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Filed pursuant to rule 424(b)(1)
Registration No. 333-20227
4,736,900 SHARES OF COMMON STOCK,
PAR VALUE $.16 2/3 PER SHARE
GROUND ROUND RESTAURANTS, INC.
This Prospectus relates to the registration of up to 4,736,900 shares (the
"Shares") of Common Stock, par value $.16 2/3 per share (the "Common Stock"), of
Ground Round Restaurants, Inc., a New York corporation (the "Company"), which
includes the registration of up to 501,500 shares (the "Conversion Shares") of
Common Stock issuable upon conversion of certain Convertible Notes (as
hereinafter defined), that may be offered for sale from time to time for the
account of certain shareholders of the Company listed as selling shareholders
under the caption "Selling Shareholders" appearing hereinafter (the "Selling
Shareholders"). The Convertible Notes were issued by the Company on September
12, 1996 in transactions exempt from the Registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"). The Company will not
receive any of the proceeds from the sale of the Shares. See "Selling
Shareholders." The Company's Common Stock is traded on the NASDAQ National
Market System ("NASDAQ") under the symbol "GRXR". On April 10, 1997, the last
reported sale price of the Common Stock on NASDAQ was $1 1/2 per share.
The distribution of Shares of Common Stock by the Selling Shareholders may
be effected from time to time in one or more transactions (which may involve
block transactions) in the over-the-counter market, on the NASDAQ National
Market System, or on any exchange on which the Common Stock may then be listed,
in negotiated transactions, through the writing of options on shares (whether
such options are listed on an options exchange or otherwise), or a combination
of such methods of sale, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices, or at negotiated prices. The
Selling Shareholders may effect such transactions by selling Shares to or
through broker-dealers, and such broker-dealers may receive compensation in the
form of underwriting discounts, concessions or commissions from the Selling
Shareholders and/or purchasers of shares for whom they may act as agent (which
compensation may be in excess of customary commissions). The Selling
Shareholders also may pledge shares as collateral for margin accounts and such
shares could be resold pursuant to the terms of such accounts. See "Selling
Shareholders."
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. FOR A DISCUSSION OF CERTAIN
MATERIAL RISKS TO BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE SHARES
OFFERED HEREBY. SEE "RISK FACTORS", WHICH BEGINS ON PAGE 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is April 21, 1997.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith is required to file periodic reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information filed by the Company can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, as well
as the Regional Offices of the Commission at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite
1300, New York, New York 10048. Copies of such materials can be obtained upon
written request from the Public Reference Section of the Commission at its
principal office at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 at
prescribed rates. The Commission maintains a Web Site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission and the address of such site is:
(http://www.sec.gov). In addition, similar information can be inspected at the
NASDAQ National Market, 1735 K. Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus constitutes a part of the Registration
Statement but does not contain all of the information set forth in the
Registration Statement, certain parts of which have been omitted in accordance
with the rules and regulations of the Commission. For further information,
reference is hereby made to the Registration Statement. Each statement made in
this Prospectus concerning a document filed as part of the Registration
Statement is qualified in its entirety by reference to such document for a
complete statement of its provisions. The Registration Statement may be
inspected without charge at the offices of the Commission or copies thereof
obtained at prescribed rates from the Public Reference Section of the
Commission, at the addresses set forth above.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission pursuant to the Exchange
Act are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the year ended September
29, 1996, as amended by the Annual Report on Form 10-K/A filed with the
Commission on or about January 24, 1997 and further amended by the
Annual Report on Form 10-K/A (Amendment No. 2) filed with the Commission
on or about March 17, 1997;
2. Quarterly Report on Form 10-Q for the quarter ended December 31, 1995;
3. Quarterly Report on Form 10-Q for the quarter ended March 31, 1996;
4. Quarterly Report on Form 10-Q for the quarter ended June 30, 1996;
5. Quarterly Report on Form 10-Q for the quarter ended December 29, 1996;
6. Current Report on Form 8-K, dated June 28, 1996;
7. Current Report on Form 8-K, dated October 11, 1996;
8. Proxy Statement dated December 20, 1995, relating to the Special Meeting
of Shareholders held on January 23, 1996;
9. Proxy Statement dated March 20, 1997, relating to the Special Meeting of
Shareholders to be held on April 16, 1997; and
10. The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A.
All reports and other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Shares shall be
deemed to be incorporated by reference in this Prospectus and shall be deemed to
be a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated herein by
reference, or contained in this Prospectus, shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document that is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed to
constitute a part of this Prospectus except as so modified or superseded.
The Company will provide, without charge to each person, including any
beneficial owner of the Shares, to whom a copy of this Prospectus is delivered,
upon the written request of any such person, a copy of any or all of the
documents which are incorporated herein by reference. Written requests for such
copies should be directed to the Company's Corporate Secretary at c/o Ground
Round Restaurants, Inc., 35 Braintree Hill Office Park, Braintree, Massachusetts
02184, telephone number (617) 380-3100.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in the Prospectus or incorporated by reference
herein. As used in the Prospectus, unless otherwise indicated or the context
otherwise requires, the term the "Company" or "Ground Round" refers to Ground
Round Restaurants, Inc. and its consolidated subsidiaries.
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. As of April 10,
1997, there were 165 restaurants system-wide, 124 of which were Company-operated
and 46 restaurants with franchise agreements (of which 41 are presently
operating).
The Company's fiscal year ended September 29, 1996 and fiscal quarter ended
December 29, 1996 were marked by continuing operating losses and the following
three significant events: (i) the introduction of a new menu (ii) restructuring
the Company's principal credit facility; and (iii) contracting for the sale of
restaurants.
The Menu. In December 1995, the Company introduced a new menu 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 has designed a new
childrens menu with eight offerings and includes a drawing slate which the child
can take home. All Ground Round restaurants serve alcoholic beverages, including
a wide selection of imported, domestic and draft beers, wines and specialty
drinks. In fiscal 1996, the average guest check in Company-operated restaurants
was approximately $9.02 (including alcoholic beverages). Alcoholic beverages
have accounted for approximately 20% of restaurant revenue during the last three
years.
Restructuring of the Credit Facility. On September 12, 1996, the Company
restructured its existing credit facility by entering into the Amended and
Restated Credit Agreement ("the Amended Credit Agreement"), among its
subsidiaries, The Ground Round, Inc., and GR of Minn., Inc. (collectively, the
"Borrowers"), 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 (collectively, the "Lenders") which, among other things, provided for
(i) continuation of the Company's credit facility in the amount of
$53,175,163.51, including a term loan in the aggregate principal outstanding
amount of $48,484,745.09 and a letter of credit obligation of $4,690,418.42,
(ii) a final maturity of such obligations on May 31, 1997, subject to automatic
extension to December 31, 1997 if $10,846,000 of the principal amount of such
credit facility is prepaid prior to May 31, 1997 (which amount has been repaid
as of the date hereof) and the absence of any event of default under the Amended
Credit Agreement on such date, and (iii) the Company to retain approximately
$2.8 million out of the first approximately $13.8 million in proceeds from the
sale of certain assets subsequent to April 30, 1996.
Interest on the restructured facility is 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. In connection with the Amended Credit Agreement, the
Company agreed to pay the Lenders a restructuring fee equal to 5% of the amount
of the restructured facility subject to reduction to 2.5% upon repayment of
approximately $10.4 million of the principal amount of the restructured facility
prior to March, 16, 1997. The Company's obligation
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to pay this restructuring fee is evidenced by a series of Convertible Notes.
Prior to the date hereof, the Company has repaid $10.4 million of the
outstanding principal balance thereby reducing the amount of the restructuring
fee to 2.5% of the amount of restructured facility, or approximately $1.36
million. At the option of the Lenders, the Convertible Notes evidencing the
amount of such restructuring fee are convertible into an aggregate of
approximately 501,500 shares of the Company's Common Stock after May 1, 1997 at
a price of approximately $2.71 per share. See "BUSINESS -- Description of the
Credit Facility."
Sale of Restaurants. On October 11, 1996, The Ground Round, Inc. ("GRI"),
a wholly owned subsidiary of the Company, completed the sale to Lone Star
Steakhouse and Saloon, Inc. ("Lone Star") of nine restaurants (the
"Restaurants") for an aggregate purchase price of approximately $9.9 million
dollars in cash pursuant to the terms of a Contract of Sale (the "Contract of
Sale") dated June 28, 1996 between GRI and Lone Star. The Company applied
substantially all of such proceeds to reduce outstanding indebtedness under the
Amended Credit Agreement.
Pursuant to the Contract of Sale, Lone Star had agreed to purchase up to 16
restaurants for an aggregate purchase price of $16 million dollars in cash.
Pursuant to a modification to the Contract of Sale ("Modification of Contract")
dated October 11, 1996, GRI and Lone Star agreed that, in addition to the nine
restaurants purchased at the closing, Lone Star would purchase up to four more
of the original 16 restaurants described in the Contract of Sale no later than
January 6, 1997 subject to the satisfaction of certain conditions as of December
1996. Of the four remaining restaurants, Lone Star has purchased three more
restaurants for approximately $2.1 million in cash in November and December,
1996 and January, 1997 and has elected not to purchase one. The Company applied
substantially all of such additional proceeds to further reduce outstanding
indebtedness under the Amended Credit Agreement. See "BUSINESS -- Sale of
Restaurants."
An investment in the Shares is subject to various risks. See "RISK
FACTORS."
The Company's principal executive offices are located at 35 Braintree Hill
Office Park, Braintree, Massachusetts 02184. Its telephone number is (617)
380-3100.
THE OFFERING
SECURITIES OFFERED:
Common Stock outstanding at April
10, 1997(1)(2)...................... 11,173,319 shares
Shares being offered(3)............. 4,736,900 shares
Common Stock to be outstanding after
the Offering(1)(3).................. 11,674,819 shares
Use of Proceeds..................... The Company will not realize any
proceeds from the
sale of the Shares offered hereby.
NASDAQ Common Stock Symbol.......... "GRXR"
Risk Factors........................ The purchaser of shares is subject to
various risks.
Prospective purchasers of the common
stock offered
hereby should consider carefully the
matters set forth
under the caption "Risk Factors."
- ---------------
(1) Excludes up to 763,000 shares of Common Stock reserved for issuance under
the Company's 1989 Stock Option Plan, as amended, and the 1992 Equity
Incentive Plan (collectively, the "Plans"). As of April 10, 1997, options to
purchase 433,870 shares of Common Stock are outstanding under the Plans. See
"RISK FACTORS -- Dilution; Substantial Options and Convertible Notes."
(2) Does not give effect to 501,500 Conversion Shares. Such 501,500 shares are
being registered for resale by the Selling Shareholders under this
Prospectus. See "RISK FACTORS -- Dilution; Substantial Options and
Convertible Notes." and "SELLING SHAREHOLDERS."
(3) Gives effect to 501,500 Conversion Shares.
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RISK FACTORS
The securities offered in this Prospectus involves a high degree of risk
and should not be made by persons who cannot afford the loss of their entire
investment. Accordingly, prospective investors should consider carefully the
following factors, in addition to the other information concerning the Company
and its business included or incorporated by reference in this Prospectus.
DECREASE IN NET SALES AND INCOME; HISTORY OF LOSSES FROM OPERATIONS; CAPITAL
REQUIREMENTS AND CREDIT FACILITY
Comparable restaurant revenue of the Company, comprised of revenue from
restaurants open during all of fiscal 1996 and 1995, decreased in fiscal 1996 by
.9% to $206.4 million from the comparable fiscal 1995 52-week period. Comparable
restaurant revenue in fiscal 1995 decreased by 5.3% for the comparable fiscal
1994 52-week period. In addition, the Company reported a net loss of $(22.9)
million in fiscal 1996, compared to a net loss of $(5.7) million in fiscal 1995
and net income of $6.2 million in fiscal 1994. The Company also reported a net
loss of $(.8) million in the first quarter of fiscal 1997, compared to a net
loss of $(3.0) million in the first quarter of fiscal 1996. There can be no
assurance that the Company's future results will improve or that the Company
will be able to return to profitability, and failure to do so could have
material adverse effect on the Company.
Accordingly, the Company anticipates that it will have a continuing need
for additional capital and cash flow to accomplish its goals and to continue its
operations. There can be no assurance that the Company will generate sufficient
funds from operations in the future or from the sale of restaurants or that
additional capital will be available or available on terms acceptable to the
Company. In addition, any future additional capital transactions, if available,
could result in substantial dilution to the Company's then existing
shareholders. If the Company's operations are unable to generate positive cash
flows and adequate funds are not otherwise available to fund the Company's
activities in 1997, the Company may be required to close or sell additional
restaurants or substantially curtail or cease substantially all of its
activities, which would have a material adverse effect on the Company.
In addition, the Company has obtained several waivers from the Lenders
under its credit facility over the past three years, relating to the failure by
the Borrowers' to observe certain financial covenants contained therein.
Pursuant to the terms of the Amended Credit Agreement, the Company is required
to comply with certain financial covenants and to maintain, among other things,
(i) a cumulative net income before interest, taxes, depreciation and
amortization ("EBITDA"), as well as, a consolidated net worth of the Company for
each monthly period through December 1997, in an amount specified in the Amended
Credit Agreement. There can be no assurance that the Company will be able to
continue to observe said financial or other covenants and other terms under the
Amended Credit Agreement, or that the Lenders will grant further waivers with
respect to any such non-compliance. Upon an event of default, the Lenders may
declare all amounts outstanding under the Amended Credit Agreement to be due and
payable to the Lenders. In addition, the Amended Credit Agreement will expire on
May 31, 1997, unless automatically extended pursuant to the terms thereof to
December 31, 1997, provided that no event of default shall have occurred
thereunder. There can be no assurance that the Amended Credit Agreement will be
automatically extended on May 31, 1997 or that the Company will be able to
negotiate an extension of such agreement. Furthermore, there can be no assurance
that the Company will be able to pay the approximate $1.36 million fee to the
Lenders evidenced by the Convertible Notes, in the event that the Lenders demand
for payment of the Convertible Notes pursuant to the terms thereof. Non-payment
of the Convertible Notes would be an event of default under the Amended Credit
Agreement and could adversely affect the Company's ability to automatically
extend such Amended Credit Agreement on May 31, 1997. See "BUSINESS OF THE
COMPANY -- Restructuring of the Credit Facility." Since it is highly unlikely
that the Company would have the funds needed to repay the amounts outstanding
under the Amended Credit Agreement, any of such events would have a material
adverse effect on the Company.
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SUBSTANTIAL INDEBTEDNESS
Pursuant to the Amended Credit Agreement, the Company restructured its
existing credit facility in the aggregate principal amount of approximately $48
million of which an aggregate of approximately $37 million was outstanding as of
March 30, 1997 in addition to a letter of credit obligation of approximately
$4.7 million. Substantially all real and leased property and all personal
property of the Company are pledged to secure such indebtedness. Events of
default under the Amended Credit Agreement include, among other things, (i) the
failure by the Company to pay any principal of, or interest on, any obligations
under the Amended Credit Agreement, including, but not limited to, payment of
the $1.36 million fee to the Lenders evidenced by the Convertible Notes if
demanded by the Lenders, (ii) the failure by the Company to observe certain
terms, covenants or agreements, such as maintaining net worth and cumulative
EBITDA requirements, and observing capital expenditure limitations, or (iii) the
occurrence of any person other than U.S. Industries, Inc. ("USI"), or any of its
affiliates, acquiring directly or indirectly 50% or more of the voting power of
voting securities of the Company. Upon the occurrence of an event of default,
the Lenders could foreclose on their security interest in the Company's assets.
Such action would have a material adverse effect on the Company's business. In
addition, the New York State Department of Taxation and Finance recently
assessed the Company with approximately $714,000 of additional sales and use
taxes, inclusive of penalties and interest, which amount is required to be paid
by October 30, 1997. While this amount was fully reserved in the Company's
financial statements for the fiscal year ended September 29, 1996 and the
quarter ended December 29, 1996, there can be no assurance that the Company will
be able to pay this tax assessment when due. Failure to make this payment would
constitute an event of default under the Amended Credit Agreement. See "Recent
Developments."
DEPENDENCE ON KEY PERSONNEL
The success of the Company's business will continue to be highly dependent
upon the services of Daniel Scoggin, Chairman of the Board and Chief Executive
Officer and on its senior management team. The loss of the services of Mr.
Scoggin could adversely effect the Company's business and development. Success
will also depend upon the Company's ability to (i) attract and retain additional
skilled management personnel (ii) and recruit and train new managers.
COMPETITION
The restaurant business generally, and the full-service, casual dining
segment in particular, is highly competitive. While management believes that
Ground Round's new menu distinguishes its restaurants from other casual dining
restaurants, there can be no assurance that other chains will not adopt a
concept similar to that of Ground Round or that the concept will be successful.
The restaurant industry is intensely competitive with respect to price, service,
location and food quality, and there are many well-established competitors with
substantially greater financial, marketing and other resources and name
recognition than the Company. Competitors of the Company include restaurants
operated by large national and regional chains, as well as numerous local
independent restaurants. Recently there has been increasing competition
developing in the mid-price, full-service, casual dining segment in which the
Company's restaurants operate. The Company and its franchisees also encounter
substantial competition in their efforts to obtain suitable locations for new
restaurants.
FACTORS AFFECTING THE RESTAURANT INDUSTRY
The restaurant business is often affected by changes in consumer tastes,
national, regional or local economic conditions, demographic trends, weather,
traffic patterns, and the type, number, and location of competing restaurants.
In addition, factors such as increased food, labor and benefits costs, inflation
and the availability of experienced management and hourly employees may
adversely affect the restaurant industry in general and the Company's
restaurants in particular.
In addition, the Company's profitability is dependent in large measure on
its ability to anticipate and react to changes in food costs. Various factors
beyond the Company's control, including adverse weather conditions,
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may affect food costs. While management has been able to anticipate and react to
changing food costs to date through its purchasing practices and menu price
adjustments, there can be no assurance that it will be able to do so in the
future.
GEOGRAPHIC CONCENTRATION; ADVERSE WEATHER
The Company's restaurants are located primarily in the Northeast,
Mid-Atlantic and Midwest regions of the United States. The Company's revenues
and profitability are, therefore, subject to prevailing economic, regulatory and
demographic conditions specific to these regions. Further, adverse winter
weather in these regions may also adversely affect the Company's revenues,
expenses and profitability.
GOVERNMENT REGULATION
The restaurant industry is subject to various federal, state and local
government regulations, including those relating to the sale of food and alcohol
beverages. While the Company to date has not experienced any material
difficulties in obtaining necessary governmental approvals, the failure to
obtain or retain food and liquor licenses or any other governmental approvals
could have a material adverse effect on the Company's operating results. In
addition, restaurant operating costs are affected by increases in the minimum
hourly wage, unemployment tax rates, sales taxes and mandated benefit programs,
such as health insurance, and similar matters over which the Company has no
control.
In particular, the Company's restaurants are subject to state and local
licensing and regulation with respect to the sale and service of alcoholic
beverages, which accounted for approximately 20% of the Company's sales for the
past three fiscal years. 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 is currently a
defendant in several "dram shop" actions, although the Company does not believe
that the outcome of those cases will have a material effect on the Company's
financial condition.
SIGNIFICANT SHAREHOLDER
JUSI Holdings, Inc. ("JUSI"), a Selling Shareholder and the record holder
of 3,632,100 shares of Common Stock (approximately 32.5% of the outstanding
Common Stock of the Company), is an indirect, wholly-owned subsidiary of USI.
Under an agreement with the Company, JUSI has the right to designate two
nominees for election to the Company's Board of Directors as long as the
beneficial ownership of Common Stock by JUSI and its corporate affiliates
exceeds 20% of the outstanding Common Stock of the Company, and the right to
designate one nominee as long as the beneficial ownership of Common Stock by
JUSI and its corporate affiliate exceeds 10% of the outstanding Common Stock of
the Company. JUSI is able therefore to exercise significant influence over
management of the Company. Also, since under New York law certain extraordinary
corporate transactions, including mergers, consolidations and the sale of all or
substantially all of the Company's assets, require the approval of the holders
of two-thirds of the outstanding shares of Common Stock, a holder of a
substantial block of shares, such as JUSI, or a purchaser of JUSI's block of
shares of Common Stock, could effectively cast the determinative vote on such
matters. Such concentration of ownership may make the Company a less attractive
target for a takeover or render more difficult or discourage a merger proposal,
a tender offer or a proxy contest.
JUSI also is the beneficiary of certain preemptive rights which allows it
to maintain its percentage ownership in the Company in the event of a proposed
sale of shares of the Company's Common Stock or warrants or rights therefor or
securities convertible into or exchangeable for such shares, other than in
connection with stock or stock options for employees. This pre-emptive right
lapses at such time as JUSI and its affiliates become the beneficial owner of
less than 25% of the outstanding shares of Common Stock. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS," for additional information concerning
JUSI.
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ANTI-TAKEOVER MATTERS; POTENTIAL ADVERSE EFFECT OF FUTURE ISSUANCES OF
AUTHORIZED PREFERRED STOCK
The Company's Board of Directors has the authority to issue up to 30,000
shares of preferred stock, par value $100.00 per share (the "Preferred Stock"),
and to determine the price, rights, preferences and restrictions, including
voting rights, of those shares, without any further vote or action by the
shareholders. Accordingly, the Board of Directors is empowered, without
shareholder approval, to issue Preferred Stock, with such dividend rates,
redemption provisions, liquidation preferences, voting rights, conversion
privileges and other characteristics as the Board of Directors may deem
necessary. The rights of holders of Common Stock will be subject to, and may be
adversely affected by, the rights of holders of any Preferred Stock that may be
issued in the future. In addition, the issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the Company
without further actions by the shareholders. See "DESCRIPTION OF CAPITAL STOCK."
DILUTION; SUBSTANTIAL OPTIONS AND CONVERTIBLE NOTES
Under the 1989 Stock Option Plan, as amended, and the 1992 Equity Incentive
Plan (collectively, the "Plans"), 763,000 shares of Common Stock are reserved
for issuance to employees, officers, directors, and consultants, of which
options to purchase 433,870 shares of Common Stock are outstanding and are
exercisable at prices between $1.53 and $9.13 as of April 10, 1997.
In connection with the execution of the Amended Credit Agreement, the
Company and the Borrowers executed a series of Convertible Notes. The holder of
the Convertible Notes has the right, at its option, after May 1, 1997 to
convert, subject to the terms thereof, the principal of the Convertible Note
into such non-registered shares of Common Stock of the Company at a conversion
price equal to $2.70833 of principal for each share of Common Stock upon
surrender of the Convertible Note to the Company. The current principal amount
of the Convertible Notes is approximately $1.36 million and as such, on or after
May 1, 1997, may be converted into an amount of up to 501,500 shares of Common
Stock. See "BUSINESS -- Description of Credit Facility." The shares of Common
Stock underlying the Convertible Notes are included for resale by certain of the
Selling Shareholders under this Prospectus. See "SELLING SHAREHOLDERS."
The existence of the Convertible Notes and options that have been or may be
issued under the Plans may prove to be a hindrance to future financing efforts
by the Company. Further, the holders of such options and Convertible Notes may
be able to exercise them at a time when the Company may otherwise be able to
obtain additional equity capital on terms more favorable to the Company.
Furthermore, sales of substantial amounts of shares underlying the aforesaid
Convertible Notes and options, as well as the other 4,235,400 shares being
registered for resale under this Prospectus, could adversely affect prevailing
market prices for the Common Stock and the exercise of any such options or
Convertible Notes may have a dilutive effect on the net tangible book value per
share of the Common Stock.
STOCK PRICE VOLATILITY
Quarterly operating results of the Company or other restaurant companies,
changes in general conditions in the economy, the financial markets or the
restaurant industry, natural disaster, changes in earnings estimates or
recommendations by research analysts, or other developments affecting the
Company or its competitors could cause the market price of the Common Stock to
fluctuate substantially. In addition, in recent years the stock market and the
restaurant industry in particular have experienced extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies, including the Company.
RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS
This Prospectus (including all reports and other documents incorporated by
reference in this Prospectus) contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange act of 1934, as
amended (the "Exchange Act"), which are intended to be covered by the safe
harbors created thereby. Investors are cautioned that all forward-looking
statements involve risks and uncertainty, including with limitation, the
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ability of the Company to improve guest services, the ability of the Company to
continue to open franchised restaurants on acceptable terms and to operate
existing restaurants profitably, changes in local, regional, and economic
conditions, especially economic conditions in the areas in which the Company's
restaurants are concentrated, increasingly intense competition in the
restaurants industry, increases in food, labor, employee benefits and similar
costs. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Prospectus will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
USE OF PROCEEDS
The Selling Shareholders will receive all of the net proceeds from any sale
of Shares pursuant to this Prospectus and, accordingly, the Company will not
receive proceeds from the sale of Shares offered hereby.
9
<PAGE> 11
SELECTED FINANCIAL DATA
The following table contains certain selected consolidated financial data
and other operating information of the Company for each of the past five fiscal
years and for the thirteen weeks ended December 29, 1996 and December 31, 1995.
The selected financial data in the table are derived from the consolidated
financial statements of the Company. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements, related notes, and other
financial information incorporated by reference herein.
<TABLE>
<CAPTION>
13 WEEKS 13 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
DEC. 29, DEC. 31, SEPT. 29, OCT. 1, OCT. 2, OCT. 3, SEPT. 27,
1996 1995 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....................... $ 49,916 $ 54,725 $ 218,833 $230,406 $243,971 $232,556 $ 226,466
Operating income (loss) from
operations.................. 416 (2,767) (22,506) (2,659) 13,277 11,866 12,090
Interest expense from
operations, net............. 1,219 1,258 4,815 4,957 4,091 4,031 4,598
Income (loss) before income
taxes....................... (803) (4,025) (27,321) (7,616) 9,186 7,835 7,492
Income taxes (benefit)........ 0 (1,006) (4,374) (1,906) 2,940 2,507 2,846
-------- -------- -------- -------- -------- -------- --------
Income (loss):
Total....................... (803) (3,019) (22,947)(1) (5,710) 6,246 5,328 4,646
Per share................... (.07) (.27) (2.05) (.51) .56 .48 .42
Weighted average common shares
outstanding................. 11,174 11,174 11,174 11,151 11,109 11,086 11,064
BALANCE SHEET DATA:
Total assets................ $105,037 $140,164 $ 121,238 $145,356 $156,772 $151,813 $ 137,780
Long-term debt, including
current maturities....... 40,334 56,083 51,446 58,580 58,770 60,305 51,965
Stockholders' equity........ 35,934 56,665 36,737 59,684 65,036 58,637 53,219
SUPPLEMENTAL OPERATING DATA:
Systemwide sales:
Company-operated............ $ 49,435 $ 54,224 $ 216,977 $228,235 $241,777 $230,017 $ 224,048
Franchised.................. 14,968 13,795 68,888 71,817 72,726 71,876 72,692
-------- -------- -------- -------- -------- -------- --------
Total systemwide
sales(2)............... 64,403 68,019 285,865 300,052 314,503 301,893 296,740
Average annual systemwide
sales per restaurant........ 1,561 1,649 1,513 1,523 1,534 1,438 1,455
Number of restaurants (at
period end):
Company-operated............ 124 147 143 151 164 166 160
Franchised.................. 41 46 46 46 41 44 44
-------- -------- -------- -------- -------- -------- --------
Total restaurants........ 165 193 189 197 205 210 204
</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.
(2) Systemwide sales are exclusive of franchise fee revenue.
10
<PAGE> 12
BUSINESS OF 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" below).
As of April 10, 1997, there were 165 restaurants system-wide, 124 of which were
Company-operated and 46 restaurants with franchise agreements (of which 41 are
presently operating).
The Company's fiscal year ended September 29, 1996, and fiscal quarter
ended December 29, 1996 were marked by continuing operating losses and the
following three significant events: (i) the introduction of a new menu (ii)
restructuring the Company's principal credit facility; and (iii) contracting for
the sale of restaurants.
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 has designed a new childrens menu with eight offerings and
includes a drawing slate which the child can take home. All Ground Round
restaurants serve alcoholic beverages, including a wide selection of imported,
domestic and draft beers , wines and specialty drinks. In fiscal 1996, the
average guest check in Company-operated restaurants was approximately $9.02
(including alcoholic beverages). Alcoholic beverages have accounted for
approximately 20% of restaurant revenue during the last three years.
RESTRUCTURING OF THE CREDIT FACILITY
On September 12, 1996, the Company restructured its existing credit
facility by entering into the Amended Credit Agreement which, among other
things, provided for (i) continuation of the Company's credit facility in the
amount of $53,175,163.51, including a term loan in the aggregate principal
outstanding amount of $48,484,745.09 and a letter of credit obligation of
$4,690,418.42, (ii) a final maturity of such obligations on May 31, 1997,
subject to automatic extension to December 31, 1997 if $10,846,000 of the
principal amount of such credit facility is prepaid prior to May 31, 1997 (which
amount has been repaid as of the date hereof), and the absence of any event of
default under the amended Credit Agreement on such date and (iii) the Company to
retain approximately $2.8 million out of the first approximately $13.8 million
in proceeds from the sale of certain assets subsequent to April 30, 1996.
Interest on the restructured facility is payable at LIBOR plus 2.625% on
the Company' LIBOR loans and Alternate Base Rate ("ABR") plus .75% on the
Company's ABR based loans. In connection with the Amended Credit Agreement, the
Company agreed to pay the Lenders a restructuring fee equal to 5% of the amount
of the restructured facility subject to reduction to 2.5% upon repayment of
approximately $10.4 million of the principal amount of the restructured facility
prior to March, 16, 1997. The Company's obligation to pay this restructuring fee
is evidenced by a series of Convertible Notes. Prior to the date hereof, the
Company has repaid $10.4 million of the outstanding principal balance thereby
reducing the amount of the restructuring fee to 2.5% of the amount of the
restructured facility, or approximately $1.36 million. At the option of the
Lenders, the Convertible Notes evidencing the amount of such restructuring fee
are convertible into an
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<PAGE> 13
aggregate of approximately 501,500 shares of the Company's Common Stock after
May 1, 1997 at a price of approximately $2.71 per share. See "Convertible Notes"
below.
The Amended Credit Agreement contains certain restrictions on the conduct
of business of the Company and its subsidiaries including restrictions on (i)
opening or operating any new restaurant location, other than franchises, (ii)
creating liens on the Borrowers' properties or assets (iii) incurring debt, and
(iv) with respect to The Ground Round, Inc., on declaring or paying dividends to
the Company. The Borrowers are also limited in the amounts of capital
expenditures as specified in the Amended Credit Agreement. In addition, the
Company is required to comply with certain financial covenants. The Company is
required to maintain, among other things, (i) a cumulative net income before
interest, taxes, depreciation and amortization ("EBITDA") and consolidated net
worth of the Company for each monthly period through December 1997, in an amount
specified in the Amended Credit Agreement. The obligations under the Amended
Credit Agreement are secured by substantially all real and leased property and
all personal property of the Company.
The Amended Credit Agreement also provided that upon delivery by JUSI to
the Lenders of an aggregate of 100,000 shares of the Company's Common Stock, it
shall no longer constitute an event of default under the Amended Credit
Agreement if USI and its affiliates (i) cease to be the legal and beneficial
owners of at least 25% of the outstanding shares of capital stock of the
Company, or (ii) shall fail to have two nominees serving on the Company's board
of directors while USI owns 20% or more of the capital stock of the Company, and
one nominee serving on the Company's board of directors so long as USI owns 10%
or more but less 20% of the outstanding capital stock of the Company (the events
listed in clauses (i) and (ii) being hereinafter referred to as the "Prohibited
Actions"). On October 1, 1996, JUSI transferred 100,000 shares of Common Stock
to the Lenders, which Shares are being registered under the Registration
Statement of which this Prospectus is a part, whereupon the Prohibited Actions
ceased to constitute events of default under the Amended Credit Agreement. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Convertible Notes. In connection with the execution of 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. At the option of the Lenders, the
Convertible Notes evidencing the amount of the restructuring fee, are
convertible into an aggregate of approximately 501,500 shares of the Company's
Common Stock after May 1, 1997 at a price of $2.70833 per share. Subject to the
right of any holder of a Convertible Note to convert amounts owing thereunder to
Common Stock, the Convertible Notes are due and payable as follows: (i) if the
holder thereof has issued a demand for payment on or prior to May 25, 1997, on
May 31, 1997 or (ii) if such holder has not issued a demand for payment on or
prior to May 31,1997, on thirty days prior written demand provided such holder
has not otherwise exercised its rights of conversion; provided, that if demand
for payment has not been issued by such holder on or prior to November 30, 1997
and such holder has not otherwise exercised its right of conversion, such
Convertible Notes shall be due and payable on December 31, 1997. In the event
that the Lenders issue a demand for payment of the Convertible Notes, there can
be no assurance that the Company will be able to pay the approximate $1.36
million fee to the Lenders. Non-payment of the Convertible Notes would be an
event of default under the Amended Credit Agreement and could adversely affect
the Company's ability to automatically extend such Amended Credit Agreement on
May 31, 1997. See "RISK FACTORS -- Decrease in Net Sales and Income; History of
Losses from Operations; Capital Requirements and Credit Facility."
Lenders' Registration Rights. In connection with the execution of the
Amended Credit Agreement, the Company entered into a Registration Rights
Agreement with the Lenders (the "Lenders Registration Rights Agreement"),
granting the Lenders certain demand and "piggyback" registration rights with
respect to both the shares of Common Stock issuable upon exercise by the Lenders
of their conversion rights pursuant to the Convertible Notes (the "Conversion
Shares") and the 100,000 shares of Common Stock delivered by JUSI to the
Lenders, which Conversion Shares and 100,000 shares of Common Stock are being
registered under the Registration Statement of which this Prospectus is a part.
The Company agreed that it shall bear all expenses in connection with the
preparation of a registration statement filed in connection therewith, excluding
certain travel costs and counsel fees and any underwriting discounts or
commissions attributable to the sale of such
12
<PAGE> 14
securities. The Company and the Lenders also agreed to indemnify each other for
certain liabilities that may arise in connection with any such registration
statement.
Amendment No. 1 to Amended Credit Agreement. On October 31, 1996, the
Company and the Lenders entered into Amendment No. 1 to the Amended Credit
Agreement pursuant to which the Amended Credit Agreement was amended to adjust
the net worth and EBITDA covenants to take into account the sale of nine
restaurants pursuant to the Contract of Sale (as described below).
Amendment No. 2 to Amended Credit Agreement. On December 5, 1996, the
Company and the Lenders entered into Amendment No. 2 to the Amended Credit
Agreement to adjust the net worth and EBITDA covenants after the sale of one
more restaurant being sold pursuant to the Modification of Contract (as
described below) at year end.
SALE OF RESTAURANTS
On October 11, 1996, The Ground Round, Inc. ("GRI"), a wholly owned
subsidiary of the Company, completed the sale to Lone Star Steakhouse and
Saloon, Inc. ("Lone Star") of nine restaurants (the "Restaurants") for an
aggregate purchase price of approximately $9.9 million dollars in cash pursuant
to the terms of a Contract of Sale (the "Contract of Sale") dated June 28, 1996
between GRI and Lone Star. The Company applied substantially all of such
proceeds to reduce outstanding indebtedness under its credit facility.
Pursuant to the Contract of Sale, Lone Star had agreed to purchase up to 16
restaurants for an aggregate purchase price of $16 million dollars in cash.
Pursuant to a modification to the Contract of Sale ("Modification of Contract")
dated October 11, 1996, GRI and Lone Star agreed that, in addition to the nine
restaurants purchased at the closing, Lone Star would purchase up to four more
of the original 16 restaurants described in the Contract of Sale no later than
January 6, 1997 subject to the satisfaction of certain conditions as of December
1996. Of the four remaining restaurants, Lone Star has purchased three more
restaurants for approximately $2.1 million in cash in November and December,
1996 and January, 1997, and has elected not to purchase one. The Company applied
substantially all of such additional proceeds to further reduce outstanding
indebtedness under the Amended Credit Agreement.
In addition, the Company is currently considering entering into sales and
leaseback transactions involving approximately eighteen (18) restaurant sites
that are owned by the Company in fee, in connection with a possible refinancing
and further extension of the Company's credit facility beyond December 31, 1997.
The Company believes that a sale and leaseback of most or all of the Company
owned restaurants will provide the Company with some 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.
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.
RECENT DEVELOPMENTS
The New York State Department of Taxation and Finance recently completed a
sales and use tax audit of the Company for the period commencing December 1992
through November 1995, resulting in an assessment of approximately $714,000 of
additional sales and use taxes, penalties and interest. Payment is required to
be made by October 30, 1997. The Company has previously established reserves
against earnings in a sufficient amount to cover this assessment, however, no
assurance can be given that the Company will have sufficient cash available to
make such payment when due.
THE RESTAURANTS
The Company's restaurants are divided into four divisions, comprised of 24
geographic regions, managed by a Senior Vice President of Operations and 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
13
<PAGE> 15
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.
The Company periodically evaluates the prospects of existing
Company-operated restaurants and will, from time to time, sell or close
individual restaurants. Consistent with the Company's policy to review its base
of restaurants for potential sales and impairments, on August 11, 1996 a
committee of the Company's Board of Directors approved the closure of ten
underperforming restaurants in fiscal 1997. Accordingly, the Company recorded a
fourth quarter charge of $3.1 million due to the reduction in the net carrying
value of the ten restaurants.
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. During fiscal
1996, management has focused its efforts towards enhancing techniques aimed to
improve guest services and control food and labor costs. Some of these
techniques involve labor scheduling, ideal vs. actual food costs and maintaining
a set number of tables per server. The Company intends to continue its efforts
and techniques towards these ends during fiscal 1997.
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. In addition, the Company negotiated
favorable payment terms with its major vendors in 1996. 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 smallwares 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. Training is an integral part of both Company-operated and franchised
new restaurant openings. A specialized training team works on-site to implement
an extensive training program for each hourly employee in a new restaurant prior
to and for several weeks after its opening. In addition, the Company maintains a
system-wide training program to achieve standardization of food preparation and
operational procedures and efficient and courteous service.
14
<PAGE> 16
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 1996 the Company was focused 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.
Historically, the Company's marketing strategy was to use media-based
advertising focused on discounts. The Company did use radio advertising for
selected markets in the first two quarters of 1995, but this marketing strategy
was proven ineffective.
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 April 10, 1997, the Company had 46 restaurants with franchise
agreements (of which 41 are presently operating), the majority of which were
located in the same geographic regions as, or in close proximity to,
Company-operated restaurants. During fiscal 1996, the average annual comparable
sales by the Company's franchised restaurants were $1.8 million. The Company's
franchise program enables the Company to expand its brand-name recognition and
derive additional revenue without substantial investment. It is management's
plan to increase the franchise base in the years 1997 and 1998. The Company
added two franchised restaurants during 1996, which were formerly
Company-operated restaurants, and one franchised restaurant has been added, as
of April 10, 1997, in 1997. Two franchised restaurants were closed during 1996
and, as of April 10, 1997, one franchised restaurant was closed in 1997.
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 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
15
<PAGE> 17
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. More than half of the
franchisees have adopted the new Company menu. In addition, all franchisees are
required to purchase food, equipment and smallwares 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 six of the 46 restaurants with franchise
agreements (of which 41 are presently 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 April 10, 1997, the Company had approximately 7,900 employees,
approximately 4,400 of whom were part-time employees. Approximately 7,300 of
these employees were employed in non-management restaurant positions,
approximately 500 were involved in restaurant management or training programs
and 65 were corporate employees. The typical restaurant has approximately 60
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.
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. To date, the Company has not
experienced any material problems resulting from its sanitation and food
handling procedures.
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
16
<PAGE> 18
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 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(TM); Triple Chips(TM); and That Really Big
Pretzel(TM). There can be no assurance that the Company will be granted
trademarks on any or all of such trademarks.
SELLING SHAREHOLDERS
An aggregate of up to 4,736,900 Shares of Common Stock may be offered by
the Selling Shareholders. The Shares offered hereby constitute approximately
40.6% of all shares of the Company's outstanding Common Stock, giving effect to
the issuance of 501,500 shares upon conversion of the Convertible Notes, and
without giving effect to the possible exercise of outstanding options under the
Plans. The table set forth below contains certain information with respect to
the beneficial ownership of the Company's Common Stock as of April 10, 1997, and
as adjusted to reflect the assumed sale of all of the Shares offered hereby by
the Selling Shareholders. The Company will not receive any proceeds from the
sale of the Shares. The material relationships between any of the Selling
Shareholders and the Company or any of its predecessors or affiliates, within
the past three years, have been provided to the Company by the Selling
Shareholders and are described below and, in the case of JUSI and GSB Holdings,
under the caption "Certain Relationships and Related Transactions" and, in the
case of the Lenders, under the caption "BUSINESS -- Description of Credit
Facility."
17
<PAGE> 19
The Registration Statement to which this Prospectus is a part has been
filed with the Commission pursuant to and in accordance with several agreements
between the Company and the Selling Shareholders, consisting of the Amended 1991
Stockholder Agreement (hereinafter defined), the GSB Registration Rights
Agreement (hereinafter defined) and the Lenders Registration Rights Agreement
(collectively the "Registration Agreements"). See "Certain Relationships and
Related Transactions" and "BUSINESS -- Description of the Credit Facility," for
a description of such Registration Agreements. All expenses of the registration
of the Shares covered by this Prospectus will be borne by the Company pursuant
to the Registration Agreements, except that the Company will not pay any
underwriters' commissions, legal and accounting expenses of JUSI and GSB, and
underwriters' commissions and certain travel and legal expenses of the Lenders.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
BENEFICIAL OWNERSHIP AS AFTER OFFERING
OF JANUARY 10, 1997(1) MAXIMUM IF MAXIMUM IS SOLD
------------------------- TO BE SOLD IN ------------------------
AMOUNT THIS OFFERING AMOUNT
SELLING SHAREHOLDER (# OF SHARES) PERCENT (# OF SHARES) (# OF SHARES) PERCENT(9)
------------- ------- -------------- ------------- -------
<S> <C> <C> <C> <C> <C>
JUSI Holdings, Inc................. 3,632,100(2) 32.5% 3,632,100 -0- *
GSB Holdings, Inc.................. 503,300(3) 4.5% 503,300 -0- *
The Bank of New York............... 221,994(4) 1.9% 221,994 -0- *
The Chase Manhattan Bank........... 151,039(5) 1.3% 151,039 -0- *
Bank of America Illinois........... 83,078(6) * 83,078 -0- *
NBD Bank, N.A...................... 62,311(7) * 62,311 -0- *
Credit Lyonnais New York Branch.... 83,078(8) * 83,078 -0- *
</TABLE>
- ---------------
* Less than 1%.
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of an individual to acquire them within 60 days upon the exercise of an
option are treated as outstanding for purposes of determining beneficial
ownership and the percent beneficially owned by such person.
(2) These shares are owned of record by JUSI Holdings, Inc. ("JUSI"), which is
an indirect wholly-owned subsidiary of U.S. Industries, Inc. ("USI") and USI
may therefore be deemed to own beneficially the shares of Common Stock owned
by JUSI. The address of JUSI and USI is 101 Wood Avenue South, Iselin, NJ
08830. These shares are subject to certain restrictions contained in the
Amended 1991 Stockholder Agreement by and between the Company and JUSI (as
assignee from HM Holdings, Inc.) Excludes 503,300 shares of Common Stock
owned directly by GSB Holdings. See Footnote 3 below. Also excludes any
other shares of Common Stock that may be beneficially owned by directors,
executive officers and/or employees of USI and its subsidiaries, directly or
through individual employee savings plan accounts. Pursuant to the Amended
1991 Stockholder Agreement, JUSI has two nominees serving on the Company's
Board of Directors, John A. Mistretta and Christian R. Guntner. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
(3) GSB Holdings, Inc. ("GSB Holdings"), which is the record holder of 503,300
shares of Company Common Stock, is engaged principally in the business of
holding investments and is a wholly-owned subsidiary of Great South Beach
Improvement Co. ("GSB Improvement"), a corporation principally engaged in
real estate development. The address of GSB Holdings is One Bethany Road at
Route 15, Building 6, Suite 94, Hazlet, New Jersey 07730. David H. Clarke is
a director and officer of GSB Holdings and a director, officer and
controlling shareholder of GSB Improvement and may, therefore, be deemed to
own beneficially the shares of Common Stock owned by GSB Holdings. Mr.
Clarke also is the Chairman of the Board and Chief Executive Officer of USI.
Excludes all shares beneficially owned by USI and any shares that may be
beneficially owned by directors, executive officers and/or employees of USI
and its subsidiaries, directly or through individual employee savings plan
accounts, as to which Mr. Clarke and GSB Holdings and GSB Improvement
disclaim beneficial ownership. Also excludes 3,000 shares of the Company
Common Stock subject to options granted to Joseph Schollenberger, a director
of the Company, who is a Vice President of GSB Holdings, as to which
beneficial ownership is disclaimed.
18
<PAGE> 20
(4) The Bank of New York is a Lender in connection with the Amended Credit
Agreement, a holder of a Convertible Note and a party to the Lenders
Registration Rights Agreement. See "BUSINESS -- Description of Credit
Facility." Includes (i) 36,910 of Common Stock transferred to The Bank of
New York on October 1, 1996 from JUSI and (ii) 185,084 shares of Common
Stock issuable upon conversion of the entire principal amount of a
Convertible Note, issued by the Company in connection with the Amended
Credit Agreement, which may be exercised after May 1, 1997 until December
31, 1997.
(5) The Chase Manhattan Bank is a Lender in connection with the Amended Credit
Agreement, a holder of a Convertible Note and a party to the Lenders
Registration Rights Agreement. See "BUSINESS -- Description of Credit
Facility." Includes (i) 25,110 shares of Common Stock transferred to The
Chase Manhattan Bank on October 1, 1996 from JUSI and (ii) 125,929 shares of
Common Stock issuable upon conversion of the entire principal amount of a
Convertible Note issued by the Company in connection with the Amended Credit
Agreement, which may be exercised after May 1, 1997 until December 31, 1997.
(6) Bank of America Illinois is a Lender in connection with the Amended Credit
Agreement, a holder of a Convertible Note and a party to the Lenders
Registration Rights Agreement. See "BUSINESS -- Description of Credit
Facility." Includes (i) 13,810 shares of Common Stock transferred to Bank
America Illinois on October 1, 1996 from JUSI and (ii) 69,268 shares of
Common Stock issuable upon conversion of the entire principal amount of a
Convertible Note issued by the Company in connection with the Amended Credit
Agreement, which may be exercised after May 1, 1997 until December 31, 1997.
(7) NBD Bank, N.A. is a Lender in connection with the Amended Credit Agreement,
a holder of a Convertible Note and a party to the Lenders Registration
Rights Agreement. See "BUSINESS -- Description of Credit Facility." Includes
(i) 10,360 shares of Common Stock transferred to NBD Bank, N.A. on October
1, 1996 from JUSI and (ii) 51,951 shares of Common Stock issuable upon
conversion of the entire principal amount of a Convertible Note issued by
the Company in connection with the Amended Credit Agreement, which may be
exercised after May 1, 1997 until December 31, 1997.
(8) Credit Lyonnais New York Branch is a Lender in connection with the Amended
Credit Agreement, a holder of a Convertible Note and a party to the Lenders
Registration Rights Agreement. See "BUSINESS -- Description of Credit
Facility." Includes (i) 13,810 shares of Common Stock transferred to Credit
Lyonnais New York Branch on October 1, 1996 from JUSI and (ii) 69,268 shares
of Common Stock issuable upon conversion of the entire principal amount of a
Convertible Note issued by the Company in connection with the Amended Credit
Agreement, which may be exercised after May 1, 1997 until December 31, 1997.
(9) Assumes conversion of the entire principal amount outstanding of all
Convertible Notes issued to Lenders in connection with the Amended Credit
Agreement.
19
<PAGE> 21
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
JUSI and the Amended Credit Agreement. The Amended Credit Agreement
provided that upon delivery by JUSI to the Lenders of an aggregate of 100,000
shares of the Company's Common Stock, it shall no longer constitute an event of
default under the Amended Credit Agreement if USI and its affiliates (i) cease
to be the legal and beneficial owners of at least 25% of the outstanding shares
of capital stock of the Company, or (ii) shall fail to have two nominees serving
on the Company's board of directors while USI owns 20% or more of the capital
stock of the Company, and one nominee serving on the Company's board of
directors so long as USI owns 10% or more but less than 20% of the outstanding
capital stock of the Company (the events listed in clauses (i) and (ii) being
hereinafter referred to as the "Prohibited Actions"). On October 1, 1996, JUSI
transferred 100,000 shares of Common Stock to the Lenders, which shares are
being registered under the Registration Statement of which this Prospectus is a
part, whereupon the Prohibited Actions ceased to constitute events of default
under the Amended Credit Agreement. See "SELLING SHAREHOLDERS."
1991 Stockholder Agreement. Pursuant to the terms of an Agreement dated
June 5, 1995, between HM Holdings, Inc., a Delaware corporation ("HM Holdings")
and JUSI, HM Holdings assigned and JUSI assumed all of HM Holdings' rights and
obligations under a stockholder agreement, dated as of August 1, 1991 between HM
Holdings and the Company (the "1991 Stockholder Agreement").
The 1991 Stockholder Agreement provides for certain rights and restrictions
with respect to JUSI's ownership of the Common Stock of the Company. Under the
1991 Stockholder Agreement, the Company has agreed that, upon JUSI's request,
the Company will use its best efforts to nominate and cause to be elected to the
Company's Board of Directors two persons designated by JUSI as long as JUSI and
its corporate affiliates beneficially own 20% or more of the outstanding shares
of Common Stock, and one person designated by JUSI as long as JUSI and its
corporate affiliates beneficially own less than 20% but more than 10% of the
outstanding shares of Common Stock. Messrs. Mistretta and Guntner are the
current nominees of JUSI serving on the Board of Directors. JUSI is not
prohibited from proposing for election and/or soliciting proxies in favor of the
election of any number of directors of the Company, but has advised the Company
that it has no present intention to seek to have additional designees elected to
the Board.
The 1991 Stockholder Agreement provides that neither JUSI nor any of its
corporate affiliates will acquire, directly or indirectly, such number of
additional shares of Common Stock as would result in JUSI and such affiliates
beneficially owning 50% or more of the outstanding shares of Common Stock
unless, in such acquisition, JUSI and/or such affiliates offer to acquire all
outstanding shares of Common Stock not held by them upon substantially the same
terms and conditions.
In its original form, the 1991 Stockholder Agreement provided that, except
in certain limited circumstances, so long as JUSI or its affiliates own 20% or
more of the outstanding shares of Common Stock, if JUSI or any such affiliates
seek to sell or otherwise dispose of all or substantially all of the shares of
Common Stock owned by it to a third party, except as may be otherwise approved
by a majority of the members of the Board of Directors not designated by JUSI,
JUSI or such affiliate would use it best efforts to cause such third party to
offer to purchase all other outstanding shares of Common Stock upon
substantially the same terms and conditions. The 1991 Stockholder Agreement
provided that, if such third party fails to make such offer, JUSI or such
affiliates would not so sell or otherwise dispose of such shares unless such
third party agrees to be subject to the same limitation on its ability to sell
and to the requirements applicable to JUSI with respect to the acquisition of
50% or more of the outstanding shares of Common Stock. In addition, in the 1991
Stockholders Agreement the Company agreed that, if at any time when JUSI or its
affiliates own 25% or more of the outstanding shares of Common Stock, the
Company shall propose to sell any shares of Common Stock or any warrants or
rights therefor or securities convertible into or exchangeable therefor, to any
person or entity other than JUSI or its affiliates, it shall give JUSI the
opportunity to purchase such number of shares or other securities as will permit
JUSI and its corporate affiliates to retain their percentage of the Company's
voting power. All of the restrictions placed on JUSI which are described above
in this paragraph were eliminated in connection with the execution of the
Amended 1991 Stockholders Agreement (described below).
20
<PAGE> 22
Pursuant to the 1991 Stockholder Agreement, the Company also agreed that,
so long as JUSI owns 5% or more of the outstanding shares of Common Stock, upon
JUSI's request, the Company will cause up to four registration statements to be
filed with the Commission in order to permit JUSI or a corporate affiliate to
sell all or a portion of its shares of Common Stock. In addition the Company
agreed, if requested, to include some or all shares of Common Stock owned by
JUSI or an affiliate in any registration statement it otherwise files (other
than registration statements relating to employee stock options). The Company
and JUSI also agreed to indemnify each other for certain liabilities that may
arise in connection with any such registration statements. On September 30,
1996, JUSI exercised one of its demand registration rights by giving written
notice to the Company to register its Shares.
Amendment of 1991 Stockholder Agreement. In connection with the execution
of the Amended Credit Agreement, the Company and JUSI entered into an Amendment,
dated as of September 12, 1996, to the 1991 Stockholder Agreement (the "Amended
1991 Stockholder Agreement), providing, among other things, that upon delivery
by JUSI to the Lenders of the 100,000 shares of common stock of the Company
described above, (x) JUSI would no longer be restricted from engaging in any of
the Prohibited Actions, (y) the restrictions relating to the sale, transfer or
disposal of the shares of Common Stock held by JUSI, and certain of its
affiliates described above, would lapse, and (z) JUSI consented to the Company
entering into the Lenders Registration Rights Agreement and agreed that the
number of shares that JUSI would otherwise be entitled to sell pursuant to its
demand registration rights may be reduced, in certain circumstances, if any of
the Lenders exercised their "piggy-back" registration rights, as described in
"BUSINESS -- Description of Credit Facility -- Lenders Registration Rights."
1991 Registration Rights Agreement With GSB Holdings. GSB Holdings, Inc.
("GSB Holdings") and the Company are parties to a Registration Rights Agreement,
dated as of August 20, 1991 (the "GSB Registration Rights Agreement"), which
allows GSB Holdings certain "piggy-back" registration rights with respect to its
Shares of Common Stock. The Company agreed, if requested, to include no less
than 50,000 shares of Common Stock owned by GSB Holdings in any registration
statement it otherwise files (other than registration statements relating to
employee stock options). On November 11, 1996, GSB exercised its piggy back
registration rights by delivering written notice to the Company to register its
Shares as part of this Registration Statement. GSB Holdings agreed to observe
the same lock-ups with regard to the sale of the shares of Common Stock owned by
it as the Company agrees to, if any, in connection with such registration
statement if so requested by the managing underwriter. The Company and GSB
Holdings also agreed to indemnify each other for certain liabilities that may
arise in connection with any such registration statement.
PLAN OF DISTRIBUTION
The distribution of the Shares of Common Stock offered by Selling
Shareholders may be effected from time to time in one or more transactions
(which may involve block transactions) in the over-the-counter market, or on the
NASDAQ National Market System (or any exchange on which the Common Stock may
then be listed) in negotiated transactions, through the writing of options
(whether such options are listed on an options exchange or otherwise), or a
combination of such methods of sale, at market prices prevailing at the time of
sale, at prices related to such prevailing market prices or at negotiated
prices. A Selling Shareholder may effect such transactions by selling Shares to
or through broker-dealers, and such broker-dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the Selling
Shareholder and/or purchasers of Shares for whom they may act as agent (which
compensation may be in excess of customary commissions). A Selling Shareholder
also may pledge Shares as collateral for margin accounts and such Shares could
be resold pursuant to the terms of such accounts.
In order to comply with certain state securities laws, if applicable, the
Common Stock will not be sold in a particular state unless such securities have
been registered or qualified for sale in such state or any exemption from
registration or qualification is available and complied with. In addition, any
securities covered by this Prospectus which qualify for sale pursuant to Rule
144 may be sold under Rule 144 rather than pursuant to this Prospectus.
21
<PAGE> 23
The Selling Shareholders and any underwriters, dealers or agents that
participate in the distribution of Shares offered hereby may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, and
any profit on the sale of such Shares by them and any discounts, commissions or
concessions received by any such underwriters, dealers or agents might be deemed
to be underwriting discounts and commissions under the Securities Act.
The Selling Shareholders will pay the commissions and discounts of
underwriters, dealers or agents, if any, incurred in connection with the sale of
the Shares. The Company will not receive any of the proceeds from sales of any
of the securities offered pursuant to this Prospectus by the Selling
Shareholders.
Each of the Selling Shareholders entered into a Registration Agreement with
the Company, which generally provides for the registration of the shares of
Common Stock under the Securities Act and the blue sky laws of the several
states. Pursuant to each of such Registration Agreements, the Company is
required, among other things, to bear the cost of such registration and
indemnify the Selling Shareholders against certain liabilities, including those
under the Securities Act. See "SELLING SHAREHOLDERS."
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company as stated in the Company's
Restated Certificate of Incorporation (the "Restated Certificate") consists of
35,000,000 shares of Common Stock, $.16 2/3 par value per share, and 30,000
shares of preferred stock, $100.00 par value per share (the "Preferred Stock").
The following summary of certain terms of the Company's capital stock
describes material provisions of, but is necessarily a summary and is subject to
and qualified in its entirety by, the Restated Certificate, the Company's
Bylaws, and applicable provisions of New York corporate law including, but not
limited to, the Business Corporation Law of the State of New York (the "BCL").
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be submitted to a vote of the shareholders and are not entitled to
cumulative voting in the election of directors, which means that the holders of
the majority of the shares voting for the election of directors can elect all of
the directors then standing for election by the holders of Common Stock. Subject
to any prior rights of any holders of Preferred Stock, the holders of Common
Stock are entitled to share ratably in such dividends, if any, as may be
declared from time to time by the Board in its discretion out of funds legally
available therefor. The holders of Common Stock are entitled to share ratably in
any assets remaining after satisfaction of all prior claims upon liquidation of
the Company. The Restated Certificate gives holders of Common Stock no
preemptive or other subscription rights, and Common Stock is not redeemable at
the option of the holders, does not have any conversion rights, and is not
subject to call. The rights, preferences and privileges of holders of Common
Stock are subject to, and may be adversely affected by, the rights of holders of
shares of any series of Preferred Stock that the Company may designate and issue
in the future.
PREFERRED STOCK
The Company also has authorized 30,000 shares of Preferred Stock, par value
$100.00 per share. The Board of Directors of the Company has the authority by
resolution to issue the Preferred Stock in one or more series and to fix the
number of shares constituting any such series, the voting powers, designations,
preferences and relative, participating, optional or other special rights and
qualifications, limitations or restrictions thereof, including the dividend
rights, terms of redemption (including sinking fund provisions), conversion
rights and liquidation preferences, without any further vote or action by
shareholders.
A purpose of authorizing the Board of Directors to issue Preferred Stock
and determine its rights and preferences is to eliminate delays associated with
a shareholder vote on specific issuances. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of
22
<PAGE> 24
discouraging a third party from acquiring, a majority of the outstanding voting
stock of the Company. The Company has no present plans to issue any shares of
Preferred Stock.
DIVIDEND POLICY
The Company does not currently intend to declare or pay any dividend on its
Common Stock. The payment of cash dividends in the future will depend on the
Company's earnings, financial condition, capital needs and other factors deemed
relevant by the Board, including corporate law restrictions on the availability
of capital for the payment of dividends, the rights of holders of any series of
Preferred Stock that may hereafter be issued and the limitations, if any, on the
payment of dividends under any then-existing credit facility or other
indebtedness. The Company's current Amended Credit Agreement contains and the
Company anticipates that any future bank revolving credit facility that the
Company may enter, would contain certain restrictions on the payment of
dividends. It is the current intention of the Board to retain earnings, if any,
to finance the operations of the Company's business.
NEW YORK ANTI-TAKEOVER LAW PROVISIONS
Section 912 of the BCL prohibits a New York corporation from engaging in a
"business combination" with an "interested shareholder" for a period of five
years from the date that such interested shareholder acquired its stock unless
such business combination or the acquisition of stock by the shareholder was
approved by the corporation's board of directors prior to the date the
shareholder acquired its stock. Except as provided above, a New York corporation
is prohibited from engaging in any business combination with an interested
shareholder unless one of the following conditions is satisfied: (i) the
business combination is approved by the board of directors of the corporation
prior to the date on which such shareholder became an interested shareholder,
(ii) the business combination is approved by a majority of shareholders other
than the interested shareholder no earlier than five years after the date such
shareholder became an interested shareholder, or (iii) the price paid to all
shareholders meets certain conditions relating to the type and minimum amount of
consideration to be paid to shareholders other than the interested shareholder.
For purposes of Section 912, a "business combination" includes a merger or
consolidation, a sale, lease, exchange, mortgage, pledge, transfer or other
disposition of assets, a stock issuance or transfer of stock having a market
value of 5% or more of the aggregate market value of the outstanding common
stock, a liquidation or dissolution, a reclassification of securities, a
recapitalization or any transaction in which the interested shareholder benefits
disproportionately in relation to any other shareholder. An "interested
shareholder" is defined as any person or entity that currently owns, directly or
indirectly, or in the case of affiliates and associates of the corporation, that
owned at any time during the past five years, more than 20% of the outstanding
voting stock of the corporation.
These provisions may discourage open market purchases or a non-negotiated
tender or exchange offer for the stock of a New York corporation such as the
Company, and, accordingly, may be adverse to the interests of a shareholder who
would desire to participate in such a transaction.
LIMITATIONS OF LIABILITY; INDEMNIFICATION OF DIRECTORS.
The Restated Certificate contains provisions permitted under the BCL
relating to the liability and indemnification of directors. The provisions
eliminate a director's liability for monetary damages for a breach of fiduciary
duty as a director, except for liability in certain circumstances involving
wrongful acts, such as the breach of a director's duty of loyalty or acts or
omissions which involve intentional misconduct or a knowing violation of law.
Further, the Restated Certificate and the Company's By-Laws contain provisions
to indemnify the Company's directors and officers to the fullest extent
permitted by the BCL, including payment in advance of a final deposition of a
director's or officer's expenses and attorneys' fees incurred in defending any
action, suit or proceeding. The Company believes that these provisions will
assist the Company in attracting and retaining qualified individuals to serve as
directors.
23
<PAGE> 25
TRANSFER AGENT AND REGISTRAR.
The Transfer Agent and Registrar for the Common Stock is Bank of New York,
New York, New York.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Kane Kessler, P.C., New York, New York.
EXPERTS
The consolidated financial statements of Ground Round Restaurants, Inc.
appearing in the Company's Annual Report on Form 10-K, as amended, for the year
ended September 29, 1996, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included therein and incorporated
herein by reference. Such consolidated financial statements are incorporated
herein by reference in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
24
<PAGE> 26
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information................ 1
Incorporation of Documents by
Reference.......................... 2
Prospectus Summary................... 3
Risk Factors......................... 5
Use of Proceeds...................... 9
Selected Financial Data.............. 10
Business of the Company.............. 11
Selling Shareholders................. 17
Certain Relationships and Related
Transactions....................... 20
Plan of Distribution................. 21
Description of Capital Stock......... 22
Legal Matters........................ 24
Experts.............................. 24
</TABLE>
======================================================
======================================================
GROUND ROUND
RESTAURANTS, INC.
4,736,900 SHARES
COMMON STOCK
------------------------
PROSPECTUS
------------------------
DATED APRIL 21, 1997
======================================================
