<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for the Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
</TABLE>
GROUND ROUND RESTAURANTS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $.16 2/3 per share
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
1,841,269 shares of Common Stock, representing the number of shares to
be acquired pursuant to the transaction and being equal to the total
number of outstanding shares (11,173,421) less shares previously
acquired by GRR Merger Corp. and GRR Holdings, LLC (9,332,152)
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$1.65, as provided in Agreement and Plan of Merger
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$3,038,093.85
------------------------------------------------------------------------
(5) Total fee paid:
$607.62
------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE> 2
[GROUND ROUND LETTERHEAD]
November 12, 1997
Dear Ground Round Shareholder:
I am pleased to invite you to attend the Special Meeting of Shareholders of
Ground Round Restaurants, Inc. ("the Company"), to be held on December 2, 1997,
at 10 a.m., local time, at the Ground Round Restaurant located at Prudential
Ct., 800 Boylston Street, Boston, Massachusetts. At the meeting you will be
asked to consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of August 29, 1997 (the "Merger Agreement"), which
provides for the merger (the "Merger") of GRR Merger Corp. (the "Purchaser"), a
wholly-owned subsidiary of GRR Holdings LLC ("Parent"), with and into the
Company. Under the terms of the Merger Agreement, each share of Common Stock,
par value $.16 2/3 per share (the "Shares"), of the Company (other than Shares
held by Parent, the Purchaser or any subsidiary thereof or held in the treasury
of the Company or by any subsidiary of the Company and other than Dissenting
Shares (as defined in the Merger Agreement)) will be converted in the Merger
into the right to receive $1.65 in cash, without interest.
The Merger is the second and final step in the acquisition by Parent of the
entire equity interest in the Company. The first step provided for in the Merger
Agreement was a cash tender offer by the Purchaser for all outstanding Shares.
The tender offer was completed on October 20, 1997, with the purchase by the
Purchaser of 8,777,252 Shares at $1.65 per Share. In accordance with the Merger
Agreement, Martha H.W. Crowninshield, Barbara M. Ginader, Neil A. Wallack and I
were elected to the Company's Board of Directors as designees of Parent and the
Purchaser, and I was elected Chairman, President and Chief Executive Officer of
the Company. The prior members of the Board resigned except Fred H. (Fritz)
Beaumont, Jr., David T. DiPasquale and Alan D. Weingarten, members of the
Special Committee who had negotiated the Merger Agreement on behalf of the
Company and who have agreed to continue to serve until consummation of the
Merger as provided in the Merger Agreement.
The Board of Directors of the Company in office prior to completion of the
tender offer determined that the Merger is fair to and in the best interests of
the Company and its shareholders and unanimously recommended that shareholders
approve and adopt the Merger Agreement and the Merger. On August 29, 1997, such
Board of Directors received the opinion of Rothschild Inc. that $1.65 per Share
was fair, from a financial point of view, to the Company's shareholders.
The affirmative vote of the holders of 66 2/3% of the outstanding Shares is
required to approve and adopt the Merger Agreement and the Merger. Parent and
the Purchaser have, pursuant to the Merger Agreement, agreed to vote the Shares
owned by them, constituting approximately 83.5% of the outstanding Shares, in
favor of approval and adoption of the Merger Agreement and the Merger.
Accordingly, such approval and adoption is assured.
Following consummation of the Merger, each shareholder of record will be
mailed a transmittal form and instructions for surrender of stock certificates
for payment pursuant to the Merger Agreement. PLEASE DO NOT SURRENDER YOUR STOCK
CERTIFICATES UNTIL YOU HAVE RECEIVED THE LETTER OF TRANSMITTAL AND INSTRUCTIONS
THERETO.
Please review carefully the attached Proxy Statement, which contains a
detailed description of the Merger and the terms and conditions of the Merger
Agreement. A copy of the Merger Agreement is included as Appendix A to the Proxy
Statement.
Sincerely,
/s/ Thomas J. Russo
THOMAS J. RUSSO
Chairman, President and Chief
Executive Officer
<PAGE> 3
GROUND ROUND RESTAURANTS, INC.
35 BRAINTREE HILL OFFICE PARK
BRAINTREE, MASSACHUSETTS 02184-9078
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 2, 1997
------------------------
TO THE SHAREHOLDERS OF GROUND ROUND RESTAURANTS, INC.:
A Special Meeting of Shareholders (the "Meeting") of Ground Round
Restaurants, Inc. ("the Company"), will be held at the Ground Round Restaurant
located at Prudential Ct., 800 Boylston Street, Boston, Massachusetts, on
December 2, 1997, at 10 a.m., local time, to consider and vote upon:
1. A proposal to approve and adopt the Agreement and Plan of Merger,
dated as of August 29, 1997 (the "Merger Agreement"), among GRR Holdings,
LLC ("Parent"), GRR Merger Corp. (the "Purchaser") and the Company and the
merger (the "Merger") of the Purchaser with and into the Company, with the
Company to continue as the surviving corporation, provided for therein.
Pursuant to the Merger Agreement each outstanding share of the Company's
Common Stock, par value $.16 2/3 per share (the "Shares") (other than
Shares held by Parent, the Purchaser or any subsidiary thereof or held in
the treasury of the Company or by any subsidiary of the Company and other
than Dissenting Shares, (as defined in the Merger Agreement)), will be
converted in the Merger into the right to receive $1.65 in cash, without
interest. The Merger is more completely described in the accompanying Proxy
Statement, and a copy of the Merger Agreement is included as Appendix A
thereto.
2. Such other business as may properly come before the Meeting or any
and all adjournments or postponements thereof.
Only shareholders of record as shown on the books of the Company at the
close of business on November 10, 1997 are entitled to notice of and to vote at
the Meeting or any and all adjournments or postponements thereof. The
affirmative vote of the holders of 66 2/3% of the outstanding Shares is required
to approve and adopt the Merger Agreement and the Merger. Parent and the
Purchaser own and have the power to vote approximately 83.5% of the outstanding
Shares, which is sufficient to approve and adopt the Merger Agreement and the
Merger without the affirmative vote of any other shareholder. Pursuant to the
Merger Agreement, Parent and the Purchaser have agreed to vote all Shares owned
by them in favor of approval and adoption of the Merger Agreement and the Merger
and, accordingly, such approval and adoption is assured.
Shareholders of the Company have the right to dissent from the proposed
Merger and to demand payment of the "fair value" of their Shares upon
consummation of the Merger. The right of shareholders to receive such payment is
contingent upon strict compliance with the requirements set forth in sections
623 and 910 of the New York Business Corporation Law (the "BCL"), which are
summarized in the accompanying Proxy Statement. The full text of sections 623
and 910 of the BCL is included as Appendix C to the Proxy Statement.
BY ORDER OF THE BOARD OF DIRECTORS
ROBIN L. MOROZ
Secretary
PLEASE MARK, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE
SHAREHOLDERS SHOULD NOT SEND ANY STOCK
CERTIFICATES WITH THE PROXY CARD
<PAGE> 4
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS OF
GROUND ROUND RESTAURANTS, INC.
TO BE HELD ON DECEMBER 2, 1997
------------------------
This Proxy Statement is being furnished to the shareholders of Ground Round
Restaurants, Inc. ("the Company"), in connection with the Special Meeting of
Shareholders of the Company (the "Meeting") to be held at the Ground Round
Restaurant, located at Prudential Ct., 800 Boylston Street, Boston,
Massachusetts, on December 2, 1997, at 10 a.m., local time. At the Meeting, the
shareholders of the Company will be asked to consider and act upon a proposal to
approve and adopt the Agreement and Plan of Merger, dated as of August 29, 1997
(the "Merger Agreement"), a copy of which is attached hereto as Appendix A, and
the merger (the "Merger") provided for therein of GRR Merger Corp. (the
"Purchaser"), a wholly-owned subsidiary of GRR Holdings, LLC ("Parent"), with
and into the Company, which will continue as the surviving corporation in the
Merger (the "Surviving Corporation") and will be a wholly-owned subsidiary of
Parent. Pursuant to the Merger, each share of the Company's Common Stock, par
value $.16 2/3 per share (individually, a "Share" and collectively, the
"Shares"), that is outstanding immediately prior to the Merger (other than
Shares owned by Parent, the Purchaser or any subsidiary thereof or held in the
treasury of the Company or by any subsidiary of the Company and other than
Dissenting Shares (as defined in the Merger Agreement)) will be converted in the
Merger into the right to receive $1.65 in cash, without interest. This Proxy
Statement is first being mailed to the Company's shareholders on or about
November 12, 1997
Pursuant to the Merger Agreement, the Purchaser commenced a tender offer
(the "Offer") for all outstanding Shares on September 8, 1997, which was
completed on October 20, 1997 with the purchase by the Purchaser of 8,777,252
Shares at $1.65 per Share. As a result of the Offer, Parent and the Purchaser
own and have the power to vote Shares sufficient in number to approve and adopt
the Merger Agreement and the Merger without the affirmative vote of any other
shareholder. Pursuant to the Merger Agreement, Parent and the Purchaser have
agreed to vote all Shares owned by them in favor of approval and adoption of the
Merger Agreement and the Merger and, accordingly, such approval is assured.
Any questions or requests for assistance in completing and submitting proxy
cards, or for additional copies of this Proxy Statement and the proxy card, may
be directed to the Information Agent at its telephone numbers and address listed
on the back cover of this Proxy Statement.
THE DATE OF THIS PROXY STATEMENT IS NOVEMBER 12, 1997.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Summary............................................................................ 1
Parties to the Merger............................................................ 1
The Meeting...................................................................... 1
Actions Prior to the Merger...................................................... 2
The Merger....................................................................... 2
Selected Historical Consolidated Financial Information........................... 5
General Information................................................................ 6
The Merger......................................................................... 7
Background of the Merger......................................................... 7
Recommendation of the Board of Directors of the Company.......................... 12
Fairness Opinion................................................................. 13
Financial Analyses............................................................ 14
Engagement Letter............................................................. 16
Certain Effects of the Merger.................................................... 16
Interests of Certain Persons in the Merger....................................... 16
Treatment of Stock Options.................................................... 16
Director Liability and Indemnification........................................ 17
Certain Interests in Parent................................................... 17
Employee Benefits............................................................. 17
Termination of Certain Employment Agreements.................................. 18
Employment and Severance Agreements........................................... 18
Effective Time of the Merger..................................................... 20
The Merger Agreement............................................................. 20
The Merger; Effective Time.................................................... 20
Conversion of Securities in the Merger........................................ 20
Cancellation of Options....................................................... 21
Directors and Officers........................................................ 21
Certificate of Incorporation and Bylaws....................................... 21
Representations and Warranties................................................ 21
Shareholders' Meeting......................................................... 22
Conduct of Business........................................................... 22
Notices....................................................................... 23
Employee Benefits Matters..................................................... 23
Indemnification and Insurance................................................. 23
Further Assurances............................................................ 24
Conditions to the Merger...................................................... 25
No Solicitation............................................................... 25
Termination................................................................... 25
Fees and Expenses............................................................. 26
Amendments.................................................................... 26
Source and Amount of Funds....................................................... 26
The Existing Credit Agreement................................................. 26
The Bank Standstill Letter and September 29 Bank Waiver....................... 26
</TABLE>
i
<PAGE> 6
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
The Fourth Amendment to the Existing Credit Agreement......................... 27
The Sale/Leaseback Transaction................................................ 28
Accounting Treatment of the Merger............................................... 28
Certain United States Federal Income Tax Consequences............................ 28
Certain Regulatory and Legal Matters............................................. 29
State Takeover Laws........................................................... 29
Alcoholic Beverage Regulation................................................. 29
Antitrust..................................................................... 30
Rights of Dissenting Shareholders................................................ 31
Certain Information Concerning The Company......................................... 33
Overview......................................................................... 33
The Restaurants.................................................................. 33
Restaurant Operations............................................................ 33
Hours of Operation............................................................ 33
The Menu...................................................................... 33
Purchasing.................................................................... 34
Training...................................................................... 34
Restaurant Reporting.......................................................... 34
Marketing..................................................................... 34
Franchising...................................................................... 34
Employees........................................................................ 35
Competition...................................................................... 35
Governmental Regulation.......................................................... 36
Trademarks....................................................................... 36
Properties....................................................................... 37
Company-Operated Restaurant Locations............................................ 37
Franchised Restaurant Locations............................................... 38
Legal Proceedings................................................................ 38
Certain Information Concerning Parent and the Purchaser............................ 39
Price Range of Shares.............................................................. 40
Selected Historical Consolidated Financial Information............................. 41
Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 42
Principal Shareholders and Share Ownership of Management........................... 43
Available Information.............................................................. 45
Shareholder Proposals.............................................................. 45
Index to Financial Statements...................................................... F-1
Appendix A -- Agreement and Plan of Merger......................................... A-1
Appendix B -- Opinion of Rothschild Inc............................................ B-1
Appendix C -- Sections 623 and 910 of the New York Business Corporation Law........ C-1
</TABLE>
ii
<PAGE> 7
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and in the Appendices hereto. Certain capitalized terms
used in this summary are defined elsewhere in this Proxy Statement. Reference is
made to, and this summary is qualified in its entirety by, the more detailed
information contained in this Proxy Statement and the Appendices hereto.
PARTIES TO THE MERGER
The Company................ Ground Round Restaurants, Inc., a New York
corporation, with its principal offices and
corporate headquarters at 35 Braintree Hill Office
Park, Braintree, Massachusetts 02184-9078,
telephone: (617) 380-3100, is a holding company
with principal subsidiaries that operate and
franchise family-oriented, full-service, casual
dining restaurants in 23 states in the Northeast,
Mid-Atlantic and Midwest regions of the United
States and franchise one restaurant in Canada.
Parent..................... GRR Holdings, LLC, a Delaware limited liability
company, was organized in August 1997 to effect the
acquisition of the Company pursuant to the Offer
and the Merger. A majority of Parent's outstanding
membership interests is held by Boston Ventures
Limited Partnership V ("BVLP V"), a private
investment limited partnership formed in Delaware
whose general partner is Boston Ventures Company V,
L.L.C., a Delaware limited liability company
("Boston Ventures Company V"). Boston Ventures
Company V, as general partner, retains Boston
Ventures Management, Inc. ("Boston Ventures") to
advise and assist in investment decisions and to
provide other management services to BVLP V. The
offices of each of Parent, BVLP V, Boston Ventures
Company V and Boston Ventures are located at 21
Custom House Street, Boston, Massachusetts 02110.
The Purchaser.............. GRR Merger Corp., a New York corporation and a
wholly-owned subsidiary of Parent, was organized in
August 1997 for the purpose of effecting the Offer
and the Merger.
THE MEETING
Time, Date, and Place of
Meeting.................. The Special Meeting of Shareholders of the Company
(the "Meeting") will be held on December 2, 1997,
at 10 a.m., local time, at the Ground Round
Restaurant located at Prudential Ct., 800 Boylston
Street, Boston, Massachusetts.
Purpose of the Meeting..... The purpose of the Meeting is to consider and vote
upon a proposal to approve and adopt the Merger
Agreement and the Merger.
Record Date................ Only holders of record of Shares of the Company at
the close of business on November 10, 1997, will be
entitled to notice of and to vote at the Meeting or
any and all adjournments or postponements thereof.
Vote Required.............. The affirmative vote of the holders of 66 2/3% of
the outstanding Shares is required to approve and
adopt the Merger Agreement and the Merger. As of
the record date, 11,173,421 Shares were outstanding
and entitled to vote. Parent and the Purchaser own
and have the power to vote an aggregate of
9,332,152 Shares (approximately 83.5% of the
outstanding
1
<PAGE> 8
Shares). Pursuant to the Merger Agreement, Parent
and the Purchaser have agreed to vote all Shares
owned by them in favor of the Merger Agreement and
the Merger. As a result, no action by any other
shareholder is required to approve and adopt the
Merger Agreement and the Merger.
ACTIONS PRIOR TO THE MERGER
The Offer.................. Pursuant to the Merger Agreement, on September 8,
1997, the Purchaser commenced the Offer at a price
of $1.65 per Share, net to the seller in cash,
without interest. The Offer expired at 6:00 p.m.,
New York City time, on October 17, 1997. Pursuant
to the Offer, the Purchaser accepted for payment
and paid for 8,777,252 Shares.
Purchaser's Director -
Designees................ Pursuant to the Merger Agreement, on October 20,
1997, following the acceptance by the Purchaser of
the Shares tendered pursuant to the Offer for
payment (and deposit by the Purchaser of the
required funds for such payment) four existing
directors resigned from the Board of Directors and
four persons designated by the Purchaser were
elected to the Board of Directors. See "THE
MERGER -- Background of the Merger" and "-- The
Merger Agreement; Directors and Officers."
THE MERGER
General.................... Upon consummation of the Merger, the Purchaser will
be merged with and into the Company, and the
Company will continue as the Surviving Corporation
and be a wholly-owned subsidiary of Parent. Each
Share outstanding immediately prior to the Merger
(other than Shares owned by Parent, the Purchaser
or any subsidiary thereof or held in the treasury
of the Company or by any subsidiary of the Company
and other than Dissenting Shares) will be converted
into the right to receive $1.65 in cash, without
interest.
Effective Time of the
Merger..................... It is expected that the Merger will become
effective as promptly as practicable following
approval and adoption of the Merger Agreement and
the Merger by the requisite vote of the Company
shareholders and the satisfaction or waiver of the
other conditions to the Merger. See "THE
MERGER -- The Merger Agreement; Conditions to the
Merger." A copy of the Merger Agreement is included
in the Proxy Statement as Appendix A.
Background of the Merger... For a description of the events leading to the
approval and adoption of the Merger Agreement and
the Merger by the Board of Directors of the Company
in office prior to consummation of the Offer, see
"THE MERGER -- Background of the Merger."
Recommendation of the Board
of Directors............. The Board of Directors of the Company in office
prior to consummation of the Offer unanimously
approved the Merger and approved and adopted the
Merger Agreement, determined that the Merger
Agreement and the transactions contemplated
thereby, including the Offer and the Merger, are
fair to, and in the best interests of, the Company
and its shareholders and recommended that the
shareholders of the Company vote for approval and
adoption of the Merger Agreement and the
2
<PAGE> 9
Merger. See "THE MERGER -- Recommendation of the
Board of Directors."
Fairness Opinion........... On August 29, 1997, Rothschild Inc.("Rothschild")
rendered an opinion to the Board of Directors of
the Company in office prior to consummation of the
Offer to the effect that the consideration to be
received pursuant to the Offer and the Merger is
fair from a financial point of view to the Company
shareholders as of the date of such opinion. The
full text of the opinion of Rothschild, which sets
forth the procedures followed, assumptions and
qualifications made, matters considered and
limitations of the review undertaken in rendering
such opinion, is attached as Appendix B to this
Proxy Statement and should be read in its entirety.
The opinion and certain analyses performed by
Rothschild in connection therewith are discussed
under "THE MERGER -- Fairness Opinion."
Certain Effects of the
Merger..................... Following the Effective Time, Parent will own 100%
of the Surviving Corporation's outstanding capital
stock. Parent will be the sole beneficiary of any
future earnings and growth of the Surviving
Corporation (until shares of capital stock, if any,
are issued to other shareholders) and will have the
ability to benefit from any divestitures, strategic
acquisitions or other corporate opportunities that
may be pursued by the Surviving Corporation in the
future. Upon consummation of the Merger, the
holders of the Shares of the Company immediately
prior to the Effective Time ("Existing
Shareholders") will cease to have ownership
interests in the Company or rights as shareholders.
The Existing Shareholders will no longer benefit
from any increases in the value of the Company or
any payment of dividends on the Shares and will no
longer bear the risk of any decreases in the value
of the Company. No cash dividends have ever been
paid on the Shares.
As a result of the Merger, the Surviving
Corporation will be privately held and there will
be no public market for its common stock. Upon
consummation of the Merger, the Shares will cease
to be included in the Nasdaq National Market. In
addition, registration of the Shares under the
Exchange Act will be terminated, and, accordingly,
the Company will no longer be required to file
periodic reports with the Securities and Exchange
Commission (the "Commission").
Interests of Certain
Persons in the Merger...... Certain current and former members of the
management and the Board of Directors of the
Company have certain interests in the Merger that
are in addition to the interests of shareholders of
the Company generally.
See "THE MERGER -- Interests of Certain Persons in
the Merger."
Certain Income Tax
Consequences............. The receipt of cash by a shareholder of the Company
in exchange for Shares pursuant to the Merger will
be a taxable transaction for federal income tax
purposes under the Internal Revenue Code of 1986,
as amended, and may also be a taxable transaction
under applicable state, local, foreign, and other
tax laws. See "THE MERGER -- Certain Federal Income
Tax Consequences of the Merger." Each shareholder
is urged to consult his, her or its own tax advisor
with respect to the tax consequences of the Merger
in his, her or its individual circumstances,
including the applicability and the effect of
federal, state, local, foreign and other tax laws.
3
<PAGE> 10
Accounting Treatment....... Parent will account for the Merger under the
"purchase" method of accounting.
Conditions to the Merger... The obligation of each party to effect the Merger
is subject to the satisfaction prior to the
Effective Time of certain conditions. See "THE
MERGER -- The Merger Agreement; Conditions to the
Merger."
Regulatory Matters......... The Company does not believe that any material
federal or state regulatory approvals, filings or
notices are required by the Company in connection
with the Merger other than (i) such approvals,
filings or notices required pursuant to federal and
state securities laws, (ii) such filings required
pursuant to the Hart-Scott-Rodino Antitrust
Improvement Act of 1976, as amended (the "HSR
Act"), and (iii) the filing of the certificate of
merger with the Secretary of State of the State of
New York. The applicable waiting period under the
HSR Act expired at 11:59 p.m., New York City time,
on September 26, 1997. See "THE
MERGER -- Regulatory Matters."
Appraisal Rights........... Under the New York Business Corporation Law (the
"BCL"), holders of the Company Common Stock have
the right to dissent from the Merger and to demand
payment of the fair value of their Shares in the
Supreme Court of New York. The right of
shareholders to receive such payment in contingent
upon strict compliance with the requirements set
forth in sections 623 and 910 of the BCL. See "THE
MERGER -- Rights of Dissenting Shareholders" and
Appendix C to this Proxy Statement, which contains
the full text of sections 623 and 910.
4
<PAGE> 11
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial data presented below for, and as of the
end of, each of the years in the five-year period ended September 29, 1996, are
derived from the consolidated financial statements of the Company, which
financial statements have been audited by Ernst & Young, L.L.P., independent
certified public accountants. The consolidated financial statements of the
Company as of September 29, 1996 and October 1, 1995 and for each of the years
in the three-year period ended September 29, 1996, are included herein (see
"Index to Financial Statements").
The selected consolidated financial data presented below as of and for the
39 weeks ended June 29, 1997 and June 30, 1996 are derived from the unaudited
consolidated financial statements of the Company included herein (see "Index to
Financial Statements"). In management's opinion, the unaudited information has
been prepared on a basis consistent with the audited consolidated financial
statements of the Company. The results of operations for the 39 weeks ended June
29, 1997 are not indicative of results which may be expected for the entire
year.
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS
39 WEEKS ENDED ENDED 52 WEEKS 52 WEEKS 53 WEEKS ENDED
-------------------- SEPT. ENDED ENDED ENDED SEPT.
JUNE 29, JUNE 30, 29, OCT. 1, OCT. 2, OCT. 3, 27,
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue............................. $142,086 $165,462 $218,833 $230,406 $243,971 $232,556 $226,466
Operating income (loss) from
operations........................ (681) (9,275) (22,506) (2,659) 13,277 11,866 12,090
Interest expense from operations,
net............................... 3,622 3,633 4,815 4,957 4,091 4,031 4,598
Income (loss) before income taxes... (4,303) (12,908) (27,321) (7,616) 9,186 7,835 7,492
Income taxes (benefit).............. 0 (3,227) (4,374) (1,906) 2,940 2,507 2,846
-------- -------- -------- -------- -------- -------- --------
Income (loss):
Total........................... (4,303) (9,681) (22,947) (1) (5,710) 6,246 5,328 4,646
Per Share....................... (.39) (.87) (2.05) (0.51) 0.56 0.48 0.42
Weighted average common Shares
outstanding....................... 11,173 11,173 11,174 11,151 11,109 11,086 11,064
OPERATING DATA:
Systemwide sales:
Company-operated.................. $140,536 $164,088 $216,977 $228,235 $241,777 $230,017 $224,048
Franchised........................ 47,962 46,991 68,888 71,817 72,726 71,876 72,692
-------- -------- -------- -------- -------- -------- --------
Total systemwide sales............ 188,490 211,079 285,865 300,052 314,503 301,893 296,740
Average annual systemwide sales per
restaurant........................ 1,542 1,474 1,513 1,523 1,534 1,438 1,455
Number of restaurants (at period
end):
Company-operated.................. 122 146 143 151 164 166 160
Franchised........................ 41 45 46 46 41 44 44
-------- -------- -------- -------- -------- -------- --------
Total Restaurants............... 163 191 189 197 205 210 204
BALANCE SHEET DATA:
Total assets...................... 99,335 132,177 121,238 145,356 156,772 151,813 137,780
Long-term debt, including current
maturities...................... 66,902 82,173 51,446 58,580 58,770 60,305 51,965
Stockholders' Equity.............. 32,433 50,004 36,737 59,684 65,036 58,637 53,219
</TABLE>
- ---------------
(1) The Company recorded a charge of $8.9 million resulting from the adoption of
Statement of Financial Accounting Standards No. 121 (SFAS No. 121),
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of " and
the decision to dispose of certain restaurants.
5
<PAGE> 12
GENERAL INFORMATION
This Proxy Statement is being furnished to the shareholders of the Company
in connection with the solicitation by the Board of Directors of the Company of
proxies to be voted at the Meeting to be held on December 2, 1997.
At the Meeting, the Company's shareholders will be asked to consider and
vote upon the approval and adoption of the Merger Agreement among Parent, the
Purchaser and the Company, providing for the Merger of the Purchaser, a
wholly-owned subsidiary of Parent, with and into the Company, as a result of
which the Company will become a wholly-owned subsidiary of Parent. See "THE
MERGER -- The Merger Agreement; The Merger; Effective Time." A copy of the
Merger Agreement is attached as Appendix A to this Proxy Statement.
The Board of Directors of the Company prior to consummation of the Offer
has unanimously approved and adopted the Merger Agreement and the Merger. See
"THE MERGER -- Recommendation of the Board of Directors." The Board of Directors
of the Purchaser, and Parent as its sole shareholder, have also approved and
adopted the Merger Agreement and the Merger.
The close of business on November 10, 1997 (the "Record Date") has been
fixed as the record date for determination of the holders of Shares who are
entitled to notice of and to vote at the Meeting or at any and all adjournments
or postponements thereof. The Shares are the only class of capital stock of the
Company outstanding. As of the Record Date, there were 11,173,421 Shares
outstanding held by approximately 648 holders of record. The holders of record
on the Record Date of Shares are entitled to one vote per Share at the Meeting.
The presence at the Meeting in person or by proxy of the holders of a majority
of the outstanding Shares will constitute a quorum for the transaction of
business, and the affirmative vote of the holders of 66 2/3% of the outstanding
Shares is required for approval and adoption of the Merger Agreement and the
Merger. Parent and the Purchaser own and have the power to vote an aggregate of
9,332,152 Shares, approximately 83.5% of the Shares, which is sufficient to
approve and adopt the Merger Agreement and the Merger without the affirmative
vote of any other shareholder. Pursuant to the Merger Agreement, Parent and the
Purchaser have agreed to vote all Shares owned by them in favor of approval and
adoption of the Merger Agreement and the Merger and, accordingly, such approval
and adoption is assured.
A representatives of Ernst & Young, L.L.P., the Company's independent
accountants, will be present at the Meeting.
A proxy card is enclosed for use by the Company shareholders. PLEASE MARK,
DATE, SIGN AND RETURN THE PROXY CARD IN THE ACCOMPANYING ENVELOPE. No postage is
required if mailed within the United States. QUESTIONS OR REQUESTS FOR
ASSISTANCE IN COMPLETING AND SUBMITTING PROXY CARDS MAY BE DIRECTED TO MACKENZIE
PARTNERS, INC., THE INFORMATION AGENT, AT ITS TELEPHONE NUMBERS AND ADDRESS
LISTED ON THE BACK COVER OF THIS PROXY STATEMENT.
All properly executed proxies not revoked will be voted at the Meeting in
accordance with the instructions contained therein. Proxies containing no
instructions will be voted in favor of approval and adoption of the Merger
Agreement and the Merger. A shareholder who has executed and returned a proxy
may revoke it at any time before it is voted, but only by executing and
returning a proxy bearing a later date, by giving written notice of revocation
to Robin L. Moroz, Vice President, General Counsel and Secretary of the Company,
at Ground Round Restaurants, Inc., 35 Braintree Hill Office Park, Braintree,
Massachusetts 02184-9078, or by attending the Meeting and voting in person.
Abstentions, and Shares as to which a broker or other record holder or nominee
indicates on a proxy that it does not have direction or authority to vote on the
Merger Agreement ("broker non-votes"), will be treated as Shares present for
purposes of determining a quorum for the Meeting but will not be counted as
affirmative or negative votes on, or in determining the number of shares voted
on the Merger Agreement and the Merger. Such abstentions, and broker non-votes
will have the same effect as a vote against approval and adoption of the Merger
Agreement and the Merger. Those Shares will be considered present at the Meeting
for purposes of determining a quorum but will not be considered present with
respect to the vote.
6
<PAGE> 13
If any other matters are properly presented for consideration at the
Meeting, the persons named in the enclosed form of proxy and acting thereunder
will have discretion to vote on such matters in accordance with their best
judgment.
Promptly after the Effective Time, State Street Bank & Trust Company, as
paying agent for the Merger (the "Paying Agent"), shall mail to each person who
was, at the Effective Time, a holder of record of a certificate or certificates
for Shares, other than the Parent, the Company or any of their respective
subsidiaries, a letter of transmittal and instructions for use in effecting the
surrender, in exchange for payment in cash therefor, of the certificates.
SHAREHOLDERS SHOULD NOT SEND THEIR STOCK CERTIFICATES WITH THEIR PROXY CARDS.
In addition to the solicitation of proxies by use of mail, the directors,
officers or regular employees of the Company may, but without compensation other
than their regular compensation, solicit proxies personally or by telephone or
fax. The Company intends to reimburse brokerage houses and other custodians,
nominees, and fiduciaries for reasonable out-of-pocket expenses incurred in
forwarding copies of solicitation material to beneficial owners of Shares held
of record by such persons. In addition, MacKenzie Partners, Inc. has been
engaged to serve as Information Agent in connection with the Merger. It will
receive reasonable and customary compensation for such services and
reimbursement of reasonable out-of-pocket expenses.
All information in this Proxy Statement with respect to Parent or the
Purchaser has been furnished by Parent, and all information with respect to the
Company has been furnished by the Company.
THE MERGER
BACKGROUND OF THE MERGER
For some time, the Company has required additional capital for working
capital and refurbishment purposes. The Company owed approximately $38,500,000,
including approximately $1,400,000 in demand notes, to its commercial lenders
under its Existing Credit Agreement (as defined under "-- Source and Amount of
Funds; Existing Credit Agreement," which currently expires on December 31, 1997
(subject to the Fourth Amendment, executed following and in connection with
consummation of the Offer, discussed under "-- Source and Amount of Funds; The
Fourth Amendment to the Existing Credit Agreement"). The Company's lenders had
indicated their desire that such debt be significantly reduced and that a
repayment plan for the balance be developed. At the same time, the Company
required significant additional capital to repair and maintain its restaurants,
and also needed to refurbish and upgrade its restaurants if it were to remain
viable in the highly competitive mid-price family restaurant market. The Company
had been unsuccessful in consummating a transaction to raise the necessary
investment funds. In addition, since August 1994, the Company's then principal
shareholder, U.S. Industries, Inc. ("USI"), which indirectly held approximately
33% of the outstanding Shares, was seeking to sell such Shares and, in 1996, had
caused the Company to register such Shares under the Securities Act of 1933, in
accordance with certain registration rights granted to USI, with a view to
selling the Shares in the market.
At the end of March 1997, Thomas J. Russo contacted the Chief Executive
Officer of USI to determine USI's intentions with respect to its investment in
the Company, as a result of which discussions took place between Mr. Russo and
USI's Chief Executive Officer during April and May with respect to a purchase of
USI's Shares. At the time of such discussions, Mr. Russo was a director of John
Harvard's Brewhouse L.L.C., controlled by another investment partnership
organized by Boston Ventures. In May 1997, Mr. Russo alerted Boston Ventures to
the availability of a substantial equity interest in the Company.
As a result of the discussions between USI and Mr. Russo, representatives
of Boston Ventures wrote to the Company's Board of Directors (the "Board") on
May 27, 1997 expressing its interest in exploring a potential acquisition
transaction whereby an entity to be organized by it would ultimately acquire all
of the outstanding Shares. The letter indicated that, as requested by USI,
Boston Ventures was prepared to purchase 549,000 Shares from USI upon the
condition that the Company enter into a confidentiality agreement providing for
a three week exclusive period for Boston Ventures to conduct due diligence on
the Company. On
7
<PAGE> 14
May 28, 1997, the Board authorized Boston Ventures to conduct a due diligence
investigation, subject to execution of a confidentiality agreement for a three
week exclusive period. The confidentiality agreement, containing customary
confidentiality and standstill provisions and providing for such three week
exclusive due diligence period, was negotiated between the parties and signed on
June 3, 1997. Concurrently with execution of the confidentiality agreement, an
affiliate of Boston Ventures purchased 277,450 Shares, and Mr. Russo purchased
262,550 Shares, from USI for a price of $1.25 per Share, in trades on the Nasdaq
National Market (which Shares, together with an additional 14,900 Shares
previously purchased by Mr. Russo's spouse, were subsequently transferred to
Parent as capital contributions).
Thereafter, Boston Ventures, with Mr. Russo, commenced a detailed review
of, and met with the Company's management to discuss, the Company's business and
financial condition. On June 26, 1997, at the request of Boston Ventures, after
consideration by the Board, the confidentiality agreement was amended to extend
the exclusivity period for Boston Ventures to complete its due diligence to July
1, 1997.
On July 1, 1997, a representative of Boston Ventures met with Ground
Round's Chairman, President, and Chief Executive Officer, Daniel R. Scoggin, and
thereafter sent a letter to the Company, confirming Boston Ventures' interest in
an acquisition of all of the outstanding Shares, at a price representing a
premium for the Shares to the then market price of approximately $1.50 per
Share, subject to, among other things, negotiation of a definitive agreement and
plan of merger containing customary representations, warranties and covenants,
receipt of all necessary third party consents and approvals, and negotiation by
the Company of an agreement with its lenders to amend the Existing Credit
Agreement and an amendment to Mr. Scoggin's employment agreement to clarify the
non-compete provision following a change in control of the Company. On July 2,
1997, the Board met to consider Boston Ventures' letter. The Board concluded,
and thereafter advised Boston Ventures in writing, that the letter failed to
make a firm financial offer and the numerous conditions to which any such offer
would be subject were unacceptable, but that representatives of the Company
would be willing to meet with representatives of Boston Ventures after the July
4th holiday, on a non-exclusive basis, to continue discussions with respect to a
possible transaction.
On July 9, 1997, USI sold its remaining 3,092,100 Shares to Christian R.
Guntner and David T. DiPasquale, who prior to that day had been executives of
USI, for an aggregate cash purchase price of $4.08 million. Mr. Guntner, who had
previously been a designee of USI on the Board, remained a director, and Mr.
DiPasquale was elected a director at a Board meeting on July 10, 1997. Upon
learning of the USI sale on July 10th, Boston Ventures again wrote to the Board
expressing disappointment over the Board's action on July 2, 1997 and the sale
by USI of its Shares and confirming that Boston Ventures was still interested in
pursuing an acquisition of all of the outstanding Shares at a price of
approximately $1.65 per Share, subject to certain of the conditions set forth in
its July 1, 1997 letter, including those described above. Boston Ventures also
indicated a willingness to make an additional equity investment in the Company
following such acquisition, and also stated that, if the Board was not
interested in a sale of the Company at that time, Boston Ventures would be
prepared to negotiate the purchase of newly issued equity, alone or in
combination with a purchase of the Shares owned by Messrs. Guntner and
DiPasquale, in a transaction resulting in Boston Ventures obtaining voting
control of the Company.
The letter was discussed by the Board at its July 10th meeting, at which
Messrs. Guntner and DiPasquale indicated that they had no interest in selling
their Shares except in conjunction with an offer for all of the Company's
outstanding Shares. The Board concluded that, although the letter lacked a firm
price and was subject to numerous conditions, and therefore did not constitute a
firm offer, it was nonetheless worth further consideration by the Company. The
Board then discussed the growing concerns of the lenders under the Existing
Credit Agreement regarding the Company's liquidity and compliance with its
obligations under the Existing Credit Agreement. To address these matters, the
Board designated a Special Committee of the Board to review, negotiate and make
recommendations to the Board with respect to investment and acquisition
proposals, including a proposal from Boston Ventures, and a Banking Committee of
the Board to negotiate and make recommendations to the Board concerning
revisions to the Existing Credit Agreement and other financial accommodations
with the lenders. Messrs. Guntner, Fred H. (Fritz) Beaumont, Jr., and Alan D.
Weingarten comprised the Special Committee, with Mr. Guntner serving as
chairman, and Messrs. DiPasquale, Guntner and Scoggin comprised the Banking
Committee, with Mr. DiPasquale serving as
8
<PAGE> 15
chairman. The full Board retained the exclusive authority to enter into any
transaction or agreement on behalf of the Company recommended by either
committee.
Later on July 10, 1997, a representative of the Company's lenders called
Mr. DiPasquale, as chairman of the Banking Committee, urging that members of the
Board meet with Boston Ventures a soon as possible. A meeting was arranged that
evening for the following morning, July 11, 1997, between representatives of
Boston Ventures, Messrs. Guntner and DiPasquale as representatives of the Board,
and their respective counsel. At that meeting, both a possible acquisition of
all of the outstanding Shares by an entity to be formed by Boston Ventures, as
well as a possible sale by Messrs. Guntner and DiPasquale of their Shares
together with an investment by such entity in a new issue of convertible
preferred stock of the Company, was discussed. Messrs. Guntner and DiPasquale
indicated they would not discuss a sale of their Shares except in conjunction
with an acquisition of all outstanding Shares by merger or otherwise. In
addition, Messrs. Guntner and DiPasquale requested that Boston Ventures provide
working capital to the Company as might be required pending consummation of a
transaction. During lengthy discussions concerning the structure and conditions
of any proposal it might make, Boston Ventures indicated that any proposal it
might make would be at a price of $1.65 per Share, which price was not
negotiable, and Boston Ventures indicated that it was only prepared to provide
additional capital to fund working capital requirements upon obtaining control
of the Company through consummation of a transaction. (The Agent under the
Existing Credit Agreement thereafter made such request of Boston Ventures, which
again declined, and then of Mr. Guntner, as further described below.) Following
the meeting, Mr. Guntner requested that Mr. Scoggin, as Chairman of the Board of
Directors, call a meeting of the Board to discuss the results of the meeting
with Boston Ventures.
On July 16, 1997, a meeting of the Board was held to hear a report on the
Company's financial condition from Stephen Kiel, the Company's Chief Financial
Officer, and to discuss the possible proposal from Boston Ventures discussed at
the July 10th meeting. During the meeting, the Board considered concerns that
had been raised by the Company's lenders with respect to the Company's liquidity
and its ability to meet its obligations under the Existing Credit Agreement. In
addition, the Board discussed the suggestion of the lenders that they would be
willing to enter into a credit support agreement (the "Bank Standstill
Agreement," see "-- Source and Amount of Funds; The Bank Standstill Letter and
September 29 Bank Waiver") if the Company entered into a definitive merger
agreement with Boston Ventures. Although the Board did not accept the price of
$1.65 contemplated by Boston Ventures, the Board directed the Special Committee
to continue negotiations with Boston Ventures with respect to the sale of the
entire Company, and the Company retained Rothschild as financial advisor for the
purpose of rendering a written opinion to the Board as to the fairness of any
acquisition proposal which might be made. In response to the Company's
indication of interest, subject to negotiation of satisfactory terms, in the
sale of the entire Company, counsel to Boston Ventures commenced preparation of
a draft merger agreement.
On July 22, 1997, the Board met to review the status of the on-going
negotiations with Boston Ventures and the Company's financial condition, as well
as the Company's strategic and financial options, including a proposed sale and
leaseback transaction of up to 20 Company-owned restaurants (see "-- Source and
Amount of Funds; The Sale/Leaseback Transaction"). Mr. Guntner advised the Board
that, following a review of the Company's short-term cash flow projections, the
lenders sought a commitment from Mr. Guntner, which request was supported by
Boston Ventures, for a $1,000,000 letter of credit to enhance the Company's
liquidity. Mr. Guntner advised the Board that he had declined to provide such
unilateral credit support to the Company and expressed his belief that such
request had irreparably compromised his ability to effectively serve as a member
of the Special Committee. He thereupon resigned from the Special Committee, and
the Board elected Mr. DiPasquale as a member of the Special Committee to replace
Mr. Guntner.
A draft merger agreement was delivered to the Company and its counsel on
July 23, 1997, and respective counsel for the parties met on July 25 and 29,
1997 to discuss points of principle on the draft, after which a revised draft
was circulated. Also on July 25th, Mr. Russo and representatives of Boston
Ventures met with representatives of the Company's lenders to discuss the
Company's liquidity and cash needs. (Earlier discussions had taken place in June
and July between representatives of Boston Ventures and a representative of the
Agent on such matters and the possible terms of an amendment of the Existing
Credit Agreement.) The Company had earlier sold certain properties to pay down
its existing bank debt, repayment of the balance
9
<PAGE> 16
of which was originally due in May 1997 but had been extended by the lenders
until December 31, 1997. At the July 25th meeting with the lenders, the lenders
again indicated their desire that the Company's bank debt be significantly
reduced and that a repayment plan for the balance be developed. The Company's
need for additional working capital was also discussed. The lenders indicated
that they would be prepared to facilitate an acquisition which would provide
additional capital of at least $7.5 million to the Company, through an amendment
of the Existing Credit Agreement and a standstill agreement pending such
acquisition, and Boston Ventures indicated a willingness to provide additional
capital of at least such amount following an acquisition of Ground Round,
subject to satisfactory negotiation of such amendment and standstill.
On July 28, 1997, a meeting of the Special Committee was held to discuss
the principal points of the initial draft of the merger agreement with counsel.
At the meeting, Rothschild delivered a preliminary presentation to the Special
Committee regarding the Company and the proposed transaction with Boston
Ventures.
During the week of August 3, 1997, the Special Committee, Boston Ventures,
on behalf of Parent and the Purchaser, and their respective counsel negotiated
the terms of the merger agreement, and counsel for Boston Ventures discussed
with Messrs. Guntner and DiPasquale and their counsel the proposed terms of a
shareholders' agreement pursuant to which they would agree, among other things,
to tender their Shares in the Offer and vote to approve the Merger. Also during
such period, representatives of Boston Ventures negotiated with the Lenders the
terms of the Bank Letter of Intent, and representatives of the Company
negotiated the terms of the Bank Standstill Letter (originally to expire on
September 30, 1997), execution of each of which was subject to completion of the
negotiation and execution of a definitive merger agreement. In addition,
representatives of Boston Ventures commenced negotiations with Mr. Scoggin and
his counsel with respect to clarifying, through additional detail, the
non-compete provision of his employment agreement following a change of control
of the Company (the "Non-Compete Amendment"), execution of which by the Company
and Mr. Scoggin, on terms reasonably satisfactory to Parent and the Purchaser,
was a condition to Parent and the Purchaser proceeding with a transaction.
Boston Ventures and its counsel also continued to conduct due diligence on
matters raised by the Company's draft disclosure letter to be delivered in
connection with a definitive merger agreement, including an investigation by
special regulatory counsel of the liquor license approvals required in
connection with the acquisition by Parent of control of the Company.
On August 7, 1997, the Board met to review the terms of the current drafts
of the merger agreement, the shareholder agreement with Messrs. Guntner and
DiPasquale, the Non-Compete Amendment, the Bank Standstill Agreement and related
bank documents and to receive Rothschild's analysis of the transactions
contemplated by the draft merger agreement. Following a detailed presentation by
Rothschild with respect to its evaluation of such transactions, Rothschild
orally confirmed to the Board that the proposed price of $1.65 per Share was
fair from a financial point of view to the Company's shareholders, subject to
confirmation of the final terms and conditions of the merger agreement being
negotiated. The Board then engaged in a lengthy discussion concerning the terms
and conditions of the draft merger agreement. Following such discussion, the
Board directed the Special Committee to resolve certain outstanding issues,
including Boston Ventures proposed condition to the transaction that certain
liquor license approvals be obtained. Pending resolution of those issues, the
Board adjourned its meeting to be reconvened on August 8, 1997.
As result of its continuing due diligence investigation, Boston Ventures
advised the Company and its counsel on August 8, 1997, immediately prior to the
reconvening of the Board meeting, that it was not prepared to proceed with a
transaction until certain matters could be resolved with respect to certain of
the liquor license approvals required in connection with the acquisition by
Parent of control of the Company and the possible applicability of certain
"tied-house" statutes to the transaction. The Board thereupon reconvened its
meeting, was apprised of such development and adjourned without taking further
action.
During the remainder of August, representatives of Boston Ventures and its
regulatory counsel met with certain regulatory authorities and otherwise sought
to obtain reasonable assurances that transfers of the Company's liquor licenses
resulting from an acquisition by Parent of the Company would be approved by the
applicable authorities and that certain "tied-house" statutes would not create a
legal impediment to the acquisition, keeping the Company apprised of such
efforts. During this time, the parties and their counsel
10
<PAGE> 17
continued to negotiate certain terms of the draft Merger Agreement and discuss
with the Company's lenders an extension of the term of the Bank Standstill
Letter from September 30, 1997 to October 22, 1997. Boston Ventures, Mr. Scoggin
and their respective counsel also continued negotiation of the Non-Compete
Amendment.
On August 25 and 27, 1997, the Special Committee met to hear reports by
Company counsel as to the status of Boston Ventures' progress in resolving the
"tied-house" issues and as to the status of the negotiation of the remaining
issues concerning the draft merger agreement. In addition, Company counsel
provided the Special Committee with an update of the status of discussions with
the Company's lenders concerning certain revisions to, and the extension of the
term of, the draft Bank Standstill Agreement. From August 27 through August 29,
1997, counsel to the Company and Boston Ventures engaged in intensive
negotiations regarding the final unresolved issues concerning the merger
agreement, including the "tied-house" issues.
On August 29, 1997, Boston Ventures notified the Company and its counsel
that it was prepared to enter into the merger agreement, as negotiated, subject
to Board approval and recommendation, and certain remaining issues with respect
thereto were negotiated by the parties. The Special Committee met and, after
receiving the opinion of Rothschild that the price of $1.65 per Share pursuant
to the Merger Agreement was fair to shareholders of the Company from a financial
point of view, recommended to the Board that the Offer and the Merger Agreement
be approved. The Compensation Committee of the Board thereupon approved the
Non-Compete Amendment. The Board then convened to consider the recommendation of
the Special Committee and to review the written fairness opinion from
Rothschild. After extensive discussion of the terms of the Offer and Merger
contemplated by the Merger Agreement involving the Company's legal and financial
advisors, the Board unanimously approved the Offer and the Merger and determined
that they are fair to, and in the best interest of, the Company and its
shareholders. The Board thereupon authorized the execution and delivery of the
Merger Agreement and approved the shareholder agreement among Parent, the
Purchaser and Messrs. Guntner and DiPasquale (such two directors abstaining) the
Bank Standstill Agreement and related documents, and ratified the Non-Compete
Amendment (Mr. Scoggin abstaining). The Board also unanimously voted to
recommend that shareholders accept the Offer and tender their Shares pursuant to
the Offer. Following such actions, the Merger Agreement, the shareholder
agreement, the Bank Letter of Intent and the Bank Standstill Letter (as extended
to October 22, 1997) were executed and delivered by the parties thereto. A
public announcement regarding the Merger Agreement was made on Tuesday,
September 2, 1997, prior to the opening of the Nasdaq Stock Market.
The Offer was commenced on September 8, 1997 and, after several extensions
pending resolution of issues relating to the Company's liquor licenses and
enactment of legislation in Massachusetts to resolve issues under its
"tied-house" statute, expired at 6:00 p.m., New York City time, on October 17,
1997. Pursuant to the Offer, the Purchaser accepted for payment and purchased
8,777,252 Shares tendered in the Offer, which Shares, together with the 554,900
Shares previously purchased by Parent, represent approximately 83.5% of the
outstanding Shares as of the Record Date.
At a meeting of the Board on October 8, 1997, the Board, among other
things, approved (subject to Parent's consent as provided in the Merger
Agreement, which consent was thereafter obtained) a special $5,000 stipend to
each member of the Special Committee, and to Mr. Guntner as an adviser to the
Special Committee, to compensate them for their efforts in connection with the
negotiation of the Merger Agreement.
Pursuant to the Merger Agreement, on October 20, 1997, Messrs. Scoggin,
Guntner, Olson and Schollenberger resigned as directors of the Company, and
Martha H.W. Crowninshield, Barbara M. Ginader, Thomas J. Russo, and Neil A.
Wallack were elected as designees of Parent, to serve as directors of the
Company until their successors are elected and qualified. The members of the
Special Committee, Messrs. Beaumont, DiPasquale and Weingarten, continue to
serve as directors in accordance with the Merger Agreement. See "-- The Merger
Agreement; Directors and Officers." The Board thereafter elected Thomas J. Russo
Chairman, President and Chief Executive Officer of the Company.
On October 20, 1997, the Fourth Amendment to the Existing Credit Agreement
was executed by the parties; also on October 20th, the Company consummated the
sale/leaseback of thirteen properties (see
11
<PAGE> 18
"-- Source and Amount of Funds; The Fourth Amendment to the Existing Credit
Agreement and; The Sale/ Leaseback Transaction").
RECOMMENDATION OF THE BOARD OF DIRECTORS OF THE COMPANY
At its meeting on August 29, 1997, the Board of Directors of the Company in
office prior to consummation of the Offer unanimously approved and adopted the
Merger Agreement, determined that the Merger Agreement and the transactions
contemplated thereby, including the Offer and the Merger, are fair to, and in
the best interests of, the shareholders of the Company, and recommended that the
shareholders of the Company accept the Offer, tender their Shares thereunder to
the Purchaser and approve and adopt the Merger Agreement and the Merger.
In making the determinations and recommendations set forth above, the Board
considered a number of factors, including, without limitation, the following,
all of which it believed supported such actions:
(i) The terms and conditions of the Offer and the Merger Agreement.
(ii) Presentations by management at Board meetings and Board committee
meetings held on and before August 29, 1997, and the knowledge of the Board
of Directors with respect to the financial condition, results of
operations, business and prospects of the Company and limited alternative
strategic transactions.
(iii) The fact that, since August 1994, when the Company announced it
had entered into a definitive merger agreement to be acquired by a new
company formed by the then management and 399 Ventures, Inc., a venture
capital company, which agreement was subsequently terminated by the
potential purchaser due to lack of financing, the Company had been
unsuccessful in consummating a transaction to raise investment funds for
working capital and investment capital needed to refurbish and upgrade the
Company's restaurants in order to enable the Company to remain viable in
the highly competitive mid-price family restaurant market. Despite the
efforts of Company management, no person had made any firm offer for the
whole Company on terms equal to or superior to those contained in the Offer
and the Merger, nor had the Company been able to consummate a significant
investment transaction.
(iv) The Offer and Merger price of $1.65 net in cash for each of the
Company's Shares constituted an approximate 10% premium to the closing
market price for the Company's Shares on the Nasdaq Stock Market on August
29, 1997, the date the Merger Agreement was approved by the Board.
(v) The then-recent historical market prices for the Shares.
(vi) The presentations of Rothschild at the Special Committee meeting
on July 28, 1997 and at each of the August 7, 1997 and the August 29, 1997
Board meetings, and the written opinion of Rothschild, delivered to the
Board at the August 29, 1997 meeting, that, as of the date of such opinion
and based upon factors set forth therein, the consideration of $1.65 per
Share net in cash to be received by the Company's shareholders pursuant to
the Offer and the Merger was fair, from a financial point of view, to such
shareholders (see "-- Fairness Opinion" and the full text of such opinion,
included as Appendix B to this Proxy Statement).
(vii) The agreement of the Company's lenders to enter into the Bank
Standstill Agreement only upon the Company's execution of the Merger
Agreement, thereby providing the Company with additional liquidity through
October 22, 1997, subject to certain conditions, and waiving certain
financial covenants under the Existing Credit Agreement for the months of
July, August and September (see "-- Background of the Merger" and
"-- Source and Amount of Funds; The Bank Standstill Letter and September 29
Bank Waiver").
(viii) That under the terms of the Merger Agreement the Board was not
prohibited from (a) furnishing information in response to certain
unsolicited requests, and (b) considering, negotiating or participating in
discussions regarding an unsolicited bona fide written Acquisition Proposal
(as defined in the Merger Agreement), and upon advice of outside counsel
that it would be consistent with the Board's
12
<PAGE> 19
fiduciary responsibility to approve or recommend a Superior Proposal (as so
defined), the Board could terminate the Merger Agreement upon payment of
fees and expenses to the Parent (see "-- The Merger Agreement; No
Solicitation").
(ix) That under the terms of the shareholder agreement entered into
between Messrs. Guntner and DiPasquale and the Purchaser, such
shareholders, who collectively owned approximately 28% of the outstanding
Shares, could terminate such agreement if the Board of Directors of the
Company exercised its fiduciary responsibility and terminated the Merger
Agreement in order to recommend a Superior Proposal.
The Board did not assign relative weights to the foregoing factors or
determine that any factor was of particular importance. Rather, the Board viewed
its position and recommendations as being based on the totality of the
information presented to and considered by it.
FAIRNESS OPINION
In July 1997, the Company retained Rothschild as financial advisor for the
purpose of rendering a written opinion to the Board as to the fairness of any
acquisition proposal which might be made to the Company (see "-- Background of
the Merger"). Except for rendering its opinion, as described below, Rothschild
did not act as financial advisor to the Company in connection with the Offer and
the Merger. The price of $1.65 per Share paid in the Offer and to be paid in the
Merger was determined between the Company and Boston Ventures and not pursuant
to a recommendation of Rothschild. Rothschild was selected by the Board, after
its consideration of several other financial advisors, because Rothschild is an
internationally recognized investment banking firm with extensive experience in
acquisition transactions. As part of its investment banking business, Rothschild
provides financial advice in the valuation of businesses and their securities in
connection with mergers and acquisitions and valuations.
On August 29, 1997, Rothschild rendered its written opinion to the Board of
Directors of the Company to the effect that the consideration to be received
pursuant to the Offer and the Merger was fair from a financial point of view to
the Company shareholders as of the date of such opinion.
In formulating its opinion, Rothschild, among other things: (i) reviewed
certain publicly available financial and other data with respect to the Company,
including (a) the consolidated financial statements for the 1994, 1995 and 1996
fiscal years and interim periods to March 30, 1997 and (b) the June 29, 1997
quarterly report on Form 10-Q, in draft form, and certain other financial and
operating data relating to the Company made available to it from published
sources and from the internal records of the Company; (ii) reviewed the Merger
Agreement; (iii) reviewed current and historical market prices and trading
volumes of the Common Stock and the capitalization and financial condition of
the Company; (iv) compared the Company, from a financial point of view, with
certain other companies in the restaurant industry; (v) considered the financial
terms, to the extent publicly available, of selected recent business
combinations of companies in the restaurant industry which it deemed to be
comparable, in whole or in part, to the Offer and the Merger; (vi) reviewed and
discussed with directors and management of the Company certain information of a
business and financial nature regarding the Company, furnished to it by the
Company, including financial forecasts and related assumptions of the Company;
(vii) reviewed and discussed with management historical and forecasted capital
expenditure requirements for both maintenance and remodelling/operational
improvement purposes; (viii) reviewed and discussed with management the Existing
Credit Agreement (as amended) which had been extended to December 31, 1997, and
future refinancing and financing opportunities; (ix) made inquiries regarding
and discussed the Offer and the Merger Agreement and other matters related
thereto with the Company's counsel; and (x) performed such other analyses and
examinations and considered such other financial, economic and market criteria
as it deemed relevant and appropriate.
In connection with its review, Rothschild did not assume any obligation
independently to verify any information utilized, reviewed or considered by it
in formulating its opinion and relied on its being accurate and complete in all
material respects. With respect to the financial forecasts for the Company
provided to it, Rothschild assumed for purposes of its opinion that the
forecasts have been reasonably prepared on bases reflecting the best available
estimates and judgments of the Company's management at the time of
13
<PAGE> 20
preparation as to the future financial performance of the Company. Rothschild
also assumed that there had not occurred any material change in the Company's
assets, financial condition, results of operations, business or prospects since
the respective dates on which the Company's most recent financial statements
were made available to it. Rothschild relied on advice of counsel and
independent accountants to the Company as to all legal and financial reporting
matters with respect to the Company, the Offer and the Merger Agreement. In
addition, Rothschild did not assume responsibility for making an independent
evaluation, appraisal or physical inspection of any of the assets or liabilities
(contingent or otherwise) of the Company, nor was it furnished with any such
appraisal. Its opinion was based on economic, monetary and market and other
conditions as in effect on, and the information made available to it as of, the
date thereof. Accordingly, although subsequent developments may affect its
opinion, Rothschild did not assume any obligations to update, revise or reaffirm
the opinion. Rothschild further assumed that the Offer would be consummated in
accordance with the terms described in the Merger Agreement without waiver by
the Company of any of the conditions to its obligations thereunder.
Rothschild's opinion was presented for the information of the Board in
connection with its consideration of the Merger Agreement, and is directed only
to the fairness from a financial point of view of the consideration to be
received by holders of Shares pursuant to the Offer and the Merger. Rothschild's
opinion did not constitute a recommendation to any shareholder as to whether to
sell such shareholder's Shares in the Offer and does not constitute a
recommendation as to how any shareholder should vote at the Meeting.
THE FULL TEXT OF ROTHSCHILD'S OPINION, WHICH SETS FORTH, AMONG OTHER
THINGS, THE PROCEDURES FOLLOWED, ASSUMPTIONS AND QUALIFICATIONS MADE, MATTERS
CONSIDERED AND LIMITATIONS OF THE REVIEW UNDERTAKEN, IS INCLUDED AS APPENDIX B
TO THIS PROXY STATEMENT. SHAREHOLDERS OF THE COMPANY ARE URGED TO READ SUCH
OPINION IN ITS ENTIRETY.
Financial Analyses. The following is a summary of the analyses that
Rothschild performed and utilized in arriving at its opinion as to the fairness
of the consideration to be received by the shareholders of the Company pursuant
to the Offer and the Merger.
Comparable Company Analysis. Using public and other available information,
Rothschild computed and analyzed the trading multiples of twelve publicly traded
restaurant companies. The multiples included the last twelve months' revenues
("LTM Revenues"), last twelve months' earnings before interest, taxes,
depreciation and amortization ("LTM EBITDA") and last twelve months' earnings
before interest and taxes ("LTM EBIT"). Fiscal year 1997 and 1998 estimates
(1997E and 1998E) of Revenues, EBITDA and EBIT were also computed and analyzed.
The following companies were included in such analyses: Apple South, Applebee's;
Boston Chicken, Brinker International; Cracker Barrel; International Dairy
Queen; Lone Star Steakhouse; Luby's Cafeterias; NPC International; Outback
Steakhouse; Ryan's and Shoney's (collectively, the "Comparable Companies"). The
August 6, 1997 stock prices of the Comparable Companies reflected the following
mean multiples: 1.5x, 1.2x and 1.0x LTM Revenues, 1997E Revenues and 1998E
Revenues, respectively; 8.1x, 6.9x and 5.9x LTM EBITDA, 1997E EBITDA and 1998E
EBITDA, respectively; and 11.1x, 9.5x and 8.0x LTM EBIT, 1997E EBIT and 1998E
EBIT, respectively. Rothschild applied the foregoing mean LTM EBITDA and 1997E
EBITDA multiples to the applicable data for the Company to calculate the
Company's enterprise value and then deducted (i) net debt (defined as
interest-bearing debt less cash and cash equivalents) at June 29, 1997 and (ii)
deferred maintenance capital spending requirements. This analysis indicated that
an equity value of between $12.9 million and $21.3 million or between $1.16 and
$1.90 per Share could be imputed for the Company. Based on a comparable average
multiple for 1998E EBITDA, the analysis imputed a negative equity value for the
Company.
The Comparable Companies exhibit differences in financial and operating
characteristics to those of the Company which could affect the public trading
value of the Comparable Companies. The mean LTM EBITDA margin for the Comparable
Companies was 18.4% and the mean LTM EBIT margin was 13.8%. The Company's LTM
EBITDA margin was 3.8% and LTM EBIT margin was -1.1%. As a result, an analysis
of such imputed valuations is not mathematical; rather it requires consideration
of the foregoing financial and operating characteristics.
14
<PAGE> 21
Discounted Cash Flow Analysis. Rothschild applied a discounted cash flow
(DCF) analysis to the Company's financial forecasts for 1997 and 1998, prepared
by the Company's management and provided to Rothschild, and for 1999 through
2007, prepared by Rothschild using assumptions consistent with those underlying
the Company management forecasts. The Company did not provide Rothschild with
any financial forecasts for periods beyond 1998. Rothschild prepared two DCF
models: a base case model and the base case adjusted for deferred maintenance
capital spending requirements.
In conducting its discounted cash flow analysis, Rothschild first
calculated the estimated unlevered future streams of cash flows that the Company
would produce through 2007. Second, Rothschild estimated the Company's future
enterprise value at the end of 2007 by applying a multiple range of 5.0x-7.0x to
the Company's estimated EBITDA in 2007. Such unlevered cash flow streams and
future enterprise value were discounted to present values using discount rates
ranging from 10.0% to 11.5%, chosen to reflect different assumptions regarding
the Company's cost of capital. These present values were then aggregated and
reduced by the Company's net debt as of June 29, 1997. The base case model
indicated an imputed equity value of the Company of between $7.8 million and
$18.5 million, or between $0.70 and $1.66 per Share. The base case adjusted for
deferred maintenance capital spending requirements indicated an imputed equity
value of the Company of between $(2.2) million and $8.5 million, or between
$(0.19) and $0.76 per Share.
Alternative Analyses. Rothschild also performed three other analyses.
First, Rothschild analyzed a liquidation scenario assuming the sale of the
Company's restaurants individually as going concerns. The total liquidation
value was calculated by using either 75% of the Company management's estimated
realizable value if the restaurant had recently been remodeled or 3.0X the cash
flow of the individual restaurant if it had not been recently remodeled. This
indicated an imputed equity value of $18.8 million, or $1.68 per Share. After
adjusting for deferred maintenance capital spending requirements, the imputed
equity value was $8.8 million, or $0.79 per Share.
Second, Rothschild analyzed a growth scenario whereby an additional $40
million of debt was incurred (equity was also considered) and spent on marketing
and restaurant remodeling (discretionary capital spending) to restore historical
(1994) margins to the current revenue base over 5 years. 2002E EBITDA was then
calculated and 2002E Enterprise Value computed. After deducting current net debt
and the new debt incurred for the discretionary capital spending, the analysis
indicated a future equity value of $39.6 million. When discounted back 5 years
at 20% (the new cost of capital given the additional leverage), the imputed
value was $1.42 per Share. After adjusting for deferred maintenance capital
spending requirements, the imputed equity value was $1.06 per Share.
Third, Rothschild analyzed a sale/leaseback scenario whereby net proceeds
from the sale of restaurants, previously identified by the Company's management
as viable for sale/leaseback, were aggregated. Rothschild calculated the annual
lease amount based on the terms of the sale/leaseback transaction and the
forecasted EBITDA was adjusted to reflect this. The enterprise value was then
calculated and net debt (minus the proceeds from the sale/leaseback) was
deducted to impute an equity value of $17.7 million, or $1.59 per Share. After
adjusting for deferred maintenance capital spending requirements, the imputed
equity value was $7.7 million, or $0.69 per Share.
Additional Analyses. Rothschild reviewed the consideration paid in the
following twelve acquisitions of restaurant companies deemed by it to be most
comparable to the Company that had been announced since 1993 (Target/Acquiror):
Canyon Cafes/Apple South, DAKA International/Compass Group; McCormick &
Schmick/Apple South; Hopps Grill & Bar/Apple South; Casa Bonita Inc./CKE
Restaurants; Bugaboo Creek Steak House/Longhorn Steaks; Grady's American
Grill/Quality Dining; DF&R Restaurants/Apple South; Marcus Corp. (18 Applebee's
Restaurants)/Applebee's; Innovative Restaurant Concepts/Applebee's; Pub Venture
of New England/Applebee's; NRH Corp./National Pizza Company. Given the operating
and financial characteristics of the Company, including the deferred maintenance
capital spending requirements, in Rothschild's view, the transactions analyzed
were not meaningfully comparable to the Offer and the Merger. Rothschild also
reviewed the historical stock price performance of the Company.
A number of other qualitative and quantitative factors were taken into
account in the rendering of Rothschild's opinion. The summary of the valuation,
financial and comparative analyses undertaken by
15
<PAGE> 22
Rothschild in the preparation and rendering of its opinion as set forth above
should be considered as a whole and is not an exhaustive and complete
description of such analyses.
Engagement Letter. Pursuant to the terms of an Engagement Letter (the
"Rothschild Engagement Letter"), dated as of July 14, 1997, between Rothschild
and the Company, the Company has paid Rothschild cash fees of (a) $25,000 upon
the Company's execution of the Rothschild Engagement Letter, and (b) $175,000,
upon Rothschild's delivery of its opinion to the Company. The Company also
agreed to reimburse Rothschild for its reasonable out-of-pocket expenses
including attorney's fees, and to indemnify Rothschild against certain
liabilities, including certain liabilities under the federal securities laws.
CERTAIN EFFECTS OF THE MERGER
Following the Merger, Parent will own 100% of the Surviving Corporation's
outstanding capital stock. Parent will be the sole beneficiary of any future
earnings and growth of the Surviving Corporation (until shares of capital stock,
if any, are issued to other stockholders) and will have the ability to benefit
from any divestitures, strategic acquisitions or other corporate opportunities
that may be pursued by the Surviving Corporation in the future. Upon the
consummation of the Merger, the Existing Shareholders will cease to have any
ownership interests in the Company or rights of shareholders. The Existing
Shareholders will no longer benefit from any increases in the value of the
Company or any payment of dividends on the Shares and will no longer bear the
risk of any decreases in value of the Company. No cash dividends have ever been
paid on the Shares.
As a result of the Merger, the Surviving Corporation will be privately held
and there will be no public market for its Common Stock. Upon consummation of
the Merger, the Shares will cease to be included in the Nasdaq National Market.
In addition, registration of the Shares under the Exchange Act will be
terminated, and, accordingly, the Company will no longer be required to file
periodic reports with the Commission.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Information with respect to certain contracts, agreements, arrangements or
understandings with certain of the Company's current and prior executive
officers and directors is set forth below, including certain directors and the
current Chairman who were elected following consummation of the Offer, as
contemplated by the Merger Agreement.
Treatment of Stock Options. Pursuant to the Merger Agreement, the Company
has agreed that, at or immediately prior to the Effective Time, each outstanding
option (an "Option") to purchase shares of Common Stock of the Company pursuant
to the Company's 1989 Amended and Restated Stock Option Plan (the "Stock Option
Plan"), the Company's 1992 Equity Incentive Plan (the "Equity Incentive Plan")
or otherwise (collectively, the "Stock Plans"), whether or not then exercisable,
shall be canceled by the Company, and each holder of a canceled Option shall
have the right to receive at the Effective Time from the Company, in
consideration for the cancellation of such Option (i) in the case of Options
that are "in the money," an amount in cash equal to the product of (A) the
number of Shares previously subject to such Option and (B) the excess, if any,
of $1.65 over the exercise price per Share previously subject to such Option,
but in any event at least $.16 2/3 per Share subject to such Option, and (ii) in
the case of Options that are not "in the money," an amount of cash set forth on
a Schedule of Option Payments authorized and approved by the Compensation
Committee of the Board. This cancellation of Options was approved by the Board
of Directors of the Company in office prior to consummation of the Offer, and
the Company thereafter reached agreements with the holders of such outstanding
Options providing for such cancellation. In addition, all directors of the
Company prior to consummation of the Merger other than Mr. Scoggin, who entered
into a cancellation agreement as described above, waived any rights to receive
payment upon cancellation of Options held by them. The Merger Agreement provides
that the obligations of Parent and the Purchaser to effect the Merger shall be
subject, among other things, to satisfaction of the condition, unless waived by
Parent, that all outstanding Options shall have been surrendered prior to or
simultaneously with the Effective Time. See "THE MERGER -- Interests of Certain
Persons in the Merger."
16
<PAGE> 23
Director Liability and Indemnification. Under the BCL, a corporation may
adopt a provision in its certificate of incorporation that eliminates or limits
the personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director; provided, however,
that such provision may not eliminate or limit director monetary liability for:
(i) breaches of the director's duty of loyalty to the corporation or its
stockholders; (ii) acts or omissions not in good faith or involving intentional
misconduct or knowing violations of laws; (iii) the payment of unlawful
dividends or unlawful stock repurchases or redemptions; or (iv) transactions in
which the director received an improper personal benefit. The Company's
Certificate of Incorporation includes such a provision. The Company's by-laws
provide that the Company shall indemnify each present and former director and
officer of the Company or any of its subsidiaries to the fullest extent
permitted by applicable law.
Under the BCL, a corporation has the power to indemnify any director or
officer against expenses, judgments, fines, and settlements incurred in a
proceeding, other than an action by or in the right of the corporation, if the
person acted in good faith and in a manner that the person reasonably believed
to be in the best interests of the corporation or not opposed to the best
interests of the corporation, and, in the case of a criminal proceeding, had no
reasonable cause to believe the conduct of the person was unlawful. In the case
of an action by or in the right of the corporation, the corporation has the
power to indemnify any officer or director against expenses incurred in
defending or settling the action if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation; provided, however, that no indemnification may be
made when a person is adjudged liable to the corporation, unless a court
determines such person is entitled to indemnity for expenses, and then such
indemnification may be made only to the extent such court shall determine. The
BCL requires that to the extent an officer or director of a corporation is
successful on the merits or otherwise in defense of any third-party or
derivative proceeding, or in defense of any claim, issue, or matter therein, the
corporation must indemnify the officer or director against expenses incurred in
connection therewith.
The Merger Agreement provides that the Company's Certificate of
Incorporation and By-Laws will be amended to provide indemnification and
exculpation provisions in favor of the past and present directors or officers of
the Company to the fullest extent permitted under New York law and that such
provisions will remain in effect for at least six years from the Effective Time,
and further provides that the current directors' and officers' liability
insurance policies (or other policies providing, subject to certain conditions,
at least the same coverage as the current policies), or as much coverage as may
be available upon payment of 120% of current premiums, will be maintained in
effect for six years from the Effective Time. See "-- The Merger Agreement;
Certificate of Incorporation and By-Laws" and "Indemnification and Insurance."
Certain Interests in Parent. Thomas J. Russo, who was elected to the Board
as Parent's designee pursuant to the Merger Agreement and replaced Mr. Scoggin
as Chairman, President and Chief Executive Officer of the Company on October 20,
1997 following consummation of the Offer, holds a minority membership interest
in Parent which was received in exchange for the contribution of certain Shares
to Parent prior to the Offer (see "-- Background of the Merger"). Martha H. W.
Crowninshield and Barbara M. Ginader, who were also elected to the Board as
Parent's designees pursuant to the Merger Agreement, following the consummation
of the Offer on October 20, 1997, are managing directors of Boston Ventures
Company V, the general partner of BVLP V, the managing member of Parent and, as
such, share in Boston Ventures Company V's indirect beneficial interest in
membership interests of Parent through its general partnership interest in BVLP
V.
Employee Benefits. Current and prior officers, directors and employees of
the Company are third party beneficiaries of Parent's agreement, pursuant to the
Merger Agreement, to cause the Company to honor, in accordance with their terms,
all individual employment, severance and change of control agreements between
the Company and any officer, director or employee of the Company, to provide or
pay when due to employees and former employees all benefits and compensation
pursuant to the Company Benefit Plans (as defined in the Merger Agreement),
policies and arrangements in effect on the date of the Merger Agreement, and to
provide to Company employees and former employees benefits under all Company
Benefit Plans, programs and arrangements that provide benefits which are no less
favorable in the aggregate than those provided to such persons under the Company
Benefit Plans, programs and arrangements in effect on the date of the Merger
17
<PAGE> 24
Agreement (other than, in each case, with respect to the individual agreements
described above and other than with respect to stock and stock-based plans or
programs). See "-- The Merger Agreement; Employee Benefit Matters."
As discussed between Parent and Mr. Russo in connection with his agreement
to assume the positions of Chairman, President and Chief Executive Officer
following consummation of the Offer, Parent will agree to provide an economic
interest in up to an aggregate of 21.5% of any increase in the value of Parent
over its contributed capital following the Merger to certain senior executives
of the Company, including Mr. Russo, Mr. Lawless, and additional executives to
be employed by the Company (which may include certain current employees of the
Company promoted to executive positions, although no discussions have taken
place between Mr. Russo and any such persons with respect thereto).
Participation by such executives in such awards, which will be subject to
partial or total forfeiture under certain circumstances, will not carry any
membership rights in Parent.
Termination of Certain Employment Agreements. Following consummation of
the Offer, the Company entered into a general release and separation agreement
with each of Daniel R. Scoggin, former Chairman, President and Chief Executive
Officer of the Company, Stephen J. Kiel, former Senior Vice President, Chief
Financial Officer and Treasurer of the Company, Anthony E. Bezsylko, former
Senior Vice President of Operations of the Company, and Henri R. Evans, former
Vice President of Marketing of the Company, providing for payment to each such
person of amounts payable, and continuation of certain benefits to such persons
as provided, pursuant to their respective employment agreements upon the
termination of their employment following a "change of control" of the Company,
as defined therein. Consummation of the Offer constituted a change of control
for purposes of such employment agreements.
Pursuant to his separation agreement, the Company paid Mr. Scoggin
$1,046,500, plus accrued vacation pay, following his resignation on October 20,
1997. Mr. Scoggin is also entitled to receive certain benefits, including
insurance, use of a Company car or a car allowance and health benefits for two
years following his resignation. Following their respective resignations on
October 31, 1997, Mr. Kiel was paid $350,000 plus accrued vacation pay, Mr.
Bezsylko was paid $150,000 plus accrued vacation pay, and is entitled to receive
$12,500 per month for one year thereafter, and Mr. Evans was paid $130,000 plus
accrued vacation pay, and is entitled to receive $10,833.33 per month for one
year thereafter, pursuant to their respective separation agreements. Each of
Messrs. Kiel, Bezsylko and Evans is also entitled to receive certain benefits,
including medical and dental insurance plans, disability and life insurance
plans and use of a Company car or a car allowance for a period of one year
following his resignation.
Employment and Severance Agreements. The Company entered into an
employment agreement with Thomas J. Russo on October 20, 1997, following
consummation of the Offer and Mr. Russo's election as Chairman, President and
Chief Executive Officer of the Company. Pursuant to his agreement, Mr. Russo is
entitled to compensation consisting of (i) a base salary of $350,000 per annum,
subject to an automatic 5% increase on each anniversary of the date of his
employment with the Company and (ii) an annual bonus of up to 100% of his salary
for the relevant fiscal year based upon his performance relative to budget as
set forth in an Executive Bonus Plan to be established by the Company. Mr. Russo
is entitled to certain benefits including, but not limited to, insurance,
disability entitlement, medical benefits and use of a Company car.
Mr. Russo has agreed that, upon termination of his employment, he will not,
for a period of two years following termination, directly or indirectly solicit
any supplier or franchisee to cease to do business or reduce its business with
the Company, solicit any employee of the Company or enter into the employment
of, render any service to, engage, own, manage, operate, join, lend money or
otherwise offer assistance to or participate in or be connected with, as an
officer, director, employee, principal, agent, creditor, proprietor,
representative, stockholder, partner, associate, consultant, or otherwise, any
business that is engaged in the "business of the Company" (as defined in the
agreement) in the "geographic markets" (as defined in the agreement) in which
the Company is operating as of the date Mr. Russo's employment terminates;
provided, however, that Mr. Russo may acquire solely as an investment, shares of
capital stock or any other equity securities of any company engaged in the
business of the Company which are traded on any national securities exchange or
are regularly quoted in the over the counter market, so long as Mr. Russo does
not control, acquire a controlling
18
<PAGE> 25
interest in or become a member of a group which exercises direct or indirect
control of, more than 5% of any class of capital stock of such corporation and
does not become a director of any such corporation. Mr. Russo's employment
agreement provides that, in the event that Mr. Russo terminates his employment
either (i) during the six month period beginning three months following a change
in control (as defined in the agreement) or (ii) during the first three months
following a change of control following a material breach of his employment
agreement by the Company, Mr. Russo shall receive a lump sum equal to three
times the sum of his base salary plus the maximum bonus he is entitled to in the
fiscal year of the termination. Mr. Russo is also entitled to continuance of
benefits, including those described above, for three years following such
termination.
On November 3, 1997 Mark Lawless joined the Company as Senior Vice
President, Chief Financial Officer and Treasurer pursuant to an employment
agreement dated October 25, 1997. Under the agreement, Mr. Lawless is entitled
to compensation consisting of (i) a base salary of $225,000 per annum (to be
reviewed annually), and (ii) an annual bonus of up to 60% of his salary for the
relevant fiscal year based upon his performance relative to budget as set forth
in an Executive Bonus Plan to be established by the Company. Mr. Lawless is
entitled to certain benefits including, but not limited to, insurance,
disability entitlement, medical benefits and use of a Company car. Mr. Lawless
has agreed that, upon termination of his employment, he will not, for a period
of two years following termination, directly or indirectly solicit any supplier
or franchisee to cease to do business or reduce its business with the Company,
solicit any employee of the Company or enter into the employment of, render any
service to, engage, own, manage, operate, join, lend money or otherwise offer
assistance to or participate in or be connected with, as an officer, director,
employee, principal, agent, creditor, proprietor, representative, stockholder,
partner, associate, consultant, or otherwise, any business that is engaged in
the "business of the Company" (as defined in the agreement) in the "geographic
markets" (as defined in the agreement) in which the Company is operating as of
the date Mr. Lawless's employment terminates; provided, however, that Mr.
Lawless may acquire solely as an investment, shares of capital stock or any
other equity securities of any company engaged in the business of the Company
which are traded on any national securities exchange or are regularly quoted in
the over the counter market, so long as Mr. Lawless does not control, acquire a
controlling interest in or become a member of a group which exercises direct or
indirect control of, more than 5% of any class of capital stock of such
corporation and does not become a director of any such corporation. Mr.
Lawless's employment agreement provides that, in the event that Mr. Lawless
terminates his employment either (i) during the six month period beginning three
months following a change in control (as defined in the agreement) or (ii)
during the first three months following a change of control following a material
breach of his employment agreement by the Company, Mr. Lawless shall receive a
lump sum equal to two times the sum of his base salary plus the maximum bonus he
is entitled to in the fiscal year of the termination. Mr. Lawless is also
entitled to continuance of benefits, including those described above, for two
years following such termination.
The Company also has a Severance Agreement, dated August 18, 1995, with
Robin L. Moroz, Vice President, General Counsel and Secretary of the Company.
The agreement provides for a bonus (a "Bonus Payment") to be received within
five days after the expiration of a period of 120 days after a change of control
of the Company has occurred (the "Stay Period"), if (i) during the Stay Period
she terminates employment for Good Reason (as defined in the agreement) or (ii)
during the Stay Period her employment is terminated by the Company for any
reason other than cause or (iii) she does not voluntarily terminate her
employment during the Stay Period other than for Good Reason. The Bonus Payment
will be equal to one-half of the employee's highest annual base salary at any
time on or after the date of the agreement. Such Severance Agreement also
provides for an additional payment (a "Severance Payment") to be received, if
(i) within 24 months after a change in control of the Company, the employee
terminates her employment with the Company for Good Reason within 90 days after
the event which constitutes Good Reason or (ii) within such 24-month period, the
Company terminates her employment for any reason other than cause. The Severance
Payment will be equal to two times the sum of (i) the employee's highest annual
base salary at any time on or after the date of the Severance Agreement and (ii)
the employee's highest targeted bonus under the Company's incentive bonus plan
at any time on or after the date of the agreement. In addition, Ms. Moroz will
be entitled for a period of 24 months after the date of termination of
employment to the benefit of all employee welfare benefit plans and arrangements
in which she is entitled to participate immediately prior to the change
19
<PAGE> 26
of control (including, without limitation, medical and dental insurance plans,
disability and life insurance plans, and car allowance programs). The sale of
Shares by USI to Messrs. Guntner and DiPasquale (see "-- Background of the
Merger") constituted a change of control for the purposes of Ms. Moroz'
Severance Agreement.
EFFECTIVE TIME OF THE MERGER
As soon as practicable after the conditions to consummation of the Merger
(described below under "-- The Merger Agreement; Conditions to the Merger") have
been satisfied or waived, and unless the Merger Agreement has been terminated as
described below (see "-- The Merger Agreement; Termination"), a certificate of
merger will be filed with the Secretary of State of the State of New York, at
which time the Merger will become effective (the "Effective Time"). It is
presently contemplated that the Effective Time will be as soon as practicable
after approval and adoption of the Merger Agreement and the Merger at the
Meeting.
THE MERGER AGREEMENT
Set forth below is a summary of the material terms of the Merger Agreement.
This summary is not a complete description of the terms and conditions of the
Merger Agreement, and shareholders are urged to read the Merger Agreement, which
is included in this Proxy Statement as Appendix A. Any capitalized terms used
below and not defined below or elsewhere in this Proxy Statement are as defined
in the Merger Agreement.
The Merger; Effective Time. The Merger Agreement provides that, as soon as
practicable after the satisfaction or waiver (if permissible) of the conditions
to the Merger and in accordance with the relevant provisions of the BCL, the
Purchaser will be merged with and into the Company. As a result of the Merger,
the separate corporate existence of the Purchaser will cease and the Company
will continue as the Surviving Corporation and will be a wholly-owned subsidiary
of Parent. As soon as practicable after the conditions to consummation of the
Merger described below have been satisfied or waived, and unless the Merger
Agreement has been terminated as provided below, a certificate of merger will be
filed with the Secretary of State of the State of New York, at which time the
Merger will become effective (the "Effective Time"). It is presently
contemplated that the Effective Time will be as soon as practicable after
approval and adoption of the Merger Agreement at the Meeting.
Conversion of Securities in the Merger. At the Effective Time, each Share
issued and outstanding immediately prior to the Effective Time (other than any
Shares owned by Parent, the Purchaser or any other wholly-owned subsidiary of
Parent, or held in the treasury of the Company or by any subsidiary of the
Company and other than Dissenting Shares), shall be converted into and represent
the right to receive $1.65 in cash, without interest (the "Merger
Consideration").
The Purchaser or State Street Bank & Trust Company as paying agent shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to the Merger Agreement to any holder of Shares such amounts that the
Purchaser or the paying agent is required to deduct and withhold with respect to
the making of such payment under the Internal Revenue Code of 1986, as amended
(the "Code"), the rules and regulations promulgated thereunder or any other
applicable law. As of the Effective Time, all such Shares shall no longer be
outstanding, shall be automatically canceled and shall cease to exist, and each
holder of a stock certificate which formerly represented any such Shares shall
thereafter cease to have any rights with respect to such Shares, except the
right to receive the Merger Consideration without interest for such Shares upon
the surrender of such certificate or certificates in accordance with Section
3.02.
By virtue of the Merger, at the Effective Time, (i) each Share issued and
outstanding immediately prior to the Effective Time, (other than Shares owned by
Parent, the Purchaser or any other wholly-owned subsidiary of Parent, Dissenting
Shares (as defined in the Merger Agreement) and any Shares held in the treasury
of the Company or by any subsidiary of the Company) shall be converted into the
right to receive an amount in cash equal to the Merger Consideration upon
surrender of a stock certificate that, immediately prior to the Effective Time,
represented an issued and outstanding Share, (ii) each Share issued and
outstanding
20
<PAGE> 27
immediately prior to the Effective Time and owned by Parent, the Purchaser or
any other wholly-owned subsidiary of Parent or held in the Company's treasury or
by any subsidiary of the Company, shall be canceled without payment of any
consideration therefor, and (iii) each share of common stock, par value $.01 per
share, of the Purchaser issued and outstanding immediately prior to the
Effective Time shall be converted into and become that number of fully-paid and
non-assessable Shares of Common Stock, par value $.16 2/3 per share, of the
Surviving Corporation as shall equal the quotient of the number of Shares issued
and outstanding at the Effective Time divided by 1,000.
Cancellation of Options. The Merger Agreement provides for cancellation,
at or immediately prior to the Effective Time, of each outstanding Option as
described under "-- Interests of Certain Persons in the Merger"). All Stock
Plans shall terminate as of the Effective Time, and the Company shall ensure
that following the Effective Time no holder of an Option or any participant in
any Stock Plans shall have any right thereunder to acquire any capital stock of
the Company, Parent or the Surviving Corporation. See "-- Interests of Certain
Persons in the Merger; Treatment of Stock Options."
Directors and Officers. The Merger Agreement provides that, promptly upon
the acceptance for payment of, and payment by the Purchaser in accordance with
the Offer for, Shares pursuant to the Offer, the Purchaser shall be entitled to
designate a majority of the Ground Round Board, which occurred on October 20,
1997 (See "-- Background of the Merger"). After the time that the Purchaser's
designees constitute at least a majority of the Board and until the Effective
Time, any amendment or termination of the Merger Agreement or the Certificate of
Incorporation or By-laws of the Company and any extension for the performance or
waiver of the obligations or other acts of Parent or the Purchaser or waiver of
the Company's rights hereunder shall also require the approval of a majority of
the then serving directors, if any, who are directors as of the date of the
Merger Agreement (the "Continuing Directors" who shall include each member of
the Special Committee of the Board formed to consider the Merger for so long as
he wishes to serve) except to the extent that applicable law requires that such
action be acted upon by the full Board, in which case such action will require
the concurrence of a majority of the Board, which majority shall include each of
the Continuing Directors. If the number of Continuing Directors prior to the
Effective Time is reduced below three for any reason, the remaining Continuing
Directors or Director shall be entitled to designate persons to fill such
vacancies who shall be deemed Continuing Directors for all purposes of this
Agreement. The Board shall not delegate any matter set forth in this paragraph
to any committee of the Board.
The Merger Agreement further provides that the directors of the Purchaser
immediately prior to the Effective Time will be the initial directors of the
Surviving Corporation and that the officers of the Company immediately prior to
the Effective Time will be the initial officers of the Surviving Corporation,
until their respective successors are duly elected and qualified.
Certificate of Incorporation and Bylaws. The Certificate of Incorporation
of the Company, as amended at the Effective Time to read as set forth in Exhibit
A to the Merger Agreement, shall be the certificate of incorporation of the
Surviving Corporation until duly amended in accordance with the terms thereof
and the BCL. The By-laws of the Company as in effect on the date of the Merger
Agreement, except as amended as set forth in Exhibit B to the Merger Agreement,
shall be the By-laws of the Surviving Corporation, until duly amended in
accordance with the terms thereof and the BCL. Promptly following the Effective
Time, Parent shall approve such amendment to the By-laws as the sole shareholder
of the Surviving Corporation.
Representations and Warranties. The Merger Agreement contains customary
representations and warranties with respect to the Company, including, but not
limited to, (i) the Company's organization and capitalization, (ii) that the
Board of Directors of the Company has approved the Merger Agreement and the
transactions contemplated thereby (including the Offer and the Merger) so as to
render the prohibitions of Section 912 of the BCL to be inapplicable to the
Merger Agreement and the transactions contemplated thereby, (iii) relating to
required consents, approvals and governmental filings (iv) the accuracy of the
Company's documents and reports filed with the Commission, the Company's
financial statements and financial condition, (v) the absence of certain changes
or events which, in the reasonable opinion of the Company, are likely,
individually or in the aggregate, to have a Material Adverse Effect (as that
term is defined in the Merger Agreement) or adversely affect the ability of the
Company to consummate the
21
<PAGE> 28
transactions contemplated by the Merger Agreement, (vi) the absence of certain
litigation, (vii) the Company's employee benefit plans, (vii) real property
matters, (viii) tax matters, (ix) environmental matters and (x) intellectual
property matters.
In the Merger Agreement, Parent and the Purchaser have made customary
representations and warranties, including, without limitation, relating to their
respective corporate organization, authority to execute, deliver and perform the
Merger Agreement, and that Parent has or will have and will make available to
the Purchaser or the Paying Agent, as applicable, sufficient funds in sufficient
time to consummate the Offer and the Merger in accordance with the terms of the
Merger Agreement.
Shareholders' Meeting. Parent and the Purchaser have agreed to vote at the
Meeting all Shares owned or acquired pursuant to the Offer or otherwise by them
or any of their affiliates in favor of the Merger Agreement and the Merger. See
"GENERAL INFORMATION."
Conduct of Business. In the Merger Agreement, the Company has covenanted
and agreed that it shall, and shall cause each of its subsidiaries to, use its
reasonable efforts in light of the Company's present financial condition to
preserve intact the business organization of the Company and each of its
subsidiaries, to keep available, consistent with the Merger Agreement, the
services of their respective operating personnel and to preserve the goodwill of
the Company and its subsidiaries with respect to third parties with whom they
have a business relationship, including, without limitation, suppliers. Except
as contemplated by the Merger Agreement, during the period from the date of the
Merger Agreement to the Effective Time, the Company and each of its subsidiaries
will conduct their respective business and operations only in the ordinary and
usual course of business consistent with past practice.
Without limiting the generality of the provisions described in the
preceding paragraph, the Merger Agreement provides that prior to the Effective
time, without the written consent of Parent, the Company will not and will cause
each of its subsidiaries not to (a) amend its certificate of incorporation or
by-laws or similar governing documents; (b) create, incur or assume any
indebtedness for borrowed money, (including obligations in respect of capital
leases other than obligations of not more than $50,000, individually or in the
aggregate, created or incurred in the ordinary course of business), except
indebtedness for borrowed money incurred under the Existing Credit Agreement or
pursuant to the New Credit Agreement or the Bank Standstill Agreement, or
assume, guarantee, endorse or otherwise become liable or responsible for the
obligations of any other person other than any subsidiaries of the Company; (c)
declare, set aside or pay any dividend or other distribution in respect of its
capital stock; (d) issue, sell, grant, purchase or redeem any shares of its
capital stock or securities convertible into or exercisable for, or options with
respect to, or warrants to purchase or rights to subscribe to or otherwise
purchase, or subdivide or in any way reclassify, any shares of its capital
stock, except for the issuance of Shares issuable upon conversion of the
convertible loan notes held by the Lenders in accordance with their terms or the
exercise of options outstanding on the date of the Merger Agreement; (e) except
for certain regularly scheduled or approved raises scheduled to occur prior to
the date of the Merger Agreement, increase the aggregate amount of compensation
payable or to become payable to any of its directors, officers or certain
employees of the Company, whether by salary, bonus or otherwise; (f) enter into
any agreement, commitment or transaction, which, if entered into prior to the
date of the Merger Agreement, would have been required to be disclosed to the
Purchaser; (g) sell, transfer, mortgage, pledge, grant any security interest in,
or permit the imposition of any lien or other encumbrance on, any asset other
than in the ordinary course of business consistent with past practice, with
certain exceptions related to the Credit Agreement and the Sale Leaseback Letter
of Intent; (h) waive any material right under any material agreement contract;
(i) other than as required by any changed in GAAP, make any material change in
its account methods or practices or make any material change in depreciation or
amortization policies or rates adopted by it for accounting purposes or, other
than normal writedowns or writeoffs consistent with past practice, make any
writeoffs of notes or accounts receivable; (j) make any loan or advance to any
person (including directors, officers and employees of the Company), with
certain exceptions, other than any subsidiary of the Company, otherwise than in
the ordinary course of business consistent with past practice; (k) terminate or
fail to renew or replace on substantially similar or more favorable terms, any
contract or other agreement, other than in the ordinary course of business,
which termination or failure to renew is legally avoidable by the Company and
individually or in the aggregate, could reasonably be expected to have a
22
<PAGE> 29
Material Adverse Effect; (l) fail to maintain all Insurance Policies in full
force and effect or fail to renew or replace with equivalent coverage any
Insurance Policy which has expired; (m) take any action which constitutes a
violation of any Liquor License which violation individually or in the
aggregate, would, in the reasonable judgment of the Company, be likely to result
in the termination of any one or more Liquor Licenses covering restaurant
operations generating, individually or in the aggregate, for the three months
ended June 30, 1997, average weekly gross food and beverage revenues in excess
of $300,000; (n) fail to operate, maintain, repair or otherwise preserve the
Real Property substantially in accordance with current practice in light of the
Company's present financial condition and not to exceed the capital expenditure
budget of the Company previously disclosed to Parent; (o) fail to comply with
all applicable filings, payment and withholding obligations under all applicable
federal, state, local and foreign tax laws except where such failure to comply
would not have a Material Adverse Effect; (p) breach, terminate or amend the
Bank Standstill Agreement or terminate or amend either the Bank Letter of Intent
or the Sale and Leaseback Letter of Intent or take any action not otherwise
permitted or required pursuant to such agreements that directly results in the
counterpart to the Bank Letter of Intent or the Sale and Leaseback Letter of
Intent terminating or stating an intention to terminate the same; or (q) agree
in writing to, or otherwise take or authorize, any of the foregoing actions.
Notices. The Company and Parent are each obligated under the Merger
Agreement to give the other prompt notice of (i) the occurrence, or failure to
occur, of any event that such party believes would be likely to cause any of its
representations or warranties contained in the Merger Agreement to be untrue or
inaccurate in any material respect at any time from August 29, 1997 to the
Effective Time and (ii) any material failure of the Company, Parent or the
Purchaser, as the case may be, or any officer, director, employee or agent
thereof, to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder.
Employee Benefits Matters. Under the Merger Agreement (a) from and after
the date of purchase of Shares pursuant to the Offer, the Company or the
Surviving Corporation will, and Parent will cause the Company or the Surviving
Corporation to honor, in accordance with their terms, all individual employment,
severance and change of control agreements between the Company and any officer,
director or employee of the Company including, without limitation, bonuses,
incentive or deferred compensation in existence on the date of the Merger
Agreement (b) from and after the date of purchase of Shares pursuant to the
Offer, the Company or Surviving Corporation, as applicable, will, and Parent
will, or will cause the Company, the Surviving Corporation or the Company to,
provide or pay when due to employees and former employees of the Company all
benefits and compensation pursuant to the Company Benefit Plans, policies and
arrangements in effect on the date of the Merger Agreement (other than with
respect to stock and stock-based plans or based benefits or awards) earned or
accrued through, and to which such individuals are entitled as of, the Effective
Time (or such later time as such Company Benefit Plans as in effect at the
Effective time or terminated or canceled by the Surviving Corporation in the
manner and subject to the conditions of the Merger Agreement); (c) for a period
ending two (2) years after the Effective Time, the Company or the Surviving
Corporation, as applicable, will, and Parent, will cause the Company or the
Surviving Corporation to, provide to Company employees and former employees
benefits under all Company benefit Plans, programs and arrangements that provide
benefits which are no less favorable in the aggregate than those provided to
such persons under the Company Benefit Plans, programs and arrangements of the
Company in effect on the date (other than with respect to the agreements subject
to subsection (a) above and other than with respect to stock and stock-based
plans or programs, including stock grants, options to purchase stock, stock
investment, alternatives, other stock based benefits or awards; and (d) nothing
in the Merger Agreement shall require the continued employment of any person,
and except as expressly set forth in the Merger Agreement no provision therein
shall prevent Parent or Surviving Corporation from amending or terminating any
Company Benefit Plan (see, "-- Interests of Certain Persons in the Merger").
Indemnification and Insurance. The Merger Agreement provides that the
Certificate of Incorporation of the Surviving Corporation shall, for period of
six years from the Effective Time, contain provisions no less favorable with
respect to indemnification than are set forth in such Certificate of
Incorporation of the Company, as amended as set forth in Exhibit A to the Merger
Agreement to provide that officers and directors
23
<PAGE> 30
shall be indemnified to the fullest extent permitted under New York law, which
provisions shall not be amended, repealed or otherwise modified for a period of
six years from the Effective Time in any manner that would adversely affect the
rights thereunder of individuals who at any time prior to the Effective Time
were directors, officers, agents or employees of the Company, unless such
modification shall be required by law.
Under the Merger Agreement, the Company shall regardless of whether the
Merger becomes effective, and, after the Effective Time the Surviving
Corporation shall, in each case to the fullest extent permitted under New York
law, indemnify and hold harmless, each present and former director and officer
of the Company and each of its Subsidiaries (collectively, the "Indemnified
Parties") against judgments, fines, reasonable amounts paid in settlement and
reasonable expenses (including attorneys' fees, costs and charges) incurred as a
result of any action or proceeding (whether arising before or after the
Effective Time), or any appeal therefrom whether civil or criminal, arising out
of or pertaining to any action or omission in their capacity as an officer or
director, prior to or at the Effective Time, for a period of six years after the
Effective Time (or with respect to claims arising from service as an officer or
director prior to the Effective Time and asserted or made prior to such sixth
anniversary which have not been resolved prior to such sixth anniversary, until
the time such matters are finally resolved). In the event of any such action or
proceeding (i) the Company or the Surviving Corporation, as the case may be,
shall pay the reasonable fees and expenses of counsel selected by the
Indemnified Parties, which counsel shall be reasonably satisfactory to the
Company or the Surviving Corporation, promptly after statements therefor are
received provided that an agreement has been entered into by such Indemnified
Party agreeing to repay such amounts to the Company if the Indemnified Party is
ultimately found not be entitled to indemnification, by a final judgment (not
subject to further appeal) of a court of competent jurisdiction, or to the
extent such amount exceeds the indemnification to which such Indemnified Party
is entitled under New York law and (ii) the Company and the Surviving
Corporation shall cooperate and provide access to all documents necessary or
beneficial to the defense of any such matter; provided, however, that neither
the Company nor the Surviving Corporation shall be liable for any settlement
effected without its written consent (which consent shall not be unreasonably
withheld, delayed or conditioned); and provided further that neither the Company
nor the Surviving Corporation shall be obligated to pay the fees and expenses of
more than one counsel for all Indemnified Parties in any single action except to
the extent that two or more of such Indemnified Parties shall have conflicting
interests in the outcome of such action.
Under the Merger Agreement, the Surviving Corporation has agreed to use its
best efforts to maintain in effect for six years from the Effective Time, if
available, the current directors' and officers' liability insurance policies
maintained by the Company (provided that the Surviving Corporation may
substitute therefor policies of at least the same coverage containing terms and
conditions which are not materially less favorable) with respect to matters
occurring prior to the Effective Time; provided, however, that the Surviving
Corporation shall not be required to maintain such insurance to the extent that
the annual premiums therefor exceed 120% of the annual premiums currently paid
by the Company in respect of the current policy or policies (the "Maximum
Amount"), but in such case shall purchase as much comparable coverage as
available for the Maximum Amount.
The Merger Agreement further provides that in the event the Company or the
Surviving Corporation or any of their respective successors (i) is consolidated
with or merges into another person and shall not be the continuing or Surviving
Corporation or entity of such consolidation or merger or (ii) transfers all or
substantially all of its properties and assets to any person in a single
transaction or a series of transactions, then, and in such case, Parent shall
make or cause to be made proper provision so that the successors or transferees
of the Company or the Surviving Corporation, as the case may be, shall comply in
all material respects with such indemnification and insurance provisions.
Further Assurances. Pursuant to the terms of the Merger Agreement and
subject to the conditions thereof, each of the parties thereto has agreed to use
all reasonable efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable to consummate and
make effective as promptly as practicable the transactions contemplated by the
Merger Agreement, including, without limitation, using all reasonable efforts to
obtain all necessary waivers, consents and approvals and to
24
<PAGE> 31
effect all necessary registrations and filings. Neither Parent nor the Company
is obligated, however, to divest or agree to divest a significant asset in order
to obtain any waiver, consent or approval.
Conditions to the Merger. The respective obligations of each party to the
Merger Agreement to effect the Merger are subject to the satisfaction at or
prior to the Effective Time of the following conditions: (a) the Purchaser shall
have accepted for payment, and paid for, Shares validly tendered and not
withdrawn pursuant to the Offer representing (together with Shares otherwise
owned by Parent or the Purchaser) not less than 50.1% of the then outstanding
Shares; (b) the Merger Agreement and the Merger shall have been approved and
adopted by the requisite vote or consent, if any, of the shareholders of the
Company required by the BCL; and (c) no order, statute, rule, regulation,
execution order, stay, decree, judgment or injunction shall have been enacted,
entered, issued, promulgated or enforced by any court or governmental authority
which prohibits or restricts the consummation of the Merger Agreement provides
that the obligations of Parent and the Purchaser to effect the Merger shall be
further subject to satisfaction of the condition, unless waived by Parent, that
all outstanding Options shall have been surrendered prior to or simultaneously
with the Effective Time.
No Solicitation. The Company has agreed that it will not, and will not
permit any of its officers, directors, advisors, agents or representatives to,
directly or indirectly, solicit or encourage the initiation or submission of any
inquiries, proposals or offers regarding any acquisition, merger, tender offer,
exchange offer, recapitalization (involving an equity investment other than
solely from existing shareholders) or similar transaction involving sale of all
or a substantial portion of the assets of, or sale of shares of capital stock or
securities convertible into capital stock, (other than a sale only to existing
lenders in connection with a refinancing of debt) of the Company whether or not
in writing and whether or not delivered to the shareholders of the Company, or
similar transactions involving the Company (any of the foregoing inquiries,
proposals or offers being referred to as an "Acquisition Proposal"); provided,
however, that nothing contained in the Merger Agreement shall prevent the
Company's Board from (i) referring any third party to this provision, (ii)
considering negotiating or participating in discussions regarding an unsolicited
bona fide written Acquisition Proposal (iii) complying with Rule 14e-2(a) or
Rule 14d-9 promulgated under the Exchange Act, if applicable, with regard to an
Acquisition Proposal made in the form of a tender offer by a third party. If the
Board of the Company after duly considering advice, written or otherwise, of the
Company's outside counsel and financial advisor, determines in good faith that
it would be consistent with its fiduciary responsibilities to approve or
recommend a Superior Proposal (as defined below), then (A) the Company shall not
enter into any agreement with respect to the Superior Proposal and (B) any other
obligation of the Company under the Merger Agreement shall not be affected
unless the Merger Agreement is terminated and fees and/or expenses of Parent and
the Purchaser are paid in accordance with the terms of the Merge Agreement. As
used in the Merger Agreement, the term "Superior Proposal" means a bona fide
proposal made by a third party to acquire the Company pursuant to a tender or
exchange offer, a merger, a sale of all or substantially all of its assets or
otherwise that the Board determines in its good faith judgment to be more
favorable to the Company's shareholders than the Offer and the Merger (after
considering the advice, written or otherwise, of its outside counsel and
financial advisor).
Termination. The Merger Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, whether prior to or after
approval of the Merger by the shareholders of the Company,
(a) by mutual written consent of Parent, the Purchaser and the
Company;
(b) by the Company if the representations and warranties of the
Purchaser set forth in the Merger Agreement are not true and correct in all
material respects at any time prior to the expiration of termination of the
Offer (except as to those representations and warranties which are made as
of a specified date, which shall be true and correct as of such date) and
such failure materially delays consummation of the Offer, or materially and
adversely affects the ability of the Purchaser and Parent to consummate the
Offer and the Merger on substantially the terms set forth in the Merger
Agreement;
(c) by Parent and the Purchaser if (i) the Effective Time shall not
have occurred on or prior to November 30, 1997, due to a failure of any of
the conditions to the Merger described under "Conditions
25
<PAGE> 32
to the Merger" above (other than in clause (a) thereof) otherwise than as a
result of a breach or default by Parent or the Purchaser under the Merger
Agreement; (ii) the Company shall have breached its obligations described
under "No Solicitation" above; or (iii) the Board shall have withdrawn or
modified, in a manner adverse to the Purchaser, its approval or
recommendation of the Offer, the Merger Agreement or the Merger or shall
have recommended or approved another tender to exchange offer or
Acquisition Proposal, or shall have adopted any resolution to effect any of
the foregoing; or
(d) by Parent and the Purchaser or the Company if any court of
competent jurisdiction in the United States or other United States
governmental body shall have issued an order, decree or ruling or taken any
other action restraining, enjoining or otherwise prohibiting the Merger and
such order, decree, ruling or other action is or shall have become
nonappealable.
In the event of the termination of the Merger Agreement and the abandonment
of the Merger pursuant to the terms of the Merger Agreement, the Merger
Agreement shall, except as set forth therein, become void and have no effect,
without any liability on the part of any party to the Merger Agreement or its
affiliates, directors, officers or shareholders; provided, however, that no such
termination shall relieve any of the Company, Parent or the Purchaser, as the
case may be, from liability for damages arising from any willful or intentional
breach of the Merger Agreement or from any obligations regarding fees and
expenses.
Fees and Expenses. In accordance with the terms of the Merger Agreement,
in the event that the Company terminates the Merger Agreement due to the
acceptance by the Board of a Superior Proposal, pursuant to Section 9.01(b)(v)
of the Merger Agreement the Company shall pay to Parent a fee in the amount of
$1,100,000 plus Expenses.
Amendments. The Merger Agreement may be amended, modified or supplemented
only by written agreement of Parent (for itself and the Purchaser) and the
Company at any time prior to the Effective Time with respect to any of the terms
contained in the Merger Agreement executed by duly authorized officers of the
respective parties, except that after the earlier of (a) the purchase by the
Purchaser of a majority of the Shares on a fully diluted basis, and (b) the
meeting of shareholders to approve the Merger contemplated by the Merger
Agreement, the price per Share to be paid pursuant to the Merger Agreement to
the holders of Shares shall in no event be decreased and the form of
consideration to be received by the holders of such Shares in the Merger shall
in no event be altered without the approval of such holders.
SOURCE AND AMOUNT OF FUNDS
The total amount of funds required by the Purchaser to purchase all of the
Shares pursuant to the Offer and the Merger is approximately $17.5 million. The
Purchaser obtained $14,482,466 to purchase all tendered Shares pursuant to the
Offer, and plans to obtain the funds required to be exchanged for Shares in the
Merger, through capital contributions from Parent. Parent has obtained, or plans
to obtain, such funds (together with approximately $7.5 million of additional
funds which have been loaned to the Company on a subordinated basis as required
by the Fourth Amendment and the September 29 Bank Waiver, discussed below, to
pay fees and expenses of the Offer and for working capital and other purposes)
from committed capital of BVLP V.
The Existing Credit Agreement. The Company is a guarantor under an Amended
and Restated Credit Agreement (as amended, the "Existing Credit Agreement"),
dated as of September 12, 1996, among its subsidiaries, The Ground Round, Inc.
("GRI"), and GR of Minn., Inc. (together with GRI, the "Borrowers"), each of the
financial institutions party thereto (the "Lenders"), The Bank of New York, as
agent for the Lenders (the "Agent"), and The Chase Manhattan Bank, as co-agent
for the Lenders. The Company's other subsidiaries are also guarantors under the
Existing Credit Agreement (collectively with the Company, the "Guarantors").
The Bank Standstill Letter and September 29 Bank Waiver. In connection
with and as a condition to Parent and the Purchaser's execution of the Merger
Agreement, the Lenders agreed, pursuant to a letter agreement, dated as of
August 29, 1997 (the "Bank Standstill Agreement"), among the parties to the
Existing Credit Agreement, to waive the Borrower's and the guarantors'
compliance with the EBITDA maintenance covenant contained in the Existing Credit
Agreement for the fiscal months ended July, August and September
26
<PAGE> 33
1997 (the "EBITDA Waiver"). In addition, on September 29, 1997, the Lenders
extended the EBITDA Waiver through the fiscal month ending December 1997 and
also waived the Borrowers' and the guarantors' compliance with the net worth and
capital expenditures covenants contained in the Existing Credit Agreement
through the fiscal month ending December 1997 (the "September 29 Bank Waiver").
These additional and extended waivers were made contingent upon (i) the
Borrowers receiving at least $7,500,000 of proceeds from the issuance of
subordinated debt to the Purchaser (the "Subordinated Debt Proceeds") by no
later than October 22, 1997 (all such proceeds were received by October 22,
1997), and (ii) there occurring and continuing no default or event of default
under the Existing Credit Agreement (other than events of default occurring
prior to the date of the September 29 Bank Waiver and disclosed in writing to
the Agent).
The Fourth Amendment to the Existing Credit Agreement. Consistent with the
terms of a letter of intent, dated August 29, 1997, among the parties to the
Existing Credit Agreement (and related guarantees), on October 20, 1997 each of
the parties to the Existing Credit Agreement executed a Fourth Amendment to the
Existing Credit Agreement (the "Fourth Amendment") which, upon its
effectiveness, as described below, will amend the Existing Credit Agreement (as
amended by the Fourth Amendment, the "New Credit Agreement") upon consummation
of the Merger (and satisfaction of certain other conditions, as discussed
below). The Fourth Amendment was also consented to by the Guarantors.
Pursuant to the terms of the Fourth Amendment, the term of the New Credit
Agreement will be extended to October 7, 2000, and the total commitments under
the New Credit Agreement initially will be $41,828,778.64 (the "Total
Commitment"), of which $37,138,360.22 (the "Revolving Credit Commitment") will
take the form of a revolving credit facility (the "Revolving Credit Facility")
and $4,690,418.42 (the "Letter of Credit Commitment") will be available for
letters of credit ("Letters of Credit"). Borrowings under the Revolving Credit
Facility bear interest at either (i) the Alternate Base Rate (as defined in the
New Credit Agreement) plus 0.75% or (ii) the Eurodollar Rate (as defined in the
New Credit Agreement) plus 2.65%. The Borrowers will also pay to the Lenders the
following fees in connection with the New Credit Agreement: (i) a commitment fee
equal to 0.50% of the average daily unused Total Commitment less the face amount
of all outstanding Letters of Credit, payable quarterly in arrears; (ii) a fee
equal to 1.0% of the average daily amount available to be drawn under any
outstanding Letters of Credit; and (iii) an amendment fee equal to 1.0% of the
Total Commitment, payable on the Closing Date (as defined below).
Under the New Credit Agreement, the Revolving Credit Facility Commitment
will be permanently reduced by (i) $500,000 at the end of each of the third and
fourth fiscal quarters of fiscal year 1998; (ii) $1,000,000 at the end of each
fiscal quarter of fiscal year 1999; and (iii) $1,250,000 at the end of each
fiscal quarter of fiscal year 2000. In addition, 100% of the proceeds of asset
sales and from tax refunds must be used to repay obligations under the Revolving
Credit Facility and to reduce the Revolving Credit Facility Commitment and 50%
of excess cash flow shall be applied to reduce the Total Commitment until such
amount reaches $26,000,000 (after giving effect to all other reductions of the
Total Commitment). Letters of Credit that have expired or have been returned
undrawn or have been reduced will result in a permanent reduction of the Letter
of Credit Commitment by the amount of such expired or returned Letter of Credit
or the amount of such reduction, as applicable.
The New Credit Agreement will contain covenants similar to those in the
Existing Credit Agreement, with certain changes including: (i) a requirement
that GRI use its commercially reasonable efforts to transact a sale/leaseback
for at least 20 fee properties on terms and conditions reasonably acceptable to
GRI and the Lenders (the "Sale/Leaseback Transaction"; the sale/leaseback of
thirteen properties closed on October 20, 1997, as described below); (ii)
requirements regarding maintenance of certain levels of EBITDA, Profit After
Controllables (as defined in the Existing Credit Agreement) and net worth (all
subject to adjustment for the Borrowers' benefit during the first six months of
the New Credit Agreement); (iii) limitations on capital expenditures; and (iv)
application of certain insurance proceeds received by the Borrowers after the
closing of the New Credit Agreement with respect to its two fire-damaged
properties (the "Fire Damaged Properties") to rebuild such properties. In
addition, the Borrowers will be required to have at all times cash on hand or
availability under the New Credit Facility of at least $4,000,000.
27
<PAGE> 34
The Fourth Amendment will become effective (the "Closing Date") upon
consummation of the Merger (which the Fourth Amendment expressly provides will
not be a default under the New Credit Agreement) and satisfaction of certain
other conditions including, among others: (i) payment of all accrued and unpaid
interest and fees under the Existing Credit Agreement; (ii) payment of
approximately $1,300,000 to the Lenders in satisfaction of certain convertible
notes (the "Convertible Notes"); and (iii) receipt by the Lenders of any
insurance proceeds paid to the Borrowers prior to the closing of the New Credit
Agreement with respect to the Fire Damaged Properties (the "Insurance
Proceeds"). In the event that the Merger is not consummated prior to the
December 31, 1997, the expiration date of the Current Credit Facility (and, as a
result, the Fourth Amendment does not become effective), the Lenders agreed in
the September 29 Bank Waiver to act in a commercially reasonable manner in
considering any request by the Borrowers to extend the expiration date of the
Existing Credit Agreement to enable the Purchaser to consummate the Merger.
While the consummation of the Offer would have constituted an event of
default under the existing Credit Agreement, on October 3, 1997, in anticipation
of the execution of the Fourth Amendment, the Lenders agreed to waive any
default or event of default resulting from the consummation of the Offer. The
Lenders also agreed that the Subordinated Debt Proceeds could be used by the
Borrowers for working capital purposes and to repay to the Lenders any amount of
principal and interest under the Existing Credit Agreement previously deferred
by the Lenders (in lieu of the entire amount of the Subordinated Debt Proceeds
being used to pay down the loans, as required by the Existing Credit Agreement).
In addition, the Lenders agreed not to convert the Convertible Notes to Shares
prior to January 1, 1998, and to accept prepayment in full of such notes at any
time prior to such date.
The Sale/Leaseback Transaction. Also on October 20, 1997, the Company sold
to, and leased back from, subsidiary companies of CNL Fund Advisors, pursuant to
the terms of the Commitment Letter dated September 9, 1997, thirteen
restaurants. The Commitment Letter provided for the Company to sell and
leaseback a minimum of fifteen and a maximum of twenty restaurants. The net sale
proceeds in the amount of $13,403,040 from the thirteen restaurants sold on
October 20th were used to reduce bank debt under the Existing Credit Agreement
by an equal amount. CNL Fund Advisors funded certain expenses of the seller,
including legal fees, brokerage commission and certain transactional costs, for
a total gross funding of $13,824,024. The term of the Commitment Letter
requiring a minimum of fifteen restaurants to be sold has been extended pending
additional due diligence on the remaining seven restaurants.
The thirteen leases are for a term of twenty years with five five-year
extensions. Percentage rent of 6% is to be paid on gross sales over a break
point on each property and is discounted for sales increases greater than
33.33%. The Company retains a right of first refusal to purchase the properties,
and an option to purchase the properties after seven years. The restaurants are
subject to a two mile non-compete.
ACCOUNTING TREATMENT OF THE MERGER
Parent will account for the Merger under the "purchase" method of
accounting.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary of the principal United States federal income tax
consequences of the Merger does not purport to be a complete analysis of all the
potential tax effects of the Merger. EACH HOLDER OF SHARES SHOULD CONSULT SUCH
HOLDER'S OWN TAX ADVISOR TO DETERMINE THE APPLICABILITY OF THE RULES DISCUSSED
BELOW TO SUCH HOLDER AND THE PARTICULAR TAX EFFECTS OF THE MERGER, INCLUDING THE
APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER INCOME TAX LAWS. This
discussion is for general purposes only and not intended for certain types of
holders subject to special treatment under the United States federal income tax
law (e.g., holders of Shares in whose hands Shares are not capital assets,
holders who receive their Shares pursuant to the exercise of employee stock
options or otherwise as compensation, financial institutions, broker-dealers,
insurance companies, tax-exempt organizations, non United States persons or
persons who hold their Shares as part of a hedge, straddle, or conversion
transaction).
28
<PAGE> 35
The receipt of cash for Shares pursuant to the Merger (including pursuant
to the exercise of appraisal rights) will be a taxable transaction for federal
income tax purposes under the Code, and also may be a taxable transaction under
applicable state, local, foreign and other income tax laws. In general, for
federal income tax purposes, a holder of Shares will recognize gain or loss
equal to the difference between such holder's adjusted tax basis in the Shares
converted to cash in the Merger and the amount of cash received therefor. Such
gain or loss generally will be capital gain or loss and will be long-term
capital gain or loss if, on the date of sale (or, if applicable, the date of the
Merger), the Shares were held for more than one year. Long-term capital gain
realized by an individual U.S. Holder is generally subject to a minimum tax rate
of 28% in respect of property held for more than one year and to a maximum rate
of 20% in respect of property held in excess of 18 months. Merger consideration
received by a holder who exercises such holder's appraisal rights will also
result in gain or loss equal to the difference between the cash received for
such holder's Shares and such holder's adjusted tax basis in the Shares.
Payments in connection with the Merger may be subject to "backup
withholding" at a rate of 31%. Backup withholding generally applies if the
holder (a) fails to furnish such holder's social security number or tax payer
identification number ("TIN"), (b) furnishes an incorrect TIN, (c) is subject to
backup withholding due to previous failures to file a federal income tax return
including reportable interest or dividend payments, or (d) under certain
circumstances, fails to provide a certified statement, signed under penalties of
perjury, that such holder is not subject to backup withholding due to previous
failures to file a federal income tax return including reportable interest or
dividend payments. Backup withholding is not an additional tax, but rather it is
an advance tax payment that is subject to refund if and to the extent that it
results in an overpayment of tax. Certain taxpayers are generally exempt from
backup withholding, including corporations and financial institutions. Certain
penalties apply for failure to furnish correct information and for failure to
include reportable payments in income. Each holder of Shares should consult with
such holder's own tax advisor as to such holder's qualification for exemption
from backup withholding and the procedure for obtaining such exemption.
CERTAIN REGULATORY AND LEGAL MATTERS.
State Takeover Laws. The Company is incorporated in New York. Section 912
of the NYBCL generally prohibits such a New York corporation from engaging in
certain "business combination" (defined to include mergers and consolidations)
with an "interested shareholder" (defined generally as any person that
beneficially owns 20% or more of the outstanding voting securities of the
corporation) for a period of five years after the date the person became an
interested shareholder unless, before such date, the board of directors of the
corporations approved either the business combination or the purchase of more
than 20% of the corporation's voting securities by the interested shareholder or
certain other statutory conditions have been met. On August 20, 1997, the
Company Board approved the purchased of Shares contemplated by the Offer, the
Merger, the Merger Agreement and the shareholder agreement among Parent, the
Purchaser and Messrs. Guntner and DiPasquale for purposes of section 912.
Accordingly, section 912 is inapplicable to, and will not prevent consummation
of, the Merger.
Alcoholic Beverage Regulation. The Company is required to operate in
compliance with the licensing and operational requirements of states and
municipalities where its restaurants are located. Failure to comply with such
requirements could cause the Company's licensees to be revoked or suspended for
cause at any time. Some states and/or municipalities require that new
licenses,permits or approvals be applied for and obtained in the event of a
change in the ownership, management or operation of the licensee or permittee,
such as occurred upon consummation of the Offer while others merely require
notice of any material change in the ownership, management or operation of the
licensee or permittee. The loss or revocation of any existing licenses, permits
or approvals, the failure to obtain any additional or new licenses, permits or
approvals or the failure to obtain approval for the transfer of any existing
licenses or permits could have a material adverse effect on the ability of the
Company to conduct its business. Certain approvals, consents, registrations,
licenses or permits were required to be obtained prior to the consummation of
the Offer, from the alcoholic beverage authorities of the states of Connecticut,
Kentucky, Massachusetts and Missouri and from the local alcoholic
29
<PAGE> 36
beverage authorities in Kentucky, Massachusetts and Missouri where the Company
holds liquor licenses (collectively, "Liquor License Approvals"). Prior to
consummation of the Offer, Parent and the Purchaser received the necessary
approvals, or satisfactory assurances from such authorities that liquor licenses
subject to any Liquor License Approval not so received would be allowed to
continue in full force and effect following consummation of the Offer and the
Merger pending receipt of such Liquor License Approval. With respect to the
other states and municipalities in which the Company holds liquor licenses, the
relevant alcoholic beverage authorities required either (i) notice of the change
in stock control, or (ii) the filing of a licenses application, either prior to
or after consummation of the Offer. In three of the states in which the Company
conducts restaurant operations (New York, Pennsylvania and Rhode Island),
another investment partnership organized by Boston Ventures operates, through
various subsidiaries, restaurant/breweries under the name "John Harvard's Brew
House" or "Union Station Brewery," and have applied, or will shortly apply, in
two other states (Delaware and Ohio), for licenses to operate a "John Harvard's
Brew House". Each of the restaurant/ breweries brews beer for consumption on the
restaurant/brewery premises. Each of these five states has what is known as a
"tied-house" statute which, by its terms, may be construed as prohibiting a
brewery (which is part of a restaurant/brewery) from, directly or indirectly,
owning or having a "financial" interest in the license, premise or business of a
retailer of alcoholic beverages, such as a restaurant. Prior to consummation of
the Offer, Parent and the Purchaser were advised by their counsel in Delaware
and by counsel to the relevant authorities in New York, Ohio and Pennsylvania,
that the Offer and Merger will not present any issue under such states'
"tied-house" statutes. The Rhode Island Department of Business Regulation
("Department") has agreed to consider further whether the transfer of control of
the Company violates Rhode Island's "tied-house" statute and has advised the
Purchaser and the Company that, pending its determination, Company may continue
to operate under its existing Rhode Island liquor licenses. If a response
permitting the transaction is not forthcoming from the Department, the Company
is prepared to seek a favorable judicial resolution of the "tied-house" issue,
or alternatively, to surrender the liquor licenses covering the Company's
premises in Rhode Island, either of which will remove any such "tied-house"
impediment.
Antitrust. Under the HSR Act and the rules that have been promulgated
thereunder by the Federal Trade Commission ("FTC"), certain acquisition
transactions may not be consummated unless certain information has been
furnished to the Antitrust Division of the Department of Justice (the "Antitrust
Division") and the FTC and certain waiting period requirements have been
satisfied. The consummation of the Offer and the Merger and the purchase of
Shares by the Purchaser pursuant thereto, was conditioned upon the expiration or
termination of all applicable HSR waiting periods.
Pursuant to the HSR Act, on September 12, 1997, BVLP V, as the "ultimate
parent entity" of the Purchaser under the HSR Act, and the Company filed
Premerger Notification and Report Forms with the Antitrust Division and the FTC
in connection with the acquisition by the Purchaser of voting securities of the
Company (the Shares) pursuant to the Merger Agreement, and the applicable
waiting period expired at 11:59 p.m., New York City time, on September 27, 1997.
The Antitrust Division and the FTC frequently scrutinize the legality under
the antitrust laws of transactions such as Parent's acquisition of the Company.
Following consummation of the Offer, the Antitrust Division or the FTC could
take such action under the antitrust laws as either deems necessary or desirable
in the public interest, including seeking to enjoin the consummation of the
Merger or seeking the divestiture of Shares acquired by the Purchaser or the
divestiture of substantial assets of the Company or its subsidiaries or Parent
or its subsidiaries. Private parties and state Attorney Generals may also bring
legal action under the antitrust laws under certain circumstances. If the
Antitrust Division, the FTC, a state or a private party raises antitrust
concerns in connection with a proposed transaction, the parties frequently
engage in negotiations with the relevant governmental agency concerning possible
means of addressing these issues and may delay consummation of the Offer or the
Merger while such discussions are ongoing. There can be no assurance that a
challenge to the Offer on antitrust grounds will not be made, or, if such a
challenge is made, of the result thereof. See "-- The Merger Agreement;
Conditions to the Merger."
30
<PAGE> 37
RIGHTS OF DISSENTING SHAREHOLDERS
Shareholders of the Company have certain rights under the BCL to dissent
from the Merger and to demand appraisal of, and to receive payment in cash of
the fair value of, their Shares. The following is a brief summary of the
statutory procedures to be followed by a holder of Shares at the Effective Time
who does not wish to accept the per Share cash consideration pursuant to the
Merger in order to dissent from the Merger and perfect dissenter's rights under
New York law. THIS SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SECTIONS 623 AND 910 OF THE BCL, THE TEXT OF WHICH
IS SET FORTH IN APPENDIX C TO THIS PROXY STATEMENT. ANY SHAREHOLDER CONSIDERING
DEMANDING APPRAISAL IS ADVISED TO CONSULT LEGAL COUNSEL. DISSENTER'S RIGHTS WILL
NOT BE AVAILABLE UNLESS AND UNTIL THE MERGER IS CONSUMMATED.
A holder of Shares who desires to exercise his dissenter's rights must
fully satisfy the following conditions. Dissenters' rights of appraisal will be
lost if the procedural requirements of Section 623 are not fully and precisely
satisfied. If dissenters' rights are lost, the shareholder will be entitled to
receive the consideration provided for in the Merger Agreement.
Any holder of Shares who elects to exercise dissenter's rights with respect
to the Merger must file with the Company, before the Meeting, or at the Meeting
but before the vote, written objection to the Merger. The objection shall
include a notice of his election to dissent, his name and residence address, the
number of Shares as to which he dissents and a demand for payment of the fair
value of his Shares if the Merger is consummated. Such objection is not required
from any shareholder to whom the Company did not give notice of the Meeting in
accordance with the BCL.
Within 10 days after the shareholders' authorization date, which term as
used in Section 623 means the date on which the shareholders' vote authorizing
the Merger is taken, the Company shall give written notice of such authorization
by registered mail to each shareholder who filed written objection or from whom
written objection was not required, excepting any shareholder who voted for the
Merger who thereby is deemed to have elected not to enforce his right to receive
payment for his Shares. Within 20 days after the giving of notice to him, any
shareholder from whom written objection was not required and who elects to
dissent shall file with the corporation a written notice of such election,
stating his name and residence address, the number of Shares as to which he
dissents and a demand for payment of the fair value of his Shares.
A shareholder may not dissent as to less than all the Shares as to which he
has a right of dissent, held by him of record, that he owns beneficially. A
nominee or fiduciary may not dissent on behalf of any beneficial owner as to
less than all of the Shares of such owner, as to which such nominee or fiduciary
has a right to dissent, held of record by such nominee or fiduciary.
Furthermore, if the Shares are owned of record in a fiduciary capacity, such as
by a trustee, guardian or custodian, the demand should be made in that capacity,
and if the Shares are owned of record by more than one person, as in a joint
tenancy or tenancy in common, the demand should be made by or for all owners of
record. All notices of election to dissent should be addressed to the Company,
35 Braintree Hill Office Park, Braintree, Massachusetts 02184-9078, Attention:
Thomas J. Russo, Chairman, President and Chief Executive Officer.
At the time of filing a notice of election to dissent or within one month
thereafter, a dissenting shareholder must submit all of his certificates
representing Shares to the Company or its transfer agent for notation thereon of
the election to dissent, after which such certificates will be returned to the
shareholder. Failure to submit such certificates may result in the loss of
dissenter's rights.
Within 15 days after the expiration of the period within which shareholders
may file their notices of election to dissent, or within 15 days after the
Effective Date of the Merger, whichever is later, the Company, as the Surviving
Corporation, is required to make a written offer by registered mail to each
shareholder who has filed a notice of election to dissent to pay for such
holder's Shares at a specified price which the Surviving Corporation considers
to be their fair value. The Surviving Corporation intends to make such written
offer to each shareholder who has filed such notice of election to dissent at
$1.65 per Share (the price offered under the Merger Agreement) because the
Company believes that price to be the fair value of the Shares.
31
<PAGE> 38
Such offer will be accompanied by a statement setting forth the aggregate
number of Shares with respect to which such notices of election to dissent from
the Merger have been received and the aggregate number of holders of such
Shares. If the Merger has been consummated at the time such offer is made, such
offer will also be accompanied by (a) advance payment to each dissenting
shareholder who has submitted his certificates for notation thereon of the
election to dissent of an amount equal to 80% of the amount of such offer, or
(b) as to each dissenting shareholder who has not yet submitted his certificates
for notation thereon, a statement that advance payment to such shareholder of an
amount equal to 80% of the amount of such offer will be made promptly upon
submission of his certificates. Acceptance of such advance payment by a
dissenting shareholder will not constitute a waiver of his dissenter's rights.
If within 30 days after the making of such written offer, the Surviving
Corporation and any dissenting shareholder agree upon the price to be paid for
such holder's Shares, payment therefor will be made within 60 days after the
making of such offer or the Effective Date of the Merger, whichever is later,
upon the surrender of the certificates representing such Shares.
If the Company fails to make such an offer within the 15-day period
described above, or if it makes an offer but the Company and a dissenting
shareholder do not agree within 30 days of its making of the offer upon the
price to be paid for such shareholder's Shares, the Company must, within 20 days
of such 15- or 30-day period, as the case may be, institute a special proceeding
in the Supreme Court of New York (the "Court") to determine the rights of
dissenting shareholders and fix the fair value of their Shares. In fixing the
fair value of the Shares, the Court will consider the nature of the Merger and
its effects on the Company and its shareholders, the concepts and methods then
customary in the relevant securities and financial markets for determining fair
value of shares of a corporation engaging in a similar transaction under
comparable circumstances and all other relevant factors. If the Company does not
institute such a proceeding within the 20-day period, any dissenting shareholder
may, within 30 days after such 20-day period, institute a proceeding for the
same. If such proceeding is not instituted within such 30-day period, any
dissenting shareholders who have not agreed with the Company as to the price to
be paid for their Shares will lose their dissenters' rights, unless the Court,
for good cause shown, shall otherwise direct. Within 60 days after the
completion of any such Court proceeding, the Company must pay to each dissenting
shareholder the amount found to be due him, with interest thereon at such rate
as the Court finds to be equitable, from the Effective Date of the Merger to the
date of payment, upon surrender by such shareholder of the certificates
representing such Shares. If the Courts finds that the refusal of any dissenting
shareholder to accept the Company's offer was arbitrary, vexatious or otherwise
not in good faith, no interest will be allowed to such shareholder.
The parties to such court proceeding will bear their own costs and
expenses, including the fees and expenses of their counsel and any experts
employed by them, except that the Court, in its discretion and under certain
conditions, may apportion and assess all or any part of the costs, expenses and
fees incurred by dissenting shareholders against the Surviving Corporation or
may apportion and assess all or any part of the costs, expenses and fees
incurred by the Surviving Corporation against any dissenting shareholders,
including any dissenting shareholders who have withdrawn their notices of
election to dissent from the Merger, who the Court finds were arbitrary,
vexatious or otherwise not acting in good faith in refusing the Company's offer
of payment.
Any shareholder who has filed a notice of election to dissent will not,
after the Effective Date of the Merger, have any of the rights of a shareholder
with respect to his Shares other than the right to be paid the fair value of
such Shares under the BCL. Any notice of election to dissent may be withdrawn by
a dissenting shareholder at any time prior to the acceptance in writing of an
offer by the Company but in no case later than 60 days after the Effective Date
of the Merger (or if the Company fails to make a timely offer to pay such
shareholder the fair value of his Shares as provided above, at any time within
60 days after any date such an offer is made), or thereafter with the written
consent of the Company. Any dissenting shareholder who withdraws his notice of
election to dissent or otherwise loses his dissenter's rights will thereupon
have only the right to receive $1.65 for each of his Shares, without interest
thereon.
32
<PAGE> 39
CERTAIN INFORMATION CONCERNING THE COMPANY
OVERVIEW
The Company is a holding company which has principal subsidiaries that
operate and franchise family-oriented, full-service, casual dining restaurants
in 24 states in the Northeast, Mid-Atlantic and Midwest regions of the United
States and franchises one restaurant in Canada. Ground Round restaurants offer a
broad selection of high quality, moderately-priced menu items, including a
choice of appetizers, entree salads, specialty sandwiches, the one-half pound
THE GROUND ROUNDER(R) hamburger and entrees featuring seafood, baby back ribs,
steak, chicken and pasta, as well as full liquor service (see "-- The Menu"). As
of September 28, 1997, the end of the Company's most recent fiscal year, there
were 167 restaurants system-wide, 123 of which were Company-operated and 44 with
franchise agreements (of which 38 were currently operating).
THE RESTAURANTS
The Company's restaurants are divided into four divisions, comprised of 22
geographic regions, managed by four Division Vice Presidents. Each region has a
Regional Director who typically oversees between four and eight Company-operated
restaurants and one to five franchised restaurants. The day-to-day operation of
each restaurant, including personnel management, food procurement, inventory
control, guest relations and local marketing, is the responsibility of a General
Manager who reports to the appropriate Regional Director.
Ground Round restaurants are located primarily in the Northeast,
Mid-Atlantic and Midwest regions of the United States. Most restaurants are in
free-standing buildings along commercial roadways with high traffic counts. Many
of the restaurants are located near a retail shopping area or in major shopping
malls. Ground Round restaurants average approximately 5,600 square feet and 210
seats. Each restaurant typically has two distinct dining areas: a main dining
room for families with children, and a smaller dining and bar area for adults.
The family dining room averages approximately 2,800 square feet in size and has
approximately 140 seats. The adult dining room, which includes a bar and lounge,
generally averages 1,400 square feet with 70 seats. The exterior of the
restaurants feature a green and yellow striped backlit awning, illuminated
signage and attractive landscaping. The design of Ground Round restaurants is
flexible and can be adapted to local architectural styles and varying floor
plans.
RESTAURANT OPERATIONS
Hours of Operation. All Ground Round restaurants are open seven days a
week, for lunch and dinner, with typical operating hours of 11:30 a.m. to
midnight. In most locations, dinner accounts for approximately 60% of sales,
with lunch and late night dining accounting for the remaining 40% of sales.
Ground Round restaurants are operated in accordance with the Company's uniform
operating standards and specifications, which are applied on a system-wide
basis. These standards and specifications relate, among other things, to the
quality, preparation and selection of menu items, furnishing and equipment,
maintenance and cleanliness of restaurant premises and employee service and
attire. The Company stresses efficient and courteous service.
The Menu. The Ground Round offers a broad selection of high quality food
at moderate prices. A new menu was introduced in December 1995 with over 200
offerings. The Company determined that it was necessary to improve the quality
and variety of its menu offerings from the menu introduced in 1994 that reduced
the number of items from approximately 88 items to 50 items. The new menu was
substantially redesigned to provide a variety of choices along the palate
profile (i.e. mild vs. spicy, heavy vs. light) and contains many new offerings
and selections which are perceived to be of higher quality and which reflect
changes in guest preferences. The expanded menu offers something for everyone
including, Mexican, Oriental, Tex-Mex, Italian, steak, ribs, hamburgers, soups
and salads. In addition, the Company designed a new Children's menu with eight
offerings and includes a drawing slate which the child can take home. In October
1997, a new format for the menu was introduced into the restaurants. All Ground
Round restaurants serve alcoholic beverages, including a wide selection of
imported, domestic and draft beers, wines and specialty drinks. In fiscal 1997,
the average guest check in Company-operated restaurants was approximately $9.68
33
<PAGE> 40
(including alcoholic beverages). Alcoholic beverages have accounted for
approximately 20%, 19% and 17% of restaurant revenue during fiscal 1995, 1996
and 1997, respectively.
Purchasing. The Company's purchasing department coordinates purchases of
most food products and most non-alcoholic beverages used in both
Company-operated and franchised restaurants. The nature of the Company's
standing purchase order arrangements with its suppliers enables it to anticipate
and better control its food costs. The Company purchases beef (other than ground
beef), chicken and fish under forward purchase contracts generally having a term
of one year, which are designed to assure the availability of specific products
at a constant price throughout the year. The Company has a coordinated
purchasing system, which offers the same prices to both Company-operated and
franchised restaurants. All franchisees are required to purchase food, equipment
and small wares from suppliers approved by the Company. This enables the Company
to assure that the items sold in all Ground Round restaurants meet the Company's
standards and specifications for uniform quality. Although not required to do
so, virtually all franchisees purchase through the Company's purchasing
department to capitalize on the strength of the Company's purchasing power.
Beer, alcoholic beverages, produce and certain dairy products are purchased by
restaurant general managers on a local basis.
Training. The Company emphasizes the training of both new and existing
employees. The Company maintains a system-wide training program to achieve
standardization of food preparation and operational procedures and efficient and
courteous service.
All managers also are required to complete successfully an eight-to-ten
week course in basic skills and management training. A written test and skill
demonstration to a supervisor are required to complete the course. In addition,
the Company requires that its hourly restaurant employees undergo training
relevant to their positions and be certified by a supervisor, based upon a
demonstration of the skills necessary for the position and a written test.
Restaurant Reporting. The Company utilizes a point of sale system in all
Company-owned restaurants. Through this system, the Company collects sales
information and cash balances on a daily basis from each restaurant. The Company
also receives payroll and other operating information on a weekly basis from its
restaurants. The point of sale system also provides real-time information to
restaurant managers which allows them to track sales by menu item, prepare daily
cost and sales reports and prepare weekly and monthly profit and loss
statements. The Company uses the information generated by the point of sale
system to facilitate planning activities at both the corporate and restaurant
levels.
Marketing. In 1997 the Company continued to focus on enhancing its image
through increased training and staffing at the restaurant level and improving
and modifying menu selections. The Company now principally employs in-store,
point of purchase materials such as banners, posters and buttons as marketing
tools.
Restaurant managers are encouraged to create and implement marketing
strategies on a local level to build sales and generate guest traffic and to
become involved in community programs in order to strengthen their restaurant's
ties to its community. These community programs include activities with area
schools and youth organizations and participation in local events.
FRANCHISING
As of September 28, 1997 the Company had 44 restaurants with franchise
agreements (of which 38 were currently operating), the majority of which were
located in the same geographic regions as, or in close proximity to,
Company-operated restaurants. During fiscal 1997, the average annual comparable
sales by the Company's franchised restaurants were $1.7 million. The Company's
franchise program enables the Company to expand its brand-name recognition and
derive additional revenue without substantial investment. During 1997, the
Company added one franchised restaurant and four franchised restaurants were
closed.
Franchisees undergo a selection process supervised by the Director of
Development and requiring final approval by senior management. The Company seeks
franchisees with significant experience in the restaurant
34
<PAGE> 41
business who have demonstrated financial and management capabilities to develop
and operate a franchised restaurant.
The Company assists franchisees with both the development and ongoing
operation of their restaurants. The Company provides assistance with site
selection, approves all franchise sites and provides franchisees with prototype
plans and specifications for construction of their restaurants. The Company's
training and new restaurant opening teams provide on-site instruction to
franchised restaurant employees. The Company's support continues with periodic
training programs, the provision of manuals and updates relating to product
specifications and quality control procedures, advertising and marketing
materials and assistance with particular advertising and marketing needs.
Supervision of franchisees is the primary responsibility of the Director of
Franchise Operations and the respective Regional Directors. The Company provides
the franchisees with ongoing support and assistance in the operations of their
restaurants and makes periodic visits to consult with franchisees and assure
that franchisees are complying with the terms of the franchise agreement. In
addition, from time to time, the Company performs audits to verify the proper
calculation of royalty payments from franchisees and ensure compliance with the
franchise agreements.
All franchised restaurants are required, pursuant to their respective
franchise agreements, to serve Ground Round menu items. In addition, all
franchisees are required to purchase food, equipment and small wares from
suppliers approved by the Company. This enables the Company to assure that the
items sold in all Ground Round restaurants meet the Company's standards and
specifications for uniform quality. Although not required to do so, virtually
all franchisees purchase through the Company's purchasing department to
capitalize on the strength of the Company's purchasing power. The current Ground
Round franchise agreement has an initial term of 20 years. Among other
obligations, the agreements require franchisees to pay an initial franchise fee
of $40,000 for the first restaurant and $35,000 for subsequent restaurants and a
continuing royalty of 3 1/2% of monthly gross sales. The current franchise
agreement also requires franchisees to spend 2 1/2% of monthly gross sales on
advertising, 1 1/2% of which must be spent locally and 1% of which is paid to
the Company for creative and promotional development. The franchise agreements
related to 12 of the 44 restaurants with franchise agreements (of which 38 are
currently operating), will expire in the next five years but give the
franchisees the right to renew their agreements, subject to certain conditions.
There currently are no territorial exclusivity provisions that limit the
Company's ability to expand in any market.
EMPLOYEES
As of September 28, 1997, the Company had approximately 7,100 employees,
approximately 3,900 of whom were part-time employees. Approximately 6,500 of
these employees were employed in non-management restaurant positions,
approximately 475 were involved in restaurant management or training programs
and 61 were corporate employees. The typical restaurant has approximately 50
employees. Company employees are not unionized, and the Company considers its
employee relations to be good. The Company and its franchisees can encounter
substantial competition in their efforts to attract interested and qualified
managerial and hourly employees.
COMPETITION
The restaurant business generally, and the full-service, casual dining
segment in particular, is highly competitive and management expects this will
continue. Management has created a new menu, developed new methods of operation
and will continue to recruit qualified restaurant managers in an effort to
alleviate the effect of such competition. Management believes that Ground
Round's new menu distinguishes its restaurants from other casual dining
restaurants. Competitors of Ground Round include restaurants operated by large
national and regional chains having substantially greater financial and
marketing resources and name recognition than Ground Round, as well as numerous
local independent restaurants. The Company has for some time required
significant additional capital to refurbish and upgrade its restaurants, in
order to remain competitive in its market. Its failure to obtain such additional
capital may have hampered the Company's ability to compete in such market.
35
<PAGE> 42
GOVERNMENTAL REGULATION
The Company is subject to various federal, state and local laws affecting
its employees and guests, its owned and leased properties and the operations of
its restaurants. The Company restaurants are subject to licensing and/or
regulations by various fire, health, sanitation and safety agencies in the
applicable state and/or municipality. In particular, the Company has adopted
extensive procedures designed to meet the requirements of applicable food
handling and sanitation laws and regulations.
Ground Round restaurants are subject to state and local licensing and
regulations with respect to the sale and service of alcoholic beverages.
Typically, alcoholic beverage licenses must be renewed annually and may be
revoked or suspended for cause. Alcoholic beverage control regulations relate to
numerous aspects of the daily operations of the Company's restaurants, including
minimum age of patrons and employees, hours of operation, advertising, wholesale
purchasing, inventory control and the handling, storage and dispensing of
alcoholic beverages. The Company has not encountered material problems relating
to alcoholic beverage licenses to date, but the failure of a restaurant to
obtain or retain a liquor license would adversely affect the restaurant's
operations.
In certain states, the Company is subject to "dram shop" statutes, which
generally give a person injured by an intoxicated person the right to recover
damages from the establishment that wrongfully served alcoholic beverages to the
intoxicated person. The Company carries liquor liability coverage as part of its
existing comprehensive general liability insurance. The Company currently is a
defendant in several "dram shop" suits. Management does not believe that an
adverse result in any of these cases will have a materially adverse effect on
the Company's financial condition or results of operations.
The Company is subject to federal and state fair labor standards, statutes
and regulations that govern such matters as minimum wages, overtime, tip
credits, child labor and other working conditions. A significant number of
Ground Round food service personnel are paid at rates based on applicable
federal and state minimum wages.
Management is not aware of any federal or state environmental regulations
that have had a material effect on the Company's operations to date. However,
more stringent requirements of local governmental bodies with respect to waste
disposal, zoning, construction and land use may increase both the cost and the
time required for construction of any new restaurants and the cost of operating
restaurants.
The Company is subject to federal and state laws, rules and regulations
governing the offer and sale of franchises. Most states have enacted laws that
require detailed disclosure in the offer and sale of franchises and/or the
registration of the franchisor with state administrative agencies. The Company
also is subject to Federal Trade Commission regulations relating to disclosure
requirements in the sale of franchises. Certain states have enacted, and others
may enact, legislation governing certain aspects of the franchise relationship.
The law applicable to franchise sales and relationships is rapidly evolving, and
the Company is unable to predict the effect on its franchising program of
additional requirements or restrictions that may be enacted or promulgated or of
court decisions that may be adverse to franchisors. Such decisions and
regulations often have limited the manner in which franchisors enforce certain
provisions of franchise agreements and alter or terminate franchise agreements.
The scope of the Company's business, and the complexity of franchise regulation,
may create regulatory compliance issues from time to time. The Company does not
believe that such problems would be material to the operation of its business.
TRADEMARKS
The Company has registered the name THE GROUND ROUND(R) and its logo with
the United States Patent and Trademark Office. In addition, the Company
currently holds other federal trademarks, including but not limited to, THE
GROUND ROUNDER(R); CINNAMON DIPPERS(R) and SLIDER(R) sundae. Pending trademark
applications are FOCACCIA BURGER; TRIPLE CHIPS; THAT REALLY BIG PRETZEL and GOLD
FORK, including design applications. There can be no assurance that the Company
will be granted trademarks on any or all of such trademarks.
36
<PAGE> 43
PROPERTIES
As of September 28, 1997, the Company operated 123 Ground Round
restaurants. At 20 locations (including the Company restaurants located in Coon
Rapids, Minnesota, and Bridgeton, Missouri, which are not currently operating
due to fire damage), both the real estate and structure are owned by the Company
in fee. At 85 locations, both the real estate and structure are leased. At the
remaining 18 locations, the land is leased and the structure is owned. Lease
terms run from 10 to 30 years, with most of the leases providing for an option
to renew for at least one additional term of five years. Within the next five
years, 70 of the Company's leases will be up for renewal. Under most leases,
rent is calculated as a percentage of gross revenues, subject to a minimum
annual rent. Generally, the leases are net leases which require the Company to
pay the cost of insurance, taxes and maintenance on the leased property. The
Company owned properties and certain leased properties are subject to security
interests.
The Company's headquarters are located in a modern office park in
Braintree, Massachusetts, where the Company leases approximately 22,000 square
feet. The lease expires in 2002. The Company believes this space is adequate for
its present and projected needs for at least the next five years.
COMPANY-OPERATED RESTAURANT LOCATIONS
The following table sets forth the location of the 123 Company-operated
restaurants as of September 28, 1997, plus the fire-damaged restaurants in Coon
Rapids, Minnesota, and Bridgeton, Missouri which are not currently operating.
The real estate and/or the structure of all locations are leased except for
those locations indicated by "*", which are owned by the Company in fee. A "**"
denotes properties sold to, and leased back from, CNL Fund Advisors pursuant to
the Sale/Leaseback Transaction and "***" denotes properties which may be sold
to, and leased back from, CNL Fund Advisors as part of the Sale/Leaseback
Transaction (see "The Merger -- Source and Amount of Funds; The Sale/Leaseback
Transaction").
CONNECTICUT
Enfield
Groton
Manchester
Plainville
Rocky Hill
Waterbury
DELAWARE
Wilmington
ILLINOIS
Rockford
Springfield
INDIANA
Greenwood
IOWA
Davenport
Des Moines
Dubuque**
Iowa City
Waterloo**
KENTUCKY
Florence
MARYLAND
Baltimore
Frederick
Hagerstown
Waldorf
MASSACHUSETTS
Andover
Boston
Braintree
Brighton
Cambridge
Framingham
Natick
North Dartmouth
Norwell
Norwood
Salem
Springfield
Stoneham
Stoughton
W. Springfield
Taunton
Walpole
Waltham
MICHIGAN
Jackson
Kalamazoo**
Livonia
MINNESOTA
Brooklyn Center
Burnsville
Coon Rapids*/***
Crystal**
Duluth
Fridley
Mankato
Richfield
Roseville
St. Cloud
St. Paul
West St. Paul
MISSOURI
Bridgeton*/***
St. Joseph
St. Louis
St. Peters
NEW HAMPSHIRE
Manchester
NEW JERSEY
Deptford
Ewing Township*/***
Gloucester**
Hackensack
Hasbrouck Heights
Maple Shade*/***
NEW YORK
Albany - Central
Bayshore
Fayetteville
Garden City
Kingston
Latham
Liverpool - Clay
Liverpool -
Salina*/***
Middletown
Nanuet*/***
New Hartford
Newburgh
Niagara Falls
Northport
Port Jefferson
Rochester - Gates**
Rochester -
Marketplace
Roslyn
Schnectady - State
Vestal*/***
OHIO
Akron - Roming
Akron - Tallmadge
Cincinnati -
Colerain**
Cincinnati -
Beechmont
Columbus - Phillipi
Elyria
Kent
Macedonia
Miamisburg
North Olmsted
37
<PAGE> 44
Parma**
Parma Heights
Solon
Strongsville
Toledo
Willowick
PENNSYLVANIA
Camp Hill**
Corapolis
Greensburg
Hazelton
Johnstown
Monroeville
Montgomeryville
Pittsburgh -
Mt. Lebanon
Reading**
Scranton
Springfield
West Chester
West Mifflin
Wexford
Whitehall**
RHODE ISLAND
Warwick
VIRGINIA
Winchester
WISCONSIN
Glendale
Greenfield
Janesville**
Racine
Wauwatosa**
West Allis
Franchised Restaurant Locations. The following table sets forth the
location of the 38 operating franchised restaurants as of September 28, 1997. An
"*" denotes a new restaurant added during fiscal 1997, which is being operated
as a Gold Fork restaurant.
CONNECTICUT
Branford
Danbury
Glastonbury
DELAWARE
Newark
KANSAS
Manhattan*
MAINE
Auburn
Augusta
Bangor
So. Portland
MARYLAND
Annapolis
MASSACHUSETTS
Chelmsford
Hadley
Lanesboro
Needham
Shrewsbury
MICHIGAN
Dearborn Hts.
Grand Rapids
NEW HAMPSHIRE
Nashua
NEW JERSEY
Bordentown
Egg Harbor
Lawrenceville
Toms River
NEW YORK
Commack
Plattsburgh
Rensselaer
Sayville
Yonkers
NORTH DAKOTA
Bismark
Fargo
Grand Forks
Minot
OHIO
Boardman
Warren
RHODE ISLAND
Pawtucket
SOUTH DAKOTA
Sioux Falls
VERMONT
So. Burlington
VIRGINIA
Danville
CANADA
Niagara Falls
LEGAL PROCEEDINGS
The Company is subject to various claims and legal actions that arise in
the ordinary course of business, including, but not limited to, claims and
actions brought pursuant to "dram shop" statutes and under federal and state
employment laws prohibiting employment discrimination. The Company believes it
is not currently a party to any "material" pending legal proceedings as defined
in Item 103 of Regulation S-K of the Securities Exchange Act of 1934, as
amended.
The Company has been named in a number of separate claims brought by former
employees alleging that the Company engaged in discriminatory practices,
including those based on age or sex. Plaintiffs maintaining claims of employment
discrimination, such as those being brought against the Company, generally are
entitled to have their claims tried by a jury and such claims may result in
punitive damage awards. Most of the proceedings against the Company are still in
the discovery or motion phase, and management believes that the discrimination
claims against the Company are without merit. The Company is actively defending
the claims. Management does not expect that the resolution of these matters will
have a material adverse effect on the consolidated results of operation, cash
flows or financial position of the Company.
38
<PAGE> 45
CERTAIN INFORMATION CONCERNING PARENT AND THE PURCHASER
Parent, a Delaware limited liability company formed on August 6, 1997, and
the Purchaser, a New York corporation formed on August 8, 1997, were each formed
by Boston Ventures for the purpose of acquiring the Company and have not
conducted any unrelated activities since their formation. All of the outstanding
common stock of the Purchaser is owned by Parent.
BVLP V, the holder of a majority of Parent's outstanding membership
interests, is a private investment limited partnership formed in Delaware and
managed by its General Partner, Boston Ventures Company V, a Delaware limited
liability company. Boston Ventures Company V, as general partner, retains Boston
Ventures to advise and assist in investment decisions and to provide other
management services to the partnership.
Boston Ventures is a private investment management firm concentrating on
expansion capital, leveraged acquisitions, corporate partnering,
recapitalization and strategic investments. Since its inception in 1983, Boston
Ventures has raised investment capital in five funds, whose investments are
focused in the service sector of the economy, with a strong emphasis on the
communications, media and leisure time markets, including Continental
Cablevision (now Media One), Metromedia, American Media, Billboard
Communications, News Corp., River City Broadcasting and Motown Records.
The business address of each of Parent, the Purchaser, BVLP V and Boston
Ventures Company V is 21 Custom House Street, Boston, Massachusetts 02110.
39
<PAGE> 46
PRICE RANGE OF SHARES
The Company's Shares are included in the Nasdaq National Market under the
symbol "GRXR". Prior to June 24, 1993, the Shares were traded on the American
Stock Exchange. The following table sets forth, for the periods indicated, the
Company high and low closing sales prices per Share of the Company Common Stock
as reported by Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1995:
First Quarter........................................................ $ 8.63 $ 6.00
Second Quarter....................................................... 7.13 5.00
Third Quarter........................................................ 5.50 2.75
Fourth Quarter....................................................... 6.56 3.13
FISCAL 1996:
First Quarter........................................................ 3.69 2.56
Second Quarter....................................................... 3.88 2.56
Third Quarter........................................................ 5.06 2.81
Fourth Quarter....................................................... 3.13 2.06
FISCAL 1997:
First Quarter........................................................ 2.69 1.50
Second Quarter....................................................... 2.50 1.38
Third Quarter........................................................ 1.63 1.25
Fourth Quarter....................................................... 2.25 1.56
FISCAL 1998:
First Quarter (through November 10, 1997)............................ 1.66 1.38
</TABLE>
On August 29, 1997, the last full day of trading prior to the public
announcement of the execution of the Merger Agreement, the closing sale price
per Share on the Nasdaq National Market as reported by published financial
sources was $1.50. On November 10, 1997, the most recent practicable trading day
prior to the mailing of this Proxy Statement, the reported sales price per Share
was $1.38. Holders of Shares are urged to obtain current market quotations for
the Shares.
The Company has not paid, and has publicly stated it does not intend to
pay, any cash dividends on the Shares.
40
<PAGE> 47
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial data presented below for, and as of the
end of, each of the years in the five-year period ended September 29, 1996, are
derived from the consolidated financial statements of the Company, which
financial statements have been audited by Ernst & Young, L.L.P., independent
certified public accountants. The consolidated financial statements of the
Company as of September 29, 1996 and October 1, 1995 and for each of the years
in the three-year period ended September 29, 1996, are included herein (see
"Index to Financial Statements").
The selected consolidated financial data presented below as of and for the
39 weeks ended June 29, 1997 and June 30, 1996 are derived from the unaudited
consolidated financial statements of the Company included herein (see "Index to
Financial Statements"). In management's opinion, the unaudited information has
been prepared on a basis consistent with the audited consolidated financial
statements of the Company. The results of operations for the 39 weeks ended June
29, 1997 are not indicative of results which may be expected for the entire
year.
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS
39 WEEKS ENDED ENDED 52 WEEKS 52 WEEKS 53 WEEKS ENDED
-------------------- SEPT. ENDED ENDED ENDED SEPT.
JUNE 29, JUNE 30, 29, OCT. 1, OCT. 2, OCT. 3, 27,
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue...................... $142,086 $165,462 $218,833 $230,406 $243,971 $232,556 $226,466
Operating income (loss) from
operations................. (681) (9,275) (22,506) (2,659) 13,277 11,866 12,090
Interest expense from
operations, net............ 3,622 3,633 4,815 4,957 4,091 4,031 4,598
Income (loss) before income
taxes...................... (4,303) (12,908) (27,321) (7,616) 9,186 7,835 7,492
Income taxes (benefit)....... 0 (3,227) (4,374) (1,906) 2,940 2,507 2,846
-------- -------- -------- -------- -------- -------- --------
Income (loss):
Total.................... (4,303) (9,681) (22,947)(1) (5,710) 6,246 5,328 4,646
Per Share................ (.39) (.87) (2.05) (0.51) 0.56 0.48 0.42
Weighted average common
Shares outstanding......... 11,173 11,173 11,174 11,151 11,109 11,086 11,064
OPERATING DATA:
Systemwide sales:
Company-operated........... $140,536 $164,088 $216,977 $228,235 $241,777 $230,017 $224,048
Franchised................. 47,962 46,991 68,888 71,817 72,726 71,876 72,692
-------- -------- -------- -------- -------- -------- --------
Total systemwide sales..... 188,490 211,079 285,865 300,052 314,503 301,893 296,740
Average annual systemwide
sales per restaurant....... 1,542 1,474 1,513 1,523 1,534 1,438 1,455
Number of restaurants (at
period end):
Company-operated........... 122 146 143 151 164 166 160
Franchised................. 41 45 46 46 41 44 44
-------- -------- -------- -------- -------- -------- --------
Total Restaurants.......... 163 191 189 197 205 210 204
BALANCE SHEET DATA:
Total assets............... 99,335 132,177 121,238 145,356 156,772 151,813 137,780
Long-term debt, including
current maturities....... 66,902 82,173 51,446 58,580 58,770 60,305 51,965
Stockholders' Equity....... 32,433 50,004 36,737 59,684 65,036 58,637 53,219
</TABLE>
- ---------------
(1) The Company recorded a charge of $8.9 million resulting from the adoption of
Statement of Financial Accounting Standards No. 121 (SFAS No. 121),
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of " and
the decision to dispose of certain restaurants.
41
<PAGE> 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information regarding the Company's financial condition, changes in
financial condition and results of operations for the 52 week year ended
September 29, 1996, taken from the Company's Annual Report on Form 10-K for the
fiscal year ended September 29, 1996, and the 39 weeks ended June 29, 1997,
taken from the Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 29, 1997, is set forth under the caption entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages F-19 through F-23 and F-29 through F-32, respectively, of this Proxy
Statement. For recent developments with respect to the Company's Existing Credit
Agreement and the Sale/Leaseback Transaction, see "THE MERGER -- Source and
Amount of Funds."
42
<PAGE> 49
PRINCIPAL SHAREHOLDERS AND SHARE OWNERSHIP OF MANAGEMENT
The following table sets forth certain information concerning the ownership
of Shares by each of the directors, the Company's Chief Executive Officer, the
Company's officers meeting the criteria set forth in 17 CFR 229.402(a) (3) (the
"Named Executive Officers"), all directors and executive officers as a group,
and each shareholder who is known by the Company to own beneficially more than
5% of the outstanding Shares, as of November 10, 1997 (except as noted with
respect to certain holders of more than 5% of the outstanding Shares). Except as
otherwise indicated, each person listed below has informed the Company that such
person has (i) sole voting and investment power with respect to the Shares and
(ii) record and beneficial ownership with respect to the Shares.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIAL OWNER OWNED % OF CLASS
- ------------------------------------------------------------------ ---------------- ----------
<S> <C> <C>
Thomas J. Russo................................................... *
Fred H. Beaumont, Jr.............................................. 3,000(1) *
Martha H. W. Crowninshield........................................ 9,332,152(2) 83.5%
David T. DiPasquale............................................... 2,000(1) *
Barbara M. Ginader................................................ 9,332,152(2) 83.5%
Neil A. Wallack................................................... 0 *
Allan D. Weingarten............................................... 3,000(1) *
Daniel R. Scoggin(3).............................................. 178,000(1) 1.6%
Stephen J. Kiel(3)................................................ 50,000(1) *
Anthony E. Bezsylko(3)............................................ 50,000(1) *
A. Gerald Leneweaver.............................................. 20,000(1) *
David L. Dobbs.................................................... 0 *
Michael R. Jorgensen(3)........................................... 0 *
All directors and executive officers as a group (18 persons)(3)... 9,750,002(5) 84.1%
GRR Merger Corp.(4)............................................... 8,777,252(6) 78.6%
GRR Holdings, LLC(4).............................................. 9,332,152(7) 83.5%
Boston Ventures Limited Partnership V(4)(7)....................... 9,332,152(8) 83.5%
Wellington Management Company, LLP
75 State Street, Boston, MA 02109............................... 905,300(9) 8.1%
Dimensional Fund Advisors, Inc.
1299 Ocean Avenue, Santa Monica, CA 90401....................... 640,900(10) 5.7%
</TABLE>
- ---------------
(1) Represent Shares issuable upon exercise of outstanding Options which became
exercisable as a result of consummation of the Offer. Such Shares are
deemed to be outstanding for the purpose of computing the percentage
ownership of persons beneficially owning such Options but are not deemed to
be outstanding for the purpose of computing the percentage ownership of any
other person. Each such holder of Options has agreed to their cancellation
at or immediately prior to the Effective Time of the Merger (see "THE
MERGER -- Interests of Certain Persons; Treatment of Stock Options").
(2) Each of Martha H. W. Crowninshield and Barbara M. Ginader may be deemed to
be the indirect beneficial owner of the 9,332,152 Shares owned by Parent
and the Purchaser, with shared power to vote and dispose of such Shares, by
reason of her being a managing director of Boston Ventures Company V, the
general partner of BVLP V. See note (7).
(3) Mr. Scoggins resigned on October 20, 1997 following consummation of the
Offer, and Messrs. Kiel and Bezsylko resigned on October 31,1997. (see "THE
MERGER -- Interests of Certain Persons; Termination of Certain Employment
Agreements"). Mark J. Lawless, who was hired commencing November 3, 1997
(see "THE MERGER -- Interests of Certain Persons; Employment and Severance
Agreements"), owns no Shares of record or beneficially. Mr. Jorgensen
resigned as Senior Vice President and Chief Financial Officer effective
August 26, 1996.
(4) The address of such person is 21 Custom House Street, Boston, Massachusetts
02110.
43
<PAGE> 50
(5) Includes Options (see note (1)) and Shares deemed indirectly beneficially
owned (see note (2)).
(6) Does not include 554,900 Shares owned directly by Parent.
(7) Represents sole power to vote and dispose of 554,900 Shares owned directly
by Parent, and shared power to vote and dispose of 8,777,252 Shares owned
by the Purchaser.
(8) Represents shared power to vote and dispose of 8,777,252 Shares owned,
directly or indirectly, by Parent and the Purchaser. BVLP V may be deemed
to be the indirect beneficial owner of, with shared voting and dispositive
power over, such Shares by reason of being the managing member of Parent.
In addition, Boston Ventures Company V, by reason of being the general
partner of BVLP V, and each of the managing directors of Boston Ventures
Company V (Anthony J. Bolland, Roy F. Coppedge III, Ms. Crowninshield, Ms.
Ginader, Richard C. Wallace and James M. Wilson), by reason of holding such
position, may each be deemed to be the indirect beneficial owner of, with
shared voting and dispositive power over, such Shares. Each such entity and
person expressly disclaims beneficial ownership of such Shares other than
to the extent of its, his or her economic interest therein.
(9) Wellington Management Company, LLP ("WMC"), is an investment advisor
registered with the Commission under the Investment Advisers Act of 1940,
as amended (the "1940 Act"). According to its filings with the Commission,
as of January 24, 1997 WMC, in its capacity as investment adviser, may be
deemed to have beneficial ownership of 905,300 Shares that are owned by
numerous investment advisory clients, none of which is known to have such
interest with respect to more than five percent of the class. As of January
24, 1997, WMC had shared voting power over 163,300 of such Shares and
shared dispositive power over all of such Shares.
(10) According to its filings with the Commission, Dimensional Fund Advisors
Inc. ("Dimensional"), a registered investment advisor, is deemed to have
beneficial ownership of 640,900 Shares as of December 31, 1996, all of
which Shares are held in portfolios of DFA Investment Dimensions Group
Inc., a registered open-end investment company (the "Fund"), or in series
of the DFA Investment Trust Company, a Delaware business trust (the
"Trust"), or the DFA Group Trust and DFA Participation Group Trust,
investment vehicles for qualified employee benefit plans, all of which
Dimensional serves as investment manager. Dimensional has sole voting power
over 469,850 of such Shares and sole dispositive power over all of such
Shares. Dimensional disclaims beneficial ownership of such Shares. Persons
who are officers of Dimensional also serve as officers of the Fund and the
Trust, each an open-end management investment company registered under the
1940 Act. According to Dimensional's filings with the Commission, these
persons, in their capacity of officers of the Fund and the Trust, vote
87,950 additional Shares which are owned by the Fund and 83,100 Shares
which are owned by the Trust (both included in the 640,900 Shares as to
which Dimensional has sole dispositive power).
44
<PAGE> 51
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith, files periodic reports, proxy statements and
other information with the Commission relating to its business, financial
conditions and other matters. The Company is required to disclose in such proxy
statements certain information, as of particular dates, concerning the Company
directors and officers, their remuneration, stock options granted to them, the
principal holders of the Company securities and any material interests of such
persons in transactions with the Company. Such reports, proxy statements and
other information may be inspected at the public reference facilities maintained
by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the Commission located at Seven World Trade
Center, 13th Floor, New York, New York 10048, and Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60601. Copies of such
material also may be obtained at prescribed rates from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission also maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports and other information regarding
registrants that file electronically with the Commission.
SHAREHOLDER PROPOSALS
If the Merger is not consummated, any shareholder who wishes to present a
proposal for inclusion in the Proxy Statement for action at future Annual
Meetings of Shareholders must comply with the rules and regulations of the
Commission then in effect. The date by which such proposals must be received by
the Company for inclusion in its Proxy Statement for the 1998 Annual Meeting has
not yet been determined. If the Merger is not consummated, the Company will
inform holders of Shares of the date by which such proposals must be received by
the Company for inclusion in the Company's Proxy Statement for the 1998 Annual
Meeting of Shareholders.
45
<PAGE> 52
[This page intentionally left blank]
<PAGE> 53
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors........................................................ F-2
Audited Financial Statements
Consolidated Balance Sheets as of September 29, 1996 and October 1, 1995............ F-3
Consolidated Statements of Operations............................................... F-4
Consolidated Statements of Stockholders' Equity..................................... F-5
Consolidated Statements of Cash Flows............................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts....................................... F-18
All other schedules are omitted because the required information is not present, or
is not present in amounts sufficient to require submission of the schedules, or
because the information required is included in the consolidated financial
statements and notes thereto.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... F-19
Unaudited Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) as of June 29, 1997 and September
29, 1996......................................................................... F-24
Condensed Consolidated Statements of Operations (Unaudited)......................... F-25
Condensed Consolidated Statements of Cash Flows (Unaudited)......................... F-26
Notes to Consolidated Financial Statements (Unaudited).............................. F-27
Management's Discussion and Analysis of Financial Condition and Results of Operations
(Unaudited)......................................................................... F-29
</TABLE>
F-1
<PAGE> 54
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
Ground Round Restaurants, Inc.
We have audited the accompanying consolidated balance sheets of Ground
Round Restaurants, Inc. as of September 29, 1996 and October 1, 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended September 29, 1996. Our
audits also included the financial statement schedule listed in the Index. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Ground Round Restaurants, Inc. at September 29, 1996 and October 1, 1995, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended September 29, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note K to the consolidated financial statements, in fiscal
year 1996, the Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of."
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
November 22, 1996
F-2
<PAGE> 55
GROUND ROUND RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 29, 1996 AND OCTOBER 1, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............................................ $ 1,775 $ 2,425
Receivables, net of allowances for doubtful accounts of $1,123 in
1996 and $797 in 1995............................................. 1,299 1,147
Income tax refunds receivable........................................ 2,550 1,541
Inventories.......................................................... 2,056 2,511
Prepaid expenses and other current assets............................ 1,471 2,115
Assets held for sale................................................. 12,806
-------- --------
Total current assets.............................................. 21,957 9,739
Property and equipment:
Land................................................................. 7,042 10,240
Buildings and leasehold improvements................................. 97,235 119,749
Machinery and equipment.............................................. 33,441 40,399
-------- --------
137,718 170,388
Accumulated depreciation and amortization............................ 53,154 53,484
-------- --------
Property and equipment, net....................................... 84,564 116,904
Other assets...................................................... 14,717 18,713
-------- --------
$121,238 $145,356
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable..................................................... $ 8,630 $ 5,933
Accrued expenses..................................................... 15,002 11,190
Current portion of long-term debt and capital lease obligations...... 11,499 8,277
-------- --------
Total current liabilities......................................... 35,131 25,400
Long-term debt and capital lease obligations........................... 39,947 50,303
Deferred income taxes.................................................. 1,120
Other long-term liabilities............................................ 9,423 8,849
Stockholders' Equity:
Preferred Stock, undesignated, par value $100 per share; authorized
30,000 shares; none issued Common Stock, par value $.16 2/3 per
share: authorized 35,000,000 shares, issued 11,174,000 in 1996 and
1995.............................................................. 1,862 1,862
Additional paid-in capital........................................... 57,883 57,883
Accumulated deficit.................................................. (23,008) (61)
-------- --------
Total stockholders' equity........................................ 36,737 59,684
-------- --------
$121,238 $145,356
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 56
GROUND ROUND RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
SEPTEMBER 29, OCTOBER 1, OCTOBER 2,
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Revenue........................................ $218,833 $230,406 $243,971
-------- -------- --------
Costs and Expenses:
Cost of products sold........................ 201,090 200,756 202,819
Selling, general and administrative.......... 16,575 16,043 15,370
Depreciation and amortization................ 11,884 14,667 13,507
Interest expense............................. 4,815 4,957 4,091
Other (income) expense....................... 2,892 1,599 (1,002)
Impairment of long-lived assets.............. 8,898
-------- -------- --------
246,154 238,022 234,785
-------- -------- --------
Net income (loss) before income taxes.......... (27,321) (7,616) 9,186
Income taxes (benefit)......................... (4,374) (1,906) 2,940
-------- -------- --------
Net Income (Loss).............................. $(22,947) $ (5,710) $ 6,246
-------- -------- --------
Weighted average common shares outstanding..... 11,174 11,151 11,109
-------- -------- --------
Per Share Data:
Net income (loss) per common share........ $ (2.05) $ (.51) $ .56
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 57
GROUND ROUND RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
SHARES ADDITIONAL ACCUMULATED DEFERRED TOTAL
COMMON COMMON PAID-IN EARNINGS OFFICER STOCKHOLDERS'
STOCK STOCK CAPITAL (DEFICIT) COMPENSATION EQUITY
------ ------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 3,
1993..................... 11,099 $ 1,850 $ 57,572 $ (597) $ (188) $ 58,637
Amortization of deferred
officer
compensation.......... 92 92
Converted stock
options............... 15 2 59 61
Net income............... 6,246 6,246
------ ------ ------- -------- ----- --------
Balance at October 2,
1994..................... 11,114 1,852 57,631 5,649 (96) 65,036
Amortization of deferred
officer
compensation.......... 96 96
Converted stock
options............... 60 10 252 262
Net loss................. (5,710) (5,710)
------ ------ ------- -------- ----- --------
Balance at October 1,
1995..................... 11,174 1,862 57,883 (61) 0 59,684
Net loss................. (22,947) (22,947)
------ ------ ------- -------- ----- --------
Balance at September 29,
1996..................... 11,174 $ 1,862 $ 57,883 $ (23,008) $ 0 $ 36,737
====== ====== ======= ======== ===== ========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 58
GROUND ROUND RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
SEPTEMBER 29, OCTOBER 1, OCTOBER 2,
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)............................ $(22,947) $ (5,710) $ 6,246
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............. 12,369 15,029 13,851
Deferred income taxes..................... (1,120) (805) 336
Write-off of deferred debt costs.......... 572
Impairment of long-lived assets........... 8,898
Gain on disposition of assets............. (1,574)
Other, net................................... 96 92
Return of insurance deposits................. 819 4,690
Change in operating assets and liabilities:
Accounts receivable....................... (85) 263 (152)
Income tax refunds receivable............. (1,009) (1,541)
Inventories and prepaid expenses.......... 1,453 481 (1,468)
Accounts payable and accrued expenses..... 6,163 (1,981) (218)
-------- -------- --------
Net cash provided by operating
activities......................... 3,722 6,651 22,375
-------- -------- --------
Cash Flows From Investing Activities:
Purchase of property and equipment........... (1,829) (9,695) (22,437)
Proceeds from sale of property and
equipment................................. 5,107 4,289 4,378
Purchase of liquor licenses.................. (164) (681)
Deposits paid................................ (217)
Notes receivable and working capital loan
collections............................... 130
Pre-opening costs and related items.......... (390) (988)
-------- -------- --------
Net cash provided by investing
activities......................... 3,278 (5,960) (19,815)
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds from long-term borrowings........... 49,600 28,800
Payments of long-term borrowings............. (7,134) (49,340) (29,813)
Payments of deferred debt costs.............. (516) (245) (1,413)
Proceeds from issuance of common stock....... 262 61
-------- -------- --------
Net cash provided by (used in)
financing activities............... (7,650) 277 (2,365)
-------- -------- --------
Net Increase (Decrease) in Cash................ (650) 968 195
Cash at beginning of period.................... 2,425 1,457 1,262
-------- -------- --------
Cash at end of period.......................... $ 1,775 $ 2,425 $ 1,457
======== ======== ========
Supplemental Cash Flow Information:
Interest paid................................ $ 4,124 $ 4,728 $ 3,458
Taxes paid................................... 79 1,067 2,339
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 59
GROUND ROUND RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 29, 1996 AND OCTOBER 1, 1995 AND OCTOBER 2, 1994
A. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the
accounts of Ground Round Restaurants, Inc. (the "Company"), and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. The Company operates and franchises family-
oriented, full-service restaurants primarily in the Northeast, Mid-Atlantic and
Midwest United States.
The fiscal year of the Company is the 52 or 53 week period ending on the
Sunday closest to September 30th. For purposes of these notes to the
consolidated financial statements, the 52 week fiscal year ended September 29,
1996, the 52 week fiscal year ended October 1, 1995, and the 52 week fiscal year
ended October 2, 1994, are referred to as 1996, 1995, and 1994, respectively.
Certain items in prior years in specific captions of the accompanying
consolidated financial statements and notes to the consolidated financial
statements have been reclassified for comparative purposes.
Cash Equivalents: Cash equivalents consist of highly liquid investments
with original maturities of three months or less, and are carried at cost which
approximates fair value.
Inventories: Inventories are stated at the lower of cost or market, as
determined by the first-in, first-out (FIFO) cost method.
Property and Equipment: Property and equipment are recorded at cost.
Depreciation and amortization, including amortization of assets recorded under
capital leases, are computed principally by the straight-line method, based on
estimated useful lives. Useful lives are generally 33 years for buildings, 10
years for machinery and equipment, and the shorter of the lease term or
estimated useful life for leasehold improvements.
Deferred Debt Costs: Deferred debt costs, included in other assets, are
costs associated with the issuance of long-term debt and amortized over the
terms of the related instruments.
Deferred Pre-Opening Costs: Pre-opening costs consist of incremental
amounts directly associated with opening a new restaurant. These costs, which
principally include initial purchases of expendables and expenses of the
restaurant staff, hired to operate the restaurant upon opening, for the training
period before the restaurant opens, are capitalized and amortized over the 12
month period following the restaurant opening.
Accounting for Stock-Based Compensation: In October 1995, the Financial
Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based
Compensation," which is effective in fiscal 1997. As permitted by the new
standard, the Company will continue applying accounting prescribed by APB
Opinion No. 25 and include additional footnote disclosures.
Intangible Assets: Intangible assets are included in other assets and
consist primarily of trade names, liquor licenses and franchise value. These
assets are being amortized by the straight-line method over lives ranging
between 15 and 40 years. The excess of cost of acquired companies over the value
assigned to net tangible assets, representing goodwill, is amortized on a
straight line basis over 40 years.
Accrued Insurance Claims: The Company maintains insurance coverage for
workers' compensation risks under contractual arrangements which retroactively
adjust premiums for claims paid subject to specified limitations. In addition,
the Company is self insured up to certain limits for risks associated with the
health care plan provided for its employees. Expenses associated with such risks
are accrued based upon the estimated amounts required to cover incurred
incidents. The Company does not provide health or other benefits to retirees.
Income Taxes: Tax provisions and credits are recorded at statutory rates
for taxable items included in the consolidated statements of operations
regardless of the period for which such items are reported for tax
F-7
<PAGE> 60
GROUND ROUND RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purposes. Deferred income taxes are recognized for temporary differences between
financial statement and income tax based assets and liabilities. Deferred tax
assets are reduced by a valuation allowance when the determination can be made
that it is more likely than not that some portion or all of the related tax
asset will not be realized.
Other Long-Term Liabilities: Other long-term liabilities comprise various
reserves including reserves for casualty insurance coverage and restaurant
closings.
Franchise Revenue: Initial franchise fees of $40,000 are recognized as
revenue when substantially all commitments and obligations have been fulfilled,
which is generally when the restaurant opens. Terms of franchise agreements are
generally over a twenty year period and provide for continuing franchise royalty
fees equal to 3 1/2% of monthly gross sales. The franchise agreements also
provide that franchisees are required to pay up to 2 1/2% of monthly gross sales
for advertising. Franchise and royalty fees included in revenues aggregated
$1,856,000, $2,171,000 and $2,192,000 for 1996, 1995 and 1994, respectively.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
B. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred debt acquisition costs.......................... $ 3,933 $ 3,417
Deferred pre-opening costs............................... 3,131 3,124
Franchise value.......................................... 4,018 4,696
Goodwill................................................. 2,815 4,166
Liquor licenses.......................................... 4,251 4,666
Tradename................................................ 2,099 3,073
Prepaid insurance........................................ 2,771 2,771
Other.................................................... 232 300
------- -------
23,250 26,213
Less accumulated amortization............................ 8,533 7,500
------- -------
$14,717 $18,713
======= =======
</TABLE>
Other assets were net of allowances for doubtful accounts of $232,000 at
September 29, 1996 and October 1, 1995.
F-8
<PAGE> 61
GROUND ROUND RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
C. PREPAID AND ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Casualty insurance....................................... $ 2,764 $ 1,998
Occupancy costs.......................................... 3,049 2,728
Payroll and payroll related expenses..................... 3,874 3,639
Sales taxes.............................................. 1,172 1,296
Accrued professional fees................................ 1,783 120
Other.................................................... 2,360 1,409
------- -------
$15,002 $11,190
======= =======
</TABLE>
Prepaid expenses and other current assets of $1,471,000 at September 29,
1996 and $2,115,000 at October 1, 1995 included prepaid casualty insurance costs
of $402,000 and $960,000, and prepaid property taxes of $863,000 and $488,000,
respectively.
D. LONG-TERM DEBT AND LEASE OBLIGATIONS
Long-term debt and capitalized lease obligations consist of the following:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Amended Credit Agreement dated September 12, 1996:
Term Note.............................................. $48,485
Tranche A Term......................................... $34,151
Tranche A Revolving.................................... 6,700
Tranche B Term......................................... 13,255
Capitalized lease obligations @ 5% to 15%................ 2,961 4,474
------- -------
51,446 58,580
Less current portion..................................... 11,499 8,277
------- -------
$39,947 $50,303
======= =======
</TABLE>
On September 12, 1996 the Company and its lenders restructured the
outstanding agreement dated October 8, 1993. The Amended and Restated Credit
Agreement ("Amended Credit Agreement") consolidated the then existing Tranche A
revolving loan, Tranche A Term Loans and Tranche B Term Loans into a single term
loan in the aggregate principal amount of approximately $48,485,000. Interest on
the facility will be payable at LIBOR plus 2.625% on the Company's LIBOR loans
and Alternate Base Rate ("ABR") plus .75% on the Company's ABR based loans. As
of September 29, 1996, the Company's loans were at Alternate Base Rate of 9%
inclusive of the .75%. The loan is scheduled to mature on May 31, 1997, subject
to an automatic extension to December 31, 1997 if the principal amount of the
loan is reduced by $10.8 million prior to May 31, 1997. The Amended Credit
Agreement contains financial covenants, including minimum levels of net worth
and certain required measures of profitability. The Company is required to make
accelerated principal payments based upon excess cash flows from operations, the
sale of certain assets and the offering proceeds from the sale of stock of the
Company. Provisions of the Amended Credit Agreement restricting the payment of
dividends would prevent the Company from paying dividends over the term of the
Amended Credit Agreement.
F-9
<PAGE> 62
GROUND ROUND RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In consideration of the banks entering into the Amended Credit Agreement,
among other things, the Company agreed to pay a maximum fee of $2.7 million to
the lenders evidenced by Convertible Notes. This fee is subject to reduction to
$1.3 million if the outstanding debt balance is reduced by $10.4 million before
May 31, 1997. Through November 15, 1996 the Company reduced its outstanding debt
balance by $10.4 million and accordingly has accrued the $1.3 million fee,
included as a component of other expense in the consolidated statement of
operations at September 29, 1996. The holder of each convertible note has the
right to convert the principal amounts thereof into common stock of the Company,
after May 1, 1997 at the price of approximately $2.71 per share.
Maturities of long-term debt for the years succeeding September 29, 1996
are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997............... $ 10,800
1998............... 37,685
</TABLE>
Interest expense for 1996, 1995, and 1994 as presented has been reduced by
interest income of $265,000, $162,000 and $171,000, respectively.
During 1996, the Company entered into two interest rate cap agreements in
the aggregate of $25,000,000 expiring during fiscal 1997, as stated in the
Amended Credit Agreement, for interest rate protection. The fixed interest rate
on these contracts at September 29, 1996 ranged from 8% to 10%. During 1995, the
Company entered into two interest rate cap agreements in the aggregate of
$30,000,000 that expired during fiscal 1996. The fixed interest rate on these
contracts at October 1, 1995 was 12%. During 1994, the Company entered into two
interest rate cap agreements in the aggregate of $15,000,000 that expired during
fiscal 1995. The fixed interest rate on these contracts at October 2, 1994
ranged from 5.5% to 7%. The interest rate differential is recognized as an
adjustment to interest expense. The payments made at the inception of the
agreements are being amortized on a straight line basis over their terms. The
amount included in the financial statements for outstanding debt approximates
fair value.
The Company occupies certain of its real estate under long-term leases,
substantially all of which contain renewal options. Most of these leases provide
for a percentage rental based on sales and, in most cases, require a minimum
annual rental.
A summary of property leased under capital leases is as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Real Estate................................................ $8,367 $8,703
Equipment.................................................. 456 456
------ ------
8,823 9,159
Less accumulated amortization.............................. 6,307 5,699
------ ------
$2,516 $3,460
====== ======
</TABLE>
The above amounts represent the present value of future minimum lease
payments at the inception of the leases, excluding that portion of the lease
payments representing estimated insurance and tax cost. Leases capitalized also
exclude that portion of the minimum lease payments attributable to land. Lease
amortization
F-10
<PAGE> 63
GROUND ROUND RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is included in depreciation expense. Future minimum lease payments under
noncancelable leases as of September 29, 1996 for each of the following years
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
1997..................................................... $ 960 $ 5,854
1998..................................................... 827 5,383
1999..................................................... 733 4,689
2000..................................................... 578 4,406
2001..................................................... 406 3,825
Thereafter............................................... 223 17,869
------ -------
Total minimum payments................................... 3,727 $42,026
=======
Less: Amounts representing interest...................... 766
------
Present value of net minimum payments.................... 2,961 .
Current portion of capital lease obligations............. 699
------
Long-term capital lease obligations...................... $ 2,262
======
</TABLE>
Minimum obligations for noncancelable operating leases have been reduced by
minimum noncancellable operating sublease rentals of $296,000. Future minimum
lease payments have been reduced by $437,000 for stores that have been sold to
Lone Star Steakhouse and Saloon, Inc. and for those stores that are expected to
be disposed of in 1997. (See Note K.)
Rent expense under operating leases for continuing operations was
$8,483,866, $8,391,000, and $8,280,000 for 1996, 1995 and 1994, respectively.
Rent expense includes contingent rental expense for capital and operating leases
of $1,860,000, $2,011,000 and $2,373,000 for 1996, 1995 and 1994, respectively.
E. STOCKHOLDERS' EQUITY
The 1992 Equity Incentive Plan, approved by the shareholders of the
Company, authorizes the granting of various options and rights to management to
purchase 350,000 shares of common stock of the Company. The 1989 Stock Option
Plan, authorizes the grant of options to purchase up to an aggregate of 575,000
shares of common stock of the Company (less any shares issued pursuant to the
exercise of options granted under the Company's 1987 and 1982 stock option
plans). Incentive stock options cannot be issued at less than fair market value
whereas the exercise price of nonqualified stock options is specified by the
Compensation Committee.
F-11
<PAGE> 64
GROUND ROUND RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of stock option transactions during 1996, 1995
and 1994:
<TABLE>
<CAPTION>
SHARES OPTION PRICES
-------- ---------------
<S> <C> <C>
Options outstanding October 3, 1993.............. 704,000 $3.29 to $10.06
Granted........................................ 19,000 $6.25 to $ 7.50
Canceled....................................... (95,000) $4.63 to $ 9.13
--------
Options outstanding at October 2, 1994........... 628,000 $3.29 to $10.06
Granted........................................ 183,000 $3.75 to $ 5.50
Canceled....................................... (386,000) $3.29 to $ 7.88
--------
Options outstanding at October 1, 1995........... 425,000 $3.29 to $10.06
Granted........................................ 376,000 $2.19 to $ 3.50
Canceled....................................... (235,000) $3.19 to $10.06
--------
Options outstanding at September 29, 1996........ 566,000 $2.19 to $ 9.13
======== ================
</TABLE>
As of September 29, 1996, options to purchase 566,000 shares of Common
Stock were outstanding pursuant to the 1992 Equity Incentive Plan and the 1989
Stock Option Plan, options to purchase 197,000 shares of Common Stock were
available for future grants pursuant to such plans and 763,000 shares of Common
Stock were reserved for issuance.
On February 2, 1993 the Compensation Committee of the Board of Directors
authorized 30,000 shares of restricted stock to be offered to Michael P.
O'Donnell, former Chairman of the Board, President, and Chief Executive Officer.
These shares, valued at $274,000 at issuance, were subject to forfeiture and
transfer restrictions over the three years following issuance. At the completion
of each year of service subsequent to the issuance date, forfeiture restrictions
were released on 10,000 shares. Pursuant to the terms of a Separation Agreement
dated April 3, 1995 between the Company and Mr. O'Donnell, all 30,000 shares of
Common Stock became fully vested and were delivered to Mr. O'Donnell. As a
result, an aggregate amount of $274,000 has been recorded as compensation
expense through fiscal 1995.
F. INCOME TAXES
The provision for income taxes for continuing operations computed under
SFAS No. 109 in 1996, 1995 and 1994 consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal...................................... $(3,254) $(1,247) $2,344
State........................................ 146 260
------- ------- ------
(3,254) (1,101) 2,604
Deferred:
Federal...................................... (1,120) (734) 298
State........................................ (71) 38
------- ------- ------
(1,120) (805) 336
------- ------- ------
Total expense (benefit).............. $(4,374) $(1,906) $2,940
======= ======= ======
</TABLE>
F-12
<PAGE> 65
GROUND ROUND RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reasons for the difference between total tax expense and the amount
computed by applying the statutory federal income tax rate to income from
continuing operations are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Taxes at statutory rate applied to pretax
income from continuing operations:........... $(9,289) $(2,589) $3,123
Increases (reductions) in tax resulting from:
State income taxes........................... (1,803) 51 197
Targeted jobs tax credits.................... (4) (515) (499)
FICA tax credits............................. (917) (815) (422)
AMT rate differential........................ 2,193
Credit carryforwards and increase in
valuation allowance....................... 5,040 1,411
Resolution of tax concerns................... (122) 481
Other........................................ 528 70 541
------- ------- ------
Total expense (benefit).............. $(4,374) $(1,906) $2,940
======= ======= ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets at September 29, 1996 and
October 1, 1995 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 29, 1996
-------------------------------------
ASSETS LIABILITIES TOTAL
-------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Vacation pay...................................... $ 265 $ 265
Accounts receivable............................... 398 398
Other deductible (income) amounts................. 292 $ (100) 192
Less valuation allowance.......................... (855) (855)
-------- ------- --------
Total current.................................. 100 (100) 0
-------- ------- --------
Noncurrent:
Credits........................................... 5,873 5,873
Depreciation...................................... 2,516 (2,823) (307)
Land.............................................. (16) (16)
Lease obligations................................. 3,130 (2,843) 287
Accrued insurance................................. 3,312 3,312
Closed store reserve.............................. 1,364 1,364
Amortization...................................... 1,419 (981) 438
Sales & use tax................................... 244 244
Deferred compensation............................. 239 239
Executive retirement.............................. 92 92
Other deductible (income) amounts................. 557 (192) 365
Less valuation allowances......................... (11,891) (11,891)
-------- ------- --------
Total noncurrent............................... 6,855 (6,855) 0
-------- ------- --------
Total current and noncurrent.............. $ 6,955 $(6,955) $ 0
======== ======= ========
</TABLE>
F-13
<PAGE> 66
GROUND ROUND RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OCTOBER 1, 1995
-----------------------------------
ASSETS LIABILITIES TOTAL
------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Vacation pay........................................ $ 228 $ 228
Accounts receivable................................. 237 237
Other deductible (income) amounts................... 53 $ (30) 23
Less valuation allowance............................ (488) (488)
------ ------- -------
Total current.................................... 30 (30) 0
------ ------- -------
Noncurrent:
Credits............................................. 3,749 3,749
Depreciation........................................ 1,535 (4,008) (2,473)
Land................................................ (272) (272)
Lease obligations................................... 2,454 (2,199) 255
Accrued insurance................................... 2,685 2,685
Closed store reserve................................ 507 507
Amortization........................................ 143 (658) (515)
Sales & use tax..................................... 276 276
Deferred Compensation............................... 249 249
Executive retirement................................ 229 229
Other deductible amounts............................ 168 37 205
Less valuation allowances........................... (6,015) (6,015)
------ ------- -------
Total noncurrent................................. 5,980 (7,100) (1,120)
------ ------- -------
Total current and noncurrent................ $ 6,010 $(7,130) $(1,120)
====== ======= =======
</TABLE>
A valuation allowance has been provided for those deferred.tax assets for
which management believes it is more likely than not that the tax benefit will
not be realized. As of September 29, 1996 the Company had approximately
$1,580,000 of alternative minimum tax credit carryforwards for federal tax
purposes, approximately $1,878,000 of targeted jobs tax credits, approximately
$2,373,000 of FICA tax credits, $28,000 of foreign tax credits and $14,000 of
research and development credits, that expire on various dates through 2011.
G. RETIREMENT BENEFITS
The Company sponsors a qualified defined contribution pension plan which
covers substantially all full-time eligible employees. Employees may contribute
up to 10% of earnings on an after tax basis which are matched by the Company
based upon years of participation in the plan up to a maximum of 3%. Defined
contribution expense for the Company was $187,000, $218,000 and $221,000 for
1996, 1995 and 1994, respectively.
The Company also sponsors a non-qualified deferred compensation plan for
key management employees. An employee can defer up to 10% of eligible
compensation which will be matched by the Company up to 3%. The Company may also
make discretionary matching contributions between 25% and 100% of each
employee's deferred compensation between 3% and 10%. In addition, a rate of
return, determined in advance by the Company, will be credited each year to the
employee's account. The funds are invested at the discretion of the Company.
Deferred compensation expense for the Company was $92,000, $100,000 and $112,000
for 1996, 1995 and 1994, respectively. Except as set forth above, the Company
has no liability for health or other benefits to retirees.
F-14
<PAGE> 67
GROUND ROUND RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
H. COST OF PRODUCTS SOLD
Cost of products sold comprises the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Food and beverage costs.................... $ 76,094 $ 73,837 $ 76,949
Labor costs................................ 76,469 77,779 76,845
Other costs................................ 48,527 49,140 49,025
-------- -------- --------
$201,090 $200,756 $202,819
======== ======== ========
</TABLE>
I. OTHER INCOME AND EXPENSE
During 1996, the Company recognized $2.8 million in expenses in connection
with the placement of an Amended and Restated Credit Agreement dated September
12, 1996, consisting of bank, administrative and legal fees.
During 1995, the Company recognized approximately $0.8 million in expenses
related to the resignation of the Company's Chairman of the Board, President,
and Chief Executive Officer. Also recognized was approximately $0.8 million in
expenses related to the termination of the Merger Agreement among the Company,
GRR Acquisition Corp. and GRR, Inc., which the parties entered into on August
23, 1994 and which was terminated on January 13, 1995. Developments in the
high-yield financing market prevented the timely completion of the financing for
the merger.
J. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly consolidated results of
operations for 1996, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 29
------------ --------- -------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996:
Revenue.................................... $ 54,725 $54,958 $ 55,779 $53,371
Gross profit............................... 4,502 3,773 4,631 4,837
Net loss................................... (3,019) (3,546) (3,116) (13,266)
Per share data:
Net loss................................... (.27) (.32) (.28) (1.19)
</TABLE>
<TABLE>
<CAPTION>
JANUARY 1 APRIL 2 JULY 2 OCTOBER 1
------------ --------- -------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1995:
Revenue.................................... $ 62,398 $56,937 $ 56,145 $54,926
Gross profit............................... 10,337 8,119 7,231 3,963
Net income (loss).......................... 122 (1,334) (738) (3,760)
Per share data:
Net income (loss).......................... .01 (.12) (.07) (.33)
</TABLE>
F-15
<PAGE> 68
GROUND ROUND RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JANUARY 2 APRIL 3 JULY 3 OCTOBER 2
------------ --------- -------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1994:
Revenue.................................... $ 62,199 $59,885 $ 60,670 $61,217
Gross profit............................... 10,731 9,400 10,263 10,758
Net income................................. 1,534 1,554 1,595 1,563
Per share data:
Net income................................. .14 .14 .14 .14
</TABLE>
FOURTH QUARTER -- 1996
The Company recognized income tax expense of $2.5 million resulting from a
change in the tax effective rate for 1996. In addition, the Company recorded a
charge of $8.9 million resulting from the adoption of Statement of Financial
Accounting Standards No. 121 (SFAS No. 121), "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of" and the decision to dispose of certain
restaurants (See Note K.)
K. STORE CLOSINGS AND IMPAIRMENT OF LONG-LIVED ASSETS
On July 1, 1996, the Company announced that it agreed to sell up to 16 of
its restaurants to Lone Star Steakhouse and Saloon, Inc. Based on mutual
consent, as of September 29, 1996 the actual number of restaurants to be sold to
Lone Star Steakhouse and Saloon, Inc. was reduced to 12 restaurants. As of
December 6, 1996, the Company sold 11 restaurants to Lone Star for $11.4
million. The carrying value of these restaurants approximates the proceeds
received from the sales. On August 11, 1996 a committee of the Company's Board
of Directors approved the closure of 10 restaurants in 1997.
The Company elected to early adopt SFAS No. 121, in the fourth quarter of
fiscal 1996. This Statement requires that long-lived assets and certain
identifiable intangibles held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
The Company considers a history of store operating losses to be its primary
indicator of potential impairment. Assets are grouped and evaluated for
impairment at the lowest level for which there are identifiable cash flows that
are independent of the cash flows of other group of assets. The Company has
identified the appropriate grouping of assets to be individual restaurants where
circumstances indicate that an impairment issue may exist. Impairment occurs if
the undiscounted operating cash flows is less than the carrying amount. The loss
is measured as the amount by which the carrying amount of the assets exceed its
fair value. The Company generally measures fair value by obtaining market rates.
Considerable management judgement is necessary to estimate market rates and,
accordingly, actual results could vary significantly from such estimates.
The net assets relating to the assets to be sold or disposed of have been
re-classified on the Consolidated Balance Sheet. Consistent with the Company's
policy to review its base of restaurants for potential sales and impairments,
the Company recorded a fourth quarter charge of $8.9 million consisting of a
$5.8 million reduction in the net carrying value of certain restaurants and
other restaurant-related long-lived assets that were determined to be impaired
and a $3.1 million reduction in the net carrying value of certain restaurants
and related equipment expected to be disposed of during 1997. The charge
resulted in a reduction to property and equipment of $5.9 million and a
reduction to intangible assets of $3.0 million.
L. LITIGATION
The Company has been named in a number of separate claims brought by former
employees alleging that the Company engaged in discriminatory practices
including those based on age or sex. Plaintiffs maintaining
F-16
<PAGE> 69
GROUND ROUND RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
claims of employment discrimination, such as those being brought against the
Company, generally are entitled to have their claims tried by a jury and such
claims may result in punitive damage awards. Most of the proceedings against the
Company are still in the discovery phase and management believes that the
discrimination claims against the Company are without merit and the Company is
actively defending the claims. Management does not expect that the resolution of
these matters will have a material adverse effect on the consolidated results of
operations, cash flows or financial position of the Company.
F-17
<PAGE> 70
SCHEDULE II
GROUND ROUND RESTAURANTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE BALANCE
BEGINNING ADDITIONS CHARGED TO AT END OF
DESCRIPTION OF PERIOD COST OTHER RECOVERIES PERIOD
- --------------------------------------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended September 29, 1996:
Allowances deducted from assets to
which they apply:
For doubtful accounts............. $ 1,030 $ 325 -- -- $ 1,355
Year Ended October 1, 1995:
Allowances deducted from assets to
which they apply:
For doubtful accounts............. 583 447 -- -- 1,030
Year Ended October 2, 1994:
Allowances deducted from assets to
which they apply:
For doubtful accounts............. 447 140 -- 4 583
</TABLE>
F-18
<PAGE> 71
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis examines the Company's operations
which comprise the Ground Round restaurant chain, and should be read in
conjunction with the financial statements and notes thereto included elsewhere
in this report. As of September 29, 1996, the Company operated 143 and
franchised 41 family-oriented, full service, casual dining restaurants.
For purposes of this discussion and analysis, the 52 week year ended
September 29, 1996, the 52 week year ended October 1, 1995 and the 52 week year
ended October 2, 1994, are referred to as 1996, 1995, and 1994, respectively.
RESULTS OF OPERATIONS
The following table sets forth the percentages which the items in the
Company's Consolidated Statements of Operations bear to total revenue unless
otherwise indicated:
<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
SEPTEMBER 29, OCTOBER 1, OCTOBER 2,
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Revenue:
Restaurant revenue........................... 99.2% 99.1% 99.1%
Franchise revenue............................ .8 .9 .9
----- ----- -----
Total Revenue............................. 100.0 100.0 100.0
Costs and Expenses:
Cost of products sold(1)..................... 92.7 88.0 83.9
Selling, general and administrative.......... 7.6 6.9 6.3
Depreciation and amortization................ 5.4 6.4 5.5
Interest expense............................. 2.2 2.2 1.7
Impairment of long-lived assets.............. 4.1
Other (income) expense....................... 1.3 .7 (.4)
Income (loss) before income taxes.............. (12.5) (3.3) 3.8
Income taxes (benefit)......................... (2.0) (.8) 1.2
----- ----- -----
Net income (loss).............................. (10.5)% (2.5)% 2.6%
</TABLE>
- ---------------
(1) As a percentage of Company-operated restaurant revenue.
Restaurant Revenue. Restaurant revenue totaled $217.0, $228.2 and $241.8
million for fiscal 1996, 1995 and 1994, respectively. Restaurant revenue is
comprised of comparable restaurant revenue (revenue from restaurants open during
all of both fiscal years) and non-comparable restaurant revenue.
Comparable restaurant revenue, comprised of revenue from restaurants open
during all of 1996 and 1995, decreased in 1996 by 0.9% to $206.4 million for the
comparable 1995 52-week period. Comparable restaurant revenue in 1995 decreased
by 5.3% for the comparable 1994 52-week period. Management believes that
improved comparable sales in 1996 vs. 1995, as compared to 1995 vs. 1994, was
the result of the new menu introduced in December 1995 with over 200 offerings.
As the Company improved menu execution and service, the comparable sales
continued to increase as demonstrated in the fourth quarter. Comparable
restaurant revenue increased by 1.5% in the fourth quarter of 1996 as compared
to the fourth quarter of 1995. In management's opinion, the decline in
comparable sales levels in 1995 vs. 1994 were primarily impacted by increased
competition within the casual dining sector, coupled with a change in consumer
spending.
The average guest check was approximately $9.02, $8.21 and $8.12 in 1996,
1995 and 1994 respectively. The increase in guest check resulted in an increase
in comparable restaurant revenues of $20.3 million in 1996 through the
implementation of a menu expansion with higher priced menu items. The guest
count declined by
F-19
<PAGE> 72
9.8% in 1996 and by 6.1% in 1995 resulting in a reduction of $20.3 million and
$13.3 million in revenues respectively. Management believes the reduction in
1996 was a result of discontinuing discounts offered primarily to bar and kids
menu patrons. Sales of alcoholic beverages (excluding soda) were approximately
19%, 20% and 21% of revenue in 1996, 1995 and 1994, respectively.
Non-comparable restaurant revenue, consisting of those restaurants not in
operation during all of both comparable years, decreased to $10.6 million in
1996 from $20.0 million in 1995. The decrease in 1996 is attributable to the
sale or closing of 16 restaurants during fiscal 1995 and the sale or closing of
nine restaurants during 1996, offset by the opening of four new restaurants
during fiscal 1995 which are currently classified as non-comparable. In 1995,
the increase in non-comparable restaurant revenue to $19.4 million from $6.7
million in 1994 was attributable to the full year operation of nine new
restaurants added in 1994, offset by the sale or closing of 15 locations during
1995.
Franchise Revenue. The Company's franchise base consisted of 46
restaurants with franchise agreements (of which 41 are presently operating), 42
and 41 in 1996, 1995 and 1994, respectively. During 1996, the Company added two
franchised restaurants, which were formerly company-operated restaurants and
closed three franchise restaurants. During 1995, the Company added six
franchised restaurants, consisting of two new franchised restaurants and four
formerly Company-operated existing restaurants which were acquired by
franchisees. One franchised restaurant was closed during 1995. During 1994, two
new franchised restaurants were added, while five franchised restaurants were
closed. Revenue from franchised restaurants (consisting of royalties and
franchise fees) were $1.9 million, $2.2 million and $2.5 million in 1996, 1995
and 1994, respectively.
Cost of Products Sold. Cost of products sold consists of both food and
beverage costs and restaurant operating expenses. Food and beverage costs
totaled 35.1%, 32.4% and 31.8% of Company-operated restaurant revenue in 1996,
1995 and 1994, respectively. The increase in the cost of products sold in 1996
reduced profits by $5.9 million. Restaurant operating expenses were 57.6%, 55.7%
and 52.1% of Company-operated restaurant revenue, respectively, in 1996, 1995
and 1994.
Food and beverage costs as a percentage of Company-operated restaurant
revenue increased by 2.7% as compared to 1995 as the Company implemented a
substantially re-designed menu during the first week of December, 1995. The
increase can be primarily attributed to higher product costs associated with new
menu items, including increases in portion sizes, the costs associated with
proper food preparation and restaurant managers ability to predict guests
preference on new menu items. The increase in food and beverage costs of .6%
from 1994 to 1995 was attributable to increased lettuce costs during the third
quarter of 1995 along with the implementation of a summer menu in the fourth
quarter of 1995. The decrease in food and beverage costs in 1994 was
attributable to lower food product costs offset by an increase in beverage costs
due to the increased cost of beer.
Restaurant operating expenses as a percentage of Company-operated
restaurant revenue increased by 1.9% in 1996 from 1995. The increases have
primarily resulted from increases in labor costs of 1.1% directly attributable
to increased kitchen staffing during implementation of the new menu and
increased front of the house staff to improve guest service. Other costs have
increased by .8% in 1996 as compared to 1995 mainly as a result costs associated
with the implementation of the new menu, including increases in printing,
plateware, supplies and repairs. These increases were partially offset by
decreases in local promotion expenses and in percentage rent expense. Most other
costs remained at a constant dollar level due to the fixed nature of certain
costs associated with operating a restaurant. Restaurant operating expenses as a
percentage of Company-operated restaurant revenue increased 3.6% in 1995 from
1994 primarily due to a $.9 million increase in hourly labor costs associated
with the roll-out of the Company's summer menu and an increase in
front-of-the-house staff to improve guest service. Other costs have remained at
relatively constant dollar levels, due to the fixed nature of costs associated
with operating a restaurant.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were 7.6%, 6.9% and 6.3% of total revenue in 1996, 1995
and 1994, respectively. Selling expenses, comprised of advertising and point of
purchase materials, development and production costs, were .6%, .9% and .5% of
total revenue for 1996, 1995 and 1994, respectively. Selling expenses decreased
in 1996 by .3% of total revenue from
F-20
<PAGE> 73
1995 due to the Company's decision not to use radio advertising. Selling
expenses increased in 1995 by .4% of total revenue from 1994, primarily due to
an increase in radio advertising during the first two quarters of 1995.
General and administrative costs, comprised of restaurant manager training,
regional overhead, and corporate administrative costs, were 7.0%, 6.0% and 5.8%
of total revenue in 1996, 1995 and 1994, respectively. The increase in general
and administrative costs of 1.0% in 1996 as compared to 1995 represents
additional training expenses incurred in order to properly staff the restaurants
at the management level, coupled with the addition of three Regional Directors
and Two Divisional Vice Presidents in order to reduce span of control (by
reducing the number of locations that each regional director is responsible
for). General and administrative costs have remained relatively constant in
dollars in 1995 as compared to 1994 with the exception of an increase in
litigation expense of $.3 million.
Depreciation and Amortization. Depreciation and amortization expenses were
5.4%, 6.4% and 5.5% of total revenue in 1996, 1995 and 1994, respectively.
Depreciation and amortization expenses decreased by 1.0% in 1996 as compared to
1995 due to the sale or closing of 16 restaurants in 1995 and nine restaurants
during 1996. Depreciation and amortization expenses increased by .9% in 1995 as
compared to 1994 primarily due to the remodeling of 120 restaurants since 1992
and an increase in pre-opening expenses.
Impairment of Long-Lived Assets. During 1996 the Company recorded a fourth
quarter charge of $8.9 million consisting of a $5.8 million reduction in the net
carrying value of certain restaurants and other restaurant related long-lived
assets that were determined to be impaired under the Statement of Financial
Accounting Standards No. 121 and a $3.1 million reduction in the net carrying
value of certain restaurants and related equipment to be disposed of in fiscal
1997. (See Footnote K in Financial Statements for further explanation).
Other (Income) and Expense. Other (income) and expenses were $2.9 million,
$1.6 million and $(1.0) million in 1996, 1995 and 1994, respectively. During
1996, the Company recognized $2.8 million in expenses in connection with the
restructuring of an Amended and Restated Credit Agreement dated September 12,
1996. Fiscal 1995 reflects $0.8 million in expenses related to the termination
of the Merger Agreement among the Company, GRR Acquisition Corp. and GRR, Inc.,
which the parties entered into on August 23, 1994 and which was terminated on
January 13, 1995. In addition, 1995 also reflects $0.8 million in expenses
related to the resignation of the Company's former Chairman of the Board,
President, and Chief Executive Officer. During 1994, the Company completed a
sale of one location for approximately $2.0 million and realized a pretax gain
of approximately $1.5 million. This gain was partially offset by the write-off
of $.6 million in expenses associated with a proposed public offering of
convertible subordinated debentures which the Company withdrew due to market
conditions.
Interest Expense. Interest expenses were 2.2%, 2.2% and 1.7% of total
revenue in 1996, 1995 and 1994, respectively. Interest expense increased in 1995
due to the increase in the average interest rate under the Company's credit
facility to 7.7% in 1995 from 6.5% in 1994.
Income Taxes. The Company's effective income tax rates were 16%, 25% and
32% in 1996, 1995 and 1994, respectively. The reduction in the 1996 and 1995
effective tax rate was primarily due to the generation of additional targeted
jobs tax credits, FICA credits and the net operating loss that did not provide a
benefit for the current year. In addition, the settlement of an Internal Revenue
Service audit for the years 1986 through 1989 impacted the 1995 rate.
Net Income (Loss). As a result of the foregoing, the Company reported a
net loss of $(22.9) million in fiscal 1996, compared to a net loss of $(5.7)
million in 1995 and net income of $6.2 million in 1994. The net loss was $(2.05)
per share in 1996, $(.51) per share in 1995, compared to net income of $.56 per
share for 1994, respectively.
LIQUIDITY AND CAPITAL RESOURCES.
A significant amount of the Company's restaurant revenues are tendered in
cash, with the remainder made with credit cards that are generally realized in
cash within a few days. Because the Company does not have significant accounts
receivable or inventories and pays its expenses within normal terms, the Company
F-21
<PAGE> 74
operates with working capital deficits as is typical in the restaurant industry.
The Company had working capital deficits of $13.2 million and $15.7 million as
of September 29, 1996 and October 1, 1995, respectively.
Net cash provided by operating activities totaled $3.7 million in 1996 as
compared with $6.7 million in 1995. The decrease is attributed to the Company's
net loss of $22.9 million for 1996 compared to the net loss of $5.7 million for
1995. The decrease was partially offset by the receipt of an income tax refund
and by an increase in accounts payable as a result of obtaining more favorable
payment terms negotiated with the Company's vendors. The Company incurred
capital expenditures totaling $1.8 million for restaurant capital maintenance
during 1996, and $9.7 million for restaurant capital maintenance, remodeling and
new restaurant construction during 1995. Available cash, net cash provided by
operations and proceeds from sales of restaurant locations of approximately $5.1
million funded 1996 capital expenditures and provided for the repayment of $7.1
million in borrowings under the Company's current credit facility with its
banks. On September 29, 1996 and October 1, 1995, the Company's borrowings under
its credit facility were $48.4 million and $54.1 million, respectively, there
are no material unused amounts of credit.
On September 12, 1996 the Company and its lenders restructured its existing
credit facility by entering into the Amended and Restated Credit Agreement
("Amended Credit Agreement") which consolidated the then existing Tranche A
revolving loan, Tranche A Term Loans and Tranche B Term Loans into a single term
loan in the aggregate principle amount of approximately $48,485,000. The
interest rate is calculated at LIBOR plus 2.625% on the Company's LIBOR loans
and alternate base rate ("ABR") plus .75% on the Company ABR based loans. The
loan is scheduled to mature on May 31, 1997, subject to an automatic extension
to December 31, 1997 if the principal amount of the loan is reduced by $10.8
million prior to May 31, 1997. Through November 15, 1996 the Company reduced its
outstanding debt balance by $10.4 million. The Amended Credit Agreement contains
financial covenants, including minimum levels of net worth and certain required
measures of profitability. The Company is required to make accelerated principal
payments based upon excess cash flows from operations, the sale of certain
assets and the offering proceeds from the sale of stock of the Company.
Provisions of the Amended Credit Agreement restricting the payment of dividends
would prevent the Company from paying dividends over the term of the Amended
Credit Agreement.
In consideration of the banks entering into the Amended Credit Agreement,
the Company agreed to pay a maximum fee of $2.7 million to the lenders evidenced
by Convertible Notes. This fee is subject to reduction to $1.3 million if the
outstanding debt balance is reduced by $10.4 million before May 31, 1997.
Through November 15, 1996 the Company reduced its outstanding debt balance by
$10.4 million, and accordingly has accrued the $1.3 million fee, included as a
component of other expense in the consolidated statement of operations at
September 29, 1996. The holder of each Convertible Note has the right to convert
the principal amount thereof into common stock of the Company, after May 1, 1997
at the price of approximately $2.71 per share.
During 1996, the Company entered into two interest rate cap agreements in
the aggregate of $25,000,000 expiring during fiscal 1997, in accordance with the
terms of the Amended Credit Agreement, for interest rate protection. The fixed
interest rate on these contracts at September 29, 1996 ranged from 8% to 10%.
During 1995, the Company entered into two interest rate cap agreements in the
aggregate of $30,000,000 that expired during fiscal 1996. The fixed interest
rate on these contracts at October 1, 1995 was 12%. During 1994, the Company
entered into two interest rate cap agreements in the aggregate of $15,000,000
that expired during fiscal 1995. The fixed interest rate on these contracts at
October 2, 1994 ranged from 5.5% to 7%. The interest rate differential is
recognized as an adjustment to interest expense. The amount included in the
financial statements for outstanding debt approximates fair value.
The Company expects to incur approximately $2.7 million in capital
expenditures during fiscal 1997. Management believes that existing cash, net
cash provided by operating activities, and proceeds from the sale of restaurant
locations, already transacted, will be sufficient to meet operating needs, fund
anticipated capital expenditures and service debt requirements, assuming that
the Amended Credit Agreement is restructured, during fiscal 1998. There can be
no assurance that the Company will be able to restructure the Amended Credit
Agreement or obtain alternative financing.
F-22
<PAGE> 75
The effect of inflation has not been a factor upon either the operations or
the financial condition of the Company. The Company's business is not
significantly seasonal in nature.
Forward-Looking Information
Statements contained in this Form 10-K that are not historical facts,
including, but not limited to, statements found in this Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations, are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 that involve a number of risks
and uncertainties. The actual results of the future events described in such
forward-looking statements in this Form 10-K could differ materially from those
stated in such forward-looking statements. Among the factors that could cause
actual results to differ materially are: the Company's ability to operate
existing restaurants profitably, changes in local, regional and national
economic conditions, especially economic conditions in the areas in which the
Company's restaurants are concentrated, increasingly intense competition in the
restaurant industry, increases in food, labor, employee benefits and similar
costs, and other risks detailed from time to time in the Company's periodic
earnings releases and reports filed with the Securities and Exchange Commission,
as well as the risks and uncertainties discussed in this Form 10-K.
F-23
<PAGE> 76
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GROUND ROUND RESTAURANTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 29, 1997 AND SEPTEMBER 29, 1996 (DOLLARS IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................ $ 1,049 $ 1,775
Receivables, net of allowances for uncollectible accounts of $991 and
$1,123 at June 29, 1997 and September 29, 1996, respectively...... 1,270 1,299
Income tax refunds receivable........................................ 0 2,550
Inventories.......................................................... 1,946 2,056
Prepaid expenses and other current assets............................ 1,990 1,471
Assets held for sale................................................. 1,579 12,806
-------- --------
Total current assets.............................................. 7,834 21,957
Property and equipment:
Land................................................................. 7,042 7,042
Buildings and leasehold improvements................................. 97,929 97,235
Machinery and equipment.............................................. 34,086 33,441
-------- --------
139,057 137,718
Accumulated depreciation and amortization............................ 59,583 53,154
-------- --------
Property and equipment, net....................................... 79,474 84,564
Other assets........................................................... 12,027 14,717
-------- --------
Total Assets........................................................... $ 99,335 $121,238
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................................... $ 7,212 $ 8,630
Accrued expenses..................................................... 11,454 15,002
Current portion of long-term debt and capital lease obligations...... 640 11,499
Term loan payable to bank (see Note 4)............................... 37,138 0
-------- --------
Total current liabilities......................................... 56,444 35,131
Long-term debt and capital lease obligations........................... 1,780 39,947
Other long-term liabilities............................................ 8,678 9,423
Stockholders' Equity:
Preferred Stock, undesignated, par value $100 per share; authorized
30,000 shares; none issued Common Stock, par value $.16 2/3 per
share: authorized 35,000,000 shares at June 29, 1997 and September
29, 1996; issued 11,173,421 at June 29, 1997 and September 29,
1996.............................................................. 1,862 1,862
Additional paid-in capital........................................... 57,883 57,883
Accumulated deficit.................................................. (27,312) (23,008)
-------- --------
Total stockholders' equity........................................ 32,433 36,737
-------- --------
Total Liabilities and Stockholders' Equity................... $ 99,335 $121,238
======== ========
</TABLE>
See notes to consolidated financial statements.
F-24
<PAGE> 77
GROUND ROUND RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
--------------------- ---------------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue........................................... $ 45,736 $ 55,779 $142,086 $165,462
Costs and Expenses:
Cost of products sold........................... 40,349 51,148 124,288 152,556
Selling, general and administrative............. 3,715 4,336 11,310 12,619
Depreciation and amortization................... 2,214 2,893 6,791 9,064
Interest expense, net........................... 1,214 1,183 3,622 3,633
Other expense................................... 118 373 378 498
------- ------- -------- --------
47,610 59,933 146,389 178,370
------- ------- -------- --------
Loss before income tax benefit.................... (1,874) (4,154) (4,303) (12,908)
Income tax benefit................................ 0 (1,038) 0 (3,227)
------- ------- -------- --------
Net Loss.......................................... $ (1,874) $ (3,116) $ (4,303) $ (9,681)
======= ======= ======== ========
Weighted average common shares outstanding........ 11,173 11,173 11,173 11,173
Per Share Data:
Net loss per common share......................... $ (.17) $ (.28) $ (.39) $ (.87)
======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-25
<PAGE> 78
GROUND ROUND RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
39 WEEKS ENDED 39 WEEKS ENDED
JUNE 29, JUNE 30,
1997 1996
-------------- --------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss.................................................... $ (4,303) $ (9,681)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................ 7,974 9,378
Deferred taxes........................................... 0 (3,015)
Change in operating assets and liabilities:
Accounts receivable...................................... 222 (228)
Income tax refunds receivable............................ 2,550 1,541
Inventories and prepaid expenses......................... 428 1,280
Accounts payable and other liabilities................... (5,675) 4,040
------- --------
Net cash provided by operating activities........... 1,196 3,315
Cash Flows From Investing Activities:
Purchase of property and equipment.......................... (1,423) (1,471)
Proceeds from sales of property and equipment............... 11,329 3,034
Sale of liquor license...................................... 60 293
------- --------
Net cash provided by investing activities........... 9,966 1,856
Cash Flows From Financing Activities:
Payments of long-term borrowings............................ (11,888) (5,322)
Payments of deferred debt costs............................. 0 (460)
------- --------
Net cash used by financing activities............... (11,888) (5,782)
Net Decrease in Cash.......................................... (726) (611)
Cash and cash equivalents at beginning of period.............. 1,775 2,425
------- --------
Cash and cash equivalents at end of period.................... $ 1,049 $ 1,814
======= ========
</TABLE>
See notes to consolidated financial statements.
F-26
<PAGE> 79
GROUND ROUND RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JUNE 29, 1997 AND JUNE 30, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of Management, the accompanying unaudited consolidated
financial statements contain all adjustments, which are of a normal recurring
nature, necessary to present fairly Ground Round Restaurants, Inc.'s (the
"Company") financial position as of June 29, 1997 and the results of operations
for the 13-week and 39-week periods ended June 29, 1997 and June 30, 1996. These
financial statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such regulations, although the Company believes the
disclosures provided are adequate to prevent the information presented from
being misleading. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's annual report on Form 10-K, as amended, for the year ended September
29, 1996 and Form 10-Q for the quarterly period ended March 30, 1997.
Certain items in specific captions in the accompanying consolidated
financial statements have been reclassified for comparative purposes.
2. COST OF PRODUCTS SOLD
Cost of products sold comprises the following:
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
--------------------- ---------------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Food and beverage costs................... $ 14,992 $ 19,525 $ 46,849 $ 57,694
Labor costs............................... 15,793 19,482 48,005 58,175
Other costs............................... 9,564 12,141 29,434 36,687
------- ------- -------- --------
$ 40,349 $ 51,148 $124,288 $152,556
======= ======= ======== ========
</TABLE>
3. LITIGATION
The Company is subject to various claims and legal actions that arise in
the ordinary course of business, including, but not limited to, claims and
actions brought pursuant to "dram shop" statutes and under federal and state
employment laws prohibiting employment discrimination. The Company believes it
is not currently a party to any "material" pending legal proceedings as defined
in Item 103 of Regulation S-K of the Securities Exchange Act of 1934, as
amended.
The Company has been named in a number of separate claims brought by former
employees alleging that the Company engaged in discriminatory practices,
including those based on age or sex. Plaintiffs maintaining claims of employment
discrimination, such as those being brought against the Company, generally are
entitled to have their claims tried by a jury and such claims may result in
punitive damage awards. In December 1996, the Company settled a pending
litigation for approximately $0.5 million which was paid in the first quarter of
fiscal 1997. Most of the remaining proceedings against the Company are still in
the discovery or motion phase and management believes that the discrimination
claims against the Company are without merit and the Company is actively
defending the claims. Management does not expect that the resolution of these
matters will have a material adverse effect on the consolidated results of
operations, cash flows or financial position of the Company.
F-27
<PAGE> 80
GROUND ROUND RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. DEBT
On September 12, 1996 the Company restructured its existing credit
agreement dated October 8, 1993, by entering into the Amended and Restated
Credit Agreement ("Amended Credit Agreement") dated as of September 12, 1996,
among The Ground Round, Inc., GR of Minn., Inc. (collectively, the "Borrowers"),
the lenders listed therein (collectively, the "Lenders"), and The Bank of New
York, as Agent, and The Chase Manhattan Bank, as Co-Agent, which consolidated
the then existing Tranche A revolving loan, Tranche A Term Loans and Tranche B
Term Loans into a single term loan in the aggregate principal amount of
approximately $48.5 million. Interest on the facility is payable at LIBOR plus
2.625% on the Company's LIBOR loans and Alternate Base Rate ("ABR") plus 0.75%
on the Company's ABR based loans. As a result of the Company's prepayment to the
Lenders of more than approximately $10.8 million the maturity date of the loan
under the Amended Credit Agreement was extended to December 31, 1997. Through
June 29, 1997 the Company has reduced its outstanding debt balance by $12.5
million.
In consideration of the Lenders entering into the Amended Credit Agreement,
the Company and each of the Borrowers executed a series of Convertible Notes
dated September 12, 1996, whereby the Borrowers promised to pay to the Lenders a
restructuring fee in the aggregate sum of approximately $2.7 million which has
been reduced to approximately $1.36 million as a result of certain prepayments
of the credit facility. The Company amended The Amended Credit Agreement by
entering into a Third Amendment (the "Amendment"), dated as of May 23, 1997. The
Amendment provides, among other things, for the issuance by the Company of
Amended and Restated Convertible Notes (the "Amended Convertible Notes") to the
Lenders to replace the Convertible Notes issued to the Lenders on September 12,
1996. The Amended Convertible Notes amended the original Convertible Notes to
provide, among other things, (y) that they shall become due thirty (30) days
after written demand for payment has been issued by any noteholder to the
Company with a final maturity date of December 31, 1997, and (z) that,
commencing June 1, 1997, interest shall accrue monthly on the unpaid principal
balance of the amended Convertible Notes, at the rate of ten percent (10%) per
annum, which interest shall be added to the principal amount thereof, and shall
be payable on the maturity date of the Amended Convertible Notes. As of the date
hereof, the Lenders have not demanded payment of the Amended Convertible Notes.
However, in the event the Lenders were to demand payment of the Amended
Convertible Notes, there can be no assurance that the Company will have
sufficient cash to pay the Amended Convertible Notes. The Company's failure to
make such payment or comply with covenants under the Amended Credit Agreement
would be an event of default under the Amended Credit Agreement and cause the
entire credit facility to be due and payable. Such event would have a material
adverse effect on the Company.
The term loan has been reclassified as current since the maturity date is
within the next 12 months. The Company is attempting to refinance or further
extend the existing credit facility in connection with sales and leaseback
transactions involving approximately 18 restaurant sites, owned in fee,
virtually all of the proceeds of which are required to repay a portion of the
term loan. However, there can be no assurance that the Company will be able to
complete such sales and leaseback transactions on commercially acceptable terms
or that the Lenders will consent to such transaction.
F-28
<PAGE> 81
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The Company operated 122 and franchised 41 full service casual dining
restaurants at June 29, 1997.
For the purposes of this discussion and analysis, the 13-week periods ended
June 29, 1997 and June 30, 1996 are referred to as the third quarter of 1997 and
1996, respectively. The 39-week periods ended June 29, 1997 and June 30, 1996
are referred to as the first nine months ended 1997 and 1996, respectively.
Comparative Results of Operations for the Third Quarter and Nine Months Ended
June 29, 1997 and June 30, 1996
The following table sets forth the percentages which the items in the
Company's Consolidated Statements of Operations bear to total revenue unless
otherwise indicated:
<TABLE>
<CAPTION>
FIRST NINE MONTHS
THIRD QUARTER ENDED ENDED
--------------------- ---------------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Restaurant revenue............................. 98.7% 99.2% 98.9% 99.2%
Franchise revenue.............................. 1.3 0.8 1.1 0.8
----- ----- ----- -----
Total revenue........................ 100.0 100.0 100.0 100.0
Cost of products sold(1)....................... 89.4 92.5 88.4 93.0
</TABLE>
- ---------------
(1) As a percentage of Company-operated restaurant revenue.
<TABLE>
<CAPTION>
FIRST NINE MONTHS
THIRD QUARTER ENDED ENDED
--------------------- ---------------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Selling, general and administrative............ 8.1% 7.8% 8.0% 7.6%
Depreciation and amortization.................. 4.8 5.2 4.8 5.5
Interest expense, net.......................... 2.7 2.1 2.5 2.2
Other expense.................................. 0.3 0.7 0.3 0.3
Loss before taxes.............................. (4.1) (7.4) (3.0) (7.8)
Income tax benefit............................. 0.0 (1.9) 0.0 (1.9)
Net loss....................................... (4.1)% (5.5)% (3.0)% (5.9)%
</TABLE>
Restaurant Revenue. Restaurant revenue totaled $45.1 million for the third
quarter and $140.5 million for the nine months ended June 29, 1997 compared to
$55.3 million and $164.1 million for the third quarter and nine months ended
June 30, 1996. Restaurant revenue is comprised of comparable restaurant revenue
(revenue from restaurants open during all of both fiscal years) and
non-comparable restaurant revenue.
Comparable restaurant revenue, comprised of revenue from restaurants open
during all of the first nine months of 1997 and 1996 remained flat at $137.3
million but decreased 3.3% in the third quarter of 1997 to $44.9 million from
$46.4 million. Comparable food sales for the third quarter ended June 29, 1997
were down 1.5% but increased 2.9% for the first nine months of 1997, management
believes the increases in the food sales year to date were largely due to
improved execution and greater consumer awareness of the new menu introduced in
the first quarter of 1996. Alcoholic beverage sales for the third quarter and
nine months ended June 29, 1997 were down 10.1% and 10.6%, respectively.
Decreases in the alcoholic beverage sales were largely due to a delay in
matching the Company's alcoholic beverage program to the Company's changing
customer base resulting from the Company's enhanced menu and the elimination of
discounting. During the third quarter of fiscal 1997, the Company hired a new
Vice President of Marketing who implemented a new alcoholic beverage program
incorporating server training, in-store promotions and customer preferences.
Although the Company experienced some improvement from the previous quarter in
alcoholic beverage
F-29
<PAGE> 82
categories following the implementation of the new beverage programs, management
believes it is too soon to assess long-term impact of such programs on alcoholic
beverage sales.
The average guest check was approximately $9.69 for both the third quarter
and first nine months of 1997 and $9.17 and $8.91 for the same periods of time
in 1996. Management believes the increase in guest check is a result of evolving
menu mix with higher priced menu items, as well as improved server
communications with the guest on the new menu offerings.
Non-comparable restaurant revenue decreased by $8.6 million in the third
quarter and $23.6 million for the first nine months of 1997 as a result of the
sale or closing of six restaurants during the last three quarters of fiscal
1996, the sale or closing of 18 restaurants during the first quarter of 1997 and
the closing of three restaurants (of which two are due to fire) during the
second quarter of 1997.
Franchise Revenue. The Company's franchise base consisted of 46
restaurants with franchise agreements (of which 41 are presently operating)
during the third quarter of 1997 and 45 restaurants in the third quarter of
1996. Revenue from franchised restaurants (consisting of royalties and franchise
fees) were $0.6 million and $1.5 million in the third quarter and first nine
months ended June 29, 1997 and $0.5 million and $1.4 million for the same
periods ending June 30, 1996.
Cost of Products Sold. Cost of products sold consists of both food and
beverage costs and restaurant operating expenses. Food and beverage costs
totaled 33.2% and 33.3% of Company-operated restaurant revenue in the third
quarter and first nine months of 1997, respectively, versus 35.3% and 35.2% for
the third quarter and first nine months of 1996, respectively. Restaurant
operating expenses were 56.2% and 57.2% of Company-operated restaurant revenue
in third quarter of 1997 and 1996 and 55.1% and 57.9% in the first nine months
of 1997 and 1996, respectively. Food and beverage costs as a percentage of
Company-operated restaurant revenue decreased by 2.1% from the third quarter of
1996 compared to the third quarter of 1997 and decreased by 1.9% for the first
nine months of 1996 compared to the first nine months of 1997. The decrease can
be partly attributed to improved purchasing practices and through a reduction in
waste. In addition, product costs in the first nine months of 1996 were
negatively impacted due to non-recurring training costs during the
implementation of the new menu.
Restaurant operating expenses as a percent of Company-operated restaurant
revenue decreased 1.0% and 2.8% from the third quarter of 1996 to the third
quarter of 1997 and from the first nine months of 1996 to the first nine months
of 1997, respectively, primarily due to a decrease in other controllable
expenses associated with the implementation of the new menu, which included menu
design and printing costs, plateware and supplies costs in the first quarter of
1996 which were not repeated in 1997. Most other costs have remained at constant
dollar levels due to the fixed nature of certain costs associated with operating
a restaurant. Decreases in labor costs for the third quarter and first nine
months of 1997 are associated with increased kitchen staffing during the
implementation of the new menu as the number of menu items increased from
approximately 50 items to over 200 items in the first quarter of 1996, which
were not repeated in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were 8.1% and 8.0% of total revenue in the third quarter
and first nine months of 1997 and 7.8% and 7.6% for the same periods in 1996.
Selling expenses, comprised of the design, development and production costs
associated with point of purchase materials, were 0.1% and 0.2% of total revenue
in the third quarter and first nine months of 1997 as compared to 0.6% and 0.5%
for the third quarter and first nine months of 1996. The decrease in selling
expense during the first nine months of 1997 was primarily due to the Company's
reduction in production costs for the in-store marketing programs.
General and administrative costs, comprised of restaurant manager training
expenses, regional overhead and corporate administrative costs, were $3.7
million or 8.0% and $11.0 million or 7.7% of total revenue in the third quarter
and first nine months of 1997, respectively, and $4.0 million or 7.2% and $11.7
million or 7.1% in the same periods of 1996. General and administrative costs
have decreased, on a constant dollar basis, as a result of lower training costs
due to fewer restaurants and decreases in corporate overhead expenses as a
result of a reduction in administrative personnel.
F-30
<PAGE> 83
Depreciation and Amortization. Depreciation and amortization expenses were
4.8% of total revenue for both the third quarter and the first nine months ended
June 29, 1997 and 5.2% and 5.5% of total revenue in the third quarter and first
nine months of 1996, respectively. The decrease in depreciation and amortization
on a constant dollar basis was due mainly to the sale or closing of 25
restaurants during the past 12 months.
Other Expense. The first nine months of 1997 reflects approximately $0.4
million in expenses relating to the settlement of a lawsuit in the first quarter
of 1997 and the payment of $0.2 million in professional fees paid during the
third quarter of 1997.
Interest Expense. Interest expenses were 2.7% and 2.5% of total revenue in
the third quarter and first nine months of 1997, respectively, versus 2.1% and
2.2% for the third quarter and first nine months ended June 30, 1996,
respectively. The Company's weighted average borrowing rates were 8.3% and 8.2%
for the third quarter and first nine months of 1997 and 8.1% and 8.0% for the
third quarter and first nine months of 1996.
Income Taxes. The Company's effective income tax rates were 0% during the
third quarter and first nine months of 1997 and 25% for the third quarter and
first nine months of 1996.
Net Loss. As a result of the above, the Company reported a net loss of
$1.9 million, or $(0.17) per share and $4.3 million or $(0.39) per share for the
third quarter and first nine months of 1997, respectively, compared to a net
loss of $3.1 million, or $(0.28) per share and $9.7 million, or $(0.87) per
share for the same periods of time in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
A significant amount of the Company's restaurant sales are tendered in
cash, with the remainder made with credit cards that are generally realized in
cash within a few days. Because the Company does not have significant accounts
receivable or inventories and pays its expenses within normal terms, the Company
operates with working capital deficits as is typical in the restaurant industry.
The Company had working capital deficits of $11.5 million, excluding the term
loan payable to lenders in the amount of $37.1 million, and $13.2 million as of
June 29, 1997 and September 29, 1996, respectively.
Net cash provided by operating activities totaled $1.2 million in the first
nine months of 1997 as compared with $3.3 million in the first nine months of
1996. The decrease is primarily attributed to the costs associated with the sale
or closing of 18 restaurants in the first quarter of 1997 and the increase in
the amount paid for the restaurant management's annual bonus. The Company
incurred capital expenditures totaling $1.4 million for restaurant capital
maintenance during the first nine months of 1997, and $1.5 million for
restaurant capital maintenance during the first nine months of 1996. The Company
expects to incur approximately $1.9 million in capital expenditures during
fiscal 1997. Available cash, cash flow from operations and proceeds from sales
of restaurant locations in fiscal 1997 of approximately $11.3 million funded
1997 capital expenditures and provided for the repayment of $11.9 million in
borrowings under the Company's credit facility with its banks during the first
nine months of fiscal 1997.
On September 12, 1996 the Company restructured its existing credit facility
by entering into the Amended Credit Agreement with its Lenders. See Note 4 to
the Financial Statements. From the commencement of negotiations with the Lenders
to restructure the credit facility in May 1996 through June 29, 1997, the
Company has reduced its outstanding debt balance by $12.5 million. On June 29,
1997 and September 29, 1996, the Company's borrowings under its credit facility
were $37.1 million and $48.4 million, respectively. There are no material unused
amounts of credit available to the Company under the credit facility. The
Amended Credit Agreement contains financial covenants, including minimum levels
of net worth and certain required measures of profitability. The Company is
required to make accelerated principal payments based upon excess cash flows
from operations, the sale of certain assets and the offering proceeds from the
sale of stock of the Company. Provisions of the Amended Credit Agreement
restricting the payment of dividends would prevent the Company from paying
dividends over the term of the Amended Credit Agreement. The term loan has been
reclassified as current since the maturity date is within the next 12 months.
There can be
F-31
<PAGE> 84
no assurance that the Company will be able to negotiate an extension of the
credit facility or remain in compliance with certain financial covenants of such
agreement.
In consideration of the Lenders entering into the Amended Credit Agreement,
the Company and each of the Borrowers executed a series of Convertible Notes
dated September 12, 1996, whereby the Borrowers promised to pay to the Lenders a
restructuring fee in the aggregate sum of approximately $2.7 million which has
been reduced to approximately $1.36 million as a result of certain prepayments
of the credit facility. The Company amended the Amended Credit Agreement by
entering into a Third Amendment (the "Amendment"), dated as of May 23, 1997. As
of the date hereof, the Lenders have not demanded payment of the Amended
Convertible Notes. However, in the event the Lenders were to demand payment of
the Amended Convertible Notes, there can be no assurance that the Company will
have sufficient cash to pay the Amended Convertible Notes. The Company's failure
to make such payment or comply with covenants under the Amended Credit Agreement
would be an event of default under the Amended Credit Agreement and cause the
entire credit facility to be due and payable. Such event would have a material
adverse effect on the Company.
The Company is contemplating a sale leaseback transaction involving
approximately 18 restaurant sites, virtually all of the proceeds of which would
be used to repay a portion of the term loan. The Company has retained a broker
to assist in the transaction and will pay commissions of between 1.5% and 3.0%
of the sale price received by the Company. The Company believes that a sale and
leaseback of most or all of the Company owned restaurants will provide the
Company with additional cash for operations and the ability to repay a portion
of the Company's credit facility thereby facilitating refinancing and/or
extending the Company's credit facility. The Company has received a number of
bids and is presently negotiating a non-binding letter of intent with one of the
parties. However, there can be no assurance that the Company will be able to
complete such sales and leaseback transactions on commercially acceptable terms
or that the Lenders will consent to such transaction.
The New York State Department of Taxation and Finance conducted a sales tax
audit of the Company for the period commencing December 1992 through November
1995. Such audit resulted in an assessment of approximately $0.7 million of
additional sales and use taxes, inclusive of penalties and interest. Management
has negotiated a settlement of this assessment with the Department of Taxation
for $0.4 million. There are nine scheduled monthly payments of which three have
been paid as of June 29, 1997. The Company has previously established reserves
against earnings in a sufficient amount to cover this assessment.
The effect of inflation has not been a factor upon either the operations or
the financial condition of the Company. The Company's business is not
significantly seasonal in nature.
FORWARD-LOOKING INFORMATION
Statements contained in this Form 10-Q that are not historical facts,
including, but not limited to, statements found in this Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations, are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 that involve a number of risks
and uncertainties. The actual results of the future events described in such
forward-looking statements in this Form 10-Q could differ materially from those
stated in such forward-looking statements. Among the factors that could cause
actual results to differ materially are: the Company's ability to operate
existing restaurants profitably, changes in local, regional and national
economic conditions, especially economic conditions in the areas in which the
Company's restaurants are concentrated, increasingly intense competition in the
restaurant industry, increases in food, labor, employee benefits and similar
costs, the ability of the Company to repay and restructure its Amended Credit
Agreement and the terms thereof and other risks detailed from time to time in
the Company's periodic earnings releases and reports filed with the Securities
and Exchange Commission, as well as the risks and uncertainties discussed in
this Form 10-Q.
F-32
<PAGE> 85
APPENDIX A
AGREEMENT AND PLAN OF MERGER
By and among
GRR HOLDINGS, LLC,
GRR MERGER CORP.
and
GROUND ROUND RESTAURANTS, INC.
Dated as of August 29, 1997
A-1
<PAGE> 86
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I THE TENDER OFFER .............................................. A-2
1.01 THE OFFER ........................................................... A-2
1.02 COMPANY ACTION ...................................................... A-3
1.03 COMPOSITION OF THE BOARD OF DIRECTORS ............................... A-5
ARTICLE II THE MERGER ................................................... A-6
2.01 THE MERGER .......................................................... A-6
2.02 EFFECTIVE TIME ...................................................... A-6
2.03 CERTIFICATE OF INCORPORATION ........................................ A-6
2.04 BY-LAWS ............................................................. A-6
2.05 DIRECTORS AND OFFICERS .............................................. A-7
2.06 FURTHER ASSURANCES .................................................. A-7
2.07 SHAREHOLDERS' MEETING ............................................... A-7
ARTICLE III CONVERSION OR CANCELLATION OF SHARES; STOCK RIGHTS .......... A-9
3.01 CONVERSION OR CANCELLATION OF SHARES ................................ A-9
3.02 EXCHANGE OF CERTIFICATES; PAYING AGENT .............................. A-9
3.03 DISSENTERS' RIGHTS .................................................. A-11
3.04 TRANSFER OF SHARES AFTER THE EFFECTIVE TIME ......................... A-11
3.05 COMPANY STOCK RIGHTS ................................................ A-11
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY ................ A-12
4.01 ORGANIZATION, QUALIFICATION ......................................... A-12
4.02 COMPANY SUBSIDIARIES ................................................ A-12
4.03 THE COMPANY'S CAPITALIZATION ........................................ A-13
4.04 AUTHORITY ........................................................... A-14
4.05 CONSENTS, APPROVALS AND GOVERNMENTAL FILINGS; NO VIOLATIONS ......... A-15
4.06 SEC REPORTS; FINANCIAL STATEMENTS ................................... A-16
4.07 PROXY STATEMENT; OFFER DOCUMENTS .................................... A-17
4.08 ABSENCE OF CERTAIN CHANGES OR EVENTS ................................ A-17
4.09 TITLE, ETC .......................................................... A-17
4.10 PATENTS, TRADEMARKS, ETC ............................................ A-19
4.11 INSURANCE ........................................................... A-19
4.12 EMPLOYEE BENEFIT PLANS .............................................. A-19
4.13 LEGAL PROCEEDINGS, ETC .............................................. A-21
4.14 TAXES ............................................................... A-22
4.15 MATERIAL AGREEMENTS ................................................. A-23
4.16 COMPLIANCE WITH LAW ................................................. A-24
4.17 INSIDER INTERESTS ................................................... A-24
4.18 ENVIRONMENTAL MATTERS ............................................... A-24
4.19 LABOR MATTERS ....................................................... A-26
4.20 CERTAIN UNDISCLOSED VIOLATIONS ...................................... A-26
4.21 BROKERS AND FINDERS ................................................. A-26
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND THE PURCHASER .... A-27
5.01 CORPORATION ORGANIZATION ............................................ A-27
5.02 AUTHORIZED CAPITAL .................................................. A-27
5.03 AUTHORITY ........................................................... A-27
</TABLE>
A-i
<PAGE> 87
<TABLE>
<CAPTION>
Page
----
<S> <C>
5.04 NO PRIOR ACTIVITIES ................................................ A-28
5.05 NO FINANCING CONTINGENCY ........................................... A-28
5.06 GOVERNMENTAL FILINGS; NO VIOLATIONS ................................ A-28
5.07 BROKERS AND FINDERS ................................................ A-29
5.08 INFORMATION ........................................................ A-29
5.09 LEGAL PROCEEDINGS, ETC ............................................. A-29
5.10 OWNERSHIP OF SHARES ................................................ A-30
ARTICLE VI COVENANTS OF THE PARTIES .................................... A-30
6.01 CONDUCT OF BUSINESS OF THE COMPANY ................................. A-30
6.02 NOTIFICATION OF CERTAIN MATTERS .................................... A-33
6.03 ACCESS TO INFORMATION .............................................. A-33
6.04 FURTHER INFORMATION ................................................ A-34
6.05 REASONABLE BEST EFFORTS ............................................ A-34
6.06 HSR FILINGS ........................................................ A-35
6.07 PUBLIC ANNOUNCEMENTS ............................................... A-35
6.08 NO SOLICITATION .................................................... A-35
6.09 INDEMNITY; D&O INSURANCE ........................................... A-36
6.10 EMPLOYEE BENEFITS MATTERS .......................................... A-38
6.11 PAYMENT OF BONUSES ................................................. A-38
ARTICLE VII CONDITIONS TO THE MERGER ................................... A-39
7.01 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER ......... A-39
7.02 CONDITIONS TO THE OBLIGATIONS OF PARENT AND THE PURCHASER TO EFFECT
THE MERGER .............................................................. A-39
ARTICLE VIII CLOSING ................................................... A-39
8.01 TIME AND PLACE ..................................................... A-39
8.02 FILINGS AT THE CLOSING ............................................. A-40
ARTICLE IX TERMINATION; AMENDMENT; WAIVER .............................. A-40
9.01 TERMINATION ........................................................ A-40
9.02 EFFECT OF TERMINATION .............................................. A-42
9.03 FEES AND EXPENSES .................................................. A-42
ARTICLE X MISCELLANEOUS ................................................ A-44
10.01 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS.. A-44
10.02 AMENDMENT AND MODIFICATION ........................................ A-44
10.03 WAIVER OF COMPLIANCE; CONSENTS .................................... A-44
10.04 COUNTERPARTS ...................................................... A-45
10.05 GOVERNING LAW; SUBMISSION TO JURISDICTION ......................... A-45
10.06 NOTICES ........................................................... A-45
10.07 ENTIRE AGREEMENT, ASSIGNMENT ETC .................................. A-46
10.08 VALIDITY .......................................................... A-46
10.09 HEADINGS; CERTAIN DEFINITIONS ..................................... A-47
10.10 PARTIES IN INTEREST ............................................... A-47
ANNEX A ................................................................. A-47
</TABLE>
A-ii
<PAGE> 88
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (hereinafter called this "Agreement"),
dated as of August 29, 1997, among Ground Round Restaurants, Inc., a New York
corporation (the "Company"),GRR Merger Corp., a New York corporation (the
"Purchaser"), and GRR Holdings, LLC, a Delaware limited liability company
("Parent").
WHEREAS, the respective Boards of Directors of the Purchaser and the
Company have determined that it is advisable and in the best interests of their
respective shareholders, and the managing member of Parent has determined that
it is advisable and in the best interests of Parent's members, for the Purchaser
to acquire the Company upon the terms and subject to the conditions set forth
herein;
WHEREAS, the Company, Parent and the Purchaser desire to make
certain representations, warranties, covenants and agreements in connection with
this Agreement;
WHEREAS, in furtherance of such acquisition, Parent proposes to
cause the Purchaser to make the Offer (as defined in Section 1.01) to purchase
all of the issued and outstanding shares of common stock of the Company, par
value $.16 2/3 per share (the "Common Stock"), upon the terms and subject to the
conditions of this Agreement, and the Board of Directors of the Company has
approved the Offer and determined to recommend that the Company's shareholders
accept the Offer; and
WHEREAS in furtherance of such acquisition, Christian R. Gunther and
David T. DiPasquale (the "Significant Shareholders") have agreed to tender an
aggregate of 3,102,100 shares of Common Stock into the Offer upon the terms and
subject to the conditions of a Shareholder Agreement dated as of August 29, 1997
by and among Parent, the Purchaser and the Significant Shareholders.
WHEREAS, to complete such acquisition, the respective Boards of
Directors of the Purchaser and the Company, the managing member of Parent and
Parent acting as the sole stockholder of the Purchaser, have approved the Offer
and the Merger (as defined in section 2.01) of the Purchaser with and into the
Company upon the terms and subject to the conditions of this Agreement; and
NOW, THEREFORE, in consideration of the representations, warranties
and agreements herein contained, and subject to the terms and conditions herein
contained, the parties hereto hereby agree as follows:
A-2
<PAGE> 89
ARTICLE I
THE TENDER OFFER
1.01 The Offer. (a) Provided that this Agreement shall not have been
terminated in accordance with Article IX and none of the events or conditions
set forth in Annex A shall have occurred and be existing, then, not later than
the first Business Day (as defined in Rule 14d-1(c)(6) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), after execution of this
Agreement, Parent and the Company shall issue a public announcement of the
execution of this Agreement, and within five Business Days of the date of the
public announcement of the execution of this Agreement the Purchaser shall,
subject to the provisions of this Agreement, commence (within the meaning of
Rule 14d-2(a) of the Exchange Act) a tender offer (the "Offer") for all of the
outstanding shares of Common Stock (the "Shares") at a price of $1.65 per Share,
net to the seller in cash. The Purchaser shall accept for payment and pay for
all Shares that have been validly tendered and not withdrawn pursuant to the
Offer at the earliest time following expiration of the Offer that all conditions
to the Offer set forth in Annex A hereto shall have been satisfied or waived by
the Purchaser. The obligation of the Purchaser to accept for payment, purchase
and pay for Shares tendered pursuant to the Offer shall be subject to the
conditions set forth in Annex A hereto, including the condition that a number of
Shares which, when aggregated with the 554,900 Shares owned by Parent to be
contributed to the Purchaser ("the Contributed Shares"), represents at least 90%
of the outstanding Shares shall have been validly tendered (and not withdrawn)
prior to the expiration date of the Offer (the "Minimum Condition"). The
Purchaser expressly reserves the right to increase the price per Share payable
in the Offer or to make any other changes in the terms and conditions of the
Offer; provided, however, that, unless previously approved by the Company in
writing, no change may be made that (i) decreases the price per Share payable in
the Offer, (ii) changes the form of consideration to be paid in the Offer, (iii)
imposes conditions to the Offer in addition to those set forth in Annex A
hereto, (iv) increases the minimum number of Shares that must be tendered as a
condition to the acceptance for payment and payment for Shares in the Offer, (v)
waives the Minimum Condition if such waiver would result in the purchase
pursuant to the Offer of less than that number of Shares which, together with
the Contributed Shares, would constitute less than 50.1% of the outstanding
Shares, or (vi) extends the Offer, provided, however, that the Purchaser may,
without the consent of the Company, extend the Offer (A) from time to time, but
not beyond 12 midnight, New York City time, on October 22, 1997, if, at the
scheduled expiration date of the Offer, any of the conditions to the Purchaser's
obligation to purchase Shares are not satisfied or waived, until such time as
such conditions are satisfied, or (B) as provided in Section 9.03(a). The
Purchaser hereby agrees that, in the event that the Minimum Condition is not
satisfied or waived at the initial expiration date of the Offer, the Purchaser
will, upon written request of the Company, extend the Offer for a period of up
to ten further Business Days. It is agreed that the conditions set forth in
Annex A are for the sole benefit of Parent and the Purchaser and may be asserted
by Parent or the Purchaser regardless of the circumstances giving rise to any
such condition or may be waived by Parent or the Purchaser, in whole or in
part, in its sole discretion. The failure by Parent or the Purchaser at any
time
A-3
<PAGE> 90
to exercise any of the foregoing rights shall not be
deemed a waiver of any such right and each such right shall be deemed an ongoing
right which may be asserted at any time. The Purchaser agrees to comply with
provisions of the Exchange Act, and the rules and regulations promulgated
thereunder, applicable to the Offer.
(b) On the commencement date of the Offer, Parent and the Purchaser
shall file with the Securities and Exchange Commission (the "SEC") a Tender
Offer Statement on Schedule 14D-1 with respect to the Offer, which shall contain
an offer to purchase and related letter of transmittal and summary advertisement
(such Schedule 14D-1 and the documents therein pursuant to which the Offer will
be made, together with any supplements or amendments thereto, the "Offer
Documents"). The Offer Documents shall comply as to form in all material
respects with the requirements of the Exchange Act, and the rules and
regulations promulgated thereunder and, on the date filed with the SEC and on
the date first published, sent or given to the holders of Shares, shall not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading, except that no representation is made by Parent or the Purchaser
with respect to information supplied by the Company in writing specifically for
inclusion in the Offer Documents. Each of Parent, the Purchaser and the Company
agrees promptly to correct any information supplied by it specifically for
inclusion in the Offer Documents if and to the extent that such information
shall have become false or misleading in any material respect, and each of
Parent and the Purchaser further agrees to take all steps necessary to cause the
Offer Documents as so corrected to be filed with the SEC and to be disseminated
to holders of Shares, in each case as and to the extent required by applicable
federal securities laws. Parent and the Purchaser agree to provide the Company
and its counsel in writing with any comments Parent, the Purchaser or their
counsel may receive from the SEC or its Staff, including, but not limited to,
comments with respect to the Offer Documents, promptly after the receipt of such
comments. The Company and its counsel shall be given a reasonable opportunity to
review and comment upon the Offer Documents and all amendments and supplements
thereto prior to their filing with the SEC or dissemination to the shareholders
of the Company.
1.02 Company Action. (a) The Company hereby approves of and consents
to the Offer and represents and warrants that the Board of Directors of the
Company (the "Board"), at a meeting duly called and held, has adopted
resolutions (i) determining that this Agreement and the transactions
contemplated hereby, including the Offer and the Merger (as defined in Section
2.01), are fair to, and in the best interests of, the shareholders of the
Company, (ii) approving and adopting this Agreement and the transactions
contemplated hereby, including the Offer and the Merger and the transactions
contemplated thereby, in all respects and that such approval constitutes
approval of the Offer, this Agreement and the Merger and the transactions
contemplated hereby and thereby, for purposes of Sections 902 and 912 of the New
York Business Corporation Law (the "NYBCL"), and similar provisions of any other
similar state statutes applicable to the transactions contemplated hereby, (iii)
recommending that the shareholders of the Company accept the Offer, tender their
Shares thereunder to the Purchaser and approve and adopt this Agreement and
the Merger, subject to
A-4
<PAGE> 91
the provisions of Section 6.08, and (iv) providing for the cancellation of all
Options (as defined in Section 3.05) as provided in Section 3.05.
(b) The Company has been advised by each of its executive officers
and each of its Directors, that such person intends to tender pursuant to the
Offer all Shares owned or controlled by such person. The Company represents that
the Board has received the written opinion of Rothschild, Inc. ("Rothschild")
that the consideration to be received by holders of Shares pursuant to the Offer
and the Merger is fair to such holders from a financial point of view, and the
Company has provided a copy of such opinion to Parent.
(c) The Company shall file with the SEC a Solicitation/
Recommendation Statement on Schedule 14D-9 with respect to the Offer (such
Schedule 14D-9, as amended from time to time, the "Schedule 14D-9") on the date
the Offer Documents are filed with the SEC and the Offer is commenced,
containing the recommendation described in Section 1.02(a) and shall mail the
Schedule 14D-9 to the shareholders of the Company. The Schedule 14D-9 shall
comply in all material respects with the requirements of the Exchange Act and
the rules and regulations promulgated thereunder on the date filed with the SEC
and on the date first published, sent or given to the Company's shareholders,
and shall not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading, except that no representation is made by the Company with
respect to information supplied in writing by Parent or the Purchaser
specifically for inclusion or incorporation by reference in the Schedule 14D-9.
Each of the Company, Parent and the Purchaser agrees promptly to correct any
information provided by it for use in the Schedule 14D-9 if and to the extent
that such information shall have become false or misleading in any material
respect, and the Company further agrees to take all steps necessary to amend or
supplement the Schedule 14D-9 and to cause the Schedule 14D-9 as so amended or
supplemented to be filed with the SEC and disseminated to the Company's
shareholders, in each case as and to the extent required by applicable federal
securities laws. Parent and its counsel shall be given a reasonable opportunity
to review and comment upon the Schedule 14D-9 and all amendments and supplements
thereto prior to their filing with the SEC or dissemination to shareholders of
the Company.
(d) In connection with the Offer, the Company will, and will cause
its transfer agent (the "Transfer Agent") to, furnish promptly to Parent and the
Purchaser mailing labels containing the names and addresses of all record
holders of Shares as of the most recent practicable date and of those persons
becoming record holders after such date, together with copies of all lists of
shareholders and security position listing and computer files and all other
information in the Company's possession and control regarding the beneficial
ownership of Shares. The Company shall promptly furnish to Parent and the
Purchaser such additional information (including, but not limited to, updated
lists of holders of Shares and their addresses, mailing labels and security
position listings and computer files) and such other assistance as Parent and
the Purchaser or their agents may reasonably request in communicating the
Offer to the record and beneficial holders of Shares. Subject to the
requirements of law, and except for such steps as are necessary or
advisable to disseminate the
A-5
<PAGE> 92
Offer and any other documents necessary to consummate the Merger and to solicit
tenders of Shares and the approval of the Merger, Parent and the Purchaser and
each of their affiliates shall hold in confidence the information contained in
any of such labels, lists and additional information, shall use such
information in connection with the Offer and the Merger, and, if this Agreement
shall be terminated, shall deliver to the Company all copies of such
information then in their possession or under their control.
1.03 Composition of the Board of Directors. (a) Promptly upon the
acceptance for payment of, and payment by the Purchaser in accordance with the
Offer for, Shares pursuant to the Offer, provided the Purchaser shall have
purchased not less than 50.1% of the outstanding Shares, the Purchaser shall be
entitled to designate such number of directors, rounded up to the next whole
number, equal to that number of directors which equals the product of the total
number of directors on the Board (giving effect to the directors elected
pursuant to this sentence) multiplied by the percentage that such number of
Shares owned in the aggregate by the Purchaser or Parent, upon such acceptance
for payment, bears to the number of Shares outstanding; provided, however, that
until the Effective Time (as defined in Section 2.02) there shall be at least
three Continuing Directors (as defined in Section 1.03(c)). The Company, shall
upon the written request of the Purchaser, use its best efforts to cause the
Purchaser's designees to be so elected. Notwithstanding the foregoing, it is the
parties present intention to have a Board of seven directors following
consummation of the Offer and prior to the Effective Time, the Board to consist
of four designees of the Purchaser and three Continuing Directors, and the
Company shall, upon the written request of the Purchaser, use its best efforts
to cause the resignation of such current directors as necessary, and the
election of the Purchaser's designees, to result in such seven member Board.
(b) The Company's obligations to cause designees of the Purchaser to
be elected or appointed to the Board of Directors of the Company shall be
subject to Section 14(f) of the Exchange Act and Rule 14f-1 promulgated
thereunder. The Company shall promptly take all actions required pursuant to
Section 14(f) and Rule 14f-1 in order to fulfill its obligations under this
Section 1.03, and shall include in the Schedule 14D-9 such information with
respect to the Company and its officers and directors as is required under
Section 14(f) and Rule 14f-1. Parent and the Purchaser will supply to the
Company any information with respect to any of them and their nominees,
officers, directors and affiliates required by Section 14(f) and Rule 14f-1 and
such other rules and regulations as are applicable.
(c) After the time that the Purchaser's designees constitute at
least a majority of the Board and until the Effective Time, any amendment or
termination of this Agreement or the Restated Certificate of Incorporation (the
"Certificate of Incorporation") or By-laws of the Company and any extension for
the performance or waiver of the obligations or other acts of Parent or the
Purchaser or waiver of the Company's rights hereunder shall also require the
approval of a majority of the then serving directors, if any, who are
directors as of the date hereof (the "Continuing Directors", who shall include
each member of the Special Committee of the Board formed to consider the
Merger for so long as he wishes to serve)
A-6
<PAGE> 93
except to the extent that applicable law requires that such action be acted
upon by the full Board, in which case such action will require the concurrence
of a majority of the Board, which majority shall include each of the
Continuing Directors. If the number of Continuing Directors prior to the
Effective Time is reduced below three for any reason, the remaining Continuing
Directors or Director shall be entitled to designate persons to fill such
vacancies who shall be deemed Continuing Directors for all purposes of this
Agreement. The Board shall not delegate any matter set forth in this Section
1.03(c) to any committee of the Board.
ARTICLE II
THE MERGER
2.01 The Merger. Subject to the terms and conditions of this
Agreement, and in accordance with New York law, at the Effective Time (as
defined in Section 2.02), Parent shall cause the Purchaser to merge (the
"Merger") with and into the Company and as a result thereof the separate
corporate existence of the Purchaser shall thereupon cease. The Company shall
continue as the surviving corporation (the "Surviving Corporation") of the
Merger (the Purchaser and the Company are sometimes hereinafter referred to as
the "Constituent Corporations") and shall, following the Merger, continue to be
governed by the laws of the State of New York, and the separate corporate
existence of the Company, with all its rights, privileges, immunities, powers
and franchises, of a public as well as of a private nature, shall continue
unaffected by the Merger. From and after the Effective Time, the Merger shall
have the effects specified in the NYBCL including, without limitation, Section
906 thereof.
2.02 Effective Time. At the Closing contemplated in Section 8.01,
the Company and Parent will cause a Certificate of Merger to be filed with the
state of New York ( the "Certificate of Merger") to be executed and filed by the
Company and the Purchaser with the New York Department of State, as provided in
and in accordance with the NYBCL. The Merger shall become effective as of the
date and at the time the Certificate of Merger has been duly filed with the
Department of State of the State of New York or such later time as is agreed
upon by the parties and specified in the Certificate of Merger, and such time is
hereinafter referred to as the "Effective Time."
2.03 Certificate of Incorporation. The Certificate of Incorporation
of the Company, as amended at the Effective Time to read as set forth in Exhibit
A hereto, shall be the certificate of incorporation of the Surviving Corporation
until duly amended in accordance with the terms thereof and the NYBCL.
2.04 By-laws. The By-laws of the Company as in effect on the date
hereof, except as amended as set forth in Exhibit B hereto, shall be the By-laws
of the Surviving Corporation, until duly amended in accordance with the terms
thereof and the NYBCL. Promptly following the Effective Time, Parent shall
approve such amendment to the By-laws as the sole shareholder of the Surviving
Corporation.
A-7
<PAGE> 94
2.05 Directors and Officers. At the Effective Time, the directors of
the Purchaser immediately prior to the Effective Time shall be the directors of
the Surviving Corporation, each of such directors to hold office, subject to the
applicable provisions of the Certificate of Incorporation and By-Laws of the
Surviving Corporation, until their respective successors shall be duly elected
or appointed and qualified. The officers of the Company immediately prior to the
Effective Time shall be the initial officers of the Surviving Corporation, in
each case until their respective successors are duly elected or appointed and
qualified.
2.06 Further Assurances. If at any time after the Effective Time the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments or assurances or any other acts or things are necessary,
desirable or proper: (a) to vest, perfect or confirm, of record or otherwise, in
the Surviving Corporation, its right, title or interest in, to or under any of
the rights, privileges, powers, franchises, properties or assets of either of
the Constituent Corporations, or (b) otherwise to carry out the purposes of this
Agreement, the proper officers and directors of the Surviving Corporation are
hereby authorized on behalf of the respective Constituent Corporations to
execute and deliver, in the name and on behalf of the respective Constituent
Corporations, all such deeds, bills of sale, assignments and assurances and do,
in the name and on behalf of the Constituent Corporations, all such other acts
and things necessary, desirable or proper to vest, perfect or confirm its right,
title or interest in, to or under any of the rights, privileges, powers,
franchises, properties or assets of the Constituent Corporations and otherwise
to carry out the purposes of this Agreement.
2.07 Shareholders' Meeting. (a) If required by applicable law in
order to consummate the Merger following expiration of the Offer and acceptance
for payment and purchase of Shares by the Purchaser pursuant to the terms of the
Offer, the Company shall (and Parent and the Purchaser shall use all reasonable
efforts to cause the Company to) take all action to the extent necessary to
consummate the Merger in accordance with applicable law, its Certificate of
Incorporation and By-Laws, including:
(i) duly call, give notice of, convene and hold an annual or special
meeting of its shareholders (the "Shareholders' Meeting"), to be held as soon as
practicable, for the purpose of approving this Agreement, the Merger and the
transactions contemplated hereby and thereby;
(ii) include in the Proxy Statement (as defined in Section 4.07) the
recommendation of the Board that shareholders of the Company vote in favor of
the approval and adoption of this Agreement and the Merger and the other
transactions contemplated hereby and thereby and the determination of the Board
that this Agreement and the transactions contemplated hereby, including the
Offer and the Merger, are fair to, and in the best interests of, the
shareholders of the Company; and
(iii) as soon as practicable after Parent's request, prepare and
file a preliminary Proxy Statement with the SEC and, after consultation with
Parent and the Purchaser, respond promptly to any comments made by the SEC with
respect to the Proxy Statement and any
A-8
<PAGE> 95
preliminary version thereof and cause the Proxy Statement to be mailed to its
shareholders at the earliest practicable time after responding to all such
comments to the satisfaction of the Staff of the SEC and to obtain the
necessary approvals by its shareholders of this Agreement. Without limiting the
generality of the foregoing, the Company agrees that its obligations pursuant
to this Section 2.07(a) shall not be affected by either the commencement,
public proposal, public disclosure or other communication to the Company by any
third party of any offer to acquire some or all of the Shares or all or any
substantial portion of the assets of the Company or any change in the
recommendation of the Board.
(b) The Company, Parent and the Purchaser, as the case may be, shall
promptly prepare and file any other filings required under the Exchange Act or
any other Federal or state securities or corporate laws relating to the Merger
and the transactions contemplated herein (the "Other Filings"). Each of the
parties hereto shall notify the other parties hereto promptly of the receipt by
it of any comments from the SEC or its Staff and of any request of the SEC for
amendments or supplements to the Proxy Statement or by the SEC or any other
governmental officials with respect to any Other Filings or for additional
information and will supply the other parties hereto with copies of all
correspondence between it and its representatives, on the one hand, and the SEC
or the members of its Staff or any other governmental officials, on the other
hand, with respect to the Proxy Statement, any Other Filings or the Merger. The
Company, Parent and the Purchaser each shall use all reasonable efforts to
obtain and furnish the information required to be included in the Proxy
Statement, any Other Filings or the Merger. If at any time prior to the time of
approval of this Agreement by the Company's shareholders there shall occur any
event that should be set forth in an amendment or supplement to the Proxy
Statement, the Company shall promptly prepare and mail to its shareholders such
amendment or supplement. The Company shall not mail the Proxy Statement or,
except as required by the Exchange Act or the rules and regulations promulgated
thereunder, any amendment or supplement thereto, to the Company's shareholders
unless the Company has first obtained the consent of Parent to such mailing.
(c) At the Shareholders' Meeting, Parent, the Purchaser, their
affiliates and Permitted Assigns (as defined in Section 10.07) will vote all
Shares owned by them in favor of approval and adoption of this Agreement, the
Merger, and the transactions contemplated hereby and thereby.
(d) Notwithstanding the foregoing, in the event that the Purchaser
or any Permitted Assigns shall acquire at least 90% of the outstanding Shares
pursuant to the Offer or otherwise, the parties hereto agree, at the request of
the Purchaser, to take all necessary and appropriate action to cause the Merger
to become effective, in accordance with Section 905 of the NYBCL, as soon as
reasonably practicable after such acquisition and the satisfaction or waiver of
the conditions of Article VII, without a meeting of the shareholders of the
Company.
A-9
<PAGE> 96
ARTICLE III
CONVERSION OR CANCELLATION OF SHARES; STOCK RIGHTS
3.01 Conversion or Cancellation of Shares. At the Effective Time, by
virtue of the Merger and without any action on the part of the holders thereof:
(a) Each Share issued and outstanding immediately prior to the
Effective Time (other than Shares owned by Parent, the Purchaser or any other
wholly-owned subsidiary of Parent, Dissenting Shares (as defined in Section
3.03) and any Shares held in the treasury of the Company or by any subsidiary of
the Company) shall be converted into and represent the right to receive an
amount in cash equal to the greater of $1.65 or any greater amount per Share
paid pursuant to the Offer as it may be amended, without interest (the "Merger
Consideration"), upon surrender of the certificate that, immediately prior to
the Effective Time, represented such issued and outstanding Share (a
"Certificate"). As of the Effective Time, all such Shares shall no longer be
outstanding, shall be automatically canceled and shall cease to exist, and each
holder of a Certificate which formerly represented any such Shares shall
thereafter cease to have any rights with respect to such Shares, except the
right to receive the Merger Consideration without interest for such Shares upon
the surrender of such Certificate or Certificates in accordance with Section
3.02.
(b) Each Share issued and outstanding immediately prior to the
Effective Time and owned by Parent, the Purchaser or any other wholly owned
subsidiary of Parent or held in the Company's treasury or by any subsidiary of
the Company, shall be canceled without payment of any consideration therefor and
shall cease to exist, and each holder of a Certificate representing any such
Shares shall thereafter cease to have any rights with respect to such Shares.
(c) Each share of Common Stock, $0.01 par value, of the Purchaser
issued and outstanding immediately prior to the Effective Time shall be
converted into and become that number of fully-paid and non-assessable shares of
Common Stock, par value $.16-2/3 per share, of the Surviving Corporation as
shall equal the quotient of (i) the number of Shares issued and outstanding at
the Effective Time divided by (ii) 1,000.
3.02 Exchange of Certificates; Paying Agent. (a) Prior to the
Effective Time, Parent shall select a bank or trust company to act as paying
agent (the "Paying Agent") for the payment of the cash consideration specified
in Section 3.01 upon surrender of Certificates for Shares converted into the
right to receive the Merger Consideration pursuant to the Merger. Immediately
prior to the Effective Time, Parent shall make available, or cause the Purchaser
or the Surviving Corporation to make available, to the Paying Agent immediately
available funds in amounts and at times necessary for the payment of the Merger
Consideration (the "Funds") upon surrender of Certificates pursuant to Section
3.01, it being understood that any and all interest earned on the Funds shall
be paid over by the Paying Agent as Parent shall direct.
A-10
<PAGE> 97
(b) Promptly after the Effective Time, the Paying Agent shall mail
to each person who was, at the Effective Time, a holder of record of a
Certificate or Certificates, other than the Parent, Company or any of their
respective subsidiaries, a letter of transmittal and instructions for use in
effecting the surrender, in exchange for payment in cash therefor, of the
Certificates. The letter of transmittal shall (i) specify that delivery shall be
effected, and risk of loss and title shall pass, only upon proper delivery to
and receipt of such Certificates by the Paying Agent and shall be in such form
and have such provisions as Parent and the Company shall reasonably specify and
(ii) include instructions for use in effecting the surrender of the Certificates
in exchange for payment of the Merger Consideration. Upon surrender to the
Paying Agent of such Certificates, together with the letter of transmittal, duly
executed and completed in accordance with the instructions thereto and such
other documents as may be reasonably required by the Paying Agent, the Paying
Agent shall promptly pay to the persons entitled thereto, out of the Funds, a
check in the amount to which such persons are entitled pursuant to Section
3.01(a), after giving effect to any required tax withholdings, and such
Certificate shall forthwith be canceled. No interest will accrue or be paid on
the amount payable upon the surrender of any such Certificates. If payment is to
be made to a person other than the registered holder of any Certificate
surrendered, it shall be a condition of such payment that the Certificate so
surrendered shall be properly endorsed or otherwise in proper form for transfer
and that the person requesting such payment shall pay any transfer or other
taxes required by reason of the payment to a person other than the registered
holder of the Certificate surrendered or establish to the satisfaction of the
Surviving Corporation or the Paying Agent that such tax has been paid or is not
applicable. Until surrendered as contemplated by this Section 3.02, each
Certificate shall be deemed at any time after the Effective Time to represent
only the right to receive upon such surrender the amount of cash, without
interest, into which the Shares theretofore represented by such Certificate
shall have been converted pursuant to Section 3.01(a).
(c) One hundred eighty days following the Effective Time, the
Surviving Corporation shall be entitled to cause the Paying Agent to deliver to
it any Funds (including any interest, dividends, earnings or distributions
received with respect thereto which shall be paid as directed by Parent) made
available to the Paying Agent by Parent which have not been disbursed, and
thereafter holders of Certificates who have not theretofore complied with the
instructions for exchanging their Certificates shall be entitled to look only to
the Surviving Corporation (subject to abandoned property, escheat or other
similar laws) for payment as general creditors thereof with respect to the cash
in the amount of the Merger Consideration payable upon due surrender of their
Certificates.
(d) Notwithstanding anything to the contrary in this Section 3.02,
none of the Paying Agent, Parent, the Company, the Surviving Corporation or the
Purchaser shall be liable to any holder of a Certificate formerly representing
Shares for any amount properly delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
3.03 Dissenters' Rights. Notwithstanding the provisions of Section
3.01 or any other provision of this Agreement to the contrary, Shares that have
not been voted in favor
A-11
<PAGE> 98
of the approval and adoption of the Merger and with respect to which
dissenters' rights shall have been demanded and perfected in accordance with
Sections 623 and 910 of the NYBCL (the "Dissenting Shares") and not withdrawn
shall not be converted into the right to receive cash at or after the Effective
Time, but such Shares shall become the right to receive such consideration as
may be determined to be due to holders of Dissenting Shares pursuant to the
laws of the State of New York unless and until the holder of such Dissenting
Shares withdraws his or her demand for such appraisal or becomes ineligible for
such appraisal. If a holder of Dissenting Shares shall withdraw his or her
demand for such appraisal or shall become ineligible for such appraisal under
applicable law (through failure to perfect or otherwise), then, as of the
Effective Time or the occurrence of such event, whichever last occurs, such
holder's Dissenting Shares shall automatically be converted into and represent
the right to receive the Merger Consideration, without interest, as provided in
Section 3.01(a) and in accordance with the NYBCL. The Company shall give Parent
(i) prompt notice of any demands for appraisal of Shares received by the
Company and (ii) the opportunity to participate in and direct all negotiations
and proceedings with respect to any such demands. The Company shall not,
without the prior written consent of Parent, make any payment with respect to,
or settle, offer to settle or otherwise negotiate, any such demands.
3.04 Transfer of Shares After the Effective Time. No transfers of
Shares shall be made in the stock transfer books of the Surviving Corporation at
or after the Effective Time. If, after the Effective Time, Certificates formerly
representing Shares are presented to the Surviving Corporation, they shall be
canceled and exchanged for the amount of cash, without interest, into which the
Shares theretofore represented by such Certificates shall have been converted
pursuant to Section 3.01(a), subject to the provisions of Section 3.01(b).
3.05 Company Stock Rights. (a) At or immediately prior to the
Effective Time, each outstanding option (an "Option") to purchase shares of
Common Stock of the Company pursuant to the Company's 1989 Amended and Restated
Stock Option Plan (the "Stock Option Plan"), the Company's 1992 Equity Incentive
Plan (the "Equity Incentive Plan") or otherwise (collectively, the "Stock
Plans"), as set forth on Schedule 4.03 of the disclosure letter delivered to
Parent as of the date of this Agreement (the "Company Disclosure Letter"),
whether or not then exercisable, shall be canceled by the Company, and each
holder of a canceled Option shall have the right to receive at the Effective
Time from the Company, in consideration for the cancellation of such Option (i)
in the case of Options that are "in the money", an amount in cash equal to the
product of (A) the number of Shares previously subject to such Option and (B)
the excess, if any, of the Merger Consideration over the exercise price per
Share previously subject to such Option and (ii) in the case of Options that are
not "in the money", an amount of cash set forth on the Schedule of Option
Payments authorized and approved by the Compensation Committee of the Board as
set forth in the minutes of a meeting thereof, a copy of which has been
delivered to the Purchaser. The Company shall upon the payment of the
consideration described in the preceding sentence withhold from such payments
any applicable federal, state, local or foreign taxes.
(b) All Stock Plans shall terminate as of the Effective Time and the
provisions in any other Company Benefit Plan (as defined in Section 4.12)
providing for the
A-12
<PAGE> 99
issuance, transfer or grant of any capital stock of the Company or any interest
in respect of any capital stock of the Company shall be amended as of the
Effective Time to provide no continuing rights to acquire, hold, transfer or
grant any capital stock of the Company or any interest in capital stock of the
Company (other than an interest in any cash payments in respect of Shares
pursuant to Section 3.01(a) or as contemplated in Section 3.05(a)), and the
Company shall ensure that following the Effective Time no holder of an Option
or any participant in any Stock Plans shall have any right thereunder to
acquire any capital stock of the Company, Parent or the Surviving Corporation.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and the
Purchaser that:
4.01 Organization, Qualification. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New York, and the Company has all requisite corporate power and authority to
own, lease and operate its properties and carry on its business as now being
conducted. The Company is duly qualified to do business and is in good standing
in each jurisdiction in which the nature of the Company's business or the
location of its properties makes such qualification necessary, except as set
forth on Schedule 4.01 of the Company Disclosure Letter. The Company has
heretofore made available to Parent and has filed with the SEC pursuant to the
Exchange Act, complete and correct copies of the Certificate of Incorporation
and By-Laws of the Company, as currently in effect. Schedule 4.01 of the Company
Disclosure Letter lists each jurisdiction in which the Company is, or is
required to be, duly qualified.
4.02 Company Subsidiaries. (a) Schedule 4.02 of the Company
Disclosure Letter lists all subsidiaries of the Company. Except as indicated
therein, all of the outstanding shares of capital stock of each such subsidiary
are owned by the Company either directly or indirectly through another of its
subsidiaries. Except as set forth in Schedule 4.02 of the Company Disclosure
Letter, there are no contracts, commitments, understandings or arrangements by
which any subsidiary of the Company is bound to issue (other than to the
Company) additional shares of its capital stock or securities convertible into
or exchangeable for shares of its capital stock or subscriptions, options,
warrants or rights to purchase or acquire any additional shares of its capital
stock or securities convertible into or exchangeable for shares of its capital
stock. Except as set forth in Schedule 4.02 of the Company Disclosure Letter,
there are no contracts, commitments, understandings or arrangements by which the
Company or any of its subsidiaries is or may be obligated to transfer any shares
of the capital stock of any subsidiary of the Company. Except as set forth in
Schedule 4.02 of the Company Disclosure Letter, all of the shares of capital
stock of each subsidiary of the Company held by the Company or any subsidiary of
the Company are fully paid and nonassessable and are owned by the Company or
such subsidiary of the Company free and clear of any claim, lien or encumbrance
other than restrictions on transferability under federal and any applicable
state
A-13
<PAGE> 100
securities laws. Each subsidiary of the Company is duly organized, validly
existing and in good standing under the laws of the jurisdiction in which it is
incorporated or organized, has the corporate power and authority necessary for
it to own or lease its properties and assets and to carry on its business as it
is now being conducted, and is duly qualified to do business and in good
standing in the states of the United States in which the ownership of its
property or the conduct of its business requires it to be so qualified, except
as set forth on Schedule 4.02 of the Company Disclosure Letter. As used in this
Agreement, the term "subsidiary" of a specified person means (i) any
corporation of which equity securities possessing a majority of the ordinary
voting power in electing the board of directors are, at the time as of which
such determination being made, owned or controlled by such specified person
either directly or indirectly or in combination with one or more subsidiaries
of such specified person or (ii) any person (other than a corporation) in which
such specified person either directly or indirectly through or in combination
with one or more subsidiaries, at the time as of which such determination is
being made, (x) is a general partner, or (y) owns or controls more than a 50%
ownership interest and has the right to elect a majority of the members of the
governing authority of such specified person.
(b) Except for interests in the Company's subsidiaries and except as
set forth in Schedule 4.02 of the Company Disclosure Letter, neither the Company
nor any of the Company's subsidiaries owns, directly or indirectly, any interest
or investment (whether equity or debt) in any corporation, company, partnership,
joint venture, business, trust or entity, other than investments in marketable
securities acquired in the ordinary course of business, nor has the Company or
any of its subsidiaries made any loan or advance to any other entity.
4.03 The Company's Capitalization. The authorized capital stock of
the Company consists of (i) 35,000,000 Shares and (ii) 30,000 shares of
Preferred Stock, $.01 par value ("Preferred Stock"). As of the close of business
on August 7, 1997, there were (i) 11,173,421 Shares issued and outstanding and
no Shares held in the Company's treasury or by any of its subsidiaries, and (ii)
no shares of Preferred Stock issued and outstanding. All outstanding Shares have
been duly authorized and validly issued, are fully paid and nonassessable and
were issued free of preemptive rights. There are not now, except for the
Options, approximately $1.36 million principal amount of amended and restated
convertible loan notes of the Company (the "Convertible Loan Notes"),
convertible into up to 501,500 Shares, subject to adjustment as provided
therein, and as set forth in Schedule 4.03 of the Company Disclosure Letter, and
at the Effective Time there will not be, (i) any options, warrants, calls,
subscriptions, convertible securities or other rights (including preemptive
rights), agreements, understandings, arrangements or commitments of any
character obligating the Company now or at any time in the future to issue or
sell any of its capital stock or other equity interest in the Company or any of
its subsidiaries, (ii) any obligations, contingent or otherwise, of the Company
or any of its subsidiaries to repurchase, redeem or otherwise acquire any shares
of capital stock or other equity interests of the Company or any of its
subsidiaries, (iii) any outstanding bonds, debentures, notes or other
obligations of the Company or any of its subsidiaries, the holders of which have
the right to vote (or which are convertible into or exercisable for securities
having the right to vote) with the holders of
A-14
<PAGE> 101
Shares on any matter, (iv) any obligations, contingent or otherwise,
guaranteeing the value of any of the Share or the capital stock of any of its
subsidiaries either not or at any time in the future, or (v) any voting trusts,
proxies or other agreements or understandings to which the Company is a party
or is bound with respect to the voting of any capital stock or other equity
interest of the Company or any other securities convertible into or
exchangeable for Shares or any other equity interests of the Company, or
options to acquire Shares or securities convertible into Share or equity
interests of the Company are held by any of the Company's subsidiaries.
4.04 Authority. The Company has full corporate power and authority
to execute, deliver and perform this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
approved by the Board, and the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby
including, without limitation, the Sale and Leaseback Letter of Intent (as
defined in Section 6.01) and the transactions contemplated thereby, the Bank
Letter of Intent (as defined in Section 6.01) and Bank Standstill Agreement and
the transactions contemplated thereby, and the other actions required to be
performed by the Company hereunder, including without limitation the Exchange
Act filings, the holding of the Shareholders' Meeting, if required, the HSR
Filing, and the cancellation of Options contemplated by Section 3.05, have been
duly and validly authorized by the Board and, except for any approval of the
Merger by the holders of the Shares required by the NYBCL, no other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
or to consummate the transactions contemplated hereby, including the acquisition
of Shares pursuant to the Offer and the Merger. The Company has taken all
actions necessary to render the prohibitions of Section 912 of the NYBCL to be
inapplicable to the execution and delivery of this Agreement and the
transactions contemplated hereby, including the entry of Parent, the Purchaser
and the Significant Shareholders into the Shareholder Agreement and the
acquisition of the Shares pursuant to the Offer and the Merger. This Agreement
has been duly and validly executed and delivered by the Company and, assuming
due authorization, execution and delivery by Parent and the Purchaser,
constitutes the valid and binding agreement of the Company, enforceable against
the Company in accordance with its terms, except to the extent that
enforceability may be limited by applicable bankruptcy, reorganization,
insolvency, moratorium or other laws affecting the enforcement of creditors'
rights generally and by general principles of equity, regardless of whether such
enforceability is considered in a proceeding in equity or at law.
4.05 Consents, Approvals and Governmental Filings; No Violations.
(a) No notices, reports or other filings are required to be made by the Company
with, nor are any consents, registrations, approvals, permits or authorizations
required to be obtained by the Company from, any public, governmental, or
regulatory body, agency, department, commission, board, bureau or other
authority or instrumentality of the United States, any state thereof or any
foreign jurisdiction (each a "Governmental Authority") in connection with the
execution and delivery of this Agreement by the Company and the consummation by
the Company of the transactions contemplated hereby, the failure to make or
obtain any or all of which could prevent, delay or burden the transactions
contemplated by this Agreement, except (A) in connection with the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
A-15
<PAGE> 102
"HSR Act"), (B) in connection with the Exchange Act, (C) in connection with
Article 16 of the NYBCL and (D) such consents, approvals, registrations,
licenses and permits with respect to Liquor Licenses listed in Exhibit 4.05B to
Schedule 4.05 of the Company Disclosure Letter (together with the consents and
approvals with respect to Liquor Licenses listed on the Purchaser Disclosure
Letter (as defined in Section 5.06) the "Liquor License Approvals").
(b) Except as set forth on Schedule 4.05 of the Company Disclosure
Letter, and except for any required approval of the Merger by the shareholders
of the Company and the filing of the Certificate of Merger in accordance with
the NYBCL, neither the execution, delivery and performance of this Agreement by
the Company nor the consummation by it of the transactions contemplated hereby
will (i) violate, conflict with or result in any breach of any provision of the
Certificate of Incorporation or By-Laws of the Company; (ii) require any
consent, approval, authorization or permit of, or filing with or notification
to, any Governmental Authority, except (A) in connection with the HSR Act, (B)
in connection with the Exchange Act or (C) in connection with Article 16 of the
NYBCL; (iii) constitute a violation or breach of, or result (with or without due
notice or lapse of time or both) in a default or loss of any material benefit
under, or give rise to any right of termination, amendment, cancellation or
acceleration under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, franchise agreement, lease, license, contract,
agreement or other instrument or obligation of any kind to which the Company or
any of its subsidiaries is a party or by which the Company or any of its
subsidiaries or any of its or their respective assets may be bound, except as
any such breach, default or right as to which requisite waivers or consents have
been obtained, (iv) require the creation or imposition of any lien upon or with
respect to any properties of the Company or any of its subsidiaries or (v)
assuming compliance with the NYBCL, the Exchange Act, and the HSR Act, violate
any order, writ, injunction, judgment, decree, law, statute, rule, regulation or
governmental permit or license applicable to the Company or any of its
subsidiaries or any of its or their respective assets.
4.06 SEC Reports; Financial Statements. The Company has filed all
required forms, reports and documents with the SEC since October 1, 1993
(collectively, together with all forms, reports and documents to be filed with
the SEC on or after the date hereof, the "SEC Reports"), each of which, as
amended, has complied or will comply in all material respects with all
applicable requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and the Exchange Act, each as in effect on the dates so
filed. None of such forms, reports or documents, including, without limitation,
any financial statements or schedules included or incorporated by reference
therein, contained, when filed, any untrue statement of a material fact or
omitted to state a material fact required to be stated or incorporated by
reference therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
Company has heretofore made available complete and correct copies of the SEC
Reports, and any amendments to any SEC Report, filed to date, and promptly will
make available to Parent a complete and correct copy of any SEC Report filed
hereafter and any amendment to any SEC Report. The consolidated financial
statements of the Company and its subsidiaries included in such reports
complied as of the respective dates thereof as to form in all material respects
with applicable accounting requirements and with the published rules and
regulations of the SEC
A-16
<PAGE> 103
and with respect thereto, were prepared in accordance with United States
generally accepted accounting principles ("GAAP") as in effect on their
respective dates applied on a consistent basis throughout the periods involved
(except as may be indicated in the notes thereto or, in the case of the
unaudited interim financial statements, as permitted by Form 10-Q of the SEC)
and fairly presented (subject, in the case of the unaudited interim financial
statements, to normal, year-end audit adjustments) the consolidated financial
position of the Company and its subsidiaries as at the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended. Since September 29, 1996, neither the Company nor any of its
subsidiaries has incurred any liabilities or obligations (whether absolute,
accrued, fixed, contingent, liquidated, unliquidated or otherwise and whether
due or to become due) of any nature, which would be required by GAAP, as of the
date hereof, to be set forth on a consolidated balance sheet of the Company and
its subsidiaries or in the notes thereto except liabilities, obligations or
contingencies (a) which are disclosed reflected or reserved for on the
unaudited balance sheet of the Company and its subsidiaries as of June 30, 1997
(including the notes thereto) or in this Agreement or in Schedule 4.06 of the
Company Disclosure Letter or (b) which (i) were incurred in the ordinary course
of business after September 29, 1996 and consistent with past practices or (ii)
are disclosed or reflected or reserved for in the Company SEC Reports filed
after September 29, 1996 and prior to the date hereof, or (c) which were
incurred as a result of actions taken or refrained from being taken (i) in
furtherance of the transactions contemplated by this Agreement, or (ii) at the
request of Parent and the Purchaser. Since September 29, 1996, there has been
no change in any of the significant accounting (including tax accounting)
policies, practices or procedures of the Company or any of its subsidiaries
except as required by GAAP or applicable law.
4.07 Proxy Statement; Offer Documents. Any proxy statement or
similar materials distributed to the Company's shareholders in connection with
the Merger, including any amendments or supplements thereto (the "Proxy
Statement"), will comply in all material respects with applicable federal
securities laws and will not contain any untrue statements of a material fact
required to be stated therein or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading, except that no
representation is made by the Company with respect to information supplied by
Parent or the Purchaser in writing for inclusion in the Proxy Statement. None
of the information supplied by the Company in writing for inclusion in the
Offer Documents or provided by the Company in the Schedule 14D-9 will, at the
respective times that the Offer Documents and the Schedule 14D-9 or any
amendments or supplements thereto are filed with the SEC and are first
published or sent or given to holders of Shares, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
4.08 Absence of Certain Changes or Events. Except as set forth in
the SEC Reports filed prior to the date hereof or in Schedule 4.08 of the
Company Disclosure Letter, since September 29, 1996 (i) the business of the
Company and its subsidiaries has been conducted in the ordinary course
consistent with past practice (except as otherwise contemplated by this
Agreement); (ii) no events have occurred which, in the reasonable
A-17
<PAGE> 104
opinion of the Company, are likely, individually or in the aggregate, to have a
Material Adverse Effect (as defined in Section 9.03(d)) or adversely affect the
ability of the Company to consummate the transactions contemplated by this
Agreement; (iii) neither the Company nor any of its subsidiaries has incurred
or will incur any material liabilities (direct, contingent or otherwise) or
engaged in any material transaction or entered into any material agreement
outside the ordinary course of business; (iv) there has been no declaration,
setting aside or payment of any dividend or other distribution with respect to
any capital stock of the Company and (v) neither the Company nor any of its
subsidiaries has taken any action described in Section 6.01.
4.09 Title, Etc.. (a) Schedule 4.09 of the Company Disclosure Letter
sets forth a list of all of the land, which includes the buildings, structures
and other improvements located thereon (the "Real Property"), which is owned in
fee by the Company or any of its subsidiaries. The Company or such subsidiary,
as the case may be, has, with respect to personal property, good, and, with
respect to real property, good, marketable and insurable, title to all of the
properties and assets which it purports to own and which are material to the
business, operation or financial condition of the Company or such subsidiary
free and clear of all mortgages, security interests, liens, claims, charges or
other encumbrances of any nature whatsoever, except for (i) any liens,
encumbrances or defects reflected in the most recent financial statements
included in the SEC Reports filed prior to the date hereof or disclosed in the
notes thereto; (ii) any liens, encumbrances or defects which do not materially
detract from the fair market value (free of such liens, encumbrances or
defects) of the property or assets subject thereto or materially interfere with
the current use by the Company and its subsidiaries of the property or assets
subject thereto or affected thereby; (iii) any liens or encumbrances for taxes
not delinquent or which are being contested in good faith, provided that
adequate reserves for the same have been established on the most recent
financial statements included in the SEC Reports to the extent required by GAAP
applied on a consistent basis; (iv) any liens or encumbrances for current taxes
and assessments not yet past due; (v) any inchoate mechanic's and materialmen's
liens and encumbrances for construction in progress; (vi) any workmen's,
repairmen's, warehousemen's and carriers' liens and encumbrances arising in the
ordinary course of business, so long as such liens have not been filed; and
(vii) any liens of the type referred to in (vi) above that have been filed, so
long as such liens do not aggregate in excess of $50,000;
(b) Schedule 4.09 of the Company Disclosure Letter sets forth a list
of all of the leases and subleases (the "Real Property Leases") under which, as
of the date hereof, the Company or any of its subsidiaries has the right to
occupy space. The summary of the Real Property Leases, including all amendments
thereto, attached to such Schedule, together with the spreadsheets attached to
such Schedule, are correct and complete in all material respects. Except as set
forth in Schedule 4.09, all Real Property Leases and material leases pursuant to
which the Company or any of its subsidiaries leases personal property from
others are, in all material respects, valid, binding and enforceable in
accordance with their terms and the Company, or the applicable subsidiary of the
Company, has good and valid leasehold title to all property leased pursuant to
each of the Real Property Leases; neither the Company nor any of its
subsidiaries has received notice of any default by the Company or any of its
subsidiaries
A-18
<PAGE> 105
under any Real Property Lease; there are no existing defaults, or any condition
or event known to the Company or any subsidiary which with the giving of notice
or lapse of time would constitute a default, by the Company or any of its
subsidiaries thereunder and, with respect to the Company's or any of its
subsidiaries' obligations thereunder without qualification and with respect to
the obligations of all other parties thereto, to the knowledge of the Company,
no uncured default or event or condition on the part of any landlord exists
under any Real Property Lease which with the giving of notice or the lapse of
time would constitute a default thereunder. Except as set forth in Schedule
4.09 of the Company Disclosure Letter, the Company has not suspended any Real
Property Leases nor is the Company in any negotiations with any lessors
regarding any Real Property Leases.
(c) All of the land, buildings, structures and other improvements
occupied by the Company and its subsidiaries in the conduct of its business are
included in the Real Property or the Real Property Leases.
(d) Except as set forth in Schedule 4.09 of the Company Disclosure
Letter, neither the Company nor any subsidiary owns or holds, nor is obligated
under or a party to, any option, right of first refusal or other contractual
right to purchase, acquire, sell lease or dispose of any Real Property or any
Real Property Leases or any portion thereof or interest therein.
4.10 Patents, Trademarks, Etc.. Schedule 4.10 of the Company
Disclosure Letter identifies all registered trademarks, copyrights and patents
owned or licensed by the Company and its subsidiaries as of the date hereof.
The Company and its subsidiaries own, or are licensed or otherwise have
adequate right to use, all patents, patent rights, trademarks, trademark
rights, service marks, service mark rights, trade names, trade name rights,
copyrights, know-how, technology, trade secrets and other proprietary
information which are material to the conduct of the business of the Company
and its subsidiaries (collectively, the "Intellectual Property"). Except as set
forth in Schedule 4.10 of the Company Disclosure Letter, no claims have been
asserted by any person, and neither the Company nor any of its subsidiaries has
asserted a claim against any person, with respect to any of the Intellectual
Property owned or used by the Company or any of its subsidiaries or challenging
or questioning the validity or effectiveness of any license or agreement
relating thereto to which the Company or any of its subsidiaries is a party,
nor, to the Company's knowledge, are any such claims threatened.
4.11 Insurance. Schedule 4.11 of the Company Disclosure Letter
identifies all property, general liability and casualty insurance policies
which currently insure the Company or any of its subsidiaries ("Insurance
Policies").
4.12 Employee Benefit Plans. (a) For purposes of this Section 4.12,
"Company Benefit Plans" means all employee benefit plans, agreements and
arrangements described in section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), maintained by the Company or any of
its subsidiaries to which the Company or any of its subsidiaries has contributed
or been required to contribute, or with
A-19
<PAGE> 106
respect to which the Company or any subsidiary of the Company has a liability,
whether direct or indirect, actual or contingent, and all employment, bonus,
deferred compensation, severance, incentive, stock option, change of control
and similar plans, policies or arrangements (whether written or oral)
maintained by the Company or any of its subsidiaries (including descriptions
of the number and level of employees covered thereby).
(b) Schedule 4.12 of the Company Disclosure Letter sets forth a list
of all Company Benefit Plans. The Company has delivered or made available to
Parent accurate and complete copies of (i) all Company Benefit Plan documents
currently in effect and all amendments thereto, and all summary plan
descriptions thereof which have been distributed to employees of the Company or
any subsidiary, (ii) the most recent determination or opinion letter issued by
the Internal Revenue Service with respect to each Company Benefit Plan, (iii)
for the three most recent plan years, Annual Reports on Form 5500 Series filed
with any governmental agency for each Company Benefit Plan and (iv) a
description setting forth the amount of any material liability of the Company as
of the Closing Date for payments more than thirty (30) calendar days past due
with respect to each "employee welfare benefit plan" as defined in ERISA section
3(1) which covers or has covered employees of the Company or any subsidiary.
(c) Except as set forth in Schedule 4.12 of the Company Disclosure
Letter with respect to each Company Benefit Plan: (i) each Company Benefit Plan
has been administered and enforced in all material respects in accordance with
its terms and, both as to form and in operation, with the requirements
prescribed by ERISA, the Internal Revenue Code of 1986, as amended (the
"Code"), and all other applicable statutes, orders, rules and regulations; (ii)
to the knowledge of the Company, no breach of fiduciary duty or non-exempt
prohibited transaction has occurred; (iii) no actions, suits, claims or
disputes are pending or, to the knowledge of the Company, threatened, other
than routine claims for benefits; (iv) all contributions and premiums due have
been made on a timely basis; and (v) such Company Benefit Plan is not a
multiemployer plan (as defined in ERISA section 3(37)), a multiple employer
plan within the meaning of the Code or ERISA, a defined benefit plan within the
meaning of ERISA section 3(35), a plan subject to section 302 of ERISA or
section 412 of the Code or Title IV of ERISA, or funded through a "welfare
benefit fund" (as defined in section 419(e) of the Code).
(d) Except as set forth in Schedule 4.12 of the Company Disclosure
Letter or as specifically provided in Section 3.05, the consummation of the
transactions contemplated by this Agreement will not (i) entitle any individual
to severance pay, or (ii) accelerate the time of payment or vesting, or increase
the amount, of compensation due to any individual.
(e) Neither the Company nor any of its subsidiaries has any unfunded
liability with respect to retiree medical or retiree life insurance benefits or
other post-termination welfare benefits under the Company Benefit Plans or
otherwise, not reserved for in the Company's financial statements included in
the SEC Reports filed prior to the date hereof.
A-20
<PAGE> 107
(f) Each Company Benefit Plan intended to be qualified under section
401(a) of the Code is so qualified, and each trust or other funding vehicle
related thereto is exempt from federal income tax under section 501(a) of the
Code.
(g) Except as set forth on Exhibit 4.06A to Schedule 4.06 of the
Company Disclosure Letter, with respect to any insurance policy providing
funding for benefits under any Company Benefit Plan, (i) there is no material
liability of the Company or any subsidiary of the Company in the nature of a
retroactive or retrospective rate adjustment, loss sharing arrangement, or other
actual or contingent liability, nor would there be any such material liability
if such insurance policy were terminated, and (ii) to the knowledge of the
Company, no insurance company issuing any such policy is in receivership,
conservatorship, liquidation or similar proceeding, and no such proceeding with
respect to any insurer is imminent.
(h) Schedule 4.12 of the Company Disclosure Letter sets forth the
name and current rates of salary, bonuses, benefits (including, but not limited
to, all employee welfare benefits) and any other form of employment compensation
(collectively "Compensation") of each officer, director or employee of the
Company and its subsidiaries whose current annual rate of Compensation from the
Company exceeds $60,000 and each Regional Director not otherwise included.
(i) Each "employee welfare benefit plan" as defined by ERISA section
3(1) which covers employees or former employees of the Company or any subsidiary
and which is a "group health plan," as defined in section 607(1) of ERISA, has
been operated in compliance with provisions of Part 6 of Title I, Subtitle B of
ERISA and section 4980B of the Code at all times except where any failure,
individually or in the aggregate, would not be reasonably expected to result in
material liability.
(j) The Company has not announced generally any plan, nor does it
have any legally binding commitment, to create any additional Company Benefit
Plans which are intended to cover employees or former employees of the Company
or any subsidiary (with respect to their relationship with such entities) or to
amend or modify any existing Company Benefit Plan which covers or has covered
employees or former employees of the Company or any subsidiary (with respect to
their relationship with such entities).
(k) Except as set forth in Schedule 4.12 of the Company Disclosure
Letter, and except as provided by law, the employment of all persons employed or
retained by the Company or any of its subsidiaries is terminable at will. Except
as set forth in Schedule 4.12 of the Company Disclosure Letter, there is no
contract, agreement, plan or arrangement covering any employee that,
individually or collectively, provides for the payment of any amount (i) that is
not deductible under section 162(a)(l) or 404 of the Code or (ii) that is an
"excess parachute payment" pursuant to section 280G of the Code.
(l) To the knowledge of the Company, neither the Company, nor any of
its subsidiaries, nor any Company Benefit Plan, directly or indirectly, is, or
is reasonably likely to be, subject to any material unfunded liability (except
as reserved for in the Company's
A-21
<PAGE> 108
financial statements included in the SEC Reports filed prior to the date
hereof) (i) with respect to any employee benefit plan, program, policy,
agreement or arrangement (whether or not terminated) that is or was maintained
or contributed to by any entity during the past six years that is (or at any
relevant time was) a member of a "controlled group of corporations" with, under
"common control" with or otherwise required to be aggregated with the Company
or any of its subsidiaries, as set forth in sections 414(b), (c) and (o) of the
Code, (ii) pursuant to the penalty, excise or joint and several liability
provisions of ERISA or the Code as they relate to employee benefit plans or
(iii) pursuant to any obligation of the Company or any subsidiary to indemnify
any person against any liability referred to in (i) or (ii) above.
4.13 Legal Proceedings, Etc.. Except as set forth in Schedule 4.13
of the Company Disclosure Letter, (i) there is no material claim, action,
proceeding or investigation pending or, to the knowledge of the Company,
threatened against or relating to the Company or any subsidiary before any court
or tribunal in any jurisdiction (domestic or foreign) or any Governmental
Authority, and (ii) neither the Company nor any subsidiary is subject to any
outstanding order, writ, judgment, injunction or decree of any court or
Governmental Authority or body.
4.14 Taxes.
(a) Filing of Tax Returns. The Company (which term shall include,
for purposes of this Section 4.14, each of its subsidiaries from time to time)
has timely filed with the appropriate taxing or other Governmental Authorities
all returns (including, without limitation, information returns and other
Tax-related information) in respect of Taxes (as such term is defined in Section
4.14(f)) required to be filed through the date hereof. Such returns and
information filed are complete, correct and accurate in all material respects.
The Company has made available to Parent copies of the Company's federal Tax
returns filed for its taxable years ended October 1, 1995 and September 29, 1996
and selected state and local Tax returns and will make available to Parent
copies of all the Company federal, state and local Tax returns filed for its
taxable years ended December 1990 and September 1991, 1992, 1993, 1994, 1995 and
1996, to the extent not previously provided, as requested by Parent.
(b) Payment of Taxes. Except as set forth in Schedule 4.14(b), all
Taxes required to be paid by the Company for any period or portion thereof
ending on or before the Closing Date, have been paid, or an adequate reserve (in
conformity with GAAP applied on a consistent basis and with the Company's past
custom and practice) has been established therefor, and the Company has no
material liability for Taxes in excess of the amounts so paid or reserves so
established. All material Taxes that the Company has been required to collect or
withhold have been duly collected or withheld and, to the extent required when
due, including extensions, have been or will be duly paid to the proper taxing
or Governmental Authority.
(c) Audit History. Except as set forth in Schedule 4.14(c) of
the Company Disclosure Letter:
A-22
<PAGE> 109
(i) No deficiencies for Taxes of the Company or, to the
knowledge of the Company, of any other person with respect to which the Company
would be liable to make a payment under a tax sharing agreement have been
claimed, proposed or assessed by any taxing or Governmental Authority.
(ii) No extension of a statute of limitations relating to
Taxes is in effect with respect to the Company.
(d) Additional Tax Representations. Except as set forth in Schedule
4.14(d) of the Company Disclosure Letter:
(i) There are no material elections with respect to Taxes
affecting the Company.
(ii) The Company is not a party to or bound by any binding tax
sharing, tax indemnity or tax allocation agreement or other similar arrangement
with any other person or entity.
(iii) There are no liens for Taxes (other than for current
Taxes not yet due and payable) upon the assets of the Company.
(iv) The Company has never been a member of an affiliated
group of corporations within the meaning of Section 1504 of the Code (an
"affiliated group"), nor has the Company or any present or former subsidiary,
or any predecessor or affiliate of any of them, become liable (whether by
contract, as transferee or successor, by law or otherwise) for the Taxes of any
other person or entity under Treasury Regulation Section 1.1502-6 or any
similar provision of state, local or foreign law other than the group of which
the Company is the parent, except for the affiliated group of which HM
Holdings, Inc. was the parent (the "HMH group") as disclosed in Schedule
4.14(d). The Company (A) has no knowledge of any liens for Taxes, any Tax
deficiency assessment against, or any audit or claimed or proposed Tax
deficiency assessment by any taxing authority against it or any member or
former member of the HMH group with respect to the Company's period of
affiliation with the HMH group, (B) is not liable to any member or former
member of the HMH group for Taxes (or any indemnity payments, make whole
payments or like amounts) attributable to such period under a tax sharing, tax
indemnity, tax allocation or similar agreement, and (C) has no knowledge of any
member or former member of the HMH group entering into any waivers or
extensions of a statute of limitations on assessment or collection of Taxes
attributable to such period.
(e) Definition of Taxes. For purposes of this Agreement, the term
"Taxes" shall mean all federal, state, local, foreign and other taxes,
assessments or other government charges, including, without limitation, income,
estimated income, gross receipts, profits, occupation, franchise, capital stock,
real or personal property, sales, use, value added, transfer, license,
commercial rent, payroll, employment or unemployment, social security,
disability, withholding, alternative or add-on minimum, customs, excise, stamp
or
A-23
<PAGE> 110
environmental taxes, and further including all interest, penalties and
additions in connection therewith for which the Company or any of its
subsidiaries may be liable.
4.15 Material Agreements. Except as set forth in Schedule 4.15 of
the Company Disclosure Letter and except for agreements made for the purpose of
completing the transactions contemplated by this Agreement, neither the Company
nor any of its subsidiaries is a party to, or bound by, any material agreement
of any kind to be performed in whole or in part after the Effective Time. Solely
for the purpose of this Section 4.15, the term "material agreement" shall mean
any agreement which (i) is outside of the ordinary course of business of the
Company or its subsidiaries, (ii) involves the payment or receipt by the Company
or any of its subsidiaries, subsequent to the date of this Agreement and for so
long as such contract is in effect, of more than $50,000 (or $100,000 if the
agreement is for the purchase or sale of food or beverage items included in the
current menu at the Company's restaurants) or (iii), is not terminable without
penalty by the Company or the subsidiary party thereto on 60 days notice. Except
as set forth in Schedule 4.15 of the Company Disclosure Letter, to the best
knowledge of the Company, there is no breach or default and there are no facts
which with notice or the passage of time would constitute a breach or default
under, or give rise to any right of termination, amendment, cancellation or
acceleration under, whether as a result of the consummation of the transactions
contemplated hereby or otherwise, any obligation to be performed by any party to
a material agreement to which the Company or any subsidiary is a party.
4.16 Compliance with Law. Except as set forth in Schedule 4.16 of
the Company Disclosure Letter, the business of the Company and its subsidiaries
is being conducted and the properties and assets of the Company and its
owned and operated in substantial compliance with all applicable laws,
ordinances, regulations, orders, judgments, injunctions, awards and decrees of
any Governmental Authority or court, tribunal or arbitrator.
4.17 Insider Interests. Except as set forth in the SEC Reports filed
prior to the date hereof or in Schedule 4.12 of the Company Disclosure Letter,
Schedule 4.17 of the Company Disclosure Letter sets forth all material
contracts, agreements of the Company with and other obligations of the Company
to any officer or director of the Company or any of its subsidiaries. Except as
set forth in Schedule 4.17 of the Company Disclosure Letter, no officer or
director of the Company or any of its subsidiaries and, to the knowledge of the
Company, no entity controlled by any such officer or director and no relative or
spouse who resides with any such officer or director (i) owns, directly or
indirectly, any material interest in any person that is, or is engaged in
business as, a competitor, lessor, lessee, customer or supplier of the Company
or any of its subsidiaries or (ii) owns, in whole or in part, any tangible or
intangible property that the Company or any of its subsidiaries uses in the
conduct of the business of the Company or any such subsidiary.
4.18 Environmental Matters.
The following definitions shall apply to this section:
A-24
<PAGE> 111
A. "Environmental Claims" shall mean all notices of violation,
liens, claims, demands, suits, or causes of action for any damage, including,
without limitation, personal injury, property damage, lost use of property or
consequential damages, arising directly or indirectly out of Environmental
Conditions or Environmental Laws. By way of example only, Environmental Claims
include (i) violations of or obligations under any contract related to
Environmental Laws or Environmental Conditions, (ii) actual or threatened
damages to natural resources, (iii) claims for nuisance or its statutory
equivalent, (iv) claims for the recovery of response costs, or administrative or
judicial orders directing the performance of investigations, responses or
remedial actions under any Environmental Laws, (v) requirements to implement
"corrective action" pursuant to any order or permit issued pursuant to
Environmental Laws, (vi) fines, penalties or liens of any kind against property
related to Environmental Laws or Environmental Conditions, and (vii) with regard
to any present or former employees, claims relating to exposure to or injury
from Environmental Conditions.
B. "Environmental Conditions" shall mean the state of the
environment, including natural resources, soil, surface water, ground water, or
ambient air, relating to or arising out of the use, storage, treatment,
transportation, release, disposal, dumping or threatened release of Hazardous
Substances.
C. "Environmental Laws" shall mean all applicable federal, state,
district, local and foreign laws, all rules or regulations promulgated
thereunder, and all orders, consent orders, judgments, notices, permits or
demand letters issued to or entered into by the Company or any of its
subsidiaries pursuant thereto, relating to pollution or protection of the
environment (e.g., ambient air, surface water, ground water, or soil).
Environmental Laws shall include, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, the
Toxic Substances Control Act, as amended, the Hazardous Materials Transportation
Act, as amended, the Resource Conservation and Recovery Act, as amended, the
Clean Water Act, as amended, the Safe Drinking Water Act, as amended, the Clean
Air Act, as amended, the Atomic Energy Act of 1954, as amended, the Occupational
Safety and Health Act, as amended, and all analogous laws promulgated or issued
by any state or other Governmental Authority.
D. "Environmental Reports" shall mean any and all written analyses,
audits, assessments, summaries or explanations, in the possession or control of
the Company or any subsidiary, of (a) any Environmental Conditions in, on or
about the Properties (defined below) of, or any property or facility formerly
owned, leased or operated by, the Company or any of its subsidiaries or (b) the
Company's or any such subsidiary's compliance with Environmental Laws.
E. "Hazardous Substances" shall mean all pollutants, contaminants,
chemicals, wastes, and any other carcinogenic, ignitable, corrosive, reactive,
toxic or otherwise hazardous substances or materials subject to regulation,
control or remediation under Environmental Laws, including but not limited to
petroleum, urea formaldehyde,
A-25
<PAGE> 112
flammable, explosive and radioactive materials, PCBs, pesticides, herbicides,
asbestos, sludge, slag, acids, metals, and solvents.
Except as set forth in Schedule 4.18 the Company Disclosure Letter, (i) the
Company and each of its subsidiaries are currently in material compliance with
all applicable Environmental Laws, including without limitation all permits or
licenses required thereunder; (ii) neither the Company nor any of its
subsidiaries has received any written notice that the Company or any such
subsidiary is not in compliance with, or is in material violation of, any such
Environmental Laws; (iii) there are no Environmental Claims pending or, to the
knowledge of the Company, threatened against the Company or any of its
subsidiaries; (iv) no underground storage tank for Hazardous Substances, no
PCBs, and, to the knowledge of the Company, no asbestos containing material is
currently located at or on any of the properties or facilities owned, leased or
operated by the Company or any of its subsidiaries (the "Properties"); and (v)
to the best knowledge of the Company and each of its subsidiaries, there have
been no releases of Hazardous Substances in quantities exceeding the reportable
quantities as defined under Environmental Laws on, upon or into the Properties
other than those authorized by Environmental Laws. In addition, true and correct
copies of the Environmental Reports have been made available to Purchaser, and a
list of all such Environmental Reports is set forth in Schedule 4.18 of the
Company Disclosure Letter.
4.19 Labor Matters. None of the employees of the Company or any of
its subsidiaries are covered by a collective bargaining agreement. Neither the
Company nor any of its subsidiaries knows of any activity or proceedings of any
labor union (or representatives thereof) to organize any unorganized employees
employed by the Company or any of its subsidiaries, nor of any strikes,
slowdowns, work stoppages, lockouts or threats thereof, by or with respect
to any of the employees of the Company or any of its subsidiaries. Except
as set forth in Schedule 4.19 of the Company Disclosure Letter, neither
the Company nor any of its subsidiaries has received any notice of any claim, or
has knowledge of any facts which, in the reasonable judgment of the Company, are
likely to give rise to any claim, that it has not complied in any material
respect with any laws relating to the employment of labor, including, without
limitation, any provisions thereof relating to wages, hours, collective
bargaining, the payment of social security and similar taxes, equal employment
opportunity, employment discrimination or employment safety.
4.20 Certain Undisclosed Violations. Except as set forth in Schedule
4.20 of the Company Disclosure Letter, neither the Company nor any of its
subsidiaries is in violation, or has received notice or claim with respect to
such a violation, of any sale/lease back agreement, credit agreement or
franchise agreement ("Franchise Agreement") to which the Company or any of its
subsidiaries is a party. All liquor licenses held by the Company or any of its
subsidiaries (each a "Liquor License" and collectively the "Liquor Licenses")
are valid and in force, and neither the Company nor any of its subsidiaries has
(after reasonable inquiry) knowledge of any violation of any obligations set
forth under any Liquor License or of any facts which constitute any such
violation or has received any notice or claim with respect to any such
violation, which violation, individually or in the aggregate, would be likely to
result in the termination of any one or more Liquor Licenses covering restaurant
operations
A-26
<PAGE> 113
generating, individually or in the aggregate, for the three months ended June
30, 1997, average weekly gross food and beverage revenues in excess of $300,000.
4.21 Brokers and Finders. Neither the Company nor any of its
subsidiaries nor any of their respective officers, directors or employees has
employed any broker, finder or investment banker or incurred any liability for
any brokerage fees, commissions, finders' fees or banking fees in connection
with the transactions contemplated herein, except that the Company has employed,
and will pay the fees and expenses of Rothschild pursuant to a letter agreement
dated as of July 14, 1997, and Jones, Lang, Wootton USA as broker in connection
with solicitation of a sale and leaseback transaction as contemplated in the
Sale and Leaseback Letter of Intent pursuant to a letter agreement dated April
14, 1997, copies of which have been delivered to Parent.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF
PARENT AND THE PURCHASER
5.01 Corporation Organization. Parent is a limited liability company
duly organized and validly existing and in good standing under the laws of the
State of Delaware, and the Purchaser is a corporation duly organized and validly
existing and in good standing under the laws of the State of New York. Parent
and the Purchaser each has all requisite corporate power and authority to own
its assets and carry on its business as now being conducted or proposed to be
conducted.
5.02 Authorized Capital. The authorized capital stock of the
Purchaser consists of 1,000 shares of Common Stock, $0.01 par value, of which
1,000 shares are outstanding and are owned, beneficially and of record, by
Parent. All of the issued and outstanding shares of capital stock of the
Purchaser are validly issued, fully paid and nonassessable and free of
preemptive rights and all liens.
5.03 Authority. Parent has the necessary limited liability company
power and authority, and the Purchaser has the necessary corporate power and
authority, to enter into this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement by each of Parent and
the Purchaser, the performance by Parent and the Purchaser of their respective
obligations hereunder and the consummation by Parent and the Purchaser of the
transactions contemplated hereby have been duly authorized by the managing
member of Parent and the board of directors of the Purchaser and approved by
Parent as sole stockholder of the Purchaser, and no other limited liability
company or corporate proceeding on the part of Parent or the Purchaser is
necessary for the execution and delivery of this Agreement by Parent and the
Purchaser and the performance by Parent and the Purchaser of their respective
obligations hereunder and the consummation by Parent and the Purchaser of the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by each of Parent and the Purchaser and, assuming the due
authorization, execution and delivery hereof by the
A-27
<PAGE> 114
Company, is a legal, valid and binding obligation of Parent and the Purchaser,
enforceable against each of Parent and the Purchaser in accordance with its
terms, except to the extent that its enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws
affecting the enforcement of creditors' rights generally or by general
equitable principles, regardless of whether such enforceability is considered
in a proceeding in equity or at law.
5.04 No Prior Activities. Neither Parent nor the Purchaser has
incurred, directly or indirectly, any liabilities or obligations, except those
incurred in connection with its incorporation or with the negotiation of this
Agreement, the Bank Standstill Agreement, the Bank Letter of Intent, the
performance of its obligations hereunder and the consummation of the
transactions contemplated hereby and thereby. Neither Parent nor the Purchaser
has engaged, directly or indirectly, in any business or activity of any type or
kind, or entered into any agreement or arrangement with any person or entity,
and is not subject to or bound by any obligation or undertaking, that is not
contemplated by or in connection with this Agreement, the Offer Documents and
the transactions contemplated hereby and thereby.
5.05 No Financing Contingency. Parent has or will have and will make
available to the Purchaser or the Paying Agent, as applicable, sufficient funds
in sufficient time to consummate the Offer and the Merger in accordance with the
terms of this Agreement.
5.06 Governmental Filings; No Violations. (a) Provided that the
Company's representations in Sections 4.04 and 4.05 hereof are true and correct,
except as set forth in the disclosure letter delivered to the Company as of the
date of this Agreement (the "Purchaser Disclosure Letter") no notices, reports
or other filings are required to be made by Parent or the Purchaser with, nor
are any consents, registrations, approvals, permits or authorizations required
to be obtained by Parent or the Purchaser from, any governmental or regulatory
authorities of the United States, the several States or any foreign
jurisdictions in connection with the execution and delivery of this Agreement by
Parent and the Purchaser and the consummation by Parent and the Purchaser of the
transaction contemplated hereby, the failure to make or obtain any or all of
which would adversely affect the ability of the Parent or the Purchaser to
consummate the transactions contemplated by this Agreement, except (A) in
connection with the HSR Act, (B) in connection with the Exchange Act, (C) in
connection with Article 16 of the NYBCL and (D) the Liquor License Approvals.
(b) Provided that the Company's representations in Sections 4.04 and
4.05 hereof are true and correct, except as set forth in the Purchaser
Disclosure Letter neither the execution and delivery of this Agreement by Parent
and the Purchaser nor the consummation by Parent and the Purchaser of the
transactions contemplated hereby nor compliance by Parent and the Purchaser with
any of the provisions hereof will: (i) violate, conflict with or result in any
breach of any provision of the Certificate of Incorporation or By-Laws of Parent
or the Purchaser; (ii) require any consent, approval, authorization or permit
of, or filing with or notification to, any Governmental Authority, except (A) in
connection with HSR, (B) in connection with the Exchange Act, (C) in connection
with Article 16 of the NYBCL or (D) the Liquor License Approvals; (iii)
constitute a violation or breach of, or result (with or without
A-28
<PAGE> 115
due notice or lapse of time or both) in a default or loss of any material
benefit under, or give rise to any right of termination, amendment,
cancellation or acceleration under, any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, franchise agreement, lease, license,
contract, agreement or other instrument or obligation of any kind to which
Parent or the Purchaser is a party or by which Parent or the Purchaser or
their respective assets may be bound, except as any such breach, default or
right as to which requisite waivers or consents have been obtained, (iv)
require the creation or imposition of any lien upon or with respect to any
properties of the Parent and the Purchaser or (v) assuming compliance with the
NYBCL and the HSR Act, violate any order, writ, injunction, judgment, decree,
law, statute, rule, regulation or governmental permit or license applicable to
Parent and the Purchaser or any of its or their respective assets, with such
exceptions with respect to the matters referred to in clauses (ii) through
(vi) as would not, individually or in the aggregate, adversely affect the
ability of the Parent or the Purchaser to consummate the transactions
contemplated by this Agreement.
5.07 Brokers and Finders. Neither Parent, the Purchaser nor any of
its officers, directors or employees has employed any broker, finder or
investment banker or incurred any liability for any brokerage fees, commissions,
finders fees or banking fees in connection with the transactions contemplated
herein.
5.08 Information. All information supplied in writing by Parent or
the Purchaser specifically for inclusion in the Proxy Statement or the Schedule
14D-9 or provided by Parent or the Purchaser in the Schedule 14D-1 or the Offer
Documents will, at the respective times that such documents or any amendments or
supplements thereto are filed with the SEC and are first published, sent or
given to holders of shares, comply in all material respects with applicable
federal securities laws and will not contain any untrue statements of a material
fact required to be stated therein or omit to state, with respect to information
supplied by Parent and the Purchaser, any material fact required to be stated
therein or necessary in order to make the statements supplied by Parent and the
Purchaser, in light of the circumstances under which they were made, not
misleading, except that no representation is made by Parent or the Purchaser
with respect to information supplied by the Company.
5.09 Legal Proceedings, Etc.. There is no claim, action, proceeding
or investigation pending or, to the knowledge of Parent or the Purchaser,
threatened against or relating to Parent or the Purchaser before any court or
tribunal in any jurisdiction (domestic or foreign) or any Governmental Authority
which could individually or in the aggregate adversely affect the ability of the
Parent or the Purchaser to consummate the transactions contemplated by this
Agreement and neither Parent nor the Purchaser is subject to any outstanding
order, writ, judgment, injunction or decree of any court or Governmental
Authority or body that could, individually or in the aggregate, materially
effect Parent's or the Purchaser's ability to consummate the transactions
contemplated by this Agreement.
5.10 Ownership of Shares. Parent beneficially owns 554,900 Shares,
which it will contribute to the Purchaser prior to the Merger, and has the sole
right to receive net proceeds of any sale of such Shares.
A-29
<PAGE> 116
ARTICLE VI
COVENANTS OF THE PARTIES
6.01 Conduct of Business of the Company. The Company shall, and
shall cause each of its subsidiaries to, use its reasonable efforts in light of
the Company's present financial condition to preserve intact the business
organization of the Company and each of its subsidiaries, to keep available,
consistent with this Agreement, the services of their respective operating
personnel and to preserve the goodwill of those having a business relationship
with each of them, including, without limitation, suppliers. Except as
contemplated by this Agreement, during the period from the date of this
Agreement to the Effective Time, the Company and each of its subsidiaries will
conduct their respective businesses and operations only in the ordinary and
usual course of business consistent with past practice. Without limiting the
generality of the foregoing, and except as a result of entering into this
Agreement or as contemplated by this Agreement or as set forth in Schedule 6.01
of the Company Disclosure Letter, during the period from the date of this
Agreement to the Effective Time, without the advance written consent of Parent,
the Company will not and will cause each of its subsidiaries not to:
(a) amend its certificate of incorporation or by-laws or
similar governing documents;
(b) (i) create, incur or assume any indebtedness for borrowed money
(including obligations in respect of capital leases, other than obligations of
not more than $50,000, individually or in the aggregate, created or incurred in
the ordinary course of business), except indebtedness for borrowed money
incurred under the Credit Agreement (as defined in Section 6.01(g)) or pursuant
to a new credit agreement refinancing such borrowing in conformity with the
terms of that certain letter of intent dated August 29, 1997, by and among the
Company and the Lenders (as defined therein) (the "Bank Letter of Intent"), or
the letter agreement dated August 29, 1997, by and among the Company and the
Lenders (the "Bank Standstill Agreement"), or (ii) assume, guarantee, endorse or
otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other person other than any subsidiary of
the Company set forth in Schedule 4.02 of the Company Disclosure Letter;
(c) declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect of
its capital stock other than on capital stock of subsidiaries set forth in
Schedule 4.02 of the Company Disclosure Letter.
(d) issue, sell, grant, purchase or redeem, whether by dividend or
otherwise, any shares of its capital stock or securities convertible into or
exercisable for, or options with respect to, or warrants to purchase or rights
to subscribe to or otherwise purchase, or subdivide or in any way reclassify,
any shares of its capital stock, except for the
A-30
<PAGE> 117
issuance of Shares issuable upon conversion of the Convertible Loan Notes in
accordance with their terms or the exercise of Options outstanding on the date
hereof;
(e) except in respect of regularly scheduled raises or raises which
have been approved by the compensation committee of the Board prior to the date
hereof in the ordinary course of business consistent with past practice, or as
disclosed in Schedule 6.01 of the Company Disclosure Letter, (i) increase the
aggregate amount of compensation payable or to become payable to any of its
directors, officers or employees whose compensation required to be disclosed on
Schedule 4.12 of the Company Disclosure Letter, whether by salary or bonus, (ii)
increase the rate or term of, or otherwise alter, amend or nullify any, or enter
into any new, employment agreement, bonus, insurance, pension, severance or
other Company Benefit Plan, payment or arrangement made to, for or with any such
directors, officers or employees;
(f) enter into any agreement, commitment or transaction which, if
entered into prior to the date hereof, would have been required to be disclosed
on Schedule 4.15 of the Company Disclosure Letter, except as required or
permitted by subsection (k) or (l) of this Section 6.01, provided, however, that
nothing herein shall prohibit the Company or any subsidiary from purchasing
food and beverage items and restaurant supplies from its vendors as of the
date hereof in the ordinary course and in quantities consistent with past
practice;
(g) sell, transfer, mortgage, pledge, grant any security interest
in, or permit the imposition of any lien or other encumbrance on, any asset
other than in the ordinary course of business consistent with past practice and
except (i) pursuant to the Credit Agreement, as amended, dated as of September
12, 1996 between the Company and Bank of America Illinois, NBD Bank, N.A.,
Credit Lyonnais New York Branch and The Bank of New York, as Agent, and The
Chase Manhattan Bank, as Co-Agent (the "Credit Agreement"), or (ii) pursuant to
the refinancing of borrowings under the Credit Agreement pursuant to a new
credit agreement in conformity with the terms set forth in the Bank Letter of
Intent or (iii) pursuant to that certain letter of intent between the Company
and CNL Fund Advisers, Inc. pursuant to which the Company intends to enter into
a sale and leaseback transaction in respect of all or substantially all of the
Real Property owned in fee by the Company (the "Sale and Leaseback Letter of
Intent");
(h) waive any material right under any contract or other
agreement identified in Schedule 4.15 of the Company Disclosure Letter;
(i) other than as required by any change in GAAP, make any material
change in its accounting methods or practices or make any material change in
depreciation or amortization policies or rates adopted by it for accounting
purposes or, other than normal writedowns or writeoffs consistent with past
practice, make any writeoffs of notes or accounts receivable;
(j) make any loan or advance to any of its shareholders, officers,
directors or employees (other than vacation advances, relocation advances and
travel advances, in each
A-31
<PAGE> 118
case in the ordinary course of business consistent with past practice, and
other advances up to $10,000 in the aggregate) or make any other loan or
advance to any other person (other than any subsidiary of the Company set
forth in Schedule 4.02 of the Company Disclosure Letter) or group otherwise
than in the ordinary course of business consistent with past practice;
(k) terminate or fail to renew, where such renewal is at the
Company's or a subsidiary's option, or fail to replace on substantially similar
or more favorable terms, any contract or other agreement other than in the
ordinary course of business, which termination or failure to renew or so
replace, individually or in the aggregate, could reasonably be expected to have
a Material Adverse Effect;
(l) fail to maintain all Insurance Policies in full force and effect
or fail to renew or replace with equivalent coverage any Insurance Policy which
has expired;
(m) take any action which constitutes a violation of any Liquor
License which violation, individually or in the aggregate, would, in the
reasonable judgment of the Restaurant Company, be likely to result in the
termination of any one or more Liquor Licenses covering restaurant operations
generating, individually or in the aggregate, for the three months ended June
30, 1997, average weekly gross food and beverage revenues in excess of $300,000;
(n) fail to operate, maintain, repair or otherwise preserve the Real
Property substantially in accordance with current practice in light of the
Company's present financial condition and not to exceed the capital expenditure
budget of the Company previously disclosed to Parent ;
(o) fail to comply with all applicable filing, payment and
withholding obligations under all applicable federal, state, local and foreign
Tax laws except where such failure to comply would not have a Material Adverse
Effect;
(p) breach, terminate or amend the Bank Standstill Agreement or
terminate or amend either the Bank Letter of Intent or the Sale and Leaseback
Letter of Intent or take any action not otherwise permitted or required pursuant
to such agreements that directly results in any counterparty to the Bank Letter
of Intent or the Sale and Leaseback Letter of Intent terminating or stating an
intention to terminate the same; or
(q) agree in writing to, or otherwise take or authorize, any of
the foregoing actions.
6.02 Notification of Certain Matters. (a) The Company shall
promptly notify Parent of any:
(i) notice or other communication from any Person (as defined in
Section 9.01) alleging that the consent of such Person is or may be
required in connection with the transactions contemplated by this
Agreement;
A-32
<PAGE> 119
(ii) notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions
contemplated by this Agreement;
(iii) action, suit, claim, investigation or proceeding commenced or,
to the best of the Company's knowledge threatened against, relating to or
involving or otherwise affecting the Company or any of its subsidiaries
which, if pending on the date of this Agreement, would have been required
to have been disclosed pursuant to Article IV or which relate to the
consummation of the transactions contemplated by this Agreement; and
(iv) change or event (A) having or which could reasonably be
expected to have a Material Adverse Effect; or (B) impairing the ability
of the Company to consummate the transactions contemplated hereby.
(b) Between the date of this Agreement and the Effective Time, the
Company shall give prompt notice to Parent of: (i) the initiation of any audit
or other review by the Internal Revenue Service (the "IRS") or any other state,
local or foreign taxing or governmental authority with respect to any Tax return
or that may result in any additional liability for Taxes, and (ii) any proposed
settlement or similar agreement ("Settlement") with the IRS or any other state,
local or foreign taxing or governmental authority and shall not enter into any
Settlement with respect to Taxes without the prior written consent of Parent,
which consent shall not be unreasonably withheld.
6.03 Access to Information. (a) Between the date of this Agreement
and the Effective Time, the Company will during ordinary business hours and upon
reasonable advance notice, (i) give Parent and Parent's authorized
representatives all access Parent shall reasonably request to all of its and
each of its subsidiaries' books, records (including, without limitation, the
workpapers of the Company's outside accountants), contracts, commitments,
restaurants, offices and other facilities and properties, and its and each of
its subsidiaries' personnel, representatives, accountants and agents; (ii)
permit Parent to make such inspections thereof, except as set forth herein below
as it may reasonably request during normal business hours, and (iii) cause its
and each of its subsidiaries' officers and advisors to furnish to Parent its
financial and operating data and such other existing information with respect to
its business, properties, assets, liabilities and personnel (including, without
limitation, title insurance reports, real property surveys and Environmental
Reports, if any), as Parent may from time to time reasonably request, provided,
however, that any such investigation shall be conducted in such a manner as not
to interfere unreasonably with the operation of the business of the Company. The
Parent and Purchaser agree not to undertake or take any actions involving
exploration, drillings, borings or other independent subsurface environmental
testings or other "Phase II" environmental investigations including obtaining
subsurface environmental surveys or tests, relating to Environmental Conditions
at any Property.
A-33
<PAGE> 120
(b) Any information provided pursuant to this Agreement shall be
held by Parent in accordance with and shall be subject to the terms of the
Confidentiality Agreement dated June 3, 1997 between the Company and Parent (the
"Confidentiality Agreement"). Notwithstanding anything herein or in the
Confidentiality Agreement to the contrary, Parent, the Purchaser or the Company
may disclose any information required to be disclosed pursuant to the Exchange
Act, or otherwise required or requested to be disclosed by the SEC after
consultation of the parties and upon advice of counsel or as otherwise permitted
by the Confidentiality Agreement.
6.04 Further Information. The Company and Parent shall give prompt
written notice to the other of (i) any representation or warranty made by the
Company or the Purchaser, respectively, contained in this Agreement becoming
untrue or inaccurate in any material respect or (ii) the failure by the Company
or the Purchaser, respectively, to comply with or satisfy in any material
respect any covenant, condition or agreement to be complied with or satisfied
under this Agreement and shall use reasonable efforts to notify the other
promptly upon becoming aware of any event or circumstance which it believes is
reasonably likely to give rise to a failure of any condition to the Offer set
forth in Annex A; provided, however, that no such notification shall affect the
representations, warranties, covenants or agreements of the parties or the
conditions to the obligations of the parties under this Agreement.
6.05 Reasonable Best Efforts. Subject to the terms and conditions of
this Agreement, the Company, Parent and the Purchaser shall use their respective
reasonable best efforts to take, or cause to be taken, all action, and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, subject to the terms of this Agreement, and
shall use their respective reasonable best efforts to satisfy the conditions to
the transactions contemplated hereby, to obtain all waivers, permits, consents
and approvals and to effect all registrations, filings and notices with or to
third parties or governmental or public bodies or authorities which are
necessary or desirable in connection with the transactions contemplated by this
Agreement, including, but not limited to, filings to the extent required under
the Exchange Act, the HSR Act and Article 16 of the NYBCL, filings and consents
with respect to Liquor Licenses (including without limitation the Liquor License
Approvals) and submissions of information requested by Governmental Authorities
and to defend against any lawsuit or proceeding, whether judicial or
administrative, challenging this Agreement or the consummation of any of the
transactions contemplated hereby. If at any time after the Effective Time any
further action is necessary or desirable to carry out the purposes of this
Agreement, the proper officers or directors of each of the parties hereto shall
take such action. Parent as the sole shareholder of the Purchaser, and the
Purchaser as a shareholder of the Company, will consent and/or vote in favor of
the transactions contemplated hereunder.
6.06 HSR Filings. The Company and Parent will file, or cause to be
filed, as promptly as possible and in no event later than ten Business Days
after the date hereof, with the United States Federal Trade Commission (the
"FTC") and the Antitrust Division of the
A-34
<PAGE> 121
United States Department of Justice (the "Department of Justice") pursuant to
the HSR Act the notification required by the HSR Act, including all requisite
documents, materials and information therefor, and request early termination
of the waiting period under the HSR Act. Each of the Company and Parent shall
furnish to the other such necessary information and reasonable assistance as
the other may request in connection with its preparation of any filing or
submission which is necessary under the HSR Act. The Company and Parent shall
each keep the other apprised of the status of any inquiries or requests for
additional information made by any governmental authority and shall comply
promptly with any such inquiry or request.
6.07 Public Announcements. The initial press release with respect to
the transactions contemplated hereby shall be a joint press release,
substantially in the form of Exhibit C hereto, and thereafter the Company and
Parent shall consult with each other before issuing any press release or
otherwise making any public statements with respect to the transactions
contemplated hereby and shall not issue any such press release or make any
such public statement prior to such consultation.
6.08 No Solicitation. (a) The Company will not, and will not permit
any of its officers, directors, advisors, agents or representatives to, directly
or indirectly, solicit or encourage the initiation or submission of any
inquiries, proposals or offers regarding any acquisition, merger, tender offer,
exchange offer, recapitalization (involving an equity investment other than
solely from existing shareholders) or similar transaction involving, sale of all
or a substantial portion of the assets of, or sale of shares of capital stock or
securities convertible into capital stock, (other than a sale only to existing
lenders in connection with a refinancing of debt) of the Company, whether or not
in writing and whether or not delivered to the shareholders of the Company, or
similar transactions involving the Company (any of the foregoing inquiries,
proposals or offers being referred to herein as an "Acquisition Proposal");
provided, however, that nothing contained in this Section 6.08 shall prevent the
Company's Board from (i) referring any third party to this provision, (ii)
considering, negotiating or participating in discussions regarding an
unsolicited bona fide written Acquisition Proposal or (iii) complying with Rule
14e-2(a) or Rule 14d-9 promulgated under the Exchange Act, if applicable, with
regard to an Acquisition Proposal made in the form of a tender offer by a third
party. If the Board of the Company after duly considering advice, written or
otherwise, of the Company's outside counsel and financial advisor, determines in
good faith that it would be consistent with its fiduciary responsibilities to
approve or recommend a Superior Proposal (as defined below), then (A) the
Company shall not enter into any agreement with respect to the Superior Proposal
and (B) any other obligation of the Company under this Agreement shall not be
affected unless this Agreement is terminated pursuant to Section 9.01(b)(v) and
all amounts payable pursuant to Section 9.03(a) are paid to Parent prior to or
concurrently with such termination. As used herein the term "Superior Proposal"
means a bona fide proposal made by a third party to acquire the Company pursuant
to a tender or exchange offer, a merger, a sale of all or substantially all of
its assets or otherwise that the Board determines in its good faith judgment to
be more favorable to the Company's shareholders than the Offer and
A-35
<PAGE> 122
the Merger (after considering the advice, written or otherwise, of its outside
counsel and financial advisor).
(b) The Company shall promptly notify Parent after receipt of any
Acquisition Proposal or any request for nonpublic information relating to the
Company by any third party in connection with an Acquisition Proposal or for
access to the properties, books or records of the Company that informs the Board
of Directors that such third party is considering making, or has made, an
Acquisition Proposal. Such notice to Parent shall be made orally and in writing
and shall indicate in reasonable detail the terms and conditions of such
proposal, inquiry or contact and, unless precluded by the terms of a
confidentiality agreement, the identity of the offeror.
(c) If the Company's Board of Directors receives a request for
material nonpublic information by a third party who makes or who states in
writing that it intends, subject to satisfactory review of such nonpublic
information, to make a bona fide Acquisition Proposal, the Company may,
subject to the execution of a confidentiality agreement substantially similar
to that then in effect between the Company and Parent but allowing for
disclosure to Parent as required in paragraph (b) of this Section 6.08,
provide such third party with access to such information.
6.09 Indemnity; D&O Insurance.
(a) The certificate of incorporation of the Surviving Corporation
shall, for a period of six years from the Effective Time, contain provisions no
less favorable with respect to indemnification than are set forth in the
Certificate of Incorporation, as amended as set forth in Exhibit A hereto, which
provisions shall not be amended, repealed or otherwise modified for such period
in any manner that would affect adversely the rights thereunder of individuals
who at any time prior to the Effective Time were directors, officers, employees
or agents of the Company, unless such modification shall be required by law.
(b) The Company shall, to the fullest extent permitted under New
York law and regardless of whether the Merger becomes effective, indemnify and
hold harmless, and after the Effective Time the Surviving Corporation shall, to
the fullest extent permitted under New York law, indemnify and hold harmless,
each present and former director and officer of the Company and each of its
subsidiaries (collectively, the "Indemnified Parties") against judgments, fines,
reasonable amounts paid in settlement and reasonable expenses, including
attorneys' fees, costs and charges incurred as a result of any action or
proceeding (whether arising before or after the Effective Time), or any appeal
therefrom, whether civil or criminal, arising out of or pertaining to any action
or omission in their capacity as an officer or director prior to or at the
Effective Time, for a period of six years after the Effective Time (or with
respect to claims arising from service as an officer or director prior to the
Effective Time and asserted or made prior to such sixth anniversary which have
not been resolved prior to such sixth anniversary, until the time such matters
are finally resolved). In the event of any such action or proceeding (i) the
Company or the Surviving Corporation, as the case may be, shall pay the
reasonable fees and expenses of counsel selected by the Indemnified Parties,
which
A-36
<PAGE> 123
counsel shall be reasonably satisfactory to the Company or the Surviving
Corporation, promptly after statements therefor are received, provided that an
agreement has been entered into by such Indemnified Party agreeing to repay such
amounts to the Company if the Indemnified Party is ultimately found by a final
judgment (not subject to further appeal) of a court of competent jurisdiction
not to be entitled to indemnification, or to the extent such amount exceeds the
indemnification to which such Indemnified Party is entitled, under New York law,
and (ii) the Company and the Surviving Corporation shall cooperate and provide
access to all documents necessary beneficial to the defense of any such matter;
provided, however, that neither the Company nor the Surviving Corporation shall
be liable for any settlement effected without its written consent (which consent
shall not be unreasonably withheld, delayed or conditioned); and provided,
further that neither the Company nor the Surviving Corporation shall be
obligated pursuant to this Section 6.10(b) above to pay the fees and expenses
of more than one counsel for all Indemnified Parties in any single action
except to the extent that two or more of such Indemnified Parties shall have
conflicting interests in the outcome of such action.
(c) The Surviving Corporation shall use its best efforts to maintain
in effect for six years from the Effective Time, if available, the current
directors' and officers' liability insurance policies maintained by the Company
(provided that the Surviving Corporation may substitute therefor policies of at
least the same coverage containing terms and conditions which are not materially
less favorable) with respect to matters occurring prior to the Effective Time;
provided, however, that the Surviving Corporation shall not be required to
maintain such insurance to the extent the annual premium therefor exceeds 120%
of the annual premiums currently paid by the Company in respect of the current
policy or policies (the "Maximum Amount") but in such case shall purchase as
much comparable coverage as available for the Maximum Amount.
(d) In the event the Company or the Surviving Corporation or any of
their respective successors (i) is consolidated with or merges into another
person and shall not be the continuing or surviving corporation or entity of
such consolidation or merger or (ii) transfers all or substantially all of its
properties and assets to any other person in a single transaction or a series of
related transactions, then in each such case the Parent shall make or cause to
be made proper provision so that the successor or transferee of the Company or
the Surviving Corporation, as the case may be, shall comply in all material
respects with the terms of this Section 6.09.
6.10 Employee Benefits Matters.
(a) From and after the date of purchase of Shares pursuant to the
Offer, the Company or the Surviving Corporation, as applicable, will, and Parent
will cause the Company or the Surviving Corporation to, honor, in accordance
with their terms, all individual employment, severance and change of control
agreements between the Company and any officer, director or employee of the
Company including, without limitation, bonuses,
A-37
<PAGE> 124
incentive or deferred compensation in existence on the date hereof and
disclosed to Parent in Schedule 4.12 of the Company Disclosure Letter.
(b) From and after the date of purchase of Shares pursuant to the
Offer, the Company or the Surviving Corporation, as applicable, will, and Parent
will cause the Company, the Surviving Corporation or the Company Benefit Plans
to, provide or pay when due to employees and former employees of the Company all
benefits and compensation pursuant to the Company Benefit Plans, policies and
arrangements in effect on the date hereof and disclosed to Parent in Section
4.12 of the Company Disclosure Letter (other than with respect to stock and
stock-based plans or programs, including stock grants, options to purchase
stock, stock investment alternatives, or other stock-based benefits or awards)
earned or accrued through, and to which such individuals are entitled as of, the
Effective Time (or such later time as such Company Benefit Plans as in effect
at the Effective Time are terminated or canceled by the Surviving Corporation
subject to compliance with this Section 6.10).
(c) For a period ending two (2) years after the Effective Time, the
Company or the Surviving Corporation, as applicable, will, and Parent, will
cause the Company or the Surviving Corporation to, provide to Company employees
and former employees benefits under all Company Benefit Plans, programs and
arrangements that provide benefits which are no less favorable in the aggregate
to such persons than those provided to such persons under the Company Benefit
Plans, programs and arrangements of the Company in effect on the date hereof and
disclosed to Parent in Schedule 4.12 of the Company Disclosure Letter (other
than with respect to the agreements subject to Section 6.10 (a) above and other
than with respect to stock and stock-based plans or programs, including stock
grants, options to purchase stock, stock investment alternatives, or other
stock-based benefits or awards).
(d) Nothing in this Agreement shall require the continued employment
of any person, and except as expressly set forth in this Section 6.10, no
provision of this Agreement shall prevent Parent or Surviving Corporation from
amending or terminating any Company Benefit Plan.
6.11 Payment of Bonuses. Parent shall cause the Company to pay, in
accordance with their respective terms, all bonuses, payments of incentive
compensation pursuant to the Company's incentive compensation plans, severance
payments and other payments as disclosed on Schedule 4.12 of the Company
Disclosure Letter in accordance with the terms hereof.
ARTICLE VII
CONDITIONS TO THE MERGER
7.01 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to this Agreement to consummate the Merger
shall be subject to the following conditions, unless waived by all parties at or
prior to the Closing:
A-38
<PAGE> 125
(a) the Purchaser shall have accepted for payment, and paid for,
Shares validly tendered and not withdrawn pursuant to the Offer representing
(together with Shares otherwise owned by Parent or the Purchaser) not less than
50.1% of the then outstanding Shares;
(b) this Agreement and the Merger shall have been approved and
adopted by the requisite vote or consent, if any, of the shareholders of the
Company required by the NYBCL; and
(c) no order, statute, rule, regulation, execution order, stay,
decree, judgment, or injunction shall have been enacted, entered, issued,
promulgated or enforced by any court or governmental authority which prohibits
or restricts the consummation of the Merger.
7.02 Conditions to the Obligations of Parent and the Purchaser to
Effect the Merger. The obligations of Parent and the Purchaser to effect the
Merger shall be further subject to satisfaction of the condition, unless waived
by Parent, that all outstanding Options shall have been surrendered and canceled
prior to or simultaneously with the Effective Time.
ARTICLE VIII
CLOSING
8.01 Time and Place. The closing of the Merger (the "Closing") shall
take place at the offices of Latham & Watkins, 885 Third Avenue, New York, New
York, at 10 a.m. local time on a date to be specified by the parties which shall
be no later than the third Business Day after the date that all of the closing
conditions set forth in Article VII have been satisfied or waived (if waivable)
unless another time, date or place is agreed upon in writing by the parties
hereto. The date on which the Closing actually occurs is herein referred to as
the "Closing Date."
8.02 Filings at the Closing. At the Closing Date, the Purchaser
shall cause the Certificate of Merger to be filed and recorded with the
Secretary of State of the State of New York, in accordance with the provisions
of Section 904 or Section 905, as applicable, of the NYBCL and shall take any
and all other lawful actions and do any and all other lawful things necessary to
cause the Merger to become effective.
ARTICLE IX
TERMINATION; AMENDMENT; WAIVER
9.01 Termination. This Agreement may be terminated and the Offer (if
the Purchaser has not accepted Shares for payment) and the Merger may be
abandoned at any time
A-39
<PAGE> 126
prior to the Effective Time, whether prior to or after approval of the Merger
by the shareholders of the Company, if required:
(a) by mutual written consent of Parent, the Purchaser and the
Company;
(b) by the Company if:
(i) the Purchaser shall have failed to commence (within the meaning
of Rule 14d-2(a) of the Exchange Act) the Offer within five Business Days of the
public announcement thereof unless the failure to commence the Offer shall be
due to (A) the failure of the Company (or any of its subsidiaries) to perform
in any material respect any of its obligations under this Agreement then
required to be performed or (B) any occurrence or circumstance which would
result in the failure of any condition to the Offer set forth in Annex A hereto;
(ii) the Purchaser shall have (A) terminated the Offer, (B) allowed
the Offer to expire without the purchase of any Shares thereunder in accordance
with the terms of this Agreement or (C) failed to accept Shares for payment
pursuant to the Offer on or prior to October 22, 1997 unless (I) such
termination or expiration or failure shall be due to the failure of any
condition set forth in (1) paragraph (iv), (vii), (viii) or (ix) (with respect
to any consent or approval required to be obtained by the Company as provided in
Annex A) of Annex A or paragraph (ii) of Annex A (otherwise than in
circumstances that would entitle the Company to terminate this Agreement
pursuant to Section 9.01(d)) or (2) paragraph (i) of Annex A unless the
Purchaser shall have failed to accept Shares for payment on or prior to October
31, 1997 or (II) the provisions of the proviso in Section 9.03(a) are
applicable, unless the Purchaser shall have failed to accept Shares for payment
on or prior to October 31, 1997;
(iii) prior to the purchase of Shares pursuant to the Offer, the
Purchaser shall have breached or failed to perform in any material respect any
of its obligations under this Agreement which obligation is required to be
performed at such time and such breach or failure materially delays consummation
of the Offer, or materially and adversely affects the ability of the Purchaser
and Parent to consummate the Offer and the Merger on substantially the terms set
forth in the Agreement;
(iv) if the representations and warranties of the Purchaser set
forth in this Agreement are not true and correct in all material respects at any
time prior to the expiration or termination of the Offer (except as to those
representations and warranties which are made as of a specified date, which
shall be true and correct as of such date) and such failure materially delays
consummation of the Offer, or materially and adversely affects the ability of
the Purchaser and Parent to consummate the Offer and the Merger on substantially
the terms set forth in this Agreement;
(v) prior to the purchase of Shares pursuant to the Offer, a
corporation, partnership, person or other entity or group (each a "Person")
shall have made a Superior Proposal and the Board, after duly considering advice
written or otherwise of the Company's outside counsel and financial advisors,
determines in good faith that it would be consistent
A-40
<PAGE> 127
with its fiduciary responsibilities to approve or recommend such Superior
Proposal, provided that such termination under this clause (v) shall not be
effective until payment of the Termination Fee and Expenses in the manner
required by Section 9.03 (a); or
(vi) the Minimum Condition is not satisfied or waived as
permitted by this Agreement upon final expiration of the Offer;
(c) by Parent and the Purchaser if:
(i) due to any occurrence or circumstance which would result in a
failure to satisfy any of the conditions set forth in Annex A hereto, the
Purchaser shall have failed to commence (within the meaning of Rule 14d-2(a) of
the Exchange Act) the Offer within five Business Days of the public announcement
thereof;
(ii) as a result any of the conditions set forth in Annex A hereto
not having been satisfied, the Purchaser shall have (A) terminated the Offer, or
(B) failed to accept Shares for payment pursuant to the Offer on or prior to
October 22, 1997;
(iii) the Effective Time shall not have occurred on or prior to
November 30, 1997, due to a failure of any of the conditions to the obligations
of the Purchaser to effect the Merger set forth in Sections 7.01(b), 7.01(c) or
7.02 otherwise than as a result of a breach or default by Parent or the
Purchaser hereunder;
(iv) the Company shall have breached its obligations under
Section 6.08; or
(v) the Board shall have withdrawn or modified (including by
amendment of the Schedule 14D-9), in a manner adverse to the Purchaser, its
approval or recommendation of the Offer, this Agreement or the Merger or shall
have recommended or approved another tender or exchange offer or other
Acquisition Proposal (whether or not a Superior Proposal), or shall have adopted
any resolution to effect any of the foregoing.
(d) by Parent and the Purchaser or the Company if any court of
competent jurisdiction in the United States or other United States governmental
body shall have issued an order, decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the Merger or the acceptance for
payment and payment for the Shares in the Offer and such order, decree, ruling
or other action is or shall have become nonappealable.
9.02 Effect of Termination. In the event of the termination of this
Agreement and the abandonment of the Offer and the Merger pursuant to Section
9.01, this Agreement shall forthwith become void and have no effect, without any
liability on the part of any party hereto or its affiliates, directors, officers
or shareholders, provided that no such termination shall relieve any of the
Company, Parent or the Purchaser, as the case may be, from liability for damages
arising (a) from any willful or intentional breach of this Agreement or (b) from
their obligations under Sections 4.21, 5.07, 6.03(b), this Section 9.02, Section
9.03 and Article X. If this Agreement is terminated as provided herein, each
party (the "Redelivering
A-41
<PAGE> 128
Party") upon request therefor shall redeliver all documents, work papers and
other materials obtained (whether before or after execution of this Agreement)
by the Redelivering Party from the requesting party in connection with the
transaction contemplated hereby, together with all copies thereof in the
possession of the Redelivering Party.
9.03 Fees and Expenses. In recognition of the significant time
and expense necessarily expended and to be expended by Parent and the
Purchaser in negotiation of this Agreement and furtherance of the
transactions contemplated hereby,
(a) in the event that:
(i) the Company terminates this Agreement pursuant to Section
9.01(b)(v); or
(ii) prior to the final expiration date ("Expiration Date") of the
Offer, (A) an Acquisition Proposal, or interest in or intention to pursue an
Acquisition Proposal, has been publicly announced or publicly confirmed by any
person (other than Parent or the Purchaser) (whether by press release or
Exchange Act filing or otherwise), and (B) on or prior to the 180th day
following the initial expiration date of the Offer (I) the Company enters into
any agreement with respect to any Acquisition Proposal or (II) any Acquisition
Proposal is commenced by way of tender offer or exchange offer;
then, in either such event, the Company shall pay to Parent a fee in the amount
of $1,100,000 (the "Termination Fee"), plus Expenses (as defined below), at the
time and manner hereinafter set forth. Notwithstanding the foregoing, no
Termination Fee will be payable in the case of clause (ii) above if the
Purchaser has not, prior to the Expiration Date, waived the Minimum Condition so
as to provide that the minimum number of Shares that must be validly tendered as
a condition to the Purchaser's acceptance for payment of Shares pursuant to the
Offer, together with the Contributed Shares, shall be no greater than 66-2/3% of
the outstanding Shares; provided, however, that in the event of such reduction
in the Minimum Condition, the Purchaser shall be entitled to extend the Offer
from time to time, for so long as the Bank Standstill Letter remains in effect,
but in no event beyond October 31, 1997, until Shares validly tendered (and not
withdrawn) in the Offer, together with the Contributed Shares, represent at
least 90% of the outstanding Shares. The Termination Fee and Expenses shall be
paid in immediately available funds concurrently with any termination described
only in clause (i) above. Expenses and the Termination Fee, if payable, shall be
paid only in the event of, and concurrently with, the consummation of any such
Acquisition Proposal in the case of clause (ii) above immediately in available
funds.
(b) if (i) this Agreement is terminated by the Purchaser and Parent
pursuant to Section 9.01(c)(i) or (ii) as a result of the Company's failure to
satisfy the condition set forth in paragraph (iv) of Annex A hereto and (ii) the
Company's breach of any of its representations and warranties under the
Agreement and/or its failure to perform its material obligations, covenants or
agreements under this Agreement resulting in the failure to satisfy
A-42
<PAGE> 129
such condition set forth in paragraph (iv) of Annex A, individually or in the
aggregate, has had or is reasonably likely to have a Material Adverse Effect,
the Company shall reimburse Parent and Purchaser for all Expenses. Expenses
payable pursuant to this Section 9.03(b) shall be paid in immediately
available funds within one Business Day following such termination.
(c) Upon the occurrence of any Event under clause (a) or (b) of this
Section 9.03 entitling Purchaser and Parent to payment of their Expenses,
Purchaser and Parent shall promptly provide the Company with invoices or other
reasonable evidence of the Expenses upon request, and Parent shall forthwith
return any portion of Expenses reimbursed by the Company as to which such
invoices or other evidence are not received.
(d) For purposes of this Agreement (i) "Material Adverse Effect"
means a material adverse effect on the business, assets, financial condition,
cash flow or results of operation of the Company and its subsidiaries,
considered on a consolidated basis, or a material adverse affect on the ability
of the Company, on the one hand, or Parent and Purchaser, on the other, to
consummate the transactions contemplated by this Agreement, provided, however,
that the Company's breach of its representation under Article IV that no more
than fifteen Real Property Leases require consents which have not been obtained
shall not be deemed to have such a Material Adverse Effect; and (ii) "Expenses"
shall mean out-of-pocket expenses incurred by Parent or the Purchaser or on
their behalf in connection with the Offer and the Merger and the consummation of
the transactions contemplated by this Agreement, (including, without limitation,
reasonable attorneys' fees and disbursements and other charges, solicitation
agent and depository fees and expenses, fees payable to the Lenders not paid by
the Company and accountants and filing fees and printing costs) up to a maximum
amount of $900,000.
ARTICLE X
MISCELLANEOUS
10.01 Survival of Representations, Warranties, Covenants and
Agreements. The representations, warranties and agreements of the parties
contained in Sections 2.06, 3.01, 3.02 (but only to the extent that such Section
expressly relates to actions to be taken after the Effective Time), 3.03, 3.04,
3.05, 4.21, 6.05, 6.08, 6.09, 6.10, 6.11 and Article X hereof, shall survive the
consummation of the Offer and the Merger. The agreements of the parties
contained in Sections 4.21, 5.07, 6.03(b), 9.02, 9.03 and Article X shall
survive any termination of this Agreement. If this Agreement shall terminate
after acceptance for payment by the Purchaser of Shares pursuant to the Offer,
but prior to the Effective Time, the agreement of the parties contained in
Sections 6.09, 6.10 and 6.11 shall also survive the termination of this
Agreement, and Parent shall, or shall cause the Purchaser to, cause Article
NINTH of the Certificate of Incorporation and Article VII of the Company's
By-laws to be amended as provided in Exhibit A and Exhibit B, respectively. All
other representations,
A-43
<PAGE> 130
warranties, agreements and covenants in this Agreement shall not survive the
consummation of the Offer and the Merger or the termination of this Agreement.
10.02 Amendment and Modification. Subject to Section 1.03(c), if
applicable, and subject to applicable law, this Agreement may be amended,
modified or supplemented only by written agreement of Parent (for itself and the
Purchaser) and the Company at any time prior to the Effective Time with respect
to any of the terms contained herein executed by duly authorized officers of the
respective parties, except that after the earlier of (a) the purchase by the
Purchaser of a majority of the Shares on a fully diluted basis, and (b) the
meeting of shareholders to approve the Merger contemplated by this Agreement,
the price per Share to be paid pursuant to this Agreement to the holders of
Shares shall in no event be decreased and the form of consideration to be
received by the holders of such Shares in the Merger shall in no event be
altered without the approval of such holders.
10.03 Waiver of Compliance; Consents. At any time prior to the
Effective Time, subject to Section 1.03(c) if applicable, the parties hereto may
extend the time for performance of any of the obligations or other acts or waive
any inaccuracies in the representations and warranties contained herein or in
the documents delivered pursuant hereto. Any failure of Parent (for itself and
the Purchaser), on the one hand, or the Company, on the other hand, to comply
with any obligation, covenant, agreement or condition herein may be waived in
writing by Parent (for itself and the Purchaser) or the Company, respectively,
but such waiver or failure to insist upon strict compliance with such
obligation, covenant, agreement or condition shall not operate as a waiver of or
estoppel with respect to any subsequent or other failure. Whenever this
Agreement requires or permits consent by or on behalf of any party hereto or any
extensions, such consent or extension shall be given in writing in a manner
consistent with the requirements for a waiver of compliance as set forth in this
Section 10.03.
10.04 Counterparts. This Agreement may be executed in any number of
counterparts each of which shall be deemed an original but all of which together
shall constitute one and the same instrument.
10.05 Governing Law; Submission to Jurisdiction. This Agreement
shall be governed by and construed in accordance with the laws of New York
without regard to its conflicts of laws rules. Each party hereto hereby (i)
irrevocably and unconditionally submits in any legal action or proceeding
relating to this Agreement, or for recognition and enforcement of any judgment
in respect thereof, to the general jurisdiction of the state and federal courts
in the state of New York, and appellate courts thereof and (ii) consents that
any action or proceeding may be brought in such courts and waives any objection
that it may now or hereafter have to the venue of any such action or proceeding
in any such court or that such action or proceeding was brought in an
inconvenient court and agrees not to plead or claim the same.
10.06 Notices. All notices and other communications hereunder shall
be in writing (except as otherwise specified in Section 6.08(b)) and shall be
deemed given if
A-44
<PAGE> 131
delivered personally, or mailed by registered or certified mail (return
receipt requested) or by overnight courier service or transmitted by facsimile
(effective upon confirmation of transmission) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) If to the Company, to:
Ground Round Restaurants, Inc.
35 Braintree Hill Office Park
P.O. Box 9078
Braintree MA 02184-9078
Attention: President
Fax: (617) 380-3100
with copies to:
Kane Kessler, P.C.
1350 Avenue of the Americas
26th Floor
New York, New York 10019
Attention: Jeffrey S. Tullman, Esq.
Fax: (212) 245-3009
(b) if to Parent or the Purchaser, to:
GRR Holdings, LLC
c/o Boston Ventures Management, Inc.
21 Custom House Street
Boston, MA 02110
Attention: Barbara M. Ginader
Fax: (617) 737-3709
with copies to:
Latham & Watkins
885 Third Avenue
New York, NY 10022
Attention: Erica H. Steinberger, Esq.
Fax: (212) 751-4864
10.07 Entire Agreement, Assignment Etc.. This Agreement, which
hereby incorporates the Company Disclosure Letter, and the Confidentiality
Agreement embodies the entire agreement and understanding of the parties hereto
in respect of the subject matter
A-45
<PAGE> 132
hereof. This Agreement supersedes all prior agreements and understanding of the
parties with respect to the subject matter hereof other than the Confidentiality
Agreement. This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and Permitted Assigns, but neither this Agreement nor any of the rights,
interest or obligations hereunder shall be assigned by any party hereto, except
that Parent shall have the right to assign the rights of the Purchaser to any
other (directly or indirectly) wholly-owned subsidiary of Parent (the "Permitted
Assigns").
10.08 Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
10.09 Headings; Certain Definitions. The Articles and Section
headings contained in this Agreement are solely for the purpose of reference,
are not part of the agreement of the parties and shall not affect in any way the
meaning or interpretation of this Agreement.
10.10 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement, other than Sections 2.03, 2.04, 6.09, 6.10 and 6.11 (each of which is
intended to be for the benefit of the persons covered thereby and may be
enforced by such persons).
[Signatures on the following page]
A-46
<PAGE> 133
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officers of the parties hereto as of the date
first above written.
GRR HOLDINGS, LLC
By: Boston Ventures Limited Partnership V,
its Managing Member
By: Boston Ventures Company V, L.L.C.,
its General Partner
By: /s/Barbara M. Ginader
-----------------------------------
Name: Barbara M. Ginader
Title: Managing Director
GRR MERGER CORP.
By: /s/Barbara M. Ginader
-----------------------------------
Name: Barbara M. Ginader
Title: President
GROUND ROUND RESTAURANTS, INC.
By: /s/Daniel R. Scoggin
-----------------------------------
Name: Daniel R. Scoggin
Title: Chairman, President
and Chief Executive Officer
A-47
<PAGE> 134
ANNEX A
The capitalized terms used herein have the meanings set forth in the
Agreement and Plan of Merger to which this Annex A is attached.
Notwithstanding any other provision of the Agreement and Plan of
Merger to which this Annex A is attached (the "Merger Agreement") or the Offer,
the Purchaser shall not be required to accept for payment, purchase or pay for
any Shares tendered pursuant to the Offer, may postpone the acceptance for
payment of and payment for any tendered Shares and may terminate or, subject to
the terms of the Merger Agreement, amend the Offer if (a) there shall not have
been validly tendered to the Purchaser (and not withdrawn) that number of Shares
which, when aggregated with the Contributed Shares, represents at least 90% of
the Shares outstanding (the "Minimum Condition"); or (b) on or after the date of
the Merger Agreement and at or before the time of acceptance for payment of any
such Shares (whether or not any Shares have theretofore been accepted for
payment or paid for pursuant to the Offer) any of the following shall occur
(each of paragraphs (i) through (ix) providing a separate and independent
condition to the Purchaser's obligation pursuant to the Offer):
(i) any waiting period applicable to the Offer and the
Merger pursuant to the HSR Act shall not have expired or been
terminated; or
(ii) there shall have been instituted or be pending any
action, proceeding, application, claim or counterclaim by any
government or governmental authority or agency, domestic or foreign,
before any court or governmental regulatory or administrative
agency, authority or tribunal, domestic or foreign (a "Claim"),
challenging the acquisition by Parent or the Purchaser of the
Shares, restraining or prohibiting the making or consummation of the
Offer or the Merger or seeking to obtain from Parent or the
Purchaser any damages that would result in a Material Adverse Effect
if such were assessed against the Company, restraining or
prohibiting, or limiting in any material respect, the ownership or
operation by Parent or the Purchaser of any material portion of the
business or assets of the Company or any of its subsidiaries or
seeking to compel Parent or the Purchaser to dispose of or forfeit
material incidents of control of all or any material portion of the
business or assets of the Company or any of its subsidiaries or
imposing limitations on the ability of Parent or the Purchaser of
effectively to exercise full rights of ownership of the Shares,
including, without limitation, the right to vote any Shares acquired
or owned by Parent or the Purchaser on all matters properly
presented to the Company's shareholders; or seeking to require
divestiture by Parent or the Purchaser of any Shares; or
(iii) there shall be any statute, rule, regulation, judgment,
order or injunction enacted, promulgated, entered, enforced or
deemed applicable to the Offer, the Merger or the Merger Agreement,
or any other action shall have been taken by any government,
governmental authority or court, domestic or foreign, other than
the routine application to the Offer or the Merger of waiting
periods
A-48
<PAGE> 135
under the HSR Act, and other than relating to the Liquor License
Approvals, which are addressed in paragraph (ix) below, that has,
or has a substantial likelihood of resulting in, any of the
consequences referred to in paragraph (ii) above; or
(iv) the Company shall have breached or failed to perform in
any material respect any of its material obligations, covenants or
agreements contained in the Merger Agreement, or any of the
representations and warranties of the Company set forth in the
Merger Agreement shall not have been true and correct in any
material respect when made or, except for any representations and
warranties made as of a specific date, shall have ceased to be true
and correct in any material respect (or, in the case of
representations and warranties that are specifically qualified as to
materiality, shall not have been true and correct when made or shall
have ceased to be true and correct) and if curable, the Company
shall have failed to cure such breach within three (3) Business Days
after written notice from Purchaser of such failure; or
(v) there shall have occurred (A) (1) any general suspension
of trading in, or limitation on prices for, securities on the New
York Stock Exchange, Inc., any other national securities exchange or
NASDAQ, (2) the declaration of a banking moratorium or any mandatory
suspension of payments in respect of banks in the United States (3)
the commencement of or escalation of a war, armed hostilities or
other international or national calamity directly or indirectly
involving the United States, (4) in the case of any of the foregoing
existing on August 29, 1997, a material acceleration or worsening
thereof, and (B) such occurrence has a Material Adverse Effect; or
(vi) the Merger Agreement shall have been terminated in
accordance with its terms; or
(vii) the Company's Board of Directors shall have withdrawn or
modified (including by amendment of the Schedule 14D-9) its approval
or recommendation of the Offer, the Merger Agreement or the Merger
or shall have approved or recommended any other tender or exchange
offer or other Acquisition Proposal, which, in the sole judgment of
Parent in any such case, and regardless of the circumstances
(including any action or omission by Parent) giving rise to such
condition, makes it inadvisable to proceed with such acceptance for
payment, except where as a result of the Company's receipt of an
unsolicited Acquisition Proposal from, or commencement of an
unsolicited tender or exchange offer by, a third party (A) the
Company issues to its shareholders a communication that contains
only the statements permitted by Rule 14d-9(e) under the Exchange
Act (and does not otherwise withdraw, modify or amend its approval
or recommendation of the Offer, the Merger or the Merger Agreement)
and (B) within five Business Days of issuing such communication the
Company
A-49
<PAGE> 136
publicly reconfirms its approval and recommendation of the Offer,
the Merger and the Merger Agreement; or
(viii) either (A) any change or development, outside of the
ordinary course of business consistent with past practice of the
Company, not disclosed in the Company Disclosure Letter shall have
occurred in the financial condition, assets, capitalization,
prospects, shareholders' equity, licenses, permits, business or
results of operations of the Company and its subsidiaries which in
the reasonable judgment of the Purchaser is or is likely,
individually or in the aggregate, to be materially adverse to the
Company or any of its subsidiaries taken as a whole, or the
Purchaser shall become aware of any fact (including, but not limited
to, any such change or development) which is likely to have
materially adverse significance with respect to the Company and its
subsidiaries taken as a whole; provided, however, that no change,
development or fact shall be deemed to be materially adverse for the
purpose of this clause (A) unless, individually or when combined
with all other changes, developments or facts, it is, in the
reasonable judgment of the Purchaser, likely to result in losses
(after taking into account any amounts recovered or insurance
proceeds receivable by the Company in compensation for such losses)
in excess of $4,500,000, or (B) the average gross sales of the
Company as reported by the Company in any 21 day period after the
date of the Merger Agreement shall be less than $3,000,000 per week;
or
(ix) (A) the Company and/or the Purchaser shall not have
obtained (1) any Liquor License Approval required to be obtained
prior to Parent's and the Purchaser's obtaining control of the
Company through the Purchaser's acceptance for payment of Shares
pursuant to the Offer (or Parent and the Purchaser shall not have
made arrangements reasonably satisfactory to them to allow any
Liquor License subject to any such Liquor License Approval to
continue in full force and effect following consummation of the
Offer and the Merger pending receipt of such Liquor License
Approval), other than any Liquor License Approvals with respect to
Liquor Licenses that, individually or in the aggregate, cover
restaurant operations (I) generating, individually or in the
aggregate, for the three months ended June 30, 1997, average weekly
gross food and beverage revenues of less than $300,000 and (II) with
average profit after controllables in any 21 day period after the
date of the Merger Agreement which, when deducted from the average
profit after controllables of the Company in the same 21 day period,
would not result in such average profit after controllables of the
Company totaling less than $540,000 per week, or (2) any consent or
approval which is legally required to be obtained prior to
consummation of the Offer and the Merger and was not disclosed in
the Company Disclosure Letter which, if not obtained, would,
individually or in the aggregate, have a Material Adverse Effect, or
(B) Parent and the Purchaser shall not have obtained continuing
assurances from the appropriate authority in any of the
Commonwealth of Massachusetts, State of New York or State of Ohio,
or otherwise made arrangements with such authority,
A-50
<PAGE> 137
satisfactory to Parent and the Purchaser in their sole discretion,
that there is no legal impediment to their obtaining control of
the Company under such Commonwealth's or State's tied-house
statute (see Section 16 of the Offer to Purchase).
The foregoing conditions are for the sole benefit of the Purchaser
and may be asserted by the Purchaser regardless of the circumstances (including
any action or inaction by Parent or the Purchaser) giving rise to any such
condition and may be waived by the Purchaser, in whole or in part in its sole
discretion. The failure by the Purchaser at any time to exercise any of the
foregoing rights shall not be deemed a waiver of any such right, the waiver of
such right with respect to any particular facts or circumstances shall not be
deemed a waiver with respect to any other facts or circumstances, and each such
right will be deemed an ongoing right which may be asserted at any time and from
time to time.
A-51
<PAGE> 138
APPENDIX B
[Rothschild Inc. Letterhead]
Board of Directors
Ground Round Restaurants, Inc.
35 Braintree Hill Office Park
Braintree, Massachusetts 02184
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to the common shareholders of Ground Round Restaurants, Inc., a New
York corporation (the "Company"), of the consideration to be received by such
holders pursuant to the Agreement and Plan of Merger dated August 29, 1997 (the
"Merger Agreement") by and among the Company, GRR Merger Corp., a New York
corporation ("Purchaser"), and GRR Holdings, LLC, a Delaware limited liability
company ("Parent"). Pursuant to the Merger Agreement, Parent will cause
Purchaser to make a tender offer (the "Offer") to purchase for $1.65 per share
net in cash all of the issued and outstanding shares of common stock (the
"Common Stock") of the Company, par value $.16 2/3 per share. Upon completion of
the Offer, Parent is to cause Purchaser to merge with and into the Company (the
"Merger") and each outstanding share of common stock of the Company not
purchased pursuant to the Offer shall be converted into a right to receive $1.65
net in cash pursuant to the Merger.
In formulating our opinion, we have, among other things: (i) reviewed
certain publicly available financial and other data with respect to the Company,
including (a) the consolidated financial statements for the 1994, 1995 and 1996
fiscal years and interim periods to March 30, 1997 and (b) the June 29, 1997
quarterly report on form 10-Q, in draft form, and certain other financial and
operating data relating to the Company made available to us from published
sources and from the internal records of the Company; (ii) reviewed the Merger
Agreement; (iii) reviewed current and historical market prices and trading
volumes of the Common Stock and the capitalization and financial condition of
the Company; (iv) compared the Company, from a financial point of view, with
certain other companies in the restaurant industry; (v) considered the financial
terms, to the extent publicly available, of selected recent business
combinations of companies in the restaurant industry which we deemed to be
comparable, in whole or in part, to the Offer and the Merger; (vi) reviewed and
discussed with directors and management of the Company certain information of a
business and financial nature regarding the Company, furnished to us by the
Company, including financial forecasts and related assumptions of the Company;
(vii) reviewed and discussed with management historical and forecasted capital
expenditure requirements for both maintenance and remodelling/operational
improvement purposes; (viii) reviewed and discussed with management the existing
Credit Agreement (as amended) which has been extended to December 31, 1997 and
future refinancing and financing opportunities; (ix) made inquiries regarding
and discussed the Offer and the Merger Agreement and other matters related
thereto with the Company's counsel; and (x) performed such other analyses and
examinations and considered such other financial, economic and market criteria
as we deemed relevant and appropriate.
In connection with this review, we have not assumed any obligation
independently to verify any information utilized, reviewed or considered by us
in formulating our Opinion and have relied on its being accurate and complete in
all material respects. With respect to the financial forecasts for the Company
provided to us, we have assumed for purposes of our opinion that the forecasts
have been reasonably prepared on bases reflecting the best available estimates
and judgments of the Company's management at the time of preparation as to the
future financial performance of the Company. We have also assumed that there has
not
B-1
<PAGE> 139
occurred any material change in the Company's assets, financial condition,
results of operations, business or prospects since the respective dates on which
the Company's most recent financial statements were made available to us. We
have relied on advice of counsel and independent accountants to the Company as
to all legal and financial reporting matters with respect to the Company, the
Offer and the Merger Agreement. In addition, we have not assumed responsibility
for making an independent evaluation, appraisal or physical inspection of any of
the assets or liabilities (contingent or otherwise) of the Company, nor have we
been furnished with any such appraisal. Our opinion is based on economic,
monetary and market and other conditions as in effect on, and the information
made available to us as of, the date hereof. Accordingly, although subsequent
developments may affect this opinion, we have not assumed any obligations to
update, revise or reaffirm this opinion.
We have further assumed that the Offer will be consummated in accordance
with the terms described in the Merger Agreement without waiver by the Company
of any of the conditions to its obligations thereunder.
We have not acted as financial advisor to the Company in connection with
the Offer or the Merger. We have been retained to render this opinion and are
being compensated therefor.
This opinion is directed to the Board of Directors of the Company in its
consideration of the fairness of the Offer and the Merger to the Company's
shareholders, from a financial point of view, and does not constitute a
recommendation to any shareholder of the Company as to how such shareholders
should vote with respect to the Merger at any shareholders meeting called to
approve such Merger or as to whether or not such shareholder should tender his
or her shares pursuant to the Offer.
Based upon the foregoing and other factors we deem relevant and in reliance
thereon, it is our opinion that as of the date hereof the consideration to be
received by the shareholders of the Company pursuant to the Offer and the Merger
is fair, from a financial point of view, to the shareholders of the Company.
Very truly yours,
Rothschild Inc.
B-2
<PAGE> 140
APPENDIX C
SEC. 623. PROCEDURE TO ENFORCE SHAREHOLDER'S RIGHT TO RECEIVE PAYMENT FOR
SHARES. (a) A shareholder intending to enforce his right under a section of
this chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the meeting
of shareholders at which the action is submitted to a vote, or at such meeting
but before the vote, written objection to the action. The objection shall
include a notice of his election to dissent, his name and residence address, the
number and classes of shares as to which he dissents and a demand for payment of
the fair value of his shares if the action is taken. Such objection is not
required from any shareholder to whom the corporation did not give notice of
such meeting in accordance with this chapter or where the proposed action is
authorized by written consent of shareholders without a meeting.
(b) Within ten days after the shareholders' authorization date, which term
as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall give
written notice of such authorization or consent by registered mail to each
shareholder who filed written objection or from whom written objection was not
required, excepting any shareholder who voted for or consented in writing to the
proposed action and who thereby is deemed to have elected not to enforce his
right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any shareholder
from whom written objection was not required and who elects to dissent shall
file with the corporation a written notice of such election, stating his name
and residence address, the number and classes of shares as to which he dissents
and a demand for payment of the fair value of his shares. Any shareholder who
elects to dissent from a merger under section 905 (Merger of subsidiary
corporation) or paragraph (c) of section 907 (Merger or consolidation of
domestic and foreign corporations) or from a share exchange under paragraph (g)
of section 913 (Share exchanges) shall file a written notice of such election to
dissent within twenty days after the giving to him of a copy of the plan of
merger or exchange or an outline of the material features thereof under section
905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to
which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial
owner as to less than all of the shares of such owner, as to which such nominee
or fiduciary has a right to dissent, held of record by such nominee or
fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall cease
to have any of the rights of a shareholder except the right to be paid the fair
value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
provided in paragraph (g), the time for withdrawing a notice of election shall
be extended until sixty days from the date an offer is made. Upon expiration of
such time, withdrawal of a notice of election shall require the written consent
of the corporation. In order to be effective, withdrawal of a notice of election
must be accompanied by the return to the corporation of any advance payment made
to the shareholder as provided in paragraph (g). If a notice of election is
withdrawn, or the corporate action is rescinded, or a court shall determine that
the shareholder is not entitled to receive payment for his shares, or the
shareholder shall otherwise lose his dissenter's rights, he shall not have the
right to receive payment for his shares and he shall be reinstated to all his
rights as a shareholder as of the consummation of the corporate action,
including any intervening preemptive rights and the right to payment of any
intervening dividend or other distribution or, if any such rights have expired
or any such dividend or distribution other than in cash has been completed, in
lieu thereof, at the election of the corporation, the fair value thereof in cash
as determined by the board as of the time of such expiration or completion, but
without prejudice otherwise to any corporate proceedings that may have been
taken in the interim.
(f) At the time of filing the notice of election to dissent or within one
month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and
C-1
<PAGE> 141
shall return the certificates to the shareholder or other person who submitted
them on his behalf. Any shareholder of shares represented by certificates who
fails to submit his certificates for such notation as herein specified shall, at
the option of the corporation exercised by written notice to him within
forty-five days from the date of filing of such notice of election to dissent,
lose his dissenter's rights unless a court, for good cause shown, shall
otherwise direct. Upon transfer of a certificate bearing such notation, each new
certificate issued therefor shall bear a similar notation together with the name
of the original dissenting holder of the shares and a transferee shall acquire
no rights in the corporation except those which the original dissenting
shareholder had at the time of transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later (but
in no case later than ninety days from the shareholders' authorization date),
the corporation or, in the case of a merger or consolidation, the surviving or
new corporation, shall make a written offer by registered mail to each
shareholder who has filed such notice of election to pay for his shares at a
specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement setting forth the aggregate number of
shares with respect to which notices of election to dissent have been received
and the aggregate number of holders of such shares. If the corporate action has
been consummated, such offer shall also be accompanied by (1) advance payment to
each such shareholder who has submitted the certificates representing his shares
to the corporation, as provided in paragraph (f), of an amount equal to eighty
percent of the amount of such offer, or (2) as to each shareholder who has not
yet submitted his certificates a statement that advance payment to him of an
amount equal to eighty percent of the amount of such offer will be made by the
corporation promptly upon submission of his certificates. If the corporate
action has not been consummated at the time of the making of the offer, such
advance payment or statement as to advance payment shall be sent to each
shareholder entitled thereto forthwith upon consummation of the corporate
action. Every advance payment or statement as to advance payment shall include
advice to the shareholder to the effect that acceptance of such payment does not
constitute a waiver of any dissenters' rights. If the corporate action has not
been consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than a
twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence.
Notwithstanding the foregoing, the corporation shall not be required to
furnish a balance sheet or profit and loss statement or statements to any
shareholder to whom such balance sheet or profit and loss statement or
statements were previously furnished, nor if in connection with obtaining the
shareholders' authorization for or consent to the proposed corporate action the
shareholders were furnished with a proxy or information statement, which
included financial statements, pursuant to Regulation 14A or Regulation 14C of
the United States Securities and Exchange Commission. If within thirty days
after the making of such offer, the corporation making the offer and any
shareholder agree upon the price to be paid for his shares, payment therefor
shall be made within sixty days after the making of such offer or the
consummation of the proposed corporate action, whichever is later, upon the
surrender of the certificates for any such shares represented by certificates.
(h) The following procedure shall apply if the corporation fails to make
such offer within such period of fifteen days, or if it makes the offer and any
dissenting shareholder or shareholders fail to agree with it within the period
of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the expiration of
whichever is applicable of the two periods last mentioned, institute a
special proceeding in the supreme court in the judicial district in which
the office of the corporation is located to determine the rights of
dissenting shareholders and to fix the fair value of their shares. If, in
the case of merger or consolidation, the surviving or new corporation is
C-2
<PAGE> 142
a foreign corporation without an office in this state, such proceeding
shall be brought in the county where the office of the domestic
corporation, whose shares are to be valued, was located.
(2) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting shareholder may institute such
proceeding for the same purpose not later than thirty days after the
expiration of such twenty day period. If such proceeding is not instituted
within such thirty day period, all dissenter's rights shall be lost unless
the supreme court, for good cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be paid
for their shares, shall be made parties to such proceeding, which shall
have the effect of an action quasi in rem against their shares. The
corporation shall serve a copy of the petition in such proceeding upon each
dissenting shareholder who is a resident of this state in the manner
provided by law for the service of a summons, and upon each nonresident
dissenting shareholder either by registered mail and publication, or in
such other manner as is permitted by law. The jurisdiction of the court
shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as
to whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation does not
request any such determination or if the court finds that any dissenting
shareholder is so entitled, it shall proceed to fix the value of the
shares, which, for the purposes of this section, shall be the fair value as
of the close of business on the day prior to the shareholders'
authorization date. In fixing the fair value of the shares, the court shall
consider the nature of the transaction giving rise to the shareholder's
right to receive payment for shares and its effects on the corporation and
its shareholders, the concepts and methods then customary in the relevant
securities and financial markets for determining fair value of shares of a
corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the
fair value of the shares without a jury and without referral to an
appraiser or referee. Upon application by the corporation or by any
shareholder who is a party to the proceeding, the court may, in its
discretion, permit pretrial disclosure, including, but not limited to,
disclosure of any expert's reports relating to the fair value of the shares
whether or not intended for use at the trial in the proceeding and
notwithstanding subdivision (d) of section 3101 of the civil practice law
and rules.
(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so
determined.
(6) The final order shall include an allowance for interest at such
rate as the court finds to be equitable, from the date the corporate action
was consummated to the date of payment. In determining the rate of
interest, the court shall consider all relevant factors, including the rate
of interest which the corporation would have had to pay to borrow money
during the pendency of the proceeding. If the court finds that the refusal
of any shareholder to accept the corporate offer of payment for his shares
was arbitrary, vexatious or otherwise not in good faith, no interest shall
be allowed to him.
(7) Each party to such proceeding shall bear its own costs and
expenses, including the fees and expenses of its counsel and of any experts
employed by it. Notwithstanding the foregoing, the court may, in its
discretion, apportion and assess all or any part of the costs, expenses and
fees incurred by the corporation against any or all of the dissenting
shareholders who are parties to the proceeding, including any who have
withdrawn their notices of election as provided in paragraph (e), if the
court finds that their refusal to accept the corporate offer was arbitrary,
vexatious or otherwise not in good faith. The court may, in its discretion,
apportion and assess all or any part of the costs, expenses and fees
incurred by any or all of the dissenting shareholders who are parties to
the proceeding against the corporation if the court finds any of the
following: (A) that the fair value of the shares as determined materially
exceeds the amount which the corporation offered to pay; (B) that no offer
or required advance payment was made by the corporation; (C) that the
corporation failed to institute the special proceeding within the period
specified therefor; or (D) that the action of the corporation in complying
with its obligations as provided
C-3
<PAGE> 143
in this section was arbitrary, vexatious or otherwise not in good faith. In
making any determination as provided in clause (A), the court may consider
the dollar amount or the percentage, or both, by which the fair value of
the shares as determined exceeds the corporate offer.
(8) Within sixty days after final determination of the proceeding, the
corporation shall pay to each dissenting shareholder the amount found to be
due him, upon surrender of the certificates for any such shares represented
by certificates.
(i) Shares acquired by the corporation upon the payment of the agreed value
therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be canceled as provided in section 515
(Reacquired shares), except that, in the case of a merger or consolidation, they
may be held and disposed of as the plan of merger or consolidation may otherwise
provide.
(j) No payment shall be made to a dissenting shareholder under this section
at a time when the corporation is insolvent or when such payment would make it
insolvent. In such event, the dissenting shareholder shall, at his option:
(1) Withdraw his notice of election, which shall in such event be
deemed withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if it
is liquidated, be subordinated to the rights of creditors of the
corporation, but have rights superior to the non-dissenting shareholders,
and if it is not liquidated, retain his right to be paid for his shares,
which right the corporation shall be obliged to satisfy when the
restrictions of this paragraph do not apply.
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation within
thirty days after the corporation has given him written notice that payment
for his shares cannot be made because of the restrictions of this
paragraph. If the dissenting shareholder fails to exercise such option as
provided, the corporation shall exercise the option by written notice given
to him within twenty days after the expiration of such period of thirty
days.
(k) The enforcement by a shareholder of his right to receive payment for
his shares in the manner provided herein shall exclude the enforcement by such
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in paragraph (e), and except that this
section shall not exclude the right of such shareholder to bring or maintain an
appropriate action to obtain relief on the ground that such corporate action
will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section, any notice to
be given by a corporation to a shareholder under this section shall be given in
the manner provided in section 605 (Notice of meetings of shareholders).
(m) This section shall not apply to foreign corporations except as provided
in subparagraph (e)(2) of section 907 (Merger or consolidation of domestic and
foreign corporations). (Last amended by Ch. 117 L. 86, eff. 9-1-86.)
SEC. 910. RIGHT OF SHAREHOLDER TO RECEIVE PAYMENT FOR SHARES UPON MERGER
OR CONSOLIDATION, OR SALE, LEASE, EXCHANGE OR OTHER DISPOSITION OF ASSETS, OR
SHARE EXCHANGE. (a) A shareholder of a domestic corporation shall, subject to
and by complying with section 623 (Procedure to enforce shareholder's right to
receive payment for shares), have the right to receive payment of the fair value
of his shares and the other rights and benefits provided by such section, in the
following cases:
(1) Any shareholder entitled to vote who does not assent to the taking
of an action specified in subparagraphs (A), (B) and (C).
C-4
<PAGE> 144
(A) Any plan of merger or consolidation to which the corporation is
a party; except that the right to receive payment of the fair value of
his shares shall not be available:
(i) To a shareholder of the parent corporation in a merger
authorized by section 905 (Merger of parent and subsidiary
corporations), or paragraph (c) of section 907 (Merger or
consolidation of domestic and foreign corporations); and
(ii) To a shareholder of the surviving corporation in a merger
authorized by this article, other than a merger specified in
subparagraph (i), unless such merger effects one or more of the
changes specified in subparagraph (b)(6) of section 806 (Provisions
as to certain proceedings) in the rights of the shares held by such
shareholder.
(B) Any sale, lease, exchange or other disposition of all or
substantially all of the assets of a corporation which requires
shareholder approval under section 909 (Sale, lease, exchange or other
disposition of assets) other than a transaction wholly for cash where
the shareholders' approval thereof is conditioned upon the dissolution
of the corporation and the distribution of substantially all of its net
assets to the shareholders in accordance with their respective interests
within one year after the date of such transaction.
(C) Any share exchange authorized by section 913 in which the
corporation is participating as a subject corporation; except that the
right to receive payment of the fair value of his shares shall not be
available to a shareholder whose shares have not been acquired in the
exchange.
(2) Any shareholder of the subsidiary corporation in a merger
authorized by section 905 or paragraph (c) of section 907, or in a share
exchange authorized by paragraph (g) of section 913, who files with the
corporation a written notice of election to dissent as provided in
paragraph (c) of section 623. (Last amended by Ch. 390, L. '91, eff.
7-15-91 .)
C-5
<PAGE> 145
Any questions or requests for assistance in completing and submitting proxy
cards, or for additional copies of this Proxy Statement and the proxy card, may
be directed to the Information Agent at its telephone numbers and address listed
below.
[MACKENZIE PARTNERS, INC. LOGO]
156 Fifth Avenue
New York, New York 10010
(212) 929-5500 (call collect)
or
Call Toll Free: (800) 322-2885
<PAGE> 146
GROUND ROUND RESTAURANTS, INC.
SPECIAL MEETING OF SHAREHOLDERS
The undersigned shareholder hereby appoints Thomas J. Russo and Mark J. Lawless,
and each of them, as proxies, each with full power of substitution, to vote as
designated on the other side of this card, all shares of common stock of Ground
Round Restaurants, Inc. (the "Company"), held of record as of November 10, 1997,
which the undersigned would be entitled to vote if personally present at the
Special Meeting of Shareholders to be held on December 2, 1997, at 10:00 a.m.,
local time, at the Ground Round Restaurant located at Prudential Ct., 800
Boylston Street, Boston, Massachusetts, and at any and all adjournments or
postponements thereof, as indicated below. The undersigned hereby revokes any
previous proxies with respect to matters covered by this Proxy.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
SEE REVERSE
SIDE
<PAGE> 147
[ x ] PLEASE MARK YOUR VOTES AS IN THIS
EXAMPLE
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C> <C>
This Proxy, when properly executed, will 1. To approve and adopt the Agreement and Plan [ ] [ ] [ ]
be voted in the manner marked by the of Merger dated as of August 29, 1997, among
undersigned shareholder. IF NO MARKING GRR Holdings, LLC, GRR Merger Corp. and the
IS MADE, THIS PROXY WILL BE DEEMED TO BE Company, and the Merger of GRR Merger Corp.
A DIRECTION TO VOTE FOR PROPOSAL 1 and with and into the Company, with the Company
in such proxies' discretion upon such continuing as the surviving corporation, as
other business as may properly come provided for therein. A copy of the
before the Meeting or any and all Agreement and Plan of Agreement is included
adjournments and postponements thereof. as Appendix A to the Proxy Statement for the
THIS PROXY IS SOLICITED ON BEHALF OF THE Meeting.
BOARD OF DIRECTORS OF THE COMPANY.
2. In the discretion of the proxies upon such [ ] [ ] [ ]
other business as may properly come before
the Meeting or any and all adjournments or
postponements thereof.
PLEASE MARK, DATE, SIGN AND MAIL PROMPTLY
</TABLE>
SIGNATURE(S) __________________________________________ Dated ____________ ,1997
When shares are held by joint tenants, both should sign. When signing as an
attorney, executor, administrator, trustee or guardian, corporate officer or
partner, please give your full title as such. If a corporation, please sign in
the full corporate name by a duly authorized officer.
