FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Fiscal Year Ended October 2, 1994

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to _____

Commission File Number: 1-6192

GROUND ROUND RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)

New York 13-5637682
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

35 Braintree Hill Office Park, Braintree, Massachusetts 02184
(Address of principal executive offices) (zip code)

Registrant's telephone number, including area code: (617) 380-3100

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each Exchange on which registered
- - ------------------- -----------------------------------------

Common Stock, $ .1667 par value NASDAQ National Market System

Securities registered pursuant to Section 12(g) of the Act:

None
(Title of Class)

Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]

On November 30, 1994, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $47.2 million, based upon
the last reported sale price for a share of the Registrant's Common Stock on
the NASDAQ National Market System.

Number of shares of Common Stock outstanding as of November 30, 1994:
11,114,269.

FORM 10-K INDEX

PART I

Page
----

Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Item 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Item 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Item 4 Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

PART II

Item 5 Market for the Registrant's Common Stock
and Related Shareholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . 13

Item 6 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Item 8 Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . 19

Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . 19

PART III

Item 10 Directors and Executive Officers of
the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Item 12 Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Item 13 Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

PART IV

Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

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PART I

ITEM 1. BUSINESS

RECENT EVENT

On August 23, 1994, the Company announced that it had entered into a definitive
merger agreement (the "Merger Agreement) to be acquired at a cash purchase
price of $9.00 per share (the "Merger Consideration") by a new company formed
by institutional investors led by 399 Ventures, Inc. Stockholders in the
acquiror will include members of senior management of the Company. Completion
of the transaction, which will be effected by a statutory merger, is subject to
receipt of financing as well as customary closing conditions. At the time the
Merger Agreement was signed, the acquiror delivered to the Company a letter
that it had obtained from Bear, Stearns & Co., Inc. ("Bear Stearns") indicating
that, based on then-current market conditions and subject to a number of
material financial conditions, Bear Stearns was highly confident of its ability
to place debt securities constituting a substantial portion of the proposed
financing. Approval of the merger requires a two-thirds vote of the Company's
stockholders.

On November 16, 1994, the Company announced that it had agreed to extend until
January 31, 1995 the termination date of the Merger Agreement in order to allow
the acquiror more time to arrange financing for the transaction. The Company
announced that it had been advised by the acquiror that the acquiror had
received advice from Bear Stearns regarding the deterioration of conditions in
the high-yield financing market and that, as a result, the acquiror did not
believe that the financing necessary to consummate the proposed merger will be
available on the terms contemplated at the time of the original Merger
Agreement. As a result, the acquiror has advised the Company that it is
pursuing alternative financing structures to complete the transaction. Under
the Merger Agreement, the acquiror is obligated to use its best efforts to
obtain financing on terms contemplated at the time of the original Merger
Agreement that would permit it to consummate the merger for the Merger
Consideration. There can be no assurance that the financing can be obtained on
such terms and, therefore, that the merger can be completed.

The amended Merger Agreement entitles either party to terminate the agreement
if the merger does not occur on or before January 31, 1995, provided that the
party electing to terminate is not in material breach of the Merger Agreement.
If the Merger Agreement is terminated, the Company will not be obligated to pay
any fees of the acquiror under the Merger Agreement other than to reimburse the
acquiror's expenses up to a maximum of $1.5 million under certain
circumstances, including termination of the agreement to accept an offer from a
third party. The Company may furnish information to and negotiate with parties
making unsolicited inquiries, accept an offer received from a third party, and
terminate the amended Merger Agreement.

OVERVIEW

The Company operates and franchises 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. A specialty section of the menu, "Just for Kids," offers
pizza, hot

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dogs and grilled cheese sandwiches at reduced prices. On Tuesdays or
Thursdays, KIDS PAY WHAT THEY WEIGH(R) at JUST A PENNY A POUND(R) for any item
selected from the children's section of the menu. As of October 2, 1994, the
end of the Company's most recent fiscal year, there were 205 restaurants
system-wide, 164 of which were Company-operated and 41 of which were operated
by franchisees.

STRATEGY

The Company's objective is to become the premier family-oriented, full service,
casual dining restaurant in the industry. The key elements of the Company's
strategy include the following:

- - -- emphasizing a "no compromise" dining experience by creating an atmosphere
WHERE KIDS CAN RELAX...AND GROWN-UPS CAN HAVE FUN(R);

- - -- offering customers an excellent price-to-value alternative to other casual
dining restaurants;

- - -- revitalizing the menu to offer items that are more appealing to the
Company's target customers;

- - -- implementing a new compensation plan designed to motivate each restaurant
general manager by tying financial rewards to the operating profits of the
manager's restaurant;

- - -- remodeling older restaurants to improve their exterior and interior
appearance to provide continuity throughout the Ground Round system;

- - -- selling or closing certain restaurants for which renovation is not
economically justifiable; and

- - -- accelerating the rate at which the company opens new restaurants.

No Compromise Dining. The Company seeks to create an atmosphere WHERE KIDS CAN
RELAX...AND GROWN-UPS CAN HAVE FUN(R). 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. In the main dining room, children can
enjoy a special selection of kids' meals while watching cartoons, coloring in
books, playing games or being entertained by periodic visits from BINGO THE
CLOWN(R). Adults dining without children or families seeking a more mature
ambiance can enjoy light snacks and complete meals in the second dining area.
By offering two distinct dining atmospheres, the Ground Round restaurants cater
to a large customer base, which the Company believes has contributed to the
resiliency of the Ground Round concept over the past 25 years.

Excellent Price-to-Value Relationship. The Company believes it offers its
customers an excellent price-to-value alternative to other casual dining
restaurants. By offering sandwiches and entrees that range in price from $3.79
to $12.95 and a children's menu with lower prices, the Company targets both
families and adults dining without children seeking a value oriented
full-service, casual dining experience. In fiscal 1994, the average guest
check in Company-operated restaurants was approximately $8.29 (including
alcoholic beverages). Alcoholic beverages have accounted for approximately 22%
of restaurant sales during the last three fiscal years.

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Revitalized Menu. The Company continues to refine its menu by developing new
products, which are perceived to be of higher quality and which reflect changes
in guest preferences. Examples include chicken quesadillas, sauteed dishes,
such as tomato and basil pasta and chicken alfredo, sizzling fajitas, a
12-ounce, center-cut sirloin steak and cajun swordfish. Several unique
desserts, such as CINNAMON DIPPERS(R), CHAOS(R) pie and peanut butter pie, have
also been added. Additionally, the Company is reducing the number of menu
items to enhance restaurant performance by simplifying execution.

Motivated General Managers. The Company believes that by sharing the
restaurant's operating profits with its managers, the Company will foster a
feeling of ownership in its managers and encourage entrepreneurship. The
Company recently began implementing its Managing General Partner program, which
allows each selected general manager to share in the success of the manager's
restaurant. A participating general manager will receive 2.5% of the monthly
operating profit and 15% of the increase in the quarterly operating profits of
the manager's restaurant. Additionally, each participating general manager
will receive a bonus of 10% of the total profit of the restaurant in the
managers's fifth year in the program. The Company expects that within the next
several years, all restaurant general managers will participate in the Managing
General Partner program. Currently, each restaurant manager not participating
in the Managing General Partner program receives incentive compensation based
upon the operating profits of the manager's restaurant. By providing its
general managers with a significant participation in the operating profits of
their restaurants, the Company believes that it will attract and retain highly
motivated managers.

Remodeling Program. The Company currently is in the process of remodeling
older restaurants to provide continuity throughout the entire Ground Round
system and preserve the integrity of the Ground Round concept. In 1992 and
1993 the Company remodeled 29 restaurants at an average cost of approximately
$275,000 per restaurant. In fiscal 1994, the Company remodeled 49 restaurants
at an average cost of approximately $147,000 per restaurant. The Company has
an additional nine restaurants undergoing remodeling. By the end of fiscal
1995, the Company plans to remodel substantially all remaining restaurants
which are economically justifiable to remodel, through which the Company can
achieve an adequate return through increased sales.

Divestiture Program. During fiscal 1994, the Company determined that it would
sell or close locations for which remodeling was not economically justifiable.
During fiscal 1994, the Company closed four locations and sold seven
Company-operated restaurants generating cash proceeds of approximately $4.4
million and has agreed to sell, subject to the fulfillment of certain closing
conditions, six Company-operated restaurants, which in the aggregate will
generate additional cash proceeds of approximately $3.6 million. The Company
intends to sell or close an additional 27 restaurants by the end of the second
quarter of fiscal year 1996. The disposal of some or all of these resturants
is not expected to have a material effect on the Company's operating profit.
In addition to the cash proceeds expected by the Company from the sales of the
remaining targeted restaurants, the Company should also realize significant
economic benefits through improved utilization of assets and decreased
management-supervision time.

Expansion Program. Management recently accelerated its expansion program by
opening five newly-constructed, Company-operated restaurants during fiscal 1992
and eight newly-constructed, Company-operated restaurants during fiscal 1993.
The Company-operated restaurants that were opened in fiscal 1992 recorded
average sales of approximately $1.9 million in fiscal 1993 (a 53-week year),
compared to $1.4 million average sales recorded by comparable Company-operated
restaurants in fiscal 1993. The eight Company- operated restaurants opened
during the fourth quarter of fiscal 1993 recorded average annualized sales of
approximately $1.8 million for fiscal 1994. The Company opened nine
Company-

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operated restaurants in fiscal 1994 and anticipates opening 10 to 20
Company- operated restaurants in fiscal 1995.

THE RESTAURANTS

The Company's restaurants are divided into 20 geographic regions, managed by an
Executive Vice President, a Senior Vice President and a Director of Operations.
Each region has a Regional Director who typically oversees between five and 16
Company-operated restaurants and one to five franchise restaurants. The
day-to-day operation of each restaurant, including personnel management, food
procurement, inventory control, guest relations and local marketing, is the
responsibility of a general manager who reports to the appropriate Regional
Director.

Ground Round restaurants are located primarily in the Northeast, Mid-Atlantic
and Midwest regions of the United States. Most restaurants are in
free-standing buildings along commercial roadways with high traffic counts.
Many of the restaurants are located near a retail shopping area or in major
shopping malls.

Ground Round restaurants average approximately 5,600 square feet and 210 seats.
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 Company has
developed a restaurant facility prototype for its new restaurants and is
remodeling its existing restaurants to make their physical appearance
consistent with this prototype. The exterior of the new and remodeled
restaurants features a green and yellow striped backlit awning, new 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 is, therefore, able to convert existing buildings to the
Ground Round concept.

The Company estimates that the investment required to open a typical
Company-operated restaurant (excluding occupancy costs, such as rent and taxes)
currently ranges from approximately $900,000 to $1.3 million, assuming the
Company does not purchase the land. The Company currently anticipates that it
will lease the land and buildings for substantially all new Company-operated
restaurants. Costs for construction of leasehold improvements vary based upon
such factors as size, location, condition and type of property. The cost of
furniture, fixtures and equipment, initial inventory and supplies and other
pre-opening expenses, including liquor licenses, are included in the range set
forth above and are incurred whether a restaurant is leased or owned. The
Company does not have any exclusive arrangements with contractors or designers.

The Company believes that location is a key factor in a restaurant's ability to
operate profitably. The Company studies area demographics, such as household
size, density of population and average household income, and site
characteristics, such as traffic volume, visibility, accessibility, parking
availability, proximity to a major shopping center and proximity to other
restaurants. Based on analysis of its most profitable restaurants, the Company
seeks sites in areas that have populations in excess of 50,000 persons within a
three-mile radius and an average household incomes of approximately $35,000.

The Company intends to locate its new restaurants primarily within or near
markets in which existing Ground Round restaurants are concentrated to benefit
from marketing and operating efficiencies. Of the new restaurants opened in
fiscal 1994, three are in Maryland, two are in Massachusetts, two are in Ohio,
and there is one in each of Minnesota and Pennsylvania. The two new franchised
restaurants opened in fiscal 1994 are in North Dakota and Pennsylvania.

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The Company periodically evaluates the prospects of existing Company-operated
restaurants and will, from time to time, sell or close individual restaurants.
See " --Strategy--Divestiture Program" above. Similarly, franchised
restaurants have closed in the past and may close in the future. During fiscal
1994, eleven Company-operated and five franchised restaurants were closed.
Four franchised restaurants were terminated for cause. Four of the five
franchised restaurants that ceased operating during fiscal 1994 were in the
bottom 30% in annualized sales among all franchised 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, courteous and responsive service.

Purchasing. The Company's purchasing department coordinates purchases of most
food products and most non-alcoholic beverages used in both Company-operated
and franchised restaurants. The nature of the Company's standing purchase
order arrangements with its suppliers enables it to anticipate and better
control its food costs. The Company purchases beef (other than ground beef),
chicken and fish under forward purchase contracts generally having a term of
one year, which are designed to assure the availability of specific products at
a constant price throughout the year. The Company has a coordinated purchasing
system, which offers the same prices to both Company-operated and franchised
restaurants. All franchisees are required to purchase food, equipment and
smallwares from suppliers approved by the Company. This enables the Company to
assure that the items sold in all Ground Round restaurants meet the Company's
standards and specifications for uniform quality. Although not required to do
so, virtually all franchisees purchase through the Company's purchasing
department to capitalize on the strength of the Company's purchasing power.
Beer, alcoholic beverages, produce and certain dairy products are purchased by
restaurant general managers on a local basis.

Training. The Company emphasizes the training of both new and existing
employees. Training is an integral part of both Company- operated and
franchised new restaurant openings. A specialized training team works on-site
to implement an extensive training program for each hourly employee in a new
restaurant prior to and for several weeks after its opening. In addition, the
Company has implemented a system-wide training program to achieve
standardization of food preparation and operational procedures and efficient,
courteous and responsive 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.

As part of its Managing General Partner program, the Company has developed a
comprehensive training course which all participating restaurant managers are
required to complete successfully. The course includes a workshop on
leadership training and covers virtually all aspects of restaurant operations,
such as techniques to increase sales, local restaurant marketing, management
information systems,

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understanding the law as a means of risk management, facilities management,
food and beverage purchasing and managing employees.

Restaurant Reporting. During fiscal 1993, the Company completed installation
of a point of sale system in its 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's goal is to use the
information generated by the point of sale system to facilitate planning
activities at both the corporate and restaurant levels. In addition, the time
required to assemble and report restaurant information should be decreased,
allowing the restaurant manager to focus on other aspects of operations.

Marketing. Historically, the Company's marketing strategy was to use
media-based advertising focused on discounts. In 1993, the Company shifted its
strategy to focus on building long-term consumer loyalty, which the Company
believes can best be accomplished by providing customers with superior service
and value. Accordingly, the Company is focusing on enhancing its image through
the remodeling of existing restaurants, increasing training at the restaurant
level and improving menus. The Company now principally employs in-store, point
of purchase materials such as banners, posters and buttons, as marketing tools.
The Company also is using radio advertising that is image- and
product-oriented.

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 a restaurant's ties to
its community. These community programs include activities with area schools
and youth organizations and participation in local events.

FRANCHISING

As of October 2, 1994, the Company had 41 franchised restaurants, the majority
of which were located in the same geographic regions as, or in close proximity
to, Company-operated restaurants. During fiscal 1994, the average annual
comparable sales by the Company's franchised restaurants were $1.8 million.
The Company's franchise program enables the Company to enhance its brand-name
recognition and derive additional revenue without substantial investment.

In fiscal 1994, two new franchised restaurants were opened, and five
restaurants were closed. Four of the five franchised restaurants were
terminated for cause. Four of the five franchised restaurants that ceased
operating during fiscal 1994 were in the bottom 30% in annualized sales among
all franchised restaurants. The Company expects four additional franchise
restaurants to open in fiscal 1995.

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

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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.

All franchised restaurants are required, pursuant to their respective franchise
agreements, to serve Ground Round menu items. In addition, all franchisees are
required to purchase food, equipment and smallwares from suppliers approved by
the Company. This enables the Company to assure that the items sold in all
Ground Round restaurants meet the Company's standards and specifications for
uniform quality. Although not required to do so, virtually all franchisees
purchase through the Company's purchasing department to capitalize on the
strength of the Company's purchasing power.

The current Ground Round franchise agreement has an initial term of 20 years.
Among other obligations, the agreements require franchisees to pay an initial
franchise fee of $40,000 for the first restaurant and $35,000 for subsequent
restaurants and a continuing royalty of 3% of monthly gross sales. The
current franchise agreement also requires franchisees to spend 2% of monthly
gross sales on advertising, 1 1/2% of which must be spent locally and 1/2% of
which is paid to the Company for creative and promotional development. The
franchise agreements related to ten of the 41 franchised restaurants will
expire in the next five years but give the franchisees the right to renew their
agreements for a 20-year term, subject to certain conditions. There currently
are no territorial exclusivity provisions that limit the Company's ability to
expand in any market. The Company, however, currently is engaged in
discussions with an existing franchisee regarding the granting of exclusive
territorial development rights in a market in which there are no Ground Round
restaurants.

EMPLOYEES

As of October 2, 1994, the Company had approximately 9,400 employees,
approximately 5,600 of whom were part-time employees. Approximately 8,700 of
these employees were employed in non-management restaurant positions, 600 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.

COMPETITION

The restaurant business generally, and the full-service, casual dining segment
in particular, is highly competitive. While management believes that Ground
Round's "no compromise" dining concept 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 not
lose its appeal. Competitors of Ground Round include restaurants operated by
large national and regional chains having substantially greater financial and
marketing resources and name recognition than Ground Round, as well as numerous
local independent restaurants. The Company and its franchisees also encounter
substantial competition in their efforts to obtain suitable locations for new
restaurants.

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HEALTH CARE AND MINIMUM WAGE LAWS

The Clinton Administration and various members of Congress have proposed
legislation to overhaul the nation's health care system. Because the outcome
of any health care reform legislation is uncertain, the Company is unable to
determine the likely impact of health care reform initiatives on its
operations.

A significant number of the Company's food service personnel are paid at rates
based on applicable federal and state minimum wages. During the 1992
presidential election campaign, then-candidate Clinton pledged to seek an
increase in the minimum wage, coupled with a proposal to index future
increases. It is not possible at this time to predict the likelihood that an
increase in the minimum wage will be enacted or, if enacted, its impact on the
Company's profitability.

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. The Company has not experienced
any material problems resulting from its sanitation and food handling
procedures.

Ground Round restaurants are subject to state and local licensing and
regulations with respect to the sale and service of alcoholic beverages.
Typically, 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.

The Company's restaurants are subject to the provisions of the Americans with
Disabilities Act ("ADA"), which requires that private entities operating places
of public accommodation, including restaurants, take steps to ensure that
disabled employees and customers are not denied access and are not segregated.
Under ADA, however, the Company is not required to make any accommodation that
would result in an "undue burden" on the Company.

Management is not aware of any federal or state environmental regulations that
have had a material effect

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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 and limiting the ability of the franchisor to terminate or refuse
to renew a franchise. 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 ability of
franchisors to 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 problems
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 and its logo with the
United States Patent and Trademark Office. In addition, the Company has other
registered trademarks, including WHERE KIDS CAN RELAX AND GROWN-UPS CAN HAVE
FUN; THE GROUND ROUNDER; BINGO THE CLOWN; KIDS PAY WHAT THEY WEIGH; JUST A
PENNY A POUND; KIDS PAY BY DEGREE!; IT'S A GREAT DEAL OF FUN!; FAMILY COUNTS;
CINNAMON DIPPERS' and SLIDER sundae. The Company believes that these
trademarks are valuable to the operation of its restaurants and marketing
strategy.

ITEM 2. PROPERTIES

As of October 2, 1994, the Company operated 164 of the 205 Ground Round
restaurants. At 29 locations, both the real estate and structure are owned by
the Company in fee. At 117 locations, both the real estate and structure are
leased. At the remaining 18 locations, the land is leased and the structure is
owned. Lease terms run from 10 to 30 years, with most of the leases providing
for an option to renew for at lease one additional term of five years. Within
the next five years, 83 of the Company's leases will be up for renewal. Under
most leases, rent is calculated as a percentage of gross revenues, subject to a
minimum annual rent. Generally, the leases are net leases which require the
Company to pay the cost of insurance, taxes and maintenance on the leased
property. The Company owned properties and certain leased properties are
subject to security interests.

The Company's headquarters are located in a modern office park in Braintree,
Massachusetts, where the Company leases approximately 22,000 square feet. The
lease expires in 1996 and has a five-year renewal option. The Company believes
this space is adequate for its present and projected needs for at least the
next five years.

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12

COMPANY-OPERATED RESTAURANT LOCATIONS

The following table sets forth the 164 company-operated restaurants as of
October 2, 1994. An * denotes a new restaurant added in 1994:

CONNECTICUT Stoughton Fairport Warminster
Enfield W. Springfield Fayetteville West Chester
Groton Taunton Garden City Wexford
Manchester Walpole Kenmore Whitehall
Plainville Worcester Kingston
Rocky Hill Latham RHODE ISLAND
Waterbury MICHIGAN Liverpool (2) Johnston
Farmington Hills Mamaroneck Warwick
DELAWARE Grand Rapids Middletown
Newark Jackson Nanuet VIRGINIA
Wilmington Kalamazoo New Hartford Winchester
Livonia Newburgh
ILLINOIS Royal Oak Niagara Falls WISCONSIN
Bloomington Northport Glendale
Decatur MINNESOTA Port Jefferson Greenfield
Rockford Brooklyn Center Poughkeepsie Janesville
Springfield Burnsville Rochester (4) Racine
Coon Rapids Roslyn Wauwatosa
INDIANA Crystal Scarsdale West Allis
Castleton Duluth Schenectady (2)
Greenwood Fridley Utica
Indianapolis (2) Mankato* Vestal
North St. Paul Yonkers
IOWA Richfield
Davenport Roseville OHIO
Des Moines St. Cloud Akron (2)
Dubuque St. Paul Cincinnati (3)
Iowa City West St. Paul Columbus (3)
Waterloo Elyria*
MISSOURI Kent
KENTUCKY Bridgeton Kettering
Florence St. Joseph Lima
St. Louis Madeira
MARYLAND St. Peters Mentor
Baltimore Miamisburg
BelAir* NEW HAMPSHIRE North Olmsted
Frederick* Manchester Parma
Hagerstown* Parma Heights
NEW JERSEY Solon*
MASSACHUSETTS Cedar Knolls Strongsville
Allston Deptford Toledo
Andover Ewing Township Willowick
Boston* Gloucester
Braintree Greenbrook PENNSYLVANIA
Brighton Hackensack Camp Hill
Cambridge Hasbrouck Heights Corapolis
Danvers Keyport Erie
Framingham Maple Shade Greensburg
Natick Sayreville Johnstown
North Dartmouth Voorhees Monroeville
Norwell No. Wales
Norwood NEW YORK Philadelphia
Salem Albany (2) Pittsburgh (3)
Saugus Amherst Reading
Springfield* Bayshore Scranton*
Stoneham Clay Springfield

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13

FRANCHISED RESTAURANT LOCATIONS

The following table sets forth the 41 franchise restaurants as of October 2,
1994. An * denotes a new restaurant added in 1994:

CONNECTICUT NEW HAMPSHIRE OHIO CANADA
Branford Nashua Boardman Niagara Falls
Danbury
Glastonbury NEW JERSEY PENNSYLVANIA
Bordentown Langhorne
MAINE Egg Harbor York *
Auburn Flemington
Augusta Lawrenceville RHODE ISLAND
Bangor Toms River Pawtucket
So. Portland
NEW YORK SOUTH DAKOTA
MARYLAND Commack Sioux Falls
Annapolis Farmingdale
Hicksville VERMONT
MASSACHUSETTS Plattsburgh So. Burlington
Chelmsford Rensselaer
Hadley Sayville VIRGINIA
Lanesboro Danville
Needham NORTH DAKOTA Lynchburg
Shrewsbury Bismarck Roanoke
Waltham Fargo
Grand Forks
MICHIGAN Minot *
Dearborn Hts.

ITEM 3. LEGAL PROCEEDINGS

The Company is subject to various claims and legal actions that arise in the
ordinary course of business, including claims and actions brought pursuant to
"dram shop" statutes and under federal and state employment laws prohibiting
employment discrimination.

The Company has been named in a number of separate claims brought by former
employees alleging that the Company engaged in discriminatory practices based
on age, race, sex or disability. Plaintiffs maintaining claims of employment
discrimination, such as those being brought against the Company, generally are
entitled to have their claims tried by a jury and such claims may result in
punitive damage awards. Most of the proceedings against the Company are still
in the discovery phase. Management believes that the discrimination claims
against the Company are without merit and the Company is actively defending the
claims.

On August 24, 1994, a suit was filed in the Massachusetts Superior Court,
Suffolk County in which the Company and each member of its Board of Directors
were named as defendants. That suit is styled Perry v. O'Donnell, et al.,
Civil Action No. 94-4648 G. The suit, which has been brought by a purported

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14
shareholder seeking to be certified as a representative of a class of
shareholders, alleges in substance that the members of the Board of Directors
acted in breach of their fiduciary duty to the Company's shareholders by (i)
failing to take appropriate steps to maximize the value to be received by the
Company shareholders upon the sale of the Company, (ii) authorizing the Company
to enter into the Merger Agreement with an entity in which certain members of
the Company's senior management, including Mr. O'Donnell, will have ownership
interest and (iii) agreeing to recommend a transaction in which the Merger
Consideration is unfair and grossly inadequate. The relief requested by the
plaintiff includes that the proposed Merger be enjoined or, if completed,
rescinded, or that damages be awarded. On September 13, 1994, a similar suit,
Weinstein v. Ground Round Restaurants, Inc., Civil Action No. 94- 4714 G, was
brought by another purported shareholder. That suit, also brought in the
Massachusetts Superior Court, Suffolk County, made the same allegations and
demanded the same relief as were made and demanded in Perry. The Company and
its directors currently are preparing their responses to both complaints. The
Company and the Board of Directors believe that such allegations completely are
without merit, and they intend vigorously to defend against them.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

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15
PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.

The Common Stock of the Company is listed on the NASDAQ National Market System
under the symbol "GRXR." Prior to June 24, 1993, shares of the Company's
common stock were traded on the American Stock Exchange. The following table
sets forth for the fiscal quarters indicated, the reported high and low closing
sales prices of the Company's Common Stock during the fiscal year ended October
2, 1994 and October 3, 1993, respectively.

1994 1993
---- ----
HIGH LOW HIGH LOW
----- --- ---- ---

1st Fiscal Quarter $8.13 $ 6.50 $7.75 $4.75
2nd Fiscal Quarter 8.00 5.50 9.63 7.50
3rd Fiscal Quarter 7.13 5.50 8.50 6.13
4th Fiscal Quarter 8.63 5.63 8.13 5.50

The Company has not paid a cash dividend on the Common Stock since its public
offering in September 1991. The Company intends to retain future earnings for
use in the operation and expansion of its restaurants and, accordingly, does
not intend to pay cash dividends in the foreseeable future. In addition, the
terms of the Company's current credit agreement effectively prohibit the
Company from declaring or paying cash dividends while borrowings are
outstanding pursuant to this agreement.

As of November 30, 1994, the number of holders of record of shares of the
Company's Common Stock was 866.

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16

ITEM 6. SELECTED FINANCIAL DATA

The following table contains certain selected consolidated financial data for
each of the past five fiscal years. In 1991, the Company changed its fiscal
year-end to the Sunday closest to September 30. The following selected
financial information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and the notes thereto included elsewhere
in this Report.

52 WEEKS 53 WEEKS 52 WEEKS 9 MONTHS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
OCTOBER 2, OCTOBER 3, SEPTEMBER 27 SEPTEMBER 29, DECEMBER 31,
1994 1993 1992 1991 1990
----- ------ ------ ------ ------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Revenue . . . . . . . . . . . . . . . . . . $243,971 $232,556 $226,466 $162,055 $215,597
Operating income from
continuing operations . . . . . . . . . . 13,277 11,866 12,090 7,714 10,504
Interest expense from
continuing operations, net . . . . . . . . 4,091 4,031 4,598 5,032 6,770
Income from continuing
operations before income taxes . . . . . . 9,186 7,835 7,492 2,682 3,734
Income taxes . . . . . . . . . . . . . . . . 2,940 2,507 2,846 1,152 2,484
------ ------ ------ ------- --------
Income from continuing operations:
Total . . . . . . . . . . . . . . . . . . 6,246 5,328 4,646 1,530 1,250
Per share . . . . . . . . . . . . . . . .56 .48 .42 .24 .19

Weighted average common shares outstanding . 11,109 11,086 11,064 6,509 6,462

OPERATING DATA:
Systemwide sales:
Company-operated . . . . . . . . . . . . $241,777 $230,017 $224,048 $160,700 $213,252
Franchised . . . . . . . . . . . . . . . 72,726 71,876 72,692 52,027 69,357
------ -------- ------- ------- ------
Total systemwide sales . . . . . . . . . 314,503 301,893 296,740 212,727 282,609
Average annual systemwide sales per
restaurant . . . . . . . . . . . . . . . 1,534 1,438 1,455 1,(a) 1,420

Number of restaurants (at period end):
Company-operated . . . . . . . . . . . . 164 166 160 154 154
Franchised . . . . . . . . . . . . . . . 41 44 44 44 45
-- ---- ------ ------- -------
Total restaurants . . . . . . . . . . . . 205 210 204 198 199

BALANCE SHEET DATA:
Total assets . . . . . . . . . . . . . . . . $156,772 $151,813 $137,780 $134,968 $170,756
Long-term debt, including current maturities 58,770 60,305 51,965 56,391 86,060
Stockholders' equity . . . . . . . . . . . . 65,036 58,637 53,219 48,573 51,843
<FN>

(a) Annualized to a 52 week year

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

GENERAL

The following discussion and analysis examines the Company's operations which
comprise the Ground Round restaurant chain. As of October 2, 1994, the Company
operated 164 and franchised 41 family-oriented, full service, casual dining
restaurants.

For purposes of this discussion and analysis, the 52 week year ended October 2,
1994, the 53 week year ended October 3, 1993 and the 52 week year ended
September 27, 1992, are referred to as 1994, 1993, and 1992, respectively.

RESULTS OF OPERATIONS

The following table sets forth the percentages which the items in the Company's
consolidated Statements of Operations bear to total revenue or Company-operated
restaurant revenue, as indicated:

52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED
OCTOBER 2, OCTOBER 3, SEPTEMBER 27,
1994 1993 1992
----- ---- ----

Revenue:
Restaurant revenue 99.1% 98.9% 98.9%
Franchise revenue .9 1.1 1.1
----- ------ -----
Total Revenue 100.0 100.0 100.0

Costs and Expenses:
Cost of products sold (1) 83.9 84.2 83.9
Selling, general and administrative 6.3 6.8 7.2
Depreciation and amortization 5.5 4.8 4.4
Interest expense 1.7 1.7 2.0
Other (income) expense (.4) (.1)

Net income before income taxes 3.8 3.4 3.3
Income taxes 1.2 1.1 1.2
--- ---- ----
Net income 2.6% 2.3% 2.1%

<FN>

(1) As a percentage of Company-operated restaurant revenue.

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18

RESTAURANT REVENUE. Restaurant revenue totalled $242.0, $230.0 and $224.0
million for 1994, 1993 and 1992, respectively. Restaurant revenue is comprised
of comparable restaurant revenue (revenue from restaurants open during all of
both fiscal years) and non-comparable restaurant revenue.

Comparable restaurant revenue, comprised of revenue from restaurants open
during all of 1994 and 1993, increased in 1994 by .7% to $213.6 million for the
comparable 52 week period. Management believes the increase is principally
attributable to improvement in operations, the continued impact of the
Company's renovation program and image- and product-based advertising.
Comparable restaurant revenue in 1993 decreased 2.1% for the comparable 52-week
period. In 1993, management de-emphasized advertised discounting, which
contributed to lower guest count levels and lower revenue but resulted in
significant savings in discounting and advertising.

The average guest check was approximately $8.29, $7.95 and $7.35 in 1994, 1993
and 1992, respectively. These increases primarily reflected an evolving menu
mix with higher priced menu items, as well as the de-emphasized discounting in
1994 and 1993. For example, 1992 included 66 additional days of JUST A PENNY A
POUND(R) and KIDS PAY BY DEGREE!(R) promotions which were not duplicated in
1993 or 1994. An insignificant portion of the increase in the average guest
check is attributed to price increases on existing menu items. Sales of
alcoholic beverages (excluding soda) were approximately 22% of revenue in each
of these three years.

Non-comparable restaurant revenue, consisting of those restaurants not in
operation during all of both comparable years, increased to $28.2 million in
1994 from $13.8 million in 1993 and $9.7 million in 1992. The increase in 1994
was attributable to the full year operation of nine new restaurants added in
1993, as well as nine new restaurants added in 1994. These increases were
partially offset by the sale or closing of eleven locations in 1994. In 1993,
the increase in non-comparable restaurant revenue was attributable to the full
year operation of seven new restaurants added in 1992, as well as nine new
restaurants added in 1993. These increases were partially offset by the
closing of three locations in 1993.

FRANCHISE REVENUE. The Company's franchise base consisted of 41 franchised
restaurants in 1994 and 44 franchised restaurants in 1993 and 1992. In 1994
two new franchised restaurants were added, while five franchised restaurants
were closed. Five new franchised restaurants were added during 1993, four of
which were opened by new franchisees, while one franchise agreement was not
renewed, three franchised restaurants were closed and another was acquired by
the Company. Revenue from franchised restaurants (consisting of royalties and
franchise fees) were $2.2 million, $2.5 million and $2.4 million in 1994, 1993
and 1992, respectively. In 1993 and 1992, $.2 million and $.5 million,
respectively, which had been reserved in prior periods, was received and
recognized as royalty revenue.

COST OF PRODUCTS SOLD. Cost of products sold consists of both food and
beverage costs and restaurant operating expenses. Food and beverage costs
totalled 31.8%, 31.9% and 31.3% of Company-operated restaurant revenue in 1994,
1993 and 1992, respectively. Restaurant operating expenses were 52.1%, 52.3%
and 52.5% of Company-operated restaurant revenue, respectively, in 1994, 1993
and 1992.

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Food and beverage costs as a percentage of Company-operated restaurant revenue
decreased .1% from 1993 to 1994 as compared to the increase of .6% from 1992 to
1993. The decrease in food and beverage costs in 1994 was attributable to
lower product costs and management's increased efforts to control food costs
and reduce waste. These activities resulted in a decrease of .5% of food
costs, offset by an increase of 1.1% of beverage costs largely due to the
increased cost of beer. Food and beverage costs in 1993 were adversely
affected by higher produce costs due to winter flooding in Arizona, late
planting in California and higher beef prices.

Restaurant operating expenses in 1994 decreased by .2% of Company-operated
restaurant revenue from 1993, principally due to decreases in labor costs as a
result of a change in the Company's policy on accrued vacation for hourly
employees, partially offset by increases in bonuses earned by restaurant
management based on increased profits. Other costs have remained at relatively
constant levels as compared with the prior year. In 1993, restaurant operating
expenses decreased by .2% of Company-operated restaurant revenue from 1992,
principally due to decreases in labor costs and reductions in discounts,
partially offset by increases in rental expense.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were 6.3%, 6.8% and 7.2% of total revenue in 1994, 1993
and 1992, respectively. Selling expenses, comprised of advertising and point
of purchase materials, development and production costs, were .5%, .7% and 1.5%
of total revenue for 1994, 1993 and 1992, respectively. Selling expenses
decreased in 1994 by .2% of total revenue from 1993, primarily due to an
additional credit of $.4 million from Coca-Cola(TM) based on product usage.
Management's strategic decision to de-emphasize media advertising used in
connection with discounting programs was primarily responsible for reducing
selling costs by .8% of revenue in 1993.

General and administrative costs, comprised of restaurant manager training,
regional overhead, and corporate administrative costs, were 5.8%, 6.1% and 5.7%
of total revenue in 1994, 1993 and 1992, respectively. General and
administrative costs decreased in 1994 from 1993 largely due to the termination
of the executive retirement plan which resulted in a credit of $.3 million.
All other general and administrative costs in 1994 remained constant as a
percentage of total revenue as compared to 1993. In 1993, general and
administrative cost increases reflect the impact of increased training and
recruitment expenses associated primarily with the hiring of new restaurant and
regional management personnel.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses were
5.5%, 4.8% and 4.4% of total revenue in 1994, 1993 and 1992, respectively. The
increase in depreciation and amortization from 4.8% of total revenue in 1993 to
5.5% of total revenue in 1994 resulted from nine new restaurants added in 1994,
nine new restaurants added in 1993 and the remodeling of seventy-eight
restaurants since 1992. In 1993, depreciation and amortization increased to
4.8% from 4.4% in 1992 due to new restaurant development and the remodeling of
twenty-nine restaurants.

OTHER (INCOME) AND EXPENSE. During 1994, the Company completed a sale of one
location for approximately $2.0 million and realized a pretax gain of
approximately $1.5 million. This gain was partially offset by the write-off of
$.6 million in expenses associated with a proposed public offering of
convertible subordinated debentures which the Company withdrew due to market
conditions.

In August 1994, the Company entered into the Merger Agreement pursuant to which
it agreed to be acquired for cash. Completion of the proposed acquisition is
subject to, among other things, the approval

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of the holders of two-thirds of the Company's stock and the acquiror's receipt
of financing. In November 1994, the acquiror advised the Company that the
acquiror did not believe the financing necessary to consummate the proposed
acquisition will be available on the terms contemplated at the time the parties
entered into the Merger Agreement. Although the acquiror is obligated to use
its best efforts to obtain financing on terms contemplated at the time of the
Merger Agreement that would permit it to consummate the Merger for the Merger
Consideration, there can be no assurance that the financing can be obtained on
such terms and, therefore, that the acquisition can be completed. To date, the
Company has incurred $.4 million of expense in connection with the proposed
acquisition. If the transaction is not completed, those expenses will be
recognized in fiscal 1995.

INTEREST EXPENSE. Interest expenses were 1.7%, 1.7% and 2.0% of total revenue
in 1994, 1993 and 1992, respectively. Interest expense in 1994 remained
constant as a percentage of total revenue as compared to 1993. The decrease in
interest expense from 1992 to 1993 was primarily a result of lower average
interest rates, which more than offset interest expense incurred under interest
rate swap agreements (see "Liquidity and Capital Resources" below) of
approximately $.8 million and $.9 million in 1993 and 1992, respectively. At
November 30, 1994, the average interest rate under the Company's credit
facilities (described below) was 7.3% as compared to an average interest rate
of 6.5% for 1994. The increase in the applicable interest rate reflects the
rising interest rate environment in the United States during the second half of
calendar 1994.

INCOME TAXES. The Company's effective income tax rates were 32%, 32% and 38%
in 1994, 1993 and 1992, respectively. The reduction in the 1993 effective tax
rate was primarily the result of lower state taxes and the generation of
targeted jobs tax credits. The full utilization of a net operating loss
carryforward also affected the 1992 income tax rate.

NET INCOME. As a result of the above, the Company reported income from
continuing operations of $6.2 million in 1994, $5.3 million in 1993 and $4.6
million in 1992, representing 2.6%, 2.3% and 2.1% of total revenue,
respectively. Net income from continuing operations was $.56, $.48 and $.42
per share for 1994, 1993 and 1992, respectively.

LIQUIDITY AND CAPITAL RESOURCES.

A significant amount of the Company's restaurant sales are for cash, with the
remainder made with credit cards that are generally realized in cash within a
few days. Because the Company does not have significant accounts receivable or
inventories and pays its expenses within normal terms, the Company operates
with working capital deficits as is typical in the restaurant industry. The
Company had working capital deficits of $15.3 million and $12.6 million as of
October 2, 1994 and October 3, 1993, respectively.

Net cash provided by operating activities totalled $22.4 million in 1994, and
$15.5 million in 1993. The company incurred capital expenditures totalling
$24.1 million and $25.1 million in 1994 and 1993, respectively, primarily for
restaurant capital maintenance, remodeling and new restaurant construction.
Cash flow from operations plus proceeds from sales of locations funded 1994
capital expenditures and provided for the repayment of approximately $1.0
million in long-term borrowings. On October 2, 1994 and October 3, 1993, the
Company's borrowings under its credit facilities were approximately $53.0
million and $53.0 million, respectively. On October 8, 1993 the credit
facilities were amended to a $70 million commitment, with the aggregate balance
of $53.7 million of the combined facility balances on that date converted to
term debt. The balance of $16.3 million is a revolving facility to fund
operations

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and new store development and converts to term debt on October 8, 1995.
Principal payments under the credit facilities begin in October 1995 and are
scheduled through July 2000.

The credit facility obligates the Company to hedge its interest rate risk on
approximately 50% of its total term borrowings. In fiscal 1992 and 1993, the
Company effected such a hedge by entering into interest rate swap agreements
under which it agreed to exchange LIBOR-based interest payments for fixed-rate
payments (see "Results of Operations-Interest Expense" above). In fiscal 1994,
the Company hedged its interest rate risk by entering interest cap agreements
under which the maximum base interest rate of its LIBOR-based payments would be
7.0%. The interest rate cap agreements had no effect on the Company's interest
expense in fiscal 1994.

The credit facilities contain certain restrictions on the conduct of the
Company's business including a prohibition on the payment of dividends. In
addition, the Company is required to comply with certain financial covenants
relating to maintenance of net worth, interest coverage, fixed charges
coverage, the ratio of funded debt to free operating cash flow and capital
expenditures (other than the separate limitations for capital expenditures for
new restaurants). The revolving line of credit requires the satisfaction of
certain criteria prior to entering into a commitment to open a new restaurant.
These criteria relate to projected capital investment and first year sales,
margins and profits as well as to location. The credit facilities also
currently restrict the Company from entering into commitments to open more than
18 new restaurants in any fiscal year, entering into a new commitment if ten or
more restaurants for which commitments are outstanding remain unopened or
entering into a new restaurant commitment if total new restaurant commitments
exceed $15 million at any one time. In addition, new restaurants must meet
certain operating tests.

The Company expects to incur approximately $25 million in capital expenditures
during the 1995 fiscal year. Management believes that existing cash, cash flow
from operations, and available borrowings under the credit facilities will be
sufficient to meet operating needs, fund anticipated capital expenditures and
service debt requirements during fiscal 1995.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required under this item is set forth on pages F-1 through F-18
of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS OF REGISTRANT

The information called for by this Item with respect to directors will be
contained in either (i) the Company's Proxy Statement, if the Company files the
proxy statement within 120 days after the end of the Company's fiscal year
ended October 2, 1994 or (ii) an amendment to this Annual Report filed on Form
10.

EXECUTIVE OFFICERS OF THE REGISTRANT

Certain information is set forth below concerning the executive officers of the
Company who have been elected to hold office for such terms as may be
prescribed by the Board, and unless sooner removed under the Bylaws of the
Company, or until their successors are duly elected and qualified. There is no
family relationship among any of the officers and directors of the Company.
The executive officers of the Company are as follows:

NAME AGE POSITION
- - ---- --- --------

Michael P. O'Donnell 38 Chairman of the Board, President and
Chief Executive Officer

Peter J. Beaudrault 39 Executive Vice President

Michael R. Jorgensen 42 Sr. Vice President, Chief Financial
Officer & Treasurer

William C. Schoener 43 Sr. Vice President - Division Operations

Warren C. Hutchins 50 Vice President - Purchasing & Distribution

Holly J. Young 41 Vice President - Marketing

Robin L. Moroz 38 Vice President - General Counsel

Elizabeth Brennan Baker 40 Vice President - Organizational
Development

Michael P. O'Donnell has served as the Chairman of the Board, President and
Chief Executive Officer of the Company since September 1991 and President and
Chief Executive Officer of the Ground Round since January 1990. He was Senior
Vice President (Southern Division) of TGI Friday's Inc., a restaurant chain,
from December 1986 through December 1989.

Peter J. Beaudrault has served as Executive Vice President of the Company since
June 1994 and was Senior Vice President of Division Operations of the Company
from September 1993 to May 1994. He

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was Divisional Vice President of the Company and Ground Round since September
1992. He was Regional Manager of TGI Friday's Inc. from July 1989 through
September 1992. He was Director of Operations for Hard Rock Cafes, Inc. from
November 1987 through July 1989.

Michael R. Jorgensen has served as Vice President, Chief Financial Officer and
Treasurer of the Company since June 1993 and was appointed Senior Vice
President in September 1993. He was Vice President, Finance - Middle East of
Alghanim Industries, the largest consumer products distributor in Kuwait, from
March 1992 to April 1993. Prior to that, Mr. Jorgensen was Vice President and
Chief Financial Officer of the Company (then known as International Proteins)
from May 1988 to September 1991.

William C. Schoener has served as Senior Vice President of Division Operations
since September 1993. He was Divisional Vice President of the Company since
September 1991 and January 1989, respectively. He was a Director of Operations
of Ground Round from June 1986 through December 1988.

Warren C. Hutchins has served as Vice President, Purchasing and Distribution of
the Company since September 1991 and August 1986, respectively. He was
Secretary of Ground Round from March 1990 through February 1991.

Holly J. Young has served as Vice President of Marketing since May of 1994, and
served as Director of Marketing when she joined the Company in March of 1994 to
April 1994. She was Senior Vice President of Marketing of Chi-Chi's
Restaurants, Inc. from January 1993 through January 1994, and Vice President of
Marketing for Grisanti's Inc. from April 1992 to December 1992. From June 1989
to March 1991, she was Senior Vice President of Marketing for Metromedia
Steakhouses, Inc. She was Vice President of Marketing for TGI Friday's Inc.
from 1987 to 1989.

Robin L. Moroz was appointed General Counsel and Secretary in December 1994.
She was hired by the Company in August 1989 and since October 1991 has served
as Assistant General Counsel.

Elizabeth Brennan Baker has served as Vice President of Organizational
Development since July of 1994. She was Vice-President of Human Resources from
January 1993 through June of 1994. She was Vice President - Personnel and
Training of the Company since September 1991 and March 1990, respectively. She
was Vice President - Training and Development of Ground Round from November
1988 through February 1990, Director of Training and Development of Ground
Round from August 1985 through October 1988.

ITEM 11. EXECUTIVE COMPENSATION

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(A) FINANCIAL STATEMENTS

Report of Ernst & Young LLP, Independent Auditors.

Consolidated Balance Sheets - October 2, 1994 and October 3, 1993.

Consolidated Statements of Income - Years Ended October 2, 1994 and
October 3, 1993 and September 27, 1992.

Consolidated Statements of Stockholders' Equity - Years Ended
October 2, 1994 and October 3, 1993, and September 27, 1992.

Consolidated Statements of Cash Flows -Years Ended October 2, 1994 and
October 3, 1993, and September 27, 1992.

Notes to Consolidated Financial Statements - Years Ended October 2,
1994 and October 3, 1993, and September 27, 1992.

FINANCIAL STATEMENT SCHEDULES

Schedule II - Amounts Receivable from Related Parties and
Underwriters, Promoters, and Employees other than Related Parties

Schedule V - Property and Equipment

Schedule VI - Accumulated Depreciation, Depletion and Amortization of
Property and Equipment

Schedule VIII - Valuation and Qualifying Accounts

Schedule X - Supplementary Income Statement Information

All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and,
therefore, have been omitted.

(B) EXHIBITS

Exhibits filed as part of this Report are listed in the EXHIBIT INDEX
appearing on Pages 26 and 27 of this Report.

-23-
26

The only reports on form 8-K filed by the Company during the fiscal
quarter ended October 2, 1994 are the following are the following:

Date of Report Items Reported
-------------- --------------

August 23, 1994 Pursuant to Item 1 of form 8-K, the Company disclosed that it had agreed
to be aquired pursuant to the terms of the Agreement and Plan of Merger
dated August 23, 1994 (the "Merger Agreement") among the Company, GRR,
Inc. and GRR Aquisition Corporation.

November 16, 1994 Pursuant to Item 1 of Form 8-K, the Company disclosed that it had entered
into the First Amendment to the Merger Agreement.

-24-
27

SIGNATURES

Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the 14th
day of December, 1994.

GROUND ROUND RESTAURANTS, INC.
(Registrant)

By: /s/ Michael R. Jorgensen
------------------------
Michael R. Jorgensen
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting
Officer)

Pursuant to the requirement of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
- - --------- ----- ----

/s/ Michael P. O'Donnell Chairman of the Board, President, December 15, 1994
- - ------------------------ and Chief Executive Officer
Michael P. O'Donnell

/s/ Michael R. Jorgensen Senior Vice President, Chief Financial December 14, 1994
- - ------------------------ Officer and Treasurer
Michael R. Jorgensen (Principal Financial and
Accounting Officer)

/s/ J. Eric Hanson Director December 11, 1994
- - ------------------
J. Eric Hanson

/s/ Robert E. Lee Director December 12, 1994
- - -----------------
Robert E. Lee

/s/ David J. P. Meachin Director December 13, 1994
- - -----------------------
David J. P. Meachin

/s/ Stanley J. Moss Director December 11, 1994
- - -------------------
Stanley J. Moss

/s/ Thomas J. Russo Director December 13, 1994
- - -------------------
Thomas J. Russo

/s/ Daniel R. Scoggin Director December 11, 1994
- - ---------------------
Daniel R. Scoggin

-25-
28

EXHIBIT INDEX

Exhibit No. Description
- - ----------- -----------

2.1 Agreement and Plan of Merger dated August 23, 1994
(the "Merger Agreement") among the Company, GRR, Inc.
and GRR Acquisition Corporation.

2.2 First Amendment dated November 16, 1994 to Merger
Agreement.

3.1 Restated Certificate of Incorporation of the Company filed
pursuant to Rule 102(c) of Regulation S-T, which integrates
the Company's 1991 Restated Certificate of Incorporation
and the 1994 amendment thereto.

3.2 Amended and Restated By-laws of the Company
(incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 29, 1992).

*10.31 Agreement between Michael P. O'Donnell and the
Company dated April 21, 1992 (incorporated by
reference to the Company's Annual Report on
Form 10-K for the year ended September 27, 1992).

10.32 Amended and Restated Credit Agreement, dated
as of October 8, 1993, among The Ground Round,
Inc. and GR of Minn., Inc., as Borrowers, and
The Bank of New York, as agent, and the banks
parties thereto (including certain exhibits)
(incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended
October 3, 1993).

*10.33 1992 Equity Incentive Plan (incorporated by reference
to the Company's definitive Proxy Statement for its
Annual Meeting of Shareholders held on March 10, 1992).

*10.34 1994 Corporate Office Incentive Plan (incorporated by
reference to the Company's Annual Report on Form
10-K for the year ended October 3, 1993).

*10.35 Agreement between Michael P. O'Donnell and the
Company dated July 26, 1994.

*10.36 Agreement between Peter J. Beaudrault and the
Company dated July 26, 1994.

-26-
29

Exhibit No. Description
- - ----------- -----------

*10.37 Agreement between Michael R. Jorgensen and
the Company dated July 26, 1994.

*10.38 Agreement between William C. Schoener and
the Company dated July 26, 1994.

21 List of Subsidiaries.

23 Consent of Ernst & Young.

24 Power of Attorney.
<FN>

Asterisk (*) denotes management contract or compensatory plan or arrangement.

-27-
30
REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Board of Directors
Ground Round Restaurants, Inc.

We have audited the accompanying consolidated balance sheets of Ground Round
Restaurants, Inc. as of October 2, 1994 and October 3, 1993, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended October 2, 1994. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Ground
Round Restaurants, Inc. at October 2, 1994 and October 3, 1993, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended October 2, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.

ERNST & YOUNG LLP

Boston, Massachusetts
November 1, 1994
except for Note L, as to which
the date is November 16, 1994

-28-
31

GROUND ROUND RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 2, 1994 AND OCTOBER 3, 1993
(Dollars in thousands, except per share amounts)

1994 1993
---- ----

ASSETS:
Current assets:
Cash and cash equivalents $ 1,457 $ 1,262
Receivables, net of allowances for doubtful
accounts of $276 in 1994 and $95 in 1993 1,511 1,359
Inventories 2,577 2,511
Prepaid expenses and other current assets 2,249 6,413
-------- --------
Total current assets 7,794 11,545

Property and equipment:
Land 11,203 11,434
Buildings and leasehold improvements 120,034 106,869
Machinery and equipment 39,867 35,439
--------- --------
171,104 153,742
Accumulated depreciation and amortization 43,531 33,211
--------- --------
Property and equipment, net 127,573 120,531
Other assets 21,405 19,737
--------- --------
$156,772 $151,813
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 7,107 $ 7,871
Accrued expenses 14,900 15,105
Income taxes 201 69
Current portion of long-term debt and capital lease obligations 902 1,055
-------- -------
Total current liabilities 23,110 24,100

Long-term debt and capital lease obligations 57,868 59,250
Deferred income taxes 3,080 2,744
Other long-term liabilities 7,678 7,082

STOCKHOLDERS' EQUITY:
Preferred Stock, undesignated, par value $100 per share;
authorized 30,000 shares; none issued
Common Stock, par value $.16 2/3 per share: authorized 35,000,000 shares
in 1994 and 15,000,000 shares in 1993; issued 11,114,000 in 1994 and
11,099,000 shares in 1993 1,852 1,850
Additional paid-in capital 57,631 57,572
Accumulated earnings (deficit) 5,649 (597)
-------- --------
65,132 58,825
Deferred Officer Compensation (96) (188)
-------- --------
Total stockholders' equity 65,036 58,637
-------- --------
$156,772 $151,813
========= ========

See notes to consolidated financial statements.

F-1
32

GROUND ROUND RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)

52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED
OCTOBER 2, OCTOBER 3, SEPTEMBER 27,
1994 1993 1992
---- ---- ----

REVENUE $243,971 $232,556 $226,466
-------- -------- --------

COSTS AND EXPENSES:
Cost of products sold 202,819 193,707 187,892
Selling, general and administrative 15,370 15,923 16,369
Depreciation and amortization 13,507 11,205 10,018
Interest expense 4,091 4,031 4,598
Other (income) expense (1,002) (145) 97
-------- -------- --------
234,785 224,721 218,974
-------- -------- --------

Net income before income taxes 9,186 7,835 7,492

Income taxes 2,940 2,507 2,846
-------- -------- --------

NET INCOME $ 6,246 $ 5,328 $ 4,646
======== ======== ========

Weighted average common shares outstanding 11,109 11,086 11,064
======== ======== ========

PER SHARE DATA:

Net income per common share $ .56 $ .48 $ .42
======== ======== ========

See notes to consolidated financial statements.

F-2
33

GROUND ROUND RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars and shares in thousands)

SHARES
-------------- ADDITIONAL ACCUMULATED DEFERRED TOTAL
COMMON TREASURY COMMON PAID-IN EARNINGS TREASURY OFFICER STOCKHOLDERS'
STOCK STOCK STOCK CAPITAL (DEFICIT) STOCK COMPENSATION EQUITY
----- ----- ----- ------- --------- ----- ------------ ------

BALANCE AT SEPTEMBER 29, 1991 11,082 (18) $1,847 $57,427 $(10,571) $(130) $48,573
Net income 4,646 4,646
-------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 27, 1992 11,082 (18) 1,847 57,427 (5,925) (130) 53,219
Issuance of restricted shares
from treasury stock 18 130 130
Issuance of restricted shares 12 2 142 $(274) (130)
Amortization of deferred
officer compensation 86 86
Converted stock options 5 1 3 4
Net income 5,328 5,328
-------------------------------------------------------------------------------
BALANCE AT OCTOBER 3, 1993 11,099 0 1,850 57,572 (597) 0 (188) 58,637
Amortization of deferred
officer compensation 92 92
Converted stock options 15 2 59 61
Net income 6,246 6,246
-------------------------------------------------------------------------------
BALANCE AT OCTOBER 2, 1994 11,114 0 $1,852 $57,631 $ 5,649 $ 0 $ (96) $65,036
====== = ====== ======= ======== ===== ===== =======

See notes to consolidated financial statements

F-3
34

GROUND ROUND RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED
OCTOBER 2, 1994 OCTOBER 3, 1993 SEPTEMBER 27, 1992
--------------- --------------- ------------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,246 $ 5,328 $ 4,646
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,851 11,583 10,372
Deferred income taxes 336 705 (75)
Write-off of deferred debt costs 572
Loss (gain) on disposition of assets (1,574) (186) 94
Other, net 92 (4)
Return of insurance deposits 4,690
Change in operating assets and liabilities:
Accounts receivable (152) 310 393
Inventories and prepaid expenses (1,468) (2,504) (2,117)
Accounts payable and accrued expenses (218) 276 3,094
------- ------- -------
Net cash provided by operating activities 22,375 15,512 16,403
------- ------- -------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (22,437) (23,857) (12,754)
Proceeds from sale of property and equipment 4,378 7
Purchase of liquor licenses (681) (387)
Proceeds from sale of liquor license 200
Deposits received (paid) (217) 17 (6)
Notes receivable and working capital loan collections 130 (76) 2,111
Pre-opening costs and related items (988) (900) (613)
------- ------- -------
Net cash used in investing activities (19,815) (25,003) (11,255)
------- ------- -------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 28,800 14,100 5,681
Payments of long-term borrowings (29,813) (5,506) (10,107)
Payments of deferred debt costs (1,413) (61) (432)
Proceeds from issuance of common stock 61
------- ------- -------
Net cash provided by (used in) financing activities (2,365) 8,533 (4,858)
------- ------- -------

NET INCREASE (DECREASE) IN CASH 195 (958) 290

Cash at beginning of period 1,262 2,220 1,930
------- ------- -------
Cash at end of period $ 1,457 $ 1,262 $ 2,220
======== ======== ========

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 3,458 $ 4,255 $ 4,335
Taxes paid 2,339 1,444 793

See notes to consolidated financial statements.

F-4
35
GROUND ROUND RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended October 2, 1994 and October 3, 1993 and September 27, 1992

A. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of Ground Round Restaurants, Inc. (the Company), and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. The Company operates and franchises
family-oriented, full-service restaurants primarily in the Northeast,
Mid-Atlantic and Midwest United States.

The fiscal year of the Company is the 52 or 53 week period ending on the Sunday
closest to September 30th. For purposes of these notes to the consolidated
financial statements, the 52 week fiscal year ended October 2, 1994, the 53
week fiscal year ended October 3, 1993, and the 52 week fiscal year ended
September 27, 1992, are referred to as 1994, 1993, and 1992, respectively.

Certain items in prior years in specific captions of the accompanying
consolidated financial statements and notes to the consolidated financial
statements have been reclassified for comparative purposes.

CASH EQUIVALENTS: Cash equivalents consist of highly liquid investments with
maturities of three months or less when purchased, and are carried at cost
which approximates fair value.

INVENTORIES: Inventories are stated at the lower of cost or market, as
determined by the first-in, first-out (FIFO) cost method.

PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost.
Depreciation and amortization, including amortization of assets recorded under
capital leases, are computed principally by the straight-line method, based on
estimated useful lives. Useful lives range from 33 years for buildings, 10
years for machinery and equipment and the shorter of the lease term or
estimated useful life for leasehold improvements.

DEFERRED DEBT COSTS: Deferred debt costs, included in other assets, are costs
associated with the issuance of long-term debt and are amortized over the terms
of the related instruments.

DEFERRED PRE-OPENING COSTS: Pre-opening costs consist of incremental amounts
directly associated with opening a new restaurant. These costs, which
principally include initial purchases of expendables and expenses of the
restaurant staff, hired to operate the restaurant upon opening, for the
training period before the restaurant opens, are capitalized and amortized over
the twelve month period following the restaurant opening. Prior to 1994, the
Company amortized the costs over the 24 month period following the restaurant
opening. The change did not have a material effect on the Company's results of
operations.

INTANGIBLE ASSETS: Intangible assets included in other assets consist of the
excess of the cost of acquired companies over the values assigned to net
tangible assets and primarily represent fair values assigned to trade names,
goodwill, liquor licenses and franchises. These intangibles are being
amortized by the straight-line method over lives ranging between 15 and 40
years.

ACCRUED INSURANCE CLAIMS: The Company maintains insurance coverage for
workers' compensation risks under contractual arrangements which retroactively
adjust premiums for claims paid subject to specified limitations. In addition,
the Company is self insured up to certain limits for risks associated with the
health care plan provided for its employees. Expenses associated with such
risks are accrued based upon the estimated amounts required to cover incurred
incidents. The Company does not provide health or other benefits to retirees.

F-5
36
INCOME TAXES: On September 28, 1992 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. In fiscal
1992, the Company provided for income taxes following the provisions of SFAS
No. 96. The cumulative effect of this accounting change on the provision for
income taxes in 1993 was not significant.

OTHER LONG-TERM LIABILITIES: Other long-term liabilities comprise various
reserves including reserves for casualty insurance coverage and restaurant
closings.

FRANCHISE REVENUE: Initial franchise fees of $40,000 new franchises are
recognized as revenue when substantially all commitments and obligations have
been fulfilled, which is generally when the restaurant opens. The terms of
franchise agreements are generally twenty years and provide for a continuing
franchise royalty fees equal to 3% of monthly gross sales. The franchise
agreements also provide that franchisees are required to pay up to 2% of
monthly gross sales for advertising. Franchise and royalty fees included in
revenues aggregated $2,192,000, $2,539,000 and $2,418,000 for 1994, 1993 and
1992, respectively.

B. OTHER ASSETS

Other assets consist of the following:

1994 1993
---- ----
(In thousands)

Deferred debt acquisition costs $ 3,172 $ 2,331
Deferred pre-opening costs 2,735 1,747
Franchises 4,696 4,796
Goodwill 4,166 4,166
Liquor licenses 4,662 3,981
Tradename 3,073 3,073
Prepaid insurance 3,871 2,999
Other 409 318
------- -------
26,784 23,411
Less accumulated amortization 5,379 3,674
------- -------
$21,405 $19,737
======= =======

Other assets were net of allowances for doubtful accounts of $307,000 and
$352,000 at October 2, 1994 and October 3, 1993, respectively.

C. PREPAID AND ACCRUED EXPENSES

Accrued expenses consist of the following:

1994 1993
---- ----
(In thousands)

Casualty insurance $ 2,336 $ 2,620
Occupancy costs 2,747 3,292
Payroll and payroll related expenses 5,273 6,025
Sales taxes 1,319 1,303
Other 3,225 1,865
------- -------
$14,900 $15,105
======= =======

Prepaid expenses and other current assets of $2,249,000 at October 2, 1994 and
$6,413,000 at October 3, 1993 included prepaid casualty insurance costs of
$1,510,000 and $5,656,000, respectively.

F-6
37

D. LONG-TERM DEBT AND LEASE OBLIGATIONS

Long-term debt and capitalized lease obligations consist of the following:

1994 1993
---- ----
(In thousands)

Amended Credit Agreement dated
October 8, 1993:
Tranche A Term $36,641 $ 37,953
Tranche A Revolving 2,100
Tranche B Term 14,220 15,000
Other 10
Capitalized lease obligations @ 5% to 15% 5,809 7,342
------- ----------
58,770 60,305
Less current portion 902 1,055
------- ----------
$57,868 $ 59,250
======= ==========

The Company had an amended credit agreement dated April 26, 1992 with a
syndicate of banks consisting of (a) a term facility in the original amount of
$44,000,000 expiring on October 15, 1997, (b) a growth facility in an amount up
to $25,000,000 and (c) a working capital facility in an amount of up to
$10,000,000. Interest on each of these facilities was, at the option of the
Company, payable at a spread over the prime rate or Eurodollar rate. The
spread, in each case, was subject to adjustment based on the Company's ratio of
free operating cash flow to debt.

On October 8, 1993 the Company and a majority of its lenders along with certain
new banks, amended the agreement dated April 26, 1992. The Amended and
Restated Credit Agreement ("Amended Agreement") provides the Company with
$70,000,000 that is comprised of the following: Tranche A Term borrowings of
$37,953,000, at prime plus .5% to .875% or LIBOR plus 1.125% to 1.625%,
depending on the funded debt to free operating cash flow ratio, with payments
commencing on October 8, 1995 (the "Conversion Date") and payable through
January 1999; Tranche A Revolving facility of up to $16,348,000 ($2,100,000
outstanding at October 2, 1994, none outstanding at October 3, 1993), at prime
plus .5% to .875% or LIBOR plus 1.125% to 1.625%, depending on the funded debt
to free operating cash flow ratio, which converts to term on the Conversion
Date and is then payable through January 1999; and Tranche B Term borrowings
of $15,000,000 at prime plus .875% or LIBOR plus 2.25% with payments commencing
in April 1999 and a final maturity of July 2000. The interest rates under the
Amended Agreement at October 2, 1994 on Tranche A Term, Tranche A Revolving,
and Tranche B Term were 6.06%, 7.75% and 6.94%, respectively.

The Amended Agreement also contains certain financial covenants, including
maintenance of minimum interest and fixed charge coverage ratios, cash flow
ratios, minimum levels of net worth and maximum leverage ratios. Provisions of
the Amended Agreement restricting the payment of dividends would prevent the
Company from paying dividends during the term of the Amended Agreement.

Maturities of long-term debt for the years succeeding October 2, 1994 are as
follows:

(In thousands)

1995 $ 0
1996 7,361
1997 9,879
1998 13,443
1999 13,746
Thereafter 8,532

F-7
Interest expense for 1994, 1993 and 1992 as presented has been reduced by
interest income of $171,000, $248,000 and $379,000, respectively.
38
Principal payments may be accelerated due to additional payments based upon
excess cash flow from operations, the sale of certain assets and the offering
proceeds from the sale of stock of the Company. Pursuant to the Amended
Agreement, certain commitment and facility fees are payable based upon the
borrowing levels.

During 1994, the Company entered into two interest rate cap agreements in the
aggregate of $15,000,000 expiring during fiscal 1995. The fixed interest rates
on these contracts at October 2, 1994 ranged from 5.5% to 7%. During 1993, the
Company had outstanding a $10,000,000 interest rate swap agreement which
expired in fiscal 1994, and a $15,000,000 interest cap agreement expiring in
fiscal year 1995 to exchange LIBOR based interest payments for fixed rate
payments. The fixed rate interest rates on these contracts at October 3, 1993
were 8.725% and 7% on the swap and cap agreements, respectively. The interest
rate differential is recognized over the lives of the agreements as an
adjustment to interest expense. The amount included in the financial
statements for outstanding debt and the related swap agreements approximates
fair value.

The Company occupies certain of its real estate under long-term leases,
substantially all of which contain renewal options. Most of these leases
provide for a percentage rental based on sales and, in most cases, require a
minimum annual rental.

A summary of property leased under capital leases is as follows:

1994 1993
---- ----
(In thousands)

Real Estate $9,353 $10,204
Equipment 456 456
------ -------
9,809 10,660
Less accumulated amortization 5,107 4,446
------ -------
$4,702 $ 6,214
====== =======

The above amounts represent the present value of future minimum lease payments
at the inception of the leases, excluding that portion of the lease payments
representing estimated insurance and tax cost. Leases capitalized also exclude
that portion of the minimum lease payments attributable to land. Lease
amortization is included in depreciation expense.

Future minimum lease payments under noncancelable leases as of October 2, 1994
for each of the following years are as follows:

CAPITAL OPERATING
LEASES LEASES
------ ------
(In thousands)

1995 $1,462 $ 5,825
1996 1,420 5,283
1997 1,248 4,729
1998 1,104 5,106
1999 981 3,417
Thereafter 1,640 24,241
------ -------
Total minimum payments 7,855 $48,601
Amount representing interest 2,046 =======
------
Present value of net minimum payments 5,809
Current portion of capital lease obligations 902
------
Long-term capital lease obligations $4,907
======

Minimum obligations for noncancelable operating leases have been reduced by
minimum noncancellable operating sublease rentals of $397,000.

F-8
39
Rent expense under operating leases for continuing operations was $8,280,000,
$7,623,000 and $7,087,000 for 1994, 1993 and 1992, respectively. Rent expense
includes contingent rental expense for capital and operating leases of
$2,373,000, $2,424,000 and $2,532,000 for 1994, 1993 and 1992, respectively.

E. STOCKHOLDERS' EQUITY

The 1992 Equity Incentive Plan, approved by the shareholders of the Company,
authorizes the granting of various options and rights to purchase 350,000
shares of common stock of the Company. Incentive stock options cannot be
issued at less than fair market value whereas the exercise price of
nonqualified stock options is specified by the Compensation Committee.
Furthermore, the number of shares available for grant is reduced by shares that
are issued or are issuable under the 1987 and 1982 stock option plans.

The following is a summary of stock option transactions during 1994, 1993 and 1992:

SHARES OPTION PRICES
------ -------------

Options outstanding September 29, 1991 146,000 $3.29 to $12.76
Granted 391,000 $4.63 to $ 6.75
Cancelled (60,000) $3.29 to $12.76
--------

Options outstanding at September 27, 1992 477,000 $3.29 to $10.06
Granted 304,000 $7.00 to $ 9.13
Cancelled (77,000) $3.29 to $ 7.88
--------

Options outstanding at October 3, 1993 704,000 $3.29 to $10.06
Granted 19,000 $6.25 to $ 7.50
Cancelled (95,000) $4.63 to $ 9.13
--------

Options outstanding at October 2, 1994 628,000 $3.29 to $10.06
======= ===== ======

As of October 2, 1994, options to purchase 628,000 shares of Common Stock were
exercisable, options to purchase 195,000 shares of Common Stock were available
for future grants and 823,000 shares of Common Stock were reserved for
issuance. In December of 1991 the exercise price of previously issued options
to purchase 113,000 shares of Common Stock were adjusted downward to reflect
the distribution of the Company's non-restaurant operations in September 1991.

On February 2, 1993 the Compensation Committee of the Board of Directors
authorized 30,000 shares of restricted stock to be offered to Michael P.
O'Donnell, Chairman of the Board, President, and Chief Executive Officer.
These shares, valued at $274,000 at issuance, are subject to forfeiture and
transfer restrictions over the three years following issuance. At the
completion of each year of service subsequent to the issuance date, forfeiture
restrictions are released on 10,000 shares. An aggregate amount of $178,000
has been recorded as compensation expense through fiscal 1994.

F-9
40

F. INCOME TAXES

The provision for income taxes for continuing operations computed under SFAS
No. 96 in 1992 and SFAS No. 109 in 1993 and 1994, consists of the following:

1994 1993 1992
---- ---- ----
(In thousands)

Current:
Federal $2,344 $1,574 $1,457
State 260 226 305
------ ------ ------
2,604 1,800 1,762
Deferred:
Federal 298 654 932
State 38 53 152
------ ------ ------
$2,940 $2,507 $2,846
====== ====== ======

The reasons for the difference between total tax expense and the amount
computed by applying the statutory federal income tax rate to income from
continuing operations are as follows:

1994 1993 1992
---- ---- ----
(In thousands)

Taxes at statutory rate applied to pretax $3,123 $2,664 $2,547
income from continuing operations
Increases (reductions) in tax resulting from:
State income taxes 197 184 302
Targeted jobs tax credits (499) (232) (158)
FICA tax credits (422)
Other 541 (109) 155
------ ------ ------
$2,940 $2,507 $2,846
====== ====== ======

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets at October 2, 1994 and
October 3, 1993 are as follows:

October 2, 1994
(In thousands)

ASSETS LIABILITIES TOTAL
------ ----------- -----

Current:
Vacation pay $ 200 $ 200
Accounts receivable 151 151
Other deductible (income) amounts 42 $(72) (30)
Less valuation allowance (321) (321)
------ ----- -----
$ 72 $(72) $ 0
------ ----- -----

F-10
41

October 2, 1994
(In thousands)
ASSETS LIABILITIES TOTAL
------ ----------- -----

Noncurrent:
Credits $ 2,285 $ 2,285
Depreciation 1,101 $(3,918) (2,817)
Lease obligations 2,358 (1,964) 394
Accrued insurance 2,640 2,640
Closed location reserve 704 704
Amortization (976) (976)
Land (318) (318)
Other deductible (income amounts) (274) (274)
Less valuation allowances (4,718) (4,718)
------- -------- --------
$ 4,370 $(7,450) $(3,080)
------- -------- --------
$ 4,442 $(7,522) $(3,080)
======= ======= =======

October 3, 1993
(In thousands)
ASSETS LIABILITIES TOTAL
------ ----------- -----

Current:
Credits $300 $ 300
Vacation pay 224 224
Accounts receivable 65 65
Other deductible (income) amounts 25 $(204) (179)
Less valuation allowance (410) (410)
---- ----- -----
Total current $204 $(204) $ 0
---- ----- -----

ASSETS LIABILITIES TOTAL
------ ----------- -----

Noncurrent:
Credits $ 1,376 $ 1,376
Depreciation 535 $(2,859) (2,324)
Lease obligations 1,431 (1,207) 224
Accrued insurance 1,561 1,561
Closed location reserve 493 493
Other deductible (income amounts) 614 (59) 555
Less valuation allowances (4,629) (4,629)
-------- ---------- ---------
Total noncurrent $ 1,381 $(4,125) $(2,744)
-------- ---------- ---------
Total current and noncurrent $ 1,585 $(4,329) $(2,744)
========== ========== ===========

Deferred income tax provision (benefit) from continuing operations under SFAS
No. 96 consisted of the following:

1992
----
(In thousands)

Accrued insurance $ (588)
Lease obligations 390
Depreciation 725
Notes and accounts receivable 597
Closed location reserve 345
Other (385)
-------
$1,084
=======

F-11
42
A valuation allowance has been provided for those deferred tax assets for which
management believes it is more likely than not that the tax benefit will not be
realized. As of October 2, 1994 the Company had approximately $1,231,000 of
alternative minimum tax credit carryforwards for federal tax purposes,
approximately $298,000 of targeted jobs tax credits, approximately $640,000 of
FICA tax credits, and $17,000 of foreign tax credits which expire on various
dates through 2009. The Company also had a 1991 net operating loss
carryforward of $1,710,000 at the end of 1991 that was utilized in 1992.

G. RETIREMENT BENEFITS

The Company sponsors a qualified defined contribution pension plan which covers
substantially all full-time eligible employees. Employees may contribute up to
10% of earnings on an after tax basis which are matched by the Company based
upon years of participation in the plan up to a maximum of 3%. Defined
contribution expense for the Company was $221,000, $240,000 and $260,000 for
1994, 1993 and 1992, respectively.

The Company also sponsors a non-qualified deferred compensation plan for key
management employees. An employee can defer up to 10% of eligible compensation
which will be matched by the Company up to 3%. The Company may also make
discretionary matching contributions between 25% and 100% of each employee's
deferred compensation between 3% and 10%. In addition, a rate of return,
determined in advance by the Company, will be credited each year to the
employee's account. The funds are invested at the discretion of the company.
Deferred compensation expense for the Company was $112,000, $97,000 and $95,000
for 1994, 1993 and 1992, respectively. Except as set forth above, the Company
has no liability for health or other benefits to retirees.

H. COST OF PRODUCTS SOLD

Cost of products sold comprises the following:

1994 1993 1992
---- ---- ----
(In thousands)

Food and beverage costs $ 76,949 $ 73,309 $ 70,215
Labor costs 76,845 73,537 71,984
Other costs 49,025 46,861 45,693
-------- -------- --------
$202,819 $193,707 $187,892
========= ======== ========

I. OTHER INCOME

During 1994, the Company completed a sale of one location for approximately
$2.0 million and realized a pretax gain of approximately $1.5 million. This
gain was partially offset by the write-off of $.6 million in expenses
associated with a proposed public offering of convertible subordinated
debentures which the Company withdrew due to market conditions.

J. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of unaudited quarterly consolidated results of
operations for 1994, 1993 and 1992:

1994: JANUARY 2 APRIL 3 JULY 3 OCTOBER 2
--------- ------- ------ ---------
(In thousands except per share data)

Revenue $62,199 $59,885 $60,670 $61,217
Gross Profit 10,731 9,400 10,263 10,758
Net Income 1,534 1,554 1,595 1,563
Per share data:
Net income .14 .14 .14 .14

F-12
43

1993: JANUARY 3 APRIL 4 JULY 4 OCTOBER 3
--------- ------- -------- ---------
(In thousands except per share data)

Revenue $62,231 $56,389 $55,760 $58,176
Gross Profit 10,729 9,423 9,268 9,434
Net Income 1,427 1,227 1,361 1,313
Per share data:
Net Income .13 .11 .12 .12

1992: DECEMBER 29 MARCH 29 JUNE 28 SEPTEMBER 27
----------- -------- ------- ------------
(In thousands except per share data)

Revenue $54,395 $57,237 $57,644 $57,190
Gross Profit 9,688 9,776 9,890 9,220
Net Income 1,128 1,156 1,177 1,185
Per share data:
Net Income .10 .10 .11 .11

K. LITIGATION

L. SUBSEQUENT EVENT

On August 23, 1994 the Company announced that it had entered into a definitive
merger agreement with a private investor group to include 399 Ventures, Inc.,
certain key members of management and various financial institutions. The
merger agreement is subject to receipt of financing and shareholder approval,
and provides that the Company's shareholders will receive $9 in cash for each
share of common stock. In connection with the merger, the Company plans to
repay all amounts outstanding under its Amended Agreement as described in Note
D. On November 16, 1994, the Company announced that it had agreed to extend
until January 31, 1995 the termination date of the Merger Agreement in order to
allow the acquiror more time to arrange financing for the transaction. The
Company anticipates holding a special meeting of shareholders to consider and
act on a proposal to approve and adopt the merger in the second quarter of
fiscal 1995. Management does not expect that the resolution of these matters
will have a material adverse effect on the consolidated financial position of
the Company.

F-13

SCHEDULE II

GROUND ROUND RESTAURANTS, INC.
AMOUNTS RECEIVABLE FROM RELATED PARTIES, UNDERWRITERS,
PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES
(Dollars in thousands)

BALANCE DEDUCTIONS BALANCE
--------------------------
BEGINNING AMOUNTS AMOUNTS END OF PERIOD
-------------
NAME OF DEBTOR OF PERIOD ADDITIONS COLLECTED WRITTEN OFF CURRENT NON-CURRENT
- - -------------- --------- --------- --------- ----------- ------- -----------

YEAR ENDED OCTOBER 2, 1994
Rodrigues-Perrett Corporation, 10%
interest bearing note $ 135 $ --- $ --- $ --- $ --- $ 135

YEAR ENDED OCTOBER 3, 1993:
Rodrigues-Perrett Corporation, 10%
interest bearing note $ --- $ 135 $ --- $ --- $ --- $ 135

YEAR ENDED SEPTEMBER 27, 1992:
HSA Properties, Inc., non-interest
bearing accounts receivable $ 141 $ --- $ 141 $ --- $ --- $ ---

F-14
45

SCHEDULE V

GROUND ROUND RESTAURANTS, INC.
PROPERTY AND EQUIPMENT
(Dollars in thousands)

BALANCE BALANCE
BEGINNING ADDITIONS OTHER END OF
CLASSIFICATION OF PERIOD AT COST RETIREMENTS CHANGES PERIOD
- - -------------- --------- ------- ----------- ------- ---------

YEAR ENDED OCTOBER 2, 1994:
Land $ 11,434 $ --- $ 231 $ --- $ 11,203
Buildings 106,869 15,920 2,755 --- 120,034
Machinery & equipment 35,439 6,185 1,757 39,867
-------- -------- ------- ----- --------
$153,742 $22,105 $4,743 $ $171,104
======== ======= ======= ===== ========

YEAR ENDED OCTOBER 3, 1993:
Land $ 11,434 $ --- $ --- $ --- $ 11,434
Buildings 92,406 14,727 244 (20) (a) 106,869
Machinery & equipment 27,434 9,128 1,114 (9) (a) 35,439
-------- -------- -------- ----- --------
$131,274 $23,855 $1,358 $ (29) $153,742
======== ======= ======= ===== ========

YEAR ENDED SEPTEMBER 27, 1992:
Land $ 11,281 $ 153 $ --- $ --- $ 11,434
Buildings 85,582 7,143 314 (5) (a) 92,406
Machinery & equipment 23,768 5,458 1,771 (21)(a,b) 27,434
-------- -------- -------- ----- --------
$120,631 $12,754 $2,085 $ (26) $131,274
======== ======= ======= ===== ========
<FN>

(a) Reclassification of assets.
(b) Sale of assets.

F-15
46

SCHEDULE VI

GROUND ROUND RESTAURANTS, INC.
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF
PROPERTY AND EQUIPMENT
(Dollars in thousands)

BALANCE BALANCE
BEGINNING ADDITIONS OTHER END OF
CLASSIFICATION OF PERIOD AT COST RETIREMENTS CHANGES PERIOD
- - -------------- ---------- --------- ----------- ------- --------

YEAR ENDED OCTOBER 2, 1994:
Buildings $20,823 $ 7,189 $ 910 $ --- $27,102
Machinery & equipment 12,388 4,935 894 --- 16,429
------- ------- ------- ----- -------
$33,211 $12,124 $1,804 $ $43,531
======= ======= ====== ===== =======

YEAR ENDED OCTOBER 3, 1993:
Buildings $15,125 $ 6,116 $ 419 $ 1 (a) $20,823
Machinery & equipment 8,636 4,150 398 --- 12,388
-------- ------- ------- ----- -------
$23,761 $10,266 $ 817 $ 1 $33,211
======= ======= ======= ===== =======

YEAR ENDED SEPTEMBER 27, 1992:
Buildings $ 9,677 $ 5,645 $ 206 $ 9 (a) $15,125
Machinery & equipment 6,593 3,663 1,625 5 (a,b) 8,636
-------- -------- ------ ----- -------
$16,270 $ 9,308 $1,831 $ 14 $23,761
======= ======== ====== ===== =======
<FN>

(a) Reclassification of assets.
(b) Sale of assets.

F-16
47

SCHEDULE VIII
GROUND ROUND RESTAURANTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)

BALANCE BALANCE
BEGINNING ADDITIONS CHARGED TO AT END OF
DESCRIPTION OF PERIOD COST OTHER DEDUCTIONS PERIOD
- - ----------- --------- ---- ----- ---------- --------

YEAR ENDED OCTOBER 2, 1994:
Allowances deducted from assets
to which they apply:
For doubtful accounts $ 447 $140 $--- $ 4(c) $ 583

YEAR ENDED OCTOBER 3, 1993:
Allowances deducted from assets
to which they apply:
For doubtful accounts $1,270 $ 51 $--- $ 874 (b)(c) 447

YEAR ENDED SEPTEMBER 27, 1992:
Allowances deducted from assets
to which they apply:
For doubtful accounts $2,006 $276 $100 (a) $1,112 (b)(c) 1,270
<FN>

(a) Reclassification of reserve.
(b) Write-off in connection with uncollectible account.
(c) Recoveries.

F-17
48

SCHEDULE X

GROUND ROUND RESTAURANTS, INC.
SUPPLEMENTARY INCOME STATEMENT INFORMATION
(Dollars in thousands)

ITEM CHARGED TO COSTS AND EXPENSES
- - ---- -----------------------------

1994 1993 1992
---- ---- ----

Maintenance and repairs $ 7,566 $7,416 $7,342
Advertising 1,013 204 2,025
Taxes other than payroll and income taxes 2,699 2,860 2,740

Depreciation and amortization of intangible assets, restaurant development
costs and similar deferrals and royalties are not scheduled above since each of
these items does not exceed one percent of total revenues.

F-18