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As filed with the Securities and Exchange Commission on January 23, 1997
Registration No. _____________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GROUND ROUND RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 13-5637682
(State or other jurisdiction I.R.S.Employer
of incorporation) Identification No.)
35 Braintree Hill Office Park
Braintree, Massachusetts 02184
(617) 380-3100
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
DANIEL R. SCOGGIN
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
GROUND ROUND RESTAURANTS, INC.
35 BRAINTREE HILL OFFICE PARK
BRAINTREE, MASSACHUSETTS 02184
(617) 380-3100
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
with copies to:
Jeffrey S. Tullman, Esq.
Kane Kessler, P.C.
1350 Avenue of the Americas
26th Floor
New York, New York 10019
(212) 541-6222
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
possible after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to
be offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. /X/............................
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act of 1933, please check
the following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. / /.........
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act of 1933, please check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /...............................
If delivery of the prospectus is expected to be made pursuant
to Rule 434 under the Securities Act of 1933, please check the following box.
/ /.............................................................................
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------
Title of each Proposed Proposed
class of maximum maximum Amount of
securities Amount offering price aggregate registration
to be registered to be registered per unit(1) offering price(1) fee
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value 4,235,400 $2.328 $9,860,540.60 $2,988.04
$.16 2/3 per share............
Common Stock, par value 501,500(2) $2.328 $1,167,554.60 $ 353.80
$.16 2/3 per share............
Total Registration Fee........ $3,341.84
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated pursuant to Rule 457(c) solely for the purpose of calculating
the registration fee. The proposed maximum offering price per share and
the proposed maximum aggregate offering price are based on the average
of the high and low sale prices on January 20, 1997, of the
Registrant's Common Stock as reported on the NASDAQ National Market
System.
(2) Represents the maximum number of shares of Common Stock as may be
issuable upon conversion of certain Convertible Notes issued on
September 12, 1996.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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SUBJECT TO COMPLETION, DATED , 1997
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 January 20, 1997,
the last reported sale price of the Common Stock on NASDAQ was $2.375 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 8.
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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 _________, 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. 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;
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. Current Report on Form 8-K, dated June 28, 1996;
6. Current Report on Form 8-K, dated October 11, 1996;
7. Proxy Statement dated December 20, 1995, relating to the
Annual Meeting of Stockholders held on January 23, 1996; and
8. 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 23 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 September 29, 1996, the end of the Company's most recent
fiscal year, there were 184 restaurants system-wide, 143 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 was 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
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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 one 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 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. 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.
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THE OFFERING
SECURITIES OFFERED:
Common Stock outstanding
at January 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 January 10,
1997, options to purchase 596,000 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; 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. 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 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
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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. 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. 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.
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 $38 million was
outstanding as of December, 1996 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, (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 USI, or any of its
affiliates, acquiring directly or indirectly 50% or more of the voting power of
voting securities of the Company. In the event of a 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.
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
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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, 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.
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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 U.S. Industries, Inc. ("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, 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.
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
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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 596,000 shares of Common Stock are
outstanding and are exercisable at prices between $1.53 and $9.13 as of January
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 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.
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<PAGE> 15
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
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.
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<PAGE> 16
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. 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>
52 WEEKS 52 WEEKS 52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 29, OCTOBER 1, OCTOBER 2, OCTOBER 3, SEPTEMBER 27,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenue $ 218,833 $ 230,406 $ 243,971 $ 232,556 $ 226,466
Operating income (loss) from
operations (22,506) (2,659) 13,277 11,866 12,090
Interest expense from
operations, net 4,815 4,957 4,091 4,031 4,598
Income (loss) before income taxes (27,321) (7,616) 9,186 7,835 7,492
Income taxes (benefit) (4,374) (1,906) 2,940 2,507 2,846
--------- --------- --------- --------- ---------
Income (loss):
Total (22,947)(1) (5,710) 6,246 5,328 4,646
Per share (2.05) (.51) .56 .48 .42
Weighted average common shares outstanding 11,174 11,151 11,109 11,086 11,064
OPERATING DATA:
Systemwide sales:
Company-operated $ 216,977 $ 228,235 $ 241,777 $ 230,017 $ 224,048
Franchised 68,888 71,817 72,726 71,876 72,692
--------- --------- --------- --------- ---------
Total systemwide sales 285,865 300,052 314,503 301,893 296,740
Average annual systemwide sales per
restaurant 1,513 1,523 1,534 1,438 1,455
Number of restaurants (at period end):
Company-operated 143 151 164 166 160
Franchised 46 46 41 44 44
--------- --------- --------- --------- ---------
Total restaurants 189 197 205 210 204
BALANCE SHEET DATA:
Total assets $ 121,238 $ 145,356 $ 156,772 $ 151,813 $ 137,780
Long-term debt, including current maturities 51,446 58,580 58,770 60,305 51,965
Stockholders' equity 36,737 59,684 65,036 58,637 53,219
</TABLE>
(1) The Company recorded a charge of $8.9 million resulting from the adoption of
Statement of Financial Accounting Standards No.121 (SFAS No.121), "Accounting
for the Impairment of Long-Lived Assets to be Disposed Of" and the decision to
dispose of certain restaurants.
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<PAGE> 17
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 23 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 September 29, 1996, the end of the
Company's most recent fiscal year, there were 184 restaurants system-wide, 143
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, was 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)
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<PAGE> 18
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 one 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 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
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<PAGE> 19
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 the aggregate sum of approximately $2.7 million which has
been reduced to approximately $1.36 million. 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 31, 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.
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 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
17
<PAGE> 20
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 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 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.
18
<PAGE> 21
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
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<PAGE> 22
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.
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.
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<PAGE> 23
FRANCHISING
As of September 29, 1996, 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. During 1996, the
Company added two franchised restaurants, which were formerly Company-operated
restaurants. Two franchised restaurants were closed during 1996.
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 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.
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<PAGE> 24
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 September 29, 1996, 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 75 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.
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<PAGE> 25
Ground Round restaurants are subject to state and local licensing
and regulations with respect to the sale and service of alcoholic beverages.
Typically, alcoholic beverage licenses must be renewed annually and may be
revoked or suspended for cause. Alcoholic beverage control regulations relate to
numerous aspects of the daily operations of the Company's restaurants, including
minimum age of patrons and employees, hours of operation, advertising, wholesale
purchasing, inventory control and the handling, storage and dispensing of
alcoholic beverages. The Company has not encountered material problems relating
to alcoholic beverage licenses to date, but the failure of a restaurant to
obtain or retain a liquor license would adversely affect the restaurant's
operations.
In certain states, the Company is subject to "dram shop" statutes,
which generally give a person injured by an intoxicated person the right to
recover damages from the establishment that wrongfully served alcoholic
beverages to the intoxicated person. The Company carries liquor liability
coverage as part of its existing comprehensive general liability insurance. The
Company currently is a defendant in several "dram shop" suits. Management does
not believe that an adverse result in any of these cases will have a materially
adverse effect on the Company's financial condition or results of operations.
The Company is subject to federal and state fair labor standards,
statutes and regulations that govern such matters as minimum wages, overtime,
tip credits, child labor and other working conditions. A significant number of
Ground Round food service personnel are paid at rates based on applicable
federal and state minimum wages.
Management is not aware of any federal or state environmental
regulations that have had a material effect on the Company's operations to date.
However, more stringent requirements of local governmental bodies with respect
to waste disposal, zoning, construction and land use may increase both the cost
and the time required for construction of 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
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<PAGE> 26
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 following table sets forth certain
information with respect to the beneficial ownership of the Company's Common
Stock as of January 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."
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 in the
case of the Lenders.
24
<PAGE> 27
<TABLE>
<CAPTION>
====================================================================================================================================
SELLING SHAREHOLDER Beneficial Ownership as Maximum Beneficial Ownership
of January 10, 1997(1) to be sold After Offering
in this if Maximum is Sold
Offering
(#of
Shares)
====================================================================================================================================
AMOUNT Percent Amount Percent(9)
(# OF SHARES) (# of
Shares)
====================================================================================================================================
<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 83,078(8) * 83,078 -0- *
York Branch
====================================================================================================================================
</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."
25
<PAGE> 28
(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. Mr. 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. David H.
Clarke, who is the Chairman of the Board and Chief Executive
Officer of USI, is a director and officer of GSB Holdings and
a director, officer and controlling shareholder of GSB
Holdings' parent corporation, GSB Improvement. 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 Mr.
Schollenberger, a director of the Company, who is a Vice
President of GSB Holdings, as to which beneficial ownership is
disclaimed.
(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.
26
<PAGE> 29
(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.
27
<PAGE> 30
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 has the
right to propose for election and/or to solicit 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.
28
<PAGE> 31
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, so long as 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 set forth above
in this paragraph, were eliminated in connection with the execution of the
Amended 1991 Stockholders Agreement (described below).
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
29
<PAGE> 32
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.
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
30
<PAGE> 33
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
31
<PAGE> 34
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 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
32
<PAGE> 35
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.
TRANSFER AGENT AND REGISTRAR.
The Transfer Agent and Registrar for the Common Stock is Bank of
New York, New York, New York.
33
<PAGE> 36
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 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.
34
<PAGE> 37
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
PAGE
----
Available Information ............................................. 3
Incorporation of Documents
by Reference ..................................................... 4
Prospectus Summary................................................. 5
Risk Factors....................................................... 8
Use of Proceeds.................................................... 13
Selected Financial Data............................................ 14
Business of the Company............................................ 15
Selling Shareholders............................................... 24
Certain Relationships and
Related Transactions.............................................. 28
Plan of Distribution............................................... 30
Description of Capital Stock....................................... 31
Legal Matters...................................................... 34
Experts............................................................ 34
GROUND ROUND
RESTAURANTS, INC.
4,736,900 SHARES
COMMON STOCK
PROSPECTUS
DATED ____, 1997
35
<PAGE> 38
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the fees and expenses in connection
with the sale and distribution of the securities being registered hereunder
which will be paid solely by the Company. All the amounts shown are estimates,
except the SEC registration fee. Each Selling Shareholder will pay any transfer
and sales taxes on the Shares sold by them in this filing:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
SEC registration fee............................... $ 3,341.84
NASDAQ listing fee................................. 9,600.00
Legal and Accounting fees and expenses............. 35,000.00
Printing and other miscellaneous expenses.......... 15,000.00
-----------
Total ........................................... $ 62,941.84
===========
</TABLE>
Item 15. Indemnification of Directors and Officers.
Section 722 of the New York Business Corporation Law provides the
following:
(a) A corporation may indemnify any person, made, or
threatened to be made, a party to an action or proceeding other than one by or
in the right of the corporation to procure a judgment in its favor, whether
civil or criminal, including an action by or in the right of any other
corporation of any type or kind, domestic or foreign, or any partnership, joint
venture, trust, employee benefit plan or other enterprise, which any director or
officer of the corporation served in any capacity at the request of the
corporation, by reason of the fact that he, his testator or intestate, was a
director or officer of the corporation, or served such other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise in
any capacity, against judgments, fines, amounts paid in settlement and
reasonable expenses, including attorneys' fees actually and necessarily incurred
as a result of such action or proceeding, or any appeal therein, if such
director or officer acted, in good faith, for a purpose which he reasonably
believed to be in, or, in the case of service for any other corporation, or any
partnership, joint
36
<PAGE> 39
venture, trust, employee benefit plan or other enterprise, not opposed to, the
best interest of the corporation and, in criminal actions or proceedings, in
addition, had no reasonable cause to believe that his conduct was unlawful.
(b) The termination of any such civil or criminal action or
proceeding by judgment, settlement, conviction or upon a plea of nolo
contendere, or its equivalent, shall not in itself create a presumption that any
such director or officer did not act, in good faith, for a purpose which he
reasonably believed to be in, or, in the case of service for any other
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise, not opposed to, the best interests of the corporation or that
he had reasonable cause to believe that his conduct was unlawful.
(c) A corporation may indemnify any person made, or threatened
to be made, a party to an action by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he, his testator or
intestate, is or was a director or officer of the corporation, or is or was
serving at the request of the corporation as a director or officer of any other
corporation of any type or kind, domestic or foreign, of any partnership, joint
venture, trust, employee benefit plan or other enterprise, against amounts paid
in settlement and reasonable expenses, including attorneys' fees, actually and
necessarily incurred by him in connection with the defense or settlement of such
action, or in connection with an appeal therein if such director or officer
acted, in good faith, for a purpose which he reasonably believed to be in, or,
in the case of service for any other corporation or any partnership, joint
venture, trust, employee benefit plan or other enterprise not opposed to, the
best interests of the corporation, except that no indemnification under this
paragraph shall be made in respect of (1) a threatened action, or a pending
action which is settled or otherwise disposed of, or (2) any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation, unless and only to the extent that the court in which the action
was brought, or, if action was not brought, any court of competent jurisdiction,
determines upon application that, in view of all the circumstances of the case,
the person is fairly and reasonably entitled to indemnity for such portion of
the settlement amount and expenses as the court deems proper.
(d) For the purpose of this section, a corporation shall be
deemed to have requested a person to serve an employee benefit plan where the
performance by such person of his duties to the corporation also imposes duties
on, or otherwise involves services by, such person to the plan or participants
or beneficiaries of the plan; excise taxes assessed on a person with respect to
an employee benefit plan pursuant to applicable law shall be considered fines;
and action taken or omitted by a person with respect to an employee benefit plan
in the performance of such person's duties for a purpose reasonably believed, by
such person to be in the interest of the participants and beneficiaries of the
plan shall be deemed to be for a purpose which is not opposed to the best
interests of the corporation.
Article "Ninth" of the Company's Restated Certificate of Incorporation provides
as follows:
37
<PAGE> 40
"To the fullest extent permitted by the New York Business
Corporation Law as it exists on the date hereof, or as it may hereafter be
amended, no director of the corporation shall be liable to the corporation or
its shareholders for damages for any breach of duty as a director. Any repeal or
modification of the foregoing sentence by the shareholders of the corporation
shall not adversely affect any right of protection of a director of the
corporation existing at the time of such repeal or modification. This
corporation shall indemnify each present and future director and officer of the
corporation against any costs and expenses which may be imposed on, or
reasonably incurred by him in connection with any claim, action, suit or
proceeding hereafter made or instituted in which he may be involved by reason of
his being or having been a director or officer of the corporation, or of any
other corporation in which he served or serves as a director or officer at the
request of the corporation, whether or not he continues to be a director or
officer at the time of imposition of such costs, or incurring of such expenses;
such costs and expenses to include the cost to such director or officer of
reasonable court approved settlements, other than amounts paid to the
corporation itself, or to such other corporation served at the request of the
corporation. The foregoing right of indemnification shall not be exclusive of
other rights to which any director or officer may be entitled as a matter of
law, and shall inure to the benefit of the heirs, executors and administrators
of any such director or officer."
The Company's Amended and Restated By-laws provide for
indemnification of the Company's directors and officers to the fullest extent
permitted by New York law.
The Company maintains an indemnification insurance policy
covering all directors and officers of the Company and its subsidiaries.
38
<PAGE> 41
Item 16. Exhibits
4.1 Form of Convertible Note payable to the Lenders dated September, 1996
(incorporated by reference to the Company's Current Report and Form
8-K, Date of Event October 11, 1996).
5.1 Opinion of Kane Kessler, P.C. as to the legality of the shares of
Common Stock.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Kane Kessler, P.C. (contained in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
Item 17. Undertakings.
A. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
provided, however, that paragraphs A(1)(i) and A(1)(ii) above do not apply if
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the Exchange Act
that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating
39
<PAGE> 42
to the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(B) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(C) The undersigned registrant hereby undertakes to deliver or
cause to be delivered with the prospectus, to each person to whom the prospectus
is sent or given, the latest annual report to security holders that is
incorporated by reference in the prospectus and furnished pursuant to and
meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Exchange Act;
and, where interim financial information required to be presented by Article 3
of Regulation S-X are not set forth in the prospectus, to deliver or cause to be
delivered to each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
(D) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
40
<PAGE> 43
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Braintree, State of Massachusetts, on the 23rd day of January, 1997.
GROUND ROUND RESTAURANTS, INC.
BY: /s/ DANIEL R. SCOGGIN
---------------------------
Name: Daniel R. Scoggin
Title: Chairman of the Board,
President and Chief
Executive Officer
We, the undersigned officers and directors of Ground Round
Restaurants, Inc., and each of us, do hereby constitute and appoint Daniel R.
Scoggin and Stephen J. Kiel, or any of them, our true and lawful attorneys and
agents, each with full power of substitution, to do any and all acts and things
in our name and behalf in our capacities as directors or officers and to execute
any and all instruments for us and in our names in the capacities listed below,
which attorneys and agents, or any of them, may deem necessary or advisable to
enable said corporation to comply with the Securities Act, as amended, and any
rules, regulations, and requirements of the Securities and Exchange Commission,
in connection with the Registration Statement, including specifically, but
without limitation, power and authority to sign for us or any of us in our names
in the capacities indicated below, any and all amendments (including
post-effective amendments) hereto; and we do hereby ratify and confirm all that
said attorneys and agents, or their substitute or substitutes, or any of them,
shall do or cause to be done by virtue thereof.
41
<PAGE> 44
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Daniel R. Scoggin Chairman of the Board, President, and January 23, 1997
________________________
Daniel R. Scoggin Chief Executive Officer
/s/ Stephen J. Kiel Senior Vice President, Chief Financial January 23, 1997
________________________
Stephen J. Kiel Officer and Treasurer
(Principal Financial and Accounting
Officer)
/s/ Christian R. Guntner Director January 23, 1997
________________________
Christian R. Guntner
/s/ John A. Mistretta Director January 23, 1997
________________________
John A. Mistretta
/s/ James R. Olson Director January 23, 1997
________________________
James R. Olson
/s/ Joseph Schollenberger Director January 23, 1997
________________________
Joseph Schollenberger
/s/ Fred H. Beaumont, Jr. Director January 23, 1997
________________________
Fred H. Beaumont, Jr.
/s/ Allan D. Weingarten Director January 23, 1997
________________________
Allan D. Weingarten
</TABLE>
42
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT Page
<S> <C> <C>
4.1 Form of Convertible Note payable to the Lenders dated
September, 1996 (incorporated by reference to the Company's
Current Report and Form 8-K, Date of Event October 11, 1996).
5.1 Opinion of Kane Kessler, P.C. as to the legality of the
shares of Common Stock.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Kane Kessler, P.C. (contained in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
</TABLE>
<PAGE> 1
[LETTERHEAD] KANE KESSLER, P.C.
January 23, 1997
Ground Round Restaurants, Inc.
35 Braintree Hill Office Park
Braintree, Massachusetts 02184
Re: Ground Round Restaurants, Inc. --
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as special counsel to Ground Round Restaurants,
Inc., a New York corporation ("GRR"), in connection with the preparation of the
Registration Statement on Form S-3 (the "Registration Statement") being filed by
GRR on or about the date hereof with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), with
respect to the registration pursuant to the Act for resale of up to 4,235,400
shares (the "Shares") of common stock, par value $.16 2/3 per share (the "Common
Stock"), of GRR and up to 501,500 shares (the "Conversion Shares") of Common
Stock issuable upon conversion of certain convertible notes described in the
Registration Statement (the "Convertible Notes").
In connection therewith, we have examined copies of the
Certificate of Incorporation, as amended, and By-Laws of GRR, the Registration
Statement, records of certain of GRR's corporate proceedings as reflected in
GRR's minute books and other records and documents that we have deemed necessary
for the purposes of this opinion. We have also examined such other documents,
papers, authorities and statutes as we have deemed necessary to form the basis
of the opinion hereinafter set forth.
<PAGE> 2
KANE KESSLER, P.C.
Ground Round Restaurants, Inc.
January 23, 1997
Page 2
In our review, we have assumed the genuineness of all
signatures and the conformity to original documents of all copies submitted to
us. As to various questions of fact material to our opinion, we have relied on
statements and certificates of officers and representatives of the Company and
public officials.
Based on the foregoing, we are of the opinion that the Shares,
assuming the receipt by the Company of due consideration therefor, have been
legally issued and are fully paid and non-assessable and the Conversion Shares,
when issued in accordance with the provisions of the Convertible Notes, assuming
the receipt by the Company of due consideration therefor, will be legally
issued, fully paid and non-assessable.
We are qualified to practice law in the State of New York and
do not purport to be experts on, or to express any opinion herein concerning any
law, other than the laws of the State of New York and the federal laws of the
United States of America.
We hereby consent to the use of this opinion as an exhibit to
the Registration Statement and to the reference to us under the heading "Legal
Matters" in the prospectus which forms a part thereof. In giving this consent,
we do not admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
Very truly yours
/s/ Jeffrey S. Tullman
KANE KESSLER, P.C.
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of Ground Round
Restaurants, Inc. for the registration of 4,736,900 shares of its common stock
and to the incorporation by reference therein of our report dated November 22,
1996, with respect to the consolidated financial statements and schedule of
Ground Round Restaurants, Inc. included in its Annual Report (Form 10-K) for
the year ended September 29, 1996, filed with the Securities and Exchange
Commission.
ERNST & YOUNG LLP
Boston, Massachusetts
January 23, 1997
