-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CRiLggWKWvpjpFz+oVRDuGybbZLxtEHpOzGDKjibNDWZvug5TmJMzioE/d79vDaE uRZpxCgw+wyw1VkmJN7oOA== 0000944209-99-000427.txt : 19990402 0000944209-99-000427.hdr.sgml : 19990402 ACCESSION NUMBER: 0000944209-99-000427 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GIANT GROUP LTD CENTRAL INDEX KEY: 0000041296 STANDARD INDUSTRIAL CLASSIFICATION: [9995] IRS NUMBER: 230622690 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04323 FILM NUMBER: 99582321 BUSINESS ADDRESS: STREET 1: 9000 SUNSET BLVD. STREET 2: 16TH FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90069 BUSINESS PHONE: 3102735678 MAIL ADDRESS: STREET 1: 9000 SUNSET BLVD. STREET 2: 16TH FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90069 FORMER COMPANY: FORMER CONFORMED NAME: GIANT PORTLAND & MASONRY CEMENT CO DATE OF NAME CHANGE: 19850610 FORMER COMPANY: FORMER CONFORMED NAME: GIANT PORTLAND CEMENT CO DATE OF NAME CHANGE: 19770921 10-K 1 FORM 10-K 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
Name of Each Exchange Title of Class on Which Registered -------------- ------------------- 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 ----
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. 1 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 2 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 3 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. 4 NARRATIVE DESCRIPTION OF BUSINESS Periscope-Women's and Children's Apparel Operating Strategy - ------------------- 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 - ---------------- 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 - -------- 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 5 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 - --------- 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 - -------------------- 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. 6 NARRATIVE DESCRIPTION OF BUSINESS (cont.) Trademarks - ---------- 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 - ---------------------------------------- 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. 7 NARRATIVE DESCRIPTION OF BUSINESS (cont.) Yarn Sourcing - ------------- 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 - -------- 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 - -------------------- 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 - -------- 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 - ------- 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 - ----------------- 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. 8 NARRATIVE DESCRIPTION OF BUSINESS (cont.) Shipping and Delivery of Finished Products - ------------------------------------------ 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 - ---------------- 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 - -------- 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 - ------------------------------- 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 - ------------ 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 - ------------ 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, 9 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 - ----------------------- 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 - ---------------------------------------------- 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 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 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 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 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 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 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 ---------------------------
1998 1997 QUARTER High Low High Low - ------- ---- --- ----- --- 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
16 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.
Year Ended December 31, 1994 1995 1996 1997 1998 - -------------------------------------------------------------------------------------------------------------------------------- Income Statement Data: (Dollars in thousands, except per share amounts) 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
(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 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 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 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 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 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 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)
1996 1997 1998 ----------- ---------- ----------- 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 =========== ========== ===========
The accompanying notes are an integral part of these financial statements. 23 GIANT GROUP, LTD. CONSOLIDATED BALANCE SHEETS As of December 31, 1997 and 1998 (Dollars in thousands, except per share amounts)
1997 1998 ---------- ----------- 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 ========== ===========
The accompanying notes are an integral part of these financial statements. 24 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)
1996 1997 1998 ----------- ---------- ----------- 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 =========== ========== ===========
The accompanying notes are an integral part of these financial statements. 25 GIANT GROUP, LTD. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years ended December 31, 1996, 1997 and 1998 (Dollars in thousands)
Capital in Common Other Total Common Excess of Stock in Retained Comprehensive Comprehensive Stock Par Value Treasury Earnings Income (Loss) Income (Loss) ---------- ---------- ----------- ---------- ------------- ------------- 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) ========== ========== =========== ========== ============= =============
The accompanying notes are an integral part of these financial statements. 26 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 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: 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
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 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 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 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.
12 Months Ended 12/31/97 12/31/98 -------- -------- Net sales $ 87,957 $ 76,043 Net loss 5,872 3,544 ========= ========= Net loss per share: Basic $ 1.39 $ .85 ========= ========= Diluted $ 1.39 $ .85 ========= =========
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:
Year Ended 12/31/96 ---------- 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 =========
31 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:
For the year ended 1996 ----------------------- Net Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ 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 ======== ========= ====== For the year ended 1997 ----------------------- Net Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic and Diluted Loss per Share - -------------------------------- Loss available to common stockholders $ (4,618) 3,260,000 $(1.42) ======== ========= ====== For the year ended 1998 ----------------------- Net Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ 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 ======== ========= ======
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.
1996 1997 1998 ---- ---- ---- Stock options - - 2,101,000 Warrants - - 75,000
32 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:
Available Unrealized Deferred Tax Decrease for Sale (1998) Fair Value Cost Loss Asset, Net In Equity - --------------- ---------- ---- ---------- ------------ --------- 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 ======= ======= ===== ===== ===== Trading Securities (1998) Fair Value Cost - ----------------- ---------- ---- Corporate Bonds $ 2,609 $ 2,605 ======= =======
33 GIANT GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 6. Marketable Securities (cont.) -----------------------------
Available Unrealized Deferred Tax Increase for Sale (1997) Fair Value Cost Gain Liability, Net In Equity - --------------- ---------- ---- ---------- -------------- --------- 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 ======= ======= ======= ======= ======= Trading Securities (1997) Fair Value Cost - ----------------- ---------- ---- Corporate Bonds $ 3,957 $ 3,991 ======= =======
The maturities for corporate and U.S. government bonds at December 31, 1997 and 1998 are as follows:
1997 1998 -------------------- --------------------- Fair Value Cost Fair Value Cost ---------- -------- ---------- -------- 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 ====== ====== ====== ======
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: Raw materials....................... $ 6,686 Work-in-process..................... 2,218 Finished goods...................... 3,534 ------- Total inventories............... $12,438 =======
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 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:
Financial position at December 31, 1997 - ---------------------------------- ---------- 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 =========
35 GIANT GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 8. Investment in Affiliate (cont.) -------------------------------
Operating results for the years ended December 31, 1996 1997 - -------------------------------------------------- ----------- ----------- 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) ======== =========
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 GIANT GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 10. Property and Equipment ----------------------
At December 31, 1997 1998 --------------- ---- ---- 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 ======= =======
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: 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 ----
37 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: 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 -------
13. Income Taxes ------------ The benefit for income taxes is comprised of the following:
For the year ended December 31, 1996 1997 1998 - ------------------------------- ------- ------- ------- 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 ======= ======= =======
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.
For the year ended December 31, 1996 1997 1998 - ------------------------------- ------- ------- ------- 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 ======= ======= =======
38 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:
At December 31, 1997 1998 - --------------- ---- ---- 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 ======== ========
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 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: 1999 $1,186 2000 1,082 2001 821 2002 347 2003 102
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 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 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:
Year ended December 31, 1996 1997 1998 ------------------------------------- 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
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:
Weighted Weighted Weighted Average Average Average 1996 Exercise 1997 Exercise 1998 Exercise Shares Price Shares Price Shares Price ------ -------- ------ -------- ------ -------- 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
42 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:
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 --------------- ------------- ----------- --------- ------------- --------- $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 ========= =========
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 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 -------------------------------------------------
For the years ended December 31 1996 1997 1998 ---- ---- ---- 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 =======
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 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 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 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 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 GIANT GROUP, LTD. QUARTERLY FINANCIAL DATA (Dollars in thousands, except per share amounts) (Unaudited)
Quarter Ended March 31 June 30 September 30 December 31 - -------------------------------------------------------------------------- -------------- ---------------- ------------------- 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 ============ ============== ================ ==================
(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.
Quarter Ended March 31 June 30 September 30 December 31 - -------------------------------------------------------------------------- -------------- ---------------- ------------------- 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 ============ ============== ================ ==================
(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 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:
Page Reference Form 10-K -------------- 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
(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 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 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 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.
Schedule Page -------- ---- II Valuation and Qualifying Accounts at December 31, 1998............................... 56 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.
53 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 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 GIANT GROUP, LTD. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNT (Dollars in thousands)
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 - ---------------------------------------------------------------------------------------------------------------- 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 =============================================================================
56 EX-10.7 2 EMPLOYMENT AGREEMENT DATED 12/3/98 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: 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- 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- 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. -4- 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, -5- 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 -6- 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 -7- 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 -8- 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- 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- 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- 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. -12- 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 -13- 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 -14- 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 -15- 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- 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- 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- 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 -19- 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. -20- 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. -21- 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. -22- 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 -23- EX-10.8 3 EMPLOYMENT AGREEMENT DATED 1/1/98 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 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 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 (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 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 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 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 EX-10.8.1 4 AMENDMENT DATED 12/11/98 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 -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 EX-10.9 5 EMPLOYMENT AGREEMENT DATED 1/1/98 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. 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 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 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 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 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 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 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 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 EX-10.9.1 6 AMENDMENT DATED 12/11/98 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 -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 EX-10.10 7 PROMISSORY NOTE OF GLENN SANDS 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 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- 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- EX-10.10.1 8 PERISCOPE LETTER TO GLENN SANDS 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 EX-10.11 9 PROMISSORY NOTE OF PERISCOPE 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 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- 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- EX-10.12 10 FORM OF WARRANT AGREEMENT 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 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 (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 (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 (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 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 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 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 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 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 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 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 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 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 EX-21 11 LIST OF SUBSIDIARIES EXHIBIT 21 GIANT GROUP, LTD. SUBSIDIARIES AS OF DECEMBER 31, 1998
Corporation State of Incorporation Ownership ----------- ---------------------- --------- KCC Delaware Company Delaware 100% Periscope Sportsware, Inc. Delaware 100%
EX-23.1 12 CONSENT OF ARTHUR ANDERSEN 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 EX-27 13 FINANCIAL DATA SCHEDULE
5 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. 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 4,226 7,797 4,752 0 12,438 32,797 2,707 724 64,560 13,253 0 0 0 73 49,748 64,560 1,143 4,699 1,469 7,707 (2,855) 1,168 107 (1,428) (1,921) 0 0 0 0 493 .15 .15
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