
Interest expense 4,007 149 34
Loss on extinguishment of debt 1,343 - -
Depreciation 390 368 397
--------- --------- ---------
10,368 4,640 6,299
--------- --------- ---------
Affiliate transactions:
Gain on sale of investment in affiliate - - 6,177
Equity in earnings (loss) of affiliate (8,898) (22,074) 367
Write-down in carrying value
of investment in affiliate (19,396) - -
--------- --------- ---------
(28,294) (22,074) 6,544
Income (loss) from continuing operations
before benefit for income taxes (38,011) (22,618) 8,263
Benefit for income taxes (3,661) (286) (9,649)
--------- --------- ---------
Income (loss) from continuing operations (34,350) (22,332) 17,912
Income from discontinued operations,
net of income taxes 6,598 - -
Gain on sale of discontinued operations,
net of income taxes 48,223 - -
--------- --------- ---------
Net income (loss) $ 20,471 $(22,332) $ 17,912
========= ========= =========
Earnings per common share:
Income (loss) from continuing operations $ (5.26) $ (4.37) $ 3.48
Income from discontinued operations, net 1.02 - -
Gain on sale of discontinued operations,
net 7.46 - -
--------- --------- ---------
Net income (loss) $ 3.22 $ (4.37) $ 3.48
========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GIANT GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1995 and 1996
(Dollars in thousands, except per share amounts)
1995 1996
--------- ---------
<C> <S> <S>
ASSETS
Current assets:
Cash and cash equivalents $ 16,991 $ 12,644
Marketable securities 25,650 10,583
Income tax receivables 593 10,928
Note and other receivables 298 3,825
Deferred income taxes 885 -
Assets held-for-sale - 21,485
Prepaid expenses and other current assets 554 1,013
--------- ---------
Total current assets 44,971 60,478
Property and equipment, net 3,267 3,559
Investment in affiliate 3,423 2,926
Note receivable and other assets 20 2,084
--------- ---------
Total assets $ 51,681 $ 69,047
========= =========
LIABILITIES
Current liabilities:
Note payable $ - $ 10,500
Accounts payable and accrued expenses 706 990
Income taxes payable 3,469 3,362
Deferred income taxes - 164
Current maturities of long-term debt 1,671 43
--------- ---------
Total current liabilities 5,846 15,059
Deferred income taxes 690 1,173
--------- ---------
Total liabilities 6,536 16,232
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized
2,000,000 shares, none issued - -
Class A Common stock, $.01 par value;
authorized 5,000,000 shares, none issued - -
Common stock, $.01 par value; authorized
12,500,000 shares; issued 7,266,000 in
1996 and 6,966,000 shares in 1995 69 73
Capital in excess of par value 33,508 36,767
Unrealized gains (losses) on investments (1,328) 246
Retained earnings 29,796 47,708
--------- ---------
62,045 84,794
Less common stock in treasury; 3,626,000
shares in 1996 and 1,952,000 shares
in 1995, at cost 16,900 31,979
--------- ---------
Total stockholders' equity 45,145 52,815
--------- ---------
Total liabilities and
stockholders' equity $ 51,681 $ 69,047
========= =========
The accompanying notes are an integral part of the consolidated balance sheets.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 1994, 1995 and 1996
(Dollars in thousands)
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Operations:
Net income (loss) $ 20,471 $ (22,332) $ 17,912
Adjustments to reconcile net income (loss)
to net cash provided (used) by operations:
Discontinued operations (6,598) - -
Gain on sale of discontinued operations (48,223) - -
Loss on extinguishment of debt 1,343 - -
Depreciation 390 368 397
(Gain) loss on sale of investments 1,065 (41) (5,234)
Gain on sale of investment in affiliate - - (6,177)
Equity in loss (earnings) of affiliate 8,898 22,074 (367)
Write-down in carrying value of investment in
affiliate 19,396 - -
Provision (benefit) for deferred taxes (242) 156 483
Amortization of deferred charges and other 249 - -
Accretion of discounts on marketable securities (571) (1,063) (318)
Changes in operating assets and liabilities:
Income tax receivables - - (10,335)
Other assets and liabilities (375) (316) (31)
Accounts payable and accrued expenses (3,570) (545) 284
---------- ---------- ----------
Net cash used by continuing operations (7,767) (1,699) (3,386)
Net cash provided by discontinued operations 11,186 - -
---------- ---------- ----------
Net cash provided (used) by operations 3,419 (1,699) (3,386)
---------- ---------- ----------
Investing activities:
Proceeds from sale of affiliates debt securities - - 17,692
Sales of marketable securities 26,740 48,022 21,391
Purchases of marketable securities (58,083) (27,302) (15,867)
Debt investment and short-term advance - - (5,500)
Purchase of assets held-for-sale and related
costs (A) - - (11,583)
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 (656) (65) (689)
Discontinued operations (5,845) - -
(Investment in) proceeds from sale of
investment in affiliate (10,085) - 8,277
Restricted investments - discontinued
operations (1,951) - -
---------- ---------- ----------
Net cash provided (used) by investing
activities 75,942 (1,583) 13,721
---------- ---------- ----------
Financing activities:
Repayment of short-term borrowings (14,825) (1,917) (1,682)
Proceeds from the exercise of stock options - - 2,025
Repayment of long-term debt (43,957) (145) -
Repayment of debt - discontinued operations (1,230) - -
Purchase of treasury stock - (1,137) (15,079)
---------- ---------- ----------
Net cash used by financing activities (60,012) (3,199) (14,682)
---------- ---------- ----------
Increase (decrease) in cash and cash
equivalents 19,349 (6,481) (4,347)
Cash and cash equivalents:
Beginning of period 4,123 23,472 16,991
---------- ---------- ----------
End of period $ 23,472 $ 16,991 $ 12,644
========== ========== ==========
Supplemental disclosure of cash paid:
Income taxes $ (2,585) $(22,364) $ (310)
Interest, net (4,606) (138) (34)
(A) In 1996, the Company purchased assets, including improvements, at a cost of $21,485.
The Ocean Group incurred $598 for pre-launching and organization costs. The Company
paid cash of $10,500 for these assets and financed the balance of $11,583 which was
paid in full in March 1997.
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1994, 1995 and 1996
(Dollars in thousands)
Capital Reduction
In Unrealized for
Excess Losses on Common Additional
Common of Par Investments Retained Stock in Pension
Stock Value Net Earnings Treasury Liability
------ ------- ----------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
Net income for 1996 17,912
Exercise of stock options 4 2,022
Company's share of
increase in affiliate's
equity due to sale of
rights, net 1,237
Purchase of treasury stock (15,079)
Unrealized gains on
investments, net 1,574
------ ------- ----------- -------- --------- ----------
Balance as of
December 31, 1996 $73 $36,767 $246 $47,708 $(31,979) $0
====== ======= =========== ======== ========= ==========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts
of GIANT GROUP, LTD. (the "Company" or "GIANT") and its wholly-
owned subsidiaries, KCC Delaware Company, Inc. ("KCC") and GIANT
MARINE GROUP, LTD., d/b/a as The Ocean Group ("GIANT MARINE").
The investment in affiliate is accounted for by the equity
method. The effects of changes in the Company's equity in the
net assets of its affiliate 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.
REVENUE RECOGNITION AND PRE-LAUNCHING AND ORGANIZATION COSTS
Revenue, on the sale of co-interests in the yachts, will be
recognized over the term of the purchase contract.
Certain costs, related directly to and that are incurred in
preparing the yachts for use or sale, are deferred and are
amortized to income over a period of not more than one year,
beginning with the start of operations or will be charged to
expense on the sale of the yachts. Costs related to improvements
that increase the life of the yachts are capitalized. Organiza-
tional costs, including legal and professional fees, are deferred
and are amortized to income, over a period of not more than one
year, beginning with the start of operations or sale of the
yachts.
MARKETABLE SECURITIES
In 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". No adjustment was
required to reflect the adoption of the new standard. Invest-
ments in marketable equity securities and corporate bonds are
considered available-for-sale and trading securities. Invest-
ments available-for-sale are carried at market and adjustments
for unrealized gains and losses are reported as a separate
component of stockholders' equity, net of deferred income taxes.
Trading securities are carried at market and net realized and
unrealized gains and losses on trading securities are included in
net earnings or loss.
The amortized cost of debt securities 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 identi-
fication 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.
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, 1994, 1995 and 1996,
the weighted average common shares outstanding were 6,463,000,
5,110,000 and 5,209,000, respectively. Fully diluted earnings
per share is not presented as it approximates primary earnings
per share.
USE OF ACCOUNTING ESTIMATES
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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform
to the 1996 presentation.
2. THE OCEAN GROUP LUXURY YACHT CO-OWNERSHIP PROGRAM
On October 31, 1996, the Company formed a new subsidiary,
GIANT MARINE, and started a new business. The Company purchased
assets, including improvements, which are reflected as assets
held-for-sale. The Company paid cash for these assets and
financed the balance of $10,500 which was paid in full in March
1997. In addition, GIANT MARINE incurred $598 in pre-launching
and organization costs which are included in prepaid expenses and
other current assets. These costs will be amortized to income,
over a period of not more than 1 year, beginning with the start
of operations or charged to expense upon the sale of the luxury
yachts.
The Luxury Yacht Co-Ownership Program provides individuals
and companies the opportunity for a Co-Ownership of a minimum of
one-fourth interest in large ocean cruising yachts. In addition,
a 100% ownership in the luxury yacht is also available. Under
the Luxury Yacht Co-Ownership Program, the purchasers of
co-interests are able to sell back their co-interest in their
yacht to The Ocean Group, following 2 years from the signing of
the purchase agreement, at the then fair market value, as
defined, less a ten percent re-marketing fee.
3. DISCONTINUED OPERATIONS
On October 6, 1994, KCC 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 was 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 discon-
tinued operations in the accompanying consolidated statements of
operations for 1994.
The condensed statements of operations related to the
discontinued operations through the date of sale are as follows:
1994
--------
Total operating revenues $69,352
Less: costs and expenses 59,355
--------
Income before income taxes 9,997
Less: income tax expense 3,399
--------
Net income $ 6,598
========
The effective tax rate for the discontinued operations varied
from the federal tax rate primarily due to state income tax offset by
percentage depletion in 1994.
<TABLE>
4. MARKETABLE SECURITIES
At December 31, 1995 and 1996, investments classified as available-for-sale and trading
securities are as follows:
<CAPTION>
Available
for Sale Unrealized Deferred Decrease
(1995) Fair Value Cost Loss 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
========== ========= ========== ============= =========
Available
for Sale Unrealized Deferred Increase
(1996) Fair Value Cost Gain Tax Liability In Equity
- ----------------- ---------- --------- ---------- ------------- ---------
Equity securities $ 3,186 $ 3,043 $ 143 $ 57 $ 86
Corporate bonds 1,386 1,119 267 107 160
---------- --------- ---------- ------------- ---------
Total $ 4,572 $ 4,162 $ 410 $ 164 $ 246
========== ========= ========== ============= =========
Trading Securities
(1996) Fair Value Cost
- ------------------ ---------- ---------
U.S. Government
Bonds $ 1,011 $ 933
Corporate bonds 5,000 5,000
========== =========
Total $ 6,011 $ 5,933
========== =========
The maturities for corporate and government bonds at December 31, 1995 and 1996 are as
follows:
</TABLE>
<TABLE>
<CAPTION>
1995 1996
Fair Amortized Fair Amortized
Value Cost Value Cost
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Due in one through five years $ 13,509 $ 14,598 $ 6,618 $ 6,302
Due after five through ten years 2,923 2,992 779 750
--------- --------- --------- ---------
$ 16,432 $ 17,590 $ 7,397 $ 7,052
--------- --------- --------- ---------
Proceeds from the sale of marketable securities totaled approximately $26,740, $48,022
and $21,391 in 1994, 1995, and 1996, respectively.
</TABLE>
5. INVESTMENT IN AFFILIATE
GIANT's investment in Rally's Hamburgers, Inc. ("Rally's") of
$3,423 and $2,926 at December 31, 1995 and 1996, represents
approximately 48% and 15%, respectively, of Rally's outstanding
common stock. At December 31, 1995 and 1996, the Company owned
approximately 7,430,000 and 3,137,000 shares of Rally's outstanding
common stock, the quoted market price of which was approximately
$7,198 and $14,313. On March 24, 1997, the market price of the
Company's investment in Rally's outstanding common stock was $10,195.
The Company's equity investment percentage in Rally's decreased
because GIANT did not elect to participate in Rally's Subscription
Rights Offering and because of the acquisition of 4,293,000 shares by
Fidelity National Financial, Inc. ("Fidelity") and CKE Restaurants,
Inc. ("CKE"), an affiliate of Fidelity, from the Company. The
Company will continue to account for the investment under the equity
method of accounting because of the Company's ability to exercise
significant influence over operating and financial policies of
Rally's, due to the Company's representation on the Rally's Board of
Directors, including GIANT's Chief Executive Officer as Chairman of
the Rally's Board of Directors.
On January 22, 1996, the Company disclosed that it intended to
offer to exchange a new series of GIANT participating, non-voting
preferred stock for Rally's outstanding common stock (the "Exchange
Offer"). Upon successful completion of the Exchange Offer, GIANT
would have owned 79.9% of Rally's outstanding common stock. On April
22, 1996, Rally's Board of Directors, after discussions between a
special committee of the Rally's Board of Directors and Donald E.
Doyle, President and Chief Executive Officer of Rally's, requested
that GIANT terminate the Exchange Offer. The termination was
requested to retain sufficient market capitalization to allow Rally's
easier access to the capital markets to raise capital in the future.
GIANT agreed to the request and terminated the proposed Exchange
Offer.
On January 29, 1996, Rally's purchased $22,000 principal amount
of its 9.875% senior notes ("Senior Notes") directly from GIANT for
$14,932. The Company had purchased a total of $26,424 in principal
during 1995 for $14,051 and recorded these Senior Notes as invest-
ments available-for-sale. The Company recognized a gain of $2,958 on
the sale of these Senior Notes. In addition, during the second
quarter of 1996, GIANT sold an additional principal amount of $3,500
of its investment in Rally's Senior Notes through the open market,
and recognized a pre-tax gain of $478.
On February 1, 1996, GIANT agreed to provide Rally's with a
short-term credit facility of up to $2,000 to provide for certain
seasonal financing requirements. The interest on this facility was
calculated at prime and accrued interest was payable on a monthly
basis. As of March 31, 1996, $500 was advanced to Rally's under this
credit facility. This $500 advance was repaid in the second quarter
of 1996 and no other advances have been made. This facility has now
been canceled.
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 could not exceed $793. The letters of
credit had a maximum maturity date of 365 days but could not extend
beyond the agreement's expiration date of February 28, 1997. The
letters of credit were secured by certain cash equivalents of GIANT.
The Company was reimbursed by Rally's for costs related to issuance
of these letters of credit. In October 1996, these letters of
credit, on behalf of Rally's, were canceled and the cash equivalents
were reinvested by GIANT.
On May 3, 1996, pursuant to a Purchase and Standstill Agreement
between GIANT and Fidelity, GIANT sold approximately 768,000 shares
of Rally's common stock to Fidelity and approximately 2,350,000
shares of Rally's common stock to CKE. The Company received cash of
$4,751 and recognized a pre-tax gain of $3,197. As part of this
transaction, GIANT granted irrevocable options to Fidelity and CKE to
each purchase an additional 1,175,000 shares of Rally's common stock
from GIANT, at exercise prices ranging from $3.00 to $4.00 per share,
through April 1998. In March 1997, 1,175,000 options granted to CKE
and Fidelity by GIANT to purchase Rally's common stock at $4.00 per
share were canceled.
On July 1, 1996, Rally's and CKE entered into a ten-year
agreement ("Operating Agreement") pursuant to which 28 Rally's owned
restaurants, located in California and Arizona, are being operated by
Carl's Jr. At the discretion of CKE, certain restaurants will be
converted to Carl's Jr. At February 24, 1997, one restaurant has
been converted. Under the Operating Agreement, Carl's Jr. will be
responsible for the conversion expenses, as well as the operating
expenses for all the restaurants. Rally's will retain ownership of
all the restaurants and receive a percentage of gross revenues
generated by each restaurant. The Operating Agreement is cancelable,
at the discretion of CKE, after an initial five-year period.
On September 5, 1996, by prospectus, Rally's distributed
transferable subscription rights to holders of record of Rally's
common stock on July 31, 1996. For each 3.25 rights held, a holder
was entitled to purchase one unit for $2.25. A unit consisted of one
share of Rally's common stock and one warrant to purchase an
additional share of Rally's common stock for $2.25. On September 16,
1996, GIANT elected to transfer its 4,312,000 subscription rights to
an unaffiliated third party, which has subsequently exercised the
rights. GIANT's increase in Rally's shareholders' equity due to the
Shareholder Rights Offering has been reflected as an increase of
$1,699 in GIANT's investment in affiliate and an increase in capital
in excess of par value.
During the fourth quarter of 1996, CKE and Fidelity, in total,
exercised its option to purchase 1,175,000 shares of Rally's common
stock at the option price of $3.00 per share. The Company received
cash of $3,526 and recognized a pre-tax gain of $2,518. The Company,
because of this sale, recognized $462 in income that was previously
shown as an increase in capital in excess of par. This income is
included in gain on the sale of investment in affiliate.
On December 20, 1996, Rally's announced that it has issued
warrants ("Rally's Warrants") to CKE and Fidelity to purchase an
aggregate 1,500,000 restricted shares of its common stock at an
exercise price of $4.375 per share. The Rally's Warrants have a
3-year term and are not exercisable until December 20, 1997. If all
the warrants are exercised by CKE and Fidelity to purchase Rally's
common stock, the Company's equity ownership in Rally's will be
reduced to approximately 12%.
The Company's sale of Rally's common stock to CKE and Fidelity,
during 1996, generated a capital loss which was carried back to prior
years and was used to reduce capital gains taxes paid on the sale of
the cement operations. As of December 31, 1996, the Company recorded
a tax benefit of $10,285 for this carryback and refund of taxes paid
in prior years. In January 1997, the Company received this refund in
full.
<TABLE>
Summarized financial information for Rally's is as follows:
<CAPTION>
Financial Position as of December 31, 1995 1996
- ------------------------------------- ---------- ----------
<S> <C> <C> <C>
Current assets $ 22,069 $ 10,416
Less: current liabilities 42,276 19,968
---------- ----------
Working capital deficiency (20,207) (9,552)
Noncurrent assets 115,323 101,842
Less: long-term debt and other noncurrent
liabilities (88,444) (72,925)
---------- ----------
Stockholders' equity $ 6,672 $ 19,365
---------- ----------
GIANT's investment in Rally's $ 3,423 $ 2,926
---------- ----------
Operating results for the year ended
December 31, 1994 1995 1996
- ------------------------------------ ---------- ---------- ---------
Revenues $ 186,318 $ 188,859 $ 162,752
Less: operating costs 200,954 225,329 158,662
---------- ---------- ----------
Income (loss) from operations $ (14,636) $ (36,470) $ 4,090
========== ========== ==========
Net (loss) income $ (19,273) $ (46,919) $ 1,988
========== ========== ==========
GIANT's share on non-cash equity income (loss) $ (8,898) $ (22,074) $ 367
========== ========== ==========
</TABLE>
In 1995, Rally's adopted SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of ("SFAS 121") and recorded a non-cash impairment loss of
approximately $13,700.
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.
In 1994, the non-cash equity loss in Rally's includes amortiza-
tion of $435 of the excess cost of the investment over underlying
equity in net assets.
On March 25, 1997, Rally's and Checkers announced that they have
agreed in principle to a merger between the two companies. Under the
terms of the letter of intent signed by the parties, each share of
Rally's common stock will be converted on completion of the merger
into three shares of Checkers common stock. Upon completion of the
merger, Rally's will become a wholly-owned subsidiary of Checkers.
The transaction is subject to negotiation of definitive agreements,
receipt of opinions of Rally's and Checker's investment bankers as to
the fairness of the transaction to Rally's and Checker's respective
shareholders, stockholder approvals and other customary conditions.
The merger is expected to close in the second or third quarter of
1997.
6. CHECKERS DRIVE-IN RESTAURANTS, INC.
On November 14, 1996, KCC, along with CKE and others purchased
an aggregate principal amount of $29,900 of Checkers Drive-In
Restaurants, Inc. (NASDAQ:CHKR) ("Checkers") $36,100 13.75% senior
subordinated debt ("Checkers Debt"), due July 31, 1998, from certain
current debt holders. These holders retained approximately $6,200 of
the principal amount. The total purchase price for the senior
subordinated debt was $29,100. KCC purchased $5,100 principal amount
of this senior subordinated debt for $5,000. On November 22, 1996,
the senior subordinated debt was restructured. As part of the
restructuring, the aggregate principal amount was reduced to $35,800,
the interest rate was reduced to 13%, the term of the restructured
credit agreement was extended one year, scheduled principal payments
were deferred to May 1997, certain financial covenants were modified
and, in return, Checkers issued warrants ("Checkers Warrants") to all
holders of the senior subordinated debt, to purchase an aggregate of
20,000,000 shares of Checkers common stock at an exercise price of
$.75 per share. KCC received 2,849,000 Checkers Warrants, which are
currently unregistered and are exercisable at any time until November
22, 2002. Checkers is obligated to register the common stock to be
issued under the Checkers Warrants by May 22, 1997. The new lenders
also agreed to provide a short-term revolving line of credit up to
$2,500 to Checkers. As of December 31, 1996, KCC advanced $500
("Checkers Advance"). The interest rate on this advance was 13%. At
December 31, 1996, KCC recorded the Checkers Warrants at $1,168 equal
to the difference between the ending market price of the common stock
on November 22, 1996 and the exercise price of $.75 per share
multiplied by the number of Checkers Warrants. At December 31, 1996,
KCC recorded the Checkers Debt at $3,832 and a related discount of
$1,270. This discount will be amortized to income using the
effective interest method. In addition, the Company had an
investment of 200,000 shares of Checkers common stock valued at $350.
In 1997, in addition to interest, Checkers expects to pay KCC
approximately $3,446 related to the Checkers Note and Advance.
The Checkers Advance of $500 was subsequently paid in February
1997.
7. PROPERTY AND EQUIPMENT
As of December 31, 1995 1996
------------------ ------ ------
Land $ 120 $ 120
Leasehold improvements 175 175
Equipment and furnishings 4,773 5,462
------ ------
5,068 5,757
Less: accumulated depreciation 1,801 2,198
------ ------
$3,267 $3,559
====== ======
8. DEBT
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.
On February 29, 1996, the Company prepaid in full its 9.25% Term
Note. The Company incurred no additional expenses in connection with
this prepayment.
9. 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.
During 1996, the Company, with the approval of the Board of
Directors, acquired 1,674,000 shares of its Common Stock at an
aggregate cost of $15,079. Included in these totals are 200,000
shares acquired from the Company's Chairman of the Board at an
aggregate cost of $1,652 and 705,000 shares purchased at an aggregate
cost of $6,085 directly from Fidelity.
During the first quarter of 1997, the Company, with the approval
of the Board of Directors, acquired 429,000 shares of its Common
Stock for an aggregate cost of $3,431.
10. COMMON STOCK OPTIONS
Under the 1996 Employee Stock Option Plan (the "1996 Plan"),
250,000 shares of the Company's $.01 par value Common Stock are
reserved for future options. The options, in general, can be issued
as either incentive or non-qualified options in accordance with the
1996 Plan. The options, in general, may be exercised in whole or in
part any time after the date of grant and terminate 10 years from the
grant date. In most cases, options shall have an exercise price
equal to the fair market value of the Common Stock on the date of
grant. In 1996, 200,000 options were granted to GIANT's Chairman of
the Board at an exercise price of $8.25 and terminate five years from
the grant date. No other options have been granted under the 1996
Plan.
Under the 1996 Stock Option Plan for Non-Employee Directors (the
"Director Plan"), 250,000 shares of the Company's $.01 par value
Common Stock are reserved for future options. Pursuant to the
Director Plan, each Non-Employee director is entitled to receive an
option to purchase 10,000 shares on May 20, 1996 (the adoption date),
10,000 shares upon the initial appointment to the Board of Directors,
and an option to purchase 10,000 shares upon subsequent reelection to
the Board. Upon election to the Executive Committee, the Non-
Employee director will receive an additional option to purchase
10,000 shares. The options may be exercised in whole or in part any
time after the date of grant and terminate five years from the grant
date. All options shall have an exercise price equal to the fair
market value of the Common Stock on the date of grant. As of
December 31, 1996, 50,000 options were granted to the three Non-
Employee members of the current Board of Directors. The exercise
prices are $7.625 for 20,000 options and $7.75 for 30,000 options.
Prior to August 1995, the Company had a 1985 Incentive Stock
Option Plan (the "Incentive Plan") and a 1985 Non-Qualified Stock
Option Plan (the "Non-Qualified Plan"). 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 granting
of options to purchase 3,000,000 shares of GIANT Common Stock and
options for 307,500 shares have been exercised as of December 31,
1996. In 1996, the Chairman of the Board of the Company exercised
300,000 options, issued under the Non-Qualified Plan 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. No
options were exercised during 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.
In 1995 and 1996, the Company purchased 164,000 and 7,000
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 and $7 which is included in general and
administrative expenses.
The Company measures compensation expense for all stock option
plans under Accounting Principles Board Opinion No. 25 ("APB 25").
The Company has not recognized compensation expense because the
exercise price of the options issued is equal to the fair market
value of the options on the date of the grant. If the Company
recognized compensation expense under SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), net income (loss) would have
been impacted as shown in the following pro forma amounts:
Year ended
---------------------------
December 31, December 31,
1995 1996
---------- ----------
Net income (loss) As reported $(22,332) $ 17,912
Proforma (27,007) 17,452
Primary earnings As reported $ (4.37) $ 3.48
(loss) per share Proforma $ (5.29) $ 3.35
The fair value of each option grant is estimated using the Black-
Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: no
dividend yield; expected volatility of 20 percent; risk-free rate of
return 7.1% percent; and expected lives of 5 years. The SFAS No. 123
method of accounting has not been applied to options granted prior to
January 1, 1995, therefore, the resulting pro forma compensation
costs may not be representative of that to be expected in future
years.
<PAGE>
<TABLE>
A summary of options is as follows:
Weighted Weighted Weighted
Average Average Average
1994 Exercise 1995 Exercise 1996 Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance 2,289,000 $ 6.43 2,319,000 $ 6.48 2,126,000 $ 6.76
Granted or issued 30,000 11.00 2,126,000 6.76 250,000 8.14
Exercised (300,000) 6.75
Canceled (2,319,000) 6.48 (20,000) 6.75
--------- --------- ---------
Ending balance 2,319,000 $ 6.48 2,126,000 $ 6.76 2,056,000 $ 6.93
========= ========= =========
Options exercisable at
end of year 2,319,000 2,054,000 2,024,000
========= ========= =========
Weighted average of
fair value of options
granted N/A $ 2.28 $ 2.75
</TABLE>
<TABLE>
The following table summarizes information about stock options outstanding and exercisable
at December 31, 1996:
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------ -------------------------
Wtd. Avg.
Outstanding Remaining Wtd. Avg. Exercisable Wtd. Avg.
Range of as of Contractual Exercise as of Exercise
Exercise Price Dec 31., 1996 Life Price Dec. 31, 1996 Price
- -------------- ------------- ----------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$6.75 to $6.88 1,756,000 9.2 years $6.75 1,742,000 $6.75
7.00 to 7.55 100,000 6.7 7.37 82,000 7.44
8.25 200,000 4.7 8.25 200,000 8.25
----------- -----------
$6.75 to $8.25 2,056,000 8.7 years $6.93 2,024,000 $6.93
=========== ===========
</TABLE>
<PAGE>
11. CLASS A COMMON STOCK, $.01 PAR VALUE
On July 12, 1996, GIANT's stockholders approved an amendment to
the Company's Certificate of Incorporation which authorized 5,000,000
shares of Class A Common Stock, $.01 par value per share. This Class
A Common Stock is identical in all respects to the $.01 par value
Common Stock except that the Class A Common Stock, except in limited
situations, have no voting rights. Presently, there are no plans or
commitments for this Class A Common Stock.
12. 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 during 1995 and 1996.
13. STOCKHOLDERS RIGHTS PLAN
On January 4, 1996, GIANT declared a dividend of one preferred
share purchase right ("Right") for each share of GIANT Common Stock
outstanding on January 16, 1996 and authorized the issuance of
additional Rights for GIANT Common Stock issued after that date.
Each Right entitles the holder to buy 1/1,000th of a share of
Series A Junior Participating Preferred Stock at an exercise price of
$30 for each 1/1,000th share. The Rights will be exercisable and
will trade separately from the GIANT Common Stock (1) ten days after
a public announcement that a person or group of persons has become
the beneficial owner of 15% or more of the GIANT Common Stock (an
"Acquiring Person"), or (2) ten business days (or such later date as
may be determined by the Board of Directors) after commencement or
announcement of an intention to make a tender or exchange offer, the
consummation of which would result in such person or group of persons
becoming the beneficial owner of 15% or more of GIANT Common Stock;
provided however, because Mr. Sugarman, Chairman and Chief Executive
Officer of the Company, beneficially owned in excess of 15% of GIANT
Common Stock on the date the Stockholders Rights Plan was adopted,
Mr. Sugarman will become an Acquiring Person only upon the acquisi-
tion by Mr. Sugarman of additional shares of GIANT Common Stock,
other than acquisitions through stock dividends, stock option plans,
GIANT compensation or employee benefit plans and other similar
arrangements.
If any person does become an Acquiring Person (subject to certain
exceptions), the other holders of GIANT Common Stock will be able to
exercise the Rights and buy GIANT Common Stock having twice the value
of the exercise price of the Rights. GIANT may, at its option,
substitute fractional interests of a share of Series A Junior Parti-
cipating Preferred Stock for each share of GIANT Common Stock to be
issued upon exercise of the Rights. Additionally, if GIANT is
involved in certain mergers where its shares are exchanged or certain
major sales of its assets occur, holders of GIANT Common Stock will
be able to purchase for the exercise price, shares of stock of the
Acquiring Person having twice the value of the exercise price of the
Rights.
The Rights may be redeemed by GIANT at any time prior to the time
any person becomes an Acquiring Person for a price of $.01 per Right.
Unless exercised, the Rights expire on January 4, 2006.
The Rights could have the effect of discouraging a third party
from making a tender offer or otherwise attempting to obtain control
of GIANT. In addition, because the Rights may discourage accumula-
tions 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.
14. INCOME TAXES
The benefit for income taxes is comprised of the following:
For the year ended
December 31, 1994 1995 1996
- ------------------ -------- --------- --------
Current federal income
tax benefit $ 3,419 $ 413 $ 8,611
Deferred federal income tax
benefit (provision) 242 (156) (483)
Current state income tax
benefit - 29 1,521
-------- --------- --------
Benefit for income taxes $ 3,661 $ 286 $ 9,649
======== ========= ========
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:
For the year ended
December 31, 1994 1995 1996
- ------------------ -------- -------- --------
Statutory federal tax
(provision) benefit on
pre-tax (income) loss $12,924 $ 7,690 $(2,809)
State tax benefit (provision),
net of federal taxes - 1,388 (507)
(Increase) decrease in
valuation allowance (9,070) (8,898) 12,560
Other, net (193) 106 405
-------- -------- --------
Benefit for income taxes $ 3,661 $ 286 $ 9,649
======== ======== ========
Deferred tax assets and (liabilities) of the Company consist of
the following:
As of December 31, 1995 1996
- ------------------ --------- ---------
Investment in Rally's $ 17,288 $ 2,341
State capital loss carryforward - 2,430
Depreciation (690) (1,056)
Unrealized investment losses (gains) 885 (164)
Other, net 68 (92)
Valuation allowance (17,356) (4,796)
--------- ---------
Net deferred tax assets
(liabilities) $ 195 $ (1,337)
========= =========
The valuation allowance at December 31, 1995 and 1996 is
provided because it is not likely, 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
these benefits. Appropriate adjustments will be made to the
valuation allowance 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, a
deferred tax asset of $885 related to unrealized losses on certain
investments classified as available-for-sale are not provided for in
the valuation allowance of $17,356 as the related investments were
sold at a net gain, subsequent to year-end, and the associated
deferred tax benefit was recognized. Gross realized losses on
marketable securities classified as investments available-for-sale in
1995, net of deferred tax of $885, are included as reduction of
equity at December 31, 1995. Certain amounts in 1995 have been
reclassified to reflect the results of the actual tax return filings.
At December 31, 1996 and 1995, the Company's consolidated
balance sheets included a liability related to a proposed assessment
by the State of California, made as a result of their audit of the
tax years 1989 through 1991. GIANT has disputed this assessment and
has provided documents to support the Company's position during
meetings with the New York office of the California State Franchise
Tax Board during 1995 and 1996. The Company has received a
preliminary proposed adjustment from the New York office which
indicates that the assessment will be reduced. The Company made
payments of $259 during 1996 as a result of this preliminary proposed
adjustment. The ultimate resolution will be based on the final
review and official notice from the California office of the
Franchise Tax Board, which has not yet been received.
Under the Internal Revenue Code, in addition to the regular
corporate income tax, an additional tax may be levied upon an entity
that is classified as a "personal holding company". In general, this
tax is imposed on corporations which are more than 50% owned,
directly or indirectly, by 5 or fewer individuals (the "Ownership
Test") and which derive 60% or more of their income from "personal
holding company" sources, generally defined to be passive income (the
"Income Test)". If a corporation falls within the Ownership Test and
the Income Test, it is classified as a personal holding company, and
will be taxed on its "undistributed personal holding company income"
at a rate of 39.6%. The Company currently meets the stock ownership
test. The Company has not met the income requirement in recent
years, therefore is not subject to this additional tax; however no
assurance can be given that the income test will not be satisfied in
the future.
15. 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 1994, 1995 and 1996
amounted to $271, $231 and $186, respectively.
Future minimum rental commitments under noncancelable leases
with a remaining term in excess of one year as of December 31, 1996
are as follows:
1997 $ 60
In April 1997, the Company will move its corporate headquarters.
The new lease term for the corporate office is 60 months at $21 per
month. The Company has two, three-year renewal options.
16. COMMITMENTS AND CONTINGENCIES
In January and February 1994, two putative class action lawsuits
were filed, purportedly on behalf of the shareholders of Rally's in
the United States District Court for the Western District of
Kentucky, against Rally's, GIANT, Burt Sugarman, certain Rally's
present and former officers and directors and its auditors. The
complaints allege defendants violated the Securities Exchange Act of
1934, as amended, among other claims, by issuing inaccurate public
statements about Rally's in order to arbitrarily inflate the price of
Rally's common stock, and seek unspecified damages, including
punitive damages. On April 15, 1994, Rally's filed a motion to
dismiss and a motion to strike. On April 5, 1995, the Court struck
certain provisions of the complaint but otherwise denied Rally's
motion to dismiss. In addition, the Court denied plaintiffs' motion
for class certification; the plaintiffs' renewed this motion, and, on
April 16, 1996, the Court certified the class. In October 1995, the
plaintiffs filed a motion to disqualify Christensen, Miller, Fink,
Jacobs, Glaser & Shapiro, LLP ("Christensen Miller") 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 association with Christensen Miller. That motion was
denied on September 19, 1996. The action briefly was stayed between
May 30 and June 21, 1996 to facilitate settlement discussions. One
settlement conference has been conducted; no others are currently
scheduled. Fact discovery is set to close on March 31, 1997. No
trial date has been scheduled yet. 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 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 shareholders of Rally's by causing
Rally's to repurchase certain Rally's Senior Notes at an inflated
price. Harbor seeks "millions of dollars" in damages, along with
rescission of the repurchase transaction. In the fall of 1996, all
defendants moved to dismiss this action. The Chancery Court
conducted a hearing before the end of the year, but has not yet ruled
on the pending notions. 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 complaint, filed before the Los Angeles County
Superior Court, alleges that these directors breached their fiduciary
duties by adopting a stockholder rights plan, by causing GIANT to
sell certain Rally's Senior Notes back to Rally's, by causing GIANT
to repurchase certain amounts of its own Common Stock pursuant to its
stock repurchase program and by agreeing to the Exchange Offer. The
complaint claims that these actions were undertaken to entrench
management rather than for the benefit of the Company and its
stockholders. The complaint seeks unspecified damages, injunctive
relief and a recovery of attorneys' fees and costs. In February
1997, defendants filed a motion to dismiss for failure to make a
pre-litigation demand on the Board of Directors to investigate the
plaintiffs' claim. The motion asks the court, in the alternative, to
stay the litigation to permit the Company to address plaintiffs'
claims internally. Argument on this motion is set for early April
1997. The Company denies all wrongdoing and intends to vigorously
defend itself in this action. It is not possible to predict the
outcome of the action at this time.
In October 1996, KCC filed a complaint, in the Los Angeles
County Superior Court, that states causes of action for fraud, breach
of fiduciary duty, fraudulent concealment, breach of contract, unfair
business practices, permanent and preliminary injunctive relief, and
declaratory relief. The complaint seeks damages for the breach by
Mr. Joseph Pike and related entities of a July 24, 1996 agreement by
which KCC agreed to contribute $6,000, in return for a 26% equity
interest in the entity producing the abortion inducing drug,
Mifepristone, in the United States and other parts of the world
("NeoGen Agreement"). KCC has also sued the licensors of
Mifepristone, the Population Council, Inc. and Advances in Health
Technology, Inc., on a declaratory relief claim. The licensors claim
that their prior approval was necessary for the July 24, 1996 NeoGen
Agreement between KCC and Joseph Pike and the other defendants. On
February 19, 1997, the Pike defendants filed an answer to the
complaint, denying its material allegations and raising affirmative
defenses. On that date, Joseph Pike and the other defendants filed a
cross-complaint against KCC, GIANT, Burt Sugarman, Terry Christensen
and David Malcolm alleging causes of action for fraud, breach of
contract, intentional interference with prospective economic
advantage, negligent interference with prospective economic advantage
and unfair business practices. No discovery has yet been conducted.
A status conference in this matter is set for July 3, 1997. No trial
date has been set.
In November 1996, Joseph Pike filed a complaint for defamation
against GIANT, KCC, Burt Sugarman, Terry Christensen, David Malcolm
and Does 1 through 50, in the San Diego County Superior Court. The
complaint seeks an unspecified amount of general, special and
exemplary damages. The court has tentatively denied KCC's motion to
dismiss the complaint on the grounds that it is a compulsory
counterclaim to the Los Angeles action, and the other defendants'
motion to transfer the matter to Los Angeles Superior Court. A
hearing date for these motions is being obtained. All defendants
(except KCC) have answered the complaint, denying its material
allegations and raising several affirmative defenses. KCC and the
other defendants have also filed a motion to stay certain and/or to
reconsider ruling on motion to strike the complaint. Both motions
are scheduled to be ruled upon on April 4, 1997. KCC denies all
wrongdoing and intends to vigorously defend itself in this action.
It is not possible to predict the outcome of the action at this time.
Since management does not believe that the previously mentioned
lawsuits contain meritorious claims, management believes that the
ultimate resolution of the lawsuits will not materially and adversely
affect the Company's financial position 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, 2000. The contract calls for a annual base
salary of $1,000 and an annual bonus determined, year to year, by the
compensation committee of the Board of Directors.
<PAGE>
Report of Independent Public Accountants
To the Board of Directors of
GIANT GROUP, LTD.:
We have audited the accompanying consolidated balance sheets of GIANT
GROUP, LTD. (a Delaware corporation) and subsidiaries as of December
31, 1996 and December 31, 1995, and the related consolidated
statement of operations, stockholders' equity and cash flows for each
of the two years in the period ended December 31, 1996. 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 audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audits 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 consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of GIANT GROUP, LTD. and subsidiaries as of December 31,
1996 and December 31, 1995, and the results of its operations and its
cash flows for each of the two years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 25, 1997
<PAGE>
Report of Independent Public Accountants
To the Board of Directors of
GIANT GROUP, LTD.:
We have audited the accompanying consolidated statements of
operations, stockholders' equity and cash flows of GIANT GROUP, LTD.
and subsidiaries for the year 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 audit. We did not audit the
financial statements of Rally's Hamburgers, Inc. for the year ended
December 31, 1994, and 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) in the
net loss of Rally's for the year ended December 31, 1994 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 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 and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based upon our audit 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 the
year ended December 31, 1994 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
March 10, 1995
<PAGE>
<TABLE>
<CAPTION>
GIANT GROUP, LTD.
QUARTERLY FINANCIAL DATA
(Dollars in thousands, except per share amounts)
(Unaudited)
1996 Quarter Ended
--------------------------------------------------------
March 31 June 30 September 30 December 31
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Income $ 1,452 $ 2,612 $ 2,815 $ 1,139
Costs and expenses 1,042 1,155 1,313 1,088
Proxy contest and related legal - 736 - 16
Exchange Offer and related expenses 388 130 - -
Gain on sale of investment in
affiliate - 3,197 - 2,980
Equity in income (loss) of
affiliate 397 (168) 88 50
Expense (benefit) for income taxes - (8,563) 51 (1,137)
Net income (loss) 419 12,183 1,539 3,771
Earnings (loss) per common share
and common equivalent share 0.08 2.33 0.32 0.77
1995 Quarter Ended
--------------------------------------------------------
March 31 June 30 September 30 December 31
---------- ---------- ---------- ---------
Income $ 1,110 $ 915 $ 859 $ 1,212
Costs and expenses 1,053 1,165 1,001 1,421
Equity in income (loss) of
affiliate (1,671) (611) (8,207) (11,585)
Net loss (1,614) (861) (8,349) (11,508)
Loss per common share and
common equivalent share (0.31) (0.17) (1.64) (2.28)
</TABLE>
<PAGE>
<page-42>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10, 11, 12 and 13.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE
COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by these items, other than information
set forth in this Form 10-K under Item I, "Executive officers of
registrant", is omitted because the Company is filing a definitive
proxy statement pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report which
includes the required information. The required information
contained in the Company's proxy statement is incorporated herein by
reference.
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 December 29, 1996 and December
31, 1995
Consolidated Statements of Operations for each of the three
fiscal years in the period ended December 29, 1996
Consolidated Statements of Stockholders' Equity for each of the
three fiscal years in the period ended December 29, 1996
Consolidated Statements of Cash Flows for each of the three
fiscal years in the period ended December 29, 1996
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 29, 1996
(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).
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
(filed as Exhibit 3.1.5 to the Company's Annual Report
on Form 10-K, dated March 29, 1996, and incorporated
herein by reference).
3.1.6 Certificate of Amendment to Restated Certificate of
Incorporation to Authorize Non-Voting Common Stock,
dated July 20, 1996 (Proposal No. 4 in the Notice of
Annual Meeting of Stockholders held on July 12, 1996,
filed with the SEC on June 7, 1996 and incorporated
herein by reference).
3.2 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 1 to the Company's Form 8-K, dated
January 4, 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).
10.4 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).
10.5 Indemnification and Release Agreement, dated as of
September 27, 1994, among the Company, KCC , GCHI
(filed as Exhibit 2 to the Company's Current Report on
Form 8-K, dated October 6, 1994 and incorporated
herein by reference).
10.6 Note purchase agreement ($16 million face value bonds)
between GIANT (seller) and Rally's (buyer), dated
January 29, 1996 (filed as Exhibit 10.7 to the
Company's Annual Report on Form 10-K, dated March 28,
1996, and incorporated herein by reference).
10.7 Note purchase agreement ($6 million face value bonds)
between GIANT (seller) and Rally's (buyer), dated
January 29, 1996 (filed as Exhibit 10.8 to the
Company's Annual Report on Form 10-K, dated March 28,
1996, and incorporated herein by reference).
10.8 Short-term promissory note ($4.1 million) between
GIANT (payee) and Rally's (maker), dated January 29,
1996 (filed as Exhibit 10.9 to the Company's Annual
Report on Form 10-K, dated March 28, 1996, and
incorporated herein by reference).
10.9 Promissory note for advances of up to $2 million
between GIANT (payee) and Rally's (maker), dated
February 1, 1996 (filed as Exhibit 10.10 to the
Company's Annual Report on Form 10-K, dated March 28,
1996, and incorporated herein by reference).
10.10 Letter of Credit Reimbursement Agreement between GIANT
and Rally's, dated February 1, 1996. (filed as Exhibit
10.11 to the Company's Annual Report on Form 10-K,
dated March 28, 1996, and incorporated herein by
reference).
10.11 Letter of Credit Agreement between GIANT and Bank of
America National Trust and Savings Association, dated
February 23, 1996 (filed as Exhibit 10.12 to the
Company's Annual Report on Form 10-K, dated March 28,
1996, and incorporated herein by reference).
10.12 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 (filed as Exhibit 10.13 to the Company's
Annual Report on Form 10-K, dated March 28, 1996, and
incorporated herein by reference).
10.13 GIANT GROUP, LTD. 1996 Employee Stock Option Plan
(Exhibit A in the Notice of Annual Meeting of Stock-
holders held on July 12, 1996, filed with the SEC on
June 7,1996, and incorporated herein by reference).
10.14 GIANT GROUP, LTD. 1996 Stock Option Plan for Non-
Employee Directors (Exhibit B in the Notice of Annual
Meeting of Stockholders held on July 12, 1996, filed
with the SEC on June 7, 1996, and incorporated herein
by reference).
10.15 Promissory note ($5 million) between GIANT and CBI
dated September 27, 1996 (filed as Exhibit 10.1 to the
Company's Form 10-Q for the third quarterly period
ended September 30, 1996, and incorporated herein by
reference).
10.16 Guaranty between GIANT and CKE on $5 million
promissory note, dated September 27, 1996 (filed as
Exhibit 10.2 to the Company's Form 10-Q for the third
quarterly period ended September 30, 1996, and
incorporated herein by reference).
10.17* Employment Agreement dated February 24, 1997, between
the Company and Burt Sugarman.
10.18 Amended and Restated Credit Agreement dated as of
November 22, 1996 among Checkers, CKE as Agent, and
the lenders listed therein (filed as Exhibit 4.1 to
Checkers Current Report on Form 8-K dated November 22,
1996, and incorporated herein by reference).
10.19 Warrant to Purchase Common Stock of Checkers Drive-In
Restaurants, Inc. dated November 22, 1996 (filed as
Exhibit 4.3 to Checkers Current Report on Form 8-K
dated November 22, 1996, and incorporated herein by
reference).
11* Statement re: Computation of Per Share Earnings.
16 Letter from Coopers & Lybrand L.L.P. to the SEC dated
January 29, 1996 (filed as Exhibit 1 to the Company's
Current Report on Form 8-K, dated January 25, 1996,
and incorporated herein by reference).
21* List of Subsidiaries.
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
(b) Reports on Form 8-K:
During the quarter ended December 31, 1996, the
Company filed the following reports on Form 8-K:
On October 31, 1996, the Company's formation of a
new, wholly-owned subsidiary, GIANT MARINE GROUP, LTD.
and the purchase of two yachts.
(c) 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.
<PAGE>
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, 1997 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, 1997 By: /s/ Burt Sugarman
----------------------
Burt Sugarman
Chairman of the Board and
Chief Executive Officer
Date: March 25, 1997 By: /s/Cathy L. Wood
----------------------
Cathy L. Wood
Vice President, Chief
Financial Officer,
Secretary and Treasurer
(Principal Financial and
Accounting Officer)
Date: March 25, 1997 By: /s/David Gotterer
-----------------------
David Gotterer
Director
Date: March 25, 1997 By: /s/Terry Christensen
-------------------------
Terry Christensen
Director
Date: March 25, 1997 By: /s/ David Malcolm
------------------------
David Malcolm
Director
<PAGE>
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 29, 1996
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
This has been a significant year for the Company on many
fronts. In order to more readily understand the Company's
improved performance, the following table provides a comparative
view of the Company's underlying operations.
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
Fiscal Years Ended
----------------------------------------------
January 1, December 31, December 29,
1995 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income (loss) from operations before
restaurant closures and other $ 2,623 $ (5,425) $ 4,110
Provision for restaurant closures
and other (17,259) (31,045) (20)
------------ ------------ ------------
Income (loss) from operations (14,636) (36,470) 4,090
Total other expense (9,619) (9,910) (8,057)
------------ ------------ ------------
Loss before income taxes and
extraordinary items (24,255) (46,380) (3,967)
Provision (benefit) for income
taxes 4,982 (539) 675
Extraordinary items, net of tax - - 5,280
------------ ------------ ------------
Net income (loss) $ (19,273) $ (46,919) $ 1,988
============ ============ ============
</TABLE>
<PAGE>
The extraordinary gain, net of tax, of approximately $5.3
million or $.31 per share from the Company's early retirement of
certain of its outstanding Senior Notes, at amounts below
carrying value, resulted in the Company reporting net income for
fiscal 1996. The transactions involving the Senior Notes were
opportunities created by the Company's conservation of cash
during the second half of 1995 and the depressed market price of
the Senior Notes during the year. In addition, the transactions
resulted in a reduction of net interest expense in 1996 of
approximately $1.3 million and $2.1 million as compared to 1994
and 1995, respectively. These transactions are more fully
described in Note 10 to the accompanying consolidated financial
statements.
As more fully discussed in Note 13 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 realiza-
bility of net operating loss carryforwards. Until circumstances
otherwise indicate that realization becomes more likely than
not, no additional benefit will be recognized.
As evidenced in the table above, the provision for
restaurant closures and other was significantly reduced in 1996
from the prior year levels. This reduction is primarily
attributable to the current year strengthening of the store
level economics which have improved the Company's ability to
recover, at a minimum, its store level investment and to prior
writedowns of underperforming assets, thereby reducing the need
at this time for additional writedowns or disposals of Company
assets. See the section below entitled "Restaurant Closures and
Other" for a more detailed discussion.
The Company's income from operations before restaurant
closures and other in fiscal 1996 represented a substantial
improvement of approximately $9.5 million over the prior year.
This improvement in the Company's financial performance is
primarily attributable to a turnaround plan, predominately
formulated in the first half of 1996, which the Company has been
implementing over the balance of the year. The Plan focuses on
four key strategies to stem the prior negative operational
performance trend: (i) strengthen the balance sheet and reduce
fixed costs, (ii) improve store level profitability, (iii)
establish an effective brand positioning, and (iv) pursue
opportunistic new store development. The results of each
strategy of the Plan are more fully discussed below.
Although the Company's debt level is still high, the
Company has made substantial progress in improving its balance
sheet and reducing fixed costs. The debt load was significantly
reduced through the retirement of approximately $22 million face
value of the Company's Senior Notes in January 1996 and an
additional $4.7 million during the fourth quarter. As a result,
the Company's annual interest expense related to the Senior
Notes has been reduced by approximately $2.6 million. In
addition, $10.8 million in gross proceeds were generated through
the Company's Rights Offering completed in September 1996. The
proceeds from the Offering have been used to pay off debt of
$4.5 million approximately and the remainder will be used for
new store construction, refurbishment of some existing
restaurants and for other general corporate purposes, including
possible further debt reduction. Outstanding warrants from the
Rights Offering and from a separate issuance of 1,500,000
additional warrants in December 1996, if exercised, could raise
an additional $17.4 million in cash proceeds. The Company also
made progress in disposing of surplus assets, as assets held for
sale declined by over $4 million from the end of 1995. Lastly,
the Company reduced its general and administrative costs by over
$3.5 million during the year.
The Company has also made progress in the second key
strategy of its turnaround plan, as store-level profitability
has improved. Much of this improvement resulted from the
Company's cost reduction actions related to food, paper and
labor which were implemented in the beginning of the second
quarter of 1996 and are further discussed in "Results of
Operations." The primary impact of these changes was realized
during the third and fourth quarters and was reflected in the
Company's store profit margins. Improvement in store level
profitability also resulted from improvements in the Company's
cost structure, reflecting the elimination of heavy discounting
that drove traffic increases but did not materially improve the
Company's profitability.
The Company's third key strategy in its turnaround plan
will be the primary focus going into 1997. Although the Company
generated net income from operations, same store sales continued
to decline since 1995. To combat this negative trend in sales,
management believes an effective brand positioning must be
established in order to grow same store sales. The new brand
positioning, referred to as "Bigger, Better Burgers," was
developed during the fourth quarter of 1996 with the assistance
of the Company's new advertising agency, Mendelsohn/Zien. The
new positioning is based on an improved burger product line
including two new premium burgers; new, more impactful menu
boards; and new advertising. The new advertising mirrors the
successful campaign created by Mendelsohn/Zien for the Carl's
Jr. chain. The new positioning was rolled out to three of the
Company's markets in December 1996 and to the remaining Company
markets by late February 1997. The Company's franchisees have
also begun conversion to the new brand positioning and, in
general, are very supportive. Although preliminary sales
results have been encouraging, management does not expect to see
the full impact of this new strategy prior to the second quarter
of 1997. Management believes that new brand positioning will
result in a gradual increase in sales over time.
The final strategy in the Company's turnaround plan is to
increase focus on new store development. Faced with declining
same store sales and profitability over the three years prior to
1996, the Company had concluded at various times that a
constriction of operations through store closures was necessary.
Given the progress against its plan, management believes that
the Company can once again start focusing on growing sales
through new store development. In 1996, the Company opened 6
stores and franchisees opened 15 stores, for a total of 21 new
stores. For 1997, management expects to open 15 Company stores
and 20 franchised stores. In addition, as a result of improved
store level economics and in an effort to improve future cash
flows, management has decided to reopen three stores previously
closed and to continue to operate one store that had been
designated for closure. These decisions were made possible by
the improvements in controllable cost performance in the second
half of the year.
Further discussion of the factors affecting results of
operations is included below.
PROPOSED TRANSACTIONS
On March 25, 1997, the Company agreed in principle to a
merger transaction pursuant to which the Company would become a
wholly-owned subsidiary of Checkers Drive-In Restaurants, Inc.,
a Delaware corporation ("Checkers"). Checkers, together with
its franchisees, operates approximately 478 double drive-thru
hamburger restaurants primarily located in the Southeastern
United States. Under the terms of the letter of intent executed
by the Company and Checkers, each share of the Company's Common
Stock will be converted into three shares of Checkers' common
stock upon consummation of the merger. The transaction is
subject to negotiation of definitive agreements, receipt of
fairness opinions by each party, receipt of stockholder and
other required approvals and other customary conditions.
RESTAURANT CLOSURES AND OTHER
Certain charges in fiscals 1994, 1995 and 1996 have been
aggregated and segregated into the caption "Provision for
Restaurant Closures and Other" in the accompanying Statements of
Operations. These items represent estimates of 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 and are discussed in further detail below.
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 alloca-
tion 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 periodi-
cally 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 construc-
tion 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, which was adopted by management,
designed to improve earnings and cash flow . 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 its most profitable markets. The Company
believed that franchisees would be better able to concentrate 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. The charge included approximately
$3.2 million as a reserve against identifiable goodwill,
territory rights and other intangible assets. 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 decided 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. Six
additional restaurants were closed in 1996. The Company decided
in 1996 to continue to operate 2 of these 16 restaurants until
such time that the leases have expired or the properties have
been sublet. The Company decided to continue to operate the
remaining 38 stores previously included in the original 60
restaurants. With the restaurant closures discussed above and
without the burden of impending closure associated with the
prior plan regarding these markets, management 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 1995 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.
The Company decided in 1996 to continue to operate two of these
restaurants, one of which is being operated by CKE, as part of a
management agreement with the Company.
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 believed had 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.
In 1995, 18 additional modular buildings became excess, as
expected Company development continued to be reduced and
decisions were made regarding other restaurant closures. At
December 31, 1995, the Company had available 54 substantially
completed modular restaurant buildings, which were not expected
to be assigned to future Company development. 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.
The charges of $2.3 million related to third quarter 1995
closure decisions, described above, also included approximately
$1.5 million related to an additional write-down on modular
buildings which were previously utilized at those locations.
During 1996, the Company sold 20 buildings, resulting in 34
buildings available for sale at December 29, 1996 which are
being marketed to franchisees and others. Current expectations
of net realizable value are based on the Company's experience
related to marketing the buildings.
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 were 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, 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. Additionally, fourth quarter,
1995 charges totaling approximately $1.1 million were recorded
to reflect changes in the estimated net realizable values of 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 recover-
able 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, under
performing 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 recover-
ability, 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 develop-
ment, 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.
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 approxi-
mately $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 establish-
ment of reserves for expected future occupancy-related costs.
During 1996, the Company revised its estimate of net realizable
value for five of its poor performing restaurants in Montgomery,
Alabama based upon an existing agreement to sell the restaurants
to a non-affiliated restaurant operator. Such change in
estimate resulted in a reduction of approximately $232,000 in
related reserves. In addition, during the fourth quarter of
1996, management decided to reopen three units previously closed
and to continue to operate a fourth unit that had been
designated for closure, resulting in a reduction in the reserves
for future occupancy-related costs of approximately $659,000.
In addition, approximately $87,000 in other charges for net
changes in estimated asset recovery were recorded during 1996.
Such adjustments to the reserves are included in the caption
"Provision for restaurant closures and other" on the accompany-
ing Statement of Operations. Total minimum lease commitments
associated with surplus properties are $11.2 million. As of
December 29, 1996, approximately $5.8 million remained in the
reserve for expected future occupancy-related costs, which is
net of amounts representing interest, discounted at 12%, as well
as estimated future sublease recoveries. Assets held for sale
of $2.0 million at December 29, 1996 resulting from the actions
noted above consist mainly of surplus land, buildings and
equipment. The expected disposal dates for these assets are
over the next 3 to 24 months. The carrying amounts of such
assets to be disposed of are shown separately on the accompany-
ing consolidated balance sheets.
In addition to the charges described above, 1995 results
include approximately $13.7 million of certain charges recorded
in the fourth quarter related to 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). This charge represents impairment of
the carrying value of the assets of 37 stores based on manage-
ment's future cash flow estimates given then current base lines
and reasonable trend assumptions. Additional impairment reserves
of approximately $824,000 were recorded during 1996, primarily
related to three additional restaurants determined to be
impaired. See Note 16 to the accompanying consolidated
financial statements.
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 (including CKE-
operated). Company revenue also includes payments resulting
from an operating agreement with CKE, referred to as Owner fee
income in the accompanying consolidated financial statements.
Restaurant cost of sales, restaurant operating expenses,
depreciation and amortization, and advertising and promotion
expenses relate directly to Company-owned restaurants. General
and administrative expenses relate to both Company-owned
restaurants and franchise operations. Owner expenses relate to
CKE-operated restaurants and consist primarily of depreciation
and amortization.
<TABLE>
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:
<CAPTION>
Fiscal Years Ended
-------------------------------------------------------------
Jan. 3, Jan. 2, Jan. 1, Dec. 31, Dec. 29,
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Restaurant sales 93.6% 95.1% 95.8% 96.2% 96.1%
Franchise revenue
and fees 6.4 4.9 4.2 3.8 3.6
Owner fee income - - - - .3
--------- --------- --------- --------- ---------
100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Restaurant cost of
sales(1) 34.7% 35.2% 35.0% 35.7% 34.3%
Restaurant operating
expenses(1) 38.6 42.9 43.7 46.4 45.5
General and administra-
tive expenses 9.4 10.1 9.7 10.0 9.4
Advertising and promo-
tion expenses(1) 5.5 7.0 6.1 7.3 5.0
Depreciation and
amortization(1) 4.8 6.1 7.9 7.2 6.3
Owner expense (2) - - - - 169.1
Other charges (credits) - 7.2 9.3 16.4 -
Income (loss) from
operations 12.5 (4.0) (7.9) (19.3) 2.5
Total other (expense) (.7) (3.7) (5.1) (5.3) (5.0)
--------- --------- --------- --------- ---------
Net income (loss)
before income taxes
and extraordinary
items 11.8 (7.7) (13.0) (24.6) (2.5)
Net income (loss) 7.7% (5.1)% (10.3)% (24.8)% 1.2%
========= ========= ========= ========= =========
Number of restaurants:
Restaurants open at the
beginning of period 333 450 520 542 481
--------- --------- --------- --------- ---------
Company restaurants
opened (closed or
transferred), net
during period 81 55 (2) (11) (30)
Franchised restaurants
opened (closed or
transferred), net
during period 36 15 24 (50) 16
--------- --------- --------- --------- ---------
Total restaurants
opened (closed or
transferred, net
during period 117 70 22 (61) (14)
--------- --------- --------- --------- ---------
Total restaurants open
at end of period 450 520 542 481 467
========= ========= ========= ========= =========
(1) As a percentage of restaurant sales.
(2) As a percentage of owner fee income.
/TABLE
<PAGE>
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 29, 1996 COMPARED WITH FISCAL YEAR
ENDED DECEMBER 31, 1995
Systemwide sales declined 11% for 1996 to approximately
$316.7 million compared with approximately $355.7 million a year
ago. This decrease is attributable to the comparatively lower
number of units in operation in 1996 and to same store sales
declines of 7% systemwide. The decline in same store sales is
primarily due to the lower customer counts experienced upon the
elimination of deep discounting programs in the third and fourth
quarters of 1996 and to the reduced media spending in the fourth
quarter of 1996.
Total Company revenues decreased 14% to approximately
$162.8 million in 1996 compared with approximately $188.9
million in 1995. Company-owned restaurant sales decreased 14%
to approximately $156.5 million due to fewer Company units in
operation, a 6% decline in same store sales, and a decline of
approximately $9 million due to the Company's operating
agreement with CKE, as discussed in "Liquidity and Capital
Resources." Year-to-date, the Company opened 6 units, closed 8
units, and transferred operational responsibility to CKE for 28
units. Franchisees, exclusive of CKE, opened 15 units and
closed 26 units. Five of the Company closures which were in the
Montgomery DMA were sold in September, 1996.
Restaurant cost of sales, as a percentage of sales,
decreased to 34.3% for 1996 compared with 35.7% for 1995. This
decrease is attributable primarily to various cost reduction
actions taken during the second half of 1996, partially offset
by higher food and paper costs as a percentage of sales in the
first six months of 1996. These cost reduction actions include
selective changes in some product and packaging specifications
as well as re-negotiation of purchase terms and selection of
alternative vendors. Management intends to continue to consumer
test and implement such cost saving strategies in its stores,
where appropriate. The increase in cost of sales in the first
half of 1996 resulted primarily from a carryover of deep
discounting programs in the first quarter of 1996 and to a shift
in product mix sold, reflecting the impact of a larger percent
of Big Buford sandwich sales in the first two quarters of 1996
compared to the same period of 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. 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. The Company from time to time
negotiates purchase quantities, such quantities do not exceed
expected usage over the term of such agreements.
Restaurant operating expenses were 45.5% of sales for 1996
compared with 46.4% for 1995. The reduction is primarily due to
management's cost reduction actions in the labor area and better
fixed cost coverage in stores operating during the second half
of the year, partially offset by increased bonus costs
associated with store management compensation. This better
fixed cost coverage is the result of closing poorer performing
units and of transferring operational responsibility for certain
higher fixed cost restaurants in Western markets to CKE. The
identified and implemented changes in staffing levels and labor
deployment in certain stores have yielded savings in management
and crew labor. Management believes that these cost reduction
actions should favorably influence ongoing operating expense
performance; however, their impact may be partially offset by
future increases in the minimum wage.
General and administrative expenses on a year-to-date basis
are lower than 1995, on both a dollar and a percentage of sales
basis. This decrease is caused primarily by reductions in the
corporate and field operations staffs, and by lower levels of
bad debt and other dead project charges, partially offset by
higher legal fees.
Advertising expenses decreased approximately $5.4 million
to 5.0% of sales for 1996 compared to 7.3% for 1995 due
primarily to decreases in levels of radio advertising, outdoor
advertising, and television advertising. During the fourth
quarter, management decided to limit media spending until work
with the new advertising agency on new creative and brand
positioning was completed. Company-wide spending on the new
advertising campaign did not begin until late February 1997.
Depreciation and amortization on a year-to-date basis
decreased to approximately $9.8 million as compared to approxi-
mately $13.0 million for the same period in the prior year.
This decrease is primarily due to asset writedowns associated
with the adoption of SFAS 121 at the beginning of the fourth
quarter 1995, to a decrease in the number of properties being
operated by the Company, and to a segregation into Owner expense
of depreciation and amortization associated with the CKE-
operated properties.
Owner expenses of approximately $744,000 for 1996 represent
the Company's segregated ownership cost related to the 28 units
operated by CKE. These expenses consist primarily of deprecia-
tion and amortization associated with the properties.
Interest expense decreased 19.3% to approximately $8.6
million for 1996 as compared to approximately $10.7 million for
1995 primarily due to the early extinguishment of debt, as
previously discussed. See "Liquidity and Capital Resources" and
Note 10 to the accompanying consolidated financial statements,
for further discussion.
Interest income was higher for 1996 as compared to 1995 due
to increases in the average daily invested amounts.
The Company's decrease in Other is due primarily to the
current year storage costs related to excess modular buildings.
The Company's net tax provision on a year to date basis is
approximately $675,000 (obtained by adding the tax provision
line to the tax expense of approximately $1,350,000 which has
been netted against the extraordinary gain). $575,000 of this
amount is related to state taxes expected to be payable.
$100,000 relates to reduction of an IRS receivable for a NOL
carryback to 1987, 1988, and 1989, further described in Note 13
to the accompanying consolidated financial statements. See
earlier discussion above concerning the extraordinary gain.
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED WITH FISCAL YEAR
ENDED JANUARY 1, 1995
Systemwide sales declined 4% for 1995 to approximately
$355.7 million compared with approximately $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 approximately $186.3
million in 1994 to approximately $188.9 million in 1995.
Company-owned restaurant sales increased 2% to approximately
$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 in Note 2 to the
accompanying consolidated financial statements, offset in part
by a 4% decline in Company-owned same store sales. The ten
units in Hampton Roads, Virginia were 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 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 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.
Restaurant operating expenses were 46.4% of sales for 1995
compared with 43.7% 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.
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.
Advertising expenses increased in 1995 to approximately
$13.2 million or 7.3% of sales, as compared with approximately
$10.9 million or 6.1% of sales in 1994. This increase is
primarily attributable to higher levels of advertising expendi-
tures 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
approximately $13.0 million as compared to approximately $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 approximately $10.7
million as compared to approximately $9.7 million in 1994
primarily due to the debt incurred as part of the Hampton Roads,
Virginia acquisition, discussed above.
Interest income was higher in 1995 than in 1994 due
primarily to a significant increase in the average daily
invested amounts.
The Company recognized other income of approximately
$200,000 in 1995 as compared with other expense of approximately
$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 2 to the consolidated financial
statements). The remainder of the increase is attributable to
the difference in investment gains and losses between years.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operating activity was
approximately $543,000 for 1996 compared with approximately
$8.5 million for 1995 and approximately $6.3 million for 1994.
The notable decrease in 1996 from 1995 resulted primarily from
reductions in working capital which more than offset higher net
income in 1996. The change in working capital related primarily
to decreased balances in accounts payable in 1996 due to
decreased food and paper costs as a percentage of sales and to
decreased overall sales volumes. The decreased overall sales
volumes are attributable to the factors discussed above in the
year to year comparison. The decrease in 1995 from 1994 is
primarily a result of declining net income, somewhat offset by
higher accrued liabilities associated with advertising, workers
compensation costs, and other miscellaneous accruals.
Capital expenditures of approximately $2.3 million for
1996 were funded primarily through sales of surplus properties
and existing cash balances. Approximately $1,286,000 of these
expenditures were for the construction or conversion of new
stores, six of which opened in 1996 and five of which opened
within the first two months of fiscal 1997. The Company spent
approximately $220,000 for the replacement of three existing
store buildings, constructed in the late eighties, with surplus
modular buildings. Such actions were taken to provide increased
operational flexibility and to reduce maintenance costs in these
units given the low cash outflow necessary to utilize certain of
the surplus modular buildings. Remaining capital expenditures
were primarily for the purchase and installation of certain
replacement equipment.
The Company plans to open fifteen units in 1997 and reopen
three units previously closed (see further discussion above).
Full year capital expenditures are expected to be in the range
of approximately $6 million to $8 million, inclusive of replace-
ment capital. This level of new unit development exceeds that
of 1996 (six units) and 1995 (three units) but is significantly
less than that of 1994 (36 units).
In January 1996, the Company repurchased, in two trans-
actions, approximately $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. The
first transaction involved the repurchase of approximately $16
million face value of the Notes for approximately $11.1 million
in cash. The second transaction involved the purchase of
approximately $6 million face value of the Notes in exchange for
a short-term note of approximately $4.1 million due in three
installments of principal and interest, bearing interest at
prime. The Company paid the final installment together with
accrued interest on this note on September 27, 1996. Prior to
the Senior Notes repurchases, the Company's Board of Directors
had received an independent opinion from an investment banking
firm as to the fairness of the transactions. Additionally, in
four separate transactions during the fourth quarter 1996, the
Company repurchased approximately $4.7 million face value of the
Notes from various other bondholders for approximately $4.5
million in cash. As a result of these debt repurchases, the
annualized ongoing interest payments on the Senior Notes have
been reduced by approximately $2.6 million per year to
approximately $5.8 million.
Principal payments of debt and capital leases totaled
approximately $21.8 million during 1996, inclusive of the
approximately $11.1 million, the approximately $4.1 million and
the approximately $4.5 million related to the Senior Notes
repurchased, as discussed above. 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 Senior Notes issued with the balance maturing on June 15,
2000. The repurchase discussed above reduces such sinking fund
requirement to approximately $1.6 million from approximately
$28.3 million.
In February 1996, the Company obtained a one-year credit
facility from GIANT. Concurrent with the completion of its
Rights Offering on September 20, 1996, this credit facility was
terminated by agreement of the parties.
The Company is actively marketing the assets included in
the caption "Assets held for sale" in the accompanying consoli-
dated balance sheet and expects realization in cash over the
next 3 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 value
less costs to sell. There can be no assurances that these
values will be realized. Of the approximate $3.7 million
generated during 1996 from the sale of land and buildings,
approximately $1.9 million was generated during the first quart
of 1996 from the closing of the sales of eleven properties
auctioned in the fourth quarter 1995.
During 1996, the Company received funds (approximately
$90,000) on land contracts which are the subject of an aggregate
amount of approximately $1.8 million of sale/leaseback
financing. The interest rate on such facility is approximately
12.5%. The holder of such contracts has been unable to complete
contractual requirements to fund such transactions. During the
first quarter of 1997, the Company has received an additional
$100,000 in funds on one of these properties. The Company
continues to consider alternatives offered by the holder
including substitution of a different buyer or extension of time
available to fund the agreements.
On July 1, 1996, the Company entered into a ten-year
operating agreement with Carl Karcher Enterprises, Inc., a
subsidiary of CKE Restaurants, Inc. (collectively referred to as
"CKE"). Pursuant to the agreement, 28 Rally's-owned restaurants
located in California and Arizona are being operated by CKE.
The Company retains ownership in the restaurants and receives
from CKE a percentage of gross revenues referred to in the
financial statements as Owner fee income. This income is offset
by the Company's segregated ownership costs related to these
units, referred to as Owner expenses in the financial statements
and consists primarily of noncash expenses of depreciation and
amortization. The agreement has improved profitability and cash
flow, generating approximately $340,000 cash flow in the last
six months of 1996.
The Company completed its Shareholder Rights Offering on
September 20, 1996. The Offering raised over $10.8 million in
gross proceeds, offset by legal and other issuance costs of
approximately $437,000. In addition to the approximate $10.8
million of gross proceeds provided by the Offering, the Warrants
issued could provide approximately $10.8 million for the
Company's future growth. The proceeds from the Offering have
been used to pay off debt of $4.5 million approximately and the
remainder will be used for new store construction, refurbishment
of some existing restaurants and for other general corporate
purposes, including possible further debt reduction.
On October 21, 1996, the Company was notified by the
indenture trustee that the bondholder consent it had been
soliciting had been approved by the required majority of the
holders of record of its 9 7/8% Senior Notes due 2000. The
consent will allow two of the Company's current stockholders,
CKE and Fidelity National Financial, Inc. and/or their
affiliates, to acquire 35% or more of the outstanding shares of
the Company's common stock without triggering "Change in
control" provisions requiring the Company to offer to purchase
the Senior Notes at 101% of their face value. This gives the
Company greater flexibility to raise capital in the future, and
it gives two of its largest stockholders the ability to increase
their investment in the Company.
On December 20, 1996, the Company issued warrants (the
"Warrants") to purchase an aggregate of 1,500,000 restricted
shares of its Common Stock to CKE and Fidelity National
Financial, Inc. The Warrants have a three-year term and are not
exercisable until December 20, 1997. The exercise price is
$4.375 per share, the closing price of the Common Stock on
December 20, 1996. The underlying shares of Common Stock have
not been registered with the Securities and Exchange Commission
and, therefore, are not freely tradable. Upon exercise, the
Warrants will provide approximately $6.6 million in additional
capital to the Company. See Note 4 to the accompanying
consolidated financial statements for further discussion.
The Company believes existing cash balances and cash flow
from operations should be sufficient to fund its current
operations and obligations. The ability of the Company to
satisfy its obligations under the Senior Notes, however,
continues to be dependent upon, among other factors, the Company
successfully increasing revenues and profits.
<PAGE>
<PAGE>
<TABLE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<CAPTION>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND DECEMBER 29, 1996
(In thousands, except shares and per share amounts)
December 31, December 29,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,811 $ 2,285
Restricted cash 683 1,649
Investments 4,933 1,958
Royalties receivable, including $483 and $0
from related parties at December 31, 1995
and December 29, 1996, respectively, net of
a reserve for doubtful accounts of $922 and
$1,405 at December 31, 1995 and December 29,
1996, respectively 818 437
Accounts and other receivables, including $23
and $565 from related parties at December 31,
1995 and December 29, 1996, respectively, net
of a reserve for doubtful accounts of $453
and $301 at December 31, 1995 and December 29,
1996, respectively 2,131 1,698
Inventory, at lower of cost or market 1,056 794
Prepaid expenses and other current assets 1,131 999
Assets held for sale 2,506 596
------------ ------------
Total current assets 22,069 10,416
Assets held for sale 3,517 1,426
Net property and equipment, at historical cost 78,683 69,806
Notes receivable, including $175 and $127 from
related parties at December 31, 1995 and
December 29, 1996, respectively, net of a
reserve for doubtful accounts of $542 and
$853 at December 31, 1995 and December 29,
1996, respectively 789 773
Goodwill, less accumulated amortization of
$1,704 and $2,243 at December 31, 1995 and
December 29, 1996, respectively 10,921 10,482
Reacquired franchise and territory rights, less
accumulated amortization of $1,202 and $1,984
at December 31, 1995 and December 29, 1996,
respectively 12,261 11,439
Other intangibles, less accumulated amortization
of $2,344 and $2,459 at December 31, 1995 and
December 29, 1996, respectively 5,262 4,769
Other assets, less accumulated amortization of
$1,638 and $1,101 at December 31, 1995 and
December 29, 1996, respectively 3,890 3,147
------------ ------------
Total assets $ 137,392 $ 112,258
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,773 $ 4,884
Accrued liabilities 15,959 13,600
Current maturities of long-term debt
and obligations under capital leases 17,544 1,484
------------ ------------
Total current liabilities 42,276 19,968
Senior notes, less current maturities, net
of discount of $768 and $429 at December
31, 1995 and December 29, 1996, respectively 69,034 57,897
Long-term debt, less current maturities 5,749 4,775
Obligations under capital leases, less current
maturities 5,631 5,408
Other liabilities 8,030 4,845
------------ ------------
Total liabilities 130,720 92,893
============ ============
Commitments and contingencies (Note 12)
Shareholders' equity:
Preferred stock, $.10 par value, 5,000,000 shares
authorized, no shares issued - -
Common stock, $.10 par value, 50,000,000 shares
authorized; 15,927,000 and 20,788,000 shares
issued at December 31, 1995 and December 29,
1996, respectively 1,593 2,079
Additional paid-in capital 60,804 71,023
Less: Treasury shares, 273,000 shares at
December 31, 1995 and December 29, 1996 (2,108) (2,108)
Retained deficit (53,617) (51,629)
------------ ------------
Total shareholders' equity 6,672 19,365
------------ ------------
Total liabilities and shareholders' equity $ 137,392 $ 112,258
============ ============
The accompanying notes to consolidated financial statements are an integral part
of these consolidated financial sheets.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 1, 1995, DECEMBER 31, 1995 AND DECEMBER 29, 1996
(In thousands, except per share amounts)
Fiscal Years Ended
------------------------------------------
January 1, December 31, December 29,
1995 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Restaurant sales $ 178,476 $ 181,778 $ 156,445
Franchise revenues and fees 7,842 7,081 5,867
Owner fee income - - 440
------------ ------------ ------------
Total revenues 186,318 188,859 162,752
COSTS AND EXPENSES:
Restaurant costs of sales 62,518 64,813 53,712
Restaurant operating expenses exclusive
of depreciation and amortization and
advertising and promotion expenses 78,072 84,305 71,155
General and administrative expenses 18,068 18,972 15,426
Advertising and promotion expenses 10,898 13,188 7,767
Depreciation and amortization 14,139 13,006 9,838
Owner expense - - 744
Provision for restaurant closures
and other 17,259 31,045 20
------------ ------------ ------------
Total costs and expenses 200,954 225,329 158,662
------------ ------------ ------------
Income (loss) from operations (14,636) (36,470) 4,090
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (9,742) (10,682) (8,622)
Interest income 477 538 614
Other (354) 234 (49)
------------ ------------ ------------
Total other (expense) (9,619) (9,910) (8,057)
------------ ------------ ------------
Loss before income taxes and
extraordinary items (24,255) (46,380) (3,967)
PROVISION (BENEFIT) FOR INCOME TAXES (4,982) 539 (675)
------------ ------------ ------------
Loss before extraordinary items $ (19,273) $ (46,919) $ (3,292)
EXTRAORDINARY ITEMS (net of tax
expense of $1,350) - - 5,280
------------ ------------ ------------
Net income (loss) $ (19,273) $ (46,919) $ 1,988
============ ============ ============
Earnings (loss) per common share:
Earnings (loss) before
extraordinary item $ (1.42) $ (3.00) $ (.19)
Extraordinary item - - .31
------------ ------------ ------------
Earnings (loss) per common share $ (1.42) $ (3.00) $ .12
============ ============ ============
Weighted average shares outstanding 13,564 15,620 17,007
============ ============ ============
The accompanying notes to consolidated financial statements are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Treasury
Stock and
Common Stock Preferred Stock Contingent
--------------------- ----------------- Shares Add'l Retained
Shrs Shrs Shrs Shrs -------------- Paid-In Earnings
Authrzd Iss'd Amt Authrzd Iss'd Amt Shrs Amt Capital (Deficit)
------- ------ ------ ------- ----- --- ----- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances
at Jan. 2,
1994 25,000 13,268 $1,327 - - $- (239) $(2,009) $50,634 $ 12,575
Issuance
of common
stock - 2,569 257 - - - - - 9,976 -
Net loss - - - - - - - - - (19,273)
------- ------ ------ ------- ----- --- ----- -------- ------- ---------
Balances
at Jan. 1,
1995 25,000 15,837 1,584 - - - (239) (2,009) 60,610 (6,698)
Amendment
to the
Charter
(A) 25,000 - - - - - - - - -
Issuance
of common
stock - 90 9 - - - - - 194 -
Treasury
stock
acquired - - - - - - (34) (99) - -
Net loss - - - - - - - - - (46,919)
------- ------ ------ ------- ----- --- ----- -------- ------- ---------
Balances
at Dec. 31,
1995 50,000 15,927 1,593 - - - (273) (2,108) 60,804 (53,617)
Issuance
of common
stock - 35 3 - - - - - 74 -
Authorization
of preferred
stock(B) - - - 5,000,000 - - - - - -
Shareholders
Rights
Offering - 4,826 483 - - - - - 9,975 -
Issuance of
compensatory
stock options
and warrants - - - - - - - - 170 -
Net income - - - - - - - - - 1,988
------- ------ ------ ------- ----- --- ----- -------- ------- ---------
Balances
at Dec. 29,
1996 50,000 20,788 $2,079 5,000,000 - $- (273) $(2,108) $71,023 $(51,629)
======= ====== ====== ======= ===== === ===== ======== ======= =========
(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.
(B) On July 10, 1996, stockholders of the Company ratified the authorization of
5,000,000 shares of Preferred Stock at a par value of $.10.
The accompanying notes to consolidated financial statements are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Fiscal Years Ended
-----------------------------------------
January 1, December 31, December 29,
1995 1995 1996
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS PROVIDED FROM OPERATING
ACTIVITIES:
Net income (loss) $ (19,273) $ (46,919) $ 1,988
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 14,139 13,006 10,482
Extraordinary items, before tax expense
of $1,350 - - (6,630)
Provision for restaurant closures
and other 17,259 31,045 20
Provision for losses on receivables 377 1,507 968
Other 568 2,276 879
Changes in assets and liabilities net
of effects from business combinations:
(Increase) decrease in assets:
Receivables (1,810) 775 (306)
Inventory (14) (63) 262
Prepaid expenses and other current
assets 752 185 161
Other assets (2,563) 292 (121)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 187 7,815 (6,011)
Deferred income taxes (1,524) - -
Other liabilities (1,824) (1,424) (1,535)
------------ ------------ -----------
Net cash provided by operating
activities 6,274 8,495 543
------------ ------------ -----------
CASH FLOWS PROVIDED FROM (USED IN)
INVESTING ACTIVITIES:
(Increase) decrease in investments 9,022 (848) 2,975
Notes receivable 429 154 312
Pre-opening costs (832) (45) (156)
Capital expenditures (19,808) (3,405) (2,306)
Proceeds from the sale of property and
equipment 2,525 4,266 4,392
(Increase) decrease in intangible assets (1,436) (111) (39)
Acquisition of businesses, net of cash
acquired (1,836) (1,931) -
Proceeds from the sale of a business - 2,730 -
------------ ------------ -----------
Net cash provided by (used in)
investing activities (11,936) 810 5,178
------------ ------------ -----------
CASH FLOWS PROVIDED FROM (USED IN) FINANCING
ACTIVITIES:
(Increase) in restricted cash - (683) (966)
Payment of organization and development
costs (4) (3) -
Principal payments of debt (5,538) (2,114) (1,696)
Senior Notes retirement - - (19,612)
Issuance of common stock, net of costs of
issuance 10,233 203 10,535
Principal payments on capital lease
obligations (393) (604) (508)
------------ ------------ -----------
Net cash provided from (used in)
financing activities 4,298 (3,201) (12,247)
------------ ------------ -----------
Net increase (decrease) in cash (1,364) 6,104 (6,526)
CASH AND CASH EQUIVALENTS, beginning of
period 4,071 2,707 8,811
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,707 $ 8,811 $ 2,285
============ ============ ===========
The accompanying notes to consolidated financial statements are an integral part of
these consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>
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 December 29, 1996,
the Rally's system included 467 restaurants in 19 states,
primarily in the Midwest and the Sunbelt, comprised of 209
Company-owned and operated, 231 franchised and 27 Company-owned
restaurants in Western markets which are operated as Rally's
restaurants by CKE Restaurants, Inc. ("CKE"), a significant
shareholder of the Company, under an operating agreement which
began July, 1996. One additional Company-owned store covered by
the operating agreement has been converted to the Carl's Jr.
format and is not included in the above store count. The
Company's restaurants offer high quality fast food. The Company
serves the drive-thru and take-out segments of the quick-service
restaurant industry. 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 Corpora-
tion, 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 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 plus available renewal options 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 1, 1995,
December 31, 1995 and December 29, 1996 were approximately
$490,000, $30,000 and $7,000, respectively.
e) Inventory
Inventory is valued at latest invoice cost which approxi-
mates the lower of first-in, first-out cost or market.
f) Supplemental Disclosures of Cash Flow Information
Fiscal Years Ended
-------------------------------
Jan. 1, Dec. 31, Dec. 29,
1995 1995 1996
-------- -------- --------
Interest paid (net of
amount capitalized) $ 9,760 $ 10,679 $ 8,639
Income taxes paid 163 212 983
Capital lease obliga-
tions incurred - 1,616 111
The purchase of HRF described in Note 2 was recorded as
follows:
Fiscal
Year Ended
---------
Dec. 31,
1995
---------
Fair value of assets acquired $ 9,133
Cash paid (2,125)
---------
Liabilities assumed $ 7,008
=========
As a result of the sale of Beaman discussed in Note 2, the
Company recorded the net present value of a non-interest bearing
note of approximately $347,000. The Company recorded in 1996
approximately $547,000 in notes receivable primarily as the
result of the sale of five of its restaurants in Montgomery,
Alabama. These non-cash transactions have been excluded from
the consolidated statement of cash flows.
During fiscal 1995 and 1996, the Company accepted notes due
within two to five years, bearing interest at rates previously
specified in the underlying franchise agreements, for certain
receivables from franchises in the aggregate amount of approxi-
mately $542,000 for 1995 and approximately $340,000 for 1996.
There were no such notes in 1994.
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 December
31, 1995 and December 29, 1996 were approximately $6.8 million
and $976,000, respectively.
g) Earnings (Loss) Per Common Share
Earnings (loss) per common shares is calculated based
upon the weighted average shares and common equivalent shares
outstanding during the periods.
h) Goodwill, Reacquired Franchise Rights, Other
Intangibles and Other Assets
Goodwill, reacquired franchise and territory rights,
other intangibles and other assets are being amortized using the
straight-line method over the following periods:
Amortization Period
-------------------
Goodwill 5, 20 - 25 years
Reacquired franchise
and territory rights 15 - 20 years
Other intangibles 3 - 25 years
Other assets 5 - 25 years
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 recover-
able. 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. The amount of any such impairment is determined as
the difference between carrying value and fair value based upon
discounted cash flows. No such impairment was recorded in any
period presented except as disclosed in Note 16.
i) Owner Fee Income and Expense
Revenue received as a result of the operating agreement
with CKE is referred to as Owner fee income in the accompanying
consolidated financial statements. Expenses related to the
ongoing investment in the CKE-operated restaurants consist
primarily of depreciation and amortization and are referred to
as Owner expenses in the accompanying consolidated financial
statements.
j) Advertising Costs
It is the Company's policy to expense advertising costs as
incurred.
k) 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 29, 1996. Such reclassifications had no
effect on previously reported net income.
2. ACQUISITION 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 approxi-
mately $7.2 million, of which approximately $2.1 million was
paid in cash and the remainder to be paid over the ensuing 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
areas. 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 non-compete (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.
The impact on operations of this acquisition was not
significant for any of the periods presented, and, therefore,
proforma amounts are not presented giving effect to this
acquisition.
On January 30, 1995, the Company sold all of the shares of
common stock of Beaman Corporation, its wholly-owned modular
building subsidiary, 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.
3. RESTAURANT CLOSURES AND OTHER
Certain charges in fiscals 1994, 1995 and 1996 have been
aggregated and segregated into the caption "Provision for
Restaurant Closures and Other" in the accompanying Statements of
Operations. These items represent estimates of 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 1994 were to abandon additional real estate develop-
ment projects and certain investment in infrastructure
(approximately $5.3 million) and to abandon additional projects
and franchise or otherwise dispose of up to 60 Company
restaurants (approximately $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 estimated
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. Also
reflected in this caption for fiscal 1995 is an approximate
$13.7 million charge related to the Company's adoption of
Statement of Financial Accounting Standards No. 121 ("SFAS 121")
further discussed in Note 16.
Included in this caption for fiscal 1996 are charges of
approximately $679,000 related to the writedown and sale of
assets offset by approximately $659,000 resulting from a
reduction in surplus property reserves related to Management's
decision to re-open three units previously closed and to
continue to operate a fourth unit that had been designated for
closure. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations "Restaurants
Closures and Other."
4. RELATED PARTY TRANSACTIONS
a) Issuance of Warrants
On December 20, 1996, the Company issued warrants (the
"Warrants") to purchase an aggregate of 1,500,000 restricted
shares of its Common Stock to CKE and Fidelity National
Financial, Inc. The Warrants were granted as an incentive to
CKE and Fidelity to continue to participate in the identifi-
cation and exploitation of synergistic opportunities with the
Company. The Warrants have a three-year term and are not
exercisable until December 20, 1997. The exercise price is
$4.375 per share, the closing price of the Common Stock on
December 20, 1996. The underlying shares of Common Stock have
not been registered with the Securities and Exchange Commission
and, therefore, are not freely tradable. Upon exercise, the
Warrants would provide approximately $6.6 million in additional
capital to the Company. The Company obtained a valuation
analysis from an investment banking firm of national standing.
Such analysis estimated the value of the Warrants to be
approximately $960,000. Approximately $24,000 has been expensed
during 1996 within General and Administrative expenses. The
remaining value will be expensed in fiscal 1997 over the
remainder of the vesting period of the underlying Warrants.
b) West Coast Operating Agreement
On July 1, 1996, the Company entered into a ten-year
Operating Agreement with Carl Karcher Enterprises, Inc., a
subsidiary of CKE Restaurants, Inc. (collectively referred to as
"CKE"). CKE is the operator of the Carl's Jr. restaurant chain.
Pursuant to the agreement, 28 Rally's owned restaurants located
in California and Arizona are being operated by CKE. Such
agreement is cancelable after an initial five-year period, at
the discretion of CKE. A portion of these restaurants, at the
discretion of CKE, will be converted to the Carl's Jr. format.
To date, one restaurant has been converted. The agreement was
approved by a majority of the independent Directors of the
Company. Prior to the agreement, the Company's independent
Directors had received an opinion as to the fairness of the
agreement, from a financial point of view, from an investment
banking firm of national standing.
Under the terms of the Operating Agreement, CKE is
responsible for conversion costs associated with transforming
the restaurants to the Carl's Jr. format, as well as the
operating expenses of all the restaurants. Rally's retains
ownership of all 28 restaurants and is entitled to receive a
percentage of gross revenues generated by each restaurant.
Subsequent to the agreement, the Company's revenues have been,
and will continue to be, reduced by the absence of the
restaurants' sales, somewhat offset by the fee paid to the
Company by CKE. For the first six months of the current year,
the restaurants covered by this Operating Agreement had sales of
approximately $10.5 million. The Company anticipates that the
agreement will continue to positively impact both net income and
cash flow. While the overall impact of the agreement is not
expected to be material to the financial statements, it will
allow management to concentrate its efforts in more fully
developed Rally's markets. The agreement will also allow the
Company to take advantage of any improvements in restaurant
operations attained by CKE by implementing these improvements in
Company stores. In the event of a sale by Rally's of any of the
28 restaurants, Rally's and CKE would share in the proceeds
based upon the relative value of their respective capital
investments in such restaurant.
c) Option Grants to Non-employees
During 1996, the Company granted 150,000 options to certain
individuals not employed by the Company for services provided.
Approximately $84,000 has been expensed for these grants in
General and Administrative Expenses in the accompanying State-
ment of Operations. Such options were granted at the market
values on the dates of grant, were immediately exercisable and
expire in five years.
d) Other Transactions
The Company has had transactions 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 which impacted the
Company's consolidated financial statements are summarized
below. Information with respect to related party rent is
disclosed in Note 12. 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
contributions to the Fund are included in the Advertising and
Promotion Expenses in the Company's consolidated Statements of
Operations.
Dec. 31, Dec. 29,
1995 1996
-------- --------
Balance Sheet Amounts
---------------------
Royalties receivable $ 483 $ -
Accounts receivable 23 565
Notes receivable 175 127
Accounts payable 307 95
Accrued liabilities - 60
Fiscal Years Ended
-------------------------------
Jan. 1, Dec. 31, Dec. 29,
1995 1995 1996
------- ------- -------
Revenue Amounts
---------------
Repurchase of Senior
Notes (gross) $ - $ - $6,339
Royalty fees 2,129 2,407 -
Owner fee income - - 440
Rental income 195 262 -
Interest income 93 16 49
------- ------- -------
$2,417 $2,685 $6,828
======= ======= =======
Expense Amounts
---------------
Legal $ 923 $ 777 $1,024
Owner expense - - 744
Interest expense - - 180
Compensatory stock
options and warrants - - 170
Other 14 - -
------- ------- -------
$ 937 $ 777 $2,118
======= ======= =======
5. RESTRICTED CASH
Restricted cash consists of amounts held in various
Certificates of Deposit as collateral for Letters of Credit and
daily Automated Clearing House ("ACH") transactions.
6. 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" 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 other than temporary.
No such provision was necessary for the years ended December 31,
1995 and December 29, 1996. The provision for the year ended
January 1, 1995 was approximately $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 is equal to the market value of invest-
ments at December 31, 1995 and December 29, 1996 and consist of
the following:
December 31, 1995
-----------------
Unites States government and its agencies $4,933
Corporate debt instruments -
------
Total $4,933
======
December 29, 1996
-----------------
United States government and its agencies $ 500
Corporate debt instruments 1,458
------
Total $1,958
======
The contractual maturities of these investments at December
29, 1996 were as follows:
1997 $ 500
2002 248
2012 299
2013 597
2017 314
--------
$ 1,958
========
The proceeds from the sale of investments and related gross
gains and losses for the twelve months ended January 1, 1995,
December 31, 1995 and December 29, 1996 were as follows:
Fiscal Years Ended
--------------------------------
Jan. 1, Dec. 31, Dec. 29,
1995 1995 1996
-------- -------- --------
Proceeds from the
sale of investments $17,798 $15,653 $10,531
Gross gains realized 137 56 -
Gross losses realized (364) - (4)
7. NET PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Dec. 31, Dec. 29,
1995 1996
--------- ---------
Land $ 14,310 $ 14,074
Buildings and leasehold
improvements 46,520 47,463
Equipment, furniture and
fixtures 45,036 41,312
--------- ---------
105,866 102,849
Less accumulated depreciation (32,049) (37,518)
--------- ---------
73,817 65,331
--------- ---------
Property held under capital
lease 6,208 6,145
Less accumulated amortization (1,342) (1,670)
--------- ---------
4,866 4,475
--------- ---------
Net property and equipment $ 78,683 $ 69,806
========= =========
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
Dec. 31, Dec. 29,
1995 1996
--------- ---------
Payroll and payroll taxes $ 3,013 $ 2,245
Closed store reserve 2,767 1,964
Workers compensation 2,102 2,367
Advertising 1,819 316
Other 6,258 6,708
--------- ---------
$ 15,959 $ 13,600
========= =========
9. OTHER LIABILITIES
Other liabilities consist of the following:
Dec. 31, Dec. 29,
1995 1996
--------- ---------
Closed store reserve $ 6,908 $ 3,881
Unfavorable lease loss 890 748
Other 232 216
--------- ---------
$ 8,030 $ 4,845
========= =========
10. SENIOR NOTES
On March 9, 1993, the Company sold approximately $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.
On January 29, 1996, the Company repurchased, in two transac-
tions, at a price of approximately $678.75 per $1,000 principal
amount, approximately $22 million face value of its 9 7/8%
Senior Notes due in the year 2000 from GIANT GROUP, LTD.
("GIANT"). The price paid in each transaction represented the
market closing price on January 26, 1996. The first transaction
involved the repurchase of approximately $16 million face value
of the Notes for approximately $11.1 million in cash. The
second transaction involved the purchase of approximately $6
million face value of Notes in exchange for a short-term note of
approximately $4.1 million, due in three installments of
principal and interest, issued by Rally's. The Company paid the
final installment on this note, together with accrued interest
thereon, on September 27, 1996. 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. Due to the repurchases 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 for fiscal 1995.
Additionally, in four separate transactions during the
fourth quarter 1996, the Company repurchased approximately $4.7
million face value of the Notes from various other bondholders
for approximately $4.5 million in cash.
These purchases resulted in extraordinary gains in 1996 net
of tax, totaling approximately $5.3 million or $.31 per share.
As a result of these debt repurchases, the annualized ongoing
interest payments on the Senior Notes have been reduced by
approximately $2.6 million per year to approximately $5.8
million. In addition, these repurchases have reduced the
sinking fund requirement discussed above to approximately $1.6
million from approximately $28 million.
The remaining outstanding Notes are publicly traded and at
December 29, 1996 had a market value of approximately $54.5
million based on the quoted market price for such notes.
On September 5, 1996 by Consent Solicitation Statement, the
Company solicited consent of its bondholders whereby the
beneficial ownership of 35% or more of the voting stock of the
Company by GIANT, Fidelity National Financial, Inc., CKE and/or
any of their affiliates would not constitute a change of control
for purposes of Section 4.14 of the Indenture. On October 21,
1996, the bondholder consent was approved by a majority of the
holders of record as of the date of the Consent Solicitation.
11. LONG-TERM DEBT
Long-term debt consists of the following:
Dec. 31, Dec. 29,
1995 1996
--------- ---------
Notes payable to banks, maturing
at various dates through February
10, 2002, secured by property and/
or equipment, bearing interest
ranging from 1/2% above prime to
9.25%. The notes are payable in
monthly principal and interest
installments ranging from $848
to $41,033. $ 1,883 $ 1,006
Note payable to finance company
due October 1998, secured by certain
equipment, bearing interest at a rate
of 7.3%. The note is payable in
monthly principal and interest
installments of $6,762. 384 133
Note payable to Company for acquisi-
tion 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. 205 79
Secured notes payable to a bank used
to finance equipment and/or modular
buildings for franchises (the
Franchise Loans), maturing at
various dates through July 15, 2000,
bearing interest at prime plus 1/2%.
The notes are payable in monthly
principal installments of $4,875.
Interest is payable monthly. 261 195
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 rom $4,742 to
$50,211. 4,814 4,461
--------- ---------
7,547 5,874
Less - Current portion (1,798) (1,099)
--------- ---------
$ 5,749 $ 4,775
========= =========
At December 29, 1996, the prime rate was 8.25%. 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:
Year
-------
1997 $ 1,099
1998 722
1999 727
2000 590
Thereafter 2,736
----------
$ 5,874
The Company is subject to certain restrictive covenants
under its debt agreements.
The market value of the Company's long-term debt approxi-
mated book value at December 29, 1996. 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.
12. 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
29, 1996:
Capital Operating
Year Leases Leases
----------------------- --------- ---------
1997 $ 1,087 $ 8,475
1998 1,010 7,870
1999 973 7,216
2000 906 6,413
Thereafter 6,772 33,052
--------- ---------
Total minimum lease
commitments 10,748 $63,026
=========
Less amounts representing
interest, discounted at
rates ranging from 10% to
12% (4,955)
---------
Present value of minimum
lease payments 5,793
Current portion of capital
lease obligations (385)
---------
Long-Term lease obligations $ 5,408
=========
The discount rates applicable to the Company's capital
leases approximate currently available market rates. Minimum
operating lease payments have not been reduced by minimum
sublease rentals of $10 million due in the future under
noncancelable subleases.
Rent expense consists of:
Fiscal Years Ended
----------------------------
Jan. 1, Dec. 31, Dec. 29,
1995 1995 1996
------- ------- -------
Minimum rentals - related
parties $ 261 $ 292 $ 470
Minimum rentals - others 6,514 6,641 4,681
Contingent rentals -
others 136 173 122
------- ------- -------
$ 6,911 $ 7,106 $ 5,273
======= ======= =======
(b) 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 defendants violated the
Securities Exchange Act of 1934, among other claims, by issuing
inaccurate public statements about the Company in order to
arbitrarily inflate the price of its common stock. The
plaintiffs seek unspecified damages. On April 15, 1994, Rally's
filed a motion to dismiss and a motion to strike. On April 5,
1995, the Court struck certain provisions of the complaint but
otherwise denied Rally's motion to dismiss. In addition, the
Court denied plaintiffs' motion for class certification; the
plaintiffs renewed this motion, and despite opposition by the
defendants, the Court granted such motion for class certifica-
tion on April 16, 1996, certifying a class from July 20, 1992 to
September 29, 1993. In October 1995, the plaintiffs filed a
motion to disqualify Christensen, Miller, Fink, Jacobs, Glaser,
Weil & Shapiro, LLP ("Christensen, Miller") 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 former director of Rally's
and a partner in Christensen, Miller. Defendants filed an
opposition to the motion, and the motion to disqualify Christen-
sen, Miller was denied. The action was stayed between May 30
and July 31, 1996 to facilitate settlement discussions. One
settlement conference has been conducted; no others are
currently scheduled. The Court denied the motion in the fall of
1996 and refused to disqualify Christensen, Miller. Fact
discovery is set to close in April 1997. No trial date has been
scheduled yet. 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 defendants deny
all wrongdoing and intend to defend themselves vigorously in
this matter. Discovery is proceeding. 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. An estimate of defense costs reimbursable under the
Company's directors' and officers' insurance is included in
"Other Assets" in the accompanying consolidated financial state-
ments.
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. Red Line failed to
make certain lease payments and on June 20, 1995, the Company
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 action alleges
that Red Line also committed events of default under the terms
of all of its Franchise Agreements with the Company. As a
result of such defaults, the Company terminated such Franchise
Agreements, and 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
Agreements and its failure to pay approximately $400,000 plus
interest owed on certain promissory notes issued to the Company
in lieu of such payments. The Company also seeks accountability
for approximately $660,000 in 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. In connection with such proceedings,
the Company's actions against Red Line have been stayed. In
November, 1996, Red Line filed a First Amended Disclosure
Statement and First Amended Liquidating Plan of Reorganization
(the "Plan") which disputed Red Line's obligation to pay the
Company any of the foregoing monies. By Bankruptcy Court Order
entered February 28, 1997 (the "Confirmation Order"), the
Company's general unsecured claims were allowed in the amount of
approximately $615,000. The Confirmation Order also approved
the Plan. The Plan provides for, among other things, mutual
releases among the Company and Red Line (such releases do not
affect the allowed general unsecured claims described above) and
the sale of Red Line's assets. Cash from those sales will be
insufficient to pay all secured claims, taxes and administrative
claims. Some of the Red Line assets are to be acquired by New
Red Line, Inc., an entity involving certain insiders and/or
affiliates of Red Line. Unsecured creditors of Red Line
(including the Company) will receive under the Plan a minority
stock interest in New Red Line, Inc. At this time, the likeli-
hood of realizing any value on account of such minority stock
interest is considered extremely speculative. The receivable
balances have been fully reserved.
In February 1996, Harbor Finance Partners ("Harbor")
commenced a derivative action, purportedly on behalf of Rally's
against GIANT and certain of Rally's officers and directors
before the Delaware Chancery Court. 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 shareholders of Rally's by
causing Rally's to repurchase from GIANT certain Rally's Senior
Notes at an inflated price. Harbor seeks "millions of dollars
in damages", along with rescission of the repurchase transac-
tion. In the fall of 1996, all defendants moved to dismiss the
action. The Chancery Court conducted a hearing on November 26,
1996, but has not yet ruled on the pending motions. The Company
denies all wrongdoing and intends to vigorously defend the
action. It is not possible to predict the outcome of this
action at this time.
Rally's filed a lawsuit on August 12, 1996 against Arkansas
Investment Group, Inc. ("AIGI"), a franchisee that currently
operates ten Rally's restaurants located in Arkansas. The
lawsuit seeks to recover royalties and contributions to the
Rally's National Advertising Fund owed by AIGI pursuant to the
applicable franchise agreements, which total approximately
$500,000 with accrued interest as of December 29, 1996. After
falling in arrears on its royalties and advertising fund
contributions, Rally's and AIGI negotiated a written agreement
to allow AIGI to make payments under a revised payment schedule.
AIGI also defaulted on that written obligation. AIGI has filed
an Answer and Counterclaim in which it alleges it does not owe
the royalties and advertising contributions due to its alleged
disagreement with operational and marketing decisions of Rally's
and Rally's alleged failure to rebate sums obtained from
suppliers. AIGI has asserted causes of action for breach of
contract, violation of the Arkansas Franchise Practices Act,
unjust enrichment and fraud. The Counterclaim alleges that AIGI
has been damaged in excess of approximately $75,000 (the minimum
jurisdictional amount for federal court), but no specific amount
of damages is identified in the Counterclaim. Rally's denies
AIGI's allegations and intends to vigorously defend the Counter-
claim. Because the litigation is 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 December 1994, Rally's entered into two franchise
agreements with Kader Investments, Inc. ("Kader") for the
development and operation of Rally's Hamburgers restaurants in
Anaheim, California and Tustin, California. Rally's assisted
the franchisee in developing and opening the restaurants. On
November 27, 1996, Kader filed a six-count Complaint against
Rally's in the California Superior Court for Orange County (Case
No. 772257) alleging material misrepresentation, respondent
superior, breach of contract, breach of the implied covenant of
good faith and fair dealing, fraud and unfair competition.
These claims arise out of allegations concerning Rally's offer
and sale of two franchises (under a two-store development
agreement), and Rally's actions during the term of the agree-
ments. The Complaint seeks as relief rescission of the parties'
franchise and development agreements; general damages of at
least $1,494,277 and $1,400,000 for the material misrepresenta-
tion and fraud counts, respectively; general damages in
unspecified amounts as to the other counts; punitive damages in
unspecified amounts; and attorneys' fees. Rally's filed an
Answer, and intends to file a Cross-Complaint alleging breach of
contract. The court has permitted the parties to hold discovery
in abeyance for a short period pending settlement discussions.
Rally's is currently attempting to settle the claim. However,
the outcome of such settlement discussion is uncertain at this
time. Should discussions not result in a settlement, Rally's
intends to vigorously defend against the claims. Because the
litigation is 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.
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 or financial condition.
(c) Other Commitments
The Company is contingently liable on certain franchisee
lease commitments totaling approximately $366,000. 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.
13. INCOME TAXES
The asset and liability method contemplated by Statement of
Financial Accounting Standards No. 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 December 31, 1995 and
December 29, 1996 are as follows:
Dec. 31, Dec. 29,
1995 1996
--------- ---------
Excess of tax depreciation
over book depreciation $ 11,390 $ 8,430
Acquired intangibles with no
tax basis 2,199 2,070
Other 8 30
--------- ---------
Gross deferred tax
liabilities $ 13,597 $ 10,530
========= =========
Net operating loss carry-
forwards $ 13,070 $ 12,824
Amounts accrued for financial
reporting purposes not yet
deductible for tax purposes 17,122 12,885
Alternative minimum tax and
targeted job tax credit
carryforwards 937 937
Other 1,267 1,514
--------- ---------
Gross deferred tax assets 32,396 28,160
Less valuation allowance 18,799 17,630
--------- ---------
Net deferred tax asset $ 13,597 $ 10,530
========= =========
The primary changes from December 31, 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 impact of SFAS 121 (See
Note 16) offset by current year tax depreciation in excess of
book depreciation. The alternative minimum tax credit carry
forward has no expiration. The net operating loss carryforwards
will expire approximately $641,000 in 2008, approximately $20.2
million in 2009 and approximately $17.5 million in 2010 and
approximately $1.6 million in 2011. The targeted jobs tax
carryforward expires approximately $118,000 in 2006, approxi-
mately $184,000 in 2007 and approximately $200,000 in 2008. A
valuation allowance of approximately $17.6 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 years.
Income tax expense consists of the following:
Fiscal Years Ended
----------------------------------
Jan. 1, Dec. 31, Dec. 29,
1995 1995 1996
--------- --------- ---------
Current $ (3,458) $ 539 $ (675)
Deferred (1,524) - -
--------- --------- ---------
Total tax (benefit)
expense $ (4,982) $ 539 $ (675)
========= ========= =========
Income tax expense for year ended December 29, 1996
consists of a benefit of $1,350,000 related to the extraordinary
gain recognized from the purchase of bonds, $575,000 in state
income tax expense and $100,000 in expense related to a
reduction in a receivable from the IRS resulting from a NOL
carryback to the years 1987, 1988 and 1989.
A reconciliation of the provisions for income taxes with
the federal statutory rate is as follows:
Fiscal Years Ended
----------------------------------
Jan. 1, Dec. 31, Dec. 29,
1995 1995 1996
--------- --------- ---------
Provision (benefit)
computed at
statutory rate $ (8,247) $(15,770) $ (1,349)
State and local
income taxes, net
of federal income
tax benefit 162 736 380
Valuation allowance 3,446 15,352 182
Other (343) 221 112
--------- --------- ---------
$ (4,982) $ 539 $ (675)
========= ========= =========
14. STOCK-BASED COMPENSATION PLANS
The Company currently has three stock option plans in
effect, the 1990 Stock Option Plan (the "Employees' Plan"), the
1990 Stock Option Plan for Non-Employee Directors (the "1990
Directors' Plan"), and the 1995 Stock Option Plan for Non-
Employee Directors (the "1995 Directors' Plan"). Additionally,
the Company has an employee stock purchase plan (the "1993
Purchase Plan"). Although there are existing options outstand-
ing under the 1990 Directors' Plan, no additional grants will be
made pursuant to this plan. The Company accounts for these
plans under APB Opinion No. 25, under which approximately
$66,000 of compensation cost has been recognized in fiscal 1996
related to 157,000 options granted to directors under the 1995
Directors Plan. Such compensation represents the difference
between the market values on the dates of grant and the measure-
ment date, July 10, 1996, the date when the grants were
ultimately approved by the shareholders at the annual meeting.
No compensation cost was recognized in any other period
presented.
During 1996, a total of 350,000 additional options were
granted to five of the current directors. These options were
not granted pursuant to an option plan. The options were
granted at a price equal to the stock's market price on the date
of grant. The options were immediately exercisable and expire
after five years.
Had compensation cost for all option grants to employees
and directors been determined consistent with FASB Statement No.
123, the Company's net income and earnings per share would have
been reduced to the following pro forma amounts:
1995 1996
---------- ----------
Net Income (Loss): As Reported $ (46,919) $ 1,988
Pro Forma (47,154) (699)
Earnings (Loss)
Per Common Share: As Reported $ (3.00) $ .12
Pro Forma (3.02) (.04)
Because the Statement 123 method of accounting has not been
applied to options granted prior to January 2, 1995, the
resulting pro forma compensation cost may not be representative
of that to be expected in future years. Additionally, the pro
forma amounts include approximately $16,000 and $12,000 in 1995
and 1996, respectively, related to the purchase discount offered
under the 1993 Purchase Plan.
The Company may sell up to 500,000 shares of stock to its
employees under the 1993 Purchase Plan. The Company has sold
approximately 36,000 shares, 51,000 shares, and 25,000 shares in
1994, 1995, and 1996, respectively, and has sold approximately
126,000 shares through December 29, 1996 since the inception of
this plan in 1993. The Company sells shares at 85% of the
stock's market price at date of purchase. The weighted average
fair value of shares sold in 1995 and 1996 was approximately
$2.06 and $3.03, respectively.
Options to purchase an aggregate of 5.5 million shares of
the Company's Common Stock may be granted under the stock option
plans, at a price not less than the market value on the date of
grant. The Company has granted options on approximately 2.4
million shares under the stock option plans. Outstanding
options expire ten years after grant under the Employees' Plan,
except with regard to shares granted to the Company's President
and Chief Executive Officer pursuant to his employment agreement
which expires in five years. Options outstanding under the two
directors' plans expire five years after grant. Options are
exercisable over various periods ranging from immediate to three
years after grant depending upon their grant dates and the plan
under which the options were granted.
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.
A summary of the status of all options granted to employees
and directors, as well as those options granted to non-employees
(see Note 4), at January 1, 1995, December 31, 1995, and
December 29, 1996, and changes during the years then ended is
presented in the table and narrative below:
<PAGE>
<TABLE>
<CAPTION>
December 31, 995 December 29, 1996
-------------------- -------------------
Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price
------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 2,225 $4.74 2,219 $4.24
Granted at price
equal to market 676 2.88 2,154 2.63
Granted at price
greater than market - - 350 1.75
Exercised - - (9) 3.05
Forfeited (412) 3.93 (201) 3.34
Expired (270) 5.38 (667) 5.62
------- --------
Outstanding at
end of year 2,219 4.24 3,846 2.92
======= ========
Exercisable at end
of year 1.048 5.09 2.359 3.21
Weighted average
of fair value of
options granted $1.76 $1.31
</TABLE>
The Company had approximately 1,910,000 options outstanding
as of January 2, 1994 at prices ranging form $2.67 to $21.50.
During fiscal 1994, approximately 1,925,000 options were granted
at prices ranging from $2.875 to $11.25; approximately 34,000
options were exercised at prices ranging form $2.66 to $6.92;
and approximately 1,576,000 options were terminated with prices
ranging from $4.125 to $21.50. These transactions resulted in
approximately 2,225,000 options outstanding as of January 1,
1995, with prices ranging form $2.67 to $9.333. At January 1,
1995, approximately 756,000 options were exercisable at prices
ranging from $2.67 to $6.50.
<PAGE>
<TABLE>
The following table summarizes information about stock options outstanding at December
29, 1996:
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- ---------------------
Outstanding Wtd. Avg. Exercisable
Range of as of Remaining Wtd. Avg. as of Wtd. Avg.
Exercise Dec. 29, Contractual Exercise Dec. 29, Exercise
Prices 1996 Life Price 1996 Price
-------------- -------- ----------- -------- ------- -----
<S> <C> <C> <C> <C> <C>
$1.25 to 2.50 982 6.9 years $1.88 80 $2.36
2.50 to 3.75 2,047 5.1 2.93 1,679 2.92
3.76 to 5.00 817 5.1 4.16 599 4.16
-------------- -------- -------
$1.25 to 5.00 3,846 5.6 2.92 2,358 3.21
======== =======
</TABLE>
The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions used for grants in
fiscal 1995 and 1996, respectively: expected volatility of 45.0
percent and 45.7 percent; risk-free interest rates of 6.75
percent and 6.82 percent for options granted to employees and
6.54 percent and 6.59 percent for options granted to directors;
and expected lives for fiscal 1995 and 1996 of eight years for
options granted to employees and five years for options granted
to directors. An expected dividend yield of 0 percent per share
was used for all periods based on the Company's history of no
dividend payments.
<PAGE>
<TABLE>
15. UNAUDITED QUARTERLY FINANCIAL DATA
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
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 common share (.22) (.08) (1.11) (1.59) (3.00)
Year Ended December 29, 1996
Revenues $ 41,912 $ 47,357 $ 38,781 $ 34,702 $162,752
Income (loss) from operations (3,369) 2,413 2,632 2,414 4,090
Net income 838 111 414 625 1,988
Earnings (loss) per common share:
Earnings (loss) before
extraordinary item (.24) .01 .01 .01 (.19)
Extraordinary item .29 - .02 .02 .31
-------- -------- -------- -------- ---------
Earnings (loss) per common share .05 .01 .03 .03 .12
======== ========= ======== ======== =========
/TABLE
<PAGE>
16. 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-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.
In addition, if an asset being tested for recoverability was
acquired in a business combination accounted for using the
purchase method, the goodwill that arose in that transaction is
included as part of the asset being evaluated and in determining
the amount of any impairment.
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 3 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 fourth quarter, 1995 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 recorded in the fourth
quarter, 1995 of approximately $13.7 million related to
writedowns of the assets associated with these restaurants.
Approximately $824,000 of associated intangible assets was
included in this writedown. The writedown is included in the
caption "Restaurant Closures and Other." The writedown of these
assets resulted in reduced depreciation and amortization expense
in the fourth quarter, 1995 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).
During the first quarter of 1996, two additional
restaurants, due to their continued poor operating performance,
were determined to be impaired, resulting in charges of
approximately $754,000 included in the caption, "Restaurant
Closures and Other". No additional restaurants were determined
to be impaired in 1996. As required by the SFAS 121, the
Company will continue to periodically review its assets for
impairment where circumstances indicate that such impairment may
exist.
17. SHAREHOLDER RIGHTS OFFERING
A Shareholder Rights Offering (the "Offering") was
completed on September 20, 1996. The Company distributed to
holders of record of its Common Stock, as of the close of
business on July 31, 1996 (the "Record Date"), transferable
subscription rights ("Right(s)") to purchase Units consisting of
one share of Common Stock and one Warrant to purchase an
additional share of Common Stock. Stockholders received one
Right for each share of Common Stock held on the Record Date.
For each 3.25 Rights held, a holder had the right to purchase
one Unit for $2.25 each. The Offering consisted of 4,825,805
Units. Each Warrant may be exercised to acquire an additional
share of Common Stock at an exercise price of $2.25 per share
and expires on September 26, 2000. The Company may redeem the
Warrants, at $.01 per Warrant, upon 30 days' prior written
notice in the event the closing price of the Common Stock equals
or exceeds $6.00 per share for 20 out of 30 consecutive trading
days ending not more than 30 days preceding the date of the
notice of redemption. The Offering was fully subscribed and
raised over approximately $10.8 million in gross proceeds offset
by legal and other issuance costs of approximately $437,000.
The proceeds from the Offering have been used to pay off debt of
approximately $4.5 million and the remainder will be used for
new store construction, refurbishment of some existing
restaurants and for other general corporate purposes, including
possible further debt reduction. The net proceeds from the
Offering were attributable primarily to the sale of the
Company's common stock. The amount attributable to the warrants
is included in "Additional paid-in capital."
In addition to the approximately $10.8 million provided by
the Rights Offering, the Warrants issued, if exercised, could
provide an additional $10.8 million in proceeds. The Company
had 15,683,869 shares of Common Stock outstanding on the Record
Date. Immediately after the Offering, 20,509,674 shares of
Common Stock and 4,825,805 Warrants were outstanding. As of
December 29, 1996, 4,818,597 of these Warrants were outstanding.
The Warrants are publicly traded and at December 29, 1996 had a
market value of approximately $11.7 million based on the quoted
market price for such warrants.
18. PROPOSED TRANSACTIONS
On March 25, 1997, the Company agreed in principle to a
merger transaction pursuant to which the Company would become a
wholly-owned subsidiary of Checkers Drive-In Restaurants, Inc.,
a Delaware corporation ("Checkers"). Checkers, together with
its franchisees, operates approximately 478 double drive-thru
hamburger restaurants primarily located in the Southeastern
United States. Under the terms of the letter of intent executed
by the Company and Checkers, each share of the Company's Common
Stock will be converted into three shares of Checkers' common
stock upon consummation of the merger. The transaction is
subject to negotiation of definitive agreements, receipt of
fairness opinions by each party, receipt of stockholder and
other required approvals and other customary conditions.
<PAGE>
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 December 31, 1995 and December 29, 1996, and
the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three fiscal years in the
period ended December 29, 1996. These consolidated financial
statements and the schedule referred to below are the responsi-
bility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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 misstate-
ment. 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 December 31,
1995 and December 29, 1996, and the results of their operations
and their cash flows for each of the three fiscal years in the
period ended December 29, 1996, 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
February 12, 1997
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
-------------------- Balance
Balance at Charged to Charged to at
Beginning Costs and Other End of
Description Of Year Expenses Accounts Deductions Year
--------------------------- ------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Year Ended January 1, 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
Notes receivable - 293 249 - 542
------- -------- -------- ---------- --------
$ 578 $ 1,507 $ - $ 168 $ 1,917
======= ======== ======== ========== ========
Year Ended December 29, 1996
Accounts receivable $ 453 $ 54 $ 0 $ 206 $ 301
Royalties receivable 922 697 (81) 133 1,405
Notes receivable 542 200 81 (30) 855
------- -------- -------- ---------- --------
$ 1,917 $ 951 $ 0 $ 309 $ 2,559
======= ======== ======== ========== ========
</TABLE>
EXHIBIT 10.17
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This AMENDED AND RESTATED EMPLOYMENT AGREEMENT
("Agreement") is made as of this 24th day of February, 1997, by and
between GIANT GROUP, LTD., a Delaware corporation (the "Corpora-
tion"), and BURT SUGARMAN (the "Employee"), and, in accordance with
Section 17 of the EMPLOYMENT AGREEMENT dated as of July 24, 1993
(the "Prior Agreement") by and between Corporation and Employee,
amends and restates in its entirety such Prior Agreement, upon the
terms and conditions hereinafter set forth.
W I T N E S S E T H
WHEREAS, the Employee has been serving the Corporation in
the capacities of Chairman of the Board of Directors, President and
Chief Executive Officer, and has been employed by the Corporation
under the Prior Agreement, which Employee may terminate in his
discretion on sixty (60) days notice, and both the Corporation and
the Employee desire to continue their relationship, subject to the
terms and conditions contained herein.
NOW, THEREFORE, in consideration of the foregoing and the
covenants and agreements hereinafter set forth, the parties hereto,
intending to be legally bound, hereby amend and restate the Prior
Agreement in its entirety on the following terms and conditions,
which shall be effective from and after the date hereof:
1. RETENTION, TERM AND DUTIES
1.1 RETENTION. The Company hereby employs the Employee
as its Chairman of the Board of Directors, President and Chief
Executive Officer, and the Employee hereby accepts such employment,
upon the terms and subject to the conditions of this Agreement.
1.2 TERM. The term of employment of the Employee by the
Company shall be for the period commencing on January 1, 1994 (the
"Commencement Date") and ending on December 31, 2000 (the "Term"),
unless this Agreement is sooner terminated pursuant to Section 5, 6
or 8 herein. Notwithstanding anything contained herein to the
contrary, the term of employment will be automatically extended for
successive two (2) year periods commencing January 1, 2001
(referred to below as an "Extended Term"), unless either party to
this Agreement elects to terminate this agreement by providing
notice pursuant to Section 12 hereof of such election to the other
party during the thirty (30) day period commencing one (1) year
prior to the expiration of the then applicable Term or Extended
Term.
1.3 POSITIONS. The Employee shall serve as Chairman of
the Board of Directors and Chief Executive Officer of the
Corporation, and as a director and senior executive officer of such
subsidiaries of the Corporation as the Employee and the Corporation
may determine from time to time. The Employee shall continue to
serve as Chairman of the Executive Committee (or other committee
exercising similar powers and authority) of the Corporation (the
"Executive Committee"), and of such subsidiaries of the Corporation
as the Employee shall determine from to time, for so long as the
Employee is providing services to the Corporation hereunder and
such committee exists.
1.4 DUTIES. The Employee shall be the most senior
executive of the Corporation (and its subsidiaries), with duties
and responsibilities commensurate with such positions. All
employees of the Corporation and its subsidiaries shall report to
the Employee. The Employee shall report only to the Corporation's
Board of Directors.
2. SCOPE OF SERVICES
2.1 SERVICES. Subject to Section 2.2 herein, the
Employee agrees that he shall perform his services to the best of
his ability. During the term of this Agreement the Employee shall
not render any services for others in any line of business in which
the Corporation or its subsidiaries are significantly engaged
without first obtaining the Corporation's written consent; and he
shall devote his full business time, care, attention and best
efforts to the Corporation's business.
2.2 OTHER INTERESTS. So long as such activities do not
materially interfere with the Employee's performance of his obliga-
tions hereunder, the Employee may devote such time and activity as
may be reasonably required with respect to the activities of Burt
Sugarman, Inc. The Employee may make and maintain investments in
any business (whether publicly or privately held) (provided that
without the consent of the Board of Directors, the Employee shall
not make material investments in any business which is in direct
material competition with the Corporation or its subsidiaries at
the time the investment is made). The Corporation makes
investments in other corporations (the "Investee Corporations"),
and presently has a substantial investment in Rally's, Inc.
Notwithstanding his duties under this Agreement, the Employee may
devote such time and energy as may reasonably be required to tend
to the business matters of such other Investee Corporations and may
receive compensation for services he renders to Rally's Hamburgers,
Inc. and any other Investee Corporation. The Employee acknowledges
that some of the Investee Corporations are publicly-held entities.
The Employee agrees that he will not invest in any Investee
Corporation except in conformity with policies established from
time to time by the Corporation's Board of Directors and applicable
securities laws.
3. COMPENSATION
3.1 BASE. The Corporation shall pay to the Employee an
annual base salary of $1,000,000 (the "Base Compensation"), payable
in equal installments (in accordance with the Corporation's
standard practices, but no less often than semi-monthly) subject to
all withholding for income, FICA and other similar taxes, to the
extent required by applicable law.
3.2 BONUS. In addition to the Base Compensation payable
to the Employee pursuant to Section 3.1 hereof, the Corporation may
pay to the Employee any additional amounts as, in the discretion of
the Corporation's Board of Directors or the Compensation Committee,
it may desire as a result of the Employee's services (the "Bonus").
3.3 NO REDUCTION. The compensation paid to the Employee
by the Corporation pursuant to this Section 3 shall not be reduced
by any amounts received or earned by the Employee with respect to
any outside activities or services permitted under Section 2.2
hereof.
4. OTHER BENEFITS
4.1 LIFE INSURANCE. So long as it does not adversely
affect the Employee's ability to obtain life insurance in the
general market at prevailing premiums, the Corporation, at its
discretion, shall have the right to take out life insurance or
other insurance with respect to the Employee, at the Corporation's
cost and for the Corporation's benefit, and the Employee shall have
no rights in such insurance policies or their proceeds. The
Employee shall cooperate with the Corporation in obtaining such
insurance, and shall timely submit to any required medical or other
examinations in Beverly Hills, California, provided that if such
medical examination cannot be conducted by the Employee's personal
physician, (a) the Employee shall have the right to have such
physician attend such examinations and (b) the examining physician
shall be based in Beverly Hills, California and be subject to the
Employee's approval, not to be unreasonably withheld. Upon
termination of this Agreement, the Employee shall have the right to
acquire ownership of such insurance policies upon reimbursement to
the Corporation of the cash surrender value thereof, if any, and
the pro rata portion of any premium paid applicable to future
periods.
4.2 INSURANCE BENEFITS. The Corporation shall continue
to make available to the Employee disability, medical, life
insurance, and any other benefits of a type, nature and amount
comparable to those benefits which have been heretofore provided to
the Employee up to this time by the Corporation, and in any event
no less favorable than the best benefits of its type made available
to any other employee of the Corporation.
4.3 EXPENSES. To the extent not otherwise reimbursed
under this Agreement, the Corporation shall reimburse the Employee
for all reasonable and customary expenses which the Employee shall
incur in connection with the Employee's services to the Corporation
or any subsidiary pursuant to this Agreement. The foregoing shall
include first class hotel, travel and meals for the Employee and
his spouse when outside the Los Angeles metropolitan area on
Corporation business (it being understood that the Employee's
spouse is a public figure who can help promote the Corporation's
image, and that while she travels with the Employee, as a condition
for the Corporation being responsible for the expenses of such
spouse, such spouse shall be obligated to attend such meetings,
dinners, seminars and other functions as the Corporation so
designates in order to promote the Corporation's business). As
used herein, the term "first class travel," when applied to air
transportation, shall mean the best service available on a
particular route, including without limitation, use of aircraft
owned, leased or chartered by the Corporation or any of its
subsidiaries. All other benefits are to be authorized by and
subject to approval by the Corporation's Board of Directors.
4.4 VACATION; SICK LEAVE. The Corporation shall provide
to the Employee such paid vacation and paid sick leave benefits
which do not materially interfere with the Employee's performance
of his obligations hereunder, but not less than six (6) weeks per
annum of paid vacation and six (6) weeks of paid sick leave.
5. DEATH OF EMPLOYEE
5.1 EFFECT. This Agreement shall automatically
terminate upon the Employee's death (the "Section 5 Termination").
Upon such termination the Corporation shall: (i) pay to the
Employee's estate the accrued amount of the compensation, benefits,
reimbursements or other sums payable pursuant to this Agreement,
such amounts to be prorated through the date of the Section 5
Termination (other than expense reimbursements which will be paid
in full), if, as and when such amounts would be paid but for such
termination of this Agreement; (ii) pay to Employee's estate a lump
sum payment equal to the greater of: (A) twice the then Base
Compensation, or (B) what would have been the aggregate Base
Compensation payable after the Employee's death through the end of
the Term or Extended Term, as the case may be, and (iii) provide to
the immediate family of the Employee the continuation of their
health insurance benefits at the Corporation's expense for a period
of two years from the Section 5 termination date. Except for the
amounts payable by Corporation pursuant to the preceding sentence,
all obligations of the Corporation with respect to compensation and
benefits under this Agreement shall cease upon a Section 5
Termination.
5.2 OPTION EXTENSION. The Corporation shall use its
best efforts to obtain stockholder approvals, to the extent
required, of amendments to its 1985 Non-Qualified Stock Option Plan
and its 1996 Employee Stock Option Plan which would provide that
the termination date for all options held under such plans by the
Employee and exercisable as of the date of his death shall remain
exercisable until (i) the termination date as set forth in the
respective option certificates or (ii) 18 months after the Section
5 Termination, whichever is later.
6. DISABILITY OF EMPLOYEE
6.1 DETERMINATION. The Employee shall be considered
disabled if, due to illness or injury, either physical or mental,
he is unable to perform his customary duties and responsibilities
as required by this Agreement for more than six (6) months in the
aggregate out of any period of twelve (12) consecutive months. The
determination that the Employee is disabled shall be made by the
Executive Committee or, if there is no Executive Committee, by the
Board of Directors of the Corporation (with the Employee abstaining
from the decision if he is then a member of such Committee or the
Board), based upon an examination and certification by a physician
based in Beverly Hills, California, selected by the Corporation
subject to the Employee's approval, which approval shall not be
unreasonably withheld. The Employee agrees to submit timely to any
required medical or other examination, provided that such examina-
tion shall be conducted in Beverly Hills, California and that if
the examining physician is other than the Employee's personal
physician, the Employee shall have the right to have such personal
physician present at such examination.
6.2 EFFECT OF DISABILITY. If the Employee is determined
to be disabled pursuant to this Section 6, the Corporation shall
have the option to terminate this Agreement by written notice to
the Employee stating the date of termination, which date may be any
time subsequent to the date of such determination, except that the
Corporation shall pay to the Employee: (i) the accrued amount of
the compensation, benefits, reimbursements and other sums payable
pursuant to this Agreement, prorated through the date of termina-
tion (other than expense reimbursements which shall be paid in
full), if, as and when such amounts would be paid but for the
termination of this Agreement, and (ii) a lump sum payment equal to
the greater of: (A) twice the then Base Compensation, or (B) what
would have been the aggregate Base Compensation payable after the
date of termination through the end of the Term or Extended Term,
as the case may be. Except for the amounts payable by the
Corporation pursuant to the preceding sentence, all obligations of
the Corporation with respect to compensation and benefits under
this Agreement shall cease upon any such termination.
6.3 OPTION EXTENSION. The Corporation shall use its
best efforts to obtain stockholder approvals, to the extent
required, of amendments to its 1985 Non-Qualified Stock Option Plan
and its 1996 Employee Stock Option Plan which would provide that
the termination date for all options held under such plans by the
Employee and exercisable as of the date of the termination of
Employee (as a result of Employee's disability) shall remain
exercisable until (i) the termination date as set forth in the
respective option certificates or (ii) 18 months after the date of
termination (as a result of Employee's disability), whichever is
later.
7. INDEMNIFICATION AND INSURANCE
7.1 OBLIGATION. The Corporation shall indemnify and
hold harmless, and in any action, suit or proceeding, defend the
Employee (with the Employee having the right to use counsel of his
choice) against all expenses, costs, liabilities and losses
(including attorneys' fees, judgments and fines, and amounts paid
or to be paid in any settlement) (collectively "Indemnified
Amounts") reasonably incurred or suffered by the Employee in
connection with the Employee's service as a director or officer of
the Corporation or any affiliate to the full extent permitted by
the By-laws of the Corporation as in effect on the date of this
Agreement, or, if greater, as permitted by the General Corporation
Law of the State of Delaware (the "GCL"), provided that the
indemnity afforded by the Corporation's By-laws shall never be
greater than permitted by the GCL. The Company shall advance on
behalf of Employee all Indemnified Amounts as they are incurred.
To the extent a change in the GCL (whether by statute or judicial
decision) permits greater indemnification than is now afforded by
the By-laws and a corresponding amendment shall not be made in said
By-laws, it is the intent of the parties hereto that the Employee
shall enjoy the greater benefits so afforded by such change.
7.2 DETERMINATION. A determination that indemnification
with respect to any claims by the Employee pursuant to this Section
7 is proper shall be made by independent legal counsel selected by
the Board of Directors of the Corporation and set forth in a
written opinion furnished by such counsel to the Board of
Directors, the Corporation and the Employee. In the event it is
determined by such counsel that Employee is not entitled to
indemnification pursuant to this Section 7 (and if such determina-
tion is contested by Employee, such determination is confirmed by
the final non-appealable order of a court of competent jurisdic-
tion), or if a court of competent jurisdiction determines in a
final non-appealable order that Employee is not entitled to
indemnification pursuant to this Section 7, Employee hereby
undertakes that he shall promptly reimburse the Company for all
such advances of Indemnified Amounts made by the Company on
Employee's behalf. Pending any such final non-appealable determi-
nation, in accordance with Section 7.1 the Corporation shall
advance on behalf of Employee all Indemnified Amounts as they are
incurred.
7.3 EFFECT. This Agreement establishes contract rights
which shall be binding upon, and shall inure to the benefit of, the
heirs, executors, personal and legal representatives, successors
and assigns of the Employee and the Corporation.
7.4 OTHER RIGHTS. The contract rights conferred by this
Section 7 shall not be exclusive of any other right which the
Employee may have or hereafter acquire under any statute, provision
of the Certificate of Incorporation or By-laws, agreement, vote of
stockholders or disinterested directors or otherwise. This Section
7 shall not be deemed to affect any rights to subrogation which may
exist in any policy of directors and officers liability insurance.
7.5 NOTICE OF CLAIMS. The Employee shall advise
promptly the Corporation in writing of the institution of any
action, suit or proceeding which is or may be subject to this
Section 7, provided that Employee's failure to so advise the
Corporation shall not affect the indemnification provided for
herein, except to the extent such failure has a material and
adverse effect on the Corporation's ability to defend such action,
suit or proceeding.
7.6 INDEMNIFICATION INSURANCE. The Employee shall be
covered by insurance, to the same extent as other senior executives
and directors of the Corporation are covered by insurance, with
respect to (a) directors and officers liability, (b) errors and
omissions, and (c) general liability insurance. The Corporation
shall maintain reasonable and customary insurance of the type
specified in parts (b) and (c) in the preceding sentence. The
Employee shall be a named insured or additional insured, without
right of subrogation against him, under any policies of insurance
carried by the Corporation. The Corporation will, in good faith,
make efforts to maintain insurance coverage of the type specified
in part (a) above at commercially reasonable rates, but the failure
to obtain such coverage shall not constitute a breach of the
Corporation's obligations hereunder.
8. TERMINATION
8.1 BY THE CORPORATION FOR CAUSE. The Corporation may
terminate this Agreement for cause at any time. For purposes of
this Agreement, the term "cause," when used in connection with
termination of the Agreement by the Corporation under this Section
8.1, shall be limited to (i) the willful engaging by the Employee
in gross misconduct which is materially injurious to the Corpora-
tion, (ii) conviction of the Employee of a felony involving any
financial impropriety which would materially interfere with the
Employee's ability to perform his services required under this
Agreement or otherwise be materially injurious to the Corporation,
or (iii) the willful refusal of the Employee to perform in a
material respect any of his material obligations under this
Agreement without proper justification after being notified with
specificity by the Board of Directors in writing of the particular
respects in which the Board of Directors asserts that Employee has
not performed such material obligations. For purposes of this
Section 8.1, no act, or failure to act, on the Employee's part
shall be considered willful unless done, or admitted to be done, by
the Employee in bad faith and without reasonable belief that such
action or omission was in the best interest of the Corporation.
8.2 BY THE EMPLOYEE FOR CAUSE. The Employee may
terminate this Agreement for cause at any time. For purposes of
this Agreement, the term "cause" when used in connection with the
termination of the Agreement by the Employee under this Section 8.2
shall be limited to the failure of the Corporation to perform in a
material respect any of its material obligations under this
Agreement without proper justification.
8.3 PROCEDURE FOR "CAUSE" TERMINATION. Any termination
of this Agreement pursuant to Section 8.1 or 8.2 hereof shall be
effective only if (i) the terminating party exercises such right of
termination in writing delivered to the non-terminating party
within sixty (60) days of the terminating party having actual
knowledge of the event giving rise to the right of termination, and
(ii) the non-terminating party shall have failed to correct or
reverse the event giving rise to such right of termination within
thirty (30) days of the receipt of such notice. Such termination
shall be effective upon the expiration of the period referred to in
clause (ii) above; provided, however, that should the Corporation
seek such termination the Employee may contest such termination and
demand arbitration as to the validity of the termination pursuant
to the procedure in Section 11.1 of this Agreement.
8.4 BY THE CORPORATION WITHOUT "CAUSE". The Corporation
may not terminate the Agreement without "cause," as defined in
Section 8.1 of this Agreement.
8.5 BY THE EMPLOYEE WITHOUT "CAUSE". The Employee shall
have the right to terminate this Agreement without "cause" and in
his discretion, upon written notice to be given to the Corporation
not less than sixty (60) days prior to the effective date of such
termination: (i) at any time after January 1, 1999; or (ii) at any
time, if Employee does not beneficially own (as defined in Rule
13-d under the Securities Exchange Act of 1934, as amended, or any
successor provision) or control at least ten percent (10%) of the
issued and outstanding shares of the Corporation's Common Stock.
8.6 EFFECT OF TERMINATION. (a) If this Agreement is
terminated for any reason prior to the end of the stated Term, or
an Extended Term, as the case may be, neither party shall have any
further obligation under this Agreement except with respect to
those provisions of this Agreement which, by their terms, require
performance by the parties subsequent to termination of this
Agreement.
(b) If this Agreement is terminated by the Corporation
for "cause" pursuant to Section 8.1 hereof or by the Employee
without "cause" pursuant to Section 8.5 hereof, the Corporation
shall pay to the Employee the accrued amount of the compensation
benefits, reimbursement and other sums payable pursuant to this
Agreement up to the effective date of termination, prorated through
the effective date of termination (other than expense reimburse-
ments which will be paid in full) if, as and when such amounts
could be paid but for the termination of this Agreement.
(c) If this Agreement is terminated by the Employee for
"cause" pursuant to Section 8.1 hereof or without "cause" from and
after January 1, 1999, or by the Corporation without "cause," the
Employee shall be entitled to receive (i) health insurance benefits
provided for in this Agreement (A) through the end of the stated
Term or (B) 24 months from the date of termination, whichever is
the longer, and (ii) a lump sum payment equal to the greater of (A)
twice the then Base Compensation or (B) what would have been the
aggregate Base Compensation payable after the date of termination
through the end of the Term or Extended Term, as the case may be.
Any amounts payable to the Employee under this paragraph (c) shall
not be reduced by any amounts earned or received by the Employee
from any third party at any time after such termination; there
being no requirement on the part of the Employee to mitigate
damages and no amounts received by him from others may be used to
mitigate damages.
8.7 CONSULTING. If this Agreement is terminated for any
reason other than pursuant to Section 5, 6, or 8.1 hereof or by the
Employee without "cause" (other than pursuant to Section 8.5
hereof), the Employee shall, at his option, continue to provide
services to the Corporation as a consultant, for a term commencing
as of the effective date of the termination of this Agreement
extending through and including the end of the Term or Extended
Term, as the case may be. The Employee shall have the right to
terminate such consultant arrangements at any time on thirty (30)
days prior notice to the Corporation. As a consultant the Employee
shall provide such services to the Corporation as he and the
Corporation shall mutually agree are appropriate under the circum-
stances (and in the event the Corporation and Employee fail to so
agree, Employee shall be entitled to receive the consultant
compensation provided for herein so long Employee is willing to
perform the services he believes are appropriate under the
circumstances); the Employee shall be entitled to receive compensa-
tion from the Corporate at a rate of not less than one hundred
thousand dollars ($100,000) per annum or such other amount as the
Employee and the Corporation shall agree upon; and the Employee
shall not be required to travel outside the Los Angeles, California
area without his consent.
8.8 TERMINATION FOLLOWING CHANGE OF OWNERSHIP. If this
Agreement is terminated by either party within one year following a
"change in the ownership" (as defined below) of the Corporation,
and in lieu of the benefits provided for in Section 8.6(b) and
8.6(c)(ii), Corporation shall pay to Employee a lump sum payment
equal to 2.99 times the average annual compensation paid by the
Corporation and includible by Employee in his gross income during
the five tax years ended prior to the tax year in which such change
of ownership or control occurs. For purposes of this Section 8.8,
a "change in the ownership" of the Corporation will be deemed to
have occurred upon: (i) completion of a transaction resulting in a
consolidation, merger, combination or other transaction in which
the common stock of the Corporation is exchanged for or changed
into other stock or securities, cash and/or any other property and
the holders of the Corporation's common stock immediately prior to
completion of such transaction are not, immediately following
completion of such transaction, the owners of at least a majority
of the voting power of the surviving entity, (ii) a tender or
exchange offer by any person or entity other than Employee and/or
his affiliates for fifty percent (50%) of the outstanding shares of
common stock of the Corporation is successfully completed, (iii)
the Corporation has sold all or substantially all of the
Corporation's assets, (iv) during any period of twenty-four (24)
consecutive months, individuals who at the beginning of such period
constituted the board of directors of the Corporation (together
with any new or replacement directors whose election by the board
of directors, or whose nomination for election, was approved by a
vote of at least a majority of the directors then still in office
who were either directors at the beginning of such period or whose
election or nomination for reelection was previously so approved)
cease for any reason to constitute a majority of the directors then
in office, and (v) any other event resulting in a change in the
ownership of the Corporation. Notwithstanding anything contained
herein to the contrary, the payment by Corporation to Employee
pursuant to this Section 8.8 shall be reduced to the extent
necessary to prevent any portion of such payment to be character-
ized as an excess parachute payment under Section 280G of the
Internal Revenue Code of 1986, as amended, or any successor
provision thereof, which may be applicable to a payment pursuant to
this Section 8.8.
8.9 EXPIRATION OF TERM. Subject to Section 8.8, upon
the termination of this Agreement upon the expiration of the Term
or Extended Term, as the case may be, or by Employee pursuant to
Section 8.5, the Corporation shall pay Employee a lump sum termina-
tion payment equal to twice the then Base Compensation.
9. CONFIDENTIAL INFORMATION: NONDISCLOSURE, ETC.
9.1 CONFIDENTIALITY. Except as may be in furtherance of
the Employee's performance of his functions as the Corporation's
most senior executive officer (including, without limitation, in
connection with acquisitions, dispositions, financings and other
significant corporate transactions, developments or planning which
involve the participation of third parties) or otherwise with the
consent of the Board of Directors or the Executive Committee, the
Employee shall not, throughout the Term of this Agreement and
thereafter, disclose to any third party, or use or authorize any
third party to use, any material information relating to the
material business or interests of the Corporation (or any of its
subsidiaries) which Employee knows to be confidential and valuable
to the Corporation or any of its subsidiaries (the "Confidential
Information"). The Confidential Information is and will remain the
sole and exclusive property of the Corporation, and, during the
Term of this Agreement, the Confidential Information, when
entrusted to the Employee's custody, shall be deemed to remain at
all times in the Corporation's sole possession and control.
Notwithstanding the foregoing, the Employee may, after prior
written notice to the Corporation (to the extent such notice is
possible under the circumstances) disclose such Confidential
Information pursuant to subpoena or other legal process, and
promptly thereafter shall advise the Corporation in writing as to
the Confidential Information which was disclosed and the
circumstances of such disclosure.
9.2 RETURN OF DOCUMENTS. Upon termination of this
Agreement for any reason whatsoever, or whenever requested by the
Executive Committee or the Board of Directors of the Corporation,
the Employee shall return or cause to be returned to the
Corporation all of the Confidential Information or any other
property of the Corporation in the Employee's possession or custody
or at his disposal, which he has obtained or been furnished,
without retaining any copies thereof.
10. NON-COMPETITION
10.1 RESTRICTION. Subject to Section 2.2 hereof, the
Employee shall not, throughout the Term or Extended Term of this
Agreement, as the case may be, without the Corporation's prior
written consent, render services to a business, or plan for or
organize a business, which is materially competitive with or
similar to the business of the Corporation or of any of its
subsidiaries by becoming an owner, officer, director, shareholder
(owning more than 4.9% of such business' equity interests),
partner, associate, employee, agent or representative or consultant
or serve in any other capacity in any such business.
10.2 TRADE SECRETS. Subject to Section 2.2 hereof, all
ideas and improvements which are protectable by patent or copyright
or as trade secrets, conceived or reduced to practice (actually or
constructively) during the Term of this Agreement by the Employee,
shall be the property of the Corporation; provided, however, that
the provisions of this Section 10.2 shall not apply to an invention
for which no equipment, supplies, facility or trade secret
information of the Corporation was used and which was developed
entirely on the Employee's own time, and (a) which does not relate
to (i) the business of the Corporation or any of its subsidiaries
or (ii) the actual or demonstrably anticipated research or develop-
ment by the Corporation of any of its subsidiaries or (b) which
does not result from any work performed by the Employee pursuant to
this Agreement.
11. REMEDIES
11.1 ARBITRATION. In the event of any dispute or
controversy arising under, out of or relating to this Agreement or
the breach hereof other than under Section 9 or 10 hereunder for
which the Corporation may seek injunctive relief, it shall be
determined by arbitration in Los Angeles, California to be heard by
a single arbitrator chosen by the Corporation and the Employee,
provided that if the Corporation and the Employee cannot agree on a
single arbitrator, each shall select one arbitrator and the
arbitrators so selected shall select a third arbitrator, and the
panel of three arbitrators shall determine the dispute. The
arbitration is to commence within four (4) weeks after service a
demand for arbitration by either party, and each party shall have
the right to make one document request on the other party prior to
commencement of the arbitration proceeding, but no other discovery
shall be conducted other than that which is agreed upon in writing
by both parties. Such arbitration and any award made therein shall
be binding upon the Corporation and the Employee.
11.2 INJUNCTIVE RELIEF. The Employee acknowledges and
agrees that any material breach which occurs or which is threatened
of Section 9 or 10 hereof shall cause substantial and irreparable
damage to the Corporation in an amount and of a character difficult
to ascertain. Accordingly, in addition to any other relief to
which the Corporation may otherwise be entitled at law, in equity
or by statute, or under this Agreement, the Corporation shall also
be entitled to seek such immediate temporary, preliminary and
permanent injunctive relief on such breach or threatened breach of
Section 9 or 10 hereof as may be granted through appropriate
proceedings.
11.3 FEES. If any action at law or in equity or
arbitration is necessary to enforce or interpret the terms and
conditions of this Agreement, the prevailing party shall be
entitled to reasonable attorney's, accountant's and expert's fees,
costs and necessary disbursements in addition to any other relief
to which it or he may be entitled. As used in this Section 11.3,
the term prevailing party shall include, but not be limited to, any
party against whom a cause of action, demand for arbitration,
complaint, cross-complaint, counterclaim, cross-claim or third
party complaint is voluntarily dismissed, with or without
prejudice.
12. NOTICES
All notices required or permitted hereunder shall be in
writing and shall be delivered in person, by facsimile, telex or
equivalent form of written communication, or sent by certified or
registered mail, return receipt requested, postage prepaid, as
follows:
To Corporation:
GIANT GROUP, LTD.
9000 Sunset Boulevard, 16th Floor
Los Angeles, California 90069
Attn: David Gotterer, Vice Chairman
GIANT GROUP, LTD.
c/o Terry Christensen, Esq.
Christensen, Miller, Fink, Jacobs,
Glaser, Weil & Shapiro, LLP
2121 Avenue of the Stars, 18th Floor
Los Angeles, California 90067
To the Employee:
Burt Sugarman
9000 Sunset Boulevard, 16th Floor
Los Angeles, California 90069
or such other party and/or address as either party may designate in
a written notice delivered to the other party in the manner
provided herein. All notices required or permitted hereunder shall
be deemed duly given and received on the date of delivery, if
delivered in person or by facsimile, telex or other equivalent
written telecommunication, or on the seventh day next succeeding
the date of mailing if sent by certified or registered mail.
13. FURTHER ACTION
The Corporation and the Employee each agrees to execute
and deliver such further documents as may be reasonably necessary
by the other in order to give effect to the intentions expressed in
this Agreement.
14. HEADING; INTERPRETATIONS
The headings and captions used in this Agreement are for
convenience only and shall not be construed in interpreting this
Agreement.
15. ASSIGNABILITY
This Agreement and the rights and duties under it may not
be assigned by any party hereto without the prior written consent
of the other party hereto. The parties expressly agree that any
attempt to assign rights and duties without such written consent
shall be null and void and of no force and effect. The terms and
provisions of this Agreement shall bind successors and assigns of
the Corporation.
16. ENTIRE AGREEMENT
This Agreement contains the entire agreement and under-
standing of the parties with respect to the matters herein, and
supersedes all existing negotiations, representations or agreements
and all other oral, written and other communications between them
concerning the subject matter of this Agreement.
17. AMENDMENTS
This Agreement may be amended or modified in whole or in
part only by an agreement in writing signed by the Corporation and
the Employee.
18. WAIVER AND SEVERABILITY
The waiver by either party of a breach of any terms or
conditions of this Agreement shall not operate or be construed as a
waiver of any subsequent breach by such party. In the event that
one or more provisions of this Agreement shall be declared to be
invalid, illegal or unenforceable under any law, rule or regula-
tion, such invalidity, illegality or unenforceability shall not
affect the validity, legality or enforceability of the other
provisions of this Agreement.
19. GOVERNING LAW
This Agreement and the rights of the parties under it
shall be governed by and construed in accordance with laws of the
State of California, including all matters of construction,
validity, performance and enforcement and without giving effect to
the principles of conflict of laws, except that matters of
corporate law and governance shall be governed by and construed in
accordance with the laws of the State of Delaware.
20. COUNTERPARTS
This Agreement may be executed in any number of
counterparts, each of which shall be an original, and all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed Agreement as of
the day and year first above written.
GIANT GROUP, LTD.
By: /s/ Burt Sugarman
--------------------------
/s/ Burt Sugarman
--------------------------
BURT SUGARMAN
EXHIBIT 11
<TABLE>
<CAPTION>
GIANT GROUP, LTD.
COMPUTATION OF PRIMARY EARNINGS PER SHARE (5)
(Dollars in thousands, except per share amounts)
Year Ended December 31,
1994 1995(1) 1996
---------- ---------- ----------
<S> <C> <C> <C>
INCOME (LOSS)
Income (loss) from continuing operations $( 34,350) $( 22,332) $ 17,912
Income earned, net of tax, on investment
of remaining proceeds from exercise of
stock options, after Company's acquisition
of common stock(2) - - 191
Interest expense reduction, net of tax,
related to the assumed retirement of debt
with option exercise proceeds(3) 342 - -
---------- ---------- ----------
Income (loss) from continuing operations
applicable to common stock ( 34,008) ( 22,332) 18,103
Income from discontinued operations, net of
income taxes 6,598 - -
Gain on sale of discontinued operations, net
of income taxes 48,223 - -
---------- ---------- ----------
Net income (loss) applicable to common
stock and equivalents $ 20,813 $ (22,332) $ 18,103
========== ========== ==========
SHARES
Weighted average number of common shares
outstanding 5,180,000 5,110,000 4,074,000
Additional shares assuming conversion of
the Company's stock options(4) 1,283,000 - 1,135,000
---------- ---------- ----------
Average common shares outstanding and
equivalents(4) 6,463,000 5,110,000 5,209,000
========== ========== ==========
PRIMARY EARNINGS PER COMMON SHARE(5)
Income (loss) from continuing earnings $ (5.26) $ (4.37) $ 3.48
Income from discontinued operations, net
of income taxes 1.02 - -
Gain on sale of discontinued operations,
net of income taxes 7.46 - -
---------- ---------- ----------
Net income (loss) $ 3.22 $ (4.37) $ 3.48
========== ========== ==========
(1) The 1995 calculation of earnings per share excludes the Company's stock options as
their effect would be anti-dilutive and is not presented.
(2) Assuming funds were invested in U.S. government short-term obligations earning
interest at 5%.
(3) Reduction of interest expense, net of income taxes, relates to assumed retirement of
debt with option exercise proceeds in excess of that amount required to retire 20% of
the Company's outstanding common stock.
(4) Reflects the 20% limit required by APB No. 15 for reacquisition of shares in 1996 and
1994. Excess proceeds from exercise of stock options have been assumed to be
invested in short-term government securities (see (2)).
(5) Fully diluted earnings per share is equal to primary earnings per share and is
therefore not disclosed.
</TABLE>
EXHIBIT 21
GIANT GROUP, LTD.
SUBSIDIARIES AS OF DECEMBER 31, 1996
Corporation State of Incorporation Ownership
- ----------- ---------------------- ---------
KCC Delaware Company, Inc. Delaware 100%
GIANT MARINE GROUP, LTD. Delaware 100%
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated February 12, 1997, on Rally's
Hamburgers, Inc., and subsidiaries' consolidated financial
statements included in this Form 10-K, into the GIANT GROUP,
LTD.'s previously filed Registration Statement File No. 33-16848.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
March 25, 1997
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated March 25, 1997, on GIANT GROUP,
LTD. and subsidiaries' consolidated financial statements for the
year ended December 31, 1996, included in the Form 10-K, into
GIANT GROUP, LTD.'s previously filed Registration Statement File
No. 33-16848.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 25, 1997
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Under date of March 27, 1995, we confirmed by letter certain
information and opinions expressed to you. With respect to the
financial statements of GIANT GROUP, LTD. for the year ended
December 31, 1994 to be included in the Form S-8 (File No. 33-
16848), we confirm that, to the best of our knowledge and belief,
the statements made in said letter are correct as of this date
and there have been no developments since March 27, 1995 that
would materially affect the financial statements for the year
ended December 31, 1994. In addition, we know of no event since
March 27, 1995, although not affecting such financial statements,
has caused or is likely to cause any material change, adverse or
otherwise, in the financial position, results of operations, or
cash flows of the Company.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FOLLOWING INFORMATION HAS BEEN EXTRACTED FROM THE FINANCIAL
STATEMENTS IN THE FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996.
</LEGEND>
<CIK> 0000041296
<NAME> GIANT GROUP, LTD.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,644
<SECURITIES> 10,583
<RECEIVABLES> 15,766
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 60,478
<PP&E> 5,757
<DEPRECIATION> 2,198
<TOTAL-ASSETS> 69,047
<CURRENT-LIABILITIES> 15,059
<BONDS> 0
0
0
<COMMON> 73
<OTHER-SE> 52,742
<TOTAL-LIABILITY-AND-EQUITY> 69,047
<SALES> 0
<TOTAL-REVENUES> 8,018
<CGS> 0
<TOTAL-COSTS> 6,299
<OTHER-EXPENSES> (6,544)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,263
<INCOME-PRETAX> (9,649)
<INCOME-TAX> 17,912
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,912
<EPS-PRIMARY> 3.48
<EPS-DILUTED> 0
</TABLE>
