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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, 1998
GIANT GROUP, LTD.
9000 Sunset Boulevard, 16th Floor, Los Angeles, California 90069
Registrants telephone number (310) 273-5678
Commission File Number 1-4323
I.R.S. Employer Identification Number 23-0622690
State of Incorporation Delaware
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Name of Each Exchange
Title of Class on Which Registered
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Securities registered pursuant to 12(b) of the Act: Common Stock, New York
$.01 Par Value Stock Exchange
(Together with Preferred
Stock Purchase Rights)
Securities registered pursuant to 12(g) of the Act: None
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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.
--
As of March 24, 1999, 3,927,148 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, 1999 was $ 12.2 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement for the annual meeting
of stockholders of the Company to be held May 18, 1999 are incorporated by
reference into Part III of this Report.
Exhibit Index located at page 51 herein.
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TABLE OF CONTENTS
PART I Page No.
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal proceedings 13
Item 4. Submission of matters to a vote of security holders 16
PART II
Item 5. Market for the registrant's common equity and
related stockholder matters 16
Item 6. Selected financial data 17
Item 7. Management's discussion and analysis of financial
condition and results of operations 18
Item 8. Financial statements and supplementary data 23
Item 9. Changes in and disagreements with accountants on
accounting and financial disclosure 50
PART III
Item 10. Directors and executive officers of the registrant 50
Item 11. Executive compensation 50
Item 12. Security ownership of certain beneficial owners
and management 50
Item 13. Certain relationships and related transactions 50
PART IV
Item 14. Exhibits, financial statement schedules and
reports on Form 8-K 50
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PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
GIANT GROUP, LTD. (herein referred to as the "Company" or "GIANT") is a
corporation, which was organized under the laws of the State of Delaware in
1913. The Company's wholly-owned subsidiaries include KCC Delaware Company
("KCC") and Periscope Sportswear, Inc. ("company" or "Periscope").
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 sold 100% of the stock of its 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.
Beginning in 1987, the Company, through its equity investment in Rally's
Hamburgers, Inc. ("Rally's"), has been involved in the operation of double
drive-through hamburger restaurants and as of December 31, 1994 owned 48%
(7,430,000 shares) of Rally's outstanding common stock. From December 1995
through November 1996, the Company's equity interest in Rally's common stock
decreased to 15% primarily due to the sale of 4,293,000 shares to Fidelity
National Financial, Inc. ("Fidelity") and CKE Restaurants, Inc. ("CKE"), an
affiliate of Fidelity.
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 ("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, GIANT agreed to the request of the Rally's
board of directors to terminate the proposed Exchange Offer.
During 1996, the Company added to its involvement in the operation of
double drive-through hamburger restaurants by purchasing 200,000 shares of the
common stock of Checkers Drive-In Restaurants ("Checkers"). In addition, along
with CKE and others, KCC purchased $29,900,000 of Checkers $36,100,000
restructured, 13% senior subordinated debt ("13% debt") from certain current
debt holders. These holders retained approximately $6,200,000 of the principal
amount. The total purchase price for the 13% debt was $29,100,000. KCC purchased
$5,100,000 principal amount of 13% debt for $5,000,000. The restructured credit
agreement extended the maturity date to July 31, 1999 and provided for 50% of
the aggregate net proceeds from the sale of assets to be paid to the holders of
the 13% debt. Since the restructured 13% debt was purchased in November 1996,
Checkers has made over $2,100,000 in principal payments to KCC, the funds coming
from a private placement of its common stock and sale of assets. Because of
these principal payments made by Checkers, the next scheduled principal payment
on the 13% debt is due on July 31, 1999, when the entire principal balance is
payable in full. The restructured credit agreement also provided for Checkers to
issue warrants ("Checkers Warrants") to all holders of the 13% 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
exercisable at any time until November 22, 2002. KCC initially assigned the
Checkers warrants a value of $1,168,000; however, due to the continued trend of
the Checkers' common stock price to trade below $.75, the Company, as of
December 31, 1998, wrote off the entire value of the warrants and recorded a
loss of $1,168,000 in the current year.
In December 1997, Rally's acquired 19,100,960 shares of Checkers, from
GIANT, CKE, Fidelity and other parties in exchange for securities of Rally's,
including convertible preferred stock. This transaction gave Rally's an
approximate 26% ownership in Checkers and made Rally's Checker's largest
stockholder. GIANT's ownership in Rally's after the transaction was concluded
amounted to 3,180,718 shares or approximately 13% as of December 31, 1997. GIANT
had accounted for the investment in Rally's common stock under the equity method
of accounting up through December 1997 when the Checkers exchange transaction
occurred. As of December 31, 1997, GIANT accounted for the investment as a
marketable security classified as an investment available-for-sale. In
connection with the exchange of Rally's stock for
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GENERAL DEVELOPMENT OF BUSINESS (cont.)
Checkers stock, William P. Foley II, Chairman of CKE and Fidelity was elected
Chairman of both Rally's and Checkers. Mr. Foley replaced GIANT's Chief
Executive Officer who had been Chairman of Rally's Board of Directors, and who
remains as a Rally's director.
In June 1998, with the approval of Rally's stockholders, the Rally's
preferred stock was converted into Rally's common stock. After the conversion,
the Company owned 3,226,000 shares of Rally's common stock, 11% of the total
outstanding common stock.
On September 25, 1998, the Company agreed in principle to a merger
transaction pursuant to which Rally's would merge with the Company and Checkers.
Under the terms of the merger transaction, each share of the Company's common
stock would be converted into 10.48 shares of Rally's common stock and each
share of Checkers common stock would be converted into 0.5 shares of Rally's
common stock upon consummation of the merger. The transaction was subject to
negotiation of definitive agreements, receipt of fairness opinions by each
party, receipt of stockholder and other required approvals and other customary
conditions. On November 2, 1998, the Company, Rally's and Checkers announced the
termination of their proposed merger. The merger was terminated when the
definitive merger agreement could not be finalized.
On January 29, 1999, Checkers and Rally's announced that they have signed a
merger agreement pursuant to which the two companies will merge in an all-stock
transaction. The merger agreement provides that each outstanding share of
Rally's stock will be exchanged for 1.99 shares of Checkers stock. The Checkers
common stock owned by Rally's (approximately 26% of Checkers common stock) will
be retired after the merger. Checkers announced a one share for twelve shares
reverse stock split to take place immediately following the merger. Subsequent
to the merger, the new Company will continue to operate restaurants under both
the Checkers and Rally's brand names for the foreseeable future.
In July 1996, KCC entered into an agreement ("NeoGen Agreement") with
Joseph Pike and his company, NeoGen Investors, L.P. ("NeoGen"), to participate
in the development, manufacturing and marketing of Mifepristone in the United
States and other parts of the world. Under the NeoGen Agreement, KCC for a cash
payment of $6 million would have obtained a 26% interest in NeoGen, the entity
that held the sublicenses for all potential uses of Mifepristone. Subsequent to
the signing of this contract, in October 1996, KCC filed suit against Joseph
Pike and NeoGen for fraud and breach of the NeoGen Agreement and also filed suit
against the licensors of Mifepristone, the Population Council, Inc. and Advances
in Health Technology, Inc. On November 4, 1996, the Population Council and
Advances in Health Technology, filed suit against Joseph Pike and NeoGen. The
suit claimed Joseph Pike had concealed information that he had been, among other
things, convicted of forgery. Under a settlement reached in 1996 with the
Population Council, Joseph Pike 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
distribution of Mifepristone. In October 1997, KCC settled their litigation
with the Population Council, Inc. and Advances in Health Technology, Inc. and in
November 1997, KCC, GIANT and Joseph Pike announced the settlement of their
litigation. KCC's action against NeoGen continues. (See Item 3, "Legal
Proceedings").
GIANT MARINE GROUP, LTD. ("GIANT MARINE") was organized under the laws of
the State of Delaware on November 22, 1996. GIANT MARINE started and operated
the Luxury Yacht Co-Ownership Program (the "Co-Ownership Program") with two
yachts until November 17, 1997, when the Co-Ownership Program was ended. During
1998, GIANT MARINE chartered its two yachts until they were both sold. On
December 28, 1998, GIANT MARINE was dissolved and the remaining assets and
liabilities were transferred to the Company.
On December 11, 1998, the Company acquired 100% of the outstanding common
stock of Periscope, a manufacturer of women's and children's clothing. Periscope
was organized under the laws of the State of Delaware in 1998 and is the
successor, by merger, to Periscope I Sportswear, Inc., a New York corporation
organized in 1975. Periscope designs, sources and markets an extensive line of
high quality, moderate priced, women's and children's clothing to mass
merchandisers and major retailers, primarily for sale under private labels.
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NARRATIVE DESCRIPTION OF BUSINESS
Periscope-Women's and Children's Apparel
Operating Strategy
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Periscope's operating strategy is to maintain complete control over the
entire production process. Raw materials are purchased and goods are produced
only upon receipt of a firm commitment from a customer. Periscope uses only
outside manufacturers to provide production flexibility and capacity and to
eliminate the significant capital investment requirements. Once a product is
shipped to a customer, returns are not accepted unless the product is defective
or delivered late. These practices minimize the need to carry unsold
inventories.
The entire production process is company controlled to tailor products to a
customer's specific needs. The company offers customers rapid order turn around
time by maintaining flexible scheduling unconstrained by a finite production
capacity.
Periscope does not own any manufacturing facilities. Outsourcing of
manufacturing allows quicker response to changing production requirements, while
eliminating the significant capital investment requirements, potential labor
problems and other risks associated with owning manufacturing facilities. Cost-
efficiency and flexibility are maintained by outsourcing nearly all stages of
production to the lowest cost provider.
Periscope maintains long-term customer relationships by working closely
with its customers to develop coordinated products and distinctive product lines
at their particular price points. In addition, Periscope's sales force consults
with customers concerning optimal delivery schedules, floor presentation,
pricing and other merchandising considerations and provides customers with
competitive market intelligence gathered through discussions with its contract
manufacturers.
Growth Strategy
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Periscope's growth strategy is to increase sales to existing customers by
expanding sales to buyers of additional products within a particular product
line and selling to other buyers within the same organization. Periscope's
broad product line enables it to pursue many of these cross-selling
opportunities.
The company also establishes test programs whereby new customers can
evaluate the quality of the company's products and sales success before placing
large orders.
Periscope seeks to increase sales by offering ladies' products in
categories outside of the company's traditional knit product offerings. The
company's goal is to be considered by its customers as providing a ''one-stop
shopping'' opportunity, where such customers can easily and quickly fill all of
their buying needs. Periscope has begun expansion of its ladies woven product
line from pants to skirts, tops, shorts and jumpers. Additionally, Periscope is
seeking to develop other ladies' lines, such as sweaters, and to import
moderately priced finished goods.
The children's lines will be expanded utilizing Periscope's strategy of
updating basic designs that will differentiate Periscope from typical children's
apparel producers.
GIANT will pursue the acquisition of apparel companies with significant
private label business and/or underdeveloped apparel brands or licensed
trademarks. The Company will primarily focus on acquisition candidates that
provide certain operational or manufacturing synergies in order to realize
enhanced economies of scale in Periscope's sales and production processes.
Presently, there are no current plans or agreements to acquire any other
companies.
Products
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Periscope's products include moderately priced, high-quality women's and
children's clothing. Periscope designs its products based on updated versions of
basic, recurring styles ("updated basics" strategy) that are less susceptible to
fashion obsolescence and less seasonal in nature than fashion styles.
Merchandisers and designers are employed to
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NARRATIVE DESCRIPTION OF BUSINESS (cont.)
regularly update these basic styles to reflect current fashion trends by using
new color schemes, fabrics, and decorative trim and by incorporating nuances of
existing popular styles.
An extensive product line has been developed in its primary market, ladies'
casual wear, which includes knit tops, bottoms, related separates, dresses and
short sets, and woven (e.g., corduroy, twill, denim) bottoms, jumpers, dresses,
coordinates, short sets and tops. In addition to its standard production
garments, custom designed merchandise for certain of its customers are produced
on a limited basis. Periscope's product offerings also include children's
apparel.
Periscope sells its products primarily under private labels, however, it
also sells a limited number of products under its own labels.
Customers
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The products are sold nationwide in an estimated 11,000 stores operated by
approximately 154 department and specialty store chains, mass merchandisers,
other retail outlets and through mail order catalogues. The company's five
largest customers accounted for approximately 66.4% and 48.6% of sales in 1998
and 1997, respectively. The company's largest customers include Kmart, Sears
and Charming Shoppes (Fashion Bug), which accounted for approximately 24.3%,
16.1% and 13.2%, respectively in 1998 and 9.4%, 12.1% and 13.4%, respectively in
1997. Other customers include Costco Wholesale, Cato Stores, Montgomery Ward,
Wal-Mart and Shopko Stores. Periscope does not currently have any long-term
commitments or contracts with any of its customers. Periscope's sales outside
the United States are insignificant.
Sales and Marketing
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Periscope's selling operation is highly centralized. An in-house sales
force of generally 5 people, primarily through the New York City showrooms,
makes sales to customers. Senior management actively participates in the
planning of marketing and selling efforts. Independent sales representatives
are not employed and regional sales offices are not operated, but the company
participates in various regional merchandise marts, industry marketplaces at
which numerous vendors rent space in order to display their products to regional
buyers. This sales structure enables management to effectively control the sales
effort and to deal directly with, and be readily accessible to, major customers.
Products are generally marketed to department and specialty store customers four
to five months in advance of each of the company's selling seasons.
Each sales person is responsible for all aspects of a customer's needs,
including design assistance, developing product samples, obtaining orders,
coordinating fabric choices, monitoring production and delivering finished
products. During the production process, the salesperson is responsible for
informing the customer about the progress of an order, including any
difficulties that might affect delivery time. In this way, the company and its
customer can make appropriate arrangements regarding any delay or other change
in the order. Further, the company ensures that multiple salespersons are
familiar with each customer account so that they can work cooperatively to
assist one another on a reciprocal basis.
Periscope's sales force is in constant contact with its customers. They
develop an understanding of the customers' retail strategies, style preferences,
production requirements, and pricing and floor presentation, as well as to
identify prevailing fashion trends. This information is then utilized to provide
its customers with products that meet their particular requirements efficiently.
The sales and design team works with certain of its customers to custom design
garments which incorporate current industry fashion trends that will reflect the
style and image that a buyer intends to project to consumers. In order to
facilitate this process the company requires that its sales force be
knowledgeable about all aspects of the design and garment production process.
Periscope has an electronic data interchange ("EDI") system through which
certain order and shipping information is automatically placed by the customer
with the company.
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NARRATIVE DESCRIPTION OF BUSINESS (cont.)
Trademarks
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Periscope's primary business has been the production of private label goods
for its customers. However, long-term trade marks and trade names, which have
been used by the company, are listed below. Each is owned by the Company and
registered in its name.
PERISCOPE(R), which has been used in department and specialty stores and
for mass merchandisers.
ASHLY BRENT(R), which has been used on specialty store products.
JUST DAWN(R), which has been used mainly on discount store products.
ANOTHER NAME(R), which has been used on discount store products with
decreasing frequency since 1981.
CURIOSITY'S CAT(R), which has been used on import goods.
DIRECTIVES(R), which has been used on department and specialty store
products.
DNA(R), which has been used on a junior's/young women's apparel line.
Contract Manufacturing and Distribution
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Periscope manufactures substantially all of its knit products by purchasing
the yarn, designing and creating fabric and contracting with select
manufacturers at every stage of both fabric and finished goods production. The
balance of its products consists primarily of woven products of the company's
design where the company purchases dyed and printed fabric and then controls all
cutting, sewing and finished goods production and imported finished knit and
woven products. A significant component of Periscope's operating strategy is the
utilization of third party contract manufacturers throughout the entire
production process from yarn purchasing through product delivery. Periscope does
not engage in any hedging activities intended to offset the risk of raw material
price fluctuations. The company supplies its main contractors with a high volume
of business on a consistent basis, making Periscope an important customer. In
certain instances, Periscope provides these contractors with 100% of their
business. This strategy enables the company to leverage its position as a key
customer to negotiate favorable pricing, and to receive production priority and
preferential treatment. This manufacturing model allows it to maximize
production flexibility, speed and efficiency without sacrificing product
quality.
During the first quarter of 1999, the company completed the shift of its
sewing and most of its cutting operations from the United States to Mexico. As a
result of the enactment of The North American Free Trade Agreement ("NAFTA")
which became effective on January 1, 1994, goods produced in Mexico are
generally exempt from U.S. import duties as long as they meet certain
guidelines. NAFTA made it economically feasible to take advantage of Mexico's
large and skilled labor pool. Periscope believes that by having its products
sewn in Mexico, it can produce high-quality goods at significant cost savings
because labor costs in Mexico are significantly lower than in the United States.
Periscope has the ability, through its contract manufacturers, to operate
on production schedules with lead times ranging from as few as 30 days to
several months to accommodate its customers' requirements. Typically specialty
retail customers attempt to respond quickly to changing fashion trends and are
increasingly less willing to assume the risk that goods ordered on long lead
times will be out of fashion when delivered. Sewing facilities are maintained in
New Jersey for orders with shorter lead times. While mass merchandisers such as
Kmart are beginning to operate on shorter lead times, they are also occasionally
able to estimate their needs as much as six months to one year in advance for
products that do not change in style significantly from season to season.
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NARRATIVE DESCRIPTION OF BUSINESS (cont.)
Yarn Sourcing
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The manufacturing process for knit products begins with yarn purchasing.
Periscope buys yarns of various qualities and characteristics from six primary
domestic suppliers as well as from overseas sources through brokers.
Knitting
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By controlling the knitting process, the company can specify the exact
technical specifications and widths at which its fabrics are produced allowing
the company to design its patterns to maximize the yields it receives from each
yard of fabric produced. In addition, the mills convert the yarn into rolls of
fabric meeting the company's specifications as to yarn content weight, width and
knitting design. This allows the company to control the quality of the fabric
for flaws, weight deficiencies or other problems earlier in the production
process, thereby increasing customer satisfaction with its finished products.
Knitted fabric is sent to one of Periscope's finishers for dyeing, bleaching or
printing and preparing the fabric for cutting. Finished fabric (both dyed and
printed) for its woven products as well as, on an occasional basis, for its knit
products are also purchased from domestic sources.
Dyeing and Printing
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Fabric rolls are delivered to the company's outside dyers and/or to the
company's outside printers who create, respectively, solid colors or print
patterns, as specified by the company. Periscope has developed an expertise in
fabric design, dyeing and printing by working closely with its manufacturers.
Currently, approximately 2,000 different styles of its printed fabrics are
catalogued in an extensive print library. If patterns from the print library are
not used, outside design studios are employed to create new printing patterns to
Periscope's specifications.
Cutting
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Beginning in January 1999 substantially all cutting facilities for knits
are now located in Mexico. Woven goods are cut domestically as well as in
factories in Mexico. The duty on woven and knit fabrics cut in Mexico is
minimal, and, under NAFTA, duties on woven or knit goods cut in Mexico are to be
eliminated by January 1, 2002.
Periscope's technical production support staff, located in New York City,
produces patterns for cutting piece goods and, using state-of-the-art computer
equipment, marks and grades the patterns onto templates in a manner to minimize
fabric waste at approximately 10% compared to the industry average of
approximately 20%. This low level of waste is attributable to its sophisticated
computer grading equipment as well as to the fact that it can have fabric rolls
manufactured in customized widths, according to the garments to be produced from
the fabric.
Sewing
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A finished product sample, including a stitching diagram as well as garment
specifications, are sent first to the sewing contractor, and then the cut
garments are delivered to these outside contractors, primarily in Mexico.
Approximately 90% of the sewing is currently performed in Mexico, with the
balance performed by domestic sewing contractors for product orders, which are
requested on an accelerated basis. The company does not own or operate any
manufacturing facilities and is therefore dependent on independent contractors
for the manufacture of its products.
Asian Production
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In 1998, approximately 16% of Periscope's net sales were of finished
products imported primarily from China and Taiwan. Periscope believes that
foreign contract manufacturing allows it to take advantage of lower
manufacturing costs for products which require more labor to produce and to
avail itself of a skilled labor force which is better equipped and trained to
produce certain products, particularly certain kinds of knitwear. Compared to
production in the United States or Mexico, foreign sourcing of products requires
a significant lead time between order and receipt, ranging from six to ten
months in the case of Far Eastern sourced manufacturing.
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NARRATIVE DESCRIPTION OF BUSINESS (cont.)
Shipping and Delivery of Finished Products
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Finished products produced in Mexico are shipped direct to the customer.
Other imported products are shipped from the contract manufacturers by sea, air
or land to either Periscope's distribution facility in North Bergen, New Jersey
or directly to customers. Products are packaged to the specifications of the
customer. Products shipped from the North Bergen distribution facility are
shipped primarily by common carrier. Most finished products are delivered to
the customer's consolidators, many of which are located in Northern New Jersey.
Periscope controls all shipping, bills of lading, invoices, etc. from its North
Bergen facility.
Quality Control
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Periscope has in place comprehensive quality control procedures to ensure
that fabrics, materials and finished products meet the company's exacting
quality standards. Company personnel regularly visit and inspect each of its
domestic and foreign contract manufacturers to ensure compliance with the
company's quality standards. In January 1999, the quality control functions for
goods manufactured in Mexico was moved to Mexico. Products, which are
manufactured in other foreign countries, are tested at the foreign site to
ensure that they comply with customer specifications. Periscope verifies that
those products shipped from foreign manufacturers meet United States customs
import requirements.
Backlog
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Periscope believes that all of its backlog of firm orders as of December
31, 1998 totaling approximately $50,000,000, will be filled within approximately
6 to 7 months. Firm orders include purchase orders placed but not yet filled.
The amount of unfilled firm orders at a particular time is affected by a number
of factors, including the scheduling of manufacture and shipment of finished
goods, which, in some instances, is dependent on the desires of the customer.
Accordingly, a comparison of unfilled firm orders from period to period is not
necessarily meaningful and may not be indicative of eventual actual shipments or
the ability to fill orders. The company's orders typically contain cancellation
provisions relating only to the quality of the product and the delivery
deadlines. Historically, the company's experience has been that cancellations,
rejections or returns of firm orders have not materially reduced the amount of
sales realized from its backlog.
Management Information Systems
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The company utilizes an ACS Optima computer system, which is widely used in
the apparel industry. It is a complete corporate system, which includes, among
other things, order entry, inventory, invoicing and shipping, sales and
management analysis, production scheduling systems and raw material management.
The new ACS operating system has been integrated with the company's new Stewart
Sinclair Warehouse Management system and will allow for scanning inbound bar-
coded finished goods inventory. The order information will then be used to
produce a master Bill of Lading, an Advanced Ship Notice and an invoice, which
will be transmitted via Electronic Data Interchange ("EDI") to the customer.
This technology allows the electronic exchange of purchase orders, invoices, and
advanced shipping notices. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for further discussion on Year
2000 matters.
Risk Factors
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In addition to the matters and risks set forth in the foregoing discussion
of Periscope's business, the operating and financial results of Periscope are
subject to the risks described below.
Competition
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Periscope competes in a highly competitive apparel industry with numerous
manufacturers, including brand name and private label producers, and retailers,
which have established, or may establish, internal product development and
sourcing capabilities. Periscope's products also compete with a substantial
number of designer and non-designer product lines. Periscope believes that it
competes favorably on the basis of quality and value of its apparel lines and
products, price,
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NARRATIVE DESCRIPTION OF BUSINESS (cont.)
the production flexibility, efficiency and speed that it enjoys as a result of
its control over the entire production process, and its long-term relationships
with contract manufacturers and customers. Nevertheless, increased competition
from manufacturers or retailers, or increased success by existing competition,
could result in reductions in unit sales or prices, or both, which could have a
material adverse effect on the company's business and results of operations.
Seasonality of Business
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Periscope has not historically experienced seasonable variations in its
business with the exception of children's apparel; instead, the company
typically experiences significant shifts in its net sales on a customer by
customer and quarter by quarter basis. Since most of the sales are derived from
large bulk orders, a change in the timing of receipt or shipment, or the number
of orders received, could result in a significant shift in the timing or amount
of revenues. Further, sales of children's apparel is seasonal with sales
reaching their peak during the "back to school" period. If sales of children's
apparel increases, the company may experience greater variations in operating
results from quarter to quarter. The variations in the operating results of the
company's business affects borrowings under the company's factoring agreement
and its level of backlog, which fluctuate in response to demand for the
company's products. Therefore, the results of any interim period are not
necessarily indicative of the results that may be achieved for an entire year.
Cyclically and Trends in the Apparel Industry
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The apparel industry historically has been subject to substantial cyclical
variations. There can be no assurance that consumers will continue to favor the
products designed and produced by the company under private label relationships
or its own brands, and a significant shift in consumer preferences could have a
material adverse effect on Periscope's business, financial condition and results
of operations. The apparel industry is a cyclical industry heavily dependent
upon the overall level of consumer spending, with purchases of apparel and
related goods tending to decline during recessionary periods when disposable
income declines. A difficult retail environment could result in downward price
pressure, which could adversely impact gross profit margins. Additionally, all
of the company's customers are in the retail industry, which industry has
experienced significant changes and difficulties over the past several years,
including consolidation of ownership, increased centralization of buying
decisions, restructuring, bankruptcies and liquidations. Additionally, financial
problems of a retailer could cause Periscope's factor to limit the amount of
credit extended to such retailer. Periscope cannot predict what effect, if any
continued or additional changes within the retail industry will have on its
business, financial condition or results of operations.
Price and Availability of Raw Materials
- ----------------------------------------
The price and availability of the raw materials used to manufacture the
company's apparel products may fluctuate significantly, depending on a variety
of factors, including crop yields and weather patterns. Periscope currently does
not engage in any hedging activities intended to offset the risk of raw material
price fluctuations. There also can be no assurance that any future increase in
the prices paid for the raw materials used in the manufacture of the company's
products will be passed along to its customers.
Dependence upon Key Personnel
- ------------------------------
Periscope's success is dependent upon the personal efforts and abilities of
Glenn Sands, its President and Chief Executive Officer and Scott Pianin, its
Executive Vice President and Chief Operating Officer. Periscope has entered into
employment agreements with Mr. Sands and with Mr. Pianin for terms expiring
December 31, 2002. The company believes that the loss of the services of Mr.
Sands and Mr. Pianin may have an adverse effect on the company. Periscope
maintains key man life insurance on the life of Mr. Sands in the amount of $15
million of which Periscope is the beneficiary for $ 11 million. Periscope is in
the process of securing a $10 million key man life insurance policy on Mr.
Pianin.
10
<PAGE>
NARRATIVE DESCRIPTION OF BUSINESS (cont.)
Dependent on Factoring of Accounts Receivable
- ---------------------------------------------
Historically, Periscope has sold nearly all of its trade accounts
receivable to a factor, which assumes the credit risk with respect to collection
of such accounts. The factor pays the company 90% of the receivable amount upon
receipt of the company's invoice to the customer and the balance when the
account is paid in full. The factor approves the credit of the company's
customers prior to sale. If the factor disapproves a sale to a customer and the
company decides to proceed with the sale, the company bears the credit risk. The
factoring agreement can be terminated by the factor upon 60 days prior notice.
Such termination could have a material adverse effect on the company's financial
condition and results of operations if the company could not replace the
factoring agreement within such period. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity".
Dependence on Unaffiliated Manufacturers
- ----------------------------------------
Periscope does not own or operate any manufacturing facilities and is
therefore dependent on independent contractors for the manufacture of its
products. The company's products are manufactured to its specifications by the
manufacturers. The inability of a manufacturer to ship the company's products
in a timely manner or to meet the company's quality standards could adversely
affect the company's ability to deliver products to its customers in a timely
manner. Delays in delivery could result in missing certain retailing seasons
with respect to some or all of the company's products or could otherwise have an
adverse effect on the company's financial condition and results of operations.
There are no formal arrangements between the company and any of its contractors
or suppliers.
Foreign Operations
- ------------------
Beginning in 1999, substantially all of Periscope's products are being
manufactured in foreign countries, primarily Mexico, China and Taiwan. The
company's operations may be adversely affected by political instability
resulting in disruption of trade from foreign countries in which the company's
contractors and suppliers are located, the imposition of additional regulations
related to imports or duties, taxes and other charges on imports. In addition,
the company's import operations are subject to constraints imposed by bilateral
textile agreements between the United States and a number of foreign countries.
These agreements impose quotas on the amount and type of goods, which can be
imported into the United States from these countries and can limit or prohibit
importation of products on very short notice. The company's imported products,
excluding goods from Mexico which are subject to NAFTA, are also subject to
United States customs duties which are a material portion of the company's cost
of imported goods. A substantial increase in customs duties or a substantial
reduction in quota limits applicable to the company's imports could have a
material adverse effect on the company's financial condition and results of
operations.
There have been a number of recent trade disputes between China and the
United States during which the United States has threatened to impose tariffs
and duties on some products imported from China and to withdraw China's "most
favored nation" trade status. The loss of most favored nation trade status for
China, changes in current tariff structures or the adoption by the United States
of trade policies of sanctions adverse to China could have a material adverse
effect on the company's results of operations from these import goods which are
approximately 10% of sales.
Because Periscope's manufacturers in China and Taiwan are located at
greater geographic distances from the company than its manufacturers in Mexico,
the company is generally required to allow greater lead time for these foreign
orders. This reduces the company's manufacturing flexibility and its ability to
accept some orders.
The Co-Ownership Program and Yacht Charter
In 1996, the Company started a new business, which offered the world's
first Luxury Yacht Co-Ownership Program of this type (the "Co-Ownership
Program"). The Co-Ownership Program provided individuals and companies the
opportunity for a Co-Ownership Program of a minimum of one-fourth interest in
large ocean cruising yachts. In addition, a 100% ownership in the luxury yacht
was available with the Company managing the yacht for a fee. This program also
provided for the management of these yachts by Giant Marine resulting in a
practical and economical way to own these yachts. In 1996, in furtherance of
this Co-Ownership Program, the Company purchased two yachts.
11
<PAGE>
NARRATIVE DESCRIPTION OF BUSINESS (cont.)
On November 17, 1997, the Company announced that GIANT MARINE would end the
Co-Ownership Program. The advertising in national newspapers and yachting
magazines and presentations at major yacht shows attracted many interested
people, but only one, one-quarter interest was sold. The sale was rescinded when
management and the Board of Directors, after reviewing the amount of time
required to sell the quarter interests in the yachts, concluded that the
potential return on the capital invested did not justify continuing the Co-
Ownership Program.
During 1998, the Company chartered its two yachts until they were both
sold. One yacht was sold at its then net book value and the other was sold at a
loss of $541,000 that was partially offset by U.S. Customs' refunds of $294,000.
On December 28, 1998, GIANT MARINE was dissolved and the remaining assets and
liabilities were transferred to the Company.
Double Drive-Through Hamburger Restaurants
The Company, through its ownership of common stock of Rally's and its debt
investment of Checkers is also involved in the operation and franchising of
double drive-through hamburger restaurants.
As of March 25, 1999, Rally's and Checkers, along with their franchisees,
operate 475 and 462 double drive-through restaurants, respectively. The Rally's
operations are located primarily in the MidAtlantic states while Checkers
operations are located primarily in the SouthEastern United States.
Rally's and Checkers' restaurants offer high quality fast food served
quickly at everyday prices generally below the regular prices of the four
largest hamburger chains. They serve the drive-through and take-out segments of
the quick-service restaurant market. They develop, own, operate and franchise
quick service "double drive-through" restaurants. 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.
On January 29, 1999, Rally's and Checkers signed a merger agreement
pursuant to which the two companies will merge in an all-stock transaction. The
merger agreement provides that each outstanding share of Rally's stock will be
exchanged for 1.99 shares of Checkers stock. The Checkers common stock owned by
Rally's (approximately 26% of Checkers common stock) will be retired after the
merger. Checkers announced a one share for twelve shares reverse stock split to
take place immediately following the merger. Subsequent to the merger, the new
Company will continue to operate restaurants under both the Checkers and Rally's
brand names for the foreseeable future.
Employees
At December 31, 1998, the Company employed approximately 140 persons on a
full-time basis, comprised of 5 executive employees, 13 management employees, 3
sales employees and 119 administrative and warehouse employees. The Company's
employees are not members of any labor union and are not subject to any
collective bargaining agreement. The Company considers its relations with its
employees to be good.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
- ---------------------------------------------------------------------------
1995
- ----
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
document (as well as information included in oral statements or other written
statements made or to be made by the Company) contains statements that are
forward-looking, such as statements relating to plans for future activities.
Such forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and uncertainties include those
previously mentioned under Periscope, as well as those relating to the
development and implementation of the Company's business
12
<PAGE>
NARRATIVE DESCRIPTION OF BUSINESS (cont)
plan, domestic and global economic conditions, manufacturing in Mexico and other
foreign countries, changes in consumer trends for apparel, acquisition strategy,
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, 60, 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 was
Chairman of Rally's Board of Directors from November 1994 through October 1997,
having also served as its Chairman of the Board and Chief Executive Officer from
1990 through February 1994. He remains a Director of Rally's. He is also a
director of Checkers.
David Gotterer, 70, 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.
William H. Pennington, 51, Vice President, Chief Financial Officer,
Secretary and Treasurer. Mr. Pennington joined the Company in October 1997.
Mr. Pennington served in senior financial positions as Vice President, Finance
for Earth Tech, Inc. from January to September 1997, Vice President, Finance for
BKK Corporation from 1993 to 1996, and as Vice President, Controller for
Beneficial Standard Life Insurance Company from 1984 to 1991 and through 1993
served as an independent consultant to the former parent company of Beneficial
Standard Life Insurance Company on Beneficial Standard Life Insurance Company
matters. In July 1996, Mr. Pennington personally commenced proceedings under
Chapter 7 of the Federal bankruptcy laws and was discharged in October 1996.
Mr. Pennington received an MBA from the University of Southern California and is
a CPA.
ITEM 2. PROPERTIES.
The Company has its executive office in leased premises consisting of
approximately 9,800 square feet at an annual base rent in 1998 of approximately
$258,000. The lease term is 60 months, expiring in April 2002, and the Company
has two, three-year renewal options. During the first quarter of 1999, the
Company's land in Pennsylvania, not deemed essential to operations, was sold.
Periscope's executive offices, showrooms and sales offices as well as its
design facilities are located in approximately 9,000 square feet on the sixth
and tenth floors at 1407 Broadway, New York, New York. The floors are leased
pursuant to a single lease for a term expiring in April 2002, at a current
annual base rent of $306,000. The accounting offices, in-house sample production
facilities, fabric marking and grading facility, label making facility, as well
as its warehousing and distribution center are located in approximately 50,000
square feet at 2075 91st Street, North Bergen, New Jersey. The facility is
leased for a term expiring September 2000 at a current annual base rent of
$266,000. Periscope believes that its existing facilities are adequate to meet
its current and foreseeable needs and that it can successfully negotiate new
leases, if needed, when its current leases expire.
ITEM 3. LEGAL PROCEEDINGS.
Mittman, et al. V. Rally's Hamburgers, Inc., et al.
- ---------------------------------------------------
Jonathan Mittman, Steven Horowitz, Dina Horowitz and John Hannan v. Rally's
Hamburgers, Inc., Burt Sugarman, GIANT GROUP, LTD., Wayne M. Albritton, Donald
C. Moore, Edward C. Binzel, Gena L. Morris, Patricia L. Glaser and Arthur
Andersen & Co., 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-
13
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
L(CS)) against Rally's, certain of its officers, directors and shareholders, a
former officer of Rally's and 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., Burt Sugarman, GIANT GROUP, LTD., Wayne M.
- -----------------------------------------------------------------------
Albritton, Donald C. Moore, Edward C. Binzel, Gena L. Morris, Patricia L. Glaser
- --------------------------------------------------------------------------------
and Arthur Andersen & Co., (Civ. No. C-94-0087-L-S). On March 23, 1994, all
- -------------------------
plaintiffs filed a consolidated lawsuit known as Mittman, et al. V. Rally's
--------------------------
Hamburgers, Inc., et al., (Civ. No. C-94-0039-L(CS)(the "Mittman Actions"). On
- ------------------------
April 15, 1994, Ms. Glaser and the Company filed a motion to dismiss the
consolidated lawsuit for lack of personal jurisdiction. The remaining defendants
filed motions to dismiss for failure to state a claim upon which relief can be
granted. On April 5, 1995, the Court denied these motions. (The Court struck
plaintiffs' punitive damages allegations and required plaintiffs to amend their
claims under section 20 of the Securities Exchange Act of 1934, but otherwise
the Court let stand the most recent version of plaintiffs' complaint at this
juncture). The Court granted Mr. Sugarman's motion to strike certain scurrilous
and irrelevant allegations, and directed plaintiffs to amend their complaint to
conform to the Court's order. 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 plaintiffs' motion,
certifying a class 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 denied the motion and refused to
disqualify Christensen, Miller.
A settlement conference occurred on December 7, 1998. Fact discovery is
not yet complete, but it is anticipated that a deadline for completion of fact
discovery will be set for summer 1999. No trial date has been set.
The Company denies all wrongdoing and intends to vigorously defend this
action. It is not possible to predict the outcome of this action at this time.
Harbor Finance Partners v. Rally's and GIANT GROUP, LTD., et al.
- ----------------------------------------------------------------
On February 13, 1996, Harbor Finance Partners ("Harbor") commenced a
derivative action, purportedly on behalf of Rally's, against the Company, 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 the Company and Rally's, along with the Company, breached
their fiduciary duties to the public shareholders of the Company by repurchasing
certain of Rally's Senior Notes at an inflated price. Harbor seeks "millions of
dollars in damages," along with the rescission of the repurchase transaction.
In the fall of 1996, all defendants moved to dismiss this action. The Chancery
Court denied defendants' motions on April 3, 1997. No trial date has been set.
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.
KCC Delaware v. Joe Pike, et al.
- --------------------------------
In October 1996, KCC filed a complaint, in the Los Angeles County Superior
Court, against Neogen Investors, L.P., N.D. Management, Inc., Neogen Holdings,
L.P., Danco Laboratories, Inc. and Neogen Pharmaceutical, Inc. (collectively the
"Neogen Entities") and Joseph Pike, stating causes of action for fraud, breach
of fiduciary duty, fraudulent concealment, breach of contract, unfair business
practices and permanent and preliminary injunctive relief and against the
licensors of Mifepristone, the Population Council, Inc. and Advances in Health
Technology, Inc., on a declaratory relief claim. The complaint seeks damages for
the breach by Joseph Pike and the Neogen entities of a July 24, 1996 agreement
by which KCC agreed to contribute $6 million in return for a 26% equity interest
in the entity producing the drug,
14
<PAGE>
3. LEGAL PROCEEDINGS (cont.)
-------------------------
Mifepristone, in the United States and other parts of the world ("Neogen
Agreement"). On February 19, 1997, Joseph Pike and the Neogen Entities filed an
answer to the complaint, denying its material allegations and raising
affirmative defenses. On that date, the Neogen Entities also filed a cross-
complaint against KCC, the Company, and certain of the Company's directors,
Terry Christensen, David Malcolm and Burt Sugarman, which alleged causes of
action for fraud, breach of contract, intentional interference with prospective
economic advantage, negligent interference with prospective economic advantage
and unfair business practices. In October 1997, KCC settled their action with
the licensors, the Population Council, Inc. and Advances in Health Technology,
Inc., and in November 1997, KCC settled their action with Joseph Pike. On May 1,
1998, the court granted the Neogen Entities summary adjudication on KCC's cause
of action for breach of contract. On October 2, 1998, the court entered an
order, which, among other things, effectively eliminates the Neogen Entities'
ability to obtain any money judgment from KCC and the other cross-defendants. On
February 23, 1999, the court entered judgement pursuant to a Stipulation for
Judgment, by which the parties respective claims are dismissed with prejudice,
save and except for the right to appeal certain issues.
First Albany Corp., as custodian for the benefit of Nathan Suckman v. Checkers
- ------------------------------------------------------------------------------
Drive-In Restaurants, Inc. et al. Case No. 1667. ("Suckman")
- --------------------------------- ---------------------------
This putative class action was filed on September 29, 1998 in the Delaware
Chancery Court in and for New Castle County, Delaware by First Albany Corp., as
custodian for the benefit of Nathan Suckman, an alleged stockholder of 500
shares of the common stock of Checkers. The complaint names Checkers, Rally's,
the Company, and certain of Rally's current and former officers and directors as
defendants, including William P. Foley II, James J. Gillespie, Joseph N. Stein,
James T. Holder, Terry Christensen, and Burt Sugarman. The complaint arises out
of the proposed merger announced on September 28, 1998 between the Company,
Rally's and Checkers (the "Proposed Merger"), and alleges generally that certain
of defendants engaged in an unlawful scheme and plan to permit Rally's to
acquire the public shares of Checkers' stock in a "going private" transaction
for grossly inadequately consideration and in breach of the defendants'
fiduciary duties. The plaintiff allegedly initiated the complaint on behalf of
all stockholders of Checkers as of September 28, 1998, and seeks, among other
things, certain declaratory and injunctive relief against the consummation of
the Proposed Merger, or in the event the Proposed Merger is consummated,
rescission of the Proposed Merger and costs and disbursements incurred in
connection with bringing the action, including attorneys' fees and such other
relief as the court may deem proper.
In view of a decision by the Company, Rally's and Checkers not to implement
the transaction that had been announced on September 28, 1998, plaintiffs have
agreed to provide the Company and all other defendants with an open extension of
time to respond to the complaint, and plaintiffs have indicated that they will
probably file an amended complaint in the event of the consummation of a merger
between Rally's and Checkers.
The Company denies all wrongdoing and intends to vigorously defend the
action. It is not possible to predict the outcome of this action at this time.
David J. Steinberg and Chaile B. Steinberg, individually and on behalf of those
- -------------------------------------------------------------------------------
similarly situated, v. Checkers Drive-In Restaurants, Inc., et al., Case No.
- ----------------------------------------------------------------------------
16680
- -----
This putative class action was filed on October 2, 1998 in the Delaware
Chancery Court in and for New Castle County, Delaware by David J. Steinberg and
Chaile B. Steinberg, alleged stockholders of an unspecified number of shares of
the common stock of Checkers. The complaint names Checkers, Rally's, the
Company, and certain of Rally's current and former officers and directors as
defendants, including William P. Foley II, James J. Gillespie, Joseph N. Stein,
James T. Holder, Terry Christensen, and Burt Sugarman. As with the complaint
detailed herein above in Suckman, the complaint arises out of the Proposed
-------
Merger, and alleges generally that certain of defendants engaged in an unlawful
scheme and plan to permit Rally's to acquire the public shares of Checkers'
stock in a "going private" transaction for grossly inadequately consideration
and in breach of the defendants' fiduciary duties. The plaintiffs allegedly
initiated the complaint on behalf of all stockholders of Checkers and seek,
among other things, certain declaratory and injunctive relief against the
consummation of the Proposed Merger and costs and disbursements incurred in
connection with bringing the action, including attorneys' fees, and such other
relief as the court may deem proper.
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS (cont.)
-------------------------
For the reasons stated above in the Suckman action, plaintiffs have agreed
-------
to provide the Company and all other defendants with an open extension of time
to respond to the complaint, and plaintiffs have indicated that they will
probably file an amended complaint in the event of the consummation of a merger
between Rally's and Checkers.
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.
Neogen Investors, L.P., and Danco Laboratories, Inc. v. KCC Delaware, Inc.,
- ---------------------------------------------------------------------------
GIANT GROUP, LTD., Terry Christensen and Does 1 through 20, inclusive, Case No.:
- --------------------------------------------------------------------------------
SC 054760
- ---------
This complaint for damages for trade libel was filed on October 30, 1998 in
the Superior Court for the State of California for the County of Los Angeles.
The complaint alleges one cause of action for trade libel against all defendants
regarding defendants' alleged statements to the media concerning plaintiffs and
Joseph Pike. The complaint has not been served. According to the complaint, a
Status Conference is set in the action on July 1, 1999. The Company denies all
wrongdoing and, if served, intends to vigorously defend itself against the
complaint.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the calendar
year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR 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 24,1999 the approximate number of record holders of the
Company's Common Stock was 1,800. The high and low sale prices for such stock
during each quarter in 1998 and 1997 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
---------------------------
<TABLE>
<CAPTION>
1998 1997
QUARTER High Low High Low
- ------- ---- --- ----- ---
<S> <C> <C> <C> <C>
First.......... $ 7 $ 5 3/8 $ 8 3/8 $ 7 1/8
Second......... 6 15/16 5 1/2 7 1/4 6 1/2
Third.......... 7 7/8 5 11/16 6 13/16 6 1/2
Fourth......... 9 5/8 5 9/16 7 15/16 6 15/16
</TABLE>
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for the five years ended December 31, 1998 and is derived from the
audited financial statements of the Company. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes included in this Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31, 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------------------------------------------------------
Income Statement Data: (Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenue:
Investment income, including sales of
marketable securities $ 442 $ 3,988 $ 7,970 $ 1,922 $ 2,203
Net sales (1) - - - - 1,143
Charter and other income (2) 209 108 48 662 1,353
----------------------------------------------------------------------------------
651 4,096 8,018 2,584 4,699
----------------------------------------------------------------------------------
Cost and expenses:
Cost of sales, including selling and
shipping (1) - - - - 1,756
General and administrative 5,018 4,491 4,971 4,981 4,093
Co-ownership program and charter - - 24 5,615 1,655
One-time items (3) 1,343 - 1,270 - 165
Amortization of goodwill (1) - - - - 38
----------------------------------------------------------------------------------
6,361 4,491 6,265 10,596 7,707
----------------------------------------------------------------------------------
Operating income (loss) (5,710) (395) 1,753 (8,012) (3,008)
Gain on sale of property & equipment - - - - 2,855
Factoring and financing costs (4,007) (149) (34) (153) (107)
Gain on sale of investment in affiliate - - 6,177 - -
Equity in earnings (loss) of affiliate (8,898) (22,074) 367 (623) -
Loss on investment in affiliate (19,396) - - - (1,168)
----------------------------------------------------------------------------------
Income (loss) before benefit for income
taxes (38,011) (22,618) 8,263 (8,788) (1,428)
Benefit for income taxes 3,661 286 9,649 4,170 1,921
----------------------------------------------------------------------------------
Income (loss) from continuing opeations (34,350) (22,332) 17,912 (4,618) 493
Income from discontinued operations, net 6,598 - - - -
Gain on sale of discontinued operations, net 48,223 - - - -
----------------------------------------------------------------------------------
Net income (loss) $ 20,471 $ (22,332) $ 17,912 $ (4,618) $ 493
==================================================================================
Basic earnings per common share (4):
Net income (loss) from continuing opeations $ (6.63) $ (4.37) $ 4.40 $ (1.42) $ 0.15
Income and gain on sale from discontinued
operations, net 10.58 - - - -
Net income (loss) 3.95 (4.37) 4.40 (1.42) 0.15
Diluted earnings per common share (4):
Net income (loss) from continuing operations $ (6.63) $ (4.37) $ 4.07 $ (1.42) $ 0.15
Income and gain on sale from discontinuned
operations, net 10.58 - - - -
Net income (loss) 3.95 (4.37) 4.07 (1.42) 0.15
Weighted average shares outstanding:
Basic earnings per common share 5,180,000 5,110,000 4,074,000 3,260,000 3,184,000
Diluted earnings per common share 5,180,000 5,110,000 4,400,000 3,260,000 3,185,000
Balance sheet data at December 31:
Assets held-for-sale $ - $ - $ 21,485 $ 24,362 $ -
Working capital 42,867 39,125 45,420 42,021 19,544
Total assets 100,895 51,681 69,047 53,876 64,560
Short-term debt, related to assets held-
for-sale - - 10,500 - -
Long-term debt and capital lease obligations 1,816 - - - 1,479
Total stockholders' equity 69,942 45,145 52,815 48,498 49,821
</TABLE>
(1) For the 20 day period ended December 31, 1998
(2) Charter income was earned only in 1997 and 1998
(3) In 1994, loss on extinguishment of debt, net of tax of $1,343, in 1996,
proxy contest for $752 and Exchange Offer for $518 and in 1998 $165 for
merger and related legal
(4) The calculation for the year ended December 31, 1994 excludes potentially
dilutive 7% convertible subordinated debentures as the effect of the
inclusion of common stock upon the conversion of these debentures would be
anti-dilutive because the stock conversion price exceeded the average price
of the common stock for the year. In addition, 45,000 options were not
included in the calculation as the effect would be anti-dilutive because
the exercise price of $11.00 exceeds the average market price of the common
stock for the year
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Dollars in thousands, except share and per
share amounts)
On December 11, 1998, the Company acquired 100% of the outstanding common
stock of Periscope. The acquisition has been accounted for by the purchase
method of accounting and, accordingly, Periscope's assets and liabilities were
recorded at their fair market value at the date of acquisition. Periscope's
results of operations for the 20-day period beginning December 12, 1998 are
included in the Company's consolidated statement of operations for the year
ended December 31, 1998.
Results of Operations for 1998 versus 1997
Revenue for the twelve months ended December 31, 1998 increased $2,115 to
$4,699 from $2,584 in the prior period. In 1998, the Company recorded net sales
of $1,143 for the Company's women's and children's apparel operations and higher
charter income of $691. Accretion of discounts related to the Company's debt
investments, included in investment income, increased $460 to $822 from $362 in
the prior period primarily due to higher accretion of the discount related to
the Company's investment in Checkers debt.
Costs and expenses for the twelve months ended December 31, 1998 decreased
$2,889 to $7,707 from $10,596 in the prior period. Co-Ownership and charter
expenses decreased $3,960 to $1,655 in 1998 compared to $5,615 in 1997 due to
the sale of the yachts in April and October resulting in lower expenses for 1998
compared to a full year of expenses for two yachts in 1997. Included in Co-
Ownership and charter expenses for 1998 is a loss of $541 from the sale of one
of its yachts in October, partially offset by U.S. Custom's refunds of $294.
The Company sold its other luxury yacht in April at a net sales price equal to
the yacht's current book value. In the fourth quarter of 1997, the Company
provided a reserve of $1,500 for the impairment of assets held-for-sale. The
Company's general and administrative expenses for the twelve months ended
December 31, 1998 decreased $888 to $4,093 from $4,981 in 1997 due to an overall
decrease in corporate expenses. These decreases in expenses were partially
offset by one-time expenses of $165 related to the proposed merger with Rally's
and Checkers that was terminated on November 2, 1998. In addition, the Company
incurred cost of sales of $1,469 and selling and shipping expenses of $ 287
related to the Company's women's and children's apparel operations in 1998.
Cost of sales included a charge of $216 for inventory turnover related to the
step-up adjustment of inventory to its fair market value at the date of
acquisition.
Other income for the twelve months ended December 31, 1998 increased $2,901
to $2,748 from an expense of $153 in the prior period. In 1998, the Company
recorded a gain of $2,855 on the sale of certain assets including the corporate
plane, a Gulfstream II SP acquired in 1991. The Company recorded lower
factoring and finance costs in 1998 of $46 compared to 1997 due to the factor
and financing costs of $150 associated with the financing of one of the luxury
yachts for two months in 1997.
In 1998, the Company recorded a non-cash loss of $1,168 related to the
entire write-off of the Company's investment in Checkers warrants due to the
continued trend of Checkers' common stock to trade below $.75, the exercise
price of the warrants. Effective December 18, 1997, the Company's ownership
percentage in Rally's common stock decreased to approximately 13%. As a result
of the Company's reduction in ownership, the Company's investment in Rally's is
now accounted for as a marketable security compared to its previous accounting
under the equity method. In 1997, the Company recorded a non-cash equity loss of
$623 related to its equity investment in Rally's.
Benefit for income taxes for the twelve months ended December 31, 1998
decreased $2,249 to $1,921 from $4,170 in the prior period. In 1998, the
benefit primarily resulted from a reduction in the tax valuation allowance based
on management's estimates related to the Company's ability to realize these
benefits, primarily related to a Federal net operating loss carryback and the
Company's current year taxable income. In 1997, the Company recognized a tax
benefit of $3,100 when it settled a dispute with the California Franchise Tax
Board ("CFTB") over taxes assessed for 1989 through 1991 for which the Company
had accrued a liability prior to 1997 and a federal net operating loss carryback
of $1,100.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Dollars in thousands, except share and per share
amounts)
Results of Operations for 1997 versus 1996
Revenue for the twelve months ended December 31, 1997 decreased $5,434 to
$2,584 from $8,018 in the prior period. In 1997, the Company's investment income
decreased $730 to $2,006 compared to $2,736 in 1996, primarily due to a lower
investment in U.S. government obligations in 1997. In 1996, the Company had
gains of $5,234 compared to losses of $84 in 1997 from sales of the Company's
investment in marketable securities. These decreases were partially offset by
charter income of $614 in 1997.
Costs and expenses for the twelve months ended December 31, 1997 increased
$4,331 to $10,596 from $6,265 in the prior period. In 1997, the Company incurred
higher Co-Ownership Program and charter expenses of $5,591 related to a full
year of operations compared to $24 in the prior period. In the fourth quarter
of 1997, the Company provided a reserve of $1,500 for the impairment of assets
held-for-sale. In 1996, costs and expenses were higher due to one-time proxy
contest and related legal expenses of $752 and Exchange Offer and related legal
expenses of $518.
Other expense for the twelve months ended December 31, 1997 increased by
$119 to $153 from $34 in the prior period primarily due to higher factor and
financing costs of $150 associated with the financing of one of the luxury
yachts for two months during 1997. Factor and financing costs for the prior
period included $30 related to the Company's 9.25% Term Note, which was repaid
in February 1996.
The Company recorded an expense of $623 for the twelve months ended
December 31, 1997 related to affiliate transactions compared to income related
to affiliate transactions of $6,544 in the prior period. Effective December 18,
1997, the Company's equity investment in Rally's decreased to approximately 13%,
from 15% at December 31, 1996, and is now accounted for as a marketable
security. Prior to this, the Company accounted for its investment in Rally's
common stock under the equity method. The Company recorded a non-cash charge of
$623 compared to non-cash earnings of $367 for its share in Rally's net loss of
$4,516 and Rally's net income of $1,988 for 1997 and 1996, respectively. 1996
also included a gain on the sale of common stock of an investment in an
affiliate of $6,177.
The Company recognized a tax benefit of $4,170 for the twelve months ended
December 31, 1997 related to the reversal of a liability the Company previously
recorded for an assessment the CFTB made for the tax years 1989 through 1991 of
$3,100 and a federal net operating loss carryback of $1,100. In 1996, an income
tax benefit of $9,649 was recognized, related to the carryback of the tax loss
on the sale of Rally's common stock.
Liquidity and Capital Resources
The cost of the acquisition of Periscope included 953,093 shares of the
Company's common stock, which were held in treasury, valued at $6,493, 75,000
Company warrants, exercisable over a five year period at $7.25 and valued at
$195 and transaction costs of $259. The excess of the cost over the estimated
fair value of the net assets acquired of $27,453, based on the Company's
preliminary allocation of the purchase price, was allocated to goodwill and is
being amortized on a straight-line basis over 40 years. The Company will
finalize the allocation of the purchase price in 1999. The Company may issue up
to an additional 225,000 shares of its common stock to Periscope stockholders
based on the level of Periscope pre-tax profits, as defined in the merger
agreement, exceeding $13 million dollars for the year ended December 31, 1999.
At December 31, 1998 and 1997, the Company had working capital of $19,544
and $42,021 with current ratios of 2.5 and 11.0 to 1, respectively. The decrease
in working capital resulted primarily from the gross advance by the Company,
prior to the completion of the acquisition of $28.5 million to Periscope.
Net cash used by operating activities for the year ended December 31, 1998
was $2,806 compared to net cash of $5,273 provided by operating activities in
1997 and net cash used by operating activities of $3,387 in 1996. In 1998, cash
was used to fund the operating activities of the Company. In 1997, net cash was
provided by the receipt of income tax refunds of $10,855 received primarily
related to the realization of capital losses on the 1996 sales of Rally's common
stock and net operating loss carryback claims, lowered by cash used for the
funding of the Company's operations. In 1996, cash used was to fund the
operating activities of the Company.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Dollars in thousands, except share and per share
amounts)
Liquidity and Capital Resources (cont.)
Net cash provided by investing activities for the year ended December 31,
1998 was $6,878 compared to net cash used by investing activities of $3,135 in
1997 and net cash provided by investing activities of $14,215 in 1996. During
1998, the Company received proceeds of $ 30,178 from the sale of its two luxury
yachts and other assets, including the corporate plane, a Gulfstream II SP
acquired in 1991. The Company also received proceeds of $44,484 from sales, net
of purchases of $42,507 of marketable securities and payments of $727 on its
investment in Checkers Debt. On December 11, 1998, prior to the effective date
of the acquisition, the Company made a gross advance of $28,500 which Periscope
used to reduce certain borrowings. The Company also paid $66 for property and
equipment and $49 for capital improvements for one of its yachts before it was
sold in October. During 1997, the Company received proceeds of $14,730 from
sales, net of purchases $13,499 of marketable securities and payments of $1,880
on its investment in Checkers Debt including payment in full of the 1996 short-
term advance. During 1997, the Company also paid $1,869 for furniture, equipment
and for leasehold improvements primarily for its new office space. In 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. The Company
also sold an additional $3,500 face value Senior Notes, through the open market,
and received proceeds of $2,760. In addition, the Company received proceeds of
$8,277 from the sale of Rally's stock to CKE and Fidelity. The Company received
proceeds of $21,391 from sales, net of purchases of $15,373 of marketable
securities. 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 Co-Ownership Program. The Company paid cash of $11,583 and financed the
remaining balance of $10,500.
Net cash used by financing activities for the year ended December 31, 1998
was $983 compared to $14,138 for 1997 and $14,682 in 1996. 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. For
the three years ended December 31, 1998, the Company purchased 207,000 shares at
a cost of $1,483, 459,000 shares at a cost of $3,638 and 1,674,000 shares at a
cost of $15,079, respectively. In February 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. In 1998, the Company received proceeds of $500 on a note
receivable from a related party. During the first quarter of 1997, the Company
paid the remaining balance of $10,500 on the short-term note, which financed
assets purchased in 1996 for the Co-Ownership Program. In May 1997, the Company
signed an agreement to borrow $10,000, secured by one of its luxury yachts and
was paid in full in July 1997. In 1996, the Company pre-paid in full its
9.25% Term-Note in the amount of $1,622. The Company incurred no additional
expenses in connection with this prepayment.
The Company's factoring line permits daily working capital borrowing of
90.0% of account receivable (non-recourse), plus 50.0% of letters of credits
outstanding issued by the Company not to exceed $ 10.0 million. The outstanding
debt is collateralized by the Company's inventory, receivables and is partially
personally guaranteed by Glenn Sands, Periscope's President and Chief Executive
Officer. The factoring line expires on May 31, 2000, is subject to annual
renewal and may be terminated at the option of the factor with 60 days written
notice. Borrowings are subject to a monthly processing charge equal to 0.7% on
gross sales up to $25 million, 0.65% on gross sales between $25 million and $75
million and 0.6% of gross sales over $75 million. In addition, an interest
charge is applied on the total outstanding debt equal to prime plus 0.5% or
8.25% at December 31, 1998. The Company had a net outstanding balance of $3.9
million under the factoring line at December 31, 1998.
The Company's current liquidity is provided by cash and cash equivalents,
liquidation of marketable securities, investment income, and borrowings under
the factoring line. 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.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Dollars in thousands, except share and per share amounts)
Inflation
- ---------
Inflation has not had a material effect on the Company's revenues and
expenses from operations in the last three years and is not expected to have a
material effect on the Company's business.
Year 2000
- ----------
The Company has completed its evaluation of its information technology for
Year 2000 compliance. The Company does not expect that the cost to modify its
information technology infrastructure to be Year 2000 compliant will be material
to its consolidated financial condition or results of operations. The Company
does not anticipate any material disruption in its operations as a result of any
failure by the Company to be in compliance. The Company has purchased new
information technology platforms, which, among other things, are Year 2000
compliant. Hardware and software costs are capitalized by the Company and all
other costs associated with Year 2000 compliance are expensed as incurred. The
Company has had discussions with its customers and vendors and although the
Company believes that the information systems of its major customers and vendors
(insofar as they relate to the Company's business) comply with Year 2000
requirements, there can be no assurance that the Year 2000 issue will not affect
the information systems of such customers and vendors as they relate to the
Company's business, or that any such impact on such customers and vendors'
information systems would not have a material adverse effect on the Company's
business, consolidated financial condition or results of operations. The
remediation of Year 2000 issues involving the Company's information systems is
expected to be completed in time to prevent any material adverse consequences to
the Company's business, consolidated financial condition or results of
operations.
Personal Holding Company
- -------------------------
Under the Internal Revenue Code, in addition to the regular corporate
income tax, an additional tax may be levied upon an entity that is classified as
a Personal holding company. In general, this tax is imposed on corporations
which are more than 50% owned, directly or indirectly, by 5 or fewer individuals
(the Ownership Test) and which derive 60% or more of their income from Personal
holding company sources, generally defined to be passive income (the Income
Test). If a corporation falls within the Ownership Test and the Income Test, it
is classified as a personal holding company, and will be taxed on its
undistributed personal holding company income at a rate of 39.6%. The Company
currently meets the stock ownership test. The Company has not met the income
requirement in recent years, therefore is not subject to this additional tax;
however no assurance can be given that the income test will not be satisfied in
the future.
Recent Accounting Pronouncements
- --------------------------------
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
`'Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The statement is intended to eliminate the diversity in practice
in accounting for internal-use software costs and improve financial reporting.
The statement is effective for fiscal years beginning after December 15, 1998.
The Company is in the process of determining the effect of this statement on the
Company's consolidated financial position and consolidated results of operations
and will follow the disclosure requirements set forth in this statement.
In June1998, the Financial Accounting Standards Board issued FASB 133
"Accounting for Derivative Instruments and Hedging Activities" ("FASB 133").
This statement increases the visibility, comparability, and understanding of
the risks associated with holding derivatives by requiring all entities to
report all derivatives at fair value as assets or liabilities. It also provides
guidance and practice by providing companies with comprehensive rules for all
derivatives and hedging activities. FASB 133 is effective for fiscal quarters of
fiscal years that begin after June 15, 1999. The Company will follow the
disclosure requirements set forth in this statement; however, the Company does
not currently hold or issue derivative instruments or nonderivative instruments
that are designated and qualify as hedging instruments.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Dollars in thousands, except share and per share amounts)
Subsequent Event
- ----------------
During the first quarter of 1999, KCC signed an agreement with Santa Barbara
Restaurant Group ("SBRG"). The agreement called for the exchange of KCC's
investment in Checkers 13% restructured debt for 998,377 shares of $.08 par
value common stock of SBRG. These shares are currently not registered; however,
KCC has the right to demand that SBRG register the shares with the Securities
and Exchange Commission within 60 days of receipt of notice. The registration is
effective for two years at which time, those shares will be fully transferable
under Rule 144 of the Securities Act of 1933.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
- -----------
The Company's primary financial instruments consist of money market funds
paying interest at varying interest rates, equity securities and bond
investments with fixed interest rates. The Company's market risk is the
potential decrease in the value of the Company's financial instruments resulting
from lower interest rates and lower market prices. The Company does not enter
into derivatives for trading or interest rate exposure. Rather, the Company
actively manages its investment portfolio to increase the returns on investment
and to ensure liquidity, invests in instruments with high credit quality
provided through major financial institutions. In addition, the Company attempts
to make prudent and informed business decisions before investing in equity
securities.
Sensitivity Analysis
- --------------------
The following analyses present the sensitivity of the market value, earnings
and cash flows of financial instruments to hypothetical changes in interest
rates and market prices as if these changes occurred at December 31, 1998. The
ranges of changes that are chosen for these analyses reflect a view of changes
that are reasonably possible over a one-year period. These forward-looking
disclosures are selective in nature and only address the potential impacts from
financial instruments. They do not include other potential effects, which could
impact business as a result of these changed rates and market prices. Actual
results could differ materially from those projected in the forward looking
statements.
The Company's cash is invested in money market funds and short-term
investments purchased with an original maturity date of three months or less. A
hypothetical change in the weighted average interest rate of 10% would result in
an immaterial decrease in interest income having little or no adverse effect on
the Company's liquidity requirements. At times, however, such investments may be
in excess of insured limits.
The carrying value of the Company's investment in marketable equity
securities is recorded at $3,912, including net unrealized losses of $201. The
estimated potential decrease in fair value resulting from the hypothetical 10%
decrease in prices quoted by the stock exchanges is $391, approximately 1% of
the Company's current assets.
The carrying value of the Company's investment in marketable fixed income
bonds are recorded at $3,885, including net unrealized losses of $116.
Generally, the fair market value of an investment in fixed interest rate debt
will decrease as interest rates rise and increase as interest rates fall. The
carrying value of bonds with maturities over 180 days, which would be included
in the calculation, is immaterial, and therefore no sensitivity analysis is
presented.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1996, 1997 and 1998
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1997 1998
----------- ---------- -----------
<S> <C> <C> <C>
Revenue:
Investment income $ 2,736 $ 2,006 $ 2,955
Gain (loss) on the sale of marketable securities 5,234 (84) (752)
Net sales - - 1,143
Charter and other income 48 662 1,353
----------- ---------- -----------
8,018 2,584 4,699
----------- ---------- -----------
Costs and expenses:
Cost of sales - - 1,469
Selling and shipping - - 287
General and administrative 4,971 4,981 4,093
Co-ownership program and charter 24 5,615 1,655
Merger and related legal - - 165
Proxy contest and related legal 752 - -
Exchange offer and related legal 518 - -
Amortization of goodwill - - 38
----------- ---------- -----------
6,265 10,596 7,707
----------- ---------- -----------
Income (loss) from operations 1,753 (8,012) (3,008)
----------- ---------- -----------
Other income (expense):
Gain on sale of property and equipment - - 2,855
Factoring and financing costs (34) (153) (107)
----------- ---------- -----------
(34) (153) 2,748
Affiliate transactions:
Gain on sale of investment in affiliate 6,177 - -
Equity in earnings (loss) of affiliate 367 (623) -
Loss on investment in affiliate - - (1,168)
----------- ---------- -----------
6,544 (623) (1,168)
----------- ---------- -----------
Income (loss) before benefit for income taxes 8,263 (8,788) (1,428)
Benefit for income taxes 9,649 4,170 1,921
----------- ---------- -----------
Net income (loss) $ 17,912 $ (4,618) $ 493
=========== ========== ===========
Basic earnings (loss) per common share $ 4.40 $ (1.42) $ 0.15
=========== ========== ===========
Diluted earnings (loss) per common share $ 4.07 $ (1.42) $ 0.15
=========== ========== ===========
Weighted average shares - basic 4,074,000 3,260,000 3,184,000
=========== ========== ===========
Weighted average shares - diluted 4,400,000 3,260,000 3,185,000
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
GIANT GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1997 and 1998
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,137 $ 4,226
Marketable securities 18,874 7,797
Current portion of note receivable from related party - 2,002
Note and other receivables 332 4,752
Income tax receivables 1,100 -
Inventories - 12,438
Prepaid expenses and other assets 420 690
Deferred income taxes - 892
Assets held-for-sale 24,362 -
---------- -----------
Total current assets 46,225 32,797
Note receivable from related party - 499
Property and equipment, net 4,905 1,983
Goodwill, net of amortization of $38 - 27,415
Deferred income taxes - 1,748
Other assets 2,746 118
---------- -----------
Total assets $ 53,876 $ 64,560
========== ===========
LIABILITIES
Current liabilities:
Due to factor $ - $ 3,868
Accounts payable 329 7,134
Current portion of note payable to related party - 400
Accrued expenses 880 1,297
Income taxes payable 219 554
Deferred income taxes 2,776 -
---------- -----------
Total current liabilities 4,204 13,253
Capital lease obligations - 252
Note payable to related party - 1,227
Deferred income taxes 1,174 7
---------- -----------
Total liabilities 5,378 14,739
---------- -----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 2,000,000 shares, none issued - -
Class A common stock, $.01 par value; authorized 5,000,000 shares, none issued - -
Common stock, $.01 par value; authorized 12,500,000 shares, 7,266,000 issued 73 73
Capital in excess of par value 36,767 35,196
Accumulated other comprehensive income - unrealized gains (losses)
on marketable securities, net 4,185 (190)
Retained earnings 43,090 43,583
---------- -----------
84,115 78,662
Less common stock in treasury, at cost; 4,085,000 shares in 1997 and
3,339,000 in 1998 (35,617) (28,841)
---------- -----------
Total stockholders' equity 48,498 49,821
---------- -----------
Total liabilities and stockholders' equity $ 53,876 $ 64,560
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1997 and 1998
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1997 1998
----------- ---------- -----------
<S> <C> <C> <C>
Operating Activities:
Net income (loss) $ 17,912 $ (4,618) $ 493
Adjustments to reconcile net income (loss) to net cash (used) provided
by operating activities:
Depreciation 397 523 320
Provision for impairment of assets held-for-sale - 1,500 541
Gain on sale of property and equipment - - (2,855)
(Gain) loss on the sale of marketable securities (5,234) 84 752
Loss on investment in affiliate - - 1,168
Gain on sale of investment in affiliate (6,177) - -
Equity in (earnings) loss of affiliate (367) 623 -
Provision (benefit) for deferred taxes 483 - (1,127)
Accretion of discounts on investments (318) (362) (822)
Changes in assets and liabilities, net of effects of business acquired:
Decrease in inventories - - 125
Decrease (increase) in income tax receivables (10,335) 9,828 1,100
(Increase) decrease in receivables and prepaid expenses and other assets 75 662 (351)
Decrease in due to factor - - 376
Increase (decrease) in accounts payable and accrued expenses 284 176 (3,228)
(Decrease) increase in income tax payable (107) (3,143) 702
----------- ---------- -----------
Net cash (used) provided by operating activities (3,387) 5,273 (2,806)
----------- ---------- -----------
Investing Activities:
Proceeds from sale of affiliate's debt securities 17,692 - -
Proceeds from sale of investment in affiliate 8,277 - -
Sales of marketable securities 21,391 14,730 44,484
Purchases of marketable securities (15,373) (13,499) (42,507)
Debt (investment) payment and short-term (advance) repayment (5,500) 1,880 727
Net advances made in connection with business acquired - - (25,889)
Net proceeds from sale of property and equipment - - 30,178
Purchases of assets held-for-sale and related costs (11,583) (4,377) (49)
Purchases of property and equipment (689) (1,869) (66)
----------- ---------- -----------
Net cash provided (used) by investing activities 14,215 (3,135) 6,878
----------- ---------- -----------
Financing Activities:
Proceeds from the exercise of stock options 2,025 - -
Proceeds from short-term borrowings - 10,000 -
Proceeds from note-receivable - related party - - 500
Repayment of short-term borrowings (1,628) (20,500) -
Purchase of treasury stock (15,079) (3,638) (1,483)
----------- ---------- -----------
Net cash used by financing activities (14,682) (14,138) (983)
----------- ---------- -----------
(Decrease) increase in cash and cash equivalents (3,854) (12,000) 3,089
Cash and cash equivalents:
Beginning of period 16,991 13,137 1,137
----------- ---------- -----------
End of period $ 13,137 $ 1,137 $ 4,226
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
GIANT GROUP, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1997 and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Capital in Common Other Total
Common Excess of Stock in Retained Comprehensive Comprehensive
Stock Par Value Treasury Earnings Income (Loss) Income (Loss)
---------- ---------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1995 $ 69 $ 33,508 $ (16,900) $ 29,796 $ (1,328)
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)
Net income for 1996 17,912 $ 17,912
Unrealized gains on marketable securities,
net of income tax provision of $1,049 1,574 1,574
---------- ---------- ----------- ---------- ------------- -------------
Balance as of December 31, 1996 73 36,767 (31,979) 47,708 246 $ 19,486
=============
Purchase of treasury stock (3,638)
Net loss for 1997 (4,618) $ (4,618)
Unrealized gains on marketable securities,
net of income tax provision of $2,612 3,939 3,939
---------- ---------- ----------- ---------- ------------- -------------
Balance as of December 31, 1997 73 36,767 (35,617) 43,090 4,185 $ (679)
=============
Treasury stock issued in connection with
business acquired 8,259
Difference between cost and value assigned
to treasury stock issued in connection with
business acquired (1,766)
Warrants issued in connection with business
acquired 195
Purchase of treasury stock (1,483)
Net income for 1998 493 $ 493
Unrealized losses on marketable securities,
net of income tax benefit of $2,903 (4,375) (4,375)
---------- ---------- ----------- ---------- ------------- -------------
Balance as of December 31, 1998 $ 73 $ 35,196 $ (28,841) $ 43,583 $ (190) $ (3,882)
========== ========== =========== ========== ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
1. Nature of Operations
--------------------
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. The Company's wholly-owned subsidiaries include KCC Delaware Company
("KCC") and Periscope Sportswear, Inc. (the "company" or "Periscope"). On
December 28, 1998, GIANT MARINE GROUP, LTD. ("GIANT MARINE") was dissolved and
the remaining assets and liabilities were transferred to the Company.
Periscope was organized under the laws of the State of Delaware in 1998 and
is the successor, by merger, to Periscope I Sportswear, Inc., a New York
corporation organized in 1975. Periscope provides an extensive line of high-
quality women's and children's clothing in the moderate price category to mass
merchandisers and major retailers, primarily for sale under private labels.
GIANT MARINE was organized under the laws of the State of Delaware in
November 1996. GIANT MARINE started and operated the Luxury Yacht Co-Ownership
Program (the "Co-Ownership Program") with two yachts until November 1997, when
the Co-Ownership Program was ended. During 1998, GIANT MARINE chartered its two
yachts until they were both sold.
2. Significant Accounting Policies
-------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of GIANT and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
The Company's investment in affiliate was accounted for by the equity
method for the year ended December 31, 1996 and for the period ended December
18, 1997 (see Note 8 to these Consolidated Financials Statements). In 1996,
the Company accounted for a change in its equity in the net assets of its
affiliate, which resulted from the issuance by its affiliate of common stock
rights, as a credit to capital in excess of par value.
Revenue Recognition
- --------------------
Revenue is recognized upon shipment of merchandise to its customers and
upon completion of the charter.
Yacht Organization Costs
- ------------------------
Certain costs related to the preparation of the yachts for use and
organization costs, including legal and professional fees, were originally
deferred and would have been amortized to income over a period of not more than
one year, beginning with the start of operations in February 1997. However,
because the Co-Ownership Program ended in November 1997, all costs were charged
to expense in 1997.
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.
Comprehensive Income
- --------------------
Effective in the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 established new rules for the reporting and display of
total comprehensive income and its components; however, the adoption of this
statement has no impact on the Company's
27
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
2. Significant Accounting Policies
-------------------------------
net income or loss and stockholders' equity. SFAS 130 requires the change in the
Company's unrealized gains and losses on marketable securities, net of deferred
income taxes, be included in total comprehensive income. Prior year's
consolidated statements of stockholders's equity have been reclassified to
conform to these requirements.
Marketable Securities
- ---------------------
Investments in equity securities and corporate bonds are classified as
available-for-sale or trading securities. Investments 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 unrealized gains and losses on
trading securities are included in investment income. The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of discounts
through maturity. Such amortization and accretion are included in investment
income. The cost of securities sold is based on the specific identification
method.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Fair Value of Financial Instruments
- ------------------------------------
Due to the short maturities of the Company's cash, receivables and
payables, the carrying value of these financial instruments approximates their
fair value. The fair value of the Company's debt, excluding note payable to
related party, is estimated based on the current rates offered to the Company
for debt with similar remaining maturities. The note receivable from and note
payable to related party has been discounted at an interest rate of 8%. The
Company believes the carrying value of these financial instruments approximates
their fair value.
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
seven years. Amortization of leasehold improvements for financial reporting
purposes is provided by the straight-line method over the life of the lease.
Maintenance and repairs are charged against results of operations as incurred.
The estimated useful lives of the Company's property and equipment are as
follows:
<TABLE>
<S> <C>
Machinery and equipment 5-7 years
Furniture and fixtures 7 years
Automobiles 5 years
Computer equipment and software 3-5 years
Leasehold improvements Life of the lease
</TABLE>
Long-Lived Assets
- -----------------
The Company follows the guidelines set forth in SFAS No. 121, "Accounting
for the Impairment of Long-lived Assets and Long-lived Assets to be Disposed of"
("SFAS 121") when reviewing its long-lived assets and certain related
intangibles for impairment whenever changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. The measurement of
impairment losses to be recognized is based on the difference between the fair
value and the carrying amount of the assets. Impairment would be recognized in
operating results if a diminution in value occurred.
28
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
2. Significant Accounting Policies (cont.)
---------------------------------------
Amortization of Goodwill
- ------------------------
Goodwill is amortized on a straight-line basis over 40 years.
Transactions with International Suppliers
- -----------------------------------------
All transactions with international suppliers currently are denominated in
U.S. dollars and are not subject to exchange rate fluctuations.
Concentration of Risk
- ---------------------
The Company places its temporary cash and cash investments with high
quality financial institutions. Management monitors the financial
creditworthiness of these financial institutions. At times, such investments
may be in excess of insured limits.
A substantial portion of Periscope's net sales and gross profits are
derived from a small number of large customers. The company does not currently
have any long-term contracts with any of its customers and can provide no
assurance that these customers will continue to place orders with the company or
that orders by such customers will continue at their previous levels.
Periscope sells nearly all of its trade accounts receivable to a factor,
which assumes the credit risk with respect to collection of such accounts. The
factor approves the credit of the company's customers prior to sale. If the
factor disapproves a sale to a customer and the company decides to proceed with
the sale, the company bears the credit risk. The factoring agreement can be
terminated by the factor upon 60 days prior notice. Such termination could have
a material adverse effect on the Company's consolidated financial condition and
results of operations if the company could not replace the factoring agreement
within such period.
Periscope does not own or operate any manufacturing facilities and is
therefore dependent on independent contractors for the manufacture of its
products. The company's products are manufactured to its specifications by the
manufacturers. The inability of a manufacturer to ship the company's products
in a timely manner or to meet the company's quality standards could adversely
affect the company's ability to deliver products to its customers in a timely
manner. Delays in delivery could result in missing certain retailing seasons
with respect to some or all of the company's products or could otherwise have an
adverse effect on the Company's consolidated financial condition and results of
operations. There are no formal arrangements between the company and any of its
contractors or suppliers.
Beginning in 1999, substantially all of Periscope's products are being
manufactured in foreign countries, primarily Mexico, China and Taiwan. The
company's operations may be adversely affected by political instability
resulting in disruption of trade from foreign countries in which the company's
contractors and suppliers are located, the imposition of additional regulations
related to imports or duties, taxes and other charges on imports. In addition,
the company's import operations are subject to constraints imposed by bilateral
textile agreements between the United States and a number of foreign countries.
These agreements impose quotas on the amount and type of goods, which can be
imported into the United States from these countries and can limit or prohibit
importation of products on very short notice. The company's imported products,
excluding goods from Mexico which are subject to the North American Free Trade
Agreement ("NAFTA"), are also subject to United States customs duties which are
a material portion of the company's cost of imported goods. A substantial
increase in customs duties or a substantial reduction in quota limits applicable
to the company's imports could have a material adverse effect on the Company's
consolidated financial condition and results of operations.
29
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
2. Significant Accounting Policies (cont.)
---------------------------------------
Use of Estimates
- ----------------
The preparation of consolidated 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 consolidated
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 consolidated financial statements.
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
Recent Accounting Pronouncements
- --------------------------------
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The statement is intended to eliminate the diversity in practice
in accounting for internal-use software costs and improve financial reporting.
The statement is effective for fiscal years beginning after December 15, 1998.
The Company is in the process of determining the effect of this statement on the
Company's consolidated financial position and results of operations and will
follow the disclosure requirements set forth in this statement.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
This statement increases the visibility, comparability, and understanding of the
risks associated with holding derivatives by requiring all entities to report
all derivatives as assets or liabilities at fair value. It also provides
guidance and practice by providing companies with comprehensive rules for all
derivatives and hedging activities. SFAS 133 is effective for fiscal quarters of
fiscal years that begin after June 15, 1999. The Company will follow the
disclosure requirements set forth in this statement; however, the Company does
not currently hold or issue derivative instruments or nonderivative instruments
that are designated and qualify as hedging instruments.
3. Acquisition
-----------
On December 11, 1998, the Company acquired 100% of the outstanding common
stock of Periscope. The acquisition has been accounted for by the purchase
method of accounting and, accordingly, Periscope's assets and liabilities have
been recorded at their fair market value as of the date of acquisition.
Periscope's results of operations for the 20-day period beginning December 12,
1998 are included in the Company's consolidated statement of operations for the
year ended December 31, 1998.
On December 11, 1998, prior to the effective date of the acquisition, the
Company made a gross advance of $28,500 in cash to Periscope, which Periscope
used to reduce certain borrowings.
The cost of the acquisition included 953,093 shares of Company common
stock, which were held in treasury and valued at $6,493, 75,000 Company warrants
valued at $195 and exercisable at $7.25 over a five year period, and transaction
costs of $259. The excess of the cost over the estimated fair value of the net
assets acquired of $27,453, based on the Company's preliminary allocation of the
purchase price, was allocated to goodwill and is being amortized on a straight-
line basis over 40 years. The Company will finalize the allocation of the
purchase price in 1999.
30
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
3. Acquisition (cont.)
-------------------
The Company may issue up to an additional 225,000 shares of its common
stock to Periscope stockholders based on the level of Periscope pre-tax profits,
as defined in the merger agreement, exceeding $13 million dollars for the year
ended December 31, 1999.
The following unaudited pro forma financial information reflects the
Company's consolidated results of operations as if the acquisition of Periscope
had taken place on January 1, 1997.
<TABLE>
<CAPTION>
12 Months Ended
12/31/97 12/31/98
-------- --------
<S> <C> <C>
Net sales $ 87,957 $ 76,043
Net loss 5,872 3,544
========= =========
Net loss per share:
Basic $ 1.39 $ .85
========= =========
Diluted $ 1.39 $ .85
========= =========
</TABLE>
This unaudited consolidated pro forma information is not necessarily
indicative of the combined results that would have occurred had the merger
occurred on those dates, nor is it indicative of the results that may occur in
the future.
4. Earnings (Loss) Per Share
-------------------------
The Company adopted SFAS No. 128, "Earnings per Share" ("SFAS 128"),
effective for the year ending December 31, 1997. Basic earnings (loss) per
common share ("Basic EPS") is computed by dividing reported net earnings or loss
available to common stockholders by the weighted average shares outstanding.
The computation of diluted earnings (loss) per common share ("Diluted EPS")
includes the application of the treasury stock method. The dilution for options
and warrants is calculated by using the securities' exercise price for the
period. As a result of the Company's adoption of SFAS 128, the Company's
reported earnings per share ("EPS") for 1996 were restated. The effect of this
accounting change on previously reported earnings per share data is as follows:
<TABLE>
<CAPTION>
Year Ended
12/31/96
----------
<S> <C>
Primary EPS as reported $ 3.48
Effect of SFAS 128 .92
---------
Basic EPS $ 4.40
=========
Fully diluted EPS as reported $ 3.48
Effect of SFAS 128 .59
---------
Diluted EPS $ 4.07
=========
</TABLE>
31
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
4. Earnings (Loss) Per Share (cont.)
---------------------------------
The following shows the reconciliation of Basic EPS and Diluted EPS for the
years ended 1996, 1997 and 1998:
<TABLE>
<CAPTION>
For the year ended 1996
-----------------------
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic Earnings per Share
- ------------------------
Income available to common stockholders $ 17,912 4,074,000 $ 4.40
======== ======
Diluted Earnings per Share
- --------------------------
Effect of dilutive securities:
Options issued to employees and non-employee directors 326,000
---------
Income available to common stockholders $ 17,912 4,400,000 $ 4.07
======== ========= ======
<CAPTION>
For the year ended 1997
-----------------------
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic and Diluted Loss per Share
- --------------------------------
Loss available to common stockholders $ (4,618) 3,260,000 $(1.42)
======== ========= ======
<CAPTION>
For the year ended 1998
-----------------------
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic Earnings per Share
- ------------------------
Income available to common stockholders $ 493 3,184,000 $ .15
======== ======
Diluted Earnings per Share
- --------------------------
Effect of dilutive securities:
Options issued to employees and non-employee directors
and warrants issued in connection with the merger 1,000
---------
Income available to common stockholders $ 493 3,185,000 $ .15
======== ========= ======
</TABLE>
The following securities are not included in the diluted earnings per share
calculation since in each case the securities' exercise price is greater than
the average market price of the Company's common stock.
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Stock options - - 2,101,000
Warrants - - 75,000
</TABLE>
32
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
5. Sale of Assets
--------------
During 1998, the Company sold certain assets, including the corporate
plane, a Gulfstream II SP acquired in 1991. The Company received cash of $6,308,
net of selling expenses. The Company used part of the proceeds from the sale of
the assets to pay off an existing mortgage and recognized a net gain of $2,855.
At December 31, 1997, the Company reduced the carrying value, in total,
of the luxury yachts to their approximate net realizable value, estimated by the
Company based on comparable market prices of similar yachts and broker
estimates. In April 1998, the Company sold for cash one of its two luxury yachts
for $14,500, less selling expenses. The net sales price equaled the Company's
current carrying value. In October 1998, the Company sold the remaining luxury
yacht for a cash sales price of $10,875 less selling expenses. The Company
recognized a loss of $541 and recorded revenue related to refunds of
approximately $294 from the U.S. Customs Services for amounts previously
deposited with this agency. The loss and related revenue are included in Co-
ownership Program and charter expenses in the consolidated statements of
operations for the year ended December 31, 1998.
6. Marketable Securities
---------------------
At December 31, 1997 and 1998, investments classified as available-for-
sale and trading securities are as follows:
<TABLE>
<CAPTION>
Available Unrealized Deferred Tax Decrease
for Sale (1998) Fair Value Cost Loss Asset, Net In Equity
- --------------- ---------- ---- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Equity securities $ 3,912 $ 4,113 $ 201 $ 81 $ 120
Corporate bonds 1,276 1,392 116 46 70
------- ------- ----- ----- -----
Total $ 5,188 $ 5,505 $ 317 $ 127 $ 190
======= ======= ===== ===== =====
<CAPTION>
Trading
Securities (1998) Fair Value Cost
- ----------------- ---------- ----
<S> <C> <C>
Corporate Bonds $ 2,609 $ 2,605
======= =======
</TABLE>
33
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
6. Marketable Securities (cont.)
-----------------------------
<TABLE>
<CAPTION>
Available Unrealized Deferred Tax Increase
for Sale (1997) Fair Value Cost Gain Liability, Net In Equity
- --------------- ---------- ---- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Equity securities $11,863 $ 5,200 $ 6,663 $ 2,665 $ 3,998
Corporate bonds 3,054 2,742 312 125 187
------- ------- ------- ------- -------
Total $14,917 $ 7,942 $ 6,975 $ 2,790 $ 4,185
======= ======= ======= ======= =======
<CAPTION>
Trading
Securities (1997) Fair Value Cost
- ----------------- ---------- ----
<S> <C> <C>
Corporate Bonds $ 3,957 $ 3,991
======= =======
</TABLE>
The maturities for corporate and U.S. government bonds at December 31,
1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
-------------------- ---------------------
Fair Value Cost Fair Value Cost
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Due in one through five years $6,000 $5,716 $3,885 $3,997
Due after five through 10 years 1,011 1,017 - -
------ ------ ------ ------
$7,011 $6,733 $3,885 $3,997
====== ====== ====== ======
</TABLE>
Proceeds from the sale of marketable securities totaled approximately
$21,391, $14,730 and $44,484 in 1996, 1997, and 1998, respectively.
7. Inventories
-----------
At December 31, 1998, inventories consist of the following:
<TABLE>
<S> <C>
Raw materials....................... $ 6,686
Work-in-process..................... 2,218
Finished goods...................... 3,534
-------
Total inventories............... $12,438
=======
</TABLE>
8. Investment in Affiliate
-----------------------
At December 31, 1998 and 1997, the Company accounted for its investment
of approximately 3,226,000 and 3,181,000 shares, respectively, of Rally's
outstanding common stock as a marketable security, classified as an investment
available-for-sale. Prior to December 18, 1997, the date the Company's equity
ownership percentage decreased to approximately 13% from 15% (at December 31,
1996), the Company accounted for this investment under the equity accounting
method. The decrease in the Company's equity ownership percentage resulted from
the exchange by KCC, CKE Restaurants, Inc. ("CKE") and Fidelity National
Financial, Inc. ("Fidelity"), among others, of their shares of Checkers common
stock for certain Rally's securities. KCC exchanged approximately 200,000 shares
of Checkers common stock, with a cost of $258 for approximately 43,000 shares of
Rally's common stock and 449 shares of Rally's series A participating preferred
stock. KCC assigned a total cost equal to the cost of Checkers stock exchanged
to both Rally's securities received and recognized no gain or loss for
accounting purposes. In June 1998, with the approval of Rally's stockholders,
one share of Rally's series A participating preferred stock was converted into
100 shares of Rally's common stock.
34
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
8. Investment in Affiliate (cont.)
-----------------------
On January 29, 1999, Checkers and Rally's announced that they signed a
merger agreement pursuant to which the two companies will merge in an all-stock
transaction. The merger agreement provides that each outstanding share of
Rally's stock will be exchanged for 1.99 shares of Checkers stock. The Checkers
common stock owned by Rally's (approximately 26% of Checkers common stock) will
be retired after the merger. Checkers announced a one share for twelve shares
reverse stock split to take place immediately following the merger. Subsequent
to the merger, the new company will continue to operate restaurants under both
the Checkers and Rally's brand names for the foreseeable future.
On September 25, 1998, the Company agreed in principle to a merger
transaction pursuant to which Rally's would merge with the Company and Checkers.
Under the terms of the merger transaction, each share of the Company's common
stock would be converted into 10.48 shares of Rally's common stock and each
share of Checkers common stock would be converted into 0.5 shares of Rally's
common stock upon consummation of the merger. The transaction was subject to
negotiation of definitive agreements, receipt of fairness opinions by each
party, receipt of stockholder and other required approvals and other customary
conditions. On November 2, 1998, the Company, Rally's and Checkers announced the
termination of their proposed merger. The merger was terminated when the
definitive merger agreement could not be finalized and the Company wrote off
$165 of merger related costs.
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, who has subsequently exercised the rights. GIANT's
increase in Rally's shareholders' equity due to Rally's 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 of $1,699.
In May and November 1996, GIANT sold a total of 4,293,000 shares of its
Rallys' common stock to Fidelity and CKE and recognized a pre-tax gain of
$5,715. The Company, because of the November sale, recognized $462 in income
that was previously shown as an increase in capital in excess of par due to the
Shareholder Rights Offering, previously discussed. This income is included in
gain on the sale of investment in affiliate. The Company's sales of Rally's
common stock to CKE and Fidelity generated a tax 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 which were sold on October 6, 1994. At 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.
During the second quarter of 1997, the Company purchased $2,224 face
value of Rally's 9.875% senior notes ("Senior Notes") in the open market. The
Senior Notes are classified as an investment available-for-sale at December 31,
1997.
Summarized financial information for Rally's is as follows:
<TABLE>
<CAPTION>
Financial position at December 31, 1997
- ---------------------------------- ----------
<S> <C>
Current assets $ 10,968
Less: current liabilities 21,777
---------
Working capital deficiency (10,809)
Plus: noncurrent assets 123,329
Less: long-term debt and other noncurrent liabilities 71,007
---------
Stockholders' equity $ 41,513
=========
</TABLE>
35
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
8. Investment in Affiliate (cont.)
-------------------------------
<TABLE>
<CAPTION>
Operating results for the years ended December 31, 1996 1997
- -------------------------------------------------- ----------- -----------
<S> <C> <C>
Revenues $162,752 $ 144,930
Less: operating costs 158,662 141,610
-------- ---------
Income from operations $ 4,090 $ 3,320
======== =========
Net income (loss) $ 1,988 $ (4,516)
======== =========
GIANT's share of non-cash equity earnings (loss) $ 367 $ (623)
======== =========
</TABLE>
At December 31, 1996 GIANT's investment in Rally's was $2,926 and was
accounted for under the equity method of accounting.
9. 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 $36,100 13.75% senior
subordinated 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 to July 1999 and certain financial covenants were
modified. In addition, scheduled principal payments were deferred to May 1997.
In return for the lenders acceptance of this restructured credit agreement,
Checkers issued warrants ("Checkers Warrants") to all holders of the 13.75%
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 exercisable at any time until November
22, 2002. 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.
Due to the trend over the last two years for Checkers' common stock to trade
below $.75, the Company, at December 31, 1998, wrote off the entire value of the
warrants and recorded a loss of $1,168 in the current year. At December 31,
1997, the Company recorded the warrants at $712, net of a valuation allowance of
$456.
The restructured credit agreement also provided for 50% of the aggregate
net proceeds from the sale of assets to be paid to the holders of the
restructured 13% debt. Since the restructured 13% debt was purchased in November
1996, Checkers has made over $2,100 in principal payments to KCC, the funds
coming from a private placement of its common stock and sale of its assets.
Because Checkers made these principal payments, the next scheduled principal
payment on the restructured 13% debt is due on July 31, 1999, when the entire
principal balance is payable in full. At December 31, 1997 and 1998, KCC's
investment in Checkers restructured 13% debt was $2,715 and $2,737, net of
related discount of $1,007 and $258, respectively.
36
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
10. Property and Equipment
----------------------
<TABLE>
<CAPTION>
At December 31, 1997 1998
--------------- ---- ----
<S> <C> <C>
Land $ 120 $ 16
Machinery and equipment 5,582 250
Furniture and fixtures 200 370
Automobiles 19 34
Computer equipment and software 97 797
Leasehold improvements 1,098 1,240
------- -------
7,116 2,707
Less: accumulated depreciation and amortization (2,211) (724)
------- -------
$ 4,905 $ 1,983
======= =======
</TABLE>
During 1998, the Company sold certain assets, including its corporate
plane, a Gulfstream II SP acquired in 1991.
During 1997, the Company retired certain fully depreciated leasehold
improvements and equipment, due to the Company's move into its new office in
April 1997.
11. Factoring and Financing Arrangements
------------------------------------
Substantially all of the Company's accounts receivable are factored on a
nonrecourse basis. The factoring line permits daily working capital borrowings
of 90% of accounts receivable plus 50% of letters of credits outstanding issued
by the Company not to exceed $ 10 million. Borrowings are subject to a monthly
processing charge equal to 0.7% on gross sales up to $25 million, 0.65% on gross
sales between $25 million and $75 million and 0.6% of gross sales over $75
million. Interest on the total outstanding advances made by the factor is
charged at .5% over prime (8.25% at December 31, 1998) and the factoring
agreement is collateralized by the Company's receivables and inventory and is
partially personally guaranteed by Glenn Sands, Periscope's President and Chief
Executive Officer. The agreement expires on May 31, 2000, is subject to annual
renewal and may be terminated at the option of the factor with 60 days written
notice. The factor also guarantees the Company's letters of credit. The
uncollected balance of receivables held by the factor as of December 31, 1998
was approximately $12 million. Total charges including interest expense,
factoring fees and commissions were $105 for the 20-day period ended December
31, 1998 and are included in factoring and financing costs in the Company's
consolidated financial statements. At December 31, 1998, the Company had a net
outstanding balance of approximately $3,900 under the factor line.
12. Capital Lease Obligations
-------------------------
The Company's capital lease obligations, at December 31, 1998 consist of
the following:
<TABLE>
<S> <C>
Capital lease obligations due through August 2003 with interest
ranging from 8.3% to 12.3% and secured by the related equipment...... $311
Less--Current maturities of capital lease obligations................. (59)
----
Capital lease obligations............................................. $252
----
</TABLE>
37
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
12. Capital Lease Obligations (cont.)
---------------------------------
Minimum annual payments under the capital leases, including interest, at
December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999..................................................... $ 85
2000..................................................... 85
2001..................................................... 85
2002..................................................... 85
2003 and thereafter...................................... 39
-------
Present value of future minimum lease obligations...... 379
Less--Amount representing interest.......................... (68)
-------
Net minimum payments................................... 311
Less--Current maturities of capital lease obligations....... (59)
-------
Capital lease obligations................................... $ 252
-------
</TABLE>
13. Income Taxes
------------
The benefit for income taxes is comprised of the following:
<TABLE>
<CAPTION>
For the year ended December 31, 1996 1997 1998
- ------------------------------- ------- ------- -------
<S> <C> <C> <C>
Current federal income tax benefit $ 8,611 $ 1,066 $ 764
Deferred federal income tax (provision) benefit (483) - 927
Current state income tax benefit 1,521 3,104 30
Deferred state income tax benefit - - 200
------- ------- -------
Benefit for income taxes $ 9,649 $ 4,170 $ 1,921
======= ======= =======
</TABLE>
The following is reconciliation between the benefit for income taxes and
the amounts computed by applying the federal statutory rate of 34% to pre-tax
income or loss.
<TABLE>
<CAPTION>
For the year ended December 31, 1996 1997 1998
- ------------------------------- ------- ------- -------
<S> <C> <C> <C>
Statutory federal tax (provision) benefit on pre-tax
(income) loss $(2,809) $ 2,988 $ 486
State tax benefit (provision), net of federal taxes (507) 270 44
Permanent items (68) (36) (76)
State tax reversal - 3,100 -
(Increase) decrease in valuation allowance 12,560 (2,401) 1,530
Other, net 473 249 (63)
------- ------- -------
Benefit for income taxes $ 9,649 $ 4,170 $ 1,921
======= ======= =======
</TABLE>
38
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
13. Income Taxes (cont.)
--------------------
Deferred tax assets and (liabilities) of the Company consist of the following:
<TABLE>
<CAPTION>
At December 31, 1997 1998
- --------------- ---- ----
<S> <C> <C>
Operating losses $ 2,010
Reserves and other, net 503
-------
Subtotal 2,513
Unrealized investment losses, net 127
-------
Net deferred tax assets $ 2,640
=======
Investment in Rally's $ 2,453 $ 2,562
State capital loss carryforward 2,430 2,310
Operating losses 2,215 842
Depreciation (1,152) (112)
Other, net 77 58
Valuation allowance (7,197) (5,667)
------- -------
Subtotal (1,174) (7)
Unrealized investment gains, net (2,776) -
------- -------
Net deferred tax liabilities $(3,950) $ (7)
======= =======
Net deferred taxes $ (3,950) $ 2,633
======== ========
</TABLE>
The valuation allowance at December 31, 1997 and 1998 is provided
because it is not likely, as defined in SFAS 109, "Accounting for Income Taxes",
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.
At December 31, 1996, 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 had disputed
this assessment and had provided documents to support the Company's position
during meetings with the New York office of the California State Franchise Tax
Board ("CFTB") during 1995 and 1996. As a result of a preliminary proposed
adjustment in December 1995, the Company made payments of $259 during 1996. In
the third quarter of 1997, the CFTB concluded the audit and accepted the
combined reports as originally filed by the Company, with only minor
adjustments. The Company's consolidated financial statements had reflected a
liability associated with the CFTB proposed assessment. As a result of settling
this dispute with the CFTB, the Company recognized a tax benefit of $3,100 in
1997.
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.
39
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
14. Debt
----
In May 1997, the Company signed an agreement to refinance one of its
luxury yachts available for sale under the Co-Ownership Program. The mortgage,
in the amount of $10,000, had a term of twenty-six months from the date of
advancement of funds, which occurred on May 30, 1997, and was subject to
prepayment upon the transfer of an interest in the luxury yacht, which was
collateral for this loan. The interest rate was prime plus one half of one
percent (0.50%). This loan was paid in full in July 1997.
15. Leases
------
The Company is obligated under noncancelable operating leases, with
variable terms and renewal options, for automobiles and warehouse, showroom and
administrative facilities. Approximate future minimum annual lease payments,
exclusive of required payments for increases in real estate taxes and operating
costs, under noncancelable leases with a remaining term in excess of one year at
December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $1,186
2000 1,082
2001 821
2002 347
2003 102
</TABLE>
Total rental expense for the years 1996, 1997 and 1998 amounted to $186,
$316 and $ 313, respectively.
16. Related Party Transactions
--------------------------
At December 31, 1998, the Company was the holder of a non-interest
bearing note for $2,606 from the President and Chief Executive Officer of
Periscope payable in installments of $2,002 on December 31, 1999 and $302 on
December 31, 2000 and 2001, respectively. The Company is also the maker of a
non-interest-bearing note for $2,000 payable to the President and Chief
Executive Officer of Periscope in five annual installments of $400, commencing
on December 1, 1999. The note receivable from and the note payable to related
party have been discounted at 8% and have unamortized discounts of $105 and
$373, respectively, at December 31, 1998.
At December 31, 1998, included in note and other receivables, are
advances of approximately $1,421 due from a manufacturing contractor located in
Mexico utilized by Periscope. The advances are due on demand and are non-
interest bearing. It is expected that substantially all of this receivable will
be paid back in 1999.
For the 20-day period ended December 31, 1998, the Company paid $20 for
performance compensation to S.R.P. Sales, Inc. ("S.R.P."), which is controlled
by Scott Pianin, a Periscope executive. As of January 1, 1999, all performance-
based compensation will be paid directly to Scott Pianin in accordance with his
employment agreement and will be no longer paid to S.R.P. In addition, the
company has purchased transportation-related services from Global Air, Inc.
("Global"), which is controlled by Glenn Sands, President and Chief Executive
Officer of Periscope. No services were purchased during the 20-day period ended
December 31, 1998, but the company expects to continue doing business with
Global.
17. 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 has been issued.
40
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
18. 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.
19. Treasury Stock
--------------
For the three years ended December 31, 1998, 1997, 1996, the Company,
with the approval of the Board of Directors, purchased 207, 000 shares at a cost
of $1,483, 459,000 shares at a cost of $3,638 and 1,674,000 shares at a cost of
$15,079, respectively. The 1996 totals included 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.
In December 1998, the Company issued 953,000 shares for 100% of the
outstanding common stock of Periscope (see Note 3 to these Consolidated
Financial Statements).
20. Common Stock Options
--------------------
Under the 1996 Employee Stock Option Plan (the"1996 Plan"), 500,000
shares of the Company's $.01 par value Common Stock were 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, at an exercise price of $8.25 and exercisable in 1997,
had been granted to the Company's Chief Executive Officer. In December 1998,
these 200,000 options were cancelled and reissued at $8.25, are exercisable
immediately and terminate in December 2005. In addition, 15,000 options at an
exercise price of $7.81 had been granted to the Company's Chief Financial
Officer in 1997 and terminate 10 years from the grant date. The options vest at
a rate of 5,000 a year, beginning in 1998.
Under the 1996 Stock Option Plan for Non-Employee Directors, as amended
on March 20, 1998, (the "Amended Director Plan"), 400,000 shares of the
Company's $.01 par value Common Stock were reserved for future options. Pursuant
to the Amended Director Plan, each Non-Employee Director was entitled to receive
an option to purchase 10,000 shares on May 20, 1996 (the "Adoption Date") or
5,000 (10,000 in 1997) shares upon the subsequent initial appointment to the
Board of Directors. On each anniversary of the Adoption Date or the subsequent
appointment date, respectively, each Non-Employee Director will receive an
additional option to purchase 5,000 (10,000 in 1997) shares. Upon election to
the Executive Committee on or after July 12, 1996, and on each anniversary
thereafter, the Non-Employee Director will receive an additional option to
purchase 5,000 (10,000 in 1997) 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. At December 31, 1998, 140,000 options had
been granted to four of the Non-Employee members of the current Board of
Directors. The exercise prices are $5.438 for 5,000 options, $6.688 for 10,000
options, $6.750 for 5,000, $6.813 for 20,000 options, $6.875 for 40,000 options,
$7.625 for 20,000 options and $7.75 for 40,000 options. No options have been
exercised.
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 at December 31, 1998. 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 at December 31, 1998. Options
under the Non-Qualified Plan terminate 10 years from date of grant. No options
under the Non-Qualified Plan were exercised for during the two-year period ended
December 31, 1998. 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
41
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
20. Common Stock Options (cont.)
----------------------------
at an exercise price of $6.75 per share. As a result of this transaction, the
Company received cash of $2,025.
In 1996, the Company purchased 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 $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:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
-------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) As reported $17,912 $(4,618) $ 493
Proforma 17,452 (4,789) 264
Basic earnings (loss) per share As reported $ 4.40 $ (1.42) $0.15
Proforma 4.28 (1.47) 0.08
Diluted earnings (loss) per share As reported $ 4.07 $ (1.42) $0.15
Proforma 3.97 (1.47) 0.08
</TABLE>
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 1996, 1997 and 1998 respectively: no dividend yield for any years;
expected volatility of 20 % for 1996, 37% for 1997 and 36% for 1998; risk-free
rate of return of 7.1% for 1996, 6.4% for 1997 and 5.6% for 1998; and expected
lives of 5 years for 1996, 5 and 10 years for 1997 and 5, 7 and 10 years for
1998. The SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1996 therefore, the resulting pro forma compensation
costs may not be representative of that to be expected in future years.
A summary of options is as follows:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
1996 Exercise 1997 Exercise 1998 Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance 2,126,000 $ 6.76 2,056,000 $ 6.93 2,076,000 $ 6.93
Granted 250,000 8.14 75,000 7.18 230,000 8.03
Exercised (300,000) 6.75 -
Canceled (20,000) 6.75 (55,000) 6.98 (200,000) 8.25
--------- --------- ---------
Ending balance 2,056,000 6.93 2,076,000 6.93 2,106,000 6.93
========= ========= =========
Options exercisable
at end of year 2,024,000 2,059,000 2,096,000
========= ========= =========
Weighted average of fair
value of options granted $ 2.75 $ 3.03 $ 2.71
</TABLE>
42
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
20. Common Stock Options (cont.)
---------------------------
The following table summarizes information about stock options
outstanding and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------- ---------------------------
Wtd. Avg.
Outstanding Remaining Wtd. Avg. Exercisable Wtd. Avg.
Range of at Contractual Exercise at Exercise
Exercise Prices Dec. 31, 1998 Life Price Dec. 31, 1998 Price
--------------- ------------- ----------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$5.44 to $6.88 1,826,000 6.1 years $6.75 1,826,000 $6.75
7.38 to 7.81 80,000 3.1 7.71 70,000 7.69
8.25 200,000 6.9 8.25 200,000 8.25
--------- ---------
5.44 to 8.25 2,106,000 6.1 years 6.93 2,096,000 6.93
========= =========
</TABLE>
21. 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 acquisition by Mr. Sugarman of additional shares of GIANT
Common Stock, other than acquisitions through stock dividends, stock option
plans, GIANT compensation or employee benefit plans and other similar
arrangements.
If any person does become an Acquiring Person (subject to certain
exceptions), the other holders of GIANT Common Stock will be able to exercise
the Rights and buy GIANT Common Stock having twice the value of the exercise
price of the Rights. GIANT may, at its option, substitute fractional interests
of a share of Series A Junior Participating Preferred Stock for each share of
GIANT Common Stock to be issued upon exercise of the Rights. Additionally, if
GIANT is involved in certain mergers where its shares are exchanged or certain
major sales of its assets occur, holders of GIANT Common Stock will be able to
purchase for the exercise price, shares of stock of the Acquiring Person having
twice the value of the exercise price of the Rights.
The Rights may be redeemed by GIANT at any time prior to the time any
person becomes an Acquiring Person for a price of $.01 per Right. Unless
exercised, the Rights expire on January 4, 2006.
The Rights could have the effect of discouraging a third party from
making a tender offer or otherwise attempting to obtain control of GIANT. In
addition, because the Rights may discourage accumulations of large blocks of
GIANT Common Stock by purchasers whose objective is to take control of GIANT,
the Rights could tend to reduce the likelihood of fluctuations in the market
price of GIANT Common Stock that might result from accumulations of large blocks
of stocks.
43
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
21. Stockholders Rights Plan (cont.)
--------------------------------
Effective December 4, 1998, in connection with the acquisition of
Periscope, the Rights Agreement was amended to exclude Glenn Sands, President
and Chief Executive Officer of Periscope and Director of the Company, from the
definition of an Acquiring Person thereunder with respect to shares of the
Company's Common Stock he was to acquire solely pursuant to the merger
agreement.
22. Information Concerning Business Segments
----------------------------------------
For the year ended December 31, 1998, the Company adopted SFAS 131
("SFAS 131"), "Disclosures About Segments of an Enterprise and Related
Information," which introduces a new model for segment reporting, called the
"management approach." The management approach is based on the way that
management organizes segments within a company for making operating decisions
and assessing performance. Reportable segments can be based on products and
services, geography, legal structure, management structure-any manner in which
management desegregates a company. The management approach replaces the notion
of industry and geographic segments in current accounting standards.
The Company has one reportable segment, women's and children's clothing,
which was acquired through an acquisition, effective December 11, 1998. The
Company's consolidated statement of operations reflects the net sales, cost of
goods sold, factor and financing costs and selling and shipping expenses for the
20-day period ended December 31, 1998. In addition, Periscope's depreciation and
amortization was $43, income tax benefit was $327 and there were no capital
expenditures. Periscope's total assets at December 31, 1998 were $47,765. The
accounting policies for this segment are the same as those described in the
Company's significant accounting polices (see Note 2 to these Consolidated
Financial Statements).
23. Supplemental Disclosures of Cash Flow Information
-------------------------------------------------
<TABLE>
<CAPTION>
For the years ended December 31
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Cash (paid) received for income taxes $ (310) $10,855 $ 2,193
Cash paid for interest 34 153 87
Financing of asset held-for-sale 10,500
Fair value of assets of business acquired 23,226
Liabilities assumed of business acquired (43,732)
Fair value of common stock issued for
business acquired 6,947
Cash advanced to business acquired 28,500
Cash received by Company from business acquired (2,611)
-------
Net cash advanced by Company for business acquired $25,889
=======
</TABLE>
24. Commitments and Contingencies
-----------------------------
The Company is involved in various claims and legal proceedings of a
nature considered normal to its business. In addition to these actions, the
Company is also involved in lawsuits as described in the following paragraphs.
Mittman/Rally's. In January and February 1994, two putative class action
----------------
lawsuits were filed, purportedly on behalf of the shareholders of Rally's in the
United States District Court for the Western District of Kentucky, against
Rally's, certain of Rally's present and former officers, directors and
shareholders and its auditors and GIANT. The complaints allege defendants
violated the Securities Exchange Act of 1934, as amended, among other claims, by
issuing inaccurate public
44
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
24. Commitments and Contingencies (Cont.)
-------------------------------------
statements about Rally's in order to arbitrarily inflate the price of Rally's
common stock, and seek unspecified damages, including punitive damages. On
April 15, 1994, GIANT filed a motion to dismiss and a motion to strike. On
April 5, 1995, the Court struck certain provisions of the complaint but
otherwise denied GIANT's motion to dismiss. In addition, the Court denied
plaintiffs' motion for class certification. On July 31, 1995, the plaintiffs
renewed this motion, and on April 16, 1996, the Court certified the class.
Settlement conferences have been conducted, most recently on December 7, 1998,
but have been unsuccessful. Fact discovery is not yet complete, but it is
anticipated that a deadline for completion of fact discovery will be set for
summer 1999. No trial date has been scheduled. Management is unable to predict
the outcome of this matter at the present time. Rally's and GIANT deny all
wrongdoing and intend to defend themselves vigorously in this matter.
Harbor. In February 1996, Harbor Finance Partners ("Harbor") commenced a
-------
derivative action, purportedly on behalf of Rally's, against Rally's officers
and directors and GIANT, David Gotterer, and Burt Sugarman before the Delaware
Chancery Courts. Harbor named Rally's as a nominal defendant. Harbor claims that
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. The NASDAQ
closing price of the Senior Notes as of March 19, 1999 was $84, approximately
24% higher than the repurchase price of $67 7/8. Harbor seeks "millions of
dollars in damages", along with rescission of the repurchase transaction. In the
fall of 1996, all defendants moved to dismiss this action. On April 3, 1997, the
Chancery Court denied defendants' motion. No trial date has been set. Rally's
and GIANT deny all wrongdoing and intend to vigorously defend this action. It is
not possible to predict the outcome of this action at this time.
KCC/Pike Santa Monica Action. In October 1996, KCC filed a complaint, in
-----------------------------
the Los Angeles County Superior Court, against NeoGen Investors, L.P., N.D.
Management, Inc., NeoGen Holdings, L.P., Danco Laboratories, Inc. and NeoGen
Pharmaceutical, Inc. (collectively the "NeoGen Entities") and Joseph Pike,
stating causes of action for fraud, breach of fiduciary duty, fraudulent
concealment, breach of contract, unfair business practices and permanent and
preliminary injunctive relief and against the licensors of Mifepristone, the
Population Council, Inc. and Advances in Health Technology, Inc., on a
declaratory relief claim. The complaint seeks damages for the breach by Joseph
Pike and the NeoGen entities of a July 24, 1996 agreement by which KCC agreed to
contribute $6,000, in return for a 26% equity interest in the entity producing
the drug, Mifepristone, in the United States and other parts of the world
("NeoGen Agreement"). The $6,000 contribution was not funded. On February 19,
1997, Joseph Pike and the NeoGen Entities filed an answer to the complaint,
denying its material allegations and raising affirmative defenses. On that date,
the NeoGen Entities also filed a cross-complaint against KCC, the Company, and
certain of the Company's directors, Terry Christensen, David Malcolm and Burt
Sugarman, which alleged causes of action for fraud, breach of contract,
intentional interference with prospective economic advantage, negligent
interference with prospective economic advantage and unfair business practices.
In October 1997, KCC settled their action with the licensors, the Population
Council, Inc. and Advances in Health Technology, Inc., and in November 1997, KCC
settled their action with Joseph Pike. On May 1, 1998, the court granted the
NeoGen Entities summary adjudication on KCC's cause of action for breach of
contract. Discovery in this action is complete. On October 2, 1998, the court
entered an order, which, among other things, effectively eliminates NeoGen
Entities' ability to obtain any money judgement from KCC and the other cross-
defendants. On February 23, 1999, the court entered judgement pursuant to a
Stipulation for Judgment, by which the parties' respective claims are dismissed
with prejudice, save and except for the right to appeal certain issues.
First Albany Corp. v. Checkers. This putative class action was filed on
-------------------------------
September 29, 1998 in the Delaware Chancery Court in and for New Castle County,
Delaware by First Albany Corp., as custodian for the benefit of Nathan Suckman,
an alleged stockholder of 500 shares of the common stock of Checkers. The
complaint names Checkers, the Company, Rally's, and certain of Rally's current
and former officers and directors as defendants, including William P. Foley II,
James J. Gillespie, Joseph N. Stein, James T. Holder, Terry N. Christensen, Burt
Sugarman, Harvey Fattig, Richard A. Peabody, Frederick E. Fisher, Clarence V.
McKee, C. Thomas Thompson and Peter C. O'Hara. The complaint arises out of the
proposed merger announced on September 28, 1998 between the Company, Rally's and
Checkers (the "Proposed
45
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
24. Commitments and Contingencies (Cont.)
-------------------------------------
Merger"), and alleges generally that certain of defendants engaged in an
unlawful scheme and plan to permit Rally's to acquire the public shares of
Checkers' stock in a "going private" transaction for grossly inadequate
consideration and in breach of the defendants' fiduciary duties. The plaintiff
allegedly initiated the complaint on behalf of all stockholders of Checkers as
of September 28, 1998, and seeks, among other things, certain declaratory and
injunctive relief against the consummation of the Proposed Merger, or in the
event the Proposed Merger is consummated, rescission of the Proposed Merger and
costs and disbursements incurred in connection with bringing the action,
including attorneys' fees, and such other relief as the court may deem proper.
In view of a decision by the Company, Rally's and Checkers not to implement the
transaction that had been announced on September 28, 1998, plaintiffs have
agreed to provide the Company and all other defendants with an open extension of
time to respond to the complaint, and plaintiffs have indicated that they will
probably file an amended complaint in the event of the consummation of a merger
between Rally's and Checkers. 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.
Steinberg (s) v. Checkers. This putative class action was filed on
--------------------------
October 2, 1998 in the Delaware Chancery Court in and for New Castle County,
Delaware by David J. Steinberg and Chaile B. Steinberg, alleged stockholders of
an unspecified number of shares of the common stock of Checkers. The complaint
names Checkers, the Company, Rally's, and certain of Rally's current and former
officers and directors as defendants, including William P. Foley II, James J.
Gillespie, Joseph N. Stein, James T. Holder, Terry N. Christensen, Burt
Sugarman, Harvey Fattig, Richard A. Peabody, Frederick E. Fisher, Clarence V.
McKee, C. Thomas Thompson and Peter C. O'Hara. As with the complaint detailed
herein above in Suckman, the complaint arises out of the Proposed Merger, and
alleges generally that certain of defendants engaged in an unlawful scheme and
plan to permit Rally's to acquire the public shares of Checkers' stock in a
"going private" transaction for grossly inadequate consideration and in breach
of the defendants' fiduciary duties. The plaintiffs allegedly initiated the
complaint on behalf of all stockholders of Checkers and seek, among other
things, certain declaratory and injunctive relief against the consummation of
the Proposed Merger, or in the event the Proposed Merger is consummated,
rescission of the Proposed Merger and costs and disbursements incurred in
connection with bringing the action, including attorneys' fees, and such other
relief as the court may deem proper. For the reasons stated previously in the
Suckman action, plaintiffs have agreed to provide the Company and all other
defendants with an open extension of time to respond to the complaint, and
plaintiffs have indicated that they will probably file an amended complaint in
the event of the consummation of a merger between Rally's and Checkers. 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.
Neogen/ Danco v. KCC. This complaint for damages for trade libel was
--------------------
filed on October 30, 1998 in the Superior Court for the State of California for
the County of Los Angeles. The complaint alleges one cause of action for trade
libel against all defendants KCC, GIANT, Terry Christensen and Does 1 through
20, regarding defendants' alleged statements to the media concerning plaintiffs
Neogen Investors, L.P., and Danco Laboratories, Inc. and Joseph Pike. The
complaint has not been served. According to the complaint, a Status Conference
is set for this action for July 1, 1999. The Company denies all wrongdoing and,
if served, intends to vigorously defend itself against the complaint.
Since management does not believe that the previously mentioned lawsuits
and other claims and legal proceedings, in which the Company is a defendant,
contain meritorious claims, management believes that the ultimate resolution of
the lawsuits will not materially and adversely affect the Company's consolidated
financial position or results of operations.
The Company has employment contracts with the following executives:
Chairman of the Board, President and Chief Executive Officer of the Company
providing for an annual base salary of $1,000 increased annually by 10% over the
prior year to a maximum of $1,600, life insurance in the face amount of $ 5
million, and upon expiration of this agreement a termination payment equal to
twice the then base compensation, and an annual bonus determined, year to year,
by the Incentive Compensation Committee of the Board of Directors within
specified guidelines of the Incentive Compensation Plan, expiring on December
31, 2005; President and Chief Executive Officer of Periscope providing for an
annual base salary of $500, a performance based bonus, determined year to year,
of $450 and an annual nonaccountable $50 business
46
<PAGE>
GIANT GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
24. Commitments and Contingencies (Cont.)
-------------------------------------
expense allowance, expiring on December 31, 2002; Periscope operations executive
providing for an annual base compensation of $184 and additional compensation
based on achieving certain performance criteria, expiring on December 31, 2002;
and with the Periscope accounting and finance executive providing for annual
compensation of approximately $168, expiring on April 30, 2003.
The Company may issue up to an additional 225,000 shares of its common
stock to Periscope stockholders based on the level of Periscope pre-tax profits,
as defined in the merger agreement, exceeding $13 million dollars for the year
ended December 31, 1999.
Periscope has a noncompetition agreement with a former Periscope
stockholder. The agreement calls for an annual fee of $75, payable in weekly
installments, through May 2001.
Periscope had approximately $3,311 of open letters of credit outstanding
at December 31, 1998.
25. Subsequent Event
----------------
During the first quarter of 1999, KCC signed an agreement with Santa
Barbara Restaurant Group ("SBRG"). The agreement called for the exchange of
KCC's investment in Checkers 13% restructured debt for 998,377 shares of $.08
par value common stock of SBRG. These shares are currently not registered;
however, KCC has the right to demand that SBRG register the shares with the
Securities and Exchange Commission within 60 days of receipt of notice. The
registration is effective for two years at which time, those shares will be
fully transferable under Rule 144 of the Securities Act of 1933.
47
<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, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1998, 1997 and 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1998 and 1997, and the results of their
operations and their cash flows for the years ended December 31, 1998, 1997 and
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 12, 1999, except with
respect to the matter discussed
in Note 25, as to which the date
is March 25, 1999
48
<PAGE>
GIANT GROUP, LTD.
QUARTERLY FINANCIAL DATA
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended March 31 June 30 September 30 December 31
- -------------------------------------------------------------------------- -------------- ---------------- -------------------
<S> <C> <C> <C> <C>
1998
Revenue $ 750 $ 1,085 $ 1,330 $ 1,534
Costs and expenses 1,612 1,375 1,623 3,097
------------ -------------- ---------------- ------------------
Loss from operations (862) (290) (293) (1,563)
Other income (expense) (1) 2,844 10 (105)
Loss on investment in affiliate - - - (1,168)
------------ -------------- ---------------- ------------------
Income (loss) before benefit (provision) for income taxes (863) 2,554 (283) (2,836)
Benefit (provision) for income taxes (697) 1,047 1,571
------------ -------------- ---------------- ------------------
Net income (loss) $ (863) $ 1,857 $ 764 $ (1,265)
============ ============== ================ ==================
Basic earnings (loss) per common share $ (0.27) $ 0.58 $ 0.24 $ (0.40)
Diluted earnings (loss) per common share (1) (0.27) 0.58 0.24 (0.40)
Shares - Basic earnings (loss) per common share 3,181,000 3,181,000 3,181,000 3,194,000
============ ============== ================ ==================
Shares - Diluted earnings (loss) per common share (1) 3,181,000 3,181,000 3,181,000 3,195,000
============ ============== ================ ==================
</TABLE>
(1) The calculations for the quarters ended June 30, 1998 and September 30, 1998
do not include 2,101,000 potentially dilutive stock options per quarter as the
effect of these options would be anti-dilutive because the exercise prices of
these options, ranging from a high of $8.25 to a low of $5.44, exceed the
average market price of the Company's common stock for the quarters,
respectively.
<TABLE>
<CAPTION>
Quarter Ended March 31 June 30 September 30 December 31
- -------------------------------------------------------------------------- -------------- ---------------- -------------------
<S> <C> <C> <C> <C>
1997
Revenue $ 745 $ 704 $ 709 $ 426
Costs and expenses 1,694 1,898 2,999 4,005
------------ -------------- ---------------- ------------------
Loss from operations (949) (1,194) (2,290) (3,579)
Other expense - (75) (77) (1)
Equity in earnings (loss) of affiliate (143) 14 (172) (322)
------------ -------------- ---------------- ------------------
Loss before benefit for income taxes (1,092) (1,255) (2,539) (3,902)
Benefit for income taxes - - 3,100 1,070
------------ -------------- ---------------- ------------------
Net income (loss) $ (1,092) $ (1,255) $ 561 $ (2,832)
============ ============== ================ ==================
Basic earnings (loss) per common share $ (0.31) $ (0.39) $ 0.18 $ (0.89)
Diluted earnings (loss) per common share (2) (0.31) (0.39) 0.18 (0.89)
Shares - Basic and diluted earnings (loss)
per common share (2) 3,490,000 3,191,000 3,181,000 3,181,000
============ ============== ================ ==================
</TABLE>
(2) The calculation for the quarter ended September 30, 1997 does not include
2,061,000 potentially dilutive stock options, as the effect of these options
would be anti-dilutive because the exercise price of these options, ranging from
a high of $8.25 to a low of $6.69, exceed the average market price of the
Companies' common stock for the quarter.
49
<PAGE>
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 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) Financial Statements for GIANT GROUP. LTD:
<TABLE>
<CAPTION>
Page Reference
Form 10-K
--------------
<S> <C>
Consolidated Statements of Operations for the three years ended
December 31, 1998 23
Consolidated Balance Sheets as of December 31, 1997 and 1998 24
Consolidated Statements of Cash Flows for the three years ended
December 31, 1998 25
Consolidated Statement of Stockholders' Equity for the three years
ended December 31, 1998 26
Notes to Consolidated Financial Statements 27
Report of Independent Certified Public Accountants 48
</TABLE>
(b) Reports on Form 8-K:
During the quarter ended December 31, 1998, the Company filed the
following reports on Form 8-K:
(1) A report filed on October 16, 1998 reporting the sale of the
Company's remaining luxury yacht and the Company's attempt to
recover refunds from the U.S. Customs Services for amounts
previously deposited with this agency.
(2) A report filed on December 4, 1998 announcing an Agreement and
Plan of Merger between the Company and Periscope Sportswear, Inc.
(3) A report filed on December 11, 1998 reporting the acquisition of
Periscope Sportswear, Inc.in an all stock transaction and amending
the Company's Rights Agreement with ChaseMellon Shareholder
Services, L.L.C. dated January 4, 1996.
50
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(cont.)
(c) Exhibits Required by Item 601 of Regulation S-K:
EXHIBIT INDEX
-------------
No. Description of Exhibit
- --- ----------------------
2.1 Agreement and Plan of Merger, dated as of December 4, 1998, among GIANT,
Acquisition Corp. and Periscope (filed as Exhibit 2.1 to the Company's
Form 8-K dated December 11, 1998, and incorporated herein by reference).
2.2 Amendment to Agreement and Plan of Merger, dated as of December 9, 1998,
among GIANT, Acquisition Corp. and Periscope (filed as Exhibit 2.2 to
the Company's Form 8-K dated December 11, 1998, and incorporated herein
by reference).
3.0 Certificate of Merger, dated December 11, 1998 (filed as Exhibit 3.1 to
the Company's Form 8-K dated December 11, 1998, and incorporated herein
by reference).
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 the
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 of the
Company, 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
Report on Form 8-K, dated January 7, 1996, and incorporated herein by
reference).
4.1 Rights Agreement between the Company and ChaseMellon Shareholder
Services, L.L.C. ("Chase"), dated January 4, 1996 (filed as Exhibit 1 to
the Company's Form 8-K, dated January 4, 1996, and incorporated herein
by reference).
4.2 Amendment to Rights Agreement dated January 4, 1996, between the Company
and Chase, dated December 4, 1998 (filed as Exhibit 4 to the Company's
Form 8-K dated December 11, 1998, and incorporated herein by reference)
51
<PAGE>
EXHIBIT INDEX (Cont.)
---------------------
No. Description of Exhibit
- --- ----------------------
10.1 1985 Non-Qualified Stock Option Plan, as amended (filed as Exhibit
10.1.2 to the Company's Annual Report on Form 10-K, dated March 28,
1995, and incorporated herein by reference).
10.2 GIANT GROUP, LTD. 1996 Employee Stock Option Plan (Exhibit A in the
Notice of Annual Meeting of Stockholders held on July 12, 1996, filed
with the SEC on June 7,1996, as amended by Exhibit B in the Notice of
Annual Meeting of Stockholders held on May 8, 1997, filed with the SEC
on April 7, 1997, and incorporated herein by reference).
10.3 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, as amended by
Exhibit C in the Notice of Annual Meeting of Stockholders held on May
8, 1997, filed with the SEC on April 7, 1997, 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 GIANT GROUP, LTD. 1997 Incentive Compensation Plan (Exhibit D in the
Notice of Annual Meeting of Stockholders held on May 8, 1997, filed
with the SEC on April 7, 1997, and incorporated herein by reference).
10.7* Employment Agreement dated December 3, 1998, between the Company and
Burt Sugarman.
10.8* Employment Agreement dated January 1, 1998, between Glenn Sands and
Periscope.
10.8.1* Amendment dated December 11, 1998, to Employment Agreement dated
January 1, 1998, between Glenn Sands and Periscope.
10.9* Employment Agreement dated January 1, 1998, between Scott Pianin and
Periscope.
10.9.1* Amendment dated December 11, 1998, to Employment Agreement dated
January 1, 1998, between Scott Pianin and Periscope.
10.10* Promissory Note of Glenn Sands payable to the order of Periscope in
the principal amount of $2,606,000.
10.10.1* Periscope letter to Glenn Sands regarding deferral on Sands promissory
note.
10.11* Promissory Note of Periscope payable to the order of Glenn Sands in
the principal amount of $2,000,000.
10.12* Form of warrant agreement to purchase common stock of the Company.
10.13 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).
52
<PAGE>
EXHIBIT INDEX (Cont.)
---------------------
No. Description of Exhibit
- --- ------------------------
10.14 Warrant to Purchase Common Stock of Checkers Drive-In Restaurants,
Inc. dated November 22, 1996 (filed as Exhibit 4.3 to Checkers Report
on Form 8-K dated November 22, 1996, and incorporated herein by
reference).
10.15 SETTLEMENT AND LIMITED RELEASE AGREEMENT between GIANT and Fidelity
and CKE, dated March 21, 1997 (filed as Exhibit 10.1 to the Company's
Form 10-Q for the first quarterly period ended March 31, 1997, and
incorporated herein by reference).
21* List of Subsidiaries.
23.1* Consent of Arthur Andersen LLP on GIANT's financial statements.
27* Financial Data Schedules.
* Exhibit included with this Form 10-K.
(d) Financial Statement Schedules
(1) Financial Statement Schedules:
The following financial statement schedules of the Company for
the three years ended December 31, 1998, 1997 and 1996 are filed as
part of this Form 10-K and should be read in conjunction with the
Consolidated Financial Statements of the Company.
<TABLE>
<CAPTION>
Schedule Page
-------- ----
<S> <C>
II Valuation and Qualifying Accounts at December 31, 1998............................... 56
<CAPTION>
Schedules not listed above have been omitted because they are not applicable or are not required or the
information required to be set forth therein is included in the Consolidated Financial Statements or Notes
thereto.
</TABLE>
53
<PAGE>
Report of Independent Public Accountants
To the Board of Directors of GIANT GROUP, LTD.:
We have audited in accordance with generally accepted auditing standards the
financial statements included in GIANT GROUP, LTD.'s annual report to
shareholders included in this Form 10-K, and have issued our report thereon
dated March 12, 1999 (except with respect to the matter discussed in Note 25, as
to which the date is March 25, 1999). Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedule listed in
the index under Item 14(d) is the responsibility of the company's management and
is presented for purposes of complying with the Securities and Exchange
Commissions rules and is not part of the basic financial statements. The
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly state 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
Los Angeles, California
March 12, 1999, except with
respect to the matter discussed
in Note 25, as to which the date
is March 25, 1999.
54
<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 29, 1999 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 29, 1999 By: /s/ Burt Sugarman
-----------------
Burt Sugarman
Chairman of the Board and
Chief Executive Officer
Date: March 29, 1999 By: /s/ William H. Pennington
-------------------------
William H. Pennington
Vice President, Chief Financial
Officer, Secretary and Treasurer
(Principal Financial and Accounting
Officer)
Date: March 29, 1999 By: /s/ David Gotterer
------------------
David Gotterer
Director
Date: March 29, 1999 By: /s/ Terry Christensen
---------------------
Terry Christensen
Director
Date: March 29, 1999 By: /s/ David Malcolm
-----------------
David Malcolm
Director
Date: March 29, 1999 By: /s/ Jeff Rosenthal
------------------
Jeff Rosenthal
Director
Date: March 29, 1999 By: /s/ Glenn Sands
---------------
Glenn Sands
Director
55
<PAGE>
GIANT GROUP, LTD.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNT
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged Deduction - Balance at
Beginning costs and to other Sale of assets End
Description of Period expenses accounts held-for-sale of Period
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Reserve for impairment
of assets held-for-sale $ 1,500 $ 541 $ - $ 2,041 $ -
=============================================================================
Year ended December 31, 1997
Reserve for impairment
of assets held-for-sale $ - $ 1,500 $ - $ - $ 1,500
=============================================================================
</TABLE>
56
<PAGE>
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT, dated this 3rd day of December, 1998, by and
between GIANT GROUP, LTD., a Delaware corporation (the "Company"), and BURT
SUGARMAN (the "Executive"), upon the terms and conditions hereinafter set forth.
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Executive has been employed as an executive officer of
the Company since 1984 and has been serving as the Chairman of the Board,
President and Chief Executive Officer of the Company, pursuant to an Amended and
Restated Employment Agreement, dated as of February 24, 1997 (the "Prior
Employment Agreement");
WHEREAS, the Company and the Executive desire to extend the term of
the Prior Agreement and make other changes as to the employment of the
Executive; and
WHEREAS, in connection with the changes to the Prior Agreement the
Company and the Executive desire to set forth the new terms and conditions of
the Executive's employment in this Agreement and to terminate the Prior
Agreement.
NOW, THEREFORE, in consideration of the foregoing and the covenants
and agreements hereinafter set forth, the parties hereto, intending to be
legally bound, hereby enter into this Agreement on the terms and conditions as
set forth below:
<PAGE>
1. EMPLOYMENT, TERM AND DUTIES
---------------------------
1.1 Employment. The Company hereby shall continue to employ the
----------
Executive as its Chairman of the Board of Directors, President and Chief
Executive Officer, and the Executive hereby agrees to continue such employment,
upon the terms and subject to the conditions of this Agreement.
1.2 Term. The term of employment of the Executive by the Company
----
shall be for a period of seven (7) years commencing on the date hereof (the
"Commencement Date") and terminating on December 31, 2005 (the "Term"), unless
this Agreement is sooner terminated pursuant to Section 5, 6 or 8 herein.
1.3 Positions. The Executive shall continue to serve as the Chairman
---------
of the Board of Directors, President and Chief Executive Officer of the Company
and also as director and senior executive officer of such subsidiaries of the
Company as the Executive and the Company may determine from time to time. The
Executive shall continue to serve as Chairman of the Executive Committee (or
other committee exercising similar powers and authority) of the Company (the
"Executive Committee"), and of such subsidiaries of the Company as the Executive
shall determine from time to time, for so long as the Executive is providing
services to the Company hereunder and such committee exists. The Company shall
include the Executive on the management slate of nominees for its Board of
Directors for all meetings (or consents in lieu of meetings) of the Company's
stockholders to be held during the Term.
1.4 Duties. The Executive shall be the most senior executive officer
------
of the Company (and its subsidiaries) with duties and responsibilities
commensurate with such
-2-
<PAGE>
positions. All employees of the Company and its subsidiaries shall report to the
Executive. The Executive shall report only to the Company's Board of Directors.
1.5 Office. The Company shall continue to maintain the office at 9000
------
Sunset Boulevard, Los Angeles, California for use by the Executive and his
appropriate support staff. Upon the Company vacating its premises at 9000 Sunset
Boulevard, the Company shall provide a subsequent office for use by the
Executive in the Beverly Hills, California area equivalent in size and quality
to the office then occupied by the Executive and his support staff, and at a
location determined by the Executive. The Executive shall not be required to
travel outside the Los Angeles, California metropolitan area without his
consent.
2. SCOPE OF SERVICES
-----------------
2.1 Services. Subject to Section 2.2 herein, the Executive agrees
--------
that he shall perform his services to the best of his ability. During the Term
hereof the Executive shall not render any substantial services for others in any
line of business in which the Company or its subsidiaries are significantly
engaged without first obtaining the consent of the Board of Directors. He shall
devote his business time, care, attention and best efforts to the Company's
business.
2.2 Other Interests. So long as such activities do not materially
---------------
interfere with the Executive's performance of his obligations hereunder, the
Executive may devote such time and energy as may be reasonably required with
respect to the activities of Burt Sugarman, Inc. The Executive may make and
maintain investments in any business (whether publicly or privately held) which
is not in direct material competition with the
-3-
<PAGE>
Company or its subsidiaries at the time the investment is made, including
investments in entities in which the Company also holds investment positions.
3. COMPENSATION
------------
3.1 Base. The Company shall pay to the Executive an annual base
----
salary of one million dollars ($1,000,000) (the "Base Compensation"), payable in
equal installments (in accordance with the Company'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. The Base
Compensation shall be increased annually by ten percent (10%) over the prior
year's Base Compensation, with such increase to be effective on each anniversary
date of this Agreement, provided that the Base Compensation cannot exceed the
rate of one million six hundred thousand dollars ($1,600,000) per annum.
3.2 Bonus. In addition to the Base Compensation payable to the
-----
Executive pursuant to Section 3.1 hereof, the Company may pay to the Executive
any additional amounts as, in the discretion of the Company's Board of Directors
or the Compensation Committee, it may desire as a result of the Executive's
services (the "Bonus"). The Executive shall participate in any bonus pool or
option plan established for executive officers of the Company.
3.3 No Reduction. The compensation paid to the Executive by the
------------
Company pursuant to this Section 3 shall not be reduced by any amounts received
or earned by the Executive with respect to any outside activities or services
permitted under Section 2.2 hereof.
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<PAGE>
4. OTHER BENEFITS
--------------
4.1 Life Insurance. Upon commencement of the Term the Company shall
--------------
obtain life insurance policies from one or more major rated domestic carriers
with respect to the life of the Executive in the face amount of $5 million at
the expense of the Company for which the Executive shall designate the
beneficiary (the "Executive Life Insurance"). The Company shall maintain the
Executive Life Insurance during the Term. So long as it does not adversely
affect the Company's ability to obtain and to maintain the Executive Life
Insurance, the Company, at its discretion, shall have the right to take out
other life insurance policies with respect to the life of the Executive, at the
Company's cost and for the Company's benefit, and the Executive shall have no
rights in these other insurance policies or the proceeds thereof. The Executive
shall cooperate with the Company in obtaining the insurance referred to in this
Section 4.1, including timely submitting to any required medical or other
examinations in Beverly Hills, California, provided that if such medical
examinations cannot be conducted by the Executive's personal physician, (a) the
Executive 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 Executive's approval, not to be unreasonably withheld. Upon
termination of this Agreement, the Executive shall have the right to acquire
ownership of any or all of the life insurance policies (including the Executive
Life Insurance) maintained by the Company covering his life, provided that the
Executive reimburses the Company in an amount equal to the cash surrender value
thereof, if any,
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<PAGE>
and the pro rata portion of any premium paid applicable to future periods of the
acquired policies.
4.2 Insurance Benefits. The Company shall make available to the
------------------
Executive disability, medical, dental and any other benefits of a type, nature
and amount comparable to those benefits which have been heretofore provided to
the Executive up to this time by the Company, and in any event no less favorable
than the best benefits of the type then made available to any other employee of
the Company.
4.3 Expenses. To the extent not otherwise reimbursed under this
--------
Agreement, the Company shall reimburse the Executive for all reasonable and
customary expenses which the Executive shall incur in connection with the
Executive's services to the Company or any subsidiary pursuant to this
Agreement. The foregoing shall include first class hotel, travel and meals for
the Executive and his spouse when outside the Los Angeles, California
metropolitan area on Company business (it being understood that the Executive's
spouse is a public figure who can help promote the Company's image, and that
while she travels with the Executive, as a condition for the Company being
responsible for the expenses of such spouse, such spouse may attend such
meetings, dinners, seminars and other functions as the Company so designates in
order to promote the Company'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 Company or any of its subsidiaries.
4.4 Vacation; Sick Leave. The Company shall provide to the Executive
--------------------
such paid vacation and paid sick leave benefits which do not materially
interfere with the
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<PAGE>
Executive's performance of his obligations hereunder, but not less than eight
(8) weeks per annum of paid vacation and eight (8) weeks of paid sick leave.
5. DEATH OF EXECUTIVE
------------------
5.1 Payment Obligation. This Agreement shall automatically terminate
------------------
upon the Executive's death (the "Section 5 Termination"). Upon such termination
the Company shall: (i) pay to the Executive's estate the accrued amount of the
compensation, benefits, reimbursements and 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 shall be paid in full), if,
as and when such amounts would be paid but for the termination of this
Agreement; and (ii) provide to the immediate family of the Executive the
continuation of their health insurance benefits at the Company's expense for a
period of two (2) years from the date of the Section 5 Termination. Except for
the amounts payable by Company pursuant to the preceding sentence, all
obligations of the Company with respect to compensation and benefits under this
Agreement shall cease upon a Section 5 Termination. The proceeds from the
Executive Life Insurance shall be paid to the beneficiary designated by the
Executive. The Company shall cooperate fully with the estate in seeking payment
of the proceeds from the Executive Life Insurance for the designated
beneficiary.
5.2 Option Extension. The Company 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
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<PAGE>
termination date for all options held under such plans by the Executive and
exercisable as of the date of his death or the termination of this Agreement by
reason of the disability of the Executive pursuant to Section 6 hereof shall
remain exercisable until the later of (i) the termination date as set forth in
the respective option certificates or (ii) twenty-four (24) months after the
Section 5 Termination or the Section 6 Termination, whichever is applicable.
6. DISABILITY OF EXECUTIVE
-----------------------
6.1 Determination. The Executive 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 a
continuous period of at least six calendar months. The determination that the
Executive is disabled shall be made by a vote of members of the Board of
Directors of the Company (with the Executive abstaining from the decision if he
is then a member of the Board), based upon an examination and certification by
the Executive's physician.
6.2 Effect of Disability. If the Executive is determined to be
--------------------
disabled pursuant to this Section 6, the Company shall have the option to
terminate this Agreement by written notice to the Executive stating the date of
termination (the "Section 6 Termination"), which date may be any time subsequent
to the date of such determination, except that the Company shall: (i) pay to the
Executive the accrued amount of the compensation, benefits, reimbursements and
other sums payable pursuant to this Agreement, such amounts to be prorated
through the date of termination (other than expense reimbursements which shall
be paid in full), if, as and when such amounts would
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<PAGE>
be paid but for the termination of this Agreement; (ii) pay to the Executive an
amount equal to the greater of (A) twice the then Base Compensation or (B) the
aggregate Base Compensation at the rate in effect on the Section 6 Termination
calculated for (I) the period from the date of the Section 6 Termination through
the end of the stated Term or (II) forty (40) months, whichever is the shorter,
which shall be paid in equal monthly installments over a period of months equal
to one-half of the remaining months in the stated Term commencing on the first
day of the month immediately following the Section 6 Termination, but in no
event shall such payment period exceed twenty (20) months; and (iii) provide to
the Executive and to his immediate family the continuation of his health
insurance benefits at the Company's expense for the remainder of the Term.
Except for the amounts payable by the Company pursuant to the preceding
sentence, all obligations of the Company with respect to compensation and
benefits under his Agreement shall cease upon any such termination.
7. INDEMNIFICATION AND INSURANCE
-----------------------------
7.1 Obligation. The Company shall indemnify and hold harmless, and in
----------
any action, suit or proceeding, defend the Executive (with the Executive 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 Executive in connection with the Executive's service
as a director or officer of the Company or any subsidiary or affiliate to the
full extent permitted by the By-laws of the Company as in effect on the date of
this Agreement, or, if greater, as permitted by the
-9-
<PAGE>
General Corporation Law of the State of Delaware (the "DGCL"), provided that the
indemnity afforded by the Company's By-laws shall never be greater than that
permitted by the DGCL. The Company shall be obligated to advance on behalf of
the Executive all Indemnified Amounts as they are incurred, subject to any
undertakings required in the DGCL. To the extent that a change in the DGCL
(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 Executive shall
enjoy the greater benefits so afforded by such change.
7.2 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 Executive and the
Company.
7.3 Other Rights. The contract rights conferred by this Section 7
------------
shall not be exclusive of any other right which the Executive may have or
hereafter acquire under any statute, provision of the Certificate of
Incorporation or By-laws of the Company, 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.
7.4 Notice of Claims. The Executive shall advise the Company in
----------------
writing of the institution of any action, suit or proceeding which is or may be
subject to this Section 7, provided that Executive's failure to so advise the
Company shall not affect the indemnification provided for herein, except to the
extent such failure has a material and adverse effect on the Company's ability
to defend such action, suit or proceeding.
-10-
<PAGE>
7.5 Indemnification Insurance. During the Term hereof and for a
-------------------------
period of three (3) years following the termination of this Agreement, the
Executive shall be covered by insurance, to the same extent as other senior
executives and directors of the Company are covered by insurance with respect to
(a) directors and officers liability, (b) errors and omissions, and (c) general
liability insurance. The Company shall maintain reasonable and customary
insurance of the type specified in parts (b) and (c) in the preceding sentence.
The Executive shall be a named insured or additional insured, without right of
subrogation against him, under any policies of insurance carried by the Company.
The Company shall, 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 Company's
obligations hereunder.
8. TERMINATION
-----------
8.1 By The Company For Cause. The Company 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
Company under this Section 8.1, shall be limited to (i) the willful engaging by
the Executive in gross misconduct which is materially injurious to the Company,
(ii) the conviction of the Executive of a felony involving any financial
impropriety which would materially interfere with the Executive's ability to
perform his services required under this Agreement or (iii) the willful refusal
of the Executive 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
-11-
<PAGE>
Board of Directors asserts that the Executive has not performed such material
obligations. For purposes of this Section 8.1, no act, or failure to act, on the
Executive's part shall be considered willful unless done, or admitted to be
done, by the Executive in bad faith and without reasonable belief that such
action or omission was in the best interest of the Company.
8.2 By The Executive For Cause. The Executive 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
Executive under this Section 8.2, shall be limited to the failure of the Company
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 Company seek such termination, the Executive may contest such termination
and demand arbitration as to the validity of the termination pursuant to the
procedures in Section 11.1 hereof.
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<PAGE>
8.4 By The Company Without "Cause". The Company may not terminate the
------------------------------
Agreement without "cause," as defined in Section 8.1 hereof.
8.5 By The Executive Without "Cause". The Executive shall have the
--------------------------------
right to terminate this Agreement without "cause" and in his discretion, upon
written notice to be given to the Company not less than sixty (60) days prior to
the effective date of such termination at any time (i) after January 1, 2000 or
(ii) if the Executive does not beneficially own (as defined in Rule 13d-3 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
Company'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, 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 Company for "cause"
pursuant to Section 8.1 hereof, the Company shall pay to the Executive the
accrued amount of the compensation benefits, reimbursement and other sums
payable pursuant to this Agreement, such amounts to be prorated through the
effective date of termination (other than expense reimbursements which will be
paid in full) if, as and when such amounts would be paid but for the termination
of this Agreement.
(c) If this Agreement is terminated by the Executive for "cause"
pursuant to Section 8.2 hereof or without "cause" after January 1, 2000 pursuant
to
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<PAGE>
Section 8.5 hereof, or by the Company without "cause," the Executive shall be
entitled to receive: (i) the accrued amount of the compensation benefits and
other sums payable pursuant to this Agreement, (ii) health insurance benefits
for himself and his immediate family provided for in this Agreement for a period
of forty (40) months from the date of termination, and (iii) an amount equal to
the greater of (A) twice the then Base Compensation or (B) the aggregate Base
Compensation at the rate in effect upon termination in accordance with this
Subsection calculated for (I) the period from the date of such termination
through the end of the stated Term or (II) forty (40) months, whichever is the
shorter, which shall be paid in equal monthly installments over a period of
months equal to one-half of the remaining months in the stated Term commencing
on the first day of the month immediately following such termination, but in no
event shall such payment period exceed twenty (20) months. Any amounts payable
to the Executive under this paragraph (c) shall not be reduced by any amounts
earned or received by the Executive from any third party at any time after such
termination; there being no requirement on the part of the Executive 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 Executive without "cause"
(other than pursuant to Section 8.5 hereof), the Executive shall, at his option,
continue to provide services to the Company 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 and on a non-exclusive
basis. The Executive shall have the right to terminate such
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<PAGE>
consultant arrangement at any time on thirty (30) days prior written notice to
the Company. As a consultant the Executive shall provide such services to the
Company as he and the Company shall mutually agree are appropriate under the
circumstances (and in the event the Company and Executive fail to so agree,
Executive shall be entitled to receive the consultant compensation provided for
herein so long as Executive is willing to perform the services he believes are
appropriate under the circumstances); the Executive shall be entitled to receive
compensation from the Company at a rate of not less than one hundred thousand
dollars ($100,000) per annum or such other amount as the Executive and the
Company shall agree upon; and the Executive shall not be required to travel
outside the Los Angeles, California metropolitan area without his consent. If
the Executive elects to provide services to the Company as a consultant, the
other provisions of this Section 8 shall not apply.
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 Company, and in lieu of the benefits provided for in
Section 8.6(b) and 8.6(c)(iii) hereof, the Company shall pay to the Executive a
lump sum payment equal to 2.99 times the average annual compensation paid by the
Company and includible by the Executive in his gross income during the five tax
years ended prior to the tax year in which such change of ownership or control
occurs. The foregoing lump sum payment shall be paid to the Executive within
thirty (30) days after termination of this Agreement pursuant to this Section
8.8. For purposes of this Section 8.8, a "change in the ownership" of the
Company will be deemed to have occurred upon: (i) completion of a
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<PAGE>
transaction resulting in a consolidation, merger, combination or other
transaction in which the common stock of the Company is exchanged for or changed
into other stock or securities, cash and/or any other property and the holders
of the Company'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 the Executive
and/or his affiliates for at least fifty percent (50%) of the outstanding shares
of common stock of the Company is successfully completed, (iii) the Company has
sold all or substantially all of its 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 Company (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 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 Company. Notwithstanding anything contained
herein to the contrary, the payment by the Company to the Executive pursuant to
this Section 8.8 shall be reduced to the extent necessary to prevent any portion
of such payment to be characterized 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
-16-
<PAGE>
8.9 Expiration of Term. In recognition of the more than twenty (20)
------------------
years of employment services that the Executive will have rendered to the
Company at the time of the expiration of the stated Term, upon the termination
of this Agreement upon the expiration of the stated Term, the Company shall (i)
pay the Executive a lump sum termination payment equal to twice the then Base
Compensation and (ii) continue at its expense the health insurance benefits for
the Executive and his immediate family provided for in this Agreement for a
period of twenty-four (24) months.
9. CONFIDENTIAL INFORMATION; NONDISCLOSURE, ETC.
--------------------------------------------
9.1 Confidentiality. Except as may be in furtherance of the
---------------
Executive's performance of his functions as a senior executive officer of the
Company (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 or the Executive Committee, the
Executive 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
Company (or any of its subsidiaries) which Executive knows to be confidential
and valuable to the Company or any of its subsidiaries (the "Confidential
Information"). The Confidential Information is and will remain the sole and
exclusive property of the Company, and, during the Term of this Agreement, the
Confidential Information, when entrusted to the Executive's custody, shall be
deemed to remain at all times in the Company's sole possession and control.
Notwithstanding the foregoing, the Executive may, after prior written notice to
the
-17-
<PAGE>
Company (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 Company 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, the Executive shall return or cause to be returned to the Company
all of the Confidential Information or any other property of the Company in the
Executive'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 Executive shall
-----------
not, throughout the Term of this Agreement without the Company's prior consent,
render services to a business, or plan for or organize a business, which is
materially competitive with the business of the Company or of any of its
subsidiaries by becoming an owner, officer, director, stockholder (owning more
than 9.9% of such business' equity interests), partner, employee or serve in any
other capacity in any such business.
10.2 Trade Secrets. 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 Executive,
shall be the property of the Company; 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
-18-
<PAGE>
of the Company was used and which was developed entirely on the Executive's own
time, and (a) which does not relate to (i) the business of the Company or any of
its subsidiaries or (ii) the actual or demonstrably anticipated research or
development by the Company of any of its subsidiaries or (b) which does not
result from any work performed by the Executive 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 Company may seek injunctive
relief, it shall be determined by arbitration in Los Angeles, California to be
heard by a single arbitrator chosen by the Company and the Executive, provided
that if the Company and the Executive 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 of 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 Company and the Executive.
11.2 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
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<PAGE>
disbursements in addition to any other relief to which it or he may be entitled.
As used in this Section 11.2, the term "prevailing party" shall include, but
shall 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 be
delivered in person, by facsimile, telex or equivalent of written communication,
or sent by certified or registered mail, return receipt requested, postage
prepaid, as follows:
To the Company:
GIANT GROUP, LTD.
9000 Sunset Boulevard - 16th Floor
Los Angeles, California 90069
Attn: David Gotterer, Vice Chairman
Facsimile No. (310) 273-5249
To the Executive:
Burt Sugarman
400 Trousdale Place
Beverly Hills, California 90210
Facsimile No. (310) 278-5656
or 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.
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<PAGE>
13. FURTHER ACTION
--------------
The Company and the Executive each agrees to execute and deliver such
further documents as may be reasonably requested 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
Company.
16. ENTIRE AGREEMENT
----------------
This Agreement contains the entire agreement and understanding of the
parties with respect to the matters herein, and supersedes all existing
negotiations, representations or agreements (including the Prior Employment
Agreement) and all other oral, written and other communications between them
concerning the subject matter of this Agreement, provided, however, that any
options or other rights the Executive may have by reason of his ownership of
capital stock of the Company shall be subject to the governing instruments
thereof except to the extent otherwise specifically provided for in this
Agreement.
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<PAGE>
17. AMENDMENTS
----------
This Agreement may be amended or modified in whole or in part only by
an agreement in writing signed by the Company and the Executive.
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
regulation, 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.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed Agreement as of the day and
year first above written.
GIANT GROUP, LTD.
By: /s/ David Gotterer -Vice Chairman
---------------------------------------
/s/ Burt Sugarman
------------------
BURT SUGARMAN
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<PAGE>
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of January 1, 1998 between GLENN SANDS (the
"Executive") and PERISCOPE SPORTSWEAR, INC., a Delaware corporation (the
"Company").
1. Term of Agreement. Subject to the terms and conditions hereof, the term
-----------------
of employment of the Executive under this Employment Agreement shall be for the
period commencing on January 1, 1998 (the "Commencement Date") and terminating
on December 31, 2000, unless sooner terminated as provided in accordance with
the provisions of Section 6 hereof. (Such term of employment is herein sometimes
called the "Employment Term".)
2. Employment. As of the Commencement Date, the Company hereby agrees to
----------
employ the Executive as President and Chief Executive Officer and the Executive
hereby accepts such employment and agrees to perform his duties and
responsibilities hereunder in accordance with the terms and conditions
hereinafter set forth.
3. Duties and Responsibilities. Executive shall be President and Chief
---------------------------
Executive Officer of the Company during the Employment Term. Executive shall
report to and be subject to the direction of the Board of Directors and shall
perform such duties consistent with his title and position as may be assigned to
him from time to time by the Board of Directors. During the Employment Term,
Executive shall devote his full time, skill, energy and attention to the
business of the Company and shall perform his duties in a diligent, trustworthy,
loyal and businesslike manner.
4. Compensation. The Company shall pay to Executive a salary at the rate
------------
of $500,000 per year payable in such manner as it shall determine, but in no
event any less often
<PAGE>
than monthly, less withholding required by law and other deductions agreed to by
Executive. During each year of the Employment Term, the Executive shall be
entitled to a $50,000 nonaccountable expense allowance and, if the following
conditions are met, a $450,000 bonus: (i) during the first year of the
Employment Term (a) the Company consummates an initial public offering, (b) the
Company has net sales of at least $87,000,000 and (c) the Executive is
continually employed by the Company through December 31, 1998 and (ii) during
the second and third years of the Employment Term, (a) the Company has net sales
of at least $90,000,000 and $100,000,000, respectively, and (b) the Executive is
employed by the Company through December 31, 1999 and December 31, 2000,
respectively. Net sales shall mean gross sales less returns and allowances.
5. Expenses and Benefits.
---------------------
(a) The Company shall, consistent with its policy of reporting and
reimbursement of business expenses, reimburse Executive for such ordinary and
necessary business related expenses as shall be incurred by Executive in the
course of the performance of his duties under this Agreement.
(b) Executive shall be eligible to participate to the extent that he
qualifies in all benefit plans, including without limitation, pension, term life
insurance, hospitalization, medical insurance and disability plans as are made
available from time-to time to executives of the Company.
(c) Executive shall be entitled to four weeks of paid vacation
annually, which shall be taken in accordance with the procedures of the Company
in effect from time-to-time.
2
<PAGE>
6. Termination.
-----------
(a) The Company shall have the right to terminate the employment
of the Executive under this Agreement for disability in the event Executive
suffers an injury, illness or incapacity of such character as to
substantially disable him from performing his duties hereunder for a period
of more one hundred eighty (180) consecutive days upon the Company giving at
least thirty (30) days written notice of termination; provided, however,
that if the Executive is eligible to receive disability payments pursuant to
a disability insurance policy paid for by the Company, the Executive shall
assign such benefits to the Company for all periods as to which he is
receiving full payment under this Agreement.
(b) This Agreement shall terminate upon the death of Executive.
(c) The Company may terminate this Agreement at any time because
of (i) Executive's material breach of any term of this Agreement or (ii) the
willful engaging by the Executive in misconduct which is materially
injurious to the Company, monetarily or otherwise; provided, in each case,
however, that the Company shall not terminate this Agreement pursuant to
this Section 6(c) unless the Company shall first have delivered to the
Executive a notice which specifically identifies such breach or misconduct
and the Executive shall not have cured the same within fifteen (15) days
after receipt of such notice.
(d) The Executive may terminate his employment for "Good Reason"
if:
(i) he is assigned, without his express written consent, any
duties inconsistent with his positions, duties, responsibilities, authority
and status with the Company as of the date hereof, or a change in his
reporting responsibilities or titles as in effect as of the date hereof,
except in connection with the termination of his employment by him without
Good Reason; or
3
<PAGE>
(ii) his compensation is reduced.
7. Liquidated Damages. It is understood that if the Executive (i) shall
------------------
elect to terminate his employment for a Good Reason (as defined above) or (ii)
his employment is terminated by the Company otherwise than as provided in
Section 6, the Executive will suffer damages which will be difficult to
calculate. Consequently, in the event of a termination of Executive's employment
for either of these reasons, Executive shall be entitled by way of liquidated
damages and not as a penalty to receive a single lump sum payment in an amount
equal to the amount of the compensation payments that, but for his termination
of employment under this Section 7, would have been payable to the Executive for
the remainder of the Employment Term.
Such payment shall be made by the Company to the Executive within fifteen
(15) days following his termination of employment for the reason set forth in
this Section 7. The Executive shall not be required to mitigate the amount of
any payment provided in this Section 7 nor shall the amount payable under this
Section be reduced by any compensation earned by the Executive after the date of
his termination of employment.
8. Revealing of Trade Secrets, etc. Executive acknowledges the interest of
-------------------------------
the Company in maintaining the confidentiality of information related to its
business and shall not at any time during the Employment Term or thereafter,
directly or indirectly, reveal or cause to be revealed to any person or entity
the supplier lists, customer lists or other confidential business information of
the Company; provided, however, that the parties acknowledge that it is not the
intention of this paragraph to include within its subject matter (a) information
not proprietary to the Company, (b) information which is then in the public
domain, or (c) information required to be disclosed by law.
4
<PAGE>
9. Covenants Not to Compete. During the Employment Term the Executive
------------------------
shall not, directly or indirectly, in any manner, engage in any business which
competes with any business conduced by the Company and will not directly or
indirectly own, manage, operate, join, control or participate in the ownership,
management, operation or control of, or be employed by or connected in any
manner with any corporation, firm or business that is so engaged, (provided,
however, that nothing herein shall prohibit the Executive from owning not more
than three (3%) percent of the outstanding stock of any publicly held
corporation). In addition, during the Employment Term and for a period of one
year thereafter, the Executive shall not, directly or indirectly, in any manner
(i) persuade or attempt to persuade any employee of the Company to leave the
employ of the Company or to become employed by any other entity or (ii) persuade
or attempt to persuade any current or former customer or contractor to reduce
the amount of business it does or intends or anticipates doing with the Company.
10. Opportunities. During his employment with the Company, and for one
-------------
year thereafter, Executive shall not take any action which might divert from the
Company any opportunity learned about by him during his employment with the
Company (including without limitation during the Employment Term) which would be
within the scope of any of the businesses then engaged in or planned to be
engaged in by the Company.
11. Survival. In the event that this Agreement shall be terminated, then
--------
notwithstanding such termination, the obligations of Executive pursuant to
Sections 8 and 9 of this Agreement shall survive such termination.
12. Contents of Agreement, Parties in Interest, Assignment, etc. This
-----------------------------------------------------------
Agreement sets forth the entire understanding of the parties hereto with respect
to the subject matter
5
<PAGE>
hereof. All of the terms and provisions of this Agreement shall be binding upon
and inure to the benefit of and be enforceable by the respective heirs,
representatives, successors and assigns of the parties hereto, except that the
duties and responsibilities of Executive hereunder which are of a personal
nature shall neither be assigned nor transferred in whole or in part by
Executive. This Agreement shall not be amended except by a written instrument
duly executed by the parties.
13. Severability. If any term or provision of this Agreement shall be held
------------
to be invalid or unenforceable for any reason, such term or provision shall be
ineffective to the extent of such invalidity or unenforceabiltiy without
invalidating the remaining terms and provisions hereof, and this Agreement shall
be construed as if such invalid or unenforcable term or provision had not been
contained herein.
14. Notices. Any notice, request, instruction or other document to be
-------
given hereunder by any party to the other party shall be in writing and shall be
deemed to have been duly given when delivered personally or five (5) days after
dispatch by registered or certified mail, postage prepaid, return receipt
requested, to the party to whom the same is so given or made:
If to the Company
addressed to: Periscope Sportswear, Inc.
1407 Broadway
Suite 620
New York, New York 10018
with a copy to: Morse, Zelnick, Rose & Lander, LLP
450 Park Avenue
New York, New York 10022
Attn: George Lander, Esq.
6
<PAGE>
If to Executive
addressed to: Glenn Sands
2 Rio Vista Drive
Alpine, New Jersey 07620
or to such other address as the one party shall specify to the other party in
writing.
16. Counterparts and Headings. This Agreement may be executed in
-------------------------
one or more counterparts, each of which shall be deemed an original and all
which together shall constitute one and the same instrument. All headings are
inserted for convenience of reference only and shall not affect the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed and delivered as of the day and year first above written.
PERISCOPE SPORTSWEAR, INC.
By: /s/ Scott Pianin
-----------------------
SCOTT PIANIN
/s/ Glenn Sands
--------------------------
GLENN SANDS
7
<PAGE>
EXHIBIT 10.8.1
AMENDMENT TO EMPLOYMENT AGREEMENT
The undersigned parties hereby agree to amend the Employment
Agreement, dated as January 1, 1998 (the "Employment Agreement"), between
Periscope Sportswear, Inc. (the "Company") and Glenn Sands (the "Executive") as
follows:
(a) Section 1 of the Employment Agreement is amended and restated to
read as follows:
"1. Term of Agreement. Subject to the terms and conditions hereof, the
-----------------
term of employment of the Executive under this Employment Agreement shall be for
the period commencing on January 1, 1998 (the "Commencement Date") and
terminating on December 31, 2002, unless sooner terminated as provided in
accordance with the provisions of Section 6 hereof; provided, however, that the
Company shall have the option to extend the Executive's employment hereunder for
two additional one year periods (each, an "Extension Period") by giving the
Executive written notice of its exercise of such option no less than 90 days
prior to the expiration of the then current term. (Such term of employment is
herein sometimes called the "Employment Term".)"
(b) Section 9 of the Employment Agreement is amended and restated to
read as follows:
"9. Covenants Not to Compete. (a) During the Covered Period (as
------------------------
defined below), the Executive shall not any where in North America, directly or
indirectly, with or without compensation, engage in, be employed by or control,
advise, manage, finance or receive any economic benefit from, or have any
interest (whether as a shareholder, director, officer, employee, subcontractor,
partner, consultant, agent or otherwise) in, any business, company, firm or
other entity which is engaged in, or conducts activities substantially similar
to or likely to be competitive with the business of the Company as conducted
from the Commencement Date until the date of termination of this Agreement (the
"Competitive Business"); provided, however, that nothing herein shall prohibit
the Executive from owning not more than five (5%) percent of the outstanding
stock of any publicly held corporation. Without limiting the foregoing, during
the Covered Period, the Executive shall not, in competition with the Competitive
Business, (A) solicit or deal with any supplier, contractor or customer of the
Company; (B) seek to persuade any employee of the Company or any of its
subsidiaries or divisions to discontinue his or her status or employment
therewith; or (C) hire or retain any employee of the Company or any of its
subsidiaries or divisions.
(b) For purposes of this Employment Agreement, the "Covered Period"
shall extend (i) from the Commencement Date until the date of termination of
this Agreement and for a period of three (3) years thereafter, if the Executive
shall terminate his employment with the Company, without cause, at any time
during the Employment Term (including during any Extension Period); or (ii) from
the Commencement Date until the date of termination of this Agreement and for a
period of one (1) year thereafter, if the Company shall exercise its option
<PAGE>
-2-
to extend the Executive's employment hereunder for an Extension Period and the
Executive shall determine not to so extend his employment with the Company.
(c) If the Executive shall continue to be employed by the Company
through December 31, 2004, the provisions of Section 9(a) above shall not apply
and, lieu thereof, the Executive agrees that, from the Commencement Date until
the date of termination of this Agreement and for a period of one (1) year
thereafter, the Executive shall not any where in North America, directly or
indirectly, on behalf of any business, company, firm or other entity which is
engaged in, or conducts activities substantially similar to or likely to be
competitive with the business of the Company as conducted from the Commencement
Date until the date of termination of this Agreement, (A) seek to persuade any
employee of the Company or any of its subsidiaries or divisions to discontinue
his or her status or employment therewith; or (B) hire or retain any employee of
the Company or any of its subsidiaries or divisions.
(d) In the event that the provisions of this Section 9 should
ever be deemed to exceed the time or geographic limitations or any other
limitations permitted by applicable law, then such provisions shall be deemed
amended to the maximum permitted by applicable law. The Executive specifically
acknowledges and agrees that (x) the remedy at law for any breach of the
foregoing covenants will be inadequate, and (y) the Company, in addition to any
other relief available to it, shall be entitled to temporary and permanent
injunctive relief in the event the Executive violates the provisions of this
Section 9."
Dated: December 11, 1998
PERISCOPE SPORTSWEAR, INC.
By: /s/ Scott Pianin
--------------------------
Name: Scott Pianin
Title: V.P.
/s/ Glenn Sands
-----------------------------
Glenn Sands
<PAGE>
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of July 1, 1998 between SCOTT PIANIN (the
"Executive") and PERISCOPE SPORTSWEAR, INC., a Delaware corporation (the
"Company").
1. Term of Agreement. Subject to the terms and conditions hereof, the term
-----------------
of employment of the Executive under this Employment Agreement shall be for the
period commencing on July 1, 1998 (the "Commencement Date") and terminating on
June 30, 2001, unless sooner terminated as provided in accordance with the
provisions of Section 6 hereof or extended in accordance with the provisions of
Section 6 hereof. (Such term of employment is herein sometimes called the
"Employment Term".
2. Employment. As of the Commencement Date, the Company hereby agrees to
----------
employ the Executive as Vice President and Chief Operating Officer and the
Executive hereby accepts such employment and agrees to perform his duties and
responsibilities hereunder in accordance with the terms and conditions
hereinafter set forth.
3. Duties and Responsibilities. Executive shall be Executive Vice
---------------------------
President and Chief Operating Officer during the Employment Term. Executive
shall report to and be subject to the direction of the President and shall
perform such duties consistent with his title and position as may be assigned to
him from time to time by the President. During the Employment Term, Executive
shall devote his full time, skill, energy and attention to the business of the
Company and shall perform his duties in a diligent, trustworthy, loyal and
businesslike manner.
<PAGE>
4. Compensation.
------------
(a) Base Compensation. The Company shall pay to Executive a salary at
the rate of $184,000 per year payable in such manner as it shall determine, but
in no event any less often than monthly, less withholding required by law and
other deductions agreed to by Executive.
(b) Incentive Compensation. The Company shall pay to Executive, as
additional compensation during each year of the Employment Term ("Incentive
Compensation"), the following amounts:
(i) One percent (1%) of the annual net sales of the Company
up to the sum of Five Million ($5,000,000.00) Dollars;
(ii) Two and one half percent (2 1/2%) of the annual net sales
of the Company in excess of Five Million ($5,000,000.00) Dollars; and
(iii) An additional one percent (1%) of annual net sales in
excess of $15,566,022. Should Executive's annual net sales exceed Nineteen
Million ($19,000,000.00) Dollars, then the amount described in this paragraph
4(b)(iii) shall be retroactively adjusted to reflect a two percent (2%)
Incentive Compensation rate for those annual net sales in excess of $15,566,022.
The percentage Incentive Compensation referenced herein shall not be
cumulative and shall apply only to Net Sales made to those accounts listed on
Schedule "A" annexed hereto as such schedule may be amended from time to time to
reflect additional customers of the Company secured and serviced by Executive.
Incentive Compensation shall be paid monthly. "Net Sales" as used herein
shall mean the gross invoice price of products actually sold and shipped by the
Company to its customers
2
<PAGE>
less any discounts, credits, return and chargebacks actually granted. In the
event goods are not shipped for any reason whatsoever, said goods shall not be
included within the term "net sales." All sales must be authorized by Glenn
Sands, in writing, prior to the accepting thereof. Any authorization of Glenn
Sands which is not granted or denied within seven (7) days shall be deemed
approved. In the event that goods are shipped subsequent to the expiration or
termination of this agreement for any reason whatsoever including a termination
for cause or death, Executive shall be entitled to receive any and all
compensations thereon as if this Agreement was in full force and effect for
orders received prior to said termination. In the absence of any agreement to
the contrary, any and all obligation to pay Incentive Compensation hereunder on
sales made by Executive subsequent to the expiration or termination of this
Agreement shall otherwise cease as of the date of termination.
There shall be no variance from the Incentive Compensation structure
provided by this Agreement without the express written agreement of the parties
hereto.
The Incentive Compensation rates listed herein do not apply to sales made
by the Company or its affiliates pursuant to various buying agent agreements
entered into between the Company (and/or its subsidiaries or affiliates) and its
clients. For purposes hereunder, the term "buying agent" shall reference those
situations wherein the Company in the ordinary course of business bills its
client only for a sales commission rather than for the actual goods sold. In
situations where the Company is acting as a buying agent and receiving solely a
commission, Executive shall receive a flat amount of Incentive Compensation at
the rate of one percent (1%) of the sales price of the goods sold. Such
Incentive Compensation is due and payable only when the Company itself receives
payment from the client. Incentive
3
<PAGE>
Compensation shall be limited solely to sales to those clients set forth in
Schedule "A" annexed hereto as such schedule may be amended from time to time as
set forth above.
With respect to Incentive Compensation earned under this Agreement during
1998, amounts earned and paid pursuant to Sections 6(a)(ii) and 6(c) of the
Consulting Agreement dated as of November 1, 1996 between Periscope I
Sportswear, Inc., a New York corporation, and S.R.P. Sales, Inc., a New York
corporation, shall be subtracted from amounts earned under this Section 4(b).
5. Expenses and Benefits.
---------------------
(a) The Company shall, consistent with its policy of reporting and
reimbursement of business expenses, reimburse Executive for such ordinary and
necessary business related expenses as shall be incurred by Executive in the
course of the performance of his duties under this Agreement.
(b) Executive shall be eligible to participate to the extent that he
qualifies in all benefit plans, including without limitation, pension, term life
insurance, hospitalization, medical insurance and disability plans as are made
available from time-to time to executives of the Company.
(c) Executive shall be entitled to four weeks of paid vacation
annually, which shall be taken in accordance with the procedures of the Company
in effect from time-to-time.
6. Termination.
-----------
(a) The Company shall have the right to terminate the employment of
the Executive under this Agreement for disability in the event Executive suffers
an injury, illness or incapacity of such character as to substantially disable
him from performing his duties
4
<PAGE>
hereunder for a period of more one hundred eighty (180) consecutive days upon
the Company giving at least thirty (30) days written notice of termination;
provided, however, that if the Executive is eligible to receive disability
payments pursuant to a disability insurance policy paid for by the Company, the
Executive shall assign such benefits to the Company for all periods as to which
he is receiving full payment under this Agreement.
(b) This Agreement shall terminate upon the death of Executive.
(c) The Company may terminate this Agreement at any time because of
(i) Executive's material breach of any term of this Agreement or (ii) the
willful engaging by the Executive in misconduct which is materially injurious to
the Company, monetarily or otherwise.
7. Revealing of Trade Secrets, etc. Executive acknowledges the interest of
-------------------------------
the Company in maintaining the confidentiality of information related to its
business and shall not at any time during the Employment Term or thereafter,
directly or indirectly, reveal or cause to be revealed to any person or entity
the supplier lists, customer lists or other confidential business information of
the Company; provided, however, that the parties acknowledge that it is not the
intention of this paragraph to include within its subject matter (a) information
not proprietary to the Company, (b) information which is then in the public
domain, or (c) information required to be disclosed by law.
8. Covenants Not to Compete. During the Employment Term the Executive
------------------------
shall not, directly or indirectly in any manner, engage in any business which
competes with any business conduced by the Company and will not directly or
indirectly own, manage, operate, join, control or participate in the ownership,
management, operation or control of, or be employed by or connected in any
manner with any corporation, firm or business that is so
5
<PAGE>
engaged, (provided, however, that nothing herein shall prohibit the Executive
from owning not more than three (3%) percent of the outstanding stock of any
publicly held corporation). In addition, during the Employment Term and for a
period of one year thereafter, the Executive shall not, directly or indirectly,
in any manner (i) persuade or attempt to persuade any employee of the Company to
leave the employ of the Company or to become employed by any other entity or
(ii) persuade or attempt to persuade any current or former customer or
contractor to reduce the amount of business it does or intends or anticipates
doing with the Company.
9. Opportunities. During his employment with the Company, and for one
-------------
year thereafter, Executive shall not take any action which might divert from the
Company any opportunity learned about by him during his employment with the
Company (including without limitation during the Employment Term) which would be
within the scope of any of the businesses then engaged in or planned to be
engaged in by the Company.
10. Survival. In the event that this Agreement shall be terminated, then
--------
notwithstanding such termination, the obligations of Executive pursuant to
Sections 7 and 8 of this Agreement shall survive such termination.
11. Contents of Agreement, Parties in Interest, Assignment, etc. This
-----------------------------------------------------------
Agreement sets forth the entire understanding of the parties hereto with respect
to the subject matter hereof. All of the terms and provisions of this Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
respective heirs, representatives, successors and assigns of the parties hereto,
except that the duties and responsibilities of Executive hereunder which are of
a personal nature shall neither be assigned nor transferred in whole or in part
by
6
<PAGE>
Executive. This Agreement shall not be amended except by a written instrument
duly executed by the parties.
12. Severability. If any term or provision of this Agreement shall be
------------
held to be invalid or unenforceable for any reason, such term or provision shall
be ineffective to the extent of such invalidity or unenforceabiltiy without
invalidating the remaining terms and provisions hereof, and this Agreement shall
be construed as if such invalid or unenforcable term or provision had not been
contained herein.
13. Notices. Any notice, request, instruction or other document to be
-------
given hereunder by any party to the other party shall be in writing and shall be
deemed to have been duly given when delivered personally or five (5) days after
dispatch by registered or certified mail, postage prepaid, return receipt
requested, to the party to whom the same is so given or made:
If to the Company
addressed to: Periscope Sportswear, Inc.
1407 Broadway
Suite 620
New York, NY 10018
with a copy to: Morse, Zelnick, Rose & Lander, LLP
450 Park Avenue
New York, New York 10022
Attn: George Lander, Esq.
If to Executive
addressed to: Scott Pianin
360 East 72/nd/ Street
New York, New York 10021
or to such other address as the one party shall specify to the other party in
writing.
7
<PAGE>
14. Counterparts and Headings. This Agreement may be executed in
-------------------------
one or more counterparts, each of which shall be deemed an original and all
which together shall constitute one and the same instrument. All headings are
inserted for convenience of reference only and shall not affect the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered as of the day and year first above written.
PERISCOPE SPORTWEAR, INC.
By: /s/ Glenn Sands
---------------------
GLENN SANDS
/s/ Scott Pianin
-----------------------
SCOTT PIANIN
8
<PAGE>
SCHEDULE A
Walmart No Name
B.J. Wholesale Norstan
Aldens Petrie Plus
Ann & Hope Ross Stores
C.R. Anthony Retail Spec.
Ames Sclottensteins
Army Stuarts
J. Byrons Sycamore
Behr Sears
Bealls Target
Bradlees Uptons
Caldors Vanity
Dress Barn Venture
Filene's Basement Vogue Body
Fred Meyer Warner
Family Dollar Winkleman's
Goody's Steinbachs
G&G Brauns
Gateway Hart
General Textile Sprouse
Grandpa Pigeons Variety Wholesale
Half Price Stores Van Heusen
Joyce Leslie Price Club
Kohl's Avon (Newport News)
Lane Bryant Margos
Limited Express Maurices
La Monts ARG
Marshalls Bob's Stores
Mervyns County Seat
Meijen Stein Mart
Mariposa The I.D.
Montgomery Ward Pamida
Nordstrom Penn Fashions
Newton QVC
Nany Women's World
Weiner Stores
Casual Corner
Casual Corner Outlet
Petite Sophisticate
August Max
9
<PAGE>
EXHIBIT 10.9.1
AMENDMENT TO EMPLOYMENT AGREEMENT
The undersigned parties hereby agree to amend the Employment
Agreement, dated as July 1, 1998 (the "Employment Agreement"), between Periscope
Sportswear, Inc. (the "Company") and Scott Pianin (the "Executive") as follows:
(a) Section 1 of the Employment Agreement is amended and restated to
read as follows:
"1. Term of Agreement. Subject to the terms and conditions hereof, the
-----------------
term of employment of the Executive under this Employment Agreement shall be for
the period commencing on July 1, 1998 (the "Commencement Date") and terminating
on December 31, 2002, unless sooner terminated as provided in accordance with
the provisions of Section 6 hereof; provided, however, that the Company shall
have the option to extend the Executive's employment hereunder for two
additional one year periods (each, an "Extension Period") by giving the
Executive written notice of its exercise of such option no less than 90 days
prior to the expiration of the then current term. (Such term of employment is
herein sometimes called the "Employment Term".)"
(b) Section 8 of the Employment Agreement is amended and restated to
read as follows:
"8. Covenants Not to Compete. (a) During the Covered Period (as
------------------------
defined below), the Executive shall not any where in North America, directly or
indirectly, with or without compensation, engage in, be employed by or control,
advise, manage, finance or receive any economic benefit from, or have any
interest (whether as a shareholder, director, officer, employee, subcontractor,
partner, consultant, agent or otherwise) in, any business, company, firm or
other entity which is engaged in, or conducts activities substantially similar
to or likely to be competitive with the business of the Company as conducted
from the Commencement Date until the date of termination of this Agreement (the
"Competitive Business"); provided, however, that nothing herein shall prohibit
the Executive from owning not more than five (5%) percent of the outstanding
stock of any publicly held corporation. Without limiting the foregoing, during
the Covered Period, the Executive shall not, in competition with the Competitive
Business, (A) solicit or deal with any supplier, contractor or customer of the
Company; (B) seek to persuade any employee of the Company, or any of its
subsidiaries or divisions to discontinue his or her status or employment
therewith; or (C) hire or retain any employee of the Company or any of its
subsidiaries or divisions.
(b) For purposes of this Employment Agreement, the "Covered Period"
shall extend (i) from the Commencement Date until the date of termination of
this Agreement and for a period of three (3) years thereafter, if the Executive
shall terminate his employment with the Company, without cause, at any time
during the Employment Term (including during any Extension Period); or (ii) from
the Commencement Date until the date of termination of this Agreement and for a
period of one (1) year thereafter, if the Company shall exercise its option
<PAGE>
-2-
to extend the Executive's employment hereunder for an Extension Period and the
Executive shall determine not to so extend his employment with the Company.
(c) If the Executive shall continue to be employed by the Company
through December 31, 2004, the provisions of Section 8(a) above shall not apply
and, lieu thereof, the Executive agrees that, from the Commencement Date until
the date of termination of this Agreement and for a period of one (1) year
thereafter, the Executive shall not any where in North America, directly or
indirectly, on behalf of any business, company, firm or other entity which is
engaged in, or conducts activities substantially similar to or likely to be
competitive with the business of the Company as conducted from the Commencement
Date until the date of termination of this Agreement, (A) seek to persuade any
employee of the Company or any of its subsidiaries or divisions to discontinue
his or her status or employment therewith; or (B) hire or retain any employee of
the Company or any of its subsidiaries or divisions.
(d) In the event that the provisions of this Section 8 should ever be
deemed to exceed the time or geographic limitations or any other limitations
permitted by applicable law, then such provisions shall be deemed amended to the
maximum permitted by applicable law. The Executive specifically acknowledges and
agrees that (x) the remedy at law for any breach of the foregoing covenants will
be inadequate, and (y) the Company, in addition to any other relief available to
it, shall be entitled to temporary and permanent injunctive relief in the event
the Executive violates the provisions of this Section 8."
Dated: December 11, 1998
PERISCOPE SPORTSWEAR, INC.
By: /s/ Glenn Sands
----------------------
Name:
Title: President
/s/ Scott Pianin
-----------------------
Scott Pianin
<PAGE>
EXHIBIT 10.10
PROMISSORY NOTE
$2,606,000. December 11, 1998
New York, New York
FOR VALUE RECEIVED, the undersigned, GLENN SANDS ("Maker"), an
individual residing at 2 Rio Vista Drive, Alpine, New Jersey 07620, hereby
promises to pay to the order of PERISCOPE SPORTSWEAR, INC., a Delaware
corporation, or its assigns ("Holder"), at 1407 Broadway, New York, New York
10018, or at such other place as may be designated by Holder, in legal tender of
the United States of America, the principal sum of TWO MILLION SIX HUNDRED SIX
THOUSAND DOLLARS ($2,606,000), in three annual installments as follows: (1) TWO
MILLION TWO THOUSAND DOLLARS ($2,002,000) shall be due and payable on December
31, 1999, (2) THREE HUNDRED TWO THOUSAND DOLLARS ($302,000) shall be due and
payable on December 31, 2000, and (3) THREE HUNDRED TWO THOUSAND DOLLARS
($302,000) shall be due and payable on December 31, 2001. This Note may be
prepaid in whole or in part at any time, at the option of Maker.
Except as otherwise provided herein, this Note is a non-interest
bearing note.
In the event Maker shall default in the due and punctual payment of
any principal installment on this Note when and as the same shall become due and
payable (an "Event of Default"), and such Event of Default shall continue for a
period of ten (10) days from the due date thereof (the "Date of Default"),
whether or not notice of default is given, then Holder may, at any time, at its
election, declare the entire principal amount then outstanding of this Note
immediately due and payable and, at any time thereafter, Holder may proceed to
collect the principal of and any interest on this Note then outstanding,
together with costs and expenses of collection (including reasonable attorneys'
fees) incurred by Holder in connection with a default under, or enforcement of
any provision of, this Note. In addition to the rights and remedies provided
above, all other rights and remedies provided by law shall be available to
Holder, and all rights and remedies shall be cumulative.
Following an Event of Default, Maker shall pay interest at the rate of
ten (10%) percent per annum on the principal amount then outstanding from the
Date of Default to the date of the actual payment thereof. Any payment hereunder
received by Holder after the Date of Default shall first be applied to the
accrued interest on the outstanding principal amount, and then to the
outstanding principal amount.
Maker hereby waives diligence, demand, presentment for payment, notice
of nonpayment, protest and notice of protest, and specifically consents to and
waives notice of any renewals or extensions of this Note, whether made to or in
favor of Maker or any other person or persons. Maker hereby expressly waives the
pleading of any statute of limitations as a
<PAGE>
defense to any demand against Maker under this Note. MAKER WAIVES THE RIGHT TO
TRIAL BY JURY IN ANY DISPUTE IN CONNECTION WITH THIS NOTE.
Notwithstanding anything in this Note to the contrary, the obligations
of Maker under this Note shall be absolute. Maker expressly and unconditionally
waives any and all rights to offset, deduct or withhold any payments or charges
due under this Note for any reason whatsoever.
Notwithstanding anything to the contrary contained in this Note, no
interest shall accrue or be payable hereunder that is in excess of the maximum
amount permitted under the applicable law relating to usury. Any interest that
is in excess of the maximum amount permitted under the applicable law relating
to usury shall be applied to reduce the outstanding principal balance hereof and
shall be deemed to represent a prepayment of principal hereunder.
The acceptance by Holder of any payment which is less than the total
of all amounts due and payable at the time of such payment shall not constitute
a waiver of Holder's rights or remedies at that time or at any subsequent time,
without the express written consent of Holder, except as and to the extent
otherwise provided by law.
The times for the performance of any obligation hereunder shall be
strictly construed, time being of the essence. Whenever any payment to be made
hereunder shall be stated to be due on a day which is not a Business Day (as
hereinafter defined), the payment shall be made on the next succeeding Business
Day and such extension of time shall be included in the computation of the
payment of interest hereunder. As used herein, the term "Business Day" means any
day excluding Saturday, Sunday and any day that is a legal holiday under the
laws of the State of New York or is a day on which banks located in New York
City are authorized by law or other governmental action to close.
No single or partial exercise of any power granted to Holder under
this Note or any other agreement between Holder and Maker shall preclude other
or further exercise thereof or the exercise of any other power. No delay or
omission on the part of Holder in exercising any right under this Note shall
operate as a waiver of such right or of any other right.
If any provisions of this Note, or the application thereof to any
circumstance, is found to be unenforceable, invalid or illegal, such provision
shall be deemed deleted from this Note or not applicable to such circumstance,
as the case may be, and the enforceability, validity or legality of the
remainder of this Note shall not be affected or impaired thereby.
Any notice to be given hereunder shall be in writing and sent by
certified or registered mail or by express courier or delivered by hand to the
address set forth at the head of this Note, or to such other address as either
Maker or Holder may hereafter duly designate in writing to the other.
-2-
<PAGE>
This Note shall be binding upon Maker, and his heirs and
administrators, and inure to the benefit of Holder, and its successors and
assigns.
This Note is subject to a letter agreement, dated the date hereof,
between Maker and GIANT GROUP, LTD. with respect to a possible one year
extension of a portion of a principal payment hereunder upon certain events.
This Note sets forth the entire agreement between Maker and Holder as
to the subject matter herein, and cannot be modified or discharged except by an
agreement in writing signed by Maker and Holder.
This Note shall be construed and enforced in accordance with, and
governed by, the laws of the State of New York.
/s/ Glenn Sands
_______________________________
Glenn Sands
-3-
<PAGE>
EXHIBIT 10.10.1
GIANT GROUP, LTD.
9000 Sunset Boulevard
Los Angeles, California 90069
December 11, 1998
Mr. Glenn Sands
2 Rio Vista Drive
Alpine, NJ 07620
Dear Mr. Sands:
Reference is made to a letter wherein you have agreed to indemnify
Periscope Sportswear, Inc. for certain taxes, a copy of which is annexed hereto
(the "Letter").
Reference is also hereby made to a promissory note made by you and payable
to Periscope in the principal amount of $2,606,000, a copy of which is annexed
hereto (the "Note").
GIANT Group, Ltd. and Periscope Sportswear, Inc. hereby agree with you that
if you are required to make any indemnification payment (a "Payment") pursuant
to the Letter prior to December 31, 1999, then, and in such event, the Note
shall be deemed amended to provide that (a) the principal amount payable on
December 31, 1999 shall be reduced by the lesser of (i) the amount of such
Payment made by you or (ii) $2,002,000 (the "Deferred Amount") and (b) the
principal amount due on December 31, 2000 shall be increased by such Deferred
Amount.
Except to the extent specifically provided for herein, the terms and
conditions of the Note shall remain in full force and effect.
Sincerely,
GIANT GROUP, LTD.
By: David Gotterer - Vice Chairman
----------------------------------------
PERISCOPE SPORTSWEAR, INC.
By: Scott Pianin - V P
----------------------------------------
Agreed to and Accepted:
/s/ Glenn Sands
- -----------------------
Glenn Sands
<PAGE>
EXHIBIT 10.11
PROMISSORY NOTE
$2,000,000. December 11, 1998
New York, New York
FOR VALUE RECEIVED, the undersigned, PERISCOPE SPORTSWEAR, INC., a
Delaware corporation ("Maker"), with principal executive offices located at 1407
Broadway, New York, New York 10018, hereby promises to pay to the order of GLENN
SANDS, an individual residing at 2 Rio Vista Drive, Alpine, New Jersey 07620, or
his assigns ("Holder"), at 1407 Broadway, New York, New York 10018, or at such
other place as may be designated by Holder, in legal tender of the United States
of America, the principal sum of TWO MILLION DOLLARS ($2,000,000) payable in
five annual installments of FOUR HUNDRED THOUSAND DOLLARS ($400,000) commencing
on December 1, 1999 and continuing through December 1, 2003. This Note may be
prepaid in whole or in part at any time, at the option of Maker.
Except as otherwise provided herein, this Note is a non-interest
bearing note.
In the event Maker shall default in the due and punctual payment of
any principal installment on this Note when and as the same shall become due and
payable (an "Event of Default"), and such Event of Default shall continue for a
period of ten (10) days from the due date thereof (the "Date of Default"),
whether or not notice of default is given, then Holder may, at any time, at his
election, declare the entire principal amount then outstanding of this Note
immediately due and payable and, at any time thereafter, Holder may proceed to
collect the principal of and any interest on this Note then outstanding,
together with costs and expenses of collection (including reasonable attorneys'
fees) incurred by Holder in connection with a default under, or enforcement of
any provision of, this Note. In addition to the rights and remedies provided
above, all other rights and remedies provided by law shall be available to
Holder, and all rights and remedies shall be cumulative.
Following an Event of Default, Maker shall pay interest at the rate of
ten (10%) percent per annum on the principal amount then outstanding from the
Date of Default to the date of the actual payment thereof. Any payment hereunder
received by Holder after the Date of Default shall first be applied to the
accrued interest on the outstanding principal amount, and then to the
outstanding principal amount.
Maker hereby waives diligence, demand, presentment for payment, notice
of nonpayment, protest and notice of protest, and specifically consents to and
waives notice of any renewals or extensions of this Note, whether made to or in
favor of Maker or any other person or persons. Maker hereby expressly waives the
pleading of any statute of limitations as a
<PAGE>
defense to any demand against Maker under this Note. MAKER WAIVES THE RIGHT TO
TRIAL BY JURY IN ANY DISPUTE IN CONNECTION WITH THIS NOTE.
Notwithstanding anything in this Note to the contrary, the obligations
of Maker under this Note shall be absolute. Maker expressly and unconditionally
waives any and all rights to offset, deduct or withhold any payments or charges
due under this Note for any reason whatsoever.
Notwithstanding anything to the contrary contained in this Note, no
interest shall accrue or be payable hereunder that is in excess of the maximum
amount permitted under the applicable law relating to usury. Any interest that
is in excess of the maximum amount permitted under the applicable law relating
to usury shall be applied to reduce the outstanding principal balance hereof and
shall be deemed to represent a prepayment of principal hereunder.
The acceptance by Holder of any payment which is less than the total
of all amounts due and payable at the time of such payment shall not constitute
a waiver of Holder's rights or remedies at that time or at any subsequent time,
without the express written consent of Holder, except as and to the extent
otherwise provided by law.
The times for the performance of any obligation hereunder shall be
strictly construed, time being of the essence. Whenever any payment to be made
hereunder shall be stated to be due on a day which is not a Business Day (as
hereinafter defined), the payment shall be made on the next succeeding Business
Day and such extension of time shall be included in the computation of the
payment of interest hereunder. As used herein, the term "Business Day" means any
day excluding Saturday, Sunday and any day that is a legal holiday under the
laws of the State of New York or is a day on which banks located in New York
City are authorized by law or other governmental action to close.
No single or partial exercise of any power granted to Holder under
this Note or any other agreement between Holder and Maker shall preclude other
or further exercise thereof or the exercise of any other power. No delay or
omission on the part of Holder in exercising any right under this Note shall
operate as a waiver of such right or of any other right.
If any provisions of this Note, or the application thereof to any
circumstance, is found to be unenforceable, invalid or illegal, such provision
shall be deemed deleted from this Note or not applicable to such circumstance,
as the case may be, and the enforceability, validity or legality of the
remainder of this Note shall not be affected or impaired thereby.
Any notice to be given hereunder shall be in writing and sent by
certified or registered mail or by express courier or delivered by hand to the
address set forth at the head of this Note, or to such other address as either
Maker or Holder may hereafter duly designate in writing to the other.
-2-
<PAGE>
This Note shall be binding upon Maker, and its successors and assigns,
and inure to the benefit of Holder, and his heirs and administrators.
This Note sets forth the entire agreement between Maker and Holder as
to the subject matter herein, and cannot be modified or discharged except by an
agreement in writing signed by Maker and Holder.
This Note shall be construed and enforced in accordance with, and
governed by, the laws of the State of New York.
PERISCOPE SPORTSWEAR, INC.
By: /s/ Scott Pianin
---------------------------
Name: Scott Pianin
Title: V.P
PAY TO THE ORDER OF BANKBOSTON, N.A.
/s/ Glenn Sands
Dec. 11, 1998
-3-
<PAGE>
EXHIBIT 10.12
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SALE, TRANSFER, PLEDGE,
HYPOTHECATION OR OTHER DISPOSITION OF THE SECURITIES EVIDENCED HEREBY OR ANY
PORTION THEREOF OR INTEREST THEREIN MAY NOT BE ACCOMPLISHED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND UNDER CALIFORNIA LAW, OR AN
OPINION OF COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY TO THE
EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED.
December ___, 1998
WARRANT CERTIFICATE
To Subscribe for and Purchase Common Stock of
GIANT GROUP, LTD.
75,000 Warrants
VOID AFTER December ___, 2003
-----------------------------
THIS WARRANT CERTIFICATE CERTIFIES that, for valuable consideration received,
L.H. Friend, Weinress, Frankson & Presson, Inc. or assigns, is the registered
holder of the number of Warrants set forth above (such number, as from time to
time to be adjusted as hereinafter provided) (individually, each a "Warrant",
and collectively, the "Warrants"). Each Warrant entitles the holder upon
exercise to subscribe for and purchase from GIANT GROUP, LTD., a Delaware
corporation (hereinafter called the "Company"), at the initial exercise price of
$7.25 per share (such price, as from time to time to be adjusted as hereinafter
provided, being hereinafter called the "Warrant Price"), at any time and from
time to time but not earlier than the Issue Date (as defined below) or later
than the Expiration Date (as defined below), one fully paid, nonassessable share
of Common Stock, $.01 par value, of the Company ("Common Stock"), subject
however, to the provisions and upon the terms and conditions hereinafter set
forth, including without limitation the provisions of Section 2 hereof. "Issue
Date" shall mean December ___, 1998. "Expiration Date" shall mean 5:00 p.m., Los
Angeles time, on December ___, 2003.
Page 1
<PAGE>
Section 1. Exercise of Warrant
Payment of Warrant Price
The Warrants may be exercised, at any time and from time to time (but not
earlier than the Issue Date or later than the Expiration Date), by the holder
hereof (hereinafter referred to as the "Warrantholder"), in whole or in part
(but not as to a fractional share of Common Stock), by the completion of the
subscription form attached hereto and by the surrender of the Warrants (properly
endorsed) at the Company's offices at 9000 Sunset Boulevard, l6/th/ Floor, Los
Angeles, CA 90069 (or at such other location as the Company may designate by
notice in writing to the Warrantholder at the address of the Warrantholder
appearing on the books of the Company), and by payment to the Company of the
Warrant Price, in cash or by certified or official bank check, for each share
being purchased. In the event of any exercise of the rights represented by this
Warrant, a certificate or certificates for the shares of Common Stock so
purchased, registered in the name of the Warrantholder, shall be delivered to
the Warrantholder within a reasonable time, after the rights represented by this
Warrant shall have been so exercised; and, unless this Warrant has expired or
has been exercised in full, a new Warrant representing the number of shares with
respect to which this Warrant shall not then have been exercised shall also be
issued to the Warrantholder within a reasonable time. With respect to any such
exercise, the Warrantholder shall for all purposes be deemed to have become the
Warrantholder of record of the number of shares of Common Stock evidenced by
such certificate or certificates from the date on which this Warrant was
surrendered and payment of the Warrant Price was made irrespective of the date
of delivery of such certificate, except that, if the date of such surrender and
payment is a date on which the stock transfer books of the Company are closed,
such person shall be deemed to have become the Warrantholder of such shares at
the close of business on the next succeeding date on which the stock transfer
books are open. No fractional shares shall be issued upon exercise of the
Warrants and no payment or adjustment shall be made upon any exercise on account
of any cash dividends on the Common Stock issued upon such exercise. If any
fractional interest in a share of Common Stock would, except for the provisions
of this Section 1, be delivered upon any such exercise, the Company, in lieu of
delivering the fractional share thereof, shall pay to the Warrantholder an
amount in cash equal to the current market price of such fractional interest as
determined in good faith by the Board of Directors of the Company.
Section 2. Adjustment of Number of Warrant Shares Issuable
Adjustment of Exercise Price and Number of Warrant Shares Issuable. The number
of shares of Common Stock issuable upon the exercise of each Warrant (the
"Warrant Number") is initially one. The Warrant Number is subject to adjustment
from time to time upon the occurrence of the events enumerated in, or as
otherwise provided in, this Section 2.
Page 2
<PAGE>
(a) Adjustment for Change in Capital Stock
If the Company:
(1) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock;
(2) subdivides or reclassifies its outstanding shares of Common Stock
into a greater number of shares;
(3) combines or reclassifies its outstanding shares of Common Stock
into a smaller number of shares; or
(4) issues by reclassification of its Common Stock any shares of its
capital stock;
then the Warrant Number in effect immediately prior to such action shall be
proportionately adjusted so that the holder of any Warrant thereafter exercised
may receive the aggregate number and kind of shares of capital stock of the
Company which he or it would have owned immediately following such action if
such Warrant had been exercised immediately prior to such action.
The adjustment shall become effective immediately after the record date in the
case of a dividend or distribution and immediately after the effective date in
the case of a subdivision, combination or reclassification.
Such adjustment shall be made successively whenever any event listed above shall
occur.
The Company shall not issue shares of Common Stock as a dividend or distribution
on any class of capital stock other than Common Stock unless (i) such dividend
or distribution is not prohibited and (ii) the Warrantholder also receives such
dividend or distribution on a ratable basis.
(b) When De Minimis Adjustment May Be Deferred
No adjustment in the Warrant Number need be made unless the adjustment would
require an increase or decrease of a least 0.5% in the Warrant Number. Any
adjustments that are not made shall be carried forward and taken into account in
any subsequent adjustment, provided that no such adjustment shall be deferred
--------
beyond the date on which a Warrant is exercised.
All calculations under this Section 2 shall be made to the nearest 1/100th of a
share.
Page 3
<PAGE>
(c) Reorganizations
In case of any capital reorganization, other than in the cases referred to in
Sections 2(a) hereof, or the consolidation or merger of the Company with or into
another corporation (other then a merger or consolidation in which the Company
is the continuing corporation and which does not result in any reclassification
of the outstanding shares of Common stock into shares of other stock or other
securities or property), or the sale of the property of the Company as an
entirety or substantially as an entirety (collectively such actions being
hereinafter referred to as "Reorganizations"), there shall thereafter be
deliverable upon exercise of any Warrant (in lieu of the number of shares of
Common Stock theretofore deliverable) the number of shares of stock or other
securities or property to which a holder of the number of shares of Common Stock
that would otherwise have been deliverable upon the exercise of such Warrant
would have been entitled upon such Reorganization if such Warrant had been
exercised in full immediately prior to such Reorganization. In case of any
Reorganization, appropriate adjustment, as determined in good faith by the Board
of Directors of the Company, whose determination shall be described in a duly
adopted resolution certified by the Company's Secretary or Assistant Secretary,
shall be made in the application of the provisions herein set forth with respect
to the rights and interests of the Warrantholder so that the provisions set
forth herein shall thereafter be applicable, as nearly as possible, in relation
to any shares or other property thereafter deliverable upon exercise of the
Warrants.
(d) Miscellaneous
For purposes of this Section 2, the term "shares of Common Stock" shall mean (i)
shares of any class of stock designated as Common Stock of the Company at the
date of this Agreement, and (ii) shares of any other class of stock resulting
from successive changes or reclassification of such shares consisting solely of
changes in par value, or from par value to no par value, or from no par value to
par value. In the event that at any time, as a result of an adjustment made
pursuant to this Section 2, the holders of Warrants shall become entitled to
purchase any securities of the Company other than, or in addition to, shares of
Common Stock, thereafter the number or amount of such other securities so
purchasable upon exercise of each Warrant shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Warrant Shares contained in subsections (a)
through (h) of this Section 2, inclusive, and the provisions of Sections 2, 3,
and 4, with respect to the Warrant Shares or the Common Stock shall apply on
like terms to any such other securities.
(e) Notice of Adjustment
Upon any adjustment of the Warrant Number, then and in each such case the
Company shall give written notice thereof, by first-class mail, postage prepaid,
addressed to the Warrantholder at the address of such Warrantholder as shown on
the books of the Company, which notice shall state the Warrant shares resulting
from such adjustment, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
Page 4
<PAGE>
(f) Stock to Be Reserved
The Company will at all times reserve and keep available out of its authorized
Common Stock or its treasury shares, solely for the purpose of issuance upon the
exercise of the Warrants as herein provided, such number of shares of Common
Stock as shall then be issuable upon the exercise of the Warrants. The Company
covenants that all shares of Common stock which shall be so issued shall be duly
and validly issued and fully paid and nonassessable and free from all taxes,
liens and charges with respect to the issue thereof, and, without limiting the
generality of the foregoing, the Company covenants that it will from time to
time take all such action as may be required to ensure that the par value per
share of the Common Stock is at all times equal to or less than the effective
Warrant Price. The Company will take all such action as may be necessary to
ensure that all such shares of Common Stock may be so issued without violation
of any applicable law or regulation, or of any requirements of any national
securities exchange or automated quotation system upon which the Common Stock of
the Company may be listed. The Company will not take any action which results in
any adjustment of the Warrant Price if the total number of shares of Common
Stock issued and issuable after such action upon exercise of the Warrant would
exceed the total number of shares of Common Stock then authorized by the
Company's Articles of Incorporation. The Company has not granted and will not
grant any right of first refusal with respect to shares issuable upon exercise
of this Warrant, and there are no preemptive rights associated with such shares.
The Company agrees that so long as any Warrants remain unexercised, it will not
grant warrants to purchase its Common Stock to any party that (i) give such
party demand registration rights which are exercisable in less than one year
from the date of the grant of such warrants, (ii) give such party demand
registration rights that are senior to those registration rights granted to the
Warrants hereunder or (iii) otherwise impair the registration or other rights
granted to the Warrants hereunder, in each case without notification to and
consent of the Warrantholder which consent shall not be
(g) Issue Tax
The issuance of certificates for shares of Common Stock upon exercise of any
Warrant shall be made without a charge to the Warrantholder for any issuance tax
in respect thereof, provided that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the Warrantholder.
(h) Closing of Books
The Company will at no time close its transfer books against the transfer of the
shares of Common Stock issued or issuable upon the exercise of this Warrant in
any manner which interferes with the timely exercise of this Warrant.
Page 5
<PAGE>
Section 3. Registration Rights
(a) Demand Registration
For purposes of Section 3 only, the "Warrantholders" shall mean the holders of
the L.H. Friend, Weinress, Frankson and Presson, Inc.,_________________________
Warrants or their assigns. By operation of a majority, the Warrantholders shall
have the right, at any time, but not earlier than eighteen (18) months from the
Issue Date or later than the Expiration Date, to make written request of the
Company to register under the rules and regulations (the "Regulations") of the
Securities and Exchange Commission (the "SEC") all shares of Common Stock to be
purchased by the Warrantholders pursuant to the terms and conditions of such
Warrants (the "Registrable Stock"). The Registrable Stock specified in such
request or a request pursuant to Section 3(c) hereof is referred to herein as
the "Subject Stock." Promptly upon receipt of such request the Company shall
commence preparing and thereafter file with the SEC a preliminary prospectus
under cover of Form S-3, if the Company is then eligible to utilize such form,
or Form S-1 or such other appropriate form, if the Company is not eligible to
utilize Form S-3, for the registration of the Subject Stock ("registration
statement") and use its best efforts to cause such registration statement to
become effective (including, without limitation, filing post-effective
amendments, appropriate qualifications under applicable blue sky or other state
securities laws, and appropriate compliance with the Regulations) as soon as
practicable to permit or facilitate the sale and distribution of the Subject
Stock. Immediately upon receipt of a request for registration pursuant to this
Section 3(a), the Company shall notify the Warrantholders and each
Warrantholder shall be permitted to include shares of Common Stock in such
registration. The Company is obligated to effect only one (1) such registration
pursuant to this Section 3(a) of the Warrantholders certificates.
Notwithstanding the provisions of this Section 3(a), if the Company shall
furnish to each of the Warrantholders a certificate signed by the Chief
Executive Officer of the Company stating that in the good faith judgment of the
Board of Directors of the Company it would be seriously detrimental to the
Company and its shareholders for such a registration statement to be filed and
it is therefore essential to defer a filing of such registration statement, the
Company shall have the right to defer such filing for a period of not more than
one hundred twenty (120) days after receipt of the request of the Warrantholders
to effect such a registration; provided, however, that the Company may not
utilize this right more than once; and provided, further, that the majority of
the Warrantholders may, at any time following the receipt of such certificate,
in writing, withdraw such request for such registration and therefore preserve
the right provided in this Section 3(a) for the Warrantholders.
If the Warrantholders otherwise elect to withdraw such request for registration
and therefore preserve the right provided in this Section 3(a), then the
Warrantholders must pay to the Company the costs and expenses incurred by the
Company in connection with such registration
Page 6
<PAGE>
request that would not have otherwise been incurred by the Company but for the
registration request.
The Company shall not be required to file any registration statement pursuant to
this Section 3 hereof (i) during any period when a registration statement of the
Company is currently on file with the Securities and Exchange Commission
provided that during such period the Company is diligently working to cause such
registration statement to become effective or (ii) within (90) days after the
effective date of any earlier registration statement filed by the Company, and
(iii) the Company shall have no obligation pursuant to this Section if at the
time the registration statement is proposed to be filed the Warrantholders may
freely sell the shares of Common Stock issuable upon exercise of this Warrant
pursuant to the Regulations of the SEC.
(b) Preparation of Documents
Prior to filing a registration statement or any amendments or supplements
thereto required hereby, the Company will furnish to a single counsel selected
by the Warrantholders copies of all documents proposed to be filed, which
documents will be subject to the timely review of such counsel. In connection
therewith, the Company shall prepare and file a registration statement to effect
such registration. The Warrantholders agrees to provide all such information and
materials and take all such action as may be reasonably required in order to
permit the Company to comply with all applicable requirements of the SEC and to
obtain any desired acceleration of the effective date of such registration
statement.
(c) Piggyback Registration
If (but without any obligation to do so) the Company proposes to register with
the SEC any of the Common Stock under the Regulations of the SEC (other than
pursuant to a request under Section 3(a) and other than securities to be issued
pursuant to a stock option or other employee benefit or similar plan, or in
connection with merger or an acquisition), the Company shall, as promptly as
practicable, give written notice to the Warrantholder (and the holders of Common
Stock issued upon the exercise of any of the Warrants) of its intention to
effect such registration. If, within 20 days after receipt of such notice and
after the Issue Date but before the Expiration Date, the Warrantholder submits a
written request to the Company specifying the amount of Registrable Stock that
the Warrantholder proposes to sell, the Company shall include the shares
specified in such request in such registration statement (and any related
qualification under blue sky laws or other compliance) and the Company shall
keep each such registration statement in effect and maintain compliance with
each federal and state law and regulation as set forth in Section 3(d);
provided, however, that inclusion in such registration statement shall be
subject to the following terms and conditions: (i) such shares need not be
included in any underwritten offering if the managing underwriter determines in
its best judgment that their inclusion would impair the success of the offering;
(ii) the Company shall bear all costs of registration, sale of the shares and
the fees and expense (if any) of a single legal counsel to the Warrantholders
other than underwriting discounts or commissions and (iii) the Company shall
have no obligation pursuant to
Page 7
<PAGE>
this Section if at the time the registration statement is proposed to be filed
the Warrantholders may freely sell the shares of Common Stock issuable upon
exercise of this Warrant pursuant to the Regulations of the SEC.
(d) Covenants of the Company
In connection with any offering of Subject Stock registered pursuant to this
Warrant, the Company shall (a) furnish to the Warrantholder such number of
copies of any registration statement (including any preliminary offering
circular) as it may reasonably request in order to effect the offering and sale
of the Subject Stock to be offered and sold, but only while the Company shall be
required under the provisions hereof to cause the registration statement to
remain current, (b) take such action as shall be desirable or necessary to
qualify the Subject Stock covered by such registration statement under such blue
sky or other state securities laws for offer and sale as the Warrantholder shall
reasonably request, and (c) keep the Warrantholder advised in writing as to the
initiation of each registration and as to the completion thereof. Upon any
registration becoming effective pursuant to this Section 3, the Company shall
use its best efforts to: (i) keep such registration statement current for a
period of 120 days if such registration is filed on Form S-3 and otherwise for a
period of 90 days; (ii) prepare and file with the SEC such amendments and
supplements to such registration statement as may be necessary to comply with
the provisions of the Regulations of the SEC with respect to the disposition of
all securities covered by such registration statement; (iii) cause all such
Subject Stock registered pursuant to such registration statement to be listed on
each securities exchange or automated quotation system on which the Common Stock
is then listed or quoted; (iv) provide a transfer agent and registrar for all
Subject Stock registered pursuant to such registration statement and CUSIP
number for all such Subject Stock, in each case not later than the effective
date of such registration and (v) otherwise comply with all applicable rules and
regulations of the SEC.
(e) Sales by the Company
In connection with any offering of Subject Stock pursuant to Section 3(a), the
Company agrees not to effect any public sale or distribution of Common Stock for
the seven-day period preceding, and the 90-day period beginning on, the
effective date of any such registration.
(f) Expenses
With respect to the registration of Subject Stock pursuant to Section 3(a),
together with any inclusion of the Subject Stock in a so-called piggyback
registration pursuant to Section 3(c), the Company will pay all expenses
incident to its performance of or compliance with this Section 3 including,
without limitation, all registration and filing fees, fees and expenses of
compliance with securities or blue sky laws, printing expenses, messenger,
telephone and delivery expenses, and fees and disbursements of its counsel and
independent certified public accountants. The Warrantholder will be responsible
for any stock transfer taxes and broker's fees, all internal
Page 8
<PAGE>
management, personnel and administrative costs of the Warrantholder, if any,
incurred by it in connection with effecting any sales of the Warrantholder's
Common Stock.
(g) Indemnification
The Company will indemnify, to the maximum extent permitted by law, the
Warrantholder, its officers and directors and each person who controls the
Warrantholder (within the meaning of the Regulation of the SEC) against all
losses, claims, damages, liabilities and expenses (or actions, proceedings or
settlements in respect thereof) caused by, arising out of or based on any untrue
or alleged untrue statement of a material fact contained in any registration
statement (or any amendment or supplement thereto) of the Company relating to
the sale of Subject Stock registered pursuant to this Section 3, or any
materials incorporated by reference therein, filed with the SEC, or any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as the same are caused by or contained in any information furnished in
writing to the Company by the Warrantholder expressly for use therein; provided,
however, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage, liability or expense arises out of or is
based upon an untrue statement or alleged untrue statement or omission made in
any preliminary prospectus if (i) such Warrantholder failed to send or deliver a
copy of the prospectus with or prior to the delivery of written confirmation of
the sale of Subject Stock and (ii) the prospectus would have completely
corrected such untrue statement or omission; and provided further that the
Company shall not be liable in any such case to the extent that any such loss,
claim, damage, liability or expense arises out of or is based upon an untrue
statement or alleged untrue statement, omission or alleged omission in the
prospectus, if such untrue statement or alleged untrue statement, omission or
alleged omission is completely corrected in an amendment or supplement to the
prospectus and if, having previously been furnished by or on behalf of the
Company with copies of the prospectus as so amended or supplemented, such
Warrantholder thereafter fails to deliver such prospectus as so amended or
supplemented prior to or concurrently with the sale of Subject Stock to the
person asserting such loss, claim, damage, liability or expense who purchased
such Subject Stock which is the subject thereof from such Warrantholder.
The Warrantholder severally agrees to indemnify and hold harmless the Company,
its directors and officers and each person, if any, who controls the Company
within the meaning of either Section 15 of the Securities Act of 1933, as
amended, or Section 20 of the Securities Exchange Act of 1934, as amended, to
the same extent as the foregoing indemnity from the Company to such
Warrantholder, but only with respect to information relating to such
Warrantholder furnished in writing by such Warrantholder expressly for use in
any registration statement or prospectus, or any amendment or supplement
thereto, or any preliminary prospectus. In case any action or proceeding shall
be brought against the Company or its directors or officers or any such
controlling person, in respect of which indemnity may be sought against a holder
of the Subject Stock, such holder shall have the rights and duties given the
Company and the Company or its directors or officers or such controlling person
shall have the rights and duties given to the Warrantholder by the preceding
paragraph.
Page 9
<PAGE>
Any person entitled to indemnification under this Section 3(g) will (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification and (ii) unless in such indemnified party's
reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party. If such defense is assumed, the
indemnifying party will not be subject to any liability for any settlement made
by the indemnified party without its consent (but such consent will not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable
judgement of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
The indemnifications set forth in this Section 3(g) shall survive the
termination or expiration of this Warrant.
Section 4. Notices of Record Dates
In the event of:
(1) any taking by the Company of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are entitled
to receive any dividend or other distribution (other than cash dividends out of
earned surplus), or any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive any right to sell shares of stock of any class or any other right, or
(2) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer of all or
substantially all the assets of the Company to or consolidation or merger of the
Company with or into any other corporation or entity, or
(3) any voluntary or involuntary dissolution, liquidation or winding-up
of the Company, then and in each such event the Company will give notice to the
Warrantholder specifying (i) the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and stating the amount
and character of such dividend, distribution or right, and (ii) the date on
which any such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding-up is to take place,
and the time, if any is to be fixed, as of which the Warrantholders of record
will be entitled to exchange their shares of Common Stock for securities or
other property deliverable upon such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding-up. Such
Page 10
<PAGE>
notice sha11 be given at least 20 days and not more than 90 days prior to the
date therein specified, and such notice shall state that the action in question
or the record date is subject to the effectiveness of a registration statement
under the Securities Act or to a favorable vote of stockholders, if either is
required.
Section 5. No Shareholder Rights or Liabilities
This Warrant shall not entitle the Warrantholder to any voting rights or other
rights as a shareholder of the Company. No provision hereof, in the absence of
affirmative action by the Warrantholder to purchase shares of Common Stock, and
no mere enumeration herein of the rights or privileges of the Warrantholder
shall give rise to any liability of such Warrantholder for the Warrant Price or
as a stockholder of the Company, whether such liability is asserted by the
Company or by creditors of the Company.
Section 6. Lost, Stolen, Mutilated or Destroyed Warrant
If this Warrant is lost, stolen, mutilated or destroyed, the Company may, on
such terms, including indemnification, as it may in its discretion reasonably
impose (which shall, in the case of a mutilated Warrant, include the surrender
thereof), issue a new Warrant of like denomination and tenor as the Warrant so
lost, stolen, mutilated or destroyed. Any such new Warrant shall constitute an
original contractual obligation of the Company, whether or not the allegedly
lost, stolen, mutilated or destroyed Warrant shall be at any time enforceable by
anyone.
Section 7. Notices
All notices, requests and other communications required or permitted to be given
or delivered hereunder shall be in writing, and shall be delivered, or shall be
sent by certified or registered mail, postage prepaid and addressed, if to the
Warrantholder to such Warrantholder at the address shown on such Warrantholder's
Warrant or at such other address as shall have been furnished to the Company by
notice from such Warrantholder. All notices, requests and other communications
required or permitted to be given or delivered hereunder shall be in writing,
and shall be delivered, or shall be sent by certified or registered mail,
postage prepaid and addressed to the Company at the Company's Address set forth
below; Attention: Secretary or at such other address as shall have been
furnished to the Warrantholder by notice from the Company. For purposes of this
warrant:
The Address of the Holder: L.H. Friend, Weinress, Frankson & Presson, Inc.
3333 Michelson Drive
Suite 650
Irvine, CA 92612
Page 11
<PAGE>
The Address of the Company: GIANT GROUP, LTD.
9000 Sunset Boulevard, 16/th/ Floor
Los Angeles, CA 90069
Section 8. Transfer
This Warrant and all rights hereunder may be transferred, in whole or in part,
upon surrender of this Warrant properly endorsed and upon payment of any
necessary transfer tax or other governmental charge imposed upon such transfer.
Upon any partial transfer the Company will issue and deliver to the
Warrantholder a new Warrant or Warrants with respect to the shares of Common
Stock not so transferred.
Section 9. Amendments and Waivers
This Warrant and any term hereof may be changed, waived, discharged or
terminated only by an instrument in writing signed by the party against which
enforcement of such change, waiver, discharge or termination is sought.
Section l0. Severability
If one more provisions of this Warrant are held to be unenforceable under
applicable law, such provision shall be excluded from this Warrant, and the
balance of this Warrant shall be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms.
Section 11. Governing Law
This Warrant shall be governed by and construed under the laws of the State of
California.
Section 12. Headings
The headings in this Warrant are for purposes of reference only and shall not
limit or otherwise affect any of the terms hereof.
Page 12
<PAGE>
IN WITNESS WHEREOF, GIANT GROUP, LTD. has executed this Warrant on and as of the
day and year first above written.
GIANT GROUP, LTD.
By:_______________________
Burt Sugarman
President and CEO
Attest:
- --------------------------
Name
Title
Page 13
<PAGE>
SUBSCRIPTION FORM TO BE EXECUTED
UPON EXERCISE OF THIS WARRANT
December___, 1998
GIANT GROUP, LTD.
The undersigned, pursuant to the provisions set forth in the Warrant, hereby
agrees to subscribe for and purchase __________________ shares of Common Stock
covered by such Warrant, and herewith tenders $_______________________ in full
payment of the purchase price for such shares.
By_________________________________
L.H. Friend, Weinress, Frankson &
Presson, Inc.
3333 Michelson Drive
Suite 650
Irvine, CA 92612
Page 14
<PAGE>
EXHIBIT 21
GIANT GROUP, LTD.
SUBSIDIARIES AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
Corporation State of Incorporation Ownership
----------- ---------------------- ---------
<S> <C> <C>
KCC Delaware Company Delaware 100%
Periscope Sportsware, Inc. Delaware 100%
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated March 12, 1999, (except with respect to the matter discussed in
Note 25, as to which the date is March 25, 1999) on GIANT GROUP, LTD. and
subsidiaries' consolidated financial statements and related schedules for the
year ended December 31, 1998, 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, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S 1998 INCOME STATEMENT AND BALANCE SHEET AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,226
<SECURITIES> 7,797
<RECEIVABLES> 4,752
<ALLOWANCES> 0
<INVENTORY> 12,438
<CURRENT-ASSETS> 32,797
<PP&E> 2,707
<DEPRECIATION> 724
<TOTAL-ASSETS> 64,560
<CURRENT-LIABILITIES> 13,253
<BONDS> 0
0
0
<COMMON> 73
<OTHER-SE> 49,748
<TOTAL-LIABILITY-AND-EQUITY> 64,560
<SALES> 1,143
<TOTAL-REVENUES> 4,699
<CGS> 1,469
<TOTAL-COSTS> 7,707
<OTHER-EXPENSES> (2,855)
<LOSS-PROVISION> 1,168
<INTEREST-EXPENSE> 107
<INCOME-PRETAX> (1,428)
<INCOME-TAX> (1,921)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 493
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
